CHAPTER I

INTRODUCTION
1.1 Introduction
There are a massive number of family owned business in Indonesia. Based
on Soedibyo (2009) more than 90% of companies in Indonesia are handled by one
family with a lot of go public companies whose shares are even held by the
family. From those companies which are listed between 2000 until 2009, 67 % of
them are listed as family owned business. Based on the research conducted by
Carney and Child (2013) when looking across East Asia from 1996 to 2008
revealed that there has been a modest decline in the percentage of family firms
which controlled by the largest families, their research also found that in so far as
firm age corresponds to a greater likelihood that an heir will take over from the
founder, the proportion of all family-owned firms with heirs at the helm clearly
has increased. Especially in Indonesia many of family-owned firms which have
exhibit political links were no longer publicly listed in 2008 which were caused
by fell due to the end of Suhartos regime in 1998 and experienced a political
backlash due to the financial crisis.
As a matter of fact, this issue regarding the family owned company is an
attention-grabbing object to study. With the greater part of shares is owned by the
family, it would impact on the companys management system as well as the force
of the ballot in the AGMS (Annual General Meeting Shareholders) or in
Indonesian Companies context stand for RUPS (Rapat Umum Pemegang Saham).
Since the majority of shareholders are family members, it is highly possible that

the election of board members and the CEO will be preferred from the family
lineage.
The one who is responsible for managing the CEO succession process and
maintaining a solid executive team is the board of the company. Meanwhile, it
takes a number of factors to be taken into account in taking the responsibility. It
requires the board to reflect on the future considered threats and opportunities, the
working of several candidates, the implications of its choice on human resources,
and so forth. This can be a demanding course especially when the family-owned
company has settled on seeking an external CEO or external senior executives. It
can be the first time that company works on seeking an external member to take
the lead. Or else, the family members remain as stakeholders after handing over
the position. In both cases, several factors such as companys history and culture
might influence the hiring process.
Naming the Chief Executive Officer successor has been the focal point of
Organizational Theory. Thus, since it may bring important influence on the
company future performance, the company should put devoted effort in the
process of electing the new successor (Khurana, 1998). Soedibyo (2012) in her
book Family Business Responses to Future Competition wrote that it is both
advantageous and disadvantageous that family-owned businesses commonly
choose a successor within the bloodline. In an instance, some companies might
prefer to select a family member to take a management position despite the fact
that there are non-family potentials whose are more capable. Even so, there are
also some other companies that decide to select a person in charge based on the

performance. Furthermore, there are also cases where the successors within the
bloodline are not ready to take the management position when the founders are
not present anymore.
It is indeed not a simple task for a family business owned to select the
right candidate for a key position in the company (Sharma, 2004). A release states
that there are less than one-third of family-owned businesses in USA made it into
the second generation. Family owned business has an important role in the
economy of the country, especially developing country like Indonesia, it has been
revealed through the research conducted by Fan et al (2011) that from 50% in all
listed firms in Asian is consists of family own business and also 32% of market
capitalization in Asian economics is ruled by family owned business, this research
also shows especially in Indonesian context after economic crisis Indonesian
family owned business stock performance is the best from the 10 countries studied
by the increasing P.E ratio from 5.3 times to 22 times and also revealed that
Indonesian family business market capitalization reaches 61% of Indonesian
Stock Exchange market capitalization. According to research conducted by
Boston Consulting Group in 2012 Defying the Odds: Building Family
Businesses that Last (Insights from Indonesia) have found that Family owned
businesses in Indonesia has become main pole of the Indonesian economy.
Simultaneously, family owned businesses rule for about 40 percent of the market
capitalization of the top 125 listed companies in Indonesia also control key
industries including real estate, agriculture, energy, and consumer goods. Another
survey conducted by Jakarta Consulting Group in 2004 have revealed that from 87

Indonesian family owned business, only 3 percent from Indonesian family owned
business which established from 1932-1943 and only 2 percent from Indonesian
family owned business which established from 1944 1955 still operates until
now. Surprisingly, only 10 percent of Indonesian family owned business which
established from 1956 to 1967 and only 24 percent of Indonesian family owned
business established from 1968 to 1991 can survive until now. It shows that the
difficulty in running the business as well as preserving consistency inside the
family including selecting the right successor can determine whether or not a
company able to survive. Thus, it is not only the difficulty in finding the right heir
which determines the closure; other factors might contribute as well.
There were so many evidences in Indonesian context that the CEO
succession event won by the heirs or family successor, for example Mustika Ratu,
Tbk. After 36 years of work in the cosmetics, fragrances, toiletries and traditional
body treatment business, finally in 12th January 2011, Mooryati Soedibyo hands
over the reins of power to her second daughter Putri Kuswisnu Wardhani. It takes
25 years to galvanize Putri Kuswisnu Wardhani whose now hold the position of
CEO. Every family owned business especially in Indonesia has their own unique
ways to conduct succession event, some needs ten years for prepare their
successor or directly replaced their dead founder (Soedibyo, 2009). Meanwhile,
there have been so many cases which indicates that Indonesian family owned
business choose their CEO not from inside their family member but from outside
family member where professional manager whose have capability, integrity and
experience was chosen, for example PT Charoen Phokphand Indonesia, Tbk,

which already conducted succession event in 2013 and choose their new CEO
Rusmin Ryadi from outside the family member. As the growth of the family firms,
they must hire people from outside the family member to occupy high positions,
as happened in PT Charoen Phokphand Indonesia, Tbk, this is caused of not all of
the expertise possessed by family members. This issues regarding to who will be
selected to be the next CEO on the Indonesia family owned business are still
debatable, because of lack of research about the Indonesian family owned
businesses which have selected non-family members as their new CEO. In
publicly listed family owned businesses, a company which is run by family
members for years is very debatable. The different perspectives among family
orientation and the shareholders can surely influence the companys goals. On the
other hand, having no trust for non-family members to take a key position in the
company might prevent the growth of the company, but on the other hand distrust
the family heir can impact on the shareholders judgments (Morck and Yeung,
2004).
It is normal in two tier board system particularly in Indonesia that RUPS
takes a big role in selecting the candidates of the successor; either within the
company or outsiders. It aims both to control the process by selecting an internal
candidate and to extend the process by opting for an external candidate. Since
both the internal and external potentials owned their specific strength, as a result,
it is debatable. In this case, according to Lauterbach,Vu and Weisberg (1999), a
family-member contender encourages stability and loyalty. On the other hand, an

external contender can be a mean to solve the struggle when the company is
facing difficulty (Parrino, 1997; Cannella & Lubatkin, 1993).
It is common in family businesses that a CEO is chosen based on her or
his bloodline instead of based on his or her capabilities. It would not be a
problematic case if the person is doing well as a CEO. However, by fixing on
choosing an internal candidate for CEO instead of selecting an external candidate
based on the capability, it might not give the company a chance to find the most
suitable person for the position. Even so, in other cases, choosing a CEO might
also be based on the ones dedication span to the company.
In leading the company, a CEO needs to consider several things such as
what the companys goals are, the difficulties they are facing and where the
company is advancing. By this, the past also takes a great role. For example, the
current CEO has capabilities to run the company well that there are concerns that
the next candidate is not capable to do the same. Or else, the board ascertains that
the current appointee is not doing the job well so they aim not to make the same
mistake. Suppose the incapable person was chosen within the family members, it
might be possible that the replacement will be chosen from non-family members.
Otherwise, suppose the person was an outsider, then the next candidate is highly
possible chosen from the internal members. In fact, both internal and external
candidates have diverse strengths which are important to prove to the stakeholders
and competitors.

Based on Charantimath (2005), a family-owned business can be defined as

a profit-oriented company where the majority shares are on average owned by
either a single extended family or one family member with substantial impact
from other family members. Further, another definition of family owned business
is explained by Heck and Trent (1999) and Hollander and Elman (1998) as a
business which is run by one or more family members with not less than 20
percent of shares are owned by the family.
This study is expected to associate the impact of family owned business
previous performance, the structure of family members in board of directors and
board of commissioners, and successor firm experience on the appointment of
Chief Executive Successor in Indonesian Publicly Listed Family owned business.
Despite the fact that the issue regarding family owned business has been globally
studied (Chrisman, Chua and Sharma 1998; Dyck et al 2002; Handler 1994; Le
Breton-Miller, Miller and Steier 2004; Sharma, Chrisman and Chua 2003; Wang,
et al 2004), only few of those researches which concern on the connection
between the factors mentioned above. Further, the study using Indonesian publicly
listed family owned business as the subject of the study is still rare.
1.2. Introduction to Problem Definition
Most of the companies in the world are family owned businesses, it is
shown by many of the current researches in economics and finance which are
concerned on issues of family owned business. (Morck, Stangeland and Yeung
2000; Claessens, Fan and Lang, 2002). One of the most interesting matters

correlated to the family owned business is about CEO succession decisions. Since
the CEO can lead where the business is running to, the argument on whether to
choose a CEO within or outside the family is usually arising in the family owned
business. (Bennedsen, et al, 2007)
The concern related to the influence of an internal CEO on family owned
companys performance has been an interest. There is a possibility that an internal
CEO can perform better compared to external candidates since he or she has a
desire for his or her succession to get recognized by the family. It is also further
mentioned that an internal CEO is seen to have more capabilities in dealing with
key stakeholders. In spite of this, a possibility of confusion between business
purposes and familys concerns can cause an internal CEO to show poor
performance. In addition to it, an internal CEO can also perform poorly since he
or she is selected not based on his or her management skills. Perez-Gonzalez
(2006) has formed a view which shows a significant decreasing performance in
the context of internal CEO selection. Compared to companies handled by
external CEOs, a family owned company managed by an internal CEO is likely to
show poorer functioning (Morck, Stangeland, and Yeung 2000; Perez-Gonzalez
2006; Villalonga and Amit 2006).
It is vital for public investors to comprehend factors which impact on the
family owned business CEO selection. They should be aware of whether the
selection of the CEO is done objectively by considering the companys goals or
merely based on the family members assessment. By determining the position
concerning the familys subjective interest and shareholders concerns, it is

possible to avoid conflicts occurred in selecting the right CEO (Bennedsen, et al,
2007)
There are five streams of research regarding the most studied issues in
family business succession based on Handler (1994). Those are (1) grouping the
stages in succession process (2) analyzing the founders characteristic, quality in
the business culture and cultivation, leadership style, hardship in succession
strategy, and difficulty in relinquishing the position (3) evaluating the importance
of successors preparations, the relation with the forerunner, business capabilities,
business experience, and sense of responsibility to the company (4) investigating
the succession from other perspectives to gain a better comprehension of
stakeholders views, such as investigating perspectives from the family members,
management, ownerships, and market system (5) Identifying triumphant
succession and the elements which are related to it.
The fourth point mentioned by Handler (1994) is supported by a study by
Bocatto, Gispert and Rialp (2010). It is indeed needed to analyze the succession
from other perspectives such as investigating perspectives from the family
members, management, ownerships, and market system, in order to gain a better
comprehension of stakeholders views.
In their research, Wang, et al, (2004) stated that thriving successions relate
to some factors can improve the successors performance which will also improve
the companys performance; those factors include the selection process quality,

10

the relation between the successor and the predecessor, and the successors
business skills and experience in handling a business.
Even though the quantity of CEO succession events are lessening (Favaro,
Karlsson, & Neilson, 2011), CEO turnover remains important. Even so, there is
not much information known regarding the factors that determine whether a
family member or an external person should take the position. Especially in
Indonesia, there is no study which focuses on the matter so far. Furthermore, this
research also concerns on other factors; family owned business past performance,
the structure of family members in board of directors and board of commissioners,
and successor firm experience, which may affect on the CEO selection in
Indonesia publicly listen family owned business.
1.3. Problem Definition and Research Question
The majority of the researches regarding the relationship between CEO
succession and companys past performance (Cucculelli and Micucci 2008;
Bennedsen, et al, 2007; Chrisman, Chua and Sharma 1998; Dyck et al,2002;
Handler 1999; Ishak, Ismail and Abdullah, 2012; Le Breton-Miller, Miller and
Steier 2004; Lauterbach,Vu,& Weisberg, 1999; Sharma, Chrisman and Chua 2003;
Wang, et al 2004) show a variety of results. The study from Cucculelli and
Micucci 2008;. Lauterbach,Vu,& Weisberg, 1999 shows the relationship between
firms past performance and CEO Succession selection decision choice which
indicates higher firm past performance caused family firms tend to select the CEO
from inside family members. The research conducted by Bennedsen, et al, 2007;
Chrisman, Chua and Sharma 1998; Dyck et al,2002; Handler 1994; Ishak, Ismail

11

and Abdullah, 2012; Le Breton-Miller, Miller and Steier 2004, found that there is
no relationship between firm past performance and CEO succession selection
choice. Nonetheless, there are only few which concern about the factors discussed
earlier; those are the companys past performance, family member composition in
the board of directors and commissioners, and also successor firm experience in
the nomination of CEO in Family owned business. Hence, the formulation of the
problem based on the discussion above is:
What is the effect of firm past performance, family member composition
in the board of directors and board of commissioners and also successor
firm experience in the nomination of CEO in Family owned business?
1.4. Research Objectives
First, this study is aimed to present cross sectional data and to enhance the
understanding on how the companys past performance would impact particularly
in deciding whether the company should assign an internal or an external
successor.
Secondly, this study is intended to improve the understanding concerning
the influence of the structure of family members in board of directors and board of
commissioners in decision making of whether the successor should be within the
family members or outside the bloodline.
Thirdly, this study is meant to improve the understanding about the
successor firm experience in selecting a new CEO.

12

1.5. Thesis Structure

Chapter two of this thesis reconsiders a number of literature studies
regarding the market response on CEO succession. The theoretical framework of
the study is also included in the chapter along with the short introduction and
hypotheses development. The theory discussed in the chapter particularly
concerns the selection of CEO in family owned business which is related to
companys previous performance, the structure of the board of directors, and
Successor Firm Experience.
Chapter three of this study reviews the research design which includes
conceptual model, methodology, data collection techniques, and the structure of
the research instruments.
Subsequently, chapter four shows the research study. It consists of the
descriptive study and logistic regression analysis of the variables. Last but not
least,

chapter

five

presents

the

recommendations for future researches.

conclusion,

research

limitation,

and

13

CHAPTER II
LITERATURE REVIEW
2.1. Family Owned Business
2.1.1. Definition of Family Owned Business
As the oldest and the largest type of business organization, a
family owned business is defined as any business or company which
involves two or more family members as its founder, its owner, and its
controller. A further definition of a family owned business is proposed
by

Charantimath

(2005:290)

in

his

book

Entrepreneurship

Development and Small Business Enterprise. He defines

A family owned business is a for-profit enterprise in which a
controlling number of voting shares (or other form of ownership),
typically but not necessarily a majority of the shares, are owned
by members of a single extended family, or are owned by one
family member but significantly influenced by other members of
the family.
A firm is categorized as a family-owned business under a
condition that the controlling person can gain sufficient shares to
ensure at least 20% of the voting rights, or it is even better to reach the
highest percentage of the voting rights, compared to other
stakeholders. Additionally, in terms of shareholding, Heck and Trent
(1999); Hollander and Elman (1998) point out that leastways 20% of
the shares are hold by the family although the business might be
managed by family members of even outsiders. In regard to its

14

ownership Brockhous (1994) emphasizes that a familys ownership

toward the firm should be at least 50% of the shares as most of family
business owneders intend to pass the business on to their descendants.
Brockhous (1994) even state that the family needs at least 51% of the
shares. Besides, family take a dominant roles in the firm management
and control.
Because of the private nature of most family businesses, it is
difficult to obtain accurate definition about them. However, from the
various definitions above, a conclusion can be drawn that a family
owneded business is a sort of enterprise, owned and prevailingly run as
well as managed by one family member or multiple generations with at
least 20% of the voting rights. The family plays the roles as decision
maker and business strategy planner, including the decision to pass on
the company to the heirs of the family.

2.1.2. The Advantages of Family Owned Business

As previously mentioned, family business has become the
oldest and the vast model of economic organization throughout the
world. In some countries, many of the largest publicly listed firms are
family-owned. Their contribution to the world economic is much
bigger than non-family businesses. Thus, family owned enterprises are
believed to outperform their non-family counterparts as they have got
several advantages that non-family businesses do not possess.

15

According to Ket de Vries (1993), there are some advantages of family

businesses as follows.
1
2
3

4
5
6
7

Long term orientation

Greater independence of action
a less (or no) pressure from stock market
b less (or no) takeover risk
Family culture as a source of pride
a. Stability
b. Strong identification/ commitment/ motivation
c. Continuity in leadership
Greater resilience in hard times
a Willing to plow back profits
Less bureaucratic and impersonal
a Greater flexibility
b Quicker decision making
Financial benefits
a Possibility of great success
Knowing the business
a Early training for family members
Family owned businesses are mostly chosen as the type of

enterprise as they offer a number of advantages. In addition to the

above mentioned benefits, the Small Business Research and
Information Centre (1998) lists the other advantages of family
businesses as follows.
a. Greater attention to customers than other business
b. The family business is more ethical than other forms of
business.
c. Being in the business for a long period of time.
d. Willing to sacrifice to continue the business.
e. Treat employees better.
f. More involved in community activities.
g. More believable because they do not treat the business only
as a money maker.

16

2.1.3. The Disadvantages of Family Owned Business

Although family owned businesses have dominated the
market and have greater impact in economic development, there are
also many family businesses that collapse and fail to be sustainable in
the long term. Thus, besides the advantages mentioned above, there are
also some disadvantages of family owned business. Ket De Vries
(1993) mentions some disadvantages of family owned business as
follows.
1 Less access to capital markets may limit growth
2 Confusing organization
a Messy structure
b No clear division of tasks
3 Nepotism
a Tolerance of inept family members as managers
b Inequitable reward systems
c Greater difficulties in attracting professional
management
4 Spoiled kid syndrome
5 Internecine strife
a Family disputes overflow into business
6 Paternalistic/autocratic rule
a a resistance to change,
b secrecy, and
c the traction of dependent personalities
7 Financial strain
a Family members milking the business
b Disequilibrium between contribution and compensation
8 Succession dramas
2.2. Past Performance to CEO Succession
The CEO (Chief Executive Officer) succession in a family owned
business is a very crucial element as the life and the stability of the company
would be led by this new CEO. Despite the unclear position hierarchy of family

17

businesses, the future CEO might be selected from internal sources as well as
external source to minimize managerial incompetency.
An internal successor is usually taken as he has an in-depth knowledge
of the family business conditions and strategies. Additionally, he has also been
familiar with the internal and external business environments, employees and
board of directors know them very well. The familys values, attitudes, and beliefs
are also continued and taken into account in running the business (Bocatto,
Gispert and Rialp, 2010). However, innovation is somewhat rare because the new
CEO as descendant mostly and simply continues what has been there.
One effective way to terminate the lack of innovation in family owned
businesses is hiring a new external source CEO. The change of CEO taken from
the external sources is a good medicine to treat the company declining
performance. This is reasonable as the new CEO derived from external sources
can bring a new atmosphere in the family owned business, where the external
CEO candidates should be able to implement and understand the aspirations that
never considered. Lauterbach, Vu and Weisberg (1999) add that an organization
needs an agent of change from an external source whenever its performance and
profitability are decreasing. These statements are contradictory with the research
findings conducted by Boccato, Gispert and Rialp (2010). They fail to see a
significant relation between past performance and the successor resources. Quite
similarly, Ishak, Ismail and Abdullah (2012) also find a nonlinear relation, firm
with poor or excellent past performance tend to appoint from inside, while firms

18

with medium grade past performance use a relatively high proportion of external
successions.
Researchers find it hard to conduct further studies regarding family
owned business as there is even no agreed-on definition of a family business.
Chrisman, Chua and Sharma (2003) propose two different approaches when
defining the family owned business: components of involvement and essence
approaches. The first approach sees a family owned business from the aspect of
family involvement sufficiency. The second approach is based on the belief that
family involvement must be directed towards behaviours that produce certain
distinctiveness before it can be considered as family business. Bocatto, Gispert
and Rialp (2010) rely on these approaches to get a clearer definition of family
owned business. These steps are consistent and synergic with two theories that
contribute to a strategic management view of the family owned business which
are agency theory and resource based view theory.
2.2.1 Agency Theory
The notion that All the world is trying to make managers think like
owners brings about the conception of agency theory. Agency theory is widely
used in management area as it clearly examines the separation of company owner
and manager. Strategic management and governance studies are also dominated
by the use of agency theory to examine the separation of ownership and control in
a company (Schulze, et al, 2001; Van den Berghe and Carchon, 2003). This theory
is crucial to be presented in this research, supporting the reality that family firms
are able to reduce certain agency dilemmas (Boccato, Gispert and Rialp, 2010).

19

Moreover, agency theory can provide a clear framework in explaining the

differences between family and nonfamily businesses (Daily and Dollinger, 1992).
In terms of family business finance, two important agency relationships
are mostly those between stakeholders and managers. Agency theory is based on
the assumption that the manager who is not the owner of the company does not
supervise the affairs of the company well compared with company owners when
managing his owned company. Due to separated ownership and control of the
company, the strategic actions and operational cost of the company are fully
decided by the manager and thus the stakeholder does not have adequate chance to
control his company.
A study conducted by La Porta, Lopez - de - Silanez and Shleifer (1999)
quite differently found that companies stakeholders have an overlapping job
description with managers. They do not simply owned the companies but also
control the decision-making process. Schulze, Lubatkin and Dino (2003) and
Schulze et al. (2001) show how a propensity toward unselfishness can manifest
itself as a problem of self-control and create agency costs in family owned
businesses. These happens due to free riding, biased parental perception of a
childs performance, difficulty in enforcing a contract, and generosity in terms of
privilege consumption, which may ultimately result in a decrease of shareholders
investment.
Morck and Yeung (2004) in their research found nepotism evidences in
family companies. The owners sometimes also neglect their off springs
inadequate competence in managing the companies. With the support of agency

20

theory, such a system of succession can be avoided through non family

management, especially when the family business performance is decreasing.
Therefore:
H1: Family owned business negative past performance is positively related to
the nomination of a nonfamily successor.
2.3 Family Member Composition in the Board of Directors and Board of
Commissioners to CEO Succession.
Over time, many family owned businesses reflect and learn the value of a
well-composed and well-run board of directors and commissioners. Since the
shareholder group is often too big to have everyone participate on the board, so
the board starts to become representative. Besides, stakeholders should recognize
the value in having the objective, professional experience of external board
members.
The agency theory in the formation of boards of companies gives a notion
that the selection of the board representatives should be viewed wider than just
company ownership and management to maintain the companies existence. One
most important thing to consider is that all board members should be focused on
the best interest of the company, not on the interest of any particular individuals.
2.3.1 Resource Based View Theory
Before exploring Resource Based Theory, it is important to define the
meaning of resource of company. According to Amit and Schoemaker (1993), a
firm's resources are defined as stocks of available factors that the organization

21

owns or controls to be processed into its final product or service, involving the
combinations of assets, mechanical production process, and collaboration between
management and employees. In shorts, resources are the inputs needed for a firms
production process. A firms resources at the end influence its production
capabilities, whether the capabilities are achieved through tangible or intangible
processes of interactions among the firms resources. So, effective companies are
those which are able to utilize their unique resources and capabilities to earn as
many profits as possible.
In RBV model, resources are given the major role in helping companies to
achieve higher organizational performance. It is believed that companies should
look inside them to find the source of competitive advantage, instead of looking at
competitive environment for them. In other words, a bundle of complex,
intangible, and dynamic resources lies at the heart of a firm's competitive
advantages, rather than the product market combinations.
Two critical assumptions of RBV in analyzing sources of competitive
advantage are that resources must also be heterogeneous and immobile.
Heterogeneous resources is chosen when the firm within an industry consider the
strategic resources they control. Another model of resource assumes that these
resources may not be perfectly mobile across firms, and thus heterogeneity can be
long lasting.
Because the nature resource in family owned business is unusually
complex and dynamic as well as rich in intangible resources, the RBV analysis

22

framework developed in the area of family business is also different from

nonfamily counterparts (Habbershon and Williams 1999). Family businesses
present some strategic resources and capabilities that may bring about competitive
advantages. These rare, valuable, invisible, and imperfect imitable assets of family
owned business enable them to develop, choose, and implement strategies that
firms without these assets are unable to do. Consequently, a family business's
unique features (commitment, shared values, culture, trust, reputation) provide the
firm with certain strategic resources and capabilities that could account for its
long-term success (Habbershon and Williams 1999).
Habbershon and Williams (1999) introduce the concept of familiness of
family firms to deeply understand the essence of family business. Habbershon and
Williams (1999) describe familiness as "the unique bundle of resources a
particular firm has because of the systems interaction between the family, its
individual members, and the business. The term familiness has nothing to do
with the involvement and the influence of the family on the business but rather
has thing to do with how family is a family firm. Familiness is proposed as the
firms source of competitive advantage, generating firm wealth and value creation.
For the purposes of this work, familiness describes the positive influence of
family involvement in the firm and allows researchers to investigate the entire
continuum of the family form of business organization, from those with
consolidated family ownership and multiple generations of family management to
those firms having controlling family ownership and strategic management input
only at the board level.

23

Studies examining the linkage between board composition and CEO

succession are mostly based on samples in economies that adopt unitary board
structure (Boccato, Gispert and Rialp, 2010). These studies further argue that the
board of directors plays an administrative role of the firm and consists of
executive and nonexecutive directors. This organizational model is quite different
from that in Indonesia in which family firms typically have supervisory board and
management board in the organizational structure. Internal and external
supervisory board monitor the management of the firm, while management board
conducts the day-to-day management of the firm and may be responsible to both
supervisory board and shareholders.
Based on Indonesias Corporation Law enacted in 1995, any corporations
shall have Dewan Komisaris (Board of Commissioners or BOC) as well as
Dewan Direksi (Board of Directions or BOD) with their clear job definition.
BOC is a supervisory board with at least two members that represent the
shareholders and is headed by a president commissioner. The BOC and BOD
representatives are elected by and responsible to the RUPS (Rapat Umum
Pemegang Saham).
The following are the distinctions between The Board of Directors (BOD)
and The Board of Commissioners (BOC), first, The Board of Directors (BOD) is
the leading component that works full time, prohibited to have other job, while the
Board of Commissioners (BOC) is commissioner and independent commissioner
components as well as various committees under them. In addition to the BOC, its
members may be affiliated to the firm (non-independent) or from outside the firm

24

(independent). The president commissioner may be elected from either nonindependent or independent members of BOC.
Second, BODs main role is to conduct the day-to-day management of the
corporation and is headed by a president director (comparable to the CEO in
unitary board structure); while BOC is responsible for strategic planning process,
for the firms risks, for monitoring directors performance, and for monitoring that
the firm does not go against the policy.
Third, based on applicable capital market regulations, publicly-traded
corporations shall have independent commissioners of at least 30 percent of the
total number of BOC members. On the other hand, BOD, which has at least two
members, must be responsible to both the shareholders and BOC.
A family owned business is variously defined by some experts in terms of
its organizational structure. Anderson and Reeb (2003) and Villalonga and Amit
(2006) define family owned business as a firm where the family members act as
officers, directors, and stakeholders. Saito (2008) adds that a firm is categorized as
a family firm if the family as the stakeholders affects the policies, strategies,
personal issues, and other parts in the firm through their ownership and
participation in the firms management. Andreas (2008) points out that family
owned business has a certain family who owned at least 25% of the shares or has
other family members who are involved in the Board of Directors of Board of
Commissioners it the shares if less than 25%.

25

H2.a: High proportion of family members sitting in the Board of Directors is

positively related to the nomination of a family successor.
H2.b: High proportion of family members sitting on the Board of
Commissioners is positively related to the nomination of a family
successor.
2.4. Successor Firm Experience to CEO Succession
As previously explained, Resource-Based View (RBV) scholars state that
bundle of complex, intangible, and dynamic resources lies at the heart of a firm's
competitive advantages, rather than at the product market combinations.
Companies, therefore, should look inside them to find the source of competitive
advantage, instead of looking at competitive environment for them
According to Amit and Schoemaker (1993), a firm's resources are defined
as stocks of available factors that the organization owns or controls to be
processed into its final product or service, involving the combinations of assets,
mechanical production process, and collaboration between management and
employees. In shorts, resources are the inputs needed for a firms production
process. A firms resources at the end influence its production capabilities,
whether the capabilities are achieved through tangible or intangible processes of
interactions among the firms resources. So, effective companies are those which
are able to utilize their unique resources and capabilities to earn as many profits as
possible. In this context, capabilities have things to do with the quality of human
capital that are involved in the management and production process.

26

The knowledge possessed by the human capital that are involved in the
family business should be objective and in line with the companys interest,
instead of individual interest. This knowledge should be taken into account when
choosing the successor of the company because once the choice is wrong, the
survival of the company might be at risk. Therefore, companies should nominate a
successor with solid experience and extensive knowledge of the firm. Iannarelli
(1992) study evidently proves that the career experience of the next-generation
family member starts in the preteen years with the early socialization process into
the family owned business. Consequently, family successors have more previous
years of experience in the company, and they are more conscious about
familiness, an intangible resource source of competitive advantage.
H3: Higher firm experience of family successors is positively related to their
nomination
2.5. Conceptual Model
Data collection techniques used in this study was secondary data survey.
The data collected was covered the relationship between the variables of
formulated hypotheses. The study examines three different reasons that may
impact on the succession of a family member or non-family member to top senior
spots, those are (1) companys past performance, (2) the structure of family
members in the board of directors and the board of commissioners, and (3)
successors experience in a direct position in the company. It can be seen that the
first factor mentioned before can be taken as a more associated one with the

27

organization theory, while the rest two factors are related more to the RBV. The
interaction of each variable and presumed relationship between CEO succession
and firm past performances and others factors which influencing CEO succession
will be seen on the graphical representation below The research model presented
below is suggested to achieve the proposed objectives and compare the proposed
hypotheses.
Figures 2.1
Hypotheses Framework

Source: Morck and Yeung (2003, 2004), Saito (2008), Andreas (2008), Iannarelli
(1992), Lauterbach,Vu and Weisberg (1999), Boccato, Gispert and Rialp (2010),
Ishak, Ismail, and Abdullah (2012), Ansari, Goergen and Mira (2014).
Hypotheses 1 was concluded from the study conducted by Morck and
Yeung (2003, 2004), Lauterbach, Vu and Weisberg (1999) and Boccato, Gispert
and Rialp (2010). Their research identifies the relationship between firms negative
past performance with the selection of nonfamily member as the new CEO.
Hypotheses 2a and 2b was obtained from the research conducted by Saito (2008),
Andreas (2008), Boccato, Gispert and Rialp (2010) and Ishak, Ismail and
Abdullah (2012). Their research found the connection between family member
sitting in the boards and CEO succession selection choice. And, hypotheses 3 was
generated from Iannareli (1992) also Boccato, Gispert and Rialp (2010) study

28

which indicates that higher family successor firm experience is related to their
nomination as the new CEO.
2.6. Control Variables
Control variables defines as the variables held constant, since the
investigator wants to study the effect of one particular independent variable, the
possibility that other factors are affecting the outcome must be eliminated. This
study employs some control variables which are sales, firm leverage and firm age.
2.6.1 Firm Size
It is argued that large firms and those with many business segments
(diversified) tend to select insiders due to the firms' complex structure and policy
(Parrino, 1997). It is important to control firm size since many researches on
leadership succession have identified the firm size as a contextual variable and a
predictor of succession rate. The logarithm of total assets as can be used a proxy
for firm size. The data of total asset in this study was collected from ORBIS
database. The firm size used in this research is one year prior to the succession
event took place.
2.6.2 Firm Age
Firm age as control variable used in this research are gathered from
ORBIS database, which is the firm age data from each family owned business
which have conducted succession event from 2006 to 2015 and through some
selective process to become the sample of this research. The firm age data

29

calculated are the age of the firms from its incorporated year until the year which
succession event happened.
2.6.3. Financial Leverage
Financial leverage as control variable used in this research are gathered
from ORBIS database, which is the financial leverage data from each family
owned business which have conducted succession event from 2006 to 2015 and
through some selective process to become the sample of this research. The
financial leverage data calculated by the ratio of long term debt on the total capital
added to retained incomes one year prior to the nomination of the new CEO.

30

CHAPTER III
METHODOLOGY
3.1. Data and Sample
Sekaran (2000: 266) states Population is the sum of the whole group of
individuals and events which were attracted the attention of researchers to be
researched or investigated. The subjects of this research are all non-financial
companies listed in the Indonesia Stock Exchange (BEI) ranging from year 2006
to 2015. Since the number of non-financial companies is greater than financial
companies, those companies symbolize the industry state of Indonesia. The
samples of this study are component of the population which owned qualified
characters to be researched. Sampling technique used in this study is purposive
sampling which aimed to acquire a typical sample which synchronized the
specified criteria.
To answer the research question, several datasets are utilized to gather all
related data. The data used in this study are cross sectional data included all CEO
succession in Indonesian FOB listed in BEI from 2006 to 2015. Data collection
initially identifies 148 CEO succession events during the examined period. After
consolidating for both data completeness and data coherency, the final sample
yields 148 succession events. This data consolidation encompasses the CEO
Succession related information, the company financial data and the company
corporate governance report

31

Data on CEO successions were gathered from ORBIS and ICMD. While
data related to the CEO itself was retrieved from FOB annual report and ORBIS.
To collect the company financial performance data ORBIS and FOB annual report
were used. In addition corporate governance report from each FOB was employed
to find composition of family members in BOD and BOC also to find how long
did CEO itself has been sitting in the BOD and BOC before he or she elected to
be the next CEO.
There are four stages done in acquiring the final sample. The first stage
focused on listing downed all companies included in the Indonesia Stock
Exchange in which the data was gained from the Indonesia Stock Exchange and
ORBIS database. By comparing the lists from those databases, only the nonfinancial firms appearing on those lists were used. The second stage focused on
examining the Corporate Governance Report of each of the companies to gain the
information about the ownership structure of the company, the FOB, the number
of family members in the BOC and BOD, and the successors experience based on
his or her length of time in the BOC and BOD.
It has been stated earlier that the FOBs can be defined as a business owned
and/or handled by one or more family members (Anderson and Reeb 2003; Heck
and Trent 1999; Hollander and Elman 1998). Then, it is further mentioned that not
less than 20 percent of shares should be held by a family (Navarro and Ansn,
2004).

32

The third stage of gaining the sample evaluated whether or not a

succession has been done in the sample of family owned business. The study fixes
on CEO succession for the period of 2006 to 2015. Specific criteria companies in
the final sample should have are (1) fit the aforesaid definition, (2) has run a
succession, and (3) has assigned a family or a non-family member to an upper
senior rank. To separate the effect of management succession from changes in
ownership, cases in which the succession agrees on a takeover of the family
owned business were not included. Last but not least, the fourth stage focused on
naming the family and non-family successors.
3.2 Variables Measurement
The dependent variable can be defined as a variable which is affected by
other variables. This study used CEO Succession as the dependent variable. CEO
Succession focuses on the family versus non-family selection. It is a binary
variable which values 1 as a family CEO becomes the successor and values 0 as a
non-family CEO becomes the successor. Family CEO defines as CEOs who are
related to the owners of family-owned firms, and non-family CEO would be
defined as CEOs who are not related to the owners of family owned business
On the contrary, the independent variable is a variable which is neither
affected by others nor affected the others. The following explains the independent
variables used in this study.
1. Firm Past performance: It is vital to take in that unrefined financial
variables measuring a companys profits are vulnerable to accounting

33

modifications and managerial exploitation. Further, are a number of

researchers (e.g., Lauterbach,Vu and Weisberg 1999, Boccato, Gispert and
Rialp 2010, Ishak, Ismail, and Abdullah 2012, Ansari, Goergen and Mira
2014) naming several indicators to better assess firm performance. Even
so, there is no indication which is likely to precisely assess the companys
performance. Due to the lack of consent regarding the most proper
performance indicators, ROE was preferred for this study. Thus, firm past
performance was assessed using average ROE which was calculated as the
ratio of net income after interest and taxes divided by shareholders fund.
The average growth is calculated for the two years prior to nomination.
The average ROE was gathered from ORBIS database
2. Family member composition in the BOD and BOC: It is assessed as the
number of family members to the total number of directors on the BOD
and BOC of the company. The composition of family members in the
BOD and BOC is calculated in t-0 or at the year when the succession took
place. The family member composition in BOD and BOC are gathered
from corporate governance report of each companys annual reports which
become research samples (Boccato, Gispert and Rialp, 2010; Ishak, Ismail
and Abdullah, 2012)
3. Successor Firms Experience: It is related to a successors period on the
board prior to the selection. This variable is a proxy for the experience and
knowledge of the company. In this study, the successors firm experience
is measured by identifying how long the successor has been participating

34

on the BOD or BOC before the succession event happened. (Boccato,

Gispert and Rialp, 2010)
Control Variable is an unchangeable variable which is able to impact
values. Further, it is a variable which is held constant to access the relationship
between other variables. Control variable acted as a steady and static standard
of evaluation in scientific testing. Several control variables are included in this
study to rule out alternative explanation of the independent variables. They are
firm size, financial leverage and firm age. Summary of the research variables
used in this study as well as the operationalization, reference and data source
are presented on the following part

Dependent

Table 3.1.
Research Variables
Operationalization
Reference

Variable
CEO

Appointment of CEO Ansari,

succession

during 2006 2016 Goergen

period.

It

is

binary Mira

ORBIS
(2014); Capital

if the successor comes Gispert

family

(Family

member Rialp

CEO)

and

and Indonesian

variable, which values 1 Boccato,

from

Data Source

Market
and Directory

(2010); database.

and Lauterbach,Vu

values 0 if the successor and

Weisberg

comes from outside the (1999)

family members (nonIndependent

family CEO).
Operationalization

References

Variable
Firm
Past ROE was preferred for Ansari,

Data Source
ORBIS

35

Performance

this study. Thus, firm Goergen

(Average

past performance was Mira

ROE)

assessed using average Boccato,

ROE

which

and database
(2014);

was Gispert

and

calculated as the ratio of Rialp (2010)

net income after interest
and taxes divided by
shareholders fund. The
average

ROE

is

calculated for the two

years

prior

to

Family

nomination
It is assessed as the Ishak,

member

number

of

family and

Ismail ORBIS
Abdullah database and

composition in members to the total (2012);

Corporate

BOD

number of directors on Boccato,

Governance

(Family

the

Directors)

composition of family Rialp (2010)

each

members in the BOD is

companys

calculated in t-0 or at the

annual report

year

BOD.

when

The Gispert

the

Family

succession took place

It is assessed as the Ishak,

member

number

of

and section from

family and

Ismail ORBIS
Abdullah database and

composition in members to the total (2012);

Corporate

BOC

number of directors on Boccato,

Governance

(Family

the

BOC.

The Gispert

and section from

Commissioner) composition of family Rialp (2010)

each

members in the BOC is

companys

calculated in t-0 or at the

annual report

year

when

the

36

succession took place

Successor Firm In this study, the Boccato,
Experience

successors

firm Gispert

Corporate
and Governance

experience is measured Rialp (2010)

Report from

by identifying how long

each

the successor has been

companys

participating

annual report

on

the

BOD or BOC before the

succession
Control
Variable
Firm Age

event

happened.
Operationalization
It

is

assessed

References
by Ansari,

ORBIS

counting the age of the Goergen

firms

from

its Mira

Data Source

and database
(2014);

incorporated date until Boccato,

the

year

which Gispert

succession

and

event Rialp (2010)

Financial

happened
Financial

Leverage

calculated by the ratio of Goergen

leverage Ansari,

ORBIS
and database

long term debt on the Mira

(2014);

total capital added to Ishak,

Ismail

retained
year

incomes

prior

succession
happened.

to

one and

Abdullah

the (2012);
event Boccato,
Gispert
Rialp

and
(2010);

Lauterbach,Vu
and
Firm Size

Weisberg

(1999)
The logarithm of total Ansari,

ORBIS

37

assets as can be used a Goergen

proxy for firm size. The Mira

and database
(2014);

firm size used in this Boccato,

research is one year Gispert

and

prior to the succession Rialp (2010)

event took place.

Ansari,
Goergen

and

Mira

(2014);

Ishak,

Ismail

and

Abdullah

(2012);
Boccato,
Gispert
Rialp

and
(2010);

Lauterbach,Vu
and

Weisberg

(1999)

3.3. Data Analysis Technique

To test the hypothesis, data analysis was needed. Descriptive analysis and
logistic regression were used in this research. The descriptive analysis includes
descriptive statistics of the characteristics of sampled firms and the descriptive
statistics for the dichotomous variables. This research also used independent t-test
and correlation test between all variables involved in this study.
The effect of companys past performance and other factors influencing on
a companys preference in selecting a particular type of a successor is estimated
by using a logistic regression. It takes in a dependent binary variable which will

38

have a value of one in cases where the selected successor is within family
members and a value of zero when the successor is a non-family member. Besides
the independent variable prior Average ROE, also taken into account are the
number of family members on the BOD and BOC and the period of time
participating in the board prior to the selection. The size of the company which is
rated by the natural logarithm (Ln) of total assets is also involved as a bigger
family owned business is inclined to have a non-family member as a manager due
to the greater scale of works (Smith and Amoaku-Adu 1999). Thus, the size of the
firm is predicted to be unlikely related to the selection of a family member. Since
the number of firms in the final sample is decreased, this study does not include
this factor. The following is to sum up the full model:
Probability (family member successor) = (firm performance,
composition of family member in the BOD, composition of family
member in the BOC, years on the board, firm age, financial leverage, firm
size)
e 1+ 2 xi
i=
The logistic regression model is specified as
1+ e 1+ 2 xi

estimate

the probability of choosing option 1 given a value X = Xi, therefore (0

i 1)

CHAPTER IV
DATA ANALYSIS

39

In this section, the results of the conducted study are reported. The
discussion which encompasses descriptive statistics of the sample and the main
findings of the event study are concisely discussed. Detail interpretation of the
data analysis result and review will be presented in the discussion section.
4.1 Descriptive Statistics
The final sample was used in this study consists of 148 CEO succession
events which gathered from Indonesian listed Family Owned Business succession
events from 2006 to 2015. Furthermore, the formulas of mean and standard
deviation are described as follows:
a. Mean
Tuckman (1978 : 50) states that the mean or average is computed by
adding a list of scores and then dividing by the numbers of the scores. The
algebraic formula used to determine the mean is:

Where:
= the mean

Xi = raw score
N

= number of cases

40

b. Standard Deviation
Mehren (1978 : 79) explains that the standard deviation of a sample is known
as S and is calculated using:

Where :
s

: Standard deviation

: represents each value in the population, x is the mean value of the

sample,

: is the summation (or total), and

n-1

: is the number of values in the sample minus 1.

The detail of statistics descriptive for this research presented on table 4.1

Table 4.1

41

Descriptive Statistics

Table 4.1 shows the descriptive statistics of the characteristics of sampled

firms. Out of the 148 succession events, 81 (55%) firms tend to select outsiders as
successors while 67 (45%) firms select insiders as successors. The mean ROE
shows that inside selection has a higher mean than outside selection and ROE
means for outside successions have negative values which indicate that on average
the sample firms are having financial difficulties. The results show that all
independent variables show firms which have selected family member as a CEO
has a higher mean than firms which have selected non-family member as a CEO.
Interestingly, all controlling variables shows firms that are selected family member as
a CEO has a lower mean than firms which selected non-family member as a CEO.

The independent t-test, also called the two sample t-test is an inferential
statistical test that determines whether there is a statistically significant difference
between the means in two unrelated groups. Table 4.1 above shows the result of
independent t-test. From table 4.1 shows that independent t-test display

42

statistically significant differences from all independent variables such as Average

ROE, Family Directors, Family Commissioners, SFE which have selected family
CEO and non-family CEO. Interestingly, from four controlling variables above,
only one variables which is Firm Size has shown significant differences between
companies which selected family CEO and non-family CEO, while the others
three controlling variables have shown no significant differences between
companies which have selected family CEO and non-family CEO.
4.2. Correlation test
Correlation test is a statistical technique that is used to measure and
describe the strength and direction of the relationship between two variables. This
research has used Pearson Correlation which often called the Product Moment
Correlation. Pearson Correlation is a statistical test equipment used to test the
associative hypothesis (the relation test) between two variables when the data used
interval or ratio scale. Table 4.2 summarizes the correlation between all variables
involved in this study.

43

Table 4.2
Correlation
Correlation of variables (N=148)
Variables

1. CEO Succession

2. Average ROE

0.139

3. Family Directors

0.647** -0.40

4. Family
Commissioners

0.289** 0.87

0.282** 1

5. SFE

0.278** 0.114

0.327** 0.85

6. FIRM AGE

-0.005

0.69

-0.244**-0.82

-0.14

7. LEVERAGE

-0.68

-0.172* -0.043

-0.045

-0.100

8. FIRM SIZE

-0.180* 0.188* -0.249**-0.234**0.068

-0.139

0.340** 0.335** 1

**correlation is significant at the 0.01 level (2-tailed)

*correlation is significant at the 0.05 level (2-tailed)

Table 4.2 shown there is a weak correlation between Average ROE and
CEO Succession. This means that changes in Average ROE variable are not
correlated with changes in the CEO Succession variable. If the Pearsons r were
0.01, it could conclude that all the variables above were not strongly correlated.
Strong and positive correlation between two variables have shown between
Family Directors and CEO Succession, Family Commissioners and CEO
Successions, Family Commissioners and Family Directors, SFE and CEO
Succession, SFE and Family Directors, Firm Size and Firm Age, Firm Size and
Leverage. This means that there is a strong relationship between two variables
which indicate changes in one variable are strongly correlated with changes in the

44

second variable so that as one variable increases in value, the second variable also
increase in value
The negative correlation have shown between Family Directors and
Average ROE, Firm Age and CEO Succession, Firm Age and Family Directors,
Firm Age and Family Commissioners, Firm Age and SFE, Leverage and CEO
Succession, Leverage and Average ROE, Leverage and Family Directors,
Leverage and Family Commissioners, Leverage and SFE, Leverage and Firm
Age, Firm Size and CEO Succession, Firm Age and Family Directors, Firm Age
and Family Commissioners. This means that as one variable increases in value,
the second variable decreases in value
4.3 Logistic Regression
To test what factor affect the CEO Succession, a logistic regression is
conducted. Logistic regression is well suited for studying between a categorical or
qualitative outcome variable and one or more predictor variables. Logistic
regression model is a model that describes the relationship between the response
variables which have an ordinal scale with the predictor variables which have
categories or continuous scales. Table 4.3 shows the relationship between CEO
succession and firms past performance indicates by Average ROE, family member
composition in BOD and BOC, Successor Firm Experience. Table 4.3 has shown
the interpretation result of logistic regression.

45

Table 4.3
Logistic Regression Analysis
B

S.E.

Wald Ratio Significance

Exp(B)

Average ROE

0.036

0.016

4.944

0.026

1.037

Family Directors

12.369

2.235

30.619

0.000

235298.784

Family Commissioners

2.024

1.405

2.077

0.150

7.572

SFE

0.190

.369

.266

0.606

1.210

FIRM AGE

7.722

7.064

1.195

0.274

2257.697

LEVERAGE

-0.237

1.091

0.047

0.828

0.789

FIRM SIZE

0.162

0.313

0.268

0.605

1.176

CONSTANT

-16.798 13.370 1.578

0.209

0.000

Independent Variables

Results shows in Table 4.3 reveal that there is significant relationship

between firms past performance and CEO Succession selection choice. Thus, the
findings support Hypotheses 1, this is support the statement of Lauterbach, Vu and
Weisberg (1999) in their research where they found that firms with high and low
pre-succession performance were more likely to choose CEO from outside while
firms with medium pre-succession performance were more likely to choose CEO
from inside the companies. Another research which was supported this findings is
research from Datta and Guthrie (1999), they have found that firms with lower
profitability tend to choose top management from outside the company.
Lauterbach, Vu and Weisberg (1999) also found that firms with poor performers

46

appoint mostly non-family member as the new CEO, and in contrast top
performers companies tend to select CEO from inside the companies.
Hypotheses 2a was supported, this means that more family members
sitting on the Board of Directors so that greater opportunities to select the new
CEO from family members than select the new CEO from non-family members.
This finding was similar with Minichilli, Nordqvist, Corbetta and Amore (2014),
their research found that the presence of family members on the board negatively
moderates the positive effect of outside non-family successions. Contrary with
Ishak et,al (2012), they found that there was no significant relationship between
board composition and decision to appoint the new CEO.
Though hypotheses 1 and 2a was supported but hypotheses 2b and 3 was
not supported. These findings contradict with Boccato, Gispert and Rialp (2010)
findings which have found that higher family successor firm experience was
related to their selection as the new CEO. While Hypotheses 2b was not
significant has supported by Ishak et al (2012) research which have found that
there was no significant relationship between firms which have a high proportion
of family member in board and its tendency to appointed outside non-family
member as CEO. These findings together with Boccato, Gispert and Rialp (2010)
which have found that there is no significant relationship between high proportion
of family board members to the nomination of family successor.
The main objective of this paper is to examine whether firm past
performance, family member composition in Board of Directors and Board of
Commissioners also Successor Firm Experience influence the selection of CEO

47

successors, i.e. whether they are selected from inside or outside a company. This
study has been successfully find a significant relationship between firm past
performance and CEO selection choice. In addition, this study finds that family
member composition in Board of Directors is significant in determining CEO
selection choice. However, the evidence suggests that higher proportion of family
member sitting in Board of Commissioners is not significant in determining CEO
selection choice. Further, successor firm experience shown by how long the
successor whether from inside or outside family member sitting in the board is not
significant in determining CEO selection choice. The major implication of this
study is that poor prior performance does necessarily lead to an outside successor,
a finding which is different from those of most previous studies (see Boccato,
Gispert and Rialp, 2010, Ishak, Ismail and Abdullah, 2012, Ansari, Goergen and
Mira, 2014). The notion of the Agency Theory view in that poorer firm past
performance will more likely to choose the new CEO from outside family
member is applicable in the Indonesian environment. Rather, the Resource Based
View theory which suggests that higher family member composition and the
longer successor firm experience react positively to the nomination of family
member as the new CEO is likely not fully applicable. This study also has
important implications for corporate governance and ownership structure of
organizations which consequently will help companies and policy makers in
strategizing CEO successions. Family Firms which are controlled by families are
more likely to choose an insider as a successor for continuity of policies,
structure, control and security.

48

Family business which was well developed, in a certain point will

inevitably require higher professional skills. In many cases, it turns out in the
family members there are excellent professional talent and fits family member in
line with the family business. Garuda Food and Bakrie Group are some biggest
family business group in Indonesia which were able to develop their family
business performance. The key point of their successful ways to grow their
business is always prioritizing the continuity of their family business and not
always put their descendants to be the first choice as the leader of the company.
Kalbe Farma Tbk, for example, after underwent strategic event such as CEO
succession, Kalbe is always act professional, after their founder gives the reins of
power to their successor, the successor which have been chosen is not from inside
the family member. But as we can see that the performance of Kalbe Farma Tbk is
always better from year to year and continues to grow, and recently in 2013 Kalbe
Farma Tbk going through another CEO succession event and eventually their new
CEO is elected from inside family member. The result shown in this research
present a new fact that in Indonesian listed family own business the new CEO
who will be selected as the new CEO is not immune to the poorer of firm past
performance. The stakeholders, shareholders also members of the boards in the
Indonesian family owned business will be consider firm past performance as a
benchmark for choosing their new CEO, because the longevity of their family
business are top priority rather than retain the descendants as the next leader of the
company.

49

CHAPTER V
CONCLUSION

After presenting the result of the study and analysis of the finding in the
previous section, conclusion of the study and its contribution to the literature and
managerial practice will be provided in this chapter. In addition, study limitation
and future research suggestion will also be indicated in the last section.
5.1 Conclusion
As the number of succession events in Indonesian listed Family Owned
Business is growing, the effect of firms past performances to the CEO
appointment was increasingly observed during the last decades. However, the
findings are not conclusive. Some research result on lower firms past performance
indicates to select non-family member as the new CEO, some found a negative
result which was no matter lower or higher firm past performance did not affect
the selection choice of the new CEO.
This study has provided more insight to the academic literature by further
investigate the impact firm past performance, family member composition in
Board of Director and Board of Commissioners, Successor Firm Experience on
CEO succession in the Indonesian context to date, particularly regarding the
perception of investors toward the appointment of family member or non-family

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member as new corporate leader. From managerial practice perspective, this study
improves practitioners understanding regarding new phenomenon that the
Indonesian Family Owned Business might react indifferently toward their CEO
appointment with regardless other factor such as family member composition and
successor firm experience.
The result obtained by conducting a logistic regression on cross sectional
data within ORBIS database indices CEO succession events during 2006-2015
encompasses 148 samples in total shows that, generally, CEO succession in
Family Owned Business is a very rare event.
The first research question indicates by firm past performance (ROE) will
affect CEO succession selection choice has supported by the results which have
shown significance level at 0.026 < 0.005, these means that in Indonesian Family
Owned Business tend to select their new CEO from his or her capability to
increase firm performance, and appointment of the outsider or non-family
member CEO considered as the cure for lower firm performance.
The research question number 2a that is high proportion of family
members sitting in the Board of Director is positively related to the nomination of
a family successor was fully supported by logistic regression result which have
shown significance level at 0.000 < 0.005, these means that the greater
composition of family member would be affected to select family member as the
new CEO in Indonesian listed Family Owned Business.
Research question number 2b and 3 was not supported, these indices by
the significance level at 0.150 and 0.606 which were greater than 0.005. These

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results show that whether family member composition in Board of Commissioners

and Successor Firm Experience did not affected CEO succession selection choice.
This result suggests that Indonesian listed Family Owned Business does
not view Family member composition in Board of Commissioners and Successor
Firm Experience as an essential factor in response to CEO succession. Hiring
CEO from outside the family member necessarily need to increase firm
performance, so that if the firm past performance is favorable would lead to
appointment of a family member as the new CEO. In other words, firm past
performance viewed to be an essential aspect to make a CEO succession selection
decision. Instead, family member composition in Board of Directors might affect
appointment of top leader position. As a result, firm past performance tends to
react positively to the CEO appointment, regardless of successor firm experience
and the family member composition in Board of Commissioners.
To sum up, leadership succession as a strategic event should be managed
properly. It significantly influences firm future viability in the eye of shareholders.
However, succession processes in family owned business will success if the firm
decision maker could convince shareholders, family members and investors that
consider firm past performance as one of the conditions to select whether to
choose family member or non-family member as the new CEO potentially bring
many benefits for the company.
5.2 Contribution to the Literature and Managerial Practice
The succession of members in top senior position is a crucial strategic
event to any type of firm, in the case of family owned business, this event can be

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even more crucial. The current study contributes to improve understanding of how
the Indonesian listed Family Owned Business dealing with CEO succession
events from the stand point of firm pas performance and others factors including
family member composition in Board of Director and Board of Commissioners
also successor firm experience.
Moreover, this research contributes to both corporate governance literature
and managerial practice. It contributes to the literature on corporate governance
field particularly in CEO succession that is considered as a strategic event. This
study extends previous research in examining how the firm past performance to
the naming of new CEO by adding family member composition in Board and
Director and Board of Commissioners also successor firm experience variable.
Furthermore, it provides empirical evidence and more insight how the CEO
succession events in Indonesian listed family owned business would react
specifically when a firm experienced a decreasing or increasing in performance.
Therefore, based on the research finding, inference can be derived how firm past
performance and family member composition in Board of Directors influence the
CEO selection decision.
Secondly, it contributes to the managerial practice by enhancing
practitioners understanding about the impact of firm past performance on CEO
succession event, especially whether the Indonesian listed family owned business
would choose the new CEO from inside family member or outside family
member. This study enables practitioners to capitalize the finding to consider CEO
succession event on their firm and its potential effect particularly to the

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shareholders. As highly qualified CEO for the top leadership position are expected
will be more emerge in the future, firm could benefit from them if the succession
event is properly managed. Therefore, this study infers that practitioners should
communicate this plan and the reason behind that in order to obtain full support
for family member or non-family member as the new CEO. In addition, they
should also attempt to educate the stakeholders regarding potential advantage by
appointing family member or non-family member as the new CEO. By
highlighting potential short and long term benefit, it is expected that the firm can
persuade its stakeholders and mitigate negative reaction from shareholders.
5.3 Limitation and Future Research
The current study serves as a valuable discussion on how Indonesian listed
family owned business, responds when family member or non-family member are
placed on top corporate leader position. Moreover, it also contributes by adding
more insight on how family member composition in Board of Directors and Board
of Commissioners also successor firm experience play its role in determining
whether to choose non-family member or family for newly hired CEO.
However, as like other research that not all variables can be included, this
study is subject to a number of potential limitations. First of all, the sample used
in this study is considered small due to the limited number of CEO succession
events for Indonesian listed family owned business during the examined period.
Between 2006 and 2015, there are only 148 CEO succession events happened in
Indonesian listed family owned business within ORBIS database. Further research
can seek larger sample which potentially enhances statistical robustness. This can

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be obtained, for instance, by extending the examined period or incorporating other

companies outside ORBIS to broaden the scope.
Second, the sample in this research constitutes all non-financial firms
including various industrial sectors such as manufacturing firm, service firm,
mining firm and other firm which were not include financial firms. This study
focuses on large and publicly traded firm, suggesting that the results may not
extend to smaller firms. Moreover, the study relies on secondhand data and it is
not able to assess the quality of the relationship within the family owned business,
between family member and other stakeholders and how this relationship affect
the succession.
Hence, the study result cannot be utilized as a baseline for generalization
to another specific context. Further research could enhance the examination to
another context and provide more comprehensive inferences. For instance, the
research can be focused on provides a basis for future research on CEO succession
which can be extended in many ways. First, in order to increase the sample size of
CEO change events, future studies need to include a longer time period so that the
results can be generalized. Further, as this study focuses on the direct relationship
between corporate performance and CEO change, future studies may include
moderating variables that may intervene this relationship such as ownership structure
and incumbent CEO power. Also future research ought to identify how institutional

shareholders interpret leadership change especially regarding new CEO

demographic such as their gender or their race and ethnicity. Future research can

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further illuminate how this CEO was chosen by conducting qualitative analysis
such as interview or case studies.