A Family Member or Professional Management? The Choice of a CEO and Its Impact on Performance

• Date: 01 November 2007
• Author: Shu‐hui Lin,Shing‐yang Hu
• Published date: 01 November 2007
• DOI: http://doi.org/10.1111/j.1467-8683.2007.00650.x

A Family Member or Professional

Management? The Choice of a CEO

and Its Impact on Performance

Shu-hui Lin* and Shing-yang Hu

In this study, we explore what kinds of family f‌irms are more likely to have a family CEO or

professional CEO, and investigate the performance of CEOs from different backgrounds. The

results show that f‌irms with low requirements in managerial skills and a high potential for

expropriation are more likely to choose a CEO from the controlling family (nepotism). Our

investigation, furthermore, shows that when a f‌irm requires high managerial skills, using a

professional CEO can help f‌irm performance, especially if the family has low cash-f‌low rights

and weak control. When there is large opportunity for expropriation in a family f‌irm, the f‌irm’s

performance will be better if the CEO is a family member and the family has highly persuasive

cash-f‌low rights.

Keywords: Family f‌irms, family CEOs, professional CEOs, f‌irm characteristics, performance

Introduction

Family f‌irms have received increasing atten-

tion in the last few years. Several recent

studies have reported that in continental

Europe, Asia, and Latin America, the vast

majority of publicly traded f‌irms are family

controlled (La Porta et al., 1999; Claessens et

al., 2000; European Corporate Governance

Network, 2001; Faccio and Lang, 2002), which

suggests that family f‌irms play an import-

ant role in economic activity worldwide.

However, research also documents that family

f‌irms have a low survival rate (Birley, 1986;

Kets de Vires, 1993; Chu and MacMurray,1993;

Morris et al., 1997) and indicates that the low

survival rate is universal and independent of

cultural context or economic environment

(Lank et al., 1994).

Failure is one of the reasons thatfamily f‌irms

have a low survival rate1. CEO succession is

crucial to the success and continuity of a f‌irm

(Miller, 1993; Ocasio, 1999). The successor is

one of the key factors that affects whether the

succession will help f‌irm performance. Within

the literature dealing with CEO succession,

there are many studies that explore the consid-

erations that affect the choice between an

insider and an outsider (Fredrickson et al.,

1988; Cannella and Lubatkin, 1993). However,

besides the aspect of choosing from inside or

outside a f‌irm, there is the unique dimension

of whether the new CEO should be a family or

non-family member (professional manager).

The choice between a family and profes-

sional CEO is a critical issue for the family

shareholder (Burkart et al., 2003; Lee et al.,

2003). Signif‌icant research efforts have been

devoted to the topic of family business succes-

sion (Handler, 1994). Much of family business

succession studies focuses on CEO succession

from one family member to another (Morris et

al., 1997; Sharma et al., 2001) while relatively

little research explores the possibility of using

a professional CEO or considers the issue of

choosing between a family and a professional

CEO.

Recently, some theoretical research has

studied from the viewpoint of the controlling

family the choice between family management

and professional management and implies

that there is a relationship between operating

characteristics and the choice of manage-

ment (Burkart et al., 2003; Bhattacharya and

*Address for correspondence:

Departmentof Business Educa-

tion, National Changhua Uni-

versity of Education, 2, Shi-Da

Rd, Changhua 500, Taiwan.

Tel: 886-4-7232105 ext. 7135;

Fax: 886-4-7211290; E-mail:

shlin@cc.ncue.edu.tw

1348 CORPORATE GOVERNANCE

Volume 15 Number 6 November 2007

© 2007 TheAuthors

Journal compilation © 2007 BlackwellPublishing Ltd, 9600 Garsington Road,

Oxford, OX4 2DQ, UK and 350 Main St,Malden, MA, 02148, USA