The Enigma of the Family Successor–Firm Performance Relationship

[We’re pleased to welcome authors Jan-Philipp Ahrens of the University of Mannheim, Andrea Calabrò of IPAG Business School, Jolien Huybrechts of Maastricht University, Michael Woywode of the University of Mannheim and the Centre of European Economic Research. They recently published an article in Entrepreneurship Theory and Practice entitled “The Enigma of the Family Successor–Firm Performance Relationship: A Methodological Reflection and Reconciliation Attempt,” which is currently free to read for a limited time. Below, they briefly describe the motivation and impact of their research.]

What motivated you to pursue this research?

The vast majority of firms on the planet are family firms. Often they are the institutionalized ‘Gestalt’ of the family’s or founder’s work, identity, and vision – and are typically managed for the long run so that a unique social constellation wrought by social capital, a vivid culture and a mutual commitment emerges over time. In essence, this includes an aspiration of an intergenerational continuity in family leadership and values, as well as in obligations and in the reciprocity that this entails. Interestingly, this peculiar long run horizon that is very difficult to imitate for non-family firms – as they cannot offer the same continuity in relationships and are more short term oriented – has been found to be a source of competitive advantage. At the same time, quite paradoxically, extant research has frequently documented that choosing a family successor is detrimental to firm performance. Thus – especially because several of us have a family firm background – we thought that there might be more to discover that could help to explain this enigma.

In what ways is your research innovative, and how do you think it will impact the field?

Our article takes a fresh and reconciliatory perspective by re-conceptualizing succession in family firms and, in particular, by making the social individual, i.e. the family successor in his/her social context and the reciprocal human interactions that constitute this group, the unit of analysis. Relying on social exchange theory and its core concepts of generalized exchange, the norm of reciprocity, and extended credit, we develop a new framework that can explain how social capital, values, and identity can be perpetuated across generations which – we argue – is of singular advantage to family successors. And indeed, when we isolate and separate important economic forces on the successor level, we observe that a “family member attribute” of the successor – understood as a CEO attribute – is performance enhancing or put differently: All other attributes equal, the family successor is the superior successor. That in itself has a series of implications for family firm theory. Of course, that is only the cocktail-party-version here, the full arguments are inside the article, which we highly recommend, especially to practitioners. The bottom line is that there is often value in the continuity of family leadership, as garnered social capital, identity, and values are retained.

What is the most important/ influential piece of scholarship you’ve read in the last year?

This would be Marcus Aurelius’ “Meditations” (Roman Emperor 161-180). Not only does it directly and in their core reveal the views on the world of the most powerful person of the time, which is entirely breathtaking and inspiring to read, but it is a towering literary monument to governing and human precepts of service and duty.

We hope that our work encourages future researchers to continue to find ways to examine other factors at the individual level that influences family firm outcomes. Only through the continued pursuit of future research at multiple levels within the family firm can we come to a better understanding of why the family firm is the unique environment that it is.

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Management Practices: Complementarity is the Key

[We’re pleased to welcome Arthur Grimes of Motu Economic and Policy Research and University 16296308759_8149d18c99_zof Auckland. Arthur recently published an article in ILR Review entitled “The ‘Suite’ Smell of Success: Personnel Practices and Firm Performance” with co-author Richard Fabling of Motu Economic and Policy Research.]

Throughout the world, we see firms in the same industry in the same country having very different productivity outcomes. We have long been fascinated in why this is the case, and whether management can do anything to place their firm in the top quartile of performers within their industry.

It turns out that management practices are key to firms’ productivity outcomes. But the key is not a simplistic application of performance pay or any other single management practice to the firm; a holistic approach is required. Recent analysis ILR_72ppiRGB_powerpointbased on longitudinal data for New Zealand firms across all sectors of the economy, shows that having in place a suite of complementary high-performance management practices can raise productivity by over 10% for firms that are in the top quartile of management practices. This is the case for firms in manufacturing, services and other sectors. The suite of management practices includes having processes for staff consultation, clear firm values, performance reviews coupled with performance pay, room for autonomous staff decision-making and staff training opportunities.  What this means for firms is that there are no ‘magic-bullet’ management practices that can be introduced quickly to transform most firms. Management need to introduce a comprehensive suite of management practices if they wish to raise their productivity to be in the top rung of firms.

The abstract from the paper:

The authors use a panel of more than 1,500 New Zealand firms, from a diverse range of industries, to examine how the adoption of human resource management (HRM) practices affects firm performance. The panel is based on managerial responses to mandatory surveys of management practices in 2001 and 2005 administered by the national statistical office, linked to objective longitudinal firm performance data. The authors find that, after controlling for time-invariant firm characteristics and changes in a wide range of business practices and firm developments, a suite of general HRM practices has a positive impact on firm labor and multifactor productivity. Conversely, these practices tend to have no effect on profitability, in part because the adoption of performance pay systems raises average wages in the firm.

You can read “The ‘Suite’ Smell of Success: Personnel Practices and Firm Performance” from ILR Review free for the next two weeks by clicking here. Want to know all about the latest research from ILR ReviewClick here to sign up for e-alerts!

*Meeting image credited to Ministerie van Buitenlandse Zaken (CC)

How Do CEOs Shape Corporate Culture?

In some ways, corporate culture is the personality Meeting Board Roomof a company, and just like human personalities, corporate cultures can vary widely. Many factors impact a company’s culture, but perhaps the most significant determining factor of culture is the values and actions of an organization’s senior leaders. In their article, “The Promise and Problems of Organizational Culture: CEO Personality, Culture, and Firm Performance,” published in the December 2014 issue of Group & Organization Management, authors Charles A. O’Reilly III of Standford University, David F. Caldwell of Santa Clara University, Jennifer A. Chatman of UC Berkeley, and Bernadette Doerr of UC Berkeley delve into the topic of organizational culture. Their paper specifically discusses how much a CEO’s personality impacts organizational culture, and how culture can in turn impact organizational performance.

home_coverThe abstract:

Studies of organizational culture are almost always based on two assumptions: (a) Senior leaders are the prime determinant of the culture, and (b) culture is related to consequential organizational outcomes. Although intuitively reasonable and often accepted as fact, the empirical evidence for these is surprisingly thin, and the results are quite mixed. Almost no research has jointly investigated these assumptions and how they are linked. The purpose of this article is to empirically link CEO personality to culture and organizational culture to objective measures of firm performance. Using data from respondents in 32 high-technology companies, we show that CEO personality affects a firm’s culture and that culture is subsequently related to a broad set of organizational outcomes including a firm’s financial performance (revenue growth, Tobin’s Q), reputation, analysts’ stock recommendations, and employee attitudes. We discuss the implications of these findings for future research on organizational culture.

You can read “The Promise and Problems of Organizational Culture: CEO Personality, Culture, and Firm Performance” from Group & Organization Management free for the next two weeks by clicking here. Want to know about all the latest research from Group & Organization Management? Click here to sign up for e-alerts!

Is Joint Achievement of Customer Satisfaction and Efficiency Beneficial in Merger Contexts?

[Editor’s Note: We’re pleased to welcome Vanitha Swaminathan, who collaborated with Christopher Groening, Vikas Mittal, and Felipe Thomaz on their paper “How Achieving the Dual Goal of Customer Satisfaction and Efficiency in Mergers Affects a Firm’s Long-Term Financial Performance” from the May issue of Journal of Service Research.]

02JSR13_Covers.indd• What inspired you to be interested in this topic?
This paper began by looking at the often repeated assertion that mergers lead to reductions in customer satisfaction. While one may believe this to be the case, there is evidence that customer satisfaction improvements actually increase financial value…which led us to ask the question, would managers wishing to maximize shareholder value reduce their focus on customer satisfaction in a merger? Following this, we wondered if a focus on both customer satisfaction and efficiency improves shareholder value even more in a merger context.

• Were there findings that were surprising to you?
Contrary to what conventional wisdom regarding mergers and customer satisfaction, we found that a dual emphasis on both customer satisfaction and efficiency improvements will actually benefit firms in a merger context. I think the biggest surprise was our finding that non-merged firms did not significantly benefit from a dual emphasis. In other words, we thought that a merged firm would find greater value in a dual emphasis, but not that a non-merged would find little to none.

• How do you see this study influencing future research and/or practice? It will help to go deeper into analyzing why customer satisfaction and efficiency improvements in merger contexts facilitate shareholder value maximization, more so than non-merger settings. Is it the improved availability of resources, or greater access to more profitable customer groups? Is it due to the creation of new synergies between the merging companies?
Addressing these questions will help increase our understanding of when to best implement these typically opposing goals (i.e., efficiency and customer satisfaction improvements) even in non-merger settings.

Read “How Achieving the Dual Goal of Customer Satisfaction and Efficiency in Mergers Affects a Firm’s Long-Term Financial Performance” from Journal of Service Research for free by clicking here. Don’t forget to click here to sign up for e-alerts and be in the know about all the latest from Journal of Service Research!

swaminathan-vanithaVanitha Swaminathan is Associate Professor of Business Administration and Robert W. Murphy Faculty Fellow in Marketing at the University of Pittsburgh. Her research interests revolve around branding strategy and consumer-brand relationships.GroeningChris_1

Christopher Groening is Assistant Professor of Marketing at the College of Business at Kent State University. Chris’s current academic research centers around investigating stakeholder influence on the financial outcomes of a firm.

MittalPhotoVikas Mittal is J. Hugh Liedtke Professor of Marketing at the Jones Graduate School of Business, Rice University and Adjunct Professor of Family Medicine at Baylor College of Medicine.Thomaz

 

Felipe Thomaz is a doctoral candidate at the Katz Graduate School of Business, University of Pittsburgh, Pittsburgh.

How does a merger contribute to firm success?

Are successful mergers only geared to wresting efficiencies? Or can there be other considerations that come into play – and ultimately affect a firm’s financial performance? “How Achieving the Dual Goal of Customer Satisfaction and Efficiency in Mergers Affects a Firm’s Long-Term Financial Performance” by Vanitha Swaminathan (University of Pittsburgh), Christopher Groening (Kent State University), Vikas Mittal (Rice University) and Felipe Thomaz (University of Pittsburgh) furthers the literature by exploring the moderating role of mergers towards maximizing long-term firm value.

We are pleased to highlight this recent study comprising 429 observations across multiple firms and industries published in the Journal of Service Research.

Professor Swaminathan graciously provided insights behind the article in her responses below.

•      What inspired you to be interested in this topic?

This paper began by looking at the often repeated assertion that mergers lead to reductions in customer satisfaction. While one may believe this to be the case, there is evidence that customer satisfaction improvements actually increase financial value…which led us to ask the question, would managers wishing to maximize shareholder value reduce their focus on customer satisfaction in a merger? Following this, we wondered if a focus on both customer satisfaction and efficiency improves shareholder value even more in a merger context.

•       Were there findings that were surprising to you?

Contrary to what conventional wisdom regarding mergers and customer satisfaction, we found that a dual emphasis on both customer satisfaction and efficiency improvements will actually benefit firms in a merger context. I think the biggest surprise was our finding that non-merged firms did not significantly benefit from a dual emphasis. In other words, we thought that a merged firm would find greater value in a dual emphasis, but not that a non-merged would find little to none.

•     How do you see this study influencing future research and/or practice?

It will help to go deeper into analyzing why customer satisfaction and efficiency improvements in merger contexts facilitate shareholder value maximization, more so than non-merger settings.  Is it the improved availability of resources, or greater access to more profitable customer groups? Is it due to the creation of new synergies between the merging companies?Addressing these questions will help increase our understanding of when to best implement these typically opposing goals (i.e., efficiency and customer satisfaction improvements) even in non-merger settings.

Read the entire article online in Journal of Service Research free through the end of January, and sign up for e-alerts so you don’t miss out on future issues and articles published in Journal of Service Research.

 

Why Some Firms Internationalize Better Than Others

Editor’s note: We are pleased to welcome Chris Graves of the University of Adelaide in Australia. His paper “An Empirical Analysis of the Effect of Internationalization on the Performance of Unlisted Family and Nonfamily Firms in Australia,” co-authored by Yuan George Shan of the University of Adelaide, is forthcoming in Family Business Review and now available in the journal’s OnlineFirst section.

This FBR article was motivated by the growing body of research comparing the performance of listed family and non-family controlled firms. Coming from Australia, where the number of listed family-controlled enterprises is low (only ~17 percent of all listed firms), I was interested in ascertaining whether the performance differences between listed family and non-family controlled firms is generalisable to unlisted firms.

pullquoteHence the first objective of this FBR article is to examine whether the performance of unlisted family firms is similar / different to that of their non-family counterparts (many of which are single owner-managed firms). Also, back in 2006, I completed my PhD titled ‘Venturing Beyond the Backyard: An Examination of the Internationalisation Process of Australian SME Family-Owned Manufacturing Enterprises’. This study highlighted that family firms lag behind their non-family counterparts when it comes to venturing overseas. Subsequent to this study, I’ve been undertaking further research on possible reasons for this, one of which is the second focus of this FBR article. Specifically, what effect does internationalisation have on the financial performance of family firms, and is this effect similar / different to that experienced by their non-family counterparts?

fbr_coverInterestingly, from an agency theory perspective (the dominant theory used to explain performance differences amongst listed firms), there should be little difference in performance amongst unlisted family and non-family firms, as both firms are likely to experience low levels of agency costs because of the high degree of overlap between ownership and management. Despite this, the findings reported in this FBR article highlight that family firms achieve a significantly higher Return on Assets (ROA) compared to their non-family counterparts. Further analysis revealed that this was due to the fact that family firms are able to achieve a higher profit margin, that is, keep their expenses relative to sales revenue lower compared to their non-family counterparts.

The other interesting finding reported in this FBR article is that family firms financially outperform their non-family counterparts when they expand internationally. Overall, growing overseas had a significant negative effect on ROA for firms in general, an issue that was not observed with family firms.

How do I see this study influencing future research and/or practice? For family business owners and advisors:

1. Although prior research suggests that family firms are less likely to venture into foreign markets (Fernández & Nieto, 2005; Graves & Thomas, 2004), based on the results in this study, there are no reasons on performance grounds why they should not be encouraged to do so.

2. Don’t underestimate the value that comes from a stewardship style of leadership. This approach to leadership may enable the firm to develop competencies not available to other firms and consequently achieve superior performance (such as lower profit margins and therefore a superior ROA). This includes building a group of talented, motivated and loyal employees who help keep costs and bureaucracy down, work together to achieve a common purpose and improve prospects for its future performance.

For future research:

1. Further research is required to examine the effect of different internationalisation strategies on the relative performance of family and non-family firms (foreign entry method employed, countries targeted).

2. Findings from this study highlight that agency theory provides little value in explaining why unlisted family firms outperform their unlisted non-family counterparts. This suggests that alternative theoretical perspectives, such as stewardship theory and / or the Resource-Based View (RBV) of the firm, may provide a better basis for explaining performance differences amongst unlisted firms.

Chris Graves 2010Read the paper, “An Empirical Analysis of the Effect of Internationalization on the Performance of Unlisted Family and Nonfamily Firms in Australia,” online in Family Business Review.

Dr. Chris Graves is a Senior Lecturer in Accounting and Family Business Management and co-founder of the Family Business Education and Research Group [FBERG] at the University of Adelaide Business School. His family business research focuses on firm performance, internationalisation, financing and corporate governance. Chris teaches financial management and family business management at both the undergraduate and postgraduate levels. He is currently serves on the board of the International Family Enterprise Research Academy (www.ifera.org).

Do Academics Make Good Directors?

Editor’s note: We are pleased to welcome Guclu Atinc of Drake University. His paper “An Investigation of the Impact of Academicians as Directors,” co-authored by Mark Kroll of The University of Texas at Brownsville and Bruce Walters of Louisiana Tech University, is forthcoming in the Journal of Leadership & Organizational Studies and now available in the journal’s OnlineFirst section.

UntitledAs a corporate governance researcher, one of the topics I am interested in is board composition. As an academician, I thought it would be interesting to investigate whether the presence of academicians as independent board members impacts organizational outcomes.

We expected academician directors to influence board vigilance and accounting performance. Based on our results, that was not the case. However, our results also showed that organizations with academician directors are valued more favorably by the market players. That finding was surprising and worthy of note for the board composition literature.

JLOS_72ppiRGB_150pixWDue to recent regulatory developments, such as the Sarbanes Oxley Act 2002, and new research findings published in premier outlets of the management field, directors are now considered to be more essential for strategic decision making.  To our knowledge, presence of academicians as board members was not assessed by previous researchers. I believe that our manuscript is a good starting point. In the future, researchers may further investigate this area. Practitioners may find our paper useful when they are looking into the effect of different board compositions. They may be particularly interested in nominating academicians as potential independent board members.

Read the article, “An Investigation of the Impact of Academicians as Directors,” online in the Journal of Leadership & Organizational Studies.

guclu-atincGuclu Atinc is an Assistant Professor of Management at Drake University. He received his doctoral degree from Louisiana Tech University in Strategic Management. His current research interests are in the area of upper echelons and boards of directors in young entrepreneurial firms and the impact of environment in strategic decision making. His research appeared in journals like Organizational Research Methods, Journal of Managerial Issues and Journal of Business Strategies.