Firstborns and leadership succession in family firms

One of the most critical moments in the life of a family firm is when the torch is passed from one generation to the next. During these times of transition, it’s essential to find the most capable leader, the person who can ensure that the organization will survive and prosper. But very often cultural, social, and emotional factors come into play that can skew this choice in a different direction.

By the same token, in family firms the relationship between the owners and the company isn’t just economical. There are social and affective dimensions that can condition managerial and decision-making processes, in some cases quite profoundly. These dimensions represent genuine ‘socioemotional wealth.’

In many Asian and European countries, including Italy, the socioemotional component can lead the family to prioritize birth order – specifically primogeniture – as a criterion for choosing the company successor. This approach reflects the desire to preserve the connection between the family and the firm, abiding by shared social norms. When the choice of the eldest child is entirely motivated by socioemotional dynamics, without taking into consideration economics or merit, this may prevent the family from evaluating alternative candidates for company leadership, people who actually might be more qualified for the job. This in turn could jeopardize the future of the company.

Taking a close look at the relationship between socioemotional wealth, succession choices and company performance, we conducted a study on 843 successions in Italian family firms which took place from 2000 to 2012. The companies in our sample all had a minimum turnover of 50 million euro. The first hypothesis we explored was the existence of a positive relationship between socioemotional wealth and primogeniture: the greater the former, the more probable the latter. Yet this relationship could be less obvious if the company was performing below par. In other words, we posited that in a floundering company, family owners would be more likely to consider potential candidates other than the firstborns as leaders, to ensure that the company’s future was in capable hands.

As far as post-succession, we looked at the effects of primogeniture on performance. Firstborns may be more inclined to replicate the same managerial models as their parents, and more reticent to introduce innovation. Beyond this, firstborns may be more focused on the interests of the family rather than the firm. Also, when the succession choice is based on birth order alone, other siblings might be less willing to take an active part in the life of the firm. To sum up, the choice of non-firstborns to head a family firm would be the outcome of a more in-depth analysis of the qualities that a successful company leader should possess, qualities that would make a positive mark on performance. This effect would be more pronounced, we believed, if the outgoing leader wasn’t the company founder, but a successor to the founder. Our reasoning here was that in second generation family firms (and beyond), there’s more time to prepare for the generational transition, a bigger pool of potential leaders in the family to choose from, and more solid governance structures which are better suited to support the choice of successor.

To evaluate these aspects, for each company we analyzed the characteristics of the outgoing leader (who was either the entrepreneur-founder, the heir to the founder, or the successor from later generations), the number, birth order and gender of the children, and the successor who was actually chosen. We measured the socioemotional wealth of the company in question with an ad hoc parameter which we built based on the ownership share of the family and their pull with the Board of Directors. Lastly, we assessed company performance by comparing it to the average for the relevant business sector.

Our findings show that the more substantial the socioemotional wealth in a company, the more likely the successor will be the firstborn. Counterintuitively, the tendency to choose the oldest child as the future leader is greater in companies that are performing poorly. What’s more, passing the torch to the firstborn is more accentuated when this person is male, and less so if there is a large number of siblings in the family to choose from.

As far as company performance, we didn’t find any significant impact when the succession falls to the firstborn. But when a non-firstborn is chosen, this corresponds to better performance, not only compared to firstborns but also with respect to leaders chosen from outside the family. But this effect is one we found only in family firms that are second generation and beyond.

Socioemotional wealth has a powerful influence over the choices that family firms make, prompting decisions that may seem irrational from an economic viewpoint. Proof of this lies in the fact that companies in crisis tend to choose firstborns to take over leadership during times of generational transition. It’s as if when faced with a threat, family owners prefer to retrench, finding refuge in their status and reputation, instead of focusing on factors that could actually turn the company around. Another push in the direction of primogeniture might come from the fact that it’s difficult to establish an immediate connection between the choice of successor and economic performance: it’s not readily apparent how the choice of someone unfit to lead the company could reverberate on the socioeconomic wealth of the family.

Expanding the pool of candidates to include more family heirs can be a very advantageous move, making it easier to identify competent leaders who are ready to fully commit to the company. What’s more, very often non-firstborn leaders prove to be more open to innovation, less risk adverse and less conformist with respect to consolidated company practices.

Overall, adopting birth order as an automatic succession criterion is a short-sighted strategy. This doesn’t mean firstborns should be out of the running entirely for leadership roles, but instead that all the children in the family should be given the chance to demonstrate their skills and abilities. This is also a way to discourage possible opportunistic behaviors by people who would otherwise be excluded from succession by default. In any case, companies must first take a hard look at the qualifications of family members (for example, education, competencies, professional experience in other companies), to ascertain the effectiveness of the decision to break the primogeniture rule.

More generally speaking, entrepreneurs and managers in family firms need to carefully weigh social norms and traditions, but along with socioemotional considerations, they always need to make a comprehensive appraisal of economic implications as well.