Conflicts Happened During Family Firm Succession – Good or Bad to Share Price?

Introduction

Recently, family business research becomes a popular topic among the scholars around the world. Still, the field of family business research as a research topic is young as compared with other fields like strategic management and finance (Siebels and zu Knyphausen-Aufseß 2012). Only a small number of researcher put emphasis on family businesses before 1980s (Heck et al 2008). As time flies, more and more publications were released. Siebels This figure shows that the research on family business is still growing and there is still large room for future development.

There are two main reasons for the growing interest on the research of family businesses. Firstly, it is due to the high participation of family businesses in the world market. Family businesses are increasingly playing an important role in the world economies. According to Astrachan and Shanker (2003), family firms contributed 64% of GDP and employed 62% of the workforce in the United States. Other researchers like Morck and Yeung (2004) and Neubauer et al (1998) also got the similar findings that family businesses was an important part of the US economies. Not only US, other parts of the world also found to have similar situation, for example, the UK (Institute for Family Businesses 2008; Westhead et al 1997), Spain (Jaskiewicz et al 2005), Germany (Haunschild 2010, Institut fur Mittelstandsforschung 2007, Faccio and Lang 2002, Klein 2000). This situation appears in the East Asia countries as well like Japan (Bennedsen et al 2014), Hong Kong (Leung, Srinidhi & Lobo 2012), Taiwan, and Singapore. According to the investment house Credit Suisse, the family firms account for nearly 50% of the Asia’s public listed companies and one-third of the region’s stock market value. From the above literature, it is shown that family firms are important to the world market and therefore it deserves an increasing focus on this topic.

Some of family firms are very famous business titans, for example, the Lee family of electronics giant Samsung in South Korea, the Wang family of Formosa Plastics in Taiwan, the Li Family of Cheung Kong Group in Hong Kong.

Further, knowing the significance of influence of family firms in the world, researchers has started to put more focus to look into this area. It is observed that the family firms are very different from the non-family firms.

Among all those topics of family businesses, “succession of family firm” becomes a hot topic in recent years (Astrachan 2010, Handler 1994, Le Breston Miller, 2004, Miller & Steier 2004, Wrigth & Kellermanns 2011). Bennedsen (2010) defined that “family succession” is that the founder of the family firm passes the ownership and control of the business to a family members. The reason why family succession appears so often is that many founders of business firms started their business after World War II. In the past two decades, those founders of the family businesses were becoming old and they wanted to pass their business to the next generation. Regarding the process of family succession, a lot of topics deserve attentions, for example, choice of family member successor or non-family member successor (Bennedsen, Nielsen, Perez Gonzalez & Wolfenzon 2006, Burkart, Panunzi & Shleifer 2003) or intra family succession succession process (Churchill & Hatten 1987, Handler 1990 1994, Lamrecht 2005, Labsberg 1988).

Some researchers are interested in the time of survival after a family succession. And more interestingly, a mere 30% of family firms are said to survive past the first generation (Beckhard and Dyer 1983; Dyer 1986), with only 10% to 15% surviving to a third generation (Applegate 1994). In addition, there is also a famous traditional Chinese saying “. Both the western scholars and Chinese old thinking are consistent.

People always says “Human are greedy for money”. Even family members have a share in their business; they always want to have more. Therefore, conflicts during succession easily arise.

Recently, there is a substantial increase in the family conflicts related to family succession in court in Hong Kong. Some famous cases are for example, Kam’s brothers in Yung Kee’s case, Stanley Ho Hung Sun’s family fight over for Stanley’s US$ 3.2 billion estate… In the following, we provide you two of the famous cases in Hong Kong.

In Yung Kee’s (one of the famous private company which operate restaurant in Hong Kong) case, which took place in 2010, Kam Kinsen, the elder brother, petitioned the court to have Yung Kee which was a private company wound up unless Ronald, the younger brother, bought his 45% ownership or Ronald sold his 55% shares to him. The court heard that Kam Kinsen was unfairly removed the power and control of the Yung Kee, after Ronald gained a majority 55% ownership. And later on, Ronald arranged his own son as a director of the company. To let the family business continue to move ahead, Kinsen applied to the court for an order that his younger brother bought his shares, or he bought Ronald’s shares. Kinsen also claimed that in circumstances where he had been in a ‘quasi-partnership’ with his younger brother, his shares should be sold for full value. The hearing was concluded in October, 2012, 27 days after Kinsen unexpectedly died of illness (BusinessWeek 2012).

Another famous case is about Stanley Ho’s gambling empire. After announcing the succession plan for the first time to the public, he sued five of his children and two of the women he calls “wives” in January 2011 over a $1.6 billion stake in Asia’s biggest casino company, SJM Holdings Ltd. Stanley claimed that it was a robbery and alleging that those children and wives transferred his share to themselves without his consent. After going into the court for two months, one of the wives said that family members had agreed on “balanced participation” in the business. Then the soap drama ended with shares prices fell by seven percent.

The consequences of family conflicts can be very serious. It may lead to the behaviour destructive to both the firm and the family (Davis & Harveston 2001). Academics like Beckhard and Dyer (1983) suggest that the failure to adequately control conflict may contribute to the high mortality rate of family businesses.

Previously, there were studies relating the conflicts in family businesses. In Davis & Harveston (2001), it suggested that there was a relationship between conflict in a family business and the composition of the family’s work group, non-work group and the extensiveness of the family’s social interaction. Their results for the relationship between conflict and family influence differed according to the generation of the family business supports the presence of moderating influence from generations.

Generally, we can think of when the conflict is taken place, the share price will drop. As with the result of Fan (2012), the share price drops during succession. Therefore, this study is used to examine the relationship between the share prices and the conflict during succession. It is proposed that the share price drop even more than the conflict is taken place during succession.

Literature Review and Hypothesis Development

Family Businesses

Family businesses are unique institutions in the world. No matter how large or small in the size, they are characterized by having the founder or a family member as president or chief executive officer, founder’s family members employed by the company and managers defining their firm as a family business (Holland and Boulton 1984).

According Zhu, Chen, Li and Zhou (2013), a family business is one which has been identified closely with not less than two generations of a family and the link identified mutually affects the interests and goals of the family and the policy of the company. Siebels and zu Knyphausen-Aufseß (2012) on the other hand, defines a family business as a partnership, proprietorship or corporation or any type of business relationship whereby the control of voting lies within a specific family. These definitions communicate the unique attributes that distinguish family of non-family businesses. The attributes include: the family’s influence on the decision making of the firm; a specific family has controlling ownership (Chu, 2011); and members of the controlling block are bound by family ties (Achleitner, Herman, Lerner and Lutz, 2010).

According to the IfM, it defines family firms as businesses in which a maximum of two families hold at least 50% of all the shares and at least one shareholder serves as an executive or a maximum or three families hold at least 50% of all shares and no family member serves an executive.

According to Bennedsen, Fan, Jian and Yeh (2015), they proposed a new approach to define family firms. As times goes on, the structure of family businesses changes. From the very beginning, the firm is owned and managed by the founder. However, as the firm has grown, the founder passed part of the ownership and decision rights to other family members or even outsiders. They developed a new model resulting in four types of firms. Among the four classifications, they concluded that the first three types are family firms while professionally managed firms are not. Below is a table summarizing the characteristics of the four types of firms.

Name Characteristics
Closely held family firms Majority owners and managers are all family members
Delegated family firms Ownership rights are majority owned by family members but the decision rights has transferred to non-family members
Family driven, diffusely held companies Ownership is diffusely held by the public; family members only hold minority amount of shares, but they continue to manage the business
Professionally managed, diffusely held public companies Founding families have left the businesses they started

Since there are different definitions for family firms, I would like to adopt the model established by Bennedsen, Fan, Jian and Yeh (2015). No doubt that it is well understood that family firms were set up by a founder with majority ownership interest held and decision making power, however, as time changes, the structure of family business changes. The original definition is so narrow that it cannot capture the view of family businesses. Therefore, I would like to adopt the new model proposed by Bennedsen, Fan, Jian and Yeh (2015) so that I can include different types of family businesses for analysis.

It is hoped that this broader definition of family firms can help to include more firms as the sample so that the results can be more representative. To find out which company is classified as family firm, annual reports of all the listed companies within a stock exchange should be manually checked. Judgments and assumptions should be made when the cases are unclear.

Family Succession

Bennedsen, Fan, Jian and Yeh (2015) defined succession when the entrepreneur stepped down from the top management and executive position and passed the ownership and decision making power to another family member or an unrelated external professional. In Fan, Wong and Zhang (2012), this study defined the succession as the time when the chairman of family firm was replaced by another family member or unrelated external professional. This study focus on the Asian family business with a characteristic that chairman was usually the key decision maker. On the contrary, this is not the case in the western countries. Quite a number of the studies focus on the CEO succession, therefore, they regard the transfer of the CEO position to the heirs as the family succession (Gomulya & Boeker 2014, Meier & Schier 2014, Minichilli, Nordqvist, Corbetta & Amore 2014).

For my study, I want to have a broader insight of the family succession. Either looking at chairman succession or CEO succession will lead to a narrower scope. Therefore, I will define family succession as the step down of top management (including both chairman and CEO) and the successor come to power. In addition, I understand that family succession not only refer to the transfer of decision making role in the company but also refer to the transfer to actual ownership to the heirs. I want to include both types of succession for my analysis.

To identify the cases of family succession, the annual reports of the family firms should be manually checked through if there are any changes in the CEO and chairman. Then, judgment and objective evidence should be obtained from the newspaper, magazines and websites to confirm whether it is a family succession under the scope of this paper.

Theory of Family Firm Value Creation

Previous literature has heavily relied upon the theory of family firm value creation to help in determining whether family firms have a higher competitive advantage over the other types of business (Carney, 2005; Chirico, Ireland & Sirmon, 2011), and whether family ownership can destroy or create value for a firm (Grönroos & Voima, 2013; Kammerlander et al. 2015). In their study, Miller, Breton-Miller & Lester (2013) found that family firms have competitive advantages such as social capital and patient capital over their family ownership structure and idiosyncratic goals that give them higher financial performance.

The theoretical model categorizes the fundamental elements that either facilitate or restrict value creation in family creation into three categories, namely: goals, governance, and resources of the family business as influenced by the owners. The goals of the family firms are considered as one of the core elements that have a substantial impact on the organizational behaviour and value creation (Kammerlander et al. 2015). Studies show that family firm owners integrate their idiosyncratic priorities and goals, which could be beneficial or detrimental to the firm performance, based on their effectiveness. Current literature shows that family firms’ owners use their socio-emotional endowments to pursue specific, non-financial-related goals such as technological innovation and environmental performance, which could be instrumental in enhancing the firm’s value creation (Kammerlander et al. 2015).

The resources, or rather, the firm’s capabilities, are also considered as major elements that facilitate value creation in family firms. According to Chirico et al. (2011), ‘familiness’ creates a competitive advantage for family firms over the other types of firms, due to the distinctive beneficial attributes of family-specific human capital, social capital and, or, reputational capital that are only available to family firms. On the other hand, the lack of these capabilities and resources, such as financial instability or scarcity, could have a crippling effect on the firm value creation, as it limits the organization from undertaking major value addition investments such as new technologies (Chirico & Nordqvist, 2010; Lindow, Stubner & Wulf, 2010).

Finally, the organizational governance structures play a major role in determining the value creation in family firms. According to Carney (2005), family firms’ owners have a high influence on the governance structures and executive powers of members, which affects the effectiveness of the organizational management and performance. Additionally, the monitoring schemes, remuneration programs, and incentives in family firms play a major role in the principal-agency relationship, as they determine whether the managers pursue their own interests or those of the organization (Sharma & Carney, 2012). Previous studies show that family firms have idiosyncratic compensation mechanisms and contracts, less hierarchical levels and varied agency problems as compared to other types of firms, which are detrimental to their value creation (Colli, 2011; Kammerlander et al. 2015). While the goals and resources of family firms create competitive advantage and facilitate for value creation for these types of firms, their governance structures create a leeway for agency problems that could be detrimental to value creation and firm performance.

The Social Performance of Family Firms

Both the instrumental stakeholder theory and resource dependence theory regard social performance as a fundamental tool for attaining valuable resources and goodwill for family firms (Chrisman et al. 2013; McGruire, Dow & Ibrahim, 2012; Silva & Majluf, 2008). Similarly, the proponents of the social responsibility argument also agree with this argument, arguing that social performance enhances the reputation, socio-emotional wealth, and prestige of family firms (Berrone et al. 2010; Dyer & Whetten, 2006). However, Berrone et al. (2010) argue that sometimes, family firms may portray family-centered or altruistic motives that prioritize the interests of the families over those of the other stakeholders, which may have a negative influence on their social performance. In their study, McGruire et al. (2012) found that social performance has a significant influence on the governance procedures and policies of family firms, especially on aspects of accountability and reducing agency problems. Supporting this argument, Chrisman et al. (2013) found that firms with strong corporate governance have greater accountability unlike those with weak corporate governance mechanisms that hold the management less accountable, giving them an opportunity to further their personal interests rather than those of the stakeholders.

Family firms are defined the family control and involvement in the business running and key organizational decision-making such as succession decisions among others (McGruire et al. 2012). While social ties are very important in maintaining the family ties, social performance plays a major role in creating a link between the family firms’ owners and other external stakeholders, allowing the firm to gain the needed support from its key stakeholders as well as building the external social capital (Silva & Majluf, 2008). Therefore, firms with strong family ties and control have a strong bond with both their external and internal stakeholders.

Given the significance of strong family ties in maintaining positive and proactive social performance, aspects of succession are pertinent in family firms. Family conflicts during successions could have a negative effect on the social performance of family ties, and could weaken the bond between the firm’s owners and its external stakeholders (Sharma & Carney, 2012). As a result, family firms should avoid poor or negative social actions such as conflicts during succession, which could help build the business prestige, socio-motional wealth, and reputation. Dyer & Whetten (2006) also argued that strong family ties are valuable in strengthening stakeholder commitment, building human capital, and enhancing firm-specific knowledge, which has a direct positive impact on the firm performance. Conversely, firms with weak family ties and negative social actions may not secure the needed stakeholder commitment, which can adversely affect their firm performance. Therefore, it is important for family firms to avoid negative social actions such as family conflicts during succession for enhanced social performance and overall firm performance, which has a positive effect on the share price.

Corporate governance and social performance

Scholars have developed theories to examine firm family ownership, governance and the performance in markets. McGuire, Dow & Ibrahim (2012) apply the resource dependence and instrumental stakeholder theory to determine the social performance of firms, as a means of performance through goodwill of the family owners. The study is similar to that of Niehm, Swinney & Miller (2008) which emphasized on the use of the theory to determine the reputation of firms and congruence of family and business. This theory uses family firm and corporate governance variables to define the role that multiple players with an equal amount of share play in guiding revenue generation, and hence, share price of the firms. Moreover, social performance measures are applied in context, with a multidimensional approach of determining family firm performance.

Moreover, McGuire et al. (2012) discuss the application of the agency theory perspective in determining the performance of family owned firms in the market. Using this theory, McGuire (2012) says that scholars can also look at the relationship between corporate governance and outside scrutiny. This is particularly when there is need to evaluate the pressures that work in a tightly controlled family firm. According to De Massis, Frattini & Litchenthaler (2012), in tightly controlled family firms, there is risk of the share price suffering because of socially risky behaviors. From an institutional perspective, McGuire et al. (2012) say that traditional family controlled families can signal their commitment to financial performance and wealth creation. This statement is backed by Peng & Jiang’s (2010) study, which indicates that from the perspective of the institutional theory, family owned firms can control the excesses of individuals by engaging in more aggressive and less risky social strategies.

One of the main aspects of share price performance is salience in family firms. According to Mitchell et al. (2011), stakeholder salience is the “degree to which managers give priority to competing stakeholder claims”. Applying the stakeholder salience theory, Mitchell et al. (2011) consider the business system and the family system, which are the two main variables that are used in investigating the stakeholder salience setting. Neville, Bell & Whitwell (2011) similarly discuss the stakeholder salience theory from a similar perspective. The concept is applied to determine two aspects of family firm running, which are the basis for the development of the family firm theory and business integration in the modern market.

Mitchell et al. (2011) support the application of the concept of stakeholder salience in family firms for three main reasons. The first reason is that the theory enables economists to investigate power, legitimacy and urgency. Similar remarks are given in the study by Kotler & De Massis (2013). Secondly, the theory helps scholars to determine the difference in behavior among family and nonfamily owned business, which therefore, sets the basis of understanding the forms of organizational management that are applied in modern firms. Thirdly, given the unique set of challenges that family businesses face, the theory can be applied in prioritizing stakeholder needs (Michell et al., 2011; Gomez-Mejja et al., 2011). In general, the concept of stakeholder salience in family firms enables scholars to understand dynamics of performance and control.

One of the areas that business theorists address is complexity and conflict in firms, especially those that are family owned. In this perspective, identity theorists have looked at the matter from the perspective of dual-identity organization (Tyker, 2014). These have the power of influencing the manner in which family-owned firms respond to market dynamics such as demands and logistics, hence impacting their market performance. The theory is similar to the framework discussed by Von Nordenflycht (2010) which looks that hybrid identities and their influences on organizational activities. Tompkins’ (2010) paper draws upon the implications of the institutional theory (Yuan, 2010) and the organizational identity theory (Bitektine, 2011), which have equally been applied to determine the negative impact of family firm succession. Using these theoretical foundations, the authors contend that hybrid organizations are likely to experience conflicts among the stakeholders, ethical conflicts and cognitive complexity (Mitchell et al., 2011; Tompkins, 2010; Albert & Whetten, 1985; Thiel et al., 2012).

Family Succession and Investors’ Return

Previous literature by Fan (2012) reveals that there exists a sharp decline of the stock value of the 250 companies controlled by Chinese families in Hong Kong, Taiwan and Singapore when undergoing successions from 60 months before the succession date and 50 months after the succession date. Bennedsen, Fan, Jian and Yeh (2015) found that the succession in 217 Chinese family firms showed a result of dissipation of firm value at almost 60% after the event. Smith and Amoako-Adu (1999) found that when the family successions are taken place, the average stock price of Canadian family firms drop by 3.2%. These three studies show a consistent results.

So far as I know there are no studies analysing the same problem for the whole world’s family firms, therefore, I would like to propose my first hypothesis as follow. The study will examine the samples of family succession cases in the well-developed Asian, American, African, European and Oceanian countries. This can help study if there is any difference between family firms in different continents and different countries.

Hypothesis 1: The investors’ return on a family business in the world drop when the succession is taken place

Furthermore, I would like to investigate the effect of family successors and nonfamily successors to the return after succession. Generally, nonfamily professional should have good experience in managing the company as compared to family successors. Therefore, they can help to maintain the family firms’ firm value. However, according to Smith and Amoako-Adu (1999), Morck, Stangeland & Yeung (2000), and Gonzalez (2001, 2002), they got the result there is no strong indication that a family successor would lead to greater drop in the investors’ return as compared to non-family successor. This time, I would also like to test this.

Hypothesis 2: Compared with nonfamily successors, family successors are more likely to lead to a greater drop in the investors’ return on the businesses.

To ascertain whether the decrease of investors’ return is due to the succession event itself or the general environment, the daily return of the family businesses is compared with the market return which is calculated by the change of the Index of the relevant stock exchange. Then, abnormal return of each day can be obtained by subtracting the market return from the firm’s return. The next step is to calculate the cumulative abnormal return for different family firms. By using the average cumulative abnormal return at each day interval, it is hoped to see that there is a sharp decrease in the investors’ return during the period the succession happens. And to investigate which time intervals the investors suffer the most, we set up different event windows for the cumulative abnormal return.

Abnormal return before and after conflict

We collect the shares prices of the listed family businesses 60 months before and 60 months after the succession take place. Then, we can calculate the daily return for the company by using the following formula. The adjusted closing share prices are obtained from the Yahoo Finance and Bloomberg databases and used. Next, we arrange the figures in the time series like from -10 (10 days before the conflict) to 10 (10 days after the conflict). We have to pay attention that the days we are referring exclude the public holidays and non-transaction day.

The change in the daily return of the company may be as a result of many different factors. The most important one will be the market performance. So we have to exclude the market’s ups and downs. The market return of the time series for the same time period is calculated by using the relevant Index. Adjusted closing Index is used for the calculation. Again, the public holidays and non-transaction days are excluded. And then we subtract the market return from the daily return of the company to arrive at the abnormal return.

The cumulative abnormal return is obtained in the next step. It is calculated by adding all the abnormal returns for different event window we are studying. Average for those cumulative abnormal returns should be calculated for each time interval.

Conflict Perspective in Family Firms During Succession

There are numerous definitions of conflict in literature and all of them basically have varied collections of explanatory variables. These make the term rather ambiguous. Achleitner, Herman, Lerner and Lutz (2010) define conflict as an interactive state that manifests itself in differences, incompatibility, or differences between or within persons or groups (Juyoung and Danes, 2013). Kelly, et al (2008) on the other hand, defines conflict through its fundamental nature as a form of resistance over values as well as claims meant to scare power, status and resources whereby the goals of the opponents are geared towards neutralizing, eliminating or injuring their rivals. The definition given by

Even though conflicts occur in every organization, conflicts in family firms are more complex because of the familial ties between members, which tend to make conflicts escalate quickly and shift easily to personal levels (Frank et al. 2011; Kellermanns & Eddleston, 2007; Von Schlippe & Frank, 2013). According to Haag (2012), succession is the most strategic process and also one of the most complicated and main source of conflict in family firms. Successions means a shift in power, and conflicts during family business succession arise due to inherent aspects of power, control, and competition. This can be seen through the cases of succession as mentioned in the introduction section. Further, succession conflicts can easily go to high levels, especially where there is no mutual understanding amongst members. Consequently, this study uses the conflict theory to develop a theoretical model for analyzing how relationship, process, and task-related conflicts in family firms influence the share price. Therefore, the conflict theory provides an insight into why and how family firms are more vulnerable to conflicts than any other form of businesses.

Generally, people have a perception that conflicts must be bad to a firm in turn of the share price and operating performance. However, researchers found that it is not the case. Previous studies analyzing conflict in family firms have categorized it into three types: task conflict, process conflict, and relationship conflict (Dyer, 2006; Kellermann & Eddleston, 2004). The conflict theory looks at the relationship conflict as the incompatibilities arising from the affective aspects characterized by feelings of friction, tension, interpersonal irreconcilables, and perceptions of frustration, irritation and annoyance amongst parties (Weiss, 2013). Process and task conflicts been linked to positive results in the firm’s performance (Siebels and zu Knyphausen-Aufseß, 2012) while relationship conflict has a devastating effect on the performance of the firm (Zhu, Chen, Li and Zhou, 2013).

Frank et al. (2011) defined relationship conflict as overt or latent and has the potential to interfere with efforts to work. The relationship conflict occurs mostly among family businesses because of family ties and its elements include anger, annoyance, worry, frustration, irritation and resentment at others (Miller, Minichilli and Corbetta, 2013). The occurrence of relationship conflict can be because of lack of mechanisms of conflict handling, the dominant presence of a family in the firm, the failure to align the interests of the business and the family and disagreements regarding succession and equity (Chu, 2011). Kellermann & Eddleston (2007) added that relationship conflict can reduce mutual understanding and good will amongst parties, which can lead to incomplete organizational processes and tasks. Therefore, relationship conflict has a bigger impact on family firms that are highly interdependent than in firms where members are less dependent on each other.

The task conflict was defined as the diverging perceptions amongst parties on which end tasks should be carried out or performed (Kellermanns & Eddleston, 2004). Unlike relationship conflict tha