The Willingness and Commitment of the Relay Generation (4)

This White Paper focuses on exploring the succession of Chinese family businesses from the perspective of family organizational psychology. Questionnaires and in-depth interviews were carried out among 114 family businesses and 503 persons including business founders, successors and professional managers, to understand their aspirations, opinions, challenges and expectations on family business succession. The key research findings are as follows:

1. Most entrepreneurs expect a smooth succession of the businesses they’ve founded. Entrepreneurs of different ages have different opinions about the path for succession: The older ones are inclined to designate their children as successors; entrepreneurs below the age of 50 are more open-minded and are willing to consider professional managers as their successors. In the same time, entrepreneurs below age 50 believe the second generation does not necessarily need to exercise management, but only hold a stake in the business. This indicates a trend that more family businesses may be led by professional managers in the future. Will there be competent professional managers willing to join family businesses by then? In other words, how should family businesses attract professional CEOs in the future? This will be a very important question to think about.

2. In terms of the second generation’s background, educational background is positively related to their aspiration for business succession, but what they’ve majored in exerts no direct impact on their attitudes towards succession. Nevertheless, for the second generation that has been well educated, the first generation’s authoritarianism can produce a significantly negative effect on their aspiration to take over the company. In other words, the more educated the second generation (especially those with science or engineering educational background) is, the less patriarchal control the first generation should exercise over them. The age of the second generation also influences their commitment to the organization. The older they are, the higher commitment they will make to the organization. It takes some time for the second generation to develop a commitment to their family business.

3. Should the second generation accumulate work experience outside the family business first or directly join the family business? Founders with higher education are inclined to have their children work in other companies or set up their own business first before returning to the family business. They also hope that the second generation can start at the bottom or rotate through various departments before taking on management positions. In contrast, founders with junior college education expect their children to join the family business as senior executives immediately after their graduation. They believe that the second generation has got enough education for top management positions, and they hope that the high starting point will provide their successors with the perspective of a boss rather than a manager.

4. Self-efficacy (or confidence in one’s own abilities) and working experience for business succession can affect the second generation’s attitude towards succession to a great extent. The more confident the successors are, and the richer experience they have, the more they will aspire to take the baton and the higher commitment they will make to the organization.

5. Noticeably, the second generation’s self-efficacy can largely influence their aspiration for succession. The successor’s confidence can not only boost his aspiration for business succession, but also reduces the negative impact of other factors. For example, if the first generation is more educated, and has more children and senior executives, the second generation will have lower aspiration for business succession. For members of the second generation who are self-confident, the above factors don’t seem to pose any challenge or exert any negative impact on their aspiration for business succession.

6. Therefore, it is very important to build up successors’ self-efficacy. Our research shows that family is a key factor affecting successors’ self-efficacy. Successors will show stronger self-efficacy if their family has greater adaptability and cohesion. Other factors, such as educational level and overseas educational experience, don’t have much to do with self-confidence. This highlights the importance of family relationships, which generate confidence and power in the members of the second generation.

7. Our research shows that in family businesses which completed a smooth succession, both their founders and successors hold strong family values, which have little to do with their educational background and overseas educational experience. They agree that family members should get along well with each other and strive to bring glory to the family; they have an acute sense of family belonging. In this sense, the family-based values shared by the two generations carry sway over the second generation’s business succession. Hence, the business succession is not a subject of school education, but that of family education. The first generation should try to instruct and influence their children by their words and deeds, and instill proper family values. This will lay a solid foundation for the successful business succession.

8. Among family harmony, family prosperity and sense of family belonging, the family harmony exerts the greatest impact on the second generation’s aspiration for business succession; and the sense of family belonging gives the second generation a sharp sense of responsibility.

9. In addition to family values, how the family members get along with each other can also have an effect on the second generations’ aspiration for business succession. Our research shows that both family cohesion and family adaptability affect the second generation’s aspiration for business succession as well as their commitment to the organization. Family adaptability has relatively greater influence than family cohesion. Family cohesion represents the emotional closeness and loyalty between family members, while family adaptability highlights a family’s openness and flexibility when facing and addressing problems. For the second generation, whether their families are able to face and address problems in a positive, open and flexible manner is more significant than how deeply they are emotionally attached to their families when they think about whether to take the baton and give their commitment. In this sense, as long as the right approach is used, the second generation will be willing to take over regardless of whether they are closely attached to their families or not.

10. Male and female members of the second generation have distinctive features. For male successors, family cohesion exerts a larger impact on their aspiration for business succession; family conflicts have a greater negative effect on male successors. A male successor would rather give up succeeding the family business if he cannot feel a strong family cohesion and harmony.

11. Interestingly, for the second generation, real business ownership has little to do with the sense of psychological ownership. The psychological ownership comes from feelings about the “family” - family cohesion and sense of family belonging. For a successor with psychological ownership over the family business, taking the baton from the older generation means to carry on the values and responsibilities of the family, and the successor will develop a strong sense of ownership over the family business. Another interesting finding is that for a family lack of cohesion, the larger proportion of ownership the first generation controls, the more the second generation will aspire to business succession. If so, it is very likely that the successor will inherit the material wealth of the family only.

12. In general, three categories of factors can exert significant impact on the second generation’s aspiration for succession, namely, individual factors, family-related factors and business-related factors. When all these factors play positive roles, the successor will be most motivated to take the baton.

13. The support and trust of the boss and senior employees are major driving forces for the second generation to develop their aspiration for succession. In the meantime, a larger and highly standardized organization will provide its successor with more room to bring into full play his/her management talents, which, in turn, will increase his/her aspiration for business succession.

14. The successor’s commitment to the organization depends, to a large extent, on his aspiration for business succession. If he has forged close family relationships, gained trust and support from the boss and senior employees during the succession, and boosted his self-confidence through education and other corporate work experience, he will make a stronger commitment to the organization. Thus, the successor’s strong commitment to the organization necessitates continued self-recognition and backing from the family and the organization.

15. A successor may behave quite differently before and after taking the baton, which cannot be explained by their educational and professional background or corporate experience. The organizational factors determine, to a large extent, whether the successor can demonstrate his/her talent. In a highly standardized organization, the successor will be more highly recognized by the founder and senior executives for his capability. For the second generations that have been highly educated overseas, a standardized organizational platform will be required for them to spread their management concepts. Without such a platform, the successors are not to blame when they fail to play to their strengths. As a result, many members of the second generation would rather start their own businesses instead of taking over a non-standardized family business.

16. The founder’s leadership style exerts an influence on the evaluation of the successor’s capability. A successor appointed by a founder who exercises visionary leadership and metes out proper awards and penalties, will be more highly recognized by senior executives. If the founder exercises authoritative leadership, senior executives will be inclined to make more negative comments on the successor’s capability. The successor appointed by a founder who exercises authoritative leadership finds it difficult to be recognized by the elder generation.

Reflections on the Future of Chinese Family Businesses

In the last decade, the earliest group of family businesses in China has come to the stage of business succession. It is the right time for us to organize research activities on family business succession. We hope that our research will provide some implications for entrepreneurs and policy-makers who are facing the challenge of family business succession. For the family business founders, there is a string of urgent challenges waiting for them to resolve: what should they do to increase their successors’ aspiration for business succession, complete the succession process smoothly, and evoke their successors’ strong commitment to the businesses? Observation and analysis around these questions are included in this research. As family businesses are an important part of the private economy, their smooth succession also carries special significance for the government. In recent years, local governments attach increasing importance to the nurturing of “rich kids”. Relevant trainings are carried out in the form of programmes at party schools and work opportunities in state-owned enterprises. These are all positive attempts to facilitate the process of business succession, and evoke extensive discussions in society. It is expected that the key findings of this research will serve as a reference for the government to facilitate the family business succession.

• Firstly, the family business succession will continue to face considerable challenges in the next decade, as the huge background differences between the first and second generations can result in a yawning gap in many areas. Relatively younger founders with higher education experience are more inclined to consider professional managers as their successors. The biggest challenge for family businesses in transitioning into a corporate family by exercising professional management lies in how to select and groom eligible professional managers and how to select the CEO capable of carrying forward the corporate values. This will be a major research focus.

• It is an understandable fact that family business owners wish to leave their family wealth to their children. The succession of business ownership and the succession of business management represent two types of succession. The second generation can be groomed as a general manager or as a shareholder and board member. The family business will need to establish a family committee to draw up an internal selection and grooming mechanism from a long-term perspective. Business schools or the government will need to offer more programs to help the second generation to better position themselves.

• While making a demand on the second generation, the first-generation entrepreneur will need to make self-examination: Has his frequent neglect of the family led to the second generation’s lack of a sense of family responsibility and reluctance to take over the business? Has he exerted too much authority, without recognizing the second generation’s capability for business succession? Has his failure to put the company back on the track of standardized management discouraged the second generation from demonstrating their talents? The second generation’s mindset and behavior has long been a mirror of the values and workings style of the first generation. When the business succession meets roadblocks, the first generation will need to search their heart to explore the root cause of the succession obstacles.

• For both business succession and equity succession, the family values and family harmony are the DNA for an enduring family business. The family culture serves as a cornerstone for a family business. The unimproved family culture is a hidden threat to the family business. Therefore, the family business owner will need to commit himself to improving the family relationships and advocating sound family values. The family spirit, family constitution and family governance will require special attention for the family business. External consultants can be engaged to help family members to understand their roles and behavior styles. It is especially necessary for the family business owner/founder to have a proper understanding of his/her role as the leader, and how his/her behavior will affect the relay generation’s aspiration for succession and commitment to the organization. The consultants can also help the family business to better develop its family charter, and promote the communication of family culture among family members.