The family firms succession paradox: how to preserve family influence while hiring external managers. A VBM perspective.

Abstract

This study aims first at underlying the role of External Managers as crucial contributors to diversification and professionalization of Family Firms TMT, with the backing of specific theories such as the Upper Echelons and the Faultline Model. A careful analysis will bring out the positive side of Non Family Members inclusion, with particular emphasis on the beneficial impact on the firm performance. Even though the benefits deriving from the cooperation of family and nonfamily leaders are empirically proved, critics reveal the emergence of several problems related to the inclusion of external managers. On one hand, agency problems occurs, defined as a conflict of interest between the company’s stockholder (in this case, the family) and the company’s managers (who are Non Family Members).This type of conflict is common in almost every organizational structure in which ownership and management do not match, and derives from the fact that managers, acting as the agent for the principals, have the duty to make decisions in order to maximize the owners’ wealth instead of their own wealth, which is the natural vocation of every individual. On the other hand, the rise of a much more family firm-peculiar problem can be identified in the loss of Socio-Emotional Wealth, crucial feature of family organizations which represent all those “non-financial aspects of the firm that meet the family's affective needs, such as identity, the ability to exercise family influence, and the perpetuation of the family dynasty” (Gomez-Mejia and al. 2007). Indeed, family firms are characterized by a double purpose: the profitability of the business, but also the preservation of the business value and culture. This latter aspect is hardly communicable and understandable to nonfamily managers, and family firms, scared of the potential loss of the business core values, may refuse to engage outsiders in the management structure to avoid such loss. Aware of the enormous advantages deriving from the introduction of professional outsiders within the management, scholars and practitioners have identified many ways to overcome the obstacles to integration (especially the agency conflicts). On one side, through the implementation of monetary incentives (wages and bonuses) and non-monetary incentives (pleasant work atmosphere, stimulating work content, addictive management culture, good degree of freedom for action). On the other, through an effective monitoring activity carried out by family-ruled controlling bodies. However, it must be stressed the idea that family businesses seek not only managers-employees, but rather “co-entrepreneurs” who are suited to the firm and the family, which means that the aim is to find a good emotional and cultural fit, besides a professional support. In this regard, the last part of the study is dedicated to propose the managerial philosophy of Value Based Management as an appropriate instrument to improve decision making quality and mitigate agency conflicts within family businesses, even if this technique was born for and generally applies to publicly traded companies.