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The relationship between succession issues and business performance

Evidence from UK family SMEs
Yong Wang
Business & Entrepreneurial Management Department, School of Social Science, University of Wales, Lampeter, Dyfed, UK

Succession issues performance 59

David Watkins and Neil Harris

Southampton Business School, Southampton Institute, Southampton, UK, and

Keith Spicer
Crime and Criminal Justice Unit, Home Ofce Research, Croydon, UK
Keywords Family rms, Business performance, Succession planning Abstract Researchers widely argue that the most signicant difference between family controlled and non-family business concerns the way in which executive succession occurs, and more specically, unique aspects of the process of intergenerational family business transfer. The importance of this study is acknowledged by the fact that it offers researchers and practitioners empirical evidence that links succession issues and the state of performance in UK-based smalland medium-sized family businesses. The article commences with a review of the conceptual framework that relates to the critical factors inuencing the succession process, followed by an introduction of the methodology. Then the article proceeds with a detailed statistical analysis based on a stratied randomly selected sample (169 small- and medium-sized family controlled businesses). In summary, the article concludes with a set of tentative recommendations. It is anticipated that this study will enable a deep debate of the issues surrounding the succession practice and raise a wide awareness of the critical factors shaping the ownership transition.

Introduction Family businesses are reckoned as one of the engines of the post-industrial growth process since they are credited for nurturing across generations entrepreneurial talent, a sense of loyalty to business success, long-term strategic commitment, and corporate independence (Poutziouris, 2001). Studies of this type of business attract an unusually diverse group of researchers and practitioners. However, in contrast to the proliferation of the family business organisation, the family business sector is characterised by alarmingly deteriorating survival rates. Researchers conrm that only about one third of family businesses survive the transition from the founders (rst generation) to the second generation of owner-management. Moreover, of those who do that, only about one third tend to survive the transition from second to third (and beyond) generation of ownership (Poutziouris, 2000; Wang et al., 2000; Ibrahim et al., 2001a). Hence effective succession within family business receives broad attention in the academia.

International Journal of Entrepreneurial Behaviour & Research Vol. 10 No. 1/2, 2004 pp. 59-84 q Emerald Group PublishingLimited 1355-2554 DOI 10.1108/13552550410521380

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Family business theories emphasis on succession Family rms have been an integral part of the British economy for centuries. Firms are generally reluctant to adopt the corporate form because owners are unwilling to hand over the administration of at least part of enterprises to non-family, salaried managers. Despite great changes in British economy since the end of the Second World War, family business continues to play an important role, though its relative signicance is certainly diminishing (Payne, 1984). Researchers observe that in large companies, family ownership is no more the central concern. In contrast, in smaller rms, ownership control is still a key characteristic (Donckels and Frohlick, 1991). Since the Department of Trade and Industry (DTI) (2003) and Brooksbank (2000) report that over 99 per cent of the UK businesses are small- and medium-sized, how to facilitate these rms the great majority of which are family operated, managed and/or controlled in order to survive and achieve sustainable growth, becomes a major topic for researchers and practitioners. Family business literature indicates that succession can be viewed as a process (Sharma et al., 2003; Dyck et al., 2002) with specic pre-arrival and post-arrival phases (Gordon and Rosen, 1981). Handler (1994) suggests that succession can be categorised into distinct stages based on the functions and roles played by the incumbents and their offspring. Stavrou and Swiercz (1998) propose a three-level model that charts the succession process. The rst level represents an offsprings pre-entry stage where successor(s) can learn from the incumbent about business operations. The second is an entry stage where integrating the offspring into the business operations is the main theme. The nal level involves the potential successors promotion to a managerial position. Studies indicate that the business requirements at different stages tend to be diverse and the strategies to handle these needs vary (Stavrou and Swiercz, 1998; Stavrou, 1999). Not only is succession as a process studied in the academia, but also the effectiveness of this strategic procedure receives signicant attention (Handler, 1994). The effectiveness of succession is not limited to whether a managing director/CEO/leader has been designated, but includes the ongoing health of a rm, quality of life, and family dynamics. Research in relevant areas indicates that strategically many critical factors are related to the effective succession, such as succession planning (Ibrahim et al., 2001a; Gersick et al., 1997; Kets de Vries, 1993), offspring grooming (Ibrahim et al., 2001b; Danco, 1997), inter-generational relationships (Handler, 1992; Seymour, 1993; Kets de Vries, 1993), and remuneration of managers (Aronoff and Ward, 1997). The following sections, briey reviews the literature that focuses on these key succession issues. Succession planning According to Sharma et al. (2001), succession planning is emphasised in family business arena for two reasons. First, activities relevant to succession planning are part of the succession process; second, succession planning is reckoned as a means to improve the success rate of ownership transition. Davis (1997) argues that succession planning has three main objectives: (1) to efciently and fairly distribute assets from older to younger generations; (2) to pass control of the business in a way that will ensure effective business leadership; and (3) to maintain and promote family harmony.

Although remarkable effort has been invested in family businesses towards meeting these three simple objectives, the effort does not normally lead to an effective succession but agony, confusion, and paralysis (Davis, 1997). The existing literature, such as Sharma et al. (2001) and Morris et al. (1997), suggests that well developed succession plans can increase the likelihood of co-operation among stakeholders in businesses, therefore enhancing the chance of a smooth and effective succession. However, converse to the signicant concern on planning, business owners and managers rarely outline their future succession (Sharma et al., 2000, 1996; Astrachan and Kolenko, 1994). According to Lansberg (1988), most stakeholders in family businesses are psychologically ambivalent toward succession planning. Company founders encounter psychological deterrents to succession planning as it may imply a letting go of power. Family members avoid planning, worrying about the subsequent loss of identity, family harmony, and privacy. Senior managers, having worked along with incumbents long-term, are reluctant to transfer from a personal relationship with the incumbent to a more formal one with the successor (see also Sharma et al., 1996, 2000; Kets de Vries, 1993). Successors, on the other hand, have to prepare themselves to handle residual conicts. The absence of a succession plan can cause serious management problems, even leading to a business failure (File and Prince, 1996). Wards study (1987) on strategic planning and business transfers offers interesting statistics about Fortune 500 companies:
Since 1955, only 188 companies have kept their status on this list as independent concerns. More than 60 per cent have been sold or acquired or have watched their sales decline signicantly in the past thirty years (pp. 1-2).

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Correspondingly, it is revealed that, from 1924 to 1984, 80 per cent of 200 successful family owned manufacturing rms no longer exist and only 13 per cent are still owned by the same family as in 1924 (Ward, 1987; Handler, 1994). The reasons for the demise of these family businesses are many. However, Ward (1987) indicates that inability to plan strategically for the business future is a major cause. In line with Ward (1987), Shulman (1991) advocates that family businesses should start thinking about transferring ownership and managerial responsibility ve-20 years in advance, while Dyck et al. (2002) and Davis (1992) all express similar sentiments. Successor development Successors are an important stakeholder group in the succession process. In the absence of a successor who is managerially and physically capable of taking over the ownership, succession within the family will rarely occur. Thus, successor grooming comes under the microscope of researchers and practitioners (Wang and Poutziouris, 2003; Ibrahim et al., 2001b). Fiegener et al. (1994) compare successor development in family and non-family businesses and conclude that family rms favour more personal, direct, relationship-centred approaches to successor development, while non-family businesses rely more on formalised, detached, task-centred approaches. Lansberg (1997) suggests that to be effective mentors, seniors must understand the differences between parenting and mentoring. The key to an effective succession is to nd an optimal blend of well-timed parenting and mentoring. In the whole succession process, to achieve an effective mentoring, seniors should negotiate the mentoring

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process with juniors from the very beginning, specifying jobs and competencies that need to be mastered at each stage. Meanwhile, juniors should be assigned real jobs that generate reliable performance data, leading to the nal gain in authority. Lansberg and Astrachan (1994) argue that successor training is mediated by the familys commitment to the business and the quality of the relationship between owner-manager and successor. They conclude that the familys commitment to the business is positively associated with the degree of successor training, and that the quality of the relationship between owner-manager and successor is positively associated with the extent of successor training. Goldbergs (1996) study further conrms that business effectiveness is related to successor grooming by providing evidence that effective successors[1] had more years of experience with the business than that of the less effective group. Inter-generational relationships The inter-generational relationship is critical to business development since successors in family businesses are normally trained in a personalised way (Wang and Poutziouris, 2003; Fiegener et al., 1994). Fox et al. (1996) indicate that the nature of family relationships during the transition stage is related to a successful succession process and suggest the need to initiate the constructive dialogue between incumbent and successor. A similar conclusion has been reached by Wang and Poutziouris (2003) and Seymour (1993) who suggest that respect, understanding, and complementary behaviour between the two generations are critical to an effective succession. Kets de Vries (1993) identies a number of psychological and emotional barriers encountered by family people in the succession process, which are similar to Lansbergs (1988) ndings. For example, parents do not want to let go of power and may even be jealous of their children due to their own physical limitations. Children may worry about the potential conicts arisen within businesses because of their parents absence. According to Sharma et al. (2000), initiating the succession process will drive incumbents to confront their managerial mortality and signicant life style change. Consequently, many incumbents are reluctant to step aside and may become the greatest single barrier to succession (Rubenson and Gupta, 1996, p. 29). Under this circumstance, cohesive inter-generational relationship can greatly mitigate incumbents psychological deterrent and facilitate a smooth succession. Sonnenfeld and Spence (1989) recognise four departure styles of founders or CEOs: monarch, general, governor and ambassador. They further suggest ambassador as the best form of departure given that founders or CEOs in this pattern are willing to leave business and prolong their service to business as advisors. Both owner-manager and heir are central persons in the succession process. In essence, the succession process is a mutual role adjustment procedure between the founder and the young generation. Parallel to the increase in the young generations authority from no role to nal chief decision maker, the predecessors role in the rm diminishes from sole operator to consultant (Handler, 1990). Therefore to enable a successful succession, it is suggested that
The successor should be sensitive to the needs of the founder (Lansberg, 1988) and should exercise patience and diplomacy (Jonovic, 1989); he/she needs to become a student of the organisation and learn its intricacies and culture (Horton, 1982) (Sharma et al., 1996, p. 21).

Compensation in family business Research on management compensation has received a great attention both from researchers and society at large (Barkema and Gomez-Mejia, 1998). A positive relationship between top managers compensation and rm performance would be consistent with agency theory, which emphasises that managers are self-serving and that formal monitoring and reward systems should be articulated to align the incentives of top managers with the interests of shareholders (Barkema and Gomez-Mejia, 1998; Jensen and Meckling, 1976). Within family business, ownership and management are normally overlapping and family members are likely to consider their rms as entities to achieve their own interests and opportunities. Thus, it is not unusual to observe that family members, especially those top management members, charge higher remuneration from businesses, contradicting business performance. This unreasonable charge will constrain effective succession in a long term and may also cause conicts between family and non-family members. Non-family members, on the other hand, sometimes have a notion that family members who work for the business should be paid less to reduce the companys payroll costs to ensure the businesss healthy survival. Aronoff and Ward (1997) suggest that ensuring that all family members clearly and openly understand what kinds of money are moving from owners to employees would result in far fewer conicts over compensation. They further recommend developing and sharing a compensation philosophy which is a framework that pays the job rewarding people based on the market value of their position. Shelly (1995) concludes that creating a formalised compensation arrangement is a better way of dealing with compensation issues and suggests establishing a bonus based on a formula that is fair to the people involved. Daily et al. (1998) suggests that the composition of remuneration committees may be relevant to explaining the level a mix of top management compensation. In general, the separation of management and ownership can be an effective way to circumvent inherent family and rm contradictions on compensation.

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Succession and business performance As aforementioned, research on family business succession results in the identication of a variety of factors associated to effective transitions. Researchers generally agree that business performance is a valid indicator to assess the effectiveness of business succession (Morris et al., 1997; Goldberg, 1996). Hence more empirical investigations into the relationship between succession issues and business performance becomes necessary. In the literature, relatively few papers endeavour to address this issue empirically (see Table I) and most of these attempts focus on the comparison between family and non-family businesses (Daily and Dollinger, 1992; Chaganti and Schneer, 1994). However, Goldberg (1996) and Morris et al. (1997) do empirically investigate the relationship between succession issues and business performance. Goldberg (1996) surveyed 63 family businesses operated by successors who have been the CEOs for a minimum of ve years to uncover signicant elements that differentiate effective from less effective successors. The ndings suggest that incumbents mentoring is correlated with successor effectiveness. In addition, the study indicates that effective successors had a signicantly better relationship with

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Sample Daily and Dollinger (1992) 104 small manufacturing rms

Data collection Mailed questionnaires, telephone interviews

Key points The professionally managed rm will follow more aggressive growth-oriented strategies than the family-owned and managed rm. The professionally managed rm will rely more on internal control procedures than the family-owned and managed rm Performance is dependent on the owners mode of entry with start-up businesses having a higher average ROTA, but with inherited businesses having higher average annual sales. Start-up businesses rated themselves signicantly higher on business, competitive, and operational strengths Successor effectiveness is associated with the incumbents mentoring. Effective successors had a signicantly better relationship with their fathers; they were introduced to the businesses at an early age; and they began working full-time in the businesses at an earlier age Pre-succession protability, size and advertising intensity are associated with the chosen executives organisational tenure levels. Pre-succession rm size and risk are associated with the age of selected CEOs. Pre-succession protability and advertising intensity are associated with type of functional background experience Proper management of family businesses should include planning ahead for the succession stage and parents should make the business more attractive to their children. A smooth inter-generational succession is essential to the protability of the business and to the welfare of the family as a whole Family business transitions do occur more smoothly when successors are better prepared, when relationships among family members are more affable, and when family businesses engage in more planning for wealth-transfer purposes. Smoother transitions may not necessarily result in better post-transition performance

64
Chaganti and 345 businesses Schneer (1994) Mailed questionnaires

Goldberg (1996)

63 businesses

Mailed questionnaires, personal interviews

Guthrie and Datta (1997)

214 CEO selection decisions

Survey, business week database, newspaper and industry trade reports

Kimhi (1997)*

Morris et al. (1997)

209 businesses

Mailed questionnaires, personal interviews

Table I. Literature on family business performance and succession issues

Note: *Conceptual article

their fathers; they were introduced to the businesses at an early age; and they began working full-time in the businesses at an earlier age. Supported by an empirical study, Morris et al. (1997) propose a fairly comprehensive model, which indicates that three sets of determinants can determine the nature of the transition, or what Handler (1990) refers to as the quality of the succession process; while the nature of the transition can further affect post-transition performance (referred to by Handler as the effectiveness of the transition). These determinants include the preparation level of heirs, the nature of relationships among family members, and the types of planning and control activities engaged in by the management of the family business (see Figure 1). Based on the evidence, Morris et al. (1997) conclude that:
Family business transitions do occur more smoothly when successors are better prepared, when relationships among family members are more affable, and when family businesses engage in more planning for wealth-transfer purposes (p. 386).

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Although Morris et al.s (1997) model provides comprehensive guidelines on succession management, no further studies can rmly conrm the ndings raised from the study, leading to an enquiry whether it can be reckoned as a domain-specic framework that charts the succession process. Hypotheses generation As discussed earlier, a number of factors in the context of family business succession have been identied by researchers and practitioners. They can be generally categorised into the following four dimensions:

Figure 1. The conceptual model

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(1) Succession planning can signicantly affect the succession process (Sharma et al., 2000, 2001; Davis, 1997; Ward, 1987). Topics covered include who should participate in preparation and when they should be prepared (Davis, 1997; Davis and Tagiuri, 1989), the establishment of a family council (Crane, 1982), the responsibility of successors (Gersick et al., 1990, 1997) and the impact of planning on business succession (Sharma et al., 2001; Ward, 1987, 1988). (2) Successor development constitutes a major step in the succession process (Wang and Poutziouris, 2003; Sharma et al., 1996; Goldberg, 1996). Work in this area addresses why heirs need to acquire the requisite managerial capabilities, business skills, and knowledge of company operations (Ward, 1990; Osborne, 1991) and how they can gain access to these (Ibrahim et al., 2001; Lansberg and Astrachan, 1994). Specic variables receiving attention include working experience outside family rms, quality of training, training method, and the impact of incumbent on successor development (Ward, 1990; Handler, 1992; Fiegener et al., 1994). (3) Inter-generational relationships can both facilitate and hinder succession planning and successor development depending on the quality of the relationship (Ward, 1987; Handler and Kram, 1988; Kets de Vries, 1993). The principle issue focus on the communication between the two generations (Williams, 1990). Other issues in this category include family turmoil, conict and trust between the two generations (Wang and Poutziouris, 2003; Handler, 1991; Ward and Aronoff, 1992) and the incumbents refusal to let go and share power with the potential successors (Handler, 1990; Kets de Vries, 1993). (4) Compensation issues have recently received increasing attention. However, researchers are still in dispute as to whether family members working for the business should be paid less to reduce the companys payroll costs or more because of the nepotism (Aronoff and Ward, 1997; Shelly, 1995). Specic variables receiving attention include family members shareholding schemes, remuneration and pension issues (Shelly, 1995; Gersick et al., 1990). Variables discussed above reect the key issues in the succession process and therefore, form the skeleton of the questionnaire for the current study. There are, of course, a number of other variables that can also affect business transition, e.g. business external environment, business objectives and nancial pressures from resource suppliers. However, they are not taken into account due to the difculty in objective measuring. The framework of Morris et al. (1997) is considered as a starting point for the current study, nevertheless two critiques have been raised. First, Morris et al. (1997) start with an investigation of the impact of the three identied succession dimensions on the nature of ownership transition. This is followed by an examination of the impact of the ownership transition on post-transition performance. In reality, the succession process is a long-term concept, starting from the incumbent generating an initiative to transfer ownership within the family, until nally the business being taken over by the offspring(s) and the incumbent stepping down from the position. The experience and emotional feeling during the whole process tends to vary. Therefore, measuring the characteristics and the succession experience can be highly subjective and complicated. Secondly, in Morris et al. (1997), a post-transition concept is employed when business performance is concerned, but the concept itself is patchy.

For example, a family business, which is currently managed by the second-generation person and is transferring the ownership to the third generation, could be categorised as a post-transition business as it has already experienced a transition from the founder to the second generation. On the other hand, it can be classied as a pre-transition business since the owner in the second-generation is arranging for his or her retirement. Having recognised these, unlike Morris et al.s (1997) two-stage investigation, the current study only concentrates on the relationship between key succession dimensions and business performance, ignoring the succession characteristics examination. In addition, the study investigates business performance rather than post-transition performance[2]. Based on the discussion in the literature review, the following proposition is suggested: Proposition 1. Succession issues are positively related to business performance. To operationalise the testing, the four dimensions of succession issues discussed in the early section are integrated into the proposition, generating four general hypotheses. H1. Succession planning is positively related to business performance. H2. Successor development is positively related to business performance. H3. Inter-generational relationships are positively related to business performance. H4. Compensation issues are positively related to business performance. Academics and researchers argue that business performance is a multi-dimensional construct (Fitzgerald and Moon, 1996). Two widely accepted business performance assessment models, the American Malcolm Baldrige National Quality Award (MBNQA) model and the European Foundation Quality Management (EFQM) model, provide comprehensive frameworks by which business performance can be assessed and compared. However, researchers argue that both models are more appropriate for larger companys assessment rather than that of the smaller one. Financial outcomes enable managers and business owners to make decisions and plan for business development (Jenkins, 1995). They are broadly utilised in the SME (small- and medium-sized enterprise) and entrepreneurship literature (Jennings and Beaver, 1997; Morris et al., 1997; Westhead and Cowling, 1997). However, there is a consensus that no single nancial indicator can accurately and comprehensively capture business performance, particularly in the small rm arena (Begley and Boyd, 1987; Daily and Dollinger, 1992). In light of this, it is preferable to devise a multiple measure of nancial performance and interpret the results based on one indicator in conjunction with others. Multiple nancial measures are consistent with the theoretical point of view that performance, as a construct, should be viewed as being multi-dimensional to cover diverse purposes and types of businesses (Levin and Minton, 1986). In examining the performance difference between family business and non-family business, Westhead and Cowling (1997) adopt growth in sales revenue, employment, productivity, exports and protability; while Daily and Dollinger (1992) call for sales

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growth, rate of improvement of net margin and operating margin. Jennings and Beaver (1997) utilise sales growth, protability, cash ow, productivity and job creation to measure the performance and competitive advantages of small rms. Barth (2003) adopts sales growth to compare small business performance in mature and new industries. Morris et al. (1997) use sales growth, prot growth, employment growth, asset growth and new markets products to study success of a family business transition. To summarise, Dyson (1997) states that business nancial performance can be measured by four ratios: protability ratio, growth ratio, efciency ratio and liquidity ratio. In the current study, a series of performance indicators utilised in the privately held owner-managed small business context are adopted. Taxonomically, prot margin, ROCE (return on capital employed), and ROSE (return on shareholders equity) are used to assess business protability. Sales growth and employment growth are employed to measure businesss potential for further development, while employee productivity is employed to estimate business effectiveness. The reason why these six different measures are chosen is that multi-dimensional indicators can facilitate a more comprehensive view of business performance and help reduce possible bias. Considering the six nancial performance indicators being utilised, each of the four general hypotheses H1-H4 is further sub-divided into six hypotheses. For example, hypothesis H1 is investigated with six hypotheses listed as the following: H1a. Succession planning is positively related to business performance measured by prot margin. H1b. Succession planning is positively related to business performance measured by return on capital employed. H1c. Succession planning is positively related to business performance measured by return on shareholders funds. H1d. Succession planning is positively related to business performance measured by sales growth. H1e. Succession planning is positively related to business performance measured by employment growth. H1f. Succession planning is positively related to business performance measured by employee productivity. Similarly, the other three hypotheses H2-H4 are also investigated, each with six performance indicators generating 18 sub-hypotheses (24 in total). H2a. Successor development is positively related to business performance measured by prot margin. H2b. Successor development is positively related to business performance measured by return on capital employed. H2c. Successor development is positively related to business performance measured by return on shareholders funds. H2d. Successor development is positively related to business performance measured by sales growth.

H2e. Successor development is positively related to business performance measured by employment growth. H2f. Successor development is positively related to business performance measured by employee productivity. H3a. Inter-generational relationships are positively related to business performance measured by prot margin. H3b. Inter-generational relationships are positively related to business performance measured by return on capital employed. H3c. Inter-generational relationships are positively related to business performance measured by return on shareholders funds. H3d. Inter-generational relationships are positively related to business performance measured by sales growth. H3e. Inter-generational relationships are positively related to business performance measured by employment growth. H3f. Inter-generational relationships are positively related to business performance measured by employee productivity. H4a. Compensation issues are positively related to business performance measured by prot margin. H4b. Compensation issues are positively related to business performance measured by return on capital employed. H4c. Compensation issues are positively related to business performance measured by return on shareholders funds. H4d. Compensation issues are positively related to business performance measured by sales growth. H4e. Compensation issues are positively related to business performance measured by employment growth. H4f. Compensation issues are positively related to business performance measured by employee productivity. Data and methodology Sample and data The sample family businesses were selected from FAME database. FAME contains information on business management team, which allows the authors to search for those rms that have two or more directors sharing the same surname. These rms were assumed to be potential family businesses (in the questionnaire a formal denition of family business based on Leach et al. (1990) was given. Businesses, by referring to this denition, were invited to self-classify themselves as family business or not). Secondly, all small and medium sized (fewer than 250 employees) independent rms were picked out. As a third step, those incorporated before 1979 were selected (1979 saw the advent of the Thatcher administration with a commitment to an enterprise culture). This was to

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ensure that businesses selected have at least the experience of considering business succession since The UK Co-operative Council (1995) reports that in the UK, on average, every ve years small business will experience an ownership transition. As a result, the sampling frame contains 12,042 established incorporated businesses. As a limitation of this study, it should be indicated that non-incorporated family businesses (sole traders and partnerships) were excluded simply because the data were not available. Consequently, any generalisations based on the current study will exclude the unincorporated family businesses. Within the sampling frame, a stratied random sampling procedure according to the year of business incorporation was used to ensure that different groups of the sample frame were adequately represented in the sample. The sample comprised 924 businesses, which is, according to Zikmund (1994), big enough for this research considering the size of the sample frame. A questionnaire with a cover letter was posted to the managing directors of these businesses. Six weeks after the initial mailing, a second copy of the survey was sent to the non-respondents. Given the fact that 145 useful replies were received from the rst wave and 24 from the second wave, it is unlikely that many more respondents would be obtained from the third or further waves. Thus, no extension of data gathering was undertaken. The overall usable response rate was 18.3 per cent (169/924). Referring to the literature, Malone (1989) had a response rate of 19.5 per cent when he undertook a survey about succession planning in family businesses. Welsch (1993) studied the impact of family ownership and involvement on the process of management succession and had a 20 per cent response rate. Based on these and the fact that the family business sector is highly insular and secretive, the current response rate of 18.3 per cent is considered acceptable. To assess the possible non-response bias resulting from the sampling procedure, checks for differences in demographic characteristics, such as business size (in terms of the number of employees), business age and type of industry, were conducted. The results indicate no signicant differences between respondents (169 usable respondents) and non-respondents (755 non-respondents) at the 0.05 level. This suggests that results from the sample could be broadly generalisable to those in the sampling frame (Tables II-V). Empirical results Analysis of items Factor analysis was employed to identify a relatively small number of factors representing themes of succession. However, it was observed that different sized
Response sample (%) (n 169) 11.2 43.2 32.0 11.2 2.4 100 Original sample (%) (n 924) 13.6 41.6 29.5 13.2 2.1 100

Number of employees Micro 0-9 Small 10-49 Medium 50-99 Medium 100-249 Missing Total

Number of companies 19 73 54 19 4 169

Table II. Sample characteristics of business size

businesses tend to have different views about succession issues, as well as adopt a variant form of formality in dealing with succession planning, and therefore analysis based on the entire sample could be confusing and lead to misunderstanding for further analysis, cluster analysis. As a result, the whole sample was split into two separate parts, small-sized businesses (those with fewer than 50 employees) and medium-sized businesses (those with 50 or more employees), according to the DTIs denition. The two sub-samples respectively include 94 (55.6 per cent) and 75 (44.4 per cent) businesses. Principal components factor analyses with varimax rotation were performed. Factor loadings of , 0.30 (Kline, 1994; White and McCain, 1998) were used to interpret dimensionality. Scale purication procedures resulted in the deletion of several items across the two family business parts. Regarding factor selection, an agreement was reached among most factor analysts about a decade ago that Cattells (1978) scree test is just about the best solution (Kline, 1994). In the scree plot, the cut-off point for

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Type of business Retail and wholesale Manufacturing Service Construction Total

Number of businesses 42 56 47 24 169

Response sample (%) (n 169) 24.9 33.1 27.8 14.2 100.0

Original sample (%) (n 924) 22.1 36.3 29.2 12.4 100

Table III. Sample characteristics of business sector

Generation in the control of the family business 1st 1st + 2nd 2nd 2nd + 3rd 3rd Other Total

Number of companies 50 46 29 13 15 16 169

Percentage 29.6 27.2 17.2 7.7 8.9 9.4 100

Table IV. Sample characteristics of generation in the control of the family business

Year of incorporation 1970-1979 1960-1969 1950-1959 1940-1949 1939Total

Number of companies 69 38 26 16 20 169

Response sample (%) (n 169) 40.8 22.5 15.4 9.5 11.8 100

Original sample (%) (n 924) 45.0 21.5 12.4 7.8 13.3 100

Table V. Sample characteristics of business age

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selection of the correct number of factors is the point of inexion where the variation accounted for by a factor becomes little more than that expected from random noise. Therefore, a ve-factor solution was generated for the small sized business sector that accounts for 42.9 per cent of the variance (Kaiser-Meyer-Olkin statistic 0.62[3]; Bartlett Test of Sphericity 963.3; signicance 0.000). Similarly, a four-factor solution was produced for medium-sized business sector, accounting for 38.5 per cent of the variance (Kaiser-Meyer-Olkin statistic 0.61; Bartlett Test of Sphericity 889.3; signicance 0.000). The factor loadings are shown in Tables VI and VII. Factors for the small-sized businesses can be interpreted as follows: . factor 1 represents succession planning; . factor 2 focuses on successor development; . factor 3 emphasises predecessors inuence; . factor 4 stresses inter-generational relationships; and . factor 5 focuses on various relationships.
Factor 1 Factor 2 Factor 3 Factor 4 Factor 5 Succession planning: consistent with other strategies Succession planning: stakeholders awareness Succession planning: systematically designed Succession planning: existence Successor development: necessity to acquire skills and knowledge Successor development: training improving inter-generational relationship Successor development: communication between the two generations Successor development: quality of training Succession planning: necessity to be implemented Successor development: necessity of managerial ability Inter-generational relationship: incumbents impact on succession Inter-generational-relationship: essentiality of agreement Inter-generational-relationship: incumbents willingness to leave Inter-generational-relationship: management advice from predecessors Inter-generational-relationship: essentiality of balancing emotionality and rationality Succession planning: successors entry Inter-generational relationship: succession planning enforcing the inter-generational relationship Cronbach alpha Eigenvalue Percent of variance 0.82 0.77 0.66 0.65 0.80 0.76 0.48 0.42 0.80 0.71 0.70 0.77 0.51 0.49 0.43 0.78 0.75 0.60 1.85 5.60

Table VI. Results of factor analysis on succession issues (small family businesses)

0.79 4.74 14.36

0.71 2.80 8.47

0.66 2.75 8.32

0.65 2.03 6.15

Factor 1 Successor development: necessity to acquire skills and knowledge Successor development: communication between the two generations Successor development: necessity of managerial ability Successor development: training improving inter-generational relationship Inter-generational-relationship: essentiality of agreement Inter-generational-relationship: essentiality of balancing emotionality and rationality Inter-generational-relationship: family council establishment Inter-generational-relationship: incumbents willingness to leave Inter-generational-relationship: trust Succession planning: succession planning enforcing the inter-generational relationship Succession planning: systematically designed Succession planning: consistent with other strategies Succession planning: stakeholders awareness Inter-generational-relationship: management advice from predecessors Successor development: assimilation of lessons Succession planning: necessity of implemention Cronbach alpha Eigenvalue Percent of variance 0.87 0.80 0.79 0.76

Factor 2

Factor 3

Factor 4

Succession issues performance 73

0.78 0.75 0.71 0.68 0.56 0.68 0.68 0.59 0.43 0.84 0.61 0.45 0.63 2.22 6.71 Table VII. Results of factor analysis on succession issues (medium-sized family businesses)

0.84 5.65 17.13

0.61 2.59 7.84

0.62 2.26 6.86

Similarly, for the medium sized family businesses, the factors can be interpreted as follows:
. . . .

factor 1 emphasises on successor development; factor 2 represents inter-generational relationships; factor 3 focuses on succession planning; and factor 4 is about management advice.

In the two business parts, some succession factors, although labelled the same, may have different contents. For example, Factor 2 in the small business sector has one element different from that of Factor 1 in the medium-sized business sector. However, the main content of these two factors is the same (the other three elements). Thus, the same name is provided while the difference is acknowledged. Interestingly, compensation issues, although they have recently received signicant attention, were not identied by the factor analysis. This indicates that this issue is at least not regarded as a key dimension by business owners in the current succession management context.

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Cluster analysis Based on the results of factor analysis, cluster analysis was further employed to classify family businesses. Considering the impact of business size and age on business performance (Porter, 1980; McConaughy and Phillips, 1999), these two elements were also employed as independent variables. In the present study, company size was measured by the average number of employees of the last ve years. Using these variables as inputs, dendrograms suggested a four-cluster solution for both business sectors. One way ANOVA and Bonferroni tests were further adopted (see Tables VIII and IX). The high F-values indicated the signicant differences between clusters across the succession issue factors, implying the robustness of the clusters from the analysis procedure. Correlation analysis Before conducting correlation analysis, all nancial performance indicators were normalised to standard scores with the controlling variable, the business sector. This is because all these nancial indicators have different means and standard deviations in different industries. The direct comparison between businesses involved in different business sectors could be confusing and misleading. Furthermore, to objectively reect the business performance, an average of businesss last ve years nancial outcomes was utilised. The results of the correlation analysis demonstrate a number of signicant relationships (see Tables X and XI).

Variable Factor 1 Factor 2 Factor 3 Factor 4 Factor 5 Number of companies

Cluster 1 2 0.19 2 0.10 2 0.06 2 0.10 2 0.11 60

Cluster 2 1.10 2 0.01 0.17 0.35 0.61 12

Cluster 3 2 1.09 2 0.05 2 0.58 2 1.30 0.68 8

Cluster 4 2 0.86 2 1.40 2 1.35 2 1.80 2 1.34 8

F-value 13.16* 3.43* 2.91* 9.41* 5.02*

Table VIII. Cluster analysis for the small family business sector

Notes: Values listed in Table VIII regarding Factors 1-5, business age and number of employees are standardised values; Six businesses are not included because of missing values; *Signicant at 0.05 level

Variable Factor 1 Factor 2 Factor 3 Factor 4 Number of companies

Cluster 1 0.05 2 0.24 0.16 2 0.02 49

Cluster 2 2 0.54 2 0.08 2 0.81 2 0.19 10

Cluster 3 2 0.57 1.29 2 1.15 0.17 8

Cluster 4 2 0.33 2 0.27 1.93 1.65 4

F-value 4.32* 7.50* 23.02* 4.65*

Table IX. Cluster analysis for the medium-sized family business sector

Notes: Values listed in Table IX regarding Factors 1-4, business age and number of employees are standardised values; Four businesses are not included because of missing values; *Signicant at 0.05 level

Small-sized business sector. For the protability ratios, the relationship between inter-generational relationships and prot margin was identied as signicant. Thus hypothesis H3a is conrmed. This result is in line with Morris et al.s (1997) ndings where family relationships are found r as a dominant variable in business transition. Family relationships are a multi-dimensional concept, which includes relationships between heirs, the family business head, the spouse of the head, and so forth. The inter-generational relationships is a key dimension of this multi-dimensional concept since the mutual respect between the two generations can minimise rivalry, bickering, hostility, and tension, thus enhancing the family business managerial system. Second, in terms of business growth ratios, a signicant positive relationship between successor development and sales growth was established. Hence, hypothesis H2d is accepted. This nding is in line with that of Goldberg (1996), which suggests a relationship between successor effectiveness and successors business training. It implies the necessity of strategically developing a successor-grooming scheme within family business. Finally, a signicant positive relationship was identied between successor development and employee productivity. Thus, hypothesis H2f is conrmed. This indicates that well trained successors are more capable of running business effectively. Disappointingly, in the current study succession planning did not demonstrate any relationship with performance despite of remarkable emphasis both in academia and

Succession issues performance 75

Prot Sales Employment margin ROCE ROSE growth growth Productivity Factor 1 (succession-planning focus) Factor 2 (successor development focus) Factor 3 (predecessors inuence focus) Factor 4 (inter-generational relationship focus) Factor 5 (various relationships focus) Note: *Signicant at the 0.05 level 0.85 0.60 0.89 0.97* 0.39 0.29 0.33 0.53 0.59 0.88 0.09 0.53 0.75 0.27 0.98* 0.82 0.63 0.89 2 0.01 2 0.47 2 0.18 0.02 2 0.74 0.55 0.98* 0.90 0.76 0.32 Table X. Correlations between succession issues and business performance indicators in small business sector (tests were conducted at the cluster level)

2 0.01 2 0.06

Prot margin ROCE

Sales Employment ROSE growth growth Productivity 2 0.41 2 0.98* 0.98* 2 0.92 2 0.25 0.61 2 0.21 2 0.57 Table XI. Correlations between succession issues and business performance indicators in medium-sized business sector (tests were conducted at the cluster level)

Factor 1 (successor development focus) 0.75 0.93* 0.96* 2 0.23 Factor 2 (inter-generational relationship focus) 0.05 0.93 0.80 2 0.71 Factor 3 (succession-planning focus) 2 0.45 2 0.83 0.97* 0.95 Factor 4 (predecessors inuence focus) 2 0.33 2 0.48 2 0.73 0.85 Note: *Signicant at the 0.05 level (two-tailed)

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industry (Sharma et al., 2000, 2001; Ward, 1987). In fact, small-sized business leaders tend to employ emergent strategy to administer businesses, ignoring the detailed planning. They believe that they can make prompt and appropriate decisions given the knowledge and experience accumulated through practice. Based on the above ndings a schematic model regarding the relationship between succession issues and business performance has been constructed (see Figure 2). Medium-sized business sector. In the medium sized business sector, for the protability ratios, three signicant positive relationships were recognised, respectively between successor development and ROCE, between successor development and ROSE, and between succession planning and ROSE. Thus hypotheses H2b, H2c, and H1c are conrmed. The conrmed hypotheses H2b and H2c are consistent with Goldbergs (1996) conclusion, while the accepted hypothesis H1c is consistent with the repeated emphasis placed on succession planning (Sharma et al., 2000, 2001; Capon et al., 1994; Ward, 1987). This study offers empirical support to the consensus view that family businesses need to strategically plan their ownership transition. Second, regarding the business growth ratios, two signicant relationships were identied between inter-generational relationships and employment based growth (positively) and between successor planning and employment growth (negatively). More specically, hypothesis H1e is conrmed, while the other hypothesis H3e is rejected. The conrmed hypothesis H1e indicates that poorly planned family businesses are not competent in business growth, while well-planned family rms are more capable of expanding business. For the rejected hypothesis H3e, an enquiry is raised as to whether the selection of employment growth as a performance indicator is appropriate. For example, a business may reduce its employment, but keep the protability at the same level. Under this circumstance, supercially employment growth is negative, but it is an efciency gain in fact. Researchers thus should bear in mind that in different situations, performance indicators may reect different contexts. Based on the ndings obtained, a model is constructed (see Figure 3).

Figure 2. Relationships between succession issues and business nancial performance in small-sized business sector

Succession issues performance 77

Figure 3. Relationships between succession issues and business nancial performance in medium-sized business sector

Discussion Hypotheses H1 through H3[4] have been tested to examine the impact of succession issues on family business performance. In this study, family businesses have been classied into two categories due to their different perspectives (and formality) on succession. In both family business sectors, results suggest that the successor development dimension is an effective predictor of business performance. Hence, it is recommended that businesses draft a training charter, possibly including the following: identication of strengths and weaknesses of the potential successor(s); identication of opportunities and threats of the family business; denition of strategic training vision and objectives; recognition of training needs; programme of strategic vision and development of training action plan; institution of periodic and irregular appraisal of training performance; and introduction of recognition mechanisms. Furthermore, family business owner-manager should formally consider the usage of the services provided by a variety of supporting agencies, counsellors and consultants. Specically, educational and training services should be taken into account. Of course training programmes should be chosen, tailored to the business scenario with an emphasis on equipping successors with essential managerial skills. Matley (2000) states that in the last 20 years, a number of costly training programmes and initiatives, e.g. Investors in People, Business Links, and Training and Local Enterprise Councils, have been launched in the UK, aiming to promote training arrangement linked to business managerial skills. However, Matley identies that owner-managers awareness, understanding and interest in the training services on offer is at low level and the further take-up rate is even more disappointing. It is claimed that the business success rate has association with those businesses that take up training initiatives (Matley, 2000; Westhead and Storey, 1997). Hence it is recommended that family rms consider an open and forward-looking approach to formally consult with various agencies and consultants to gain professional advice and incorporate added value approaches into managerial practices under the auspices of advice providers. Second, recognition of the relationship between inter-generational relationships and protability and growth in the small business sector conrms Morris et al.s line that family relationships constitute a dominant variable in succession. Morris et al. (1997) suggests that the two most critical issues in relationship are trust and affability. Trust

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can be characterised by mutual support, honesty, condence in each partys reliability and integrity and a willingness of each party to acknowledge the others achievements. Affability is concerned with mutual respect between the two generations and minimisation of rivalry. Properly handling and managing this relationship focusing on the trust and affability can effectively reduce bickering, hostility and tension within business, enabling a smoother succession and higher level of performance. In addition, senior non-family managers are, quite often, actively involved in the successor grooming process (Wang and Poutziouris, 2003; Lansberg and Astrachan, 1994). If the relationship between owner-manager and successor is in trouble, non-family managers may doubt the owner-managers commitment to succession and hence view training as being of no consequence. Effort therefore, should be invested toward the construction of harmonious inter-generational relationship since it can at least provide condence to non-family managers and ease the succession process. The fact that inter-generational relationships is recognised as a signicant dimension in the small business sector, but not in the medium-sized sector implies that business size may inuence business owners perceptions of the importance of the relationship between two generations. For larger businesses, due to their complicated hierarchical structure, the relationship between the two generations may become alienated and be distracted by other sub-relationships, e.g. the relationship with other senior non-family directors. Meanwhile, the board of directors (non-family directors can be on board) can also play a key role in business administration by providing fresh perspectives and initiatives, conducting more objective analysis of the rms strengths and weaknesses, and directing business on a more professional track. In smaller-sized businesses, due to the unavoidable close contact between the two generations, the quality of the relationship is vital. Quite often, the incumbents attitude and willingness to leave the business will directly inuence the effectiveness of transition. While this attitude and willingness are, to a great degree, affected by the inter-generational relationship. Finally, evidence indicates that succession planning plays an important role in medium-sized family businesses, while in small-sized businesses it has been overlooked. This fact suggests that the owners perception on the planning may correlate to business size. This is reasonable since when businesses grow to a certain stage, their structure becomes more formalised and hierarchical and subsequent requirements more multifaceted. This deserves more planning work. Ward (1988) identies several explanations for the high failure rate in family business, but the most signicant is that many owner-managers do not strategically plan for the business future. Researchers also identify that business owners in smaller businesses are apt to adopt emergent strategy to administrate and leave succession planning to chance (Sharma et al., 2003, 2000). The UK Co-operative Council (1995) indicates that owners/managers of SMEs are generally lacking of management skills. This implies that generally they lack of the knowledge on how to strategically plan for business development, how to market products and increase their market share and how to motivate their employees to better serve companies and their customers. Provided such a situation, a greater concern toward succession planning is highly recommended. Specically, succession planning refers to the process of developing a business strategy that provides prescriptions about how business generational transition can be operationalised effectively. It is designed to create insights into the company and

environment in which the company operates. Such a plan could seek to address the following issues: . Why should the family be committed to perpetuating the business? . What is the vision of the business at the post-succession stage? . Who should participate in the planning process? . When and how should the offspring be prepared? . When and how should the incumbent depart? . How will the family resolve various conicts, both on the family and the business side? . How to constitute and use the board of directors? Meanwhile, how to nurture, enthuse, identify and encourage offsprings entrepreneurial spirit should also receive a signicant attention. Open strategies coupled with entrepreneurial ventures have been conrmed to be able to endow business with more competence to succeed in the highly competitive market, while a conservative philosophy with a passive lifestyle pursuit will only constrain the long term business survival and growth The methodological challenges in conducting family business research indicate that a number of limitations constrain the conclusions of any study such as this. First, the lack of secondary data forces researchers to conduct their own primary studies, which are difcult both to implement and to compare with prior research (Brockhaus, 1994). Reasons for this include many family business owners disinterest in participating in such studies and the lack of consistent denitions from study to study. Such caveats imply that any generalisation across the sector can be difcult or even dangerous to achieve. Furthermore, family business research has suffered from the shortage of longitudinal studies (Brockhaus, 1994). Family business owners are reluctant to participate in studies that only require single response, let alone those that require several rounds of intervention or interaction. Furthermore, the high discontinuance rate related with small family businesses makes follow-up studies almost unachievable. Future study can be extended towards checking how exogenous variables in the model (i.e. succession planning, successor training and inter-generational relationships) interact with one another. For example, are businesses experiencing more cohesive inter-generational relationships likely to create better-prepared successors, or conduct higher degree of succession planning? Another critical issue requiring further research is the causes of failure and success in descendent-controlled family businesses. Is it possible to measure success or failure relative to norms for a given industry? Are there identiable failure factors, and to what extent are these related to family versus non-family issues? Moreover, some very basic research issues need to be addressed when studying business performance in the context of family business, since this involves specifying indicators of success which go well beyond the nancial, and are certainly more multi-dimensional than would be the case for more professionally run and public limited companies. But just what are the indicators of success used by family businesses? Are there differences in types and uses of success evaluation between family businesses with high and low nancial performance? Certainly, it warrants

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more work before one can hope to develop domain-specic theories pertaining to family business succession and performance.

80

Notes 1. Effective successors in Goldberg (1996) are dened as those who have demonstrated nancial competence by increasing revenues and prots during the ve-year period of 1989 to 1993. 2. In this study, business performance was measured by an average of the businesss last ve years nancial outcomes. 3. Small values for the KMO measure mean that a factor analysis of the variables may not be ideal, since correlations between pairs of variables cannot be explained by the other variables (Norusis, 1994). Kaiser (1974) characterises measures in the 0.80 as meritorious, in the 0.70 as middling, in the 0.60 as mediocre, in the 0.50 as miserable, and below 0.50 as unacceptable. 4. Hypothesis H4 has been excluded due to the results of the factor analysis.

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