Abstract
This study examines the performance consequences of Chief Executive Officer (CEO) successions, focusing on the types of board chairs and firm ownership structures. While CEO successions can bring adaptation benefits and performance gains through strategic realignment, they can also cause disruption costs and performance losses by disturbing stakeholder relationships. We examine how the presence of a predecessor CEO or an independent individual as board chair affects postsuccession performance differently depending on the level of family control. Our analysis of a panel dataset of S&P 1500 firms from 2003 to 2022 and a series of robustness tests provide strong support for our predictions. We found that with increasing family control, predecessor CEOs as board chairs have a more positive effect on postsuccession performance, while the opposite holds true for independent board chairs. Further, within family-controlled firms, the effect of predecessor retention is stronger for outside than inside CEO successions. Our findings expand CEO succession and board chair research by demonstrating that the value of a board chair type after a CEO succession depends on a firm’s ownership structure, particularly the degree of family control.
Introduction
Chief Executive Officer (CEO) successions present a significant challenge for firms. When handled well, a CEO succession can result in performance improvements. New CEOs come in with fresh perspectives that help realign firms with evolving technological and market trends and/or customer demands (Menon & Pfeffer, 2003; Wiersema & Bantel, 1993). Thus, CEO successions can have adaptation benefits when new CEOs are able to successfully implement strategic change (Shen & Cannella, 2002). With a new CEO at the helm of a firm, a CEO succession can, however, also result in performance losses as the established ways of working with internal and external stakeholders are disrupted (Zhang & Rajagopalan, 2004). For instance, stakeholders often fear hold-ups from new CEOs reducing their efforts or resisting change, which can induce operational inefficiencies and hinder change and innovation (Denis, Langley, & Pineault, 2000; Schulze & Zellweger, 2021). Indeed, negative sentiment from stakeholders has been identified as an important driver of poor postsuccession performance (Keil, Lavie, & Pavićević, 2022). To disentangle these performance effects, the core debate in the literature focuses on the distinction between inside and outside CEOs (Karaevli, 2007; Schepker, Kim, Patel, Thatcher, & Campion, 2017; Zhang & Rajagopalan, 2003) and firm- and industry-level contingencies (for a review, see Berns & Klarner, 2017).
Few studies focus on the governance context a new CEO steps into to disentangle the performance effects of CEO successions (Cummings, Eggers, & Wang, 2021; Schepker et al., 2017). This oversight is problematic, though, as the type of board chair can affect postsuccession performance (Krause & Semadeni, 2013). Typically, the predecessor CEO or an independent individual holds the board chair position after a CEO succession since a new CEO is rarely directly appointed board chair (Krause & Semadeni, 2013). However, predecessor CEOs and independent individuals as board chairs maintain different relationships with firms (Banerjee, Nordqvist, & Hellerstedt, 2020), bring distinct resources to firms (Krause, Semadeni, & Withers, 2016), and may thus affect the CEO succession–performance relationship differently.
A predecessor CEO has a close relationship with the focal firm, which can limit adaptation benefits from a succession since the predecessor CEO may want to preserve the status quo and protect their own strategic legacy from a new CEO’s change initiatives (Cummings et al., 2021; Querbach, Bird, Kraft, & Kammerlander, 2020; Yi, Zhang, & Windsor, 2020). Thus, agency conflicts related to a predecessor CEO as board chair can reduce postsuccession performance (Quigley & Hambrick, 2012). However, a predecessor CEO is deeply embedded in the focal firm’s network of stakeholders and has knowledge about important employees, customers, and business partners (Hillman, Withers, & Collins, 2009), which can help reduce the disruption costs after a succession (Fahlenbrach, Minton, & Pan, 2011), thereby improving postsuccession performance.
Similarly, mixed predictions can be made for an independent board chair. Untainted by conflicts of interest, and with a distal relationship to the focal firm, an independent board chair can foster performance gains by granting the new CEO more leeway for strategic change, resulting in adaptation benefits (Krause & Semadeni, 2013). However, an independent board chair may lack the in-depth knowledge needed to accurately assess the costs from disrupted stakeholder relationships caused by a new CEO’s strategic decisions, which typically exceed the firm-specific expertise of an independent board chair (Khanna, Jones, & Boivie, 2014; Makri, Lane, & Gómez-Mejía, 2006), thereby reducing postsuccession performance. Thus, both predecessor CEOs and independent individuals as board chairs bring potential benefits and drawbacks to postsuccession performance.
Moving beyond direct effects, our study identifies two contingencies that influence the postsuccession performance effects of different board chair types: (1) a firm’s ability to mitigate potential agency conflicts with its board chair, which affects the realization of adaptation benefits, and (2) the extent of a firm’s dependency on strong stakeholder relationships for its performance advantage, which determines the significance of disruption costs. Thus, firms can achieve performance gains by retaining their predecessor CEOs as board chairs when they effectively manage agency conflicts with their board chairs and are highly dependent on stakeholder relationships for their performance advantage. Such conditions are often found in firms with stronger family control, where firm owners have greater incentives to monitor their firms (Anderson & Reeb, 2004; Fama & Jensen, 1983) and higher dependence on strong stakeholder relationships for their performance advantage (Combs, Jaskiewicz, Ravi, & Walls, 2023; Miller & Le Breton-Miller, 2005; Sraer & Thesmar, 2007). Conversely, firms with stronger family control likely experience more performance losses under independent board chairs. Thus, the value of different types of board chairs after a CEO succession varies with the level of family control.
Going back to the core debate in the CEO succession literature about the higher disruption costs but also the higher adaptation benefits from outside CEO successions (Karaevli, 2007; Minichilli, Nordqvist, Corbetta, & Amore, 2014; Shen & Cannella, 2002; Zhang & Rajagopalan, 2003), we suggest that within family-controlled firms, predecessor retention in combination with outside CEO successions can lead to stronger performance gains than inside CEO successions, while the opposite holds true for board chair independence.
We test our theorizing using a sample of S&P 1500 firms over a 20-year period from 2003 to 2022. Controlling for self-selection into family control and predecessor retention, we found strong support for our theorizing. Our study makes three main contributions. First, our study expands the CEO succession literature by demonstrating that the value of different types of board chairs after CEO successions varies by firm ownership, in particular family control. Our findings align with prior research on the negative performance effects of predecessor retention (Cummings et al., 2021; Krause & Semadeni, 2013; Quigley & Hambrick, 2012; Yi et al., 2020) but only in firms with no or weaker family control. In contrast, with increasing family control, we find more positive firm performance effects from predecessor retention, which demonstrates the importance of taking firms’ ownership structures into account when studying CEO successions. Indeed, our results corroborate the importance of considering ownership structures when studying the (in)effectiveness of governance mechanisms (Connelly, Hoskisson, Tihany, & Certo, 2010) and add to the stakeholder-centric perspective of CEO successions (Keil et al., 2022).
Second, we provide a novel theoretical lens to study the choice of board chair. Organizational theory advocates for new CEOs as board chairs (Krause, Semadeni and Cannella, 2014), and agency theory advocates for independent board chairs (Coles & Hesterly, 2000). Building on the family business literature (e.g., Berrone, Cruz, & Gomez-Mejia, 2012, 2013; Daspit, Holt, Chrisman, & Long, 2016), we explain when predecessor CEOs—a large but often overlooked group of board chairs (Krause et al., 2016)—outperform other types of board chairs after CEO successions. Our supplementary analysis shows that predecessor CEOs reduce stakeholder conflicts after CEO successions better than other types of board chairs, supporting our theoretical claim. Our findings thus add to the limited understanding of the value of inside board chairs (Banerjee et al., 2020).
Finally, our study contributes to research on CEO successions in family firms (e.g., Amore, Bennedsen, Le Breton-Miller, & Miller, 2021; Gedajlovic, Carney, Chrisman, & Kellermanns, 2012; Minichilli et al., 2014; Querbach et al., 2020). While minority shareholders in public family firms often prefer independent board chairs to protect their interests (Cabrera-Suárez, De Saá-Pérez, & García-Almeida, 2001; Jones, Makri, & Gómez-Mejía, 2008), our findings reveal a more negative impact of board chair independence on postsuccession performance in firms with stronger family control, questioning its effectiveness (Veltrop, Bezemer, Nicholson, & Pugliese, 2021). Conversely, predecessor retention reduces conflicts with employees, customers, and business partners, and improves firm performance more in firms with stronger family control for the benefit of controlling families and minority shareholders alike.
Theory and Hypotheses
CEO Successions and Board Chair Types
The literature offers two opposing perspectives regarding the performance effects of CEO successions: adaptation benefits and disruption costs. On the positive side, CEO successions can generate adaptation benefits for firms. New CEOs typically bring fresh perspectives, which can help realign firms with evolving technological landscapes, market trends, and/or shifting customer demands (Menon & Pfeffer, 2003; Wiersema & Bantel, 1993). When a new CEO is able to implement strategic change effectively, succession can enhance firm performance (Shen & Cannella, 2002).
However, on the negative side, CEO successions carry significant risks in the form of disruption costs. These costs arise since a new CEO disrupts established ways of working inside and outside the focal firm (Zhang & Rajagopalan, 2004). In particular, primary stakeholders—namely, those stakeholders who are directly involved in the firm’s value creation, such as employees, customers, and business partners (Bridoux & Stoelhorst, 2014)—often have hold-up fears after a succession (Schulze & Zellweger, 2021). Internally, a lack of support or outright resistance from employees can hinder the new CEO’s ability to steer the firm, resulting in operational inefficiencies (Denis et al., 2000). Externally, business partners and customers may perceive the succession as a source of uncertainty, fearing hold-up and shifts in strategic direction or priorities (Zhang & Rajagopalan, 2010). Thus, the new CEO’s unfamiliarity with existing stakeholder relationships or inability to manage stakeholder relationships can lead to negative sentiment from stakeholders, which has recently been identified as a major driver of poor postsuccession performance (Keil et al., 2022).
The CEO succession literature explores contingencies that explain when the balance between adaptation benefits and disruption costs tilts toward performance gains or losses. The primary focus of this literature is on a CEO’s origin from inside or outside the focal firm (Berns & Klarner, 2017; Schepker et al., 2017). Research indicates, for example, that an outside CEO succession can lead to performance gains when a CEO’s background aligns with firm characteristics (Keil et al., 2022) or when there is corporate stability, such as through a long-tenured CEO (Karaevli & Zajac, 2013) or in munificent environments (Georgakakis & Ruigrok, 2017). Conversely, performance losses are more likely when a new CEO, from inside or outside the focal firm, faces negative stakeholder sentiment (Keil et al., 2022).
Only a few studies investigate the governance context a new CEO steps into (Cummings et al., 2021). This oversight is problematic, though, as the type of board chair can affect postsuccession performance (Krause & Semadeni, 2013). Typically, the predecessor CEO or an independent individual is board chair after a CEO succession, since a new CEO is rarely appointed board chair (Krause & Semadeni, 2013). Both types of board chairs maintain different relationships with the focal firm (Banerjee et al., 2020) and bring distinct resources to the firm (Krause et al., 2016), which can tilt the balance between performance gains or losses after successions.
Predecessor retention
Prior research primarily focuses on the negative postsuccession performance consequences and loss of adaptation benefits when predecessor CEOs remain as board chairs (Cummings et al., 2021; Krause & Semadeni, 2013; Nakauchi & Wiersema, 2015; Querbach et al., 2020; Quigley & Hambrick, 2012; Yi et al., 2020). Based on agency arguments, predecessor retention likely hinders a new CEO’s ability to make strategic change (Quigley & Hambrick, 2012). For instance, predecessor CEOs may encroach on successors’ territory to preserve their own legacy against change (Krause & Semadeni, 2013; Nakauchi & Wiersema, 2015; Quigley & Hambrick, 2012). Further, when a new CEO is under the close watch of the predecessor, the CEO is more likely to “stay the course,” delaying necessary change for fear of offending their predecessor (Lorsch & Zelleke, 2005; Yi et al., 2020). Thus, from an agency perspective, the close relationship between a predecessor CEO and the focal firm hinders change after a succession, which likely results in firm performance that is close to or below presuccession levels.
Much less established is a resource perspective on predecessor CEOs as board chairs (Krause et al., 2016). Indeed, board chairs vary in the resources they contribute to their firms, which can include both firm-specific and external knowledge and networks (Krause et al., 2016). These resource advantages likely help mitigate the disruption costs of CEO successions. Predecessor CEOs bring unique insider resources, such as familiarity with their firms’ inner workings and deep ties to employees, customers, and business partners (Fahlenbrach et al., 2011). Thus, predecessor CEOs as board chairs can leverage their knowledge of and relationships with stakeholders to guide their firms’ new CEOs and boards in strategic discussions. For instance, predecessor CEOs understand employee strengths and weaknesses and the value embedded in specific stakeholder relationships (Kang & Kim, 2020). This understanding enables predecessor CEOs to advise and monitor important stakeholder investments to maintain their firms’ competitive advantage. Predecessor CEOs’ proven track records and high status lend further weight to their contributions in board discussions (Boivie, Bednar, Aguilera, & Andrus, 2016; Fahlenbrach et al., 2011) and in collaborations with new CEOs (Krause et al., 2016), steering the focus toward stakeholder concerns (Banerjee et al., 2020).
In addition, predecessor CEOs as board chairs can assist new CEOs in becoming socialized with important stakeholders and mobilizing the value that is built into these relationships (Andres, Fernau, & Theissen, 2014). Addressing stakeholder expectations and concerns upfront can mitigate negative reactions to strategic change. In support, Fiss and Zajac (2006) found that framing strategic change to reflect the interests of all stakeholders (not just shareholders) increases support and improves firm performance. Thus, predecessor CEOs can assist new CEOs in balancing stakeholder demands and reducing negative sentiment. Contrasting both perspectives, predecessor retention can thus come with positive and negative postsuccession performance consequences.
Board chair independence
An independent board chair comes from outside the focal firm and has no work experience with the firm (Daily & Dalton, 1997). While favored from an agency perspective, the empirical evidence on the performance effects of board chair independence are mixed (Veltrop et al., 2021), and few studies explicitly investigate the performance effects of independent board chairs after CEO successions (Banerjee et al., 2020). Independent board chairs likely contribute to higher adaptation benefits from CEO successions. An independent board chair is typically involved in selecting a new CEO and in formulating the focal board’s mandate for the new CEO. Thus, untainted by conflicts of interest and having a more distal relationship with the firm, an independent board chair is likely to provide a new CEO with the leeway to make necessary strategic change while simultaneously monitoring the new CEO to ensure they do not to extract excessive rents from the firm (Krause & Semadeni, 2013).
However, independent board chairs can also exacerbate the disruption costs of CEO successions. Independent board chairs are hired for their firm-external knowledge and new network ties (Hillman et al., 2009). While they typically develop some firm-specific knowledge over time, they often maintain general knowledge applicable across firms to remain attractive in the job market (Levit & Malenko, 2016; Osterloh & Frey, 2006). To be effective in assessing the disruptive effects of a CEO succession for stakeholders, a board chair needs to have a high degree of understanding of the focal firm’s inner workings (Khanna et al., 2014), since this knowledge is typically implicit through the personal interactions of the CEO with employees or customers. A board with an independent chair may thus lack the in-depth firm-specific knowledge needed to fully understand the inner workings of the firm, which is most often beyond the capacity of independent directors (Makri et al., 2006). While independence helps board chairs be neutral judges between new CEOs and stakeholders (Blair & Stout, 1999), their distance from internal firm processes and stakeholder relationships may also be their biggest disadvantage in discussions on stakeholder matters (Wang, He, & Mahoney, 2009; Zeitoun & Pamini, 2017). Further, independent board chairs typically promote shareholder value as they are selected from shareholders and are expected to promote their interests (Krause & Semadeni, 2013), which reduces independent board chairs’ pressure to address stakeholder concerns.
Thus, both predecessor CEOs and independent individuals as board chairs bring potential benefits and drawbacks to postsuccession performance. Moving beyond direct effects, our study identifies two contingencies that influence the postsuccession performance effects of different board chair types: (1) a firm’s ability to mitigate potential agency conflicts with its board chair, which affects the realization of adaptation benefits, and (2) the extent of a firm’s dependency on strong stakeholder relationships for its performance advantage, which determines the significance of disruption costs. Thus, firms can achieve performance gains by retaining a predecessor CEO as board chair when they effectively manage agency conflicts with their board chairs and are highly dependent on strong stakeholder relationships for their performance advantage. Such conditions are often found in firms with stronger family control, where firm owners have greater incentives to monitor their firms (Anderson & Reeb, 2004; Fama & Jensen, 1983) and higher dependence on strong stakeholder relationships for their performance advantage (Combs et al., 2023; Miller & Le Breton-Miller, 2005; Sraer & Thesmar, 2007). Conversely, firms with stronger family control likely experience more performance losses under an independent board chair. In the following, we thus argue that the value of different types of board chairs after a CEO succession varies with firm ownership, particularly the level of family control.
Family Control, Predecessor Retention, and Postsuccession Firm Performance
Firms with stronger family control are well positioned to better leverage predecessor retention and achieve more performance gains for at least two reasons. First, a key factor hindering performance gains from predecessor retention is self-serving behavior by predecessor CEOs serving as board chairs who aim to preserve their own strategic legacy against strategic change proposed by new CEOs, thereby reducing adaptation benefits from successions (Quigley & Hambrick, 2012). Family owners who exert stronger control are known to actively monitor their firms (Anderson & Reeb, 2004), especially due to their high concentration of wealth in their firms (Fama & Jensen, 1983). Indeed, empirical evidence shows a positive relationship between family control and firm performance, suggesting reduced agency costs through active family-owner monitoring (Anderson & Reeb, 2003). Family owners also occupy board positions when holding higher levels of control over their firms, giving them direct access to private information. For instance, family board members can directly observe the behavior of the CEO and board during board meetings (Anderson & Reeb, 2004), which helps curb opportunistic behavior by predecessor CEOs. In support, Cumming et al. (2021) show that predecessor retention relates to more strategic change when a board’s monitoring capacity is higher. Further, Zybura, Zybura, Ahrens, and Woywode (2021) find that predecessor retention in firms with stronger family control increases innovation outputs, suggesting adaptation benefits from CEO successions with predecessor retention.
Firms with weaker or no family control typically have more dispersed ownership (Anderson & Reeb, 2003), which reduces individual shareholders’ incentives and capacity to monitor or intervene in a predecessor CEO’s behavior as board chair (Fama & Jensen, 1983). Thus, in line with prior research, predecessor retention in a firm with weaker or no family control likely limits a new CEO’s ability to implement change, thereby reducing the adaptation benefits from succession (Quigley & Hambrick, 2012). Hence, with increasing family control, firms can more effectively counter the agency costs tied to predecessor retention, giving new CEOs the leeway to question strategic preferences and conservative routines (Kotlar & De Massis, 2013) and thus increasing adaptation benefits with predecessor CEOs as board chairs. 1
Second, another key factor enabling stronger performance gains from predecessor retention is that a firm needs to be highly dependent on strong stakeholder relationships for its performance advantage, thus making predecessor retention particularly valuable to mitigate otherwise very high disruption costs of a CEO succession. Empirical evidence shows that negative stakeholder sentiment is consequential for any firm’s postsuccession performance (Keil et al., 2022). However, firms with stronger family control are known to build their performance advantage more on strong stakeholder relationships (Miller & Le Breton-Miller, 2005). With increasing family control, firms disproportionally invest in strong stakeholder relationships that satisfy the socioemotional wealth goals of the controlling families (Berrone et al., 2012; Gómez-Mejía, Cruz, Berrone, & De Castro, 2011). As a result, these firms have close interactions with stakeholders, which in turn yield more in-depth knowledge of stakeholders (Miller & Le Breton-Miller, 2005), embed these firms more deeply in stakeholder networks (Daspit et al., 2016), and often develop into long-term and enduring relationships (Le Breton-Miller & Miller, 2006). For instance, a family owner of a listed firm described their trust-based relationships with distributors as follows: “The kind of company that we are . . . they can trust us, unlike some competitors who might say they have a new distributor now, so goodbye. It (family ownership) brings support and safety when we co-operate” (Heino, Tuominen, & Jussila, 2020, p. 8). Thus, increased interactions with stakeholders yield greater trust and more personal relationships that result in tangible performance advantages for firms with stronger family control.
These theoretical arguments are also supported by strong empirical evidence showing that with increasing family control, firms improve their efficiency through strong stakeholder relationships. In particular, it is well established that firms with stronger family control trade higher job security for employees in exchange for lower compensation (Bassanini, Breda, Caroli, & Rebérioux, 2013; Block, 2010; Neckebrouck, Schulze, & Zellweger, 2018; Sraer & Thesmar, 2007). Further, with increasing family control, firms benefit from higher consumer trust and loyalty (Beck & Prügl, 2018; Schellong, Kraiczy, Malär, & Hack, 2019), improve coordination and knowledge sharing (Uzzi, 1997), and attract better-quality business partners (Jones, Harrison, & Felps, 2018), all of which fuel collaboration (Miller & Le Breton-Miller, 2005) and co-creation (Heino et al., 2020) and reduce transaction costs (Dyer & Singh, 1998). Thus, it is crucial for firms with stronger family control to cultivate and sustain strong stakeholder relationships to ensure strong firm performance (Combs et al., 2023). Put differently, failure to sustain strong stakeholder relationships after successions can result in more severe performance losses for firms with stronger family control.
The value of strong stakeholder relationships typically lies with CEOs, particularly in public firms, and these relationships are not easily transferable to a successor (Berrone et al., 2013; Daspit et al., 2016). CEOs in firms with stronger family control often have longer tenures, gaining credibility and trust among stakeholders over time by honoring agreements (Corbetta & Salvato, 2004). CEO successions thus put the typically stronger stakeholder relationships and their value under more severe stress in firms with stronger family control (Berrone et al., 2013). Consistent with these arguments, predecessor retention should be more impactful in reducing the disruption costs of successions in firms with stronger family control.
Firms with no or lower levels of family control can also build strong stakeholder relationships, but due to their stronger focus on short-term shareholder value creation (Sirmon & Hitt, 2003) and on the needs of investors and financial markets (Bushee, 1998; Miller & Le Breton-Miller, 2005) combined with their less frequent interactions with nonfinancial stakeholders (Gómez-Mejía et al., 2011), they have difficulties developing and maintaining the same level of strength in stakeholder relationships (Combs et al., 2023). Thus, while capable of building strong relationships, firms with weaker or no family control may not always prioritize personal and trust-based relationships with stakeholders to build their performance advantage. Further, as illustrated by the quote above, firms with weaker or no family control may struggle more to credibly signal to employees or business partners that their firm-specific investments, which are needed to co-create value, are safe (Hoskisson, Gambeta, Green, & Li, 2018). Thus, the disruption of stakeholder relationships is more consequential for postsuccession performance in firms with stronger family control.
In sum, we propose that with increasing family control, owners’ closer monitoring and firms’ stronger reliance on strong stakeholder relationships for their performance advantage make predecessor retention more likely to positively relate to postsuccession performance. In contrast, in firms with weaker or no family control, predecessor retention is likely to maintain or even reduce firm performance after a succession, in accordance with previous literature (Quigley & Hambrick, 2012), due to the high agency costs of predecessor retention that reduce adaptation benefits as well as the less severe disruption costs of CEO successions. Stated formally,
Hypothesis 1: The relationship between predecessor retention and postsuccession firm performance is moderated by family control. With increasing family control, predecessor retention is more positively associated with postsuccession firm performance.
Family Control, Board Chair Independence, and Postsuccession Firm Performance
Firms with stronger family control likely struggle more with performance losses after a succession with an independent board chair for at least two reasons. First, compared to other types of board chairs, an independent board chair can give greater leeway to a new CEO to initiate strategic change and monitor a new CEO—without conflicts of interest—to ensure the board’s mandate is implemented (Krause & Semadeni, 2013). With lower levels of family control, shareholders rely more strongly on an independent board chair to monitor a new CEO’s behavior since individual shareholders have fewer incentives and less capacity to monitor their firms (Anderson & Reeb, 2004). However, with increasing family control, controlling family owners often exercise their control rights using board seats (Anderson & Reeb, 2004; Fama, 1980) and can thus personally monitor a new CEO to ensure they implement the board’s change mandate. Hence, with increasing family control, the benefits of board chair independence to achieve adaptation benefits decrease.
Second, as we argued above, firms with stronger family control rely more on strong stakeholder relationships for their performance advantage (e.g., Berrone et al., 2013) and thus face more severe disruption costs from successions. Independent board chairs are known to have less firm-specific knowledge since they never worked in the focal firm (Levit & Malenko, 2016; Osterloh & Frey, 2006). However, in firms with increasing family control, a high degree of understanding of the focal firm’s inner workings is important to effectively assess the disruptive nature of a new CEO’s strategic decisions for stakeholders (Khanna et al., 2014). The lack of in-depth, firm-specific knowledge, which is most often beyond the capacity of independent directors (Makri et al., 2006), is thus more detrimental to postsuccession performance in firms with stronger family control.
Further, due to pressure from financial markets (Cabrera-Suárez et al., 2001), independent board chairs in firms with stronger family control are typically appointed to protect the interests of minority shareholders (García-Ramos & García-Olalla, 2011; Jones et al., 2008). Thus, independent board chairs in firms with high levels of family control likely focus their attention on the demands of minority shareholders and potential conflicts of interest with controlling family owners, thereby further distracting attention away from the concerns of stakeholders and increasing the disruption costs of successions. Thus, in firms with stronger family control, board chair independence likely increases the disruption costs of successions. Firms with lower or no family control—as we argued in detail above—may not always prioritize personal and trust-based relationships with stakeholders to build their performance advantage, but instead focus more on shareholder value and needs (Bushee, 1998; Miller & Le Breton-Miller, 2005; Sirmon & Hitt, 2003). Thus, disruption of stakeholder relationships in these firms should be less consequential for postsuccession performance.
Taken together, board chair independence is likely to reduce postsuccession performance in firms with stronger family control due to the lower adaptation benefits that an independent board chair brings to these firms, and the higher disruption costs of successions. In sum, we propose that with increasing family control, owners’ closer monitoring and firms’ stronger reliance on strong stakeholder relationships for their performance advantage make board chair independence more likely to negatively relate to postsuccession performance. Put formally,
Hypothesis 2: The relationship between board chair independence and postsuccession firm performance is moderated by family control. With increasing family control, board chair independence is more negatively associated with postsuccession firm performance.
Heterogeneity Within Family-Controlled Firms
While our predictions above align with the existing CEO succession literature regarding firms with weaker or no family control, the novelty of our study lies in explaining the different performance effects of board chair types in firms with higher levels of family control. Focusing on family-controlled firms, we go back to the core debate in the CEO succession literature about the higher disruption costs but also the higher adaptation benefits of outside CEO successions (Karaevli, 2007; Minichilli et al., 2014; Shen & Cannella, 2002; Zhang & Rajagopalan, 2003). In particular, our arguments offer novel insights into the performance effects of outside CEOs in combination with board chair types in family-controlled firms. 2
Regarding predecessor retention, we propose that postsuccession performance gains in family-controlled firms are more pronounced for outside than inside CEO successors. Under the vigilant oversight of family owners, which effectively limits agency costs from predecessor retention, a predecessor CEO as board chair can be particularly valuable to reduce the higher disruption costs of outside CEO successions. While outside CEOs bring fresh perspectives and new ideas to initiate strategic change, they typically lack support from employees to successfully implement change (Shen & Cannella, 2002). With profound knowledge of firm-specific stakeholder contributions and deep embeddedness in the existing stakeholder network of the focal family-controlled firm, a predecessor CEO as board chair can help an outside CEO become embedded in the firm’s stakeholder network more quickly. In addition, predecessor CEOs can promote support for proposed change by an outside CEO among employees, highlighting the benefits for employees and the firm alike. Relatedly, predecessor CEOs possess deep firm-specific knowledge and trust from stakeholders and can provide their nuanced view when assessing proposed strategic change, challenging an outside CEO to consider existing stakeholders’ contributions to the focal firm’s value creation. For instance, an outside CEO might favor a cheaper supplier for cost savings, potentially overlooking the current supplier’s role in developing tailor-made solutions for previous product development. The predecessor CEO as board chair can probe the outside CEO to ensure they have thoroughly discussed cost-reduction alternatives with the existing supplier, thus potentially preserving valuable relationships before making a final decision. Thus, the combination of predecessor retention and outside CEO successors can be particularly valuable to enhance postsuccession performance in family-controlled firms.
Inside CEOs can better integrate stakeholder considerations into their strategic decisions (Dorobantu, Henisz, & Nartey, 2017) due to their previous roles in family-controlled firms (Daspit et al., 2016). Thus, the combination of an inside CEO with predecessor retention is likely less valuable for reducing the disruption costs of successions than that with an outside CEO. Nevertheless, we expect some benefits from this combination as negative stakeholder sentiment affects all new CEOs (Keil et al., 2022). For instance, inside CEOs may have limited exposure to all stakeholder groups, potentially favoring those they are familiar with (Xuan, 2009). For example, chief operating officers likely know suppliers well but are less familiar with demands from important customers, while chief finance officers may have established ties with shareholders but fewer interactions with suppliers or customers. In sum, we contend that within family-controlled firms, predecessor CEO retention is more beneficial with an outside than an inside CEO successor.
Hypothesis 3: Within family-controlled firms, the relationship between predecessor retention and postsuccession firm performance is moderated by outside CEO successors. With an outside CEO successor, predecessor retention is more positively associated with postsuccession firm performance.
Regarding board chair independence, we propose that the postsuccession performance disadvantages in family-controlled firms are more pronounced for outside than inside CEO successors. As we argued above, the vigilant oversight of family owners reduces the benefits of an independent board chair to monitor a new CEO, and their effort to implement the board’s change mandate, and thus reduces the benefits of board chair independence to achieve adaptation benefits from successions in family-controlled firms.
However, the disruption costs of successions in family-controlled firms with an independent board chair are likely higher for outside than inside CEO successions. Having an independent board chair who lacks familiarity with the focal family-controlled firm’s inner workings (Zeitoun & Pamini, 2017), and an outside CEO without firm-specific knowledge (Coles & Hesterly, 2000), creates a disadvantageous combination as both the new CEO and board chair lack in-depth firm-specific knowledge to reduce the severe disruption costs of successions in family-controlled firms. For instance, if an outside CEO proposes divestitures, an independent board chair may focus on the narrow interests of minority shareholders (Cabrera-Suárez et al., 2001) instead of considering the broader impact on supplier and customer relationships for the focal family-controlled firm (Bettinazzi & Feldman, 2021). In this case, suppliers providing equipment to the divesting family-controlled firm and the to-be-divested business likely have to renegotiate contracts, while customers need to establish separate relationships, incurring costs that may inadvertently harm the family-controlled firm’s stakeholder relationships (Bettinazzi & Feldman, 2021). Such situations can lead to reduced effort and disengagement, worsening postsuccession performance declines in family-controlled firms with an outside CEO successor. Thus, although outside CEOs may offer new strategic direction, the benefits likely do not outweigh the disruption costs in family-controlled firms with independent board chairs.
Inside CEO successors, in contrast, typically pursue more nuanced and less radical strategic change than outside CEO successors, generally lowering the disruption costs of successions (Shen & Cannella, 2002). In family-controlled firms, independent board chairs typically prioritize the interests of minority shareholders (Jones et al., 2008). Inside CEO successors can help provide a more balanced perspective between stakeholder concerns and minority shareholders’ interests using their firm-specific knowledge and embeddedness in their firms’ existing stakeholder networks from their previous roles. Thus, an independent board chair combined with an inside CEO successor likely reduces the disruption costs of a CEO succession. In sum, in family-controlled firms, board chair independence combined with an outside CEO is likely to result in worse postsuccession performance declines than board chair independence combined with an inside CEO.
Hypothesis 4: Within family-controlled firms, the relationship between board chair independence and postsuccession firm performance is moderated by outside CEO successors. With an outside CEO successor, board chair independence is more negatively associated with postsuccession firm performance.
Sample and Methods
Data and Sample
Our dataset consists of the S&P 1500 over a 20-year period from 2003 to 2022. We identified 1,183 CEO successions, including 135 within family-controlled firms. 3 We obtained CEO and board data from BoardEx; financial data from Thomson Reuter’s Compustat; and family ownership data from NRG Metrics, which collects family ownership and board membership data using documents like annual reports, SEC filings, and press releases (e.g., Gómez-Mejía, Sanchez-Bueno, Miroshnychenko, Wiseman, Muñoz-Bullón, & De Massis, 2024). The board chair’s influence may extend beyond the succession year (Yi et al., 2020), so we created a panel dataset to capture postsuccession performance effects (Quigley & Hambrick, 2012). We coded the CEO succession year as Year 0 and the subsequent years as Years 1, 2, and 3, respectively. If the board chair or the new CEO departed before Year 3, the dataset includes the observation up to the departure year. This approach resulted in a panel dataset comprising 3,894 succession-year observations, including 454 succession-year observations in family-controlled firms. Robustness tests excluding the succession year (Year 0) and using different timespans show consistent results.
Dependent Variable
Firm performance
We measured firm performance using return on assets (ROA). Firm performance was operationalized as the difference in the ROA in Years 0, 1, 2, and 3, respectively, and the average ROA over the past 2 years prior to the succession (average Year −2 and Year −1) divided by the average ROA over the past 2 years prior to the succession. Recent CEO succession research almost exclusively relies on accounting-based performance measures, particularly ROA (e.g., see Keil et al., 2022) because market-based performance measures tend to be partially driven by factors outside of firms’ control (e.g., Zhang & Qu, 2016).
Independent Variables
Predecessor retention
We coded predecessor retention 1 if the predecessor CEO was the board chair in the focal year and −1 otherwise (Quigley & Hambrick, 2012). 4 Overall, 43% of predecessor CEOs in our sample stayed on as board chairs, which is comparable to the findings by (Quigley & Hambrick, 2012). We found, however, that predecessor retention was considerably higher in firms with family control than in firms without family control (53% vs. 42% in Year 0) and that these differences persisted over time (27% vs. 14% in Year 3).
Board chair independence
We coded board chair independence 1 if the board chair in the focal year did not have any past or present working relationship with the focal firm and was not a blockholding shareholder and −1 otherwise (Daily & Dalton, 1997). Overall, 33% of the firms in our sample had independent board chairs in Year 0. We found that board chair independence was considerably lower in firms with family control than in firms without family control (13% versus 36% in Year 0) and that these differences persisted over time (10% vs. 30% in Year 3).
Family control
We defined family control as a combination of family ownership and board representation following a well-established convention in the family business literature (Gómez-Mejía, Patel, & Zellweger, 2018). We measured family control as a family that had, directly or indirectly, at least 5% ownership in the respective firm and at least one family member in top management or on the board of directors. The variable was set to 0 if family ownership was less than 5% and/or no family member was involved in top management or the board of directors. If family ownership was greater than 5% and at least one family member was involved in top management or the board of directors, then the percentage of family ownership was coded as a continuous variable (Chrisman & Patel, 2012).
Using a measure of family control that combines both family ownership and board representation is important for our study. Family control is an essential part our theorizing since board representation is what allows family owners to more closely observe and eventually sanction the behavior of the board chair and CEO during board meetings, and ownership allows family owners to influence board decision-making. Our measurement provides a more nuanced stance for measuring family control than a binary variable (Chrisman & Patel, 2012). Nevertheless, we reran our analyses using a dummy variable for family control, and the results remain consistent. Our definition of family-controlled firm also includes founder-led firms. Founder-led firms, like later-generation firms, face challenges in reducing the disruption costs of CEO successions and increasing the adaptation benefits. As a robustness check, we replicated our analyses excluding founder-led (first-generation) family-controlled firms. The results remain consistent.
Outside CEO successor
We coded outside CEO successor 1 if the new CEO was not a family member and had worked for fewer than 6 months in the focal firm before the CEO succession and −1 otherwise (Shen & Cannella, 2002).
Control Variables
We controlled for predecessor CEO characteristics that may affect postsuccession firm performance: predecessor CEO founder status, coded 1 if the predecessor CEO was also the founder of the firm and −1 otherwise, as the founder may hold pronounced firm-specific resources (Wasserman, 2003); predecessor CEO firm tenure, measured as the number of years since the predecessor CEO joined the firm, since CEOs with longer tenures may have deeper firm-specific knowledge; predecessor CEO career horizon, measured as the difference between 65 and the predecessor CEO’s age in Year 0, since CEOs with shorter career horizons may have different risk preferences that may affect performance (Krause & Semadeni, 2014); and predecessor CEO duality, coded 1 if the predecessor CEO was also board chair in the year before succession and −1 otherwise, since whether the predecessor CEO already held the board chair position prior to CEO succession may influence firm performance (Krause & Semadeni, 2013).
We also controlled for successor CEO characteristics: successor CEO heir apparent, coded 1 if the new CEO held the title of president or chief operating officer prior to the CEO appointment and was at least 4 years younger than the incumbent CEO and −1 otherwise (Minichilli et al., 2014), since the benefits of predecessor retention may be reduced for an heir apparent, who has already learned about stakeholder relationships prior to succession (Hambrick & Cannella, 2004); successor CEO-board chair, coded 1 if the new CEO was also the board chair and −1 otherwise; and successor CEO position tenure, calculated as the CEO’s number of years in the CEO position, to account for potential learning effects of the new CEO. We also included board independence, measured as the percentage of directors on the board who were independent in Year t − 1, to control for the board’s level of oversight and responsiveness to performance issues (Krause et al., 2014) and lead independent director, coded 1 if the board had a lead independent director in Year t − 1 and −1 otherwise, since lead independent directors are often a compromise between the board’s control and collaboration functions (Krause, Withers, & Semadeni, 2017). We also controlled for firm characteristics in Year t – 1: firm size (log) in terms of the number of employees; firm age, measured as the number of years since founding; firm leverage, measured as the ratio of total debt to total assets; firm sales growth, measured as the change in total sales between the focal Year t and Year t – 1; and a firm’s total corporate diversification based on Palepu’s (1985) measurement. Lastly, we used three-digit industry dummies to control for general industry trends and calendar-year dummies to control for general economic conditions.
Estimation and Endogeneity
Our empirical design addresses endogeneity potentially stemming from family control, since differences in postsuccession performance may be driven by systematic differences between firms with and without family control and not from the treatment effect of the board chair type. Further, we accounted for the nonrandom event of the appointment of predecessor CEOs as board chairs. To safeguard against these two selection biases, we took three steps.
First-differenced dependent variable
We used a first-differenced firm performance measure as the dependent variable, as defined above. This measure considers within-firm variation in performance (e.g., firm performance in postsuccession Year t minus the average firm performance in presuccession Years Y – 1 and Y – 2) and soaks up any unobservable time-invariant firm characteristics (Feldman, Amit, & Villalonga, 2016), which is important as we are interested in the magnitude of firm performance differences in an individual firm rather than the cross-sectional superiority of firms with stronger family control.
Propensity score matching
We followed prior family firm studies (e.g., Chang & Shim, 2015; Chrisman, Devaraj, & Patel, 2017; Neckebrouck et al., 2018) and used propensity score matching (PSM) to construct a sample of similar firms with and without family control. PSM lowers the influence of observable heterogeneity between both types of firms (Dehejia & Wahba, 2002). We matched firms with and without family control on presuccession firm characteristics that likely explain systematic performance differences between both types of firms (addressing endogeneity from self-selection into family control).
We used the following variables in our matching: (1) presuccession firm performance since firms might be less likely to retain their predecessor CEOs as board chairs under poor performance conditions (Krause & Semadeni, 2013), (2) predecessor CEO career horizon because predecessor CEOs closer to retirement are more likely to be retained as board chairs (Krause & Semadeni, 2014), (3) predecessor CEO firm tenure because family-controlled firms are more likely to have longer-tenured CEOs who have thus accumulated more knowledge about firm-specific resources (Zellweger, 2017), (4) CEO successor heir apparent and (5) CEO successor outside because firms with family control are more likely to appoint an heir apparent and less likely to appoint an outsider than firms without family control (Minichilli et al., 2014), (6) predecessor retention and (7) board chair independence to ensure we compared firms that made the same decision with regard to board chair type, (8) firm size to control for general firm differences (Chrisman et al., 2017), (9) two-digit industry dummies to control for general industry trends, and (10) calendar-year dummies to control for general economic conditions.
We matched firm-years rather than firms, taking into account that firms that form a good match in one year may not necessarily form a good match over the full sample period (Dehejia & Wahba, 2002). This procedure also minimized the risk of dissimilar matching due to extreme values of any of the covariates, thereby allowing for relatively bias-free and conservative tests of our hypotheses (Boivie et al., 2016). The results of balancing tests confirm that firms with and without family control displayed significant differences in the matching variables, which supports the use of PSM (Mithas, Chen, Lin, & De Oliveira Silveira, 2022). After our matching, these differences became insignificant, suggesting that our final sample is well balanced (see Appendix A in the online supplemental material). This process led us to a matched sample with 908 succession-year observations, of which 454 succession-year observations belonged to firms with family control.
Heckman selection model
Prior studies on predecessor retention (e.g., Quigley & Hambrick, 2012; Yi et al., 2020) use the Heckman selection model (Hill, Johnson, Greco, O’Boyle, & Walter, 2021; Semadeni, Withers, & Trevis Certo, 2014) to address nonrandom selection into predecessor retention. While we used control variables to account for observable factors that may affect retention decisions and postsuccession firm performance (e.g., predecessor CEOs who are founders), there might also be unobserved variables that affect firms’ selection into predecessor retention and postsuccession performance (e.g., a board’s desire for change). We identified two instrumental variables: industry prevalence of predecessor retention, calculated as the number of instances of predecessor retention in the same three-digit North American Industry Classification System industry, and predecessor CEO departure due to health reasons, coded 1 if the departure of the predecessor CEO was related to health issues and −1 otherwise. Both instruments are highly correlated with predecessor retention (i.e., are relevant instruments) but weakly correlated with postsuccession firm performance (i.e., meet the exclusion condition that the instruments do not affect, for example, a board’s desire for change). We used the full sample to predict the likelihood of predecessor retention in the first-stage probit regression with robust standard errors. Table B1 in online Appendix B reports the results of the first-stage selection model. We included the inverse Mills ratio as a control variable, labeled predecessor retention control, to test our hypotheses.
We used generalized estimating equations (Krause et al., 2016; Quigley & Hambrick, 2012), which are appropriate for modeling unbalanced longitudinal data with intertemporal correlations across multiple observations per firm (Liang & Zeger, 1986). We specified a Gaussian distribution family, an identity link function, and an unstructured working correlation matrix as the least restrictive correlation matrix suitable for unbalanced panel data. The results remain consistent when using an exchangeable correlation matrix. Further, we estimated all models using robust standard errors clustered at the firm level. In all models, the variance inflation factors are below 3.8. As a robustness test, we also estimated a random-effects panel regression, and the results remain consistent. Given the invariant nature of some of our independent variables (e.g., predecessor retention, board chair independence, outside CEO successor), we were unable to estimate a fixed-effects panel regression.
Results
Table 1 presents the means, standard deviations, and correlations for the matched sample used for Hypotheses 1 and 2. Table 2 present the results for Hypotheses 1 and 2. Model 1 includes all control and independent variables, Models 2 and 3 include the individual interaction effects, and Model 4 is the full model used for the interpretation of our results. Consistent with Hypothesis 1, Model 4 shows a positive coefficient with a low probability of error for the interaction term between predecessor retention and family control (β = 0.935; p = .000). These results are economically meaningful. The effect size of the interaction on firm performance is about seven times the effect size of outside CEO (β = −0.134), the primary focus of the CEO succession literature, and about one-third larger than the effect size of board independence (β = 0.612), one of the most common governance mechanisms affecting firm performance. Figure 1a shows that in line with previous research on predecessor retention (Quigley & Hambrick, 2012), in a firm with no family control (family control = 0), the average loss in ROA induced by predecessor retention is 24.9% relative to the presuccession ROA in firms with no family control (of, on average, 11.0%). Further, the difference in the change in ROA compared to the presuccession ROA in firms with no family control between having a predecessor CEO and having another type of board chair is −13.7 percentage points. In contrast, in a firm with family control (one standard deviation [SD] above the mean of 26%), the average gain in ROA induced by predecessor retention is 18.8% relative to the presuccession ROA in firms with family control (of, on average, 11.0%). Further, the difference in the change in ROA compared to the presuccession ROA in firms with family control between having a predecessor CEO and having another type of board chair is 35.0 percentage points.
Descriptive Statistics and Correlations
Note. N = 908. Correlations equal to or larger than 0.07 have p values lower than or equal to .05.
Results Predicting Postsuccession Firm Performance for Hypotheses 1 and 2
Note. All models report results from generalized equation estimations. Standard errors are below the coefficient in parentheses, and p values are in square brackets.
Plot of the Change in Postsuccession Performance Dependent on the Level of Family Control and Predecessor Retention (Hypothesis 1) and Board Chair Independence (Hypothesis 2)
Consistent with Hypothesis 2, Model 4 shows a negative coefficient with a low probability of error for the interaction term between board chair independence and family control (β = −0.537; p = .041). Figure 1b shows that in a firm with family control (1 SD above the mean of 26%), the average loss in ROA induced by board chair independence is 26.7% relative to the presuccession ROA in a firm with family control (of, on average, 11.0%). Further, the difference in the change in ROA compared to the presuccession ROA in firms with family control between having an independent board chair and having another type of board chair is −31.3 percentage points. In contrast, in firms with no family control (family control = 0), the average loss in ROA induced by board chair independence is 20.7% compared to the presuccession ROA in firms with no family control (of, on average, 11.0%). Further, the difference in the change in ROA compared to the presuccession ROA in firms with no family control between having an independent board chair and having another board chair is 3.4 percentage points.
Models 1–4 in Table 3 present the results for Hypotheses 3 and 4. Model 1 includes only the control and independent variables, Models 2 and 3 include the individual interaction effects, and Model 4 is the full model used for the interpretation of our results. Consistent with Hypothesis 3, Model 4 shows a positive coefficient with a low probability of error for the interaction term between predecessor retention and outside CEO (β = 0.184; p = .056). Figure 2 shows that having a board chair other than a predecessor CEO in family-controlled firms results in, on average, a 45.2% (23.3%) decline in ROA relative to the presuccession ROA for outside (inside) CEO successors. In contrast, with a predecessor CEO as board chair, firms with family control observe, on average, a 35.6% (20.8%) increase in ROA compared to the presuccession ROA for outside (inside) CEO successors. Model 4 shows a positive coefficient with a very high probability of error for the interaction term between board chair independence and outside CEO (β = 0.085; p = .482), which does not provide support for our Hypothesis 4.
Results Predicting Postsuccession Firm Performance for Hypotheses 3 and 4
Note. All models report results from generalized equation estimations. Standard errors are below the coefficient in parentheses, and p values are in square brackets.
Plot of the Moderating Effect of an Outside CEO Successor on the Relationship Between Predecessor Retention and Postsuccession Performance in Family-Controlled Firms (Hypothesis 3)
Robustness Checks
Impact threshold of a confounding variable (ITCV) tests
As discussed in our method section, we took several steps to address concerns stemming from self-selection into firms with family control and predecessor retention. Besides selection biases, we also addressed omitted-variable biases. In particular, we explored whether there is a high degree of risk that our interaction effects for predecessor retention and family control suffer from omitted-variable bias, so we conducted ITCV tests. We followed Busenbark, Yoon, Gamache, and Withers (2022) and used the command konfound in Stata (Version 18) with a significance level of 0.05 to implement the tests. The ITCV results indicate that an omitted variable would need to overturn the relationship between our dependent variable of firm performance and the interaction between predecessor retention and family control in 48.15% of the currently significant cases in order to bias our results. In other words, to invalidate the inference, 437 of the cases would have to be replaced with a case for which there is an effect of zero (Busenbark et al., 2022). Further, the ITCV analysis suggests that to invalidate the inference, an omitted variable would have to be correlated at 0.319 with the outcome variable and 0.319 with the independent variable conditional on covariates. Correspondingly the impact of an omitted variable (as defined by Frank [2000]) must be 0.319 × 0.319 = 0.1015 to invalidate the inference. The partial correlations of all the controls included in our analysis are substantially below this threshold. The ITCV tests thus alleviate concerns that our results suffer from omitted variable bias.
Use of PSM
We used PSM to reduce the imbalances in presuccession firm characteristics between firms with and without family control that may explain systematic performance differences between both types of firms. The high imbalances in our matching variables before matching became insignificant after matching, which strengthens the justification to use PSM (Mithas et al., 2022). However, we are aware of recent criticism of PSM that it may increase rather than decrease imbalances in a sample (King & Nielsen, 2019). To strengthen the robustness of our results, we calculated the pre- and post-imbalances of all—not just the matching—variables and demonstrated the lower imbalances after matching, and we also reran our analysis with the unmatched sample and found consistent results, as reported in online Appendix C.
Additional Analyses
Stakeholder conflicts
In our theorizing, we suggested that the strong stakeholder relationships in firms with stronger family control are more under stress during CEO successions. To get closer to our proposed mechanism, we collected data on stakeholder conflicts. We define a stakeholder conflict as a controversy between a new CEO and a primary stakeholder group (employees, customers, or business partners). If our theorizing holds, fewer (more) stakeholder conflicts should be observed after CEO successions in firms with stronger family control that retain the predecessor CEO as board chair (have an independent board chair).
Our measurement of stakeholder conflicts with the new CEO captures the U.S. media’s coverage of controversies with stakeholders related to the focal new CEO’s strategic decisions in the year of the CEO succession and the following 3 years. In line with prior research on media coverage of CEOs (Chen, Crossland, & Luo, 2015; Keil et al., 2022; Vergne, Wernicke, & Brenner, 2018), we first located all Factiva press items covering the new CEO and a stakeholder group irrespective of the content. We considered all press items that simultaneously mentioned the name of the new CEO and a primary stakeholder group (employees, customers, or business partners) within a range of, at most, 20 words. To ensure the press items related to the new CEO rather than to the predecessor CEO, we dropped a press item if it mentioned both. Further, to ensure a press item was about the focal firm, we only considered press items that simultaneously mentioned the new CEO and the focal firm. Overall, our search resulted in 3,801 unique press items mentioning a new CEO and a stakeholder group. For each firm, we then hand-coded the number of press items to identify controversies between the new CEO and a stakeholder group (e.g., “layoff,” “wage reduction,” “closure of site,” “partnership terminations,” or “supplier changes”). We excluded lawsuits, product failures, and antitrust controversies as we were unable to unanimously link these controversies to the new CEO’s decisions. Altogether, we identified 651 press items describing stakeholder controversies related to a new CEO’s decisions.
Our final variable stakeholder conflict was coded as a dummy variable taking the value of 1 if the focal firm had a reported stakeholder controversy in a given year and 0 otherwise. Given the binary dependent variable, we specified a generalized estimating equation model with a binomial distribution and a logit link function. Table D1 in Online Appendix D shows the results of the post hoc analyses for stakeholder conflict as the dependent variable. The results of Model 1 show a negative coefficient with a low probability of error for predecessor retention (β = −0.488; p = .076), suggesting that predecessor CEOs as board chairs are generally able to reduce stakeholder conflicts. Further, Model 1 shows a negative coefficient with a low probability of error for the interaction term between predecessor retention and family control (β = −1.090; p = .053), supporting our proposed mechanism that with increasing family control, firms with predecessor retention have a lower likelihood of stakeholder conflicts after CEO successions. Further, the results of Model 2 show a positive coefficient with a high probability of error for the interaction term between board chair independence and family control (β = 0.387; p = .594), suggesting that independent board chairs are not able to reduce stakeholder conflicts more in firms with stronger family control. Further, in Models 1 and 2, we found a positive coefficient with a low probability of error for family control, suggesting that with increasing family control, firms have a higher likelihood of stakeholder conflicts. Thus, these findings lend support to our theoretical arguments.
Strategic change
An alternative (agency) explanation for our findings on predecessor retention is that firms with stronger family control and predecessor CEOs as board chairs perform better by maintaining the status quo, thus reducing disruption costs. If this is the case, less strategic change should be observed after CEO successions in firms with stronger family control combined with predecessor retention and more strategic change should be observed in firms with stronger family control combined with board chair independence. To test this alternative explanation, we calculated strategic change as the absolute change in total diversification from the presuccession year (Y − 1) to Years 0, 1, 2, and 3, respectively (Palepu, 1985). Table D1 in online Appendix D presents the results with strategic change as the dependent variable. The results of Model 3 show a positive coefficient with a low probability of error for the interaction term between predecessor retention and family control (β = 0.153; p = .037), suggesting that more (not less) strategic change occurs in firms with stronger family control combined with predecessor retention, thereby refuting the alternative explanation. The results of Model 4 show a negative coefficient with an elevated probability of error for the interaction term between board chair independence and family control (β = 0.001; p = .992). These findings lend further support to our proposed theoretical mechanism.
Moderating effects in firms without family control
Hypotheses 3 and 4 focus on firms with family control only because the novelty of our study lies in explaining the performance effects of board chair types in firms with controlling family owners. However, for completeness, we also ran the moderating effects of outside CEO successors and board chair type in firms without family control. Table D1 in online Appendix D shows the results for the sample of firms without family control (family control = 0). The results of Model 5 show a negative coefficient with a low probability of error for predecessor retention (β = −0.232; p = .074) and a negative coefficient with a high probability of error for the interaction term between predecessor retention and outside CEO (β = −0.077; p = .491). These results for firms without family control suggest that the agency costs related to predecessor retention reduce adaptation benefits below the disruption costs, resulting in performance declines in firms without family control for inside and outside CEO successors alike. The results of Model 6 show a negative coefficient with an elevated probability of error for board chair independence (β = −0.086; p = .529) and a negative coefficient with a high probability of error for the interaction term between board chair independence and outside CEO (β = −0.032; p = .778), corroborating previous findings that the performance benefits of board chair independence are less clear in firms without family control (Veltrop et al., 2021).
Temporal shifts
Our data consists of information from the S&P 1500 over a 20-year period from 2003 to 2022. Debates on the board chair position have been evolving since 2003. Regulatory changes in February 2010 by the Securities and Exchange Commission (SEC; U.S. Security and Exchange Commission, 2010) requiring firms to disclose and justify their board leadership structures prompted significant changes in predecessor retention and board chair independence after a CEO succession (see online Appendix E, Figures E1 and E2, for graphical illustrations). The average predecessor retention rate after a CEO succession dropped from 49% to 38% after 2010 mainly due to a drop in firms without family control (from an average 49% between 2003 and 2010 to an average of 36% between 2011 and 2020), while the predecessor retention rate remained stable in firms with family control (from an average of 54% between 2003 and 2010 to an average of 51% between 2011 and 2020). The average rate of board chair independence after a CEO succession increased from 20% to 41%, driven by an increase in firms without family control (from an average of 22% between 2003 and 2010 to an average of 45% between 2011 and 2020), while board chair independence in firms with family control remained stable (from an average of 9% between 2003 and 2010 to an average of 12% between 2011 and 2020).
To account for these time trends, we reran our analyses, splitting our sample into two time periods: (1) 2003 to 2009 and (2) 2011 to 2022 (excluding the year of policy change). As shown in online Appendix E, our main results remain largely consistent for both time periods. Consistent with our Hypothesis 1, we found a positive interaction effect of predecessor retention and family control with a low probability of error for the period 2011–2022 (Model 1: β = 0.890; p = .010) and for the period 2003–2009 (Model 3: β = 1.151; p = .014). Consistent with Hypothesis 2, we found a negative interaction effect of board chair independence and family control with a slightly elevated probability of error for the period 2011–2022 (Model 2: β = −0.488; p = .122) and a low probability of error for the period 2003–2010 (Model 4: β = −4.513; p = .000).
Discussion
Contributions and Implications
Our study makes three main contributions. First, our study contributes to the CEO succession literature by showing that the value of different types of board chairs after CEO successions varies with firm ownership. Our study is aligned with prior research on the negative performance effects of predecessor retention after CEO successions (Cummings et al., 2021; Krause & Semadeni, 2013; Quigley & Hambrick, 2012; Yi et al., 2020), but only in firms without family control. In contrast, with increasing family control, we found more positive firm performance effects from predecessor retention, which demonstrates the importance of taking firms’ ownership structures into account when studying CEO successions. Thus, our study demonstrates the importance of considering the governance context a new CEO steps into when taking over a firm to explain the performance effects of CEO successions.
Further, we add to and expand the stakeholder-centric perspective on CEO successions (Keil et al., 2022). Our supplementary analyses suggest that a predecessor CEO is better able to reduce stakeholder conflicts after a CEO succession than other types of board chairs, supporting our theoretical claim that predecessor retention is an effective governance mechanism to prevent negative stakeholder reactions after a CEO succession in firms with increasing family control.
Second, we provide a novel theoretical lens to study the choice of board chair. Organizational theory advocates for new CEOs as board chairs (Krause et al., 2014), and agency theory advocates for independent board chairs (Coles & Hesterly, 2000). We build on the family business literature (e.g., Berrone et al., 2013; Daspit et al., 2016) to explain the conditions under which predecessor CEOs—a large but often overlooked group of board chairs (Krause et al., 2016)—outperform other board chairs after CEO successions. Our findings thus add to our limited understanding of how inside board chairs contribute value (Banerjee et al., 2020), and corroborate the importance of considering ownership structures when studying the (in)effectiveness of governance mechanisms, particularly the choice of board chair (Connelly et al., 2010).
One may ask whether a novel conceptual lens on board chair types is warranted or whether our findings could be explained by agency theory alone. From an agency perspective, family control should align interests equally well for all types of board chairs since ownership and control are concentrated (Fama & Jensen, 1983). Thus, we should have found no effect for predecessor retention. However, our findings reveal better firm performance with stronger family control for predecessor CEOs compared to other board chairs. For independent board chairs, firms with stronger family control report increasing performance declines after CEO successions, which runs counter to agency predictions. We further ruled out the agency explanation that firms with stronger family control combined with predecessor CEOs as board chairs perform better simply because they maintain the status quo by showing that increasing family control combined with predecessor retention results in more (not less) postsuccession strategic change. Our study thus provides a more nuanced understanding of predecessor CEOs as board chairs and underlines the importance of fit between the type of board chair and firm ownership.
Lastly, our study speaks to research on CEO successions in family firms (Amore et al., 2021; Gedajlovic et al., 2012; Minichilli et al., 2014; Querbach et al., 2020). In public family firms, minority shareholders often favor an independent board chair to preserve their interests (Cabrera-Suárez et al., 2001; Jones et al., 2008). However, our findings show a stronger negative effect of board chair independence on postsuccession performance in firms with stronger family control, thereby questioning the effectiveness of independent board chairs (Veltrop et al., 2021). In contrast, we show that predecessor retention not only has a stronger positive effect on firm performance with increasing family control (for the benefit of shareholders) but also a stronger effect on reducing conflicts with employees, suppliers, and customers (i.e., preserves relationships for the benefit of stakeholders). Thus, while predecessor retention may incur agency costs related to the lower adaptation benefits of CEO successions, in family-controlled firms, the adaptation benefits outweigh the disruption costs.
Further, our results show that family-controlled firms particularly benefit from outside CEO successions in combination with predecessor retention. This finding is interesting because it shows a little-used but viable way for family-controlled firms to bring in an outsider to the CEO position and thereby prevent firm performance declines. We add to prior studies on outside CEO successions in family-controlled firms (Miller, Breton-Miller, Minichilli, Corbetta, & Pittino, 2014; Minichilli et al., 2014) by suggesting that the high performance variance of outside CEO successions may be explained by the type of board chair, which tends to tilt the balance toward performance gains with predecessor retention but not with board chair independence. In particular, our findings support the notion that firms with stronger family control do not aim to “preserve the status quo” but aim to move forward after a CEO succession. We found that the combination of an outside CEO with fresh ideas and new perspectives and the predecessor CEO as board chair with in-depth knowledge about and relationships with important stakeholders can result in performance improvements under the close watch of controlling family owners.
Limitations and Future Research Implications
As with any study, ours has limitations. First, our study focuses on family control, but other types of controlling owners might have an equally strong ability to reduce the self-serving behavior of predecessor CEOs as board chairs, build their firms’ competitive advantage on strong stakeholder relationships, and thus generate benefits from predecessor retention. Thus, expanding the analysis to other controlling owners constitutes an interesting avenue for future research. Second, predecessor CEOs in firms with weaker or stronger family control may differ in their attachment to, or benevolence toward, these firms as well as their involvement in the choice of successor, which might be alternative explanations for the positive performance effects of predecessor retention in firms with stronger family control. While we controlled for unobserved heterogeneity in our empirical study and showed in our ICTV tests that our results are unlikely to be overturned by an omitted variable, future research could use qualitative or survey-based methods to get to these alternative mechanisms. Third, our study context comprises U.S. firms, so future studies can expand into other institutional contexts outside the United States. Fourth, we acknowledge that we were unable to disentangle the performance effects of specific stakeholder groups and heterogeneity within stakeholder groups. Future studies could investigate how exactly individual stakeholder groups impact postsuccession performance and how this impact differs depending on the board chair type. Fifth, our study builds on robust evidence that pursuing strong stakeholder relationships contributes to family-controlled firms’ performance advantage (Gómez-Mejía et al., 2011; Neckebrouck et al., 2018; Sraer & Thesmar, 2007). We did not measure the strength of stakeholder relationships pre- and postsuccession directly. While stakeholder relationships as part of socioemotional wealth have long served as an unmeasured theoretical concept in family business research (Gómez-Mejía et al., 2011), we used databases to approximate the disruption of stakeholder relationships by measuring the number of reported stakeholder conflicts after CEO successions. Future research may continue this endeavor to get closer to the theoretical construct.
Conclusion
Our study points to the importance of considering the governance context a new CEO steps into when taking over a firm to explain the performance effects of CEO successions. Our study shows that the value of different types of board chairs after a CEO succession varies with firm ownership, in particular the degree of family control. We hope our study serves as a steppingstone for future work that complements established ways of studying corporate governance, and pays particular attention to how variation in firm ownership shapes effective governance practices—a field of research that holds wide theoretical and practical relevance.
Supplemental Material
sj-docx-1-jom-10.1177_01492063251328256 – Supplemental material for Ownership Matters: How Family Control Affects the Value of Board Chair Types After CEO Successions
Supplemental material, sj-docx-1-jom-10.1177_01492063251328256 for Ownership Matters: How Family Control Affects the Value of Board Chair Types After CEO Successions by Christine Scheef and Thomas Zellweger in Journal of Management
Footnotes
Acknowledgements
The authors would like to thank editor Amy Y. Ou and two anonymous reviewers for their valuable and constructive feedback throughout the review process. The authors would also like to thank Guoli Chen, Ryan Krause, Tomi Laamanen, Vangelis Souitaris, and Yan Anthea Zhang for their valuable feedback on earlier versions of the manuscript, as well as Nomena Andriantahina, Chiara Ehrat, and Sebastian Sigg for their assistance in data collection. The authors also thank the participants of the Academy of Management Annual Meeting (2019), the 6th International Research Forum on Mittelstand (2020), and the International Corporate Governance Society Conference (2023) for their thoughtful input on earlier versions of the manuscript.
Supplemental material for this article is available with the manuscript on the JOM website.
Notes
References
Supplementary Material
Please find the following supplemental material available below.
For Open Access articles published under a Creative Commons License, all supplemental material carries the same license as the article it is associated with.
For non-Open Access articles published, all supplemental material carries a non-exclusive license, and permission requests for re-use of supplemental material or any part of supplemental material shall be sent directly to the copyright owner as specified in the copyright notice associated with the article.
