BLOOD THINNER THAN WATER WHEN TIMES GET TOUGH: UK evidence that Increasing foreign competition pushes family members out of firms
07 Apr 2017
When competition from abroad increases, family firms are more likely to fire family members who are senior managers than managers who are unrelated to the founders. What''s more, they are more likely to replace family managers with managers from outside the family. These are the central findings of a study by Su Wang, to be presented at the Royal Economic Society''s annual conference at the University of Bristol in April 2017.
Analysing data on UK family firms in manufacturing for the period from 2004 to 2014, the research tracks the composition of firm management and how it changed due to increased competition. Competition accounted for almost half of the average family senior manager departures in the period, and the research finds that higher product market competition from foreign markets forces family firms to fire more family senior managers than unrelated managers. Once fired, family senior managers are more likely to be replaced with unrelated managers to the family.
Family businesses in the UK made a £346 billion value-added contribution to GDP in 2011, providing 40% of total private sector employment. While family members who act as managers are likely to be less qualified than outsiders and have less incentive to exert effort during hard times, they are also less likely to fall prey to short-termism in investment. Yet, as the author concludes, ''Competition reduces the private benefit of family control and thus leads to more senior family manager departures.''
From the Santander''s ''swift transition'' to the Samsung ''soft succession'', family businesses have been under the spotlight during their vulnerable transition times. Despite ambiguous comparisons of performances between family and non-family firms, corporate governance, especially the succession plans inside family firms, remains understudied both inside family businesses and in academics.
In particular, when do family firms appoint a family member to important senior managerial positions? And is blood always thicker than water?
My research looks at one specific economic force – competition from foreign markets – and estimates its impact on senior manager turnover decisions inside family firms. Using UK manufacturing family firm managerial information for the period 2004 to 2014, I find that higher product market competition from foreign markets forces the family firms to fire more family senior managers than unrelated managers. Once fired, family senior managers are more likely to be replaced with managers unrelated to the family.
Family businesses in the UK made a £346 billion value-added contribution to GDP in 2011, providing 40% of total private sector employment. While lots of these firms are lacking succession plans, the senior executive manager succession decision is a major and critical challenge in determining firm growth in the long run and survival in difficult times.
Faced with intense product market competition, an unrelated manager has more incentive to exert effort, which reduces the monitoring cost. Unrelated managers with better skills selected from a larger talent pool are more capable than family managers, thus favouring the choice of an unrelated manager.
At the same time, family managers typically have less myopic investment strategies compared with unrelated managers. Furthermore, the good reputation carried on by the founder or the previous family managers, the business relationship built up, and the private benefits of family control add to advantages of passing the firm on into family hands.
My empirical findings show that a one unit increase in foreign competition, which is measured as the exchange rate of the pound against a foreign currency index, leads to 0.207 more family managers leaving the family firm in the subsequent two years. This number accounts for almost half of the average family senior manager departures in my sample period. In contrast, the study shows that unrelated senior managers are less likely to be fired during these hard times.
To understand better what happens after senior managers leave the firm, I then decompose the results into the outcomes of family manager departures and unrelated manager departures. I find that a one unit increase in import penetration leads to 0.206 more family managers leaving the firm without any further replacement in their positions.
Among those who are replaced, there is a decrease of 0.006 of family-to-family transitions on average, indicating that intense competition results in a decrease in family successions. But I find a 0.05 increase in the number of unrelated manager replacing unrelated departing managers.
These results suggest that competition reduces the private benefits of family control and thus leads to more senior family manager departures. The fact that these departing family managers are not replaced – and that even when there is a replacement, we see a drop of family succession – tells us that some family senior manager positions are redundant and family managers are less qualified before the competition shock.
Is blood really thicker than water? The answer is perhaps No when there is a fierce outside competition.
''Manager turnover and product market competition: evidence from UK family firms'' - Su Wang
http://www.lse.ac.uk/finance/research/financePhdProfiles/SuWang.aspx | Department of Finance London School of Economics and Political Science | S.Wang50@lse.ac.uk