Correlates of success in family business transitions

ELSEVIER

CORRELATES OF SUCCESS

IN FAMILY BUSINESS

TRANSITIONS

MICHAEL H. MORRIS Graduate School o,f Business,

University of Cape Town, South Africa

ROY 0. WILLIAMS The Williams Family Business Group,

Stockton, California

JEFFREY A. ALLEN College of Business Administration,

University of Central Florida, Orlando, Florida

RAMON A. AVILA College of Business Administration,

Ball State University, Muncie, Indiana

EXECUTIVE Fundamental differences are identified between the nature and functioning offamily-owned and -managed businesses and those that are not,farnily-con-

SUMMARY trolled. These differences include the time horizons of management. the implications of business failure, the degree of job securit.v, the centralization of decision-making, accountability for decision-making, and the impact of the family system on the business system, among others. It is argued that the

most significant of these differences concerns the way in which executive succession occurs, and specih- tally, unique aspects of the process of intergenerational transfer within family-owned businesses.

Based on an initial round of interviews with second- and third-generation family business owners. and a detailed review of the extant literature, a model is proposed consisting of three sets of determinants o,f successful family business transitions: the preparation level of the heirs, the nature of relationships among family members, and the types ofplanning and control activities engaged in by the management o,f the family business. Successful transitions are further hypothesized to irtftuence ,subsequrnt cam- puny performance.

Much of the research to date on family business transitions has tended to be quulitative, case- oriented, and/or anecdotal in nature. The result has been a number of rich insights into the complexities

Address correspondence to Michael H. Morris, Ph.D., Donald Gordon Professor of Entrepreneurship. Gradu- ate School of Business. University of Cape Town, Cape Town. South Africa.

Journal of Business Venturing 12, 385-401 0 1997 Elsevier Science Inc. 655 Avenue of the Americas. New York, NY l(x)10

0X83-9026/‘)7/$17.(H) PII s0xx3-~0~6(~~7)0001 o-4

386 M.H. MORRIS ET AL.

and dynamics of the family enterprise, but limited in terms of the genera&ability of thefindings. Consider- ably less attention has been devoted to quantitative studies that employ larger samples andprovide empirical tests of relationships between key variables. This lack of attention is traced to inherent measurement difficulties in the family business field, and to the relatively young status of the field itself as a distinct area receiving academic attention. The current study attempts to bridge this gap.

The study provides a quantitative assessment of the proposed model using two cross-sectional subsamples consisting of 209 second- and third-generation family-owned businesses. Both regression and structural equations (LISREL) analyses are employed. The results indicate support for the proposed model. Family business transitions do occurmoresmoothly when heirsare betterprepared, when relationships among family members are more trust-based and affable, and when family businesses engage in more planning for taxation and wealth-transferpurposes. Of these factors, relationships within the family has the single greatest impact on successful transitions. At the same time, smoother transitions do not necessarily result in better post-transition performance by the enterprise. This linkage to performance appears to be more complex. One possibility is that some level of conflict or strife is a prerequisite for the transition to have a significant impact on subsequent performance.

Based on these results, family business owners are encouraged to devote relatively more attention to relationship issues, and relatively less to estate and tax planning. It is suggested that a “relationship charter” be developed as a vehicle for strategically managing relationships within the family, much as relationships must be managed with suppliers or customers. Suggestions are also made for further research, and the study’s limitations are denoted. Researchers are encouraged to devote efforts to exploring relationships among the exogenous variables in the research model, such as that between preparation levels of heirs and family relationships. Further, the issue of success and failure in second- and third- generation businesses warrants greater attention, including identification of key failure and success factors as well as determination of differences in failure rates for family- versus non-family-owned businesses and isolation of the reasons for such differences. 0 1997 Elsevier Science Inc.

INTRODUCTION Relatively little attention has been devoted to researching the nature and functioning of family-owned businesses, or the strategic challenges confronting these firms. Research on these firms is certainly disproportionate to their number and contribution to the economies of virtually every nation. For instance, of the more than 18million business enterprises in the Untied States, between 80% and 90% are family-dominated (Duman 1992; Kets de Vries 1993). Further, family-owned and -managed firms account for more than 50% of the employment and of the GNP in the United States (Dyer 1986; Rosenblatt, Anderson, and Johnson 1985). These businesses range from small mom-and-pop operations and growth-oriented entrepreneurial firms to large multinational enterprises. In fact, they make up one third of the companies listed in the Fortune 500.

The dominant strategic issue shared by these firms is the question of succession, which is reflected in their survival rates over time. The available evidence suggests that only 30% of these firms survive into the second generation of family ownership, and 15% survive into the third generation (Kets de Vries 1993; Ward 1987). Statistics such as these have been attributed to a large number of factors, with little data reported as to the relative importance of any single factor.

The purpose of the present research is to more systematically assess the determinants of successful business transitions. Based on a review of the literature and a series of structured interviews with family business owners, a model of succession determinants is proposed. Results from two major cross-sectional surveys are then used to test the relationships speci- fied in this model. Implications are drawn for family business owners and employees, and suggestions are made for ongoing research.

SUCCESS IN FAMILY BUSINESS TRANSITIONS 387

HOW FAMILY FIRMS ARE DIFFERENT The population of businesses having meaningful family participation is as diverse as the private sector at large. These firms run the gamut in terms of size, age, the products and/or services that they sell, and the markets that they serve. For our purposes, a distinction can be drawn between (a) family-owned (controlled) and -managed businesses, (b) family-owned (controlled) but professionally managed (by non-family members), and (c) privately or pub- licly held companies in which a controlling interest is not held by one or a few families. The focus of this research is the former group, which tends to consist largely of small and medium- sized enterprises.

Carsrud (1994) defines a family business as one in which ownership and policymaking are dominated by members of an “emotional kinship group.” To paraphrase a popular ex- pression, family businesses are like other firms. . . only different. The differences lie primarily in the fact that contemporary models of organization clearly separate ownership (typically stockholders) from management (Berle and Means 1932; Daily and Dollinger 1991). Under such circumstances, management is said to become “professionalized,” meaning specialists are hired, often with relevant training and experience, to fulfill the various roles, responsibili- ties, and functions of management. These managers operate in accord with a formal employment contract, and are accountable to the shareholders of the firm.

Table 1 depicts a number of the resulting differences between family-owned and -managed companies and other firms. Admittedly, exceptions to these generalizations can be found in both types of firms, but the incentive nonetheless exists for relative differences to persist. Thus, a professional manager in a business that is not family-controlled might be expected to rely on shorter time horizons, to be less personally impacted by business failure, to demonstrate more career mobility (and possibly less organizational loyalty), to be moti- vated more by traditional personal rewards (pay raises, promotions), and to perceive less job security than family members running the family business (Daily and Dollinger 1991; Kepner 1983; Kets de Vries 1993; Levinson 1971).

In terms of the organizations themselves, businesses that are family-controlled frequently have a more centralized decision-making process and control systems that are less formalized, although this changes across generations. Conflicts among family-member employees tend to be circular and sustained over time by the repetitive sequences of interactions within the family, both at work and away from the business (Kaslow 1993). Thus, a particular family conflict can impact on a subsequent business decision that, in turn, creates new sources of differences within the family. Further, personal family issues will often commingle with business issues, affecting decision processes. Finally, even when well-planned, succession processes in family-owned business tend to be far more problematic and traumatic compared to those in non-family-controlled firms.

FAMILY FIRM SUCCESSION AS A COMPLEX, EVOLUTIONARY PROCESS Succession processes, during which the business is transferred from one generation to the next, represent arguably the most critical issue confronting family firms. These processes include the dynamics that precede and lead up to the actual transition, as well as the after- math of the transition and its implications for the various involved parties (family members in and out of the firm, non-family employees, the founder/owner, customers, etc.).

A number of perspectives have been provided regarding how organizations evolve over


TABLE 1 Proposed Differences between Family-Owned and Managed Firms and Non- Family-Controlled Firms

Family-owned, managed

l Family members in managerial positions have lifetime and personal stake in firm.

l Family members in managerial positions may be with firm for entire career.

l Family members have indefinite time horizon.

l Failure of the business has dramatic personal and career implications for family members, especially those in senior management positions.

l Likelihood of family member in managerial position being terminated is low.

l Personal gain results from a sense of pride in organisation’s growth, success, job creation, and family wealth creation.

l Organizaitonal performance tends to be correlated with managerial compensation.

l Decision making tends to be more centralized, although this may lessen across generations.

l Internal control systems tend to be more informal.

l Succession can be problematic and traumatic even if planned for; rivalries can arise among family members, while conflicts occur between the business head and heirs.

l Family member managers are accountable to self, family.

l Conflicts tend to further a dynamic pattern that is circular; a conflict within the family can impact on business decisions made at a much later date, which in turn influences future family dynamics.

l Non-family employees may perceive real limits to their upward mobility and personal opportunities within the firm.

l Family affairs can directly effect business affairs and vice versa.

Not family controlled

l Manager’s interest in firm is limited more so to specifics of employment contract.

l Managers seldom remain with one firm for entire career.

l Managers have shorter time horizon.

l Failure of the business has relatively less personal impact on the manager.

l Likelihood (or perception of likelihood) of a manager being terminated or his/her position eliminated is greater.

l Personal gain results from advancement, promotion and increased compensation.

l Organizational performance tends to be less directly correlated with what a particular manager earns.

l Decision making is often more participative and team-based.

l Internal control systems tend to be more formalized.

l Succession can involve conflict and competition, but stockholders will monitor the process in an effort to ensure it is accom- plished in a timely and orderly fashion.

l The manager is accountable to stockholders.

l Conflicts tend to follow a more linear pattern such that their impacts are more traceable over time and isolated.

. Employees are apt to have a greater sense of equal opportunity in terms of advancement and participation in decision making; this may produce more internal competition.

l While the personal lives of employees affect their job performance, the impact is likely to be more on the individual than the firm.

time, or the so-called “organizational life cycle” (e.g., Adizes 197X; Churchill and Lewis 1983; Griener 1972). While many aspects of these frameworks apply directly to family firms, they generally assume a separation of ownership and management. Hence they assume that the organization usually outgrows the managerial capabilities of the founding entrepreneur, and they ignore issues of succession. More fundamentally, they focus on the business subsystem only, and family firms are more complex.

If a family firm is conceptualized as a “total system,” then it can be said to consist of a number of subsystems, including the business as an entity, the family as an entity, and

SlJCCESS IN FAMILY BUSINESS TRANSITIONS 389

the founder as an entity (Beckhard and Dyer 1983; Dyer and Handler 1994). Each of these subsystems has unique (and potentially conflicting) identities and cultures, and each contains subsystems of its own. In order to understand the evolution of the family firm, then, one must consider the interactions among the various subsystems. Kepner (1983) refers to the “co-evolution” of family and firm in discussing how family affects firm but also how firm affects family.

Family firms represent relatively stable systems so long as the founder is in place and in role. However, triggering events occur that destabilize the family firm, such as the decision to bring a family member into a senior position, or the founder‘s decision to disengage. Ambi- guity, confusion, and conflict result both for family members and professionals in the firm. and all affected parties can be expected to seek as much control over their own destinies as possible. The subsequent adaptation process is frequently ill-managed. Beckhard and Dyer (1983) suggest that successful adaptation is influenced both by the conditions within the firm (e.g., state of maturity, economic health) and family dynamics (e.g., of family. interdepcn- dencies among family members, sibling rivalries, financial condition of family members).

Barnes and Hershon (1976), in discussing life-cycle transitions that occur between major growth stages within a business, draw a distinction between company transitions and family management transitions. The former may include a change in the company structure. while the latter might consist of the passing away of one’s spouse or the entry into the tit-m of one’s children. They conclude that family management transitions are usually smoother when they occur at the same time as business transitions. and vice versa, and that transitions involve mutual adjustment processes between the family and business subsystems.

Separately. Kepner (1983) examines family life cycles, concluding that stress is com- pounded when transitions in the family life cycle coincide with transition crises in the life cycle of the firm. She argues that each system is concerned with maintaining the integrity of its own system boundaries and is more resistant to differentiation and separation. As a result, major symptoms of dysfunction in the family/firm relationship are likely to occur.

Turning to actual succession processes themselves. Handler (1991) proposes the exis- tence of three stages in the process: personal development of the heir-apparent (prior to working full time in the firm), business involvement, and leadership succession. Further, these processes can be characterized by a number of underlying descriptors. Examples include the length of the transition process, how well-planned it is. the ease with which the transition occurs, conflicts that occur between the current head and the heir apparent. conflicts experienced within the family and by non-family employees. and changes that occur in managerial roles and control, among others.

Kets de Vries (1993) and others have explored a number of psychological and emotional problems experienced by the owner-parent and that person’s children as succession processes unfold. For instance, parents frequently do not want to accept their own mortality and physical limitations, and may envy their children. Children may experience a fear of abandonment, dread potential conflicts that will arise when the parent is not around to arbi- trate, or live out childhood emotional traumas through the business. Such factors tend to be countered by forces that facilitate the transition, such as taxation issues, the occurrence of major health problems, and the founder’s fundamental desire to see the business continue as his or her legacy.

Family members fill a number of roles during the succession process. It is not unusual, for example, for the spouse of the head of the business to act as a behind-the-scenes go- between, resolving key crises between predecessor and heir-apparent. Handler (1990) has suggested not only that roles change over the stages of succession, but that a successful transi-


tion involves a process of mutual role adjustment. Thus, the current generation head of the business may move from “sole operator” to “monarch” to “overseer/delegator” to “consul- tant.” Meanwhile, the next-generation family member moves from having “no role” to “helper” to “manager” to “leader/chief decision-maker.” She argues that the roles of the next-generation family members tend to be shaped by the role of the predecessor. Accord- ingly, a correlation may exist, for example, between the current head of the firm filling the role of monarch and the next-generation member filling the role of helper.

FACTORS INFLUENCING SUCCESSFUL TRANSITIONS Discussions of succession frequently concentrate on the question of whether the family business remains in family hands beyond the first generation. The implication is that the high proportion of family businesses that fail to move to a second or third generation is somehow not normal, or at least that the proportions can (and should) be reduced. In this context, it is worth noting that many family businesses-up to one third in a recent survey by MassMu- tual (1993)-specifically opt to not involve their families in the business and/or to not pass the business on to family members.

Alternatively, in evaluating a given succession, it has been suggested that one should distinguish between the “quality” of the experience and the “effectiveness” of the succession (Handler 1990). Quality is a reflection of how the involved family members personally experience the process. It is concerned with such issues as conflict, distrust, rivalry, resentment, and stress. Effectiveness is more related to how others judge the outcome of the transition. Examples of issues here include organizational performance indicators and satisfaction levels experienced by the next-generation managers. Further, it would seem logical that quality and effectiveness are related, although it is not clear in what way. For instance, there is some anecdotal evidence to suggest that some degree of conflict and rivalry may be functional in terms of the ultimate outcome of the transition (Kepler 1983; Kets de Vries 1993).

Research on succession processes has resulted in the identification of a variety of factors believed to be associated with effective transitions. Much of the published work tends to be anecdotal, and a given study will typically concentrate on one or two factors. Few systematic attempts have been made to comprehensively identify and classify these factors.

Of all the factors, the greatest amount of attention has been devoted to the need for family firms to develop formal succession plans and to engage in early estate planning (e.g., Dance 1982; Kets de Vries 1993; Ward 1987; Ward and Aronoff 1992; Williams 1990). Topics covered here include the structure of such plans, who should participate in their preparation, when they should be prepared, contingency issues in planning, and ways to avoid taxation liabilities, among others. Others have stressed issues of trust and communication among family members (e.g., Barnes and Hershon 1976; Brokaw 1992; Dyer 1986; Kets de Vries 1993; Levinson 1971; Ward and Aronoff 1992; Williams 1990).The potentially dysfunctional outcomes of sibling rivalries and/or failure to accommodate one another have also been high- lighted (e.g., Barnes and Hershon 1976; Handler 1991; Kaslow 1993; Kepner 1983; Kets de Vries 1993; Schlossberg 1992). Refusal of the head of the family business to let go, or to share power in incrementally increasing degrees, as well as that person’s resentment of heirs is a related topic (e.g., Handler 1990; Handler 1991; Keogh and Forbes 1991; Kepner 1983). The importance of shared values, agreement regarding what is equitable, and common tradi- tions across family generations has been emphasized as well (e.g., Dyer and Handler 1994; Nelton 1991). Another major concern receiving mention is the preparation level of heirs, that is, the extent to which they have the requisite business skills, managerial capabilities,


knowledge of company operations, and attitudinal predisposition to run the business (e.g., Doescher 1993; Fenn 1994; Hyatt 1992; Osborne 1991). Yet others have concentrated on organizational structures, such as the need to create a family council, the establishment of a board of directors with outside representation, and the use of consultants and advisors (e.g., Beckhard and Dyer 1983; Handler 1992; Jaffe 1992; Ward and Aronoff 1993).

This is but a partial list of issues. To obtain a more comprehensive picture, further exploratory research was undertaken by the authors. Structured personal interviews were conducted with a convenience sample of 20 second- or third-generation heads of family businesses. They were asked a series of open-ended questions regarding the nature of the transition process, including its length, key success factors, and major mistakes or issues they might have handled differently. In addition to these one-on-one interviews, a second analysis was conducted on confidential (i.e., a number of highly personal anecdotes were shared) data obtained from work by one of the authors with 40 groups of family business owners (first through fourth generation). Each group contained between 25 and 200 individuals, and the sessions were conducted over a five-year time period. The analysis was done on results of open discussions in which participants identified the factors they most associated with the relative success of the transitions in which they had been involved.

In this exploratory research, we were able to identify a consistent pattern in the factors that led to breakdowns in the succession process. These factors fell into three general groups or categories, and these groups effectively capture virtually all of the items identified in the literature summarized above. They were (1) problems in relationships among family members (the key factor mentioned 60% of the time in the two analyses); (2) heirs not being sufficiently prepared (25%); and (3) issues related to planning and control activities (10%).

The analysis also suggested that family business owners, when addressing succession- related issues, tended to allocate the largest proportion of their time to addressing estate- planning matters, including working with their legal and tax advisors, finding ways to avoid taxes, and preparing assets for transfer through trusts, wills, and other devices. Thus, while relationships within the family are identified as critical in determining succession outcomes, more time is devoted to tax and estate-planning issues than to developing positive relationships.

THE STUDY Although the issue of succession has been a dominant concern of family business researchers, the research to date has largely been qualitative, case-oriented, and/or anecdotal. While such work has produced rich insights into particular family business contexts, it typically lacks generalizability and does not allow for the establishment of statistical relationships between variables. Brockhaus (1994) has noted the prevalence of inadequate research designs and the absence of sophisticated statistical techniques in the extant literature.

To develop a more-complete understanding of the implications of the succession factors identified in the literature and in our preliminary research, while also attempting to over- come some of these methodological limitations, a causal model was designed and tested with data from two cross-sectional surveys. The model is illustrated in Figure 1. In it, the three summary factors from our preliminary research are identified as independent variables that determine the nature of the transition, or what Handler (1990) refers to as the “quality” of the succession process. The nature of the transition, in turn, affects post-transition performance (referred to by Handler as the “effectiveness” of the transition).


Preparation of Heirs

Nature of Family and Business Relationships

\ \

of the Transition Post-transition Performance

sales// I\

FIGURE 1 A conceptual model of the determinants and outcomes of family business transitions.

Survey Design The research design involved mail surveys directed at heads of second- and third-generation family-owned businesses.The questionnaire was relatively lengthy, consisting of 94 items, and was structured into five sections. Based on a pre-test of the survey on a convenience sample of 12 family business owners, the questionnaire took approximately 30 minutes to complete. Section I concerned respondents’ background, and was concerned with assessing the preparation of the individual prior to assuming control. Questions were included on various aspects of the respondent’s educational background, work experience inside and outside of the family business, reason for joining the business, and a global question on the respondent’s perceived level of preparation. Various 5-point Likert, categorical, and continuous scales were used to capture aspects of the preparation of heirs.

Section II explored family and business relationships. The organizational conflict scale used by Frone, Russell, and Cooper (1992) and the organizational commitment scale of Cook and Wall (1980) were adapted to a family setting. Items were measured on a 5-point scale with end points of 1 = “Strongly Disagree,” 5 = “Strongly Agree,” and a mid-point of 3 = “Neither Agree nor Disagree.” Reported reliabilities for each of these scales in other studies have exceeded 0.87.

Section III of the questionnaire addressed the transition experience itself. A series of 5-point scales, ranging from 1 = “Does Not Describe” to 5 = “Definitely Describes,” was used to measure the extent to which the transition was smooth, comfortable, antagonistic, complicated, and so forth. Questions regarding the length of the transition, whether or not the predecessor remained involved afterwards, and whether that person relinquished control when promised were also included.

Section IV examined whether firms pursued an array of planning and control activities (tax, estate, and succession) and their reliance on advisory boards and councils). These items employed dichotomous (yes, no) or multichotomous response scales.


The final section measured post-transition performance using the index proposed by Covin and Slevin (1990). Respondents rated the importance of 10 performance variables (e.g., sales, profits, cash flow) using 5-point scales with end points of 1 = “Of Little Impor- tance” and 5 = “Extremely Important.” Their levels of satisfaction with company performance on each of the variables was indicated on a 5-point scale, ranging from 1 = “Highly Dissatisfied” to 5 = “Highly Satisfied” with a mid-point of 3 = “Neither Satisfied Nor Dissati- sfied.” A performance index was derived by multiplying Importance X Satisfaction for each performance variable and summing the products. Reliabilities for this scale in previous studies have ranged from 0.86 to 0.92.

Sampling Methodology

Data for the study were collected using cross-sectional surveys from two subsamples. Heads of family-owned businesses that had experienced at least one intergenerational transition were asked to participate. Following pre-notification, a survey packet containing a cover letter, the questionnaire, and a self-addressed, stamped reply envelope was mailed to these individuals. As an incentive, participants were also promised an executive summary of the results.

The first subsample involved mailing the survey to 500 randomly selected non-tirst- generation businesses belonging to The Executive Council (TEC), a national organization of family-owned businesses. Surveys were mailed to the family member heading the organization. The second subsample involved randomly selecting five cities in Indiana from those having a population of between 50,000-150,000. Chambers of Commerce in each city were contacted and asked for copies of their Business Directories with names of the second- and third-generation family businesses annotated. This procedure resulted in a sampling frame of 298 businesses. The questionnaire was mailed to all identified firms, and again the family head of the business was asked to complete the survey.

For the first TEC subsample, 102 surveys were returned for a response rate of 20%. In the second subsample, 107 surveys were returned for a 36% response rate. Overall, a total of 209 questionnaires was obtained for a response rate of 26%. However, complete data were obtained from only 177 respondents (22%). The attrition rate was due primarily to respondents’ inability to answer questions on planning and control activities because components of estate and succession plans were not implemented in the business transitions from one generation to the next. To test for possible nonresponse bias resulting from the sampling procedure, checks for differences on the demographic characteristics of organizational size and industry type (Armstrong and Overton 1977) produced no significant differences between respondents and non-respondents at the 0.05 level.

Reliability

For purposes of scale development, principal components factor analyses with varimax rota- tion were performed on three sets of items: the 19 items concerning the relationships among family members that worked in the business during the preceding generation, the 8 items describing the transitional experience from the preceding generation, and the 10 weighted financial performance criteria. Three factors with eigenvalues > 1.0 were initially extracted from the set of family relations items and two factors from the financial criteria. All 8 items measuring the transition experience loaded on one factor. Factor loadings of > 0.50 were


TABLE 2 A Summary Table of Reliability for the Composite Scales Representing Family Relations, Transitional Experience, and Financial Performance

Total Cronbach Item-total Factor explained

Composite scale items alpha corrs. loadings var.

Transitional experience 1. SMOOTH

a. Comfortable b. Smooth

*c. Difficult *d. Frustrating *e. Complicated *f. Antagonistic g. Well-coordinated h. Enjoyable

Financial performance 2. PROFIT

i. Cash flow j. Return on equity k. Gross profit margin 1. Net profit from operations m. Profit to sales ratio n. Return on investment o. Ability to fund growth from profits

Family relations 3. AFFABLE

*p. There was considerable sibling rivalry in my family

*q. Certain family members were hostile to other members

r. There was little bickering among family members

*s. Certain family members had no respect for other members

*t. Certain family members were considered uncooperative

*u. Tensions between members tended to interfere with business

4. TRUST *v. Family members tended to play

roles and not be themselves w. Family members tended to

trust one another x. Family members were open and

honest with one another y. Family members had good

cooperative relationships z. Family members worked together

as a team

* Scale reverse-coded for that item.

.86

.89

.89 57.4 .73 ,813 .76 ,835 .80 .8.56 .76 ,821 .58 .680 ..54 ,604 .60 .692 .63 ,721

47.2 .53 ,602 .66 .797 .66 ,745 .71 .769 .61 ,691 .67 ,791 .59 ,620

48.1 .60 .625

.76 .755

.60 ,719

.76 ,706

.73 ,774

.67 ,546

.87 .51 ,642

.75 .675

.77 ,757

.79 ,710

.73 ,610

7.0

used to interpret dimensionality. Scale purification procedures resulted in the deletion of only one item from the dimension representing AFFABLE family relations (see Table 2).

Applying the Nunnally (1978) criterion of 0.70 for exploratory research, acceptable scale reliability was achieved on four of the identified dimensions. Two of these described


TABLE 3 Covariance Matrix with Correlations, Means, and Standard Deviations for the Indicator Variables in the Model

Variable Yl Y2 Xl x2 X3 Means Std. Dev.

SMOOTH (Yl) 1.00 21.30 16.88 13.37 5.24 26.84 7.27 PROFIT (Y2) .lO 1.00 26.03 23.64 -33.61 82.91 29.59 AFFABLE (Xl) .40 .15 l.00 19.36 -4.52 20.90 5.75 TRUST (X2) .42 .18 .77 1.00 -4.25 19.16 4.39 TAXEFF (X3) .ll -.18 -.I2 -.lS m 16.37 6.49

family relationships and were labeled AFFABLE and TRUST. one of them characterized the transition experience and was labeled SMOOTH, and the fourth measured performance and was labeled PROFIT. Cronbach alpha’s for the four dimensions were 0.91, 0.88, 0.89, and 0.84, respectively. Table 2 summarizes the resulting scales by presenting the individual items, item-total correlations, loadings on corresponding factors, and amount of total explained variance attributed to each. All four composite scales reported in the table are unidi- mensional.

Validity Content validity for the scales was established through a rigorous search of the literature, personal interviews, and a pre-test of the instrument on similar study units (Nunnally 1978). In an effort to assess concurrent validity for the transitional experience (SMOOTH) scale, a correlational approach was undertaken. Responses were obtained to a 3-point ordinal measure “that best describes your assumption of control.” This measure was coded 1 = “was a major struggle,” 2 = “was a minor struggle,” and 3 = “involved no struggle.” The measure proved to be significantly correlated with responses to SMOOTH (p = S4,p < .Ol). Conver- gent validity also was assessed by inspecting the correlation between the two measures of the family-relations construct. Convergence is the extent of agreement between two or more measures of a given construct (Campbell and Fisk 1959). Confirmation occurs when measures of the same construct correlate higher with each other than with measures of other constructs. A high correlation (r = .77,p = .OO) between the AFFABLE and TRUST measures indicates convergent validity (see Table 3).

ANALYSIS AND RESULTS Regression Analysis To test the influence of the various factors representing the Preparation of Heirs illustrated in Figure 1, two multiple regressions were performed using Characteristics of the Transition (SMOOTH) and Post-transition Performance (PROFIT) as dependent variables. Because of the mixed scales used to measure various aspects of heir preparation, ordinary least- squares regression was selected. Chi-square and t-tests were first performed to test for differences between the two subsamples on each of a set of six independent variables. No significant differences were found at the 0.05 level, so that the two subsamples were pooled for the analysis.

Several of the multi-category background variables were dummy-coded to produce meaningful variables for the interpretation of regression coefficients: formal education (FORMED) = 1 if a college or graduate degree, 0 otherwise; “primary motivation for joining


AFFABLE

TAXEFF POST TRANS PERF I, +j PROFIT 1

FIGURE 2 The final causal model.

the family business” (MOTIV) = 1 if “own desire,” 0 otherwise; and entry position “when you first joined the company on a full-time basis” (MANEXP) = 1 if middle- or senior-level manager, otherwise 0. Because of the skewed distribution of frequencies reported for the continuous measure “How many different, distinct positions have you held in the family business?“, the natural log (LOGPOS) was used to capture nonlinear relations. The remaining two preparation variables, “years of work experience outside of the family business” (WORKEXP), and self-perception of preparation (SELFPERC) were each measured on 5-point scales that approached continuity.

Results of the regression of SMOOTH against the set of independent variables produced a significant multivariate F (6, 170) = 5.63, p < .OOO, however only self-perception of preparation (SELFPERC) was significant (p < .OOO) with a positive coefficient of 0.41. In the second regression (F = 2.42, p < .05) with financial performance criteria (PROFIT) as the dependent variable, two variables, FORMED (Beta = .19, p = .023) and MANEXP (Beta = -.21, p = .Ol) were significant with coefficients that are relatively equal in magni- tude but opposite in sign. No other variables achieved significance in either of the regressions.

Structural Equations Analysis Further analysis was conducted to test the effects of the Nature of Family and Business Rela- tionships and of Planning and Control Activities on Characteristics of the Transition (as shown in Figure 1). This analysis was amenable to structural equations methodology. Two primary advantages of using structural equations methodology over other approaches to causal analysis are the explicit modeling of errors in both equations and variables, and the specification of relations between theoretical constructs and indicator variables. Composite scale scores derived from the exploratory factor analyses (see DeVellis 1991) were used as indicator variables because the primary interest was the relations between variable-level constructs, not individual scale items.

Figure 2 represents a path model of the proposed causal relations between the exogenous variables, the nature of family and business relationships (FAM/BUS RELAT) and tax planning (TAX PLAN’G), and the endogenous variables, transition (TRANSITN) and post- transition performance (POST-TRANS PERF). The FAM/BUS RELAT construct is mea-


TABLE 4 Parameter Estimates for the Causal Model Paths

Parameters Max. likelihood

estimates t-Values Standardized

solution

-ii ,527 6.631 519 yz ,153 1.46’) ,154 Y? ,029 2.695 .1x7 Y4 -.027 -2.144 ~-.I75 P ,057 0.551 o.sx

GFI = .991 AGFI = ,954 RMR = 2.920 NFI = ,894 df. = 3 Coeff. of Det. = ,341

sured by its two composite indicators, AFFABLE and TRUST. The TRANSITN and POST- TRANS PERF constructs are each measured by their single composite scales (SMOOTH and PROFIT), respectively. TAX PLAN’G is measured by the single weighted indicator TAXEFF. Similar to the regression analysis, paths from the exogenous variables to POST- TRANS PERF were also estimated.

To estimate the model parameters, the single measure TAXEFF (h,) was set equal to 1.0 and its error term (6,) equal to zero. Instead of assuming the composite single indicators SMOOTH and PROFIT to be errorless and setting them equal to unity, the variance for each (A4 and A,) was fixed as the product of the square root of its reliability estimate (o) and standard deviation. Individual error variances (E, and E?) were fixed as the product of the variance of the observed variable and (1 - o) (Joreskog and Sorbom 1983; Kenny 1979). By fixing the variance on the FAM/BUS RELAT construct to 1.0, estimates for both indicators, AFFABLE and TRUST were obtained.

The data were subjected to LISREL VI (Joreskog and Sorbom 1983). A two-groups analysis was employed to test whether the covariance matrices were invariant over the two subsamples (I: (‘1 = Z(*)). The resulting Chi-square-x? (15) = 20.38,~ = .16--provided evidence that the covariance matrices of the two subsamples did not differ significantly. Conse- quently, subsequent analysis was based on the combined sample.

The correlation matrix for the combined sample in Table 2 was used as input for the analysis. Covariances between indicators are shown above and Pearson product-moment correlations below the diagonal. The variable means and standard deviations suggest that the variables are fairly well-behaved. Subsequent analysis was based on fitting the covariance matrix implied by the model to the sample covariance matrix.

The overall fit of the model to the data is more than acceptable (x’ (3) = 4.09, p = .25). The goodness-of-fit (GFI) index registered 0.99 (0.95 when adjusted for degrees of free- dom) and the root mean square residual (RMR) was 0.02. The Null Fit Index (NFI) (Bentler and Bonnett 1980), a measure of incremental fit to a null model with all variables mutually independent, was 0.98 (x2A (7) was 215.29 - 4.09 = 211.20, p < .OO). Table 4 presents the path estimates from the maximum-likelihood fitting function. T-values and the standardized solution are also provided along with the overall goodness-of-fit indices.

Estimates for three of the paths in the model were statistically significant (t > 2.0). The direct paths fromFAM/BUS RELAT (n = .53, t = 6.63) and from TAX PLAN’G to TRAN- SIT (y3 = .03, t = 2.70) are significant (t 2 2.0), indicating that family and business relationships and tax planning are positively related to the transitional experience from one genera-


tion to the next. The path between TAX PLAN’G and POST-TRANS PERF was also significant, but in a negative direction (yl = -.03, t = -2.14) suggesting that tax planning is inversely related to post-transition performance. The remaining two paths from FAM/ BUS RELAT to POST-TRANS PERF (yZ = .15, t = 1.47) and from TRANSIT to POST- TRANS PERF (l3 = .06, t = 55) were nonsignificant.

The total coefficient of determination for the structural equations was 0.34. Squared multiple correlations for the two indicators of FAM/BUS RELAT were 0.73 for AFFABLE and 0.81 for TRUST. All other model parameters not reported in Table 4 were significant at the 0.05 level or beyond. Inspection of the Lagrangian Multiplier tests (modification indices) and standardized residuals indicated no significant improvement in fit or specification error for the model.

CONCLUSIONS AND IMPLICATIONS The findings lend tentative empirical support to the model proposed in Figure 1. Family business transitions do appear to occur more smoothly where heirs are better prepared, where relationships among family members are more trust-based and affable, and where family businesses engage in more planning for taxation and wealth transfer purposes. Altern- atively, post-transition performance is positively affected by the education level of the heirs and the extent to which heirs work their way up through the ranks.

Importantly, the dominant variable in successful business transitions appears to be family relationships. In spite of the considerable emphasis, both in practice and in the literature, placed on succession planning and preparing heirs, it appears that the family business leader’s first priorities should be building trust, encouraging open communication, and fostering shared values among the family members. Thus, greater attention in theory and practice should be given to the human element, the complex interactions that dynamically unfold, and the corresponding need for interventions aimed at establishing and maintaining family cohesion.

Family relationships have multiple dimensions, including relationships among heirs, between heirs and the family business head, between heirs and the spouse of the family business head, and so forth. This research has suggested that the two most critical issues in relationships are trust and affability. Trust is characterized by openness and honesty among family members, as well as confidence in a family member’s reliability and integrity. It can be associated with such qualities as consistency, competence, fairness, responsibility, helpfulness, and benevolence. Affability is concerned with mutual respect between the family business head and heirs, on the one hand, and with the minimization of rivalry, bickering, hostility, and tension, on the other hand. Thus, rivalry is replaced by accommodation and team approaches to tasks and problems.

Similar to relationships with suppliers and customers, relationships within the family represent a strategic dimension within the business, and a potential source of competitive advantage. Accordingly, they must be managed strategically. One possible approach is to develop a “relationship charter” that provides a framework for the accomplishment of common goals and effective teamwork within the family unit. Such a charter would include (1) identification of strengths, weaknesses, opportunities, and threats within the family unit; (2) establishment of mutual goals and objectives for relationship quality and effectiveness; (3) definition of mutual role expectations; (4) development of programs for developing and im- proving relationships; (5) periodic measurement of relationship performance and family


member satisfaction with the relationship; and, (6) creation of accepted mechanisms for conflict mediation and resolution.

The failure to find a relationship between the nature of the transition and post-transition performance raises a number of questions. It may be that some level of conflict or strife is a prerequisite for the transition to have a significant impact on performance. Whether or not the relationship is curvilinear, or there are optimal levels of conflict or strife insofar as subsequent performance is concerned, is a subject for further research. However, this does raise a related issue. The literature on psychological and sociological characteristics associated with entrepreneurial behavior often highlights conflicts in and dysfunctional aspects of the relationship between entrepreneurs and their fathers when growing up (e.g., Dyer and Handler 1994, p. 73). Again, then, to the extent that entrepreneurial behavior is desirable on the part of the heir, some degree of conflict appears desirable, so long as it is coupled with shared values between generations regarding the importance of growth, value creation, and innovation. Alternatively, the focus in the extant literature would appear to be on min- imizing conflicts.

Counter to expectations, tax planning had a negative impact on subsequent financial performance. One explanation is that a preoccupation with avoiding taxation may find the owner/manager ignoring fundamental business issues. Another possibility is that tax planning results in actions that serve individual financial gain at the expense of business profits (i.e., an income transfer). In either case, it is important that tax planners attempt to get family business owners to think holistically. They must help the owner understand that tax planning is not a substitute for succession planning, which suggests a need to ask questions beyond those concerned with dollars. It also indicates a need for tax planners to develop networks whereby they can introduce the family business owner to other experts and consultants in such areas as family therapy, business planning, and succession planning.

The methodological challenges in conducting family business research create a number of limitations that should be kept in mind when reviewing these results. Absent a longitudinal perspective, which might entail monitoring a given family business over two or three decades, approaches such as the one used here, though flawed, become necessary. While the statistical methodology employed enables causal inferences, the study suffers from sample size limitations. Although this is not unusual where the unit of analysis is the organization (i.e., a family business that has experienced a transition), smaller relative samples do constrain the analysis. Further, the study relied on self-reports from a cross-section of firms that had made the transition, and things may well be perceived somewhat differently in hindsight than they in fact actually were. A related limitation is the non-representation of firms that had failed to make the transition. In addition, a number of the measures employed here had not previously been applied in a family context. Measurement problems may have contributed to some of the variables falling out of the analysis. It would also have been desirable to have multiple indicators for some of the single-measure items. In a similar vein, the measures of post-transition performance might have been supplemented with actual measures of financial performance.

Future research should focus on redressing these limitations, while increasing the vol- ume of quantitative research to complement the emerging body of qualitative work on family business transitions. More evidence from representative samples of family businesses is needed to confirm or falsify the inferences generated from qualitative studies. In addition, models such as the one proposed here require further refinement. For instance, deeper insights are needed regarding ways in which the exogenous variables in the model (preparation, family relationships, and planning/control activities) interact with one another. Do businesses experiencing more cohesive relationships among family members tend to produce


better-prepared heirs, or tend to plan better? Another critical issue requiring further research involves the causes of failure and success in second- and third-generation businesses. Can success or failure be measured relative to norms for a given industry? Are there identifi- able failure factors, and to what extent are these related to family versus non-family issues? Do family businesses experience differential rates of success compared to non-family- controlled businesses in the same industry? Does this differential change from generation to generation? Progress in areas such as these will be instrumental in developing a rich body of theory in the family business area, and in developing a set of normative insights regarding how these firms can evolve in a more strategic fashion.

REFERENCES Adizes, I. 1978. Organizational passages: Diagnosing and treating life-cycle problems of organiza-

tions. Organizational Dynamics 712-25. Barnes, L.B., and Hershon, S.A. 1976. Transferring power in the family business. Harvard Busi-

ness Review 54(4):105-114. Beckhard, R., and Dyer, W.G. 1983. Managing continuity in the family-owned business. Organi-

zational Dynamics 12(l):%12. Bentler, P.M., and Bonnett, D.G. 1980. Significance tests and goodness of fit in analysis of covari-

ante structures. Psychological Bulletin 88:588-606. Berle, A.A., and Means, G. 1932. The Modern Corporation and Private Property. San Diego:

Harcourt Brace Jovanovich. Brockhaus, R.H. 1994. Entrepreneurship and family business research: Comparisons, critique,

and lessons. Entrepreneurship Theory and Practice 19(1):25-38. Brokaw, L. 1992. Why family businesses are best. ZNC (March):73-81. Campbell, D.T., and Fisk, D.W. 1959. Convergent and discriminant validation by the multi-trait-

multi-method matrix. Psychological Bulletin 56:&l-105. Carsrud, A.L. 1994. Meanderings of a resurrected psychologist, or lessons learned in creating a

family business program. Entrepreneurship Theory and Practice 19(1):3948. Churchill, N.C., and Lewis, N.C. 1983. The five stages of small business growth. Harvard Business

Review 61:3@-50. Cook, J, and Wall, T. 1980. New work attitude measures of trust, organizational commitment

and personal need non-fulfillment. Journal of Occupational Psychology 53:39-52. Covin, J., and Slevin, D. 1990. New venture strategic posture, structure, and performance: An

industry life cycle analysis. Journal of Business Venturing 5(2):123-135. Daily, C.M., and Dollinger, M.J. 1991. Family firms are different. Review of Business 13(1):3-5. Dance, L. 1982. Beyond SurvivakA Business Owner’s Guide for Success. Cleveland, OH: Univer-

sity Press. DeVellis, R.F. 1991. Scale Development Theory and Applications. Newbury Park, CA: Sage Pub-

lications. Doescher, W.F. 1993. How to shake the family tree. D & B Reports, July/August, pp. 10-11. Duman, R. 1992. Family firms are different. Entrepreneurship Theory and Practice 17:13-21. Dyer, W.G. 1986. Cultural Change in Family Firms. San Francisco: Jossey-Bass. Dyer, W.G., and Handler, W. 1994. Entrepreneurship and family business: Exploring the connec-

tions. Entrepreneurship Theory and Practice 19(1):71-84. Fenn, D. 1994. Are your kids good enough to run your business. INC., August, pp. 36-48. Frone, M.R., Russell, M., and Cooper, M.L. 1992. Ante-dents and outcomes of work-family

conflict: Testing a model of the work-family interface. Journal of Applied Psychology 77(1):65-78.


Griener, L.E. 1972. Evolution and revolution as organizations grow. Harvard Business Re- view 50:37-46.

Handler, W. 1990. Succession in family firms: A mutual role adjustment between entrepreneur and next-generation family members. Entrepreneurship Theory and Practice 1537-51.

Handler, W. 1991. Key interpersonal relationships of next-generation family members in family firms. Journal of Small Business Management 28:21-32.

Handler, W. 1992. The family venture. In W. Sahlman and H. Stevenson, eds.. The Entrepreneurial Venture. Boston: Harvard Business School, pp. 311-321.

Hyatt, J. 1992. Fathers and sons. INC., May, pp. 5162. Jaffe, D.T. 1992. Working with the Ones You Love. Berkeley. CA: Conari Press. Joreskog, K.G., and Sorbom, D. 1983. LISREL: Analysis of Linear Structural Relationships by

Method of Maximum Likelihood-User’s Guide, 2nd Edition. Chicago: National Educa- tional Resources.

Kaslow, F. 1993. The lore and lure of family business. American Journal of Family Therapy 21(1):3-16.

Kenny, D.A. 1979. Correlation and Causality. New York: Wiley. Keogh, J.. and Forbes, C. 1991. Enduring generations of change. Industrial Distribution, October.

pp. 28-34. Kepner, E. 1983. The family and the firm: A coevolutionary perspective. Organizational Dynam-

ics 12:57-70. ” Kets de Vries, M.F.R. 1993. The dynamics of family controlled firms: The good news and the

bad news. Organizational Dynamics 21:59-71. Levinson, H. 1971. Conflicts that plague the family business. Harvard Business Review 49:71-80. MassMutual. 1993. Major Findingsofthe Family Business Survey. Springfield, MA: Massachusetts

Mutual Life Insurance Co. Nelton, S. 1991. Ten keys to success in family business. Nations Business 79:4445. Nunnally, J.C. 1978. Psychometric Theory, Second Edition, New York: McGraw-Hill. Osborne, R.L. 1991. Second-generation entrepreneurs: Passing the baton in the privately held

company. Management Decision 29(1):42-46. Rosenblatt, P.L., Anderson, M.R. and Johnson, P. 1985. The Family in Business. San Francisco:

Jossey-Bass. Schlossberg, J. 1992. My way: Did John Polcari have to scrap the family business to save it? Restuu-

rant Business 1:9&102. Ward, J.I. 1987. Keeping the Family Business Healthy. San Francisco: Jossey-Bass. Ward, J.L., and Aronoff, C.E. 1992. Accountability: The Whetstone effect. Nations Business

80:52-53. Ward, J.L., and Aronoff, C.E. 1993. In-laws in the family business. Nations Business X1:32-33. Williams, R. 1992. Preparing Your Family to Manage Wealth. Marina, CA: Monterey Pacific

Institute.

Documents

Correlates of success in family business transitions