“As I neared retirement the company began to expand the business in China. A colleague asked why I would do this as it would be 20 years and I would be long retired before we would see any return. ‘20 years?’ I replied. ‘We are a 315-year-old family firm; 20 years is short term for us.’”
- Bob de Kuyper, Retired-CEO of DeKuyper Royal Distilleries
Leaving a Legacy
Intrigued by a family business leader who invested in China at the end of his career just before passing on the torch to the next leader, I wondered, ‘what is the difference between having a family versus a non-family executive in the family firm as the CEO approaches retirement?’. My recent study with co-authors Pascual Berrone, Stephen G. Sapp, and Lorenzo Congiu, published in the Journal of Management Studies, offers new perspectives on the long term benefits to be derived from the long career horizons of CEOs in family firms.
The study, based on 3,432 family and nonfamily firm annual observations from the S&P 500 from 1997 to 2009, challenges the predominant view, known as the ‘CEO Horizon Problem’.. The horizon problem shows that generally, as CEOs near retirement they forego risky long-term strategic choices and instead focus on decisions that enhance their own short-term self-interests. This short career horizon of CEOs leads to decisions that are focused on the CEO’s personal reputation and financial benefit. These CEOs are more likely to reject investments that may not benefit the firm until after their retirement – a myopic approach that can have serious impact on overall firm strategy.
However, family firm CEOs have a broader set of goals that include the optimization of socioemotional wealth, the non-financial qualities that distinguish family controlled firms from nonfamily firms.
Socioemotional Wealth: Coin of the Realm in Family Firms
We found that amongst the socioemotional qualities of family control, influence, and deep rooted values, is the desire to leave a legacy to coming generations. In fact, the desire to keep the firm alive and growing for future generations creates the long decision horizon adopted by family firm CEOs as they approach the end of their tenure within the company. This long-term legacy-driven decision making, which may include the willingness to engage in risks such as short-term losses from international acquisitions to long-term advantage to the family business, is even more pronounced when the family firm CEO is also a family member. Other research shows that non-family CEOs would not typically make such strategic decisions; it could harm the results of the business at the end of their careers.
Contribution to the Field of Family Business
Our study contributes new knowledge in two areas. The first is in the realm of CEO career horizon literature, with the comparison of career horizon ‘length’ between CEOs in family versus nonfamily firms. The second contribution is to literature on socioemotional wealth in family firms, by examining whether retiring CEOs from family firms who are also members of the family, are more focused on socioemotional concerns than non-family-member CEOs in family firms.
Unlike near-retirement CEOs in widely held firms, near-retirement CEOs in family firms are more concerned about transgenerational control and the legacy that they pass on to future generations. Consequently, family CEOs make different strategic decisions to those made by nonfamily CEOs. Near-retirement CEOs in family firms differ from their counterparts in nonfamily firms in that they are willing to continue to engage in international acquisitions as they approach retirement, despite the potential short-term risks. When CEOs of family firms near retirement, they focus on long-term benefit to the firm – even engaging in ‘risky business’ as part of a longer strategy. This is in sharp contrast to the nonfamily firm ‘CEO Career Horizon Problem’ in which risk-averse self-interest drives the decisions of the chief executive on the cusp of retirement.
Dr. Vanessa M. Strike holds the CIBC Professorship in Applied Business Family Studies and oversees the strategic, research, and academic direction of the Business Families Centre. She is an Assistant Professor in Sauder’s Organizational Behaviour and Human Resources Division. To read the full study, please see Strike, V. M., Berrone, P., Sapp, S. G. and Congiu, L. (2015), A Socioemotional Wealth Approach to CEO Career Horizons in Family Firms. Journal of Management Studies, 52: 555–583.