The Relevance of Game Theory to Succession in Family Firms (Part I)

In the article “Game Theory and Family Business Succession: an Introduction” by Timothy Mathews, Tim Blumentritt and Gaia Marchiso in the March 2013 issue of the journal Family Business Review, game theory is introduced as a framework through which to examine succession as a series of decisions about a family firm’s leadership, for the purpose of better-understanding the outcomes of succession events. Despite the complicated use of mathematical equations inherent in this theory, the authors make a strong case for the relevance of game theory and its effective application to succession.

Experts in the field of family business widely agree that succession is the single-most-often cited challenge or hurdle for family businesses, and that many studies have been conducted in an effort to understand succession and help to alleviate its ensuing problems. However, in all of the studies to date on succession and its related factors, none have “explor[ed] specific decision-making processes involved in the succession process,” especially in the “presence of conflict or indecision,” which is the basis of reasoning for this unique application of game theory to the process of succession.

Using game theory as a tool to analyze interactions between two or more ‘players,’ or ‘actors,’ the authors argue that the application of game theory could create potential for a significant step forward in the study of family business succession and “allows for a more sophisticated and insightful analysis since the decisions … [are analyzed] as interdependent choices.” Furthermore, it creates an opportunity to test these models empirically, which would also be a significant step forward in the study of succession.

The authors explain the basic tenets of game theory in the first half of the paper, and then apply it to basic succession events in the second half. The introduction to game theory and the examples of the application of game theory operate on several assumptions, including the assumption that the family wishes to retain family control of the firm; which, as professional advisors know, is not necessarily or always the case, but which is a necessary hypothesis in order to explain the application of the theory to the process of succession.

While informative, the first half of the paper on the introduction to game theory itself is only interesting in relation to family business because of its proposed effectiveness when applied to the complex family dynamic: “[t]he power of game theory rests in its ability to analyze situations in which the choices and actions of multiple players are interactive and mutually dependent: The outcomes experienced by one actor are influenced by the choices made by the other actor(s) in the game.”

Written by Jennifer Halyk for IFEA

Part II will appear next week.

Article Citation:

Tim Blumentritt, Timothy Mathews, and Gaia Marchisio

“Game Theory and Family Business Succession: An Introduction.”

Family Business Review March 2013 26: 51-67, first published on October 4, 2012 doi:10.1177/0894486512447811

Read More

HBR Study Identifies Key Factors for Successful CEO Transition

The article “Leadership Lessons from Great Family Businesses” published in the Harvard Business Review provides several practical suggestions for increasing the chances of a successful CEO transition process for family enterprises. 

By analyzing 50 globally leading family firms with annual revenue above 500 million pounds and investigating the reasons behind their success, authors Fernández-Aráoz, Iqbal and Ritter explain that strong governance; a family focus; an openness to family and non-family members; and a structured, methodical approach to the succession process significantly affects the overall chance of success in the process of generational transition. 

The authors describe these factors as follows: 

·      a governance baseline

·      “family gravity” (a family member as the center of influence)

·      future leaders with aligned values

·      a disciplined CEO succession plan 

Firstly, the authors identify governance as the baseline from which to attract and manage both internal and external talent. They found that nonfamily executives had concerns related to governance before joining a family firm because of the likelihood that the family would influence the business as oppose d to being professionally-run. Pointing out that very few companies in their study operated without eith er a supervisory or advisory board, and in many cases where there was a board, a “clear separation” between family and business representation existed. 

Secondly, the authors use the term “family gravity” to describe a family-centeredness or unique family focus which includes at least one family member, an d as many as three, as a center of influence which personifies the corporate identity, aligns various interests and maintains a common vision. (This term is sometimes also called “familiness” in other context s.)

Thirdly, the authors identify the skill and rigorousness with which the family seeks and finds future leaders as another key factor in the success of generational transition, and argue that both family an d nonfamily talent must be assessed on competencies, potential and values, with a particular emphasis on values. In the study, company ethos was often described by both family members and nonfamily executives as respect, integrity, quality, humility , passion, modesty and ambition. Along with 

cultural fit and investment in talent development, these values provide a solid foundation from which to start. 

Lastly, the authors outline a disciplined succession process with which to approach multiple candidates for a CEO appointment proactively and strategically, and display it in a clear and easily understandable three-phase table. Based on the experiences of the best family businesses from their sample, they found that many of the companies followed a hierarchical process when considering candidates, and gave first preference to family, then internal talent, and then finally external executives. While the authors have identified three “nonfamily CEO archetypes,” many experts could argue that it isn’t necessarily accurate to classify “types” in this way, particularly in family enterprise, where firm-specific qualities vary from company to company. However the recommendation is sound, with the contextual knowledge that the archetypes describe leadership qualities which would be most effective in family enterprise environments overall. 

Ultimately, the authors have identified governance; a family focus; leadership values and discipline throughout the CEO succession process as crucially important factors which will positively affect the success of intergenerational transition in otherwise successful family firms. Given that succession is a profoundly complex and challenging process for most , if not all, family firms, these recommendations derived from research on some of the most highly successful enterprising family businesses globally should be taken into consideration. 

https://hbr.org/2015/04/leadership-lessons-from-great-family-businesses

Read More