Understanding Interpersonal Trust Between Family Business Successor and Family Firm

Introduction:

It is necessary therefore, to ask whether continuity and succession are necessarily the main, or the only criteria of family business success. Kaye (1996) argued that outstanding financial performance and longevity were not the only criteria for family business success and listed the following additional criteria: both generations felt that the younger generation had made significant contributions to the business; they either passed the baton or made a good decision to sell the business, in which case they worked together to maximize its value; the process of getting there was personally rewarding for them, individually as well as collectively; there were no serious personal casualties along the way (p. 336). Succession in a family firm is not a straightforward process, even for a CEO who is approaching the age of retirement and has clearly stated his will to pass the baton. Difficulties inherent to this process can be all the more pronounced when the company is a small-sized family firm (as in the majority of cases) and when its profitability is strongly associated with the CEO’s personality. While succession is one of the major topics in family business research (Astrachan, 2010; Handler, 1994; Le Breton-Miller, Miller, & Steier, 2004; Wrigth & Kellermanns, 2011), most of these studies address the intra-family succession process (Churchill & Hatten,1987; Handler, 1990, 1994; Lambrecht,2005; Lansberg, 1988; Le Breton-Miller et al., 2004; Sharma, Chua, & Chrisman, 2000; Ward, 1987) or the choice between a family or a non-family successor (Bennedsen, Nielsen, Perez-Gonzalez, & Wolfenzon, 2006; Burkart, Panunzi, & Shleifer, 2003). These studies are mainly carried out from the point of view of the incumbent. Research on family business succession typically depicts the complexity of the rare occurrence in entrepreneurial families in which a family successor assumes the top management position in a family firm (Gersick, Lansberg, Desjardins, & Dunn, 1999). This is understood as a chronology that involves multiple stages—beginning with the pre-succession stage, proceeding to the successor’s incremental early introduction into the family firm until full-time employment, continuing with the continuous gain of authority and concluding with the incumbent’s complete transfer of the executive position to the offspring (e.g., Cadieux, Lorrain, & Hugron, 2002; Cater & Justis, 2009; Churchill & Hatten, 1987; Handler, 1990; Keating & Little, 1997; Le Breton- Miller, Miller, & Steier, 2004; McGivern, 1978). In analyzing these processes, the literature focuses on the peculiarities of family firms that are likely to affect the recruitment and selection of a suitable family successor, such as shared familial values, objectives, culture, commitment and loyalty to the firm (Cabrera-Sua´ rez, De Saa´ – Pe´ rez, & Garcı´a-Almeida, 2001; Kets de Vries, 1993; Lansberg & Astrachan, 1994), emotions (Howorth & Ali, 2001; Lansberg, 1988), family ties (Miller, Steier, & Le Breton-Miller, 2003; Pe´ rez- Gonza´ lez, 2006), nepotism (Kets de Vries, 1993; Pe´rez-Gonza´ lez, 2006) and the limited pool of candidates (Bennedsen, Nielsen, Pe´rez-Gonza´ lez, & Wolfenzon, 2007; Dyer, 2006; Pe´rez-Gonza´ lez, 2006). However, these contributions have only superficially addressed the question of how a family successor is actually recruited and selected. As Keating and Little (1997, p. 159) ascertain, ‘‘there is a need for a better understanding of what the important factors are in choosing a family successor. We also lack a clear understanding of the process by which the potential successor is chosen.’’

Family Businesses and leadership

Even though there is no consensus on the definition of a family enterprise, we can find some parallels between many of the authors’ definitions. At the heart of many, implicitly or explicitly, is the idea of family influence or control—generally of two kinds: ownership and management (Neubauer & Lank, 1998). Therefore, the key to understanding the behavior of these organizations is found in the interaction of the two distinct subsystems, family and business, and in the effect this has on the actions of all those involved in the system (Churchill & Hatten, 1987). This interrelation may cause certain tensions and distortions because family and business are two distinct systems, usually with opposing objectives and needs (Lansberg, 1983). Leadership succession has long been recognized as an important variable for the understanding of the organizational processes given that succession is usually followed by changes in the organization. Particularly, the change in the top position of the organization (usually the CEO) can alter the direction and politics of a business (Panian, 1981). Succession is considered an indicator of the future of the business, since the successes and failures of the CEO are frequently linked to those of the company (Kesner & Sebora, 1994). Despite its quantity, most of the succession literature (see Kesner & Sebora, 1994 for a review) remains silent concerning the processes through which leaders become integrated over time (Denis, Langley, & Pineault, 2000). These authors view the integration of a new CEO as a mutual adjustment process between the organization and the new leader. Here, the process of attaining managerial control is, at the same time, a process of learning organizational norms and role systems (socialization). Similarly, succession in family firms is considered a multi-stage process beginning even before the heirs enter the business with effects that extend beyond the moment that they are named as successors. Researchers have pointed out three important aspects in this process. Firstly, the socialization process to which the family successors are subjected, and during which they are gradually prepared for leadership (Longenecker & Schoen, 1978). Secondly, the biological reality of parents and their offspring being separated by age and business experience, but united by blood ties and shared family experience (Churchill & Hatten, 1987). And thirdly, the mutual role adjustment process between the founder and next-generation family members, so that the simultaneous evolution of both generations is considered the key to understanding the succession (Handler, 1989).

Successor’s development as leader of the family firm

In this study, we center on the analysis of successors and their development as leaders, since it is he/ she who will lead the company in the future (Dumas, 1989; Goldberg, 1996; Goldberg & Wooldridge, 1993; Handler, 1989; Swogger, 1991). Therefore, this question takes on great strategic importance as many organizations view leadership as a source of competitive advantage and are interested in its development (Day, 2001).

Training for leadership: Leadership can be seen as a complex interaction between the leader and the social and organizational environment (Fiedler, 1996). Basically, leadership represents a complex form of social problem solving. In order to solve these problems leaders must develop certain skills and the effective application of these skills depends on knowledge. To solve leadership problems, knowledge is needed according to:(1) the task at hand, (2) the organization, and (3) the people with whom one works. The process of knowledge creation occurs through informal, intra- and inter organizational networking as well as by incorporating informal social interaction in formal strategic processes (Holt-Larsen, 1996). Thus, several authors emphasize the importance of training people through work experience (Day, 2001). Knowledge and skills develop as a function of experience and certain types of experiences would prove particularly beneficial, including: (1) job assignments that provide exposure to new and challenging problems, (2) mentoring, (3) appropriate training, and (4) hands-on experience in solving related problems (Mumford, Zaccaro, Harding, Jacobs, & Fleishman, 2000). Therefore, the following general re proposition can be stated: The training experiences that the successor receives and the form in which the learning process is conducted will influence his/her development as a leader, thereby affecting the chances of the succession process being successful. Concretely, the factors that can be considered important influences on this training experience are described in the following paragraphs.

Academic training can be useful in providing a set of systematic experiences to promote the development of certain knowledge, problem-solving, and systems skills (Mumford, Marks, Connelly, Zaccaro, & Reiter-Palmon, 2000). It has also been recommended that family successors obtain business experience outside the family firm before joining it (Ward, 1987). Thus, it is argued that the successor’s abilities are judged with greater objectivity. Personal development, self-confidence, and achieving success outside the firm establish the successor as a competent executive with a broader perspective of the firm’s environment (Barach, Ganitsky, Carson, & Doochin, 1988). There is also evidence that early exposure to the company while doing menial jobs and summer jobs constitutes valuable experience encouraging the successor to get prior knowledge of the company. Therefore, he/she becomes familiar with the nature of the business and with the employees, and develops specific abilities necessary for the business. This encourages the acceptance of the successor, allows him/ her to achieve credibility, and strengthens important business relationships (Barach et al., 1988). According to Mumford, Marks et al. (2000) and Mumford, Zaccaro et al. (2000), the first step in the process of developing leadership skills has to do with the education and socialization.

Successors’ commitment: Commitment is defined as the successor’s willingness to take over the business (Goldberg & Wooldridge, 1993) and it is considered to be a crucial factor in the success of succession in family firms  (Chrisman, Chua, & Sharma, 1998). A firm commitment results when offspring want to join the company, feel wanted and profoundly welcome, are not pushed by parents to be executives or successors, and can choose whether or not to join the family firm (Barach & Ganitsky, 1995). It is directly linked to the ease with which power and authority are transferred (Goldberg & Wooldridge, 1993). Therefore, the following general proposition can be stated:

The success of the succession process will depend on the level of successor’s commitment to the

Company. Effective successors have a more positive attitude about the business than non-effective ones (Goldberg, 1996). The question is, then, whether non-effective successors join the company with a negative attitude or whether their later experience in the company causes these to develop. The factors determining that commitment may be related to the circumstances for successors to join the firm and how they assumed responsibility, that is, whether or not it was voluntary. These could affect the feeling of control and managerial and personal autonomy the successor experiences (Goldberg & Wooldridge, 1993). Goldberg (1996) finds an association between the success of the successors and the appeal the company has for them, emphasizing the need to revitalize the company to make it viable and appealing to new generations. In some cases, this is instigated by the predecessor and in others the new generation carries out the changes immediately after becoming general managers. So it is also necessary to consider the motivation related to the expectations of satisfying needs and interests in the family company. Apart from expectations, the appeal of the family firm is linked to the real possibility of satisfying successors’ needs for professional advancement and achievement, their personal needs (personal identity, responsibility, and achievement) and those associated with each stage of life (experimentation and exploration in youth, advancement and achievement in maturity, and equilibrium in the later stages), since this will influence their level of satisfaction, productivity, and future plans (Handler, 1989). Similarly, Mumford, Marks et al. (2000) and Mumford, Zaccaro et al. (2000) state that the achievement and mastering motives and the capacity to exercise influence are two critical incentives to become an effective leader.

Decision for Succession in family businesses

One of the shared characteristics of several successful family businesses, e.g., the Tata Group, to Ford, to Bombardier Inc., is that they all seek an outside heir to the corporate throne. Rather than look for a successor within the family, all of these companies have realized that the best CEO talent may lie outside the family.What are the chances that the best person for the jobwould happen to be part of the same family when it is such a small pool of candidates? After all, an outstanding family business CEO should take account of regression-to-the-mean: his or her exceptional skill is likely to be followed by a family heir’s less exceptional skill (Galton, 1906). Succession planning allows for continuity and prosperity in a business. Research indicates that the probability of an effective succession occurring is increased if succession planning processes are engaged (Sharma, Chrisman, Pablo, & Chua, 2001). If a CEO dies or retires unexpectedly, there can be massive disruption in the company (Sharma, Chrisman, & Chua, 2003). Family businesses are often succeeded by an heir, even when these successors are under-qualified (Kirby & Lee, 1996). This is problematic because such practices often destroy family businesses. Even though the literature clearly states that there can be a decline in profits when a family-CEO takes over, many family businesses still make this potentially detrimental decision. A study of over 100 Small and Medium Enterprises (SME) by Trow (1961) found that the succession process generally operates in the following way. If the owner has a child, then the child (usually the son) will be considered to be the successor unless he is uninterested or too young. In this instance, succession planning is postponed. If the owner then leaves the organization then the child will take over the business and any shortcomings will be ignored. It is generally only when the owner has no heir that other people will be considered for the CEO position. The desire of the CEO to give preferential treatment to his or her children is understandable given the amount of effort it takes to build a business (Ip & Jacobs, 2006). Given this, it is quite clear why there is a prevalence of nepotism. Entrepreneurs generally resist the idea of retirement (Duffy & Stevenson, 1984) thus making succession planning difficult. In addition to this, family members may resist holding discussions in order to not upset the aging family member. The founding CEO generally has more seats on the board of directors than others (Wasserman, 2003) and their opinion is often greatly revered (Zaleznik & Kets de Vries, 1975). In effect, much of the responsibility for succession planning lies with this incumbent who has an emotional attachment to the business often carrying the family name (Sharma et al., 2003). For these reasons, often there is a conflict between the family system and the business system (Rosenblatt, De Mik, Anderson, & Johnson, 1985). In the end, it is often the needs of the family that come before the needs of the business (Rutigliano, 1986).

In a study of Italian manufacturing firms, researchers reported that when management is maintained by the family, there is a negative effect (Nepotism in family businesses is often associated with poor performances) on the performance of the firm, particularly in those that were previously performing above average (Cucculelli & Micucci, 2008). A study looking at management replacement in the UK found that family CEOs are less likely to be removed from their positions following poor performance compared with professional managers. Perhaps this can explain why, when family CEOs depart, stock prices react favorably and operating performance improves (Hillier & McColgan, 2009). A study with 5334 successions in public and private limited liability firms in Denmark found that when CEO succession transitions to a family member there is a large negative impact on the performance of the firm in terms of operating profitability. In fact, there was a fall by at least four percentage points. These findings were most dramatic in fast-growing industries with highly-skilled workers and in large firms (Bennedsen et al., 2007). The reason for this negative impact is contested. A study of 124 management successions in Canadian family firms listed on the Toronto Stock Exchange found that non-family appointments often follow from a downturn in company performance so there is clear scope for improvement, and that, investors may have uncertainty about a family successor due to their young age, which might reflect a lack of management experience (Smith & Amoako-Adu, 1999).

Interpersonal trust among successors and leader

Trust is viewed as fundamental for the competitiveness of social organizations given the increased levels of complexity and uncertainty. Trust refers to a person’s belief that individuals engaged in exchanges will make sincere efforts to uphold their commitments and will not take advantage of the given opportunity; in other words, it is one’s willingness to rely on others (Rousseau, Sitkin, Burt & Camerer, 1998). Trust is central to family businesses—where a group of individuals affiliated with the enterprise are connected through common ancestry or marriage—because their existence goes well beyond economic rationale. It “often represents a fundamental basis for cooperation” and it is a source of competitive advantage for family businesses (Steier, 2001, p. 354).

The concept of trust has attracted research attention from a number of disciplines including sociology, economics, organizational behavior and strategy among others, because it is believed to be significant in a number of ways: It enables cooperation, promotes network relationships; reduces harmful conflict; decreases transaction costs; and facilitates the effective functioning of groups and effective responses to crises (Rousseau et al., 1998). Based on a cross-disciplinary review of the trust literature, Rousseau et al. (1998: 395) define trust as “a psychological state comprising the intention to accept vulnerability based upon positive expectations of the intentions or behavior of another.” Thus, trust is not a behavior but a psychological condition that is caused or results in behavior. Furthermore, interdependence between individuals and uncertainty as to whether the other intends to act appropriately are commonly viewed as two necessary elements for trust to arise (Lane, 1998).

Trust is also a multi-level phenomenon and scholars have noted that useful theories of trust explore the interconnections among trust at multiple levels (Lane, 1998; Rousseau et al., 1998). At the micro-level, scholars address inter-personal trust, but acknowledge that these relations are embedded in a broader context, and hence, inter-personal trust is constrained and enhanced by macro-level systems trust or trust in the reliable functioning of abstract systems at the organizational or societal level. For example, Pearce, Branyicki and Bigley (2000) found that the absence of procedures within firms for consistent employee treatment coupled with the autocratic nature government under a thinking mechanism undermined the inter-personal trust between supervisors and subordinates. Similarly, foreign managers’ trust in the institutional context in China influenced their trust in local staff, reinforcing the inter-connections among trust at the institutional, organizational and interpersonal levels (Child & Mollering, 2003).

While many scholars have viewed trust and distrust as two ends of a single trust-distrust continuum or view the presence of low trust as indicative of distrust, Lewicki, McAllister and Bies (1998) posit that trust is distinct from distrust. They argue that relationships between individuals are multiplex, and hence, both trust and distrust are separate constructs that can co-exist within facets of interpersonal relationships. For instance, within relationships with colleagues we have encounters in different domains of work and different contexts, where the colleague may be trusted in some domains but be distrusted in others. Thus, underlying this conceptualization of trust is the notion that trust is a multi-faceted concept with multiple bases. Trust is very much dependant on the competence part as well although competence is undeniably desirable in a leader, measuring or even establishing competency is difficult. The literature uses “education,” “experience in the family business,” “experience outside the family business,” and “past performance” as proxies for competence, and we do likewise. Educational attainment is believed to Indi-cate an individual’s knowledge, skills, receptivity to innovation, and cognitive and problem-solving abilities (Feigner, et al., 1994; Ham brick &Mason, 1984; Cooper, Gimeno-Gason, & Woo,1991). Experience in the family business enables the successor to develop relationships within the company and understand the culture and intricacies of the business (Danco, 1982; Lansberg &Astrachan, 1994; Nelton, 1986). Experience out-side the company helps the successor develop an identity and prepare for a wider range of problems that may confront the organization Interpersonal trust is the perception you have that the other person will not intentionally or unintentionally do anything that harms your interests. It is the feeling that you can depend on that other person to meet your expectations when you are not able to control or monito the his/her behaviour.

Data and Method

A survey was done to understand the interpersonal trust between successor and top-level management of SMEs in India. For identification of  family businesses, the initial  approach was to look for them through  the databases of   the virtues project, which did not filter out good results, which led us to the second method of using CII (Family business Sectorial data to identify family businesses in Gujarat), based on  it we  identified 500  family businesses in Gujarat which have at least  been established  at least for 25 years or more, have a  financial turnaround  of 2 crores at least  and  have being  not being declared a sick unit in  last 4 years. This also took care of additional point of having a second generation family members working in them. The sampling technique used was purposive sampling as idea was the number of years a business is established more chances of factors of Tran generational family businesses being there.  Literature research also backed up the call of having purposive sampling when studying family businesses ( Bird et al, 2002, Winter et al 2004, Hamilton  2011)  have strongly pronated use of  purposive  sampling.   The method ensures less seepage rate and also  it makes  sample to be made  up of specific character where  random sampling  will fail.

The research work of Brockhaus (1994), Rogoff  (2003) was indicative for us to look for  a flexible nature of study  where our focus should be  to get  quantifiable data to  identify characteristics of  the next generation and the team around , the purpose could have been very difficult to be done if   using  qualitative research as the only method  (Hamilton, E. 2006) (Winter 2004). The major purpose was also to identify some of the issues which were not quantified earlier for e.g. acceptance of professional education, trust to name a few. Prime   objectives of the survey were to

1. How many  second generation family  members continue in the same family businesses
2. What are the learning mechanisms  for them
3. Education as a contributing  factor in the second generation family members (To be digitized through interviews)
4. Role of  mentoring  teams  in  family businesses
5. Time one can take  working full time within the family businesses to establish the  next generation boss
6. Resistances by the team members to accept and work with new owner.

As established tool of interpersonal  trust among the team was being used  testing them on  openness, communication, professional support and  managerial competence, additionally we included the  details regarding demographics, education and sector of business ( Paul, D.L. & Mc Daniler, R, 2004)  and Ribiere, V. M., & Tuggle, F. D. (2005) working on trust have suggested  using  demographic details can lead to significant  relations  on  mapping trust parameters.

Table 1: Description of Data