Family business owners should allocate resources to formalise their evaluation processes for candidates from outside their family to secure its long-term future, research reveals.
A paper from the Warwick Business School (WBS) in the UK found that 70 per cent of family-owned businesses fail after the first generation primarily due to poor succession decisions.
WBS associate professor of strategy and behavioural science, Chengwei Liu, said many family business owners opt for who they know, rather than taking a risk on an unknown person to take the reins of their business, despite evidence indicating they may be better off looking beyond their children.
“One common characteristic of leaders’ succession decisions in family businesses is that they tend to assign offspring as their heir, a form of nepotism,” Liu said. “Nepotism in family business succession tends to lead to decline or even bankruptcy.
“In our research, we argue even when a leader can overcome individual decision biases, a bias from their strong ties with family can still allow a leader to wrongly conclude family members are better qualified than external candidates, when often the opposite is true.”
Liu’s research colleague, Nick Chater, said that evidence showed business leaders were inclined to believe family members were better qualified candidates than people from outside their clan.
“Information from strong ties makes family members less likely to be underestimated than their external counterpart,” Chater said.
“Strong ties have advantages, but tend to be weak in terms of accessing information on candidates outside the family.
“Re-arranging organisations to facilitate updating their records on how external candidates who failed to get the job are getting on in their career can in turn help avoid the weakness of strong ties.”
