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Ansari, Iram Fatima, Goergen, Marc and Mira, Svetlana 2014. The determinants of the CEO
successor choice in family firms. Journal of Corporate Finance 28 , pp. 6-25.
10.1016/j.jcorpfin.2013.12.006 file
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The Determinants of the CEO Successor Choice in Family
Firms
Iram Fatima Ansari
Cardiff Business School, Cardiff University
Marc Goergen
Cardiff Business School, Cardiff University, and European Corporate Governance Institute
(ECGI)
Svetlana Mira
Cardiff Business School, Cardiff University
ABSTRACT
This paper studies the factors that influence the CEO succession decision in family firms whose
incumbent CEO is a member of the controlling family. The sample includes all such firms from
France, Germany and the UK. We propose a new measure of directors’ independence, which
adjusts for various links with the controlling family. While we find that conventionally defined
directors’ independence has no impact on the CEO succession decision, our corrected measure
reduces the likelihood of the successor being another family member. There is also evidence that
firms from France that are cross-listed in the UK or USA are less likely to appoint another family
CEO.
Keywords: Family firms, CEO succession, corporate governance, corporate control and
ownership
JEL code: G32, G34
Acknowledgements: We would like to thank participants at a workshop at Cardiff Business
School as well as participants at the 13
th
Workshop on Corporate Governance and Investment at
Cardiff University and the 2013 ACCGBS at Assumption University of Thailand for helpful
comments and suggestions. We are particularly grateful to Øyvind Bøhren. Iram gratefully
acknowledges financial support from the College of Economics and Political Science, Sultan
Qaboos University, Oman. Finally, we are indebted to an anonymous referee, Luc Renneboog and
Stuart Gillan, the Editor.
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Highlights
This paper studies CEO succession and re-appointment decisions in family firms.
The sample includes French, German and UK family firms.
Reported board independence does not impact the choice of CEO successor.
Conversely, board independence adjusted for links with the family shareholder does.
UK and US cross-listed French firms less likely choose a family member as CEO.
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1. Introduction
Bertrand and Schoar (2006) argue that family founders have a long-term view of their firm and
have a strong interest in its continuity and survival. In support of this argument, there are many
examples of successful and well-known family firms that have stood the test of time and have
survived for generations. Such firms include Ford Motor Company, BMW, l’Oréal and Siemens.
Conversely, myopia and short-termism are traits frequently associated with widely held firms (see
e.g. Franks and Mayer, 1997).
However, family firms face a major challenge when it is time to ‘pass on the baton’ as the retiring
family CEOs often appoint their offspring as successors (Plath, 2008). More specifically,
Bertrand and Schoar (2006) argue that the firm’s family founders may be subject to ‘dynastic
thinking’, resulting in the top management jobs being filled with their relatives rather than more
talented nonfamily managers (Barnett, 1960). Although family members are often not the best
candidates for the job, as they may lack proper education and professionalism, they typically have
an unfair advantage over outsiders in getting the top jobs in the firm (Schulze et al., 2001).
Nonfamily, i.e. minority shareholders’ preference for better qualified, nonfamily CEOs may thus
clash with the family’s desire to extract private benefits of control from their firm.
The literature refers to this conflict of interests as minority shareholder expropriation (see e.g.,
Maher and Andersson, 2000; La Porta et al., 1997; Denis and McConnell, 2003; Goergen and
Renneboog, 2008). This paper attempts to identify the factors that determine the choice of CEO
successor in family firms, thereby also identifying the conditions under which the large
shareholder’s interests may override the interests of the minority shareholders. More specifically,
this paper studies this choice in listed family firms in France, Germany and the UK.
Why study these three countries? First, France, Germany and the UK are representatives of the
three main legal families (La Porta et al., 1997, 1998), i.e. French civil law, German civil law and
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common law, respectively. While investor protection is strong under common law, the law of the
UK, it is much weaker under French and German civil law. Second, all three countries have
distinct corporate governance systems. In France and Germany, corporate control is highly
concentrated whereas in the UK it is dispersed. There is also often a wedge between the control
and ownership held by the large shareholder in France and Germany whereas this is not the case
in the UK. Further, there are also major differences between France and Germany. In particular,
France’s corporate governance system has traditionally been characterized by the existence of a
‘noyau dur’, a system of cross-shareholdings between large quoted companies, some of which are
former state-owned banks and insurance companies, that was set up to reduce the influence of
foreign ownership on French business (see e.g. Bloch and Kemp, 2001). As a result, and contrary
to common wisdom, France is the only country in Europe with substantial equity ownership by
banks (15.5% on average of the equity). While Germany is often considered to be a bank-based
corporate governance system, ownership by banks is much lower and their influence is typically
derived from proxy voting, i.e. from voting the shares of their depositors, in otherwise widely
held companies. The three countries also differ in terms of their corporate boards. While the UK
has a single-tier board where the executives, including the CEO, and the non-executives sit,
Germany has a two-tier board with a supervisory board (Aufsichtsrat) where the non-executives
and employee representatives sit and a management board (Vorstand) where the executives sit.
While France gives its firms the choice between a single-tier board and a two-tier board, most
firms have opted for the former (Goergen et al., 2006). Hence, we also analyze whether the three
countries show differences in the impact of the hypothesized determinants on the CEO successor
choice. Our empirical analysis suggests that there are cross-country differences.
This paper makes three major contributions to the literature. First, existing studies on CEO
successions tend to focus on widely held firms, which by definition do not have large
shareholders, or unlisted family businesses, which typically have no minority shareholders. In
