Underperformance in family successions: the role of outside work experience

Internal seminar for researchers

Abstract: The underperformance of family successors relative to professional CEOs in family firms has been repeatedly documented. Using administrative data, we study 4,000 CEO transitions in the population of family-controlled Norwegian firms over a 17-year period.

First, we document that a large majority of family successors are  employed in the firm well before they take over as CEOs, and that a remarkably high fraction of such inside recruits, around fifty percent, have never had full-time employment outside the family firm. This early positioning of successors in the firm may result from families' desires to foster identity and loyalty to their business norms and thinking.

Second, we find that the previously documented underperformance of family successors is entirely driven by successors recruited from inside the firm, whereas family successors recruited from outside employers perform on par with professional CEOs.

We propose that extensive exposure to the family firm may entail a lack of cognitive diversity and "thinking outside the box", resulting from internalization of older generations' beliefs and business norms.

We are able to rule out a range of alternative explanations for our results, including differences in inside and outside family successors' prior management experience and education. The performance gap between inside and outside successors holds up when we consider only son-successors of the outgoing CEOs, as well as when we compare inside and outside professional CEOs.  At the same time, the duration of family successors' outside work experience explains a substantial part of the performance gap.

We also consider whether selection on unobservable characteristics of outside family successors can explain our results. If the most talented family members receive outside work offers, the performance gap reflects differences in innate ability rather than skills acquired from outside employment. To the extent that this is the case, our results have the important implication that outside offers are an observable signal that family owners can use to guide their succession decisions.