The CEO succession has taken place: A successor was appointed, and the predecessor has moved on to the board. Is the way clear for the successor to introduce innovation? A recent study by Prof. Dr. Miriam Bird, professor for Entrepreneurship and Family Enterprise at the TUM School of Management, TUM Campus Heilbronn, and her co-authors (Prof. Dr. Nadine Kammerlander, Dr. Stephanie Querbach and Jun.-Prof. Priscilla Kraft from the WHU – Otto Beisheim School of Management) shows this is often not the case. Why?
For small and medium-sized family firms with up to 250 employees, innovation is of utmost importance: Innovation has been considered crucial for firms’ long-term success and for remaining competitive. Company succession is often regarded as an opportunity for firm renewal and innovation. The successor has the potential to bring new impulses and knowledge into the company, often has new ideas, and a different risk behavior than the predecessor. However, existing literature so far has neglected the influence of the previous CEO on the innovation behavior of the company post-succession. What role does the board retention of the former CEO play for innovation introduced post-succession? This is the key question of the study
“When the Former CEO Stays on Board: The Role of the Predecessor’s Board Retention for Product Innovation in Family Firms”, in which the authors examined more than 200 small and medium-sized family firms in Switzerland.
Mentor or Obstacle?
Often the former CEO is regarded as a mentor who can pass on his knowledge and experience to the successor and thus support him in introducing new products and services. But is that really the case? The present study shows: No, on the contrary; if the former CEO continues to remain involved in the company as a board member, this will have a negative effect on the company’s innovation post-succession. On average, the former CEO remains on the board for eleven months after the succession has taken place. If he remains for additional 11.5 months on the board, the innovation of the company declines by 25.9 percent.
The reason for this finding is that the predecessor has a tendency to stick to the status quo and is unwilling to accept change. If the predecessor continues to serve on the board, the successor is severely restrained in his managerial discretion. This negative influence is reinforced in case the former CEO chooses his successor himself. The study shows if the managing director is solely responsible for selecting his successor and remains on the board of directors 11.5 months longer than the average, the company’s innovation drops by 60.8 percent. One possible explanation for this is that individuals tend to select people as successors who are similar to themselves and therefore are likely to maintain the status quo within the company.
Trust Creates Leeway
The study also examines whether the CEO succession takes place within the family versus outside the family. In the case of succession within the family, the negative influence of predecessor’s board retention on innovation is significantly reduced. Here, trust plays an important role; most CEOs trust their own family more than outsiders and thus grant the family-internal successor more freedom with regard to introducing innovation to the company.
Restraining the Influence of the Old CEO
The following practical implications for small medium-sized family firms can be derived: family businesses should be aware that the former CEO, in case he continues remain on the board can be a hindrance for the predecessor in introducing new products and services. This why it is important to grant the predecessor managerial discretion and to clearly define the tasks of the predecessor. Family businesses should also avoid a situation, in which the predecessor appoints his successor on his own and should introduce governance mechanisms to ensure that a suitable, innovative successor is found.
In the case of family-internal succession, the previous CEO grants the successor more decision-making freedom. However, succession by a family member is not always an option. It is therefore important to create trust between the predecessor and the successor – and to reduce the influence of the predecessor, especially in the case of family-external succession.
Prof. Dr. Miriam Bird
holds the professorship for Entrepreneurship and Family Enterprise at the TUM School of Management, TUM Campus Heilbronn. As director, she is also leading the Global Center for Family Enterprise
(GCFE). In her research, Miriam Bird focuses on topics such as company succession, innovation and strategy in family firms. In particular, she is interested in understanding better the social context enterprises are embedded in.