Should the Founder’s Son Be the C.E.O.?

The William Wrigley Jr. Co., which sells mostly chewing gum, named a new CEO yesterday, and in at least one significant way he is different from every CEO that Wrigley has ever had: he is not a Wrigley. The new CEO is William D. Perez, who has also run S.C. Johnson & Co. (another family company) and, for a short time, Nike (which Phil Knight sort of thinks of as a family company). Perez is the first non-family CEO of Wrigley in the company’s 115 years; Bill Wrigley Jr. will become executive chairman, with Wrigley and Perez both reporting to the board. Wall Street apparently liked the new hire, with Wrigley shares closing up 14% for the day (although the announcement coincided with a report of higher third-quarter earnings).

It wasn’t long ago that William Ford Jr. brought in an outside CEO to run his family company. (And seemingly just in time: Ford announced a $5.8 billion quarterly loss today.) On a much smaller scale, there is even talk that the New York Times, which among the most venerable family businesses in the country, may someday soon be run by someone outside the Sulzberger family.

All this has led me to wonder:

1. Is the age of Scion-ology truly on the wane?

2. How much does the C.E.O. actually affect a company’s performance?

3. How do non-family C.E.O.’s compare to family C.E.O.’s?

I don’t know the answer to No. 1, though I am guessing that it is yes, and I am also guessing that some of this blog’s readers can weigh in with worthwhile comments.

There has been a ton of research on No. 2, most of which I believe suggests that a C.E.O.’s performance is not nearly as important as is commonly thought. (This issue has a lot in common with the importance of, say, a baseball manager, discussed a bit here.)

As for No. 3, there is an interesting new paper called “Inside the Family Firm: The Role of Families in Succession Decisions and Performance,” which uses a dataset from Denmark to explore the value of a family C.E.O. vs. a non-family C.E.O. The authors are Morten Bennedsen, Kasper M. Nielsen, Francisco Perez-Gonzalez, and Daniel Wolfenzon. “We find that family successions have a large negative causal impact on firm performance: operating profitability on assets falls by at least four percentage points around CEO transitions,” they write. “Furthermore, we show that family-CEO underperformance is particularly large in fast-growing industries, industries with highly skilled labor force and relatively large firms. Overall, our empirical results demonstrate that professional, non-family CEOs provide extremely valuable services to the organizations they head.”

This jibes with a bunch of anecdotal research I did a few years ago, while I was working on a book about the psychology of money (which I abandoned in order to write Freakonomics, silly me). There is a really interesting and smart family-business consultant named David Bork, who helped hook me up with a number of small and medium-sized family businesses that were in the process of handing off from one generation to the next. As you can imagine, this is an extraordinarily complicated scenario on many fronts. Sometimes, the son (or occasionally the daughter) of the founder was wildly uninterested in running the company but couldn’t bear to tell the father; sometimes the founder was convinced that the son would make a great C.E.O., despite ample evidence to the contrary; and there were many other options, most of them bad. So if it’s that hard an issue with small companies, imagine how much harder it is for a Wrigley or a Ford with all the attendant shareholder and media noise.


Craig

As long as the CEO-to-be gets a great education and lots of experience in the company, I don't see why he/she would not be BETTER than an outsider. They have a unique tie to the company, probably a stronger interest in its survival, and more significant experiences with its culture and employees. As for the research from Denmark, it seems to me that it would be extremely difficult to contribute a decrease in performance solely to a change in CEO who happens to be a family member--there are just too many different variables to account for (an infinite number, really). I skimmed the paper and results, but wasn't very impressed. I would go as far as to say that any result that supports their assumption is entirely coincidental.

blain

The importance of the CEO is much more likely to be clear if it's negative than if it's positive. That is, if the CEO screws up badly, it can screw up the company badly. Bad management can trickle down and make all kinds of stupid things happen.

OTOH, if the CEO does his job well, somebody/anybody below him can screw up, with stupidity resulting before he can find and fix the problem (if it's fixable).

And then there's just the crap that can happen and mess everything up, even if everybody made the best choices they could at the time.

I don't see a problem with the founder's son running the company if that's the direction he's gone and he has adequate ability. Some sons just don't want to be (or just aren't) chips off the block, and putting them in the seat just because they are sons would be dumb.

ggrappone

My family has owned automobile dealerships for over 80 years (I'm fourth generation). I can tell you that Scion-ology is alive and well in the car biz. There are well established families passing the businesses down, as well as new entrepreneurs who are buying dealerships in the hopes of securing a good future for their children. I bet it is similar in other industries too.

I think Scion-olgy is more threatened in the big, publicly traded companies. Maybe stock holder patience for poor performance doesn't allow for nepotism anymore?

711buddha

The vast majority of CEOs out there are well qualified and capable. Their businesses do well or suffer based on external factors. The few who are not competent can destroy a business, even in a healthy business environment. Its alot like driving a car.

Driving isn't terribly difficult. Being good enough is usually fine. There are rare occasions where being an excellent driver can make a difference (avoiding an accident, etc.) If you don't know how to drive, a crash is almost inevitable. For the most part though, being CEO is not nearly as challenging as the case studies you get in B-school might suggest.

prosa

And then there's the Stupid Grandson Theory, which holds that while the children of a company's founder generally do a decent job running it, things fall apart when the next generation - the founder's grandchildren - take over. Seagram Corporation is a textbook case of this theory in action. On a local scale, there's Barney's department store in Manhattan.

MattW

Only a certain percentage of people have the work ethic and intelligence and interest to successfully run a large corporation. You can argue about whether that percentage is 1% or 20% depending on how important you think a CEO is.

Either way, by limiting potential CEOs to family members your chances of not having a suitable leader are much greater than opening the possibilites to the whole CEO market.

Also, many times a company would benefit from a fresh look. A child will not often come in and reorganize all of his parent's work.

oddTodd

I wonder why shareholders of public corporations put up with family-member CEOs. From a profit-maximizing perspective, in a real, open search for the best CEO for the job, why would it be in so many cases that the best CEO for the job happens to be the son of the last CEO? And if S.C. Johnson's sons, or Ford's grandsons, or Augustus Busch the Twelfth is so qualified, how come we don't see them getting C-level jobs at corporations not founded by their relatives?

JustinH

One thing I think should be considered is how other employees feel about a son or daughter taking over a company. For example, you work for a company for many years and instead of the CEO promoting the person most deserving, he promotes his son or daughter. I worked as IT Manager for a medium size insurance company for many years, but when the owner let me know that the company would always be a "family-run" company I left to pursue a job with a company which I could obtain some sort of ownership. They offered a great salary as well as many benefits, but the idea that I could only move up so far in the company was the main reason for me leaving.

DavidH

There may be a causality issue here that isn't being recognized: are the children failing as CEOs because they aren't as qualified, or is there some other commonality between these companies that explains the same trend? Hereditary leadership positions is succession planning by default. Perhaps companies that have well thought out succession plans with orederly transitions tend to do better than organizations that are run by each generation until that generation drops dead, to be taken up by the next generation, ready or not.

unroyal

1. Yes.

2. I believe CEOs are more than the Queen of England.

lajay

In my experience, if you have a charismatic founder who has amassed great loyalty from his employees, it is extremely difficult for the children to find success within the organization. Especially for aa company in a maturing cycle of its business. At the upper management levels, executives have put in their time, perhaps starting with the founder. But yet there will always be a barrier to entry into the highest rung(s) of the company for them. This creates a sense of resentment and distrust of any incoming child(ren). As well, these executives are the founder's picks, they may not easily get on board with any new direction sought by a 2nd generation CEO. What I have seen is the continual battle of 2nd gen CEO to build his own legacy against the near mythic status given to the founder/father. This crumbling of the management can hinder any success the 2nd gen CEO could hope to have. The critical piece to this is clearly the underlying cause of the transition (death, retirement, etc).

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John Fembup

Who cares?

I mean, as long as the gum is OK, what reason is there to care about executive succession?

I mean, c'mon.

It's chewing gum!

gp

As long as executives have a role in the firm, it is irrelavent who sits on top. Many managers in large publicly traded companies quit to take a role managing a division in a family-owned enterprise. Similarly, family businesses that employ management consultants keep trusted outsiders' advice as well as a consistent pool of future managerial talent.

It is only where family companies are insular, try to employ all children (even those who were never really meant for work), or those where the son thinks he can go it alone without outside assistance, where the business bleeds talent and free falls.

Craig

As long as the CEO-to-be gets a great education and lots of experience in the company, I don't see why he/she would not be BETTER than an outsider. They have a unique tie to the company, probably a stronger interest in its survival, and more significant experiences with its culture and employees. As for the research from Denmark, it seems to me that it would be extremely difficult to contribute a decrease in performance solely to a change in CEO who happens to be a family member--there are just too many different variables to account for (an infinite number, really). I skimmed the paper and results, but wasn't very impressed. I would go as far as to say that any result that supports their assumption is entirely coincidental.

blain

The importance of the CEO is much more likely to be clear if it's negative than if it's positive. That is, if the CEO screws up badly, it can screw up the company badly. Bad management can trickle down and make all kinds of stupid things happen.

OTOH, if the CEO does his job well, somebody/anybody below him can screw up, with stupidity resulting before he can find and fix the problem (if it's fixable).

And then there's just the crap that can happen and mess everything up, even if everybody made the best choices they could at the time.

I don't see a problem with the founder's son running the company if that's the direction he's gone and he has adequate ability. Some sons just don't want to be (or just aren't) chips off the block, and putting them in the seat just because they are sons would be dumb.

ggrappone

My family has owned automobile dealerships for over 80 years (I'm fourth generation). I can tell you that Scion-ology is alive and well in the car biz. There are well established families passing the businesses down, as well as new entrepreneurs who are buying dealerships in the hopes of securing a good future for their children. I bet it is similar in other industries too.

I think Scion-olgy is more threatened in the big, publicly traded companies. Maybe stock holder patience for poor performance doesn't allow for nepotism anymore?

711buddha

The vast majority of CEOs out there are well qualified and capable. Their businesses do well or suffer based on external factors. The few who are not competent can destroy a business, even in a healthy business environment. Its alot like driving a car.

Driving isn't terribly difficult. Being good enough is usually fine. There are rare occasions where being an excellent driver can make a difference (avoiding an accident, etc.) If you don't know how to drive, a crash is almost inevitable. For the most part though, being CEO is not nearly as challenging as the case studies you get in B-school might suggest.

prosa

And then there's the Stupid Grandson Theory, which holds that while the children of a company's founder generally do a decent job running it, things fall apart when the next generation - the founder's grandchildren - take over. Seagram Corporation is a textbook case of this theory in action. On a local scale, there's Barney's department store in Manhattan.

MattW

Only a certain percentage of people have the work ethic and intelligence and interest to successfully run a large corporation. You can argue about whether that percentage is 1% or 20% depending on how important you think a CEO is.

Either way, by limiting potential CEOs to family members your chances of not having a suitable leader are much greater than opening the possibilites to the whole CEO market.

Also, many times a company would benefit from a fresh look. A child will not often come in and reorganize all of his parent's work.

oddTodd

I wonder why shareholders of public corporations put up with family-member CEOs. From a profit-maximizing perspective, in a real, open search for the best CEO for the job, why would it be in so many cases that the best CEO for the job happens to be the son of the last CEO? And if S.C. Johnson's sons, or Ford's grandsons, or Augustus Busch the Twelfth is so qualified, how come we don't see them getting C-level jobs at corporations not founded by their relatives?