Sacrificing the Firstborn in a Family Firm Succession Is a Good Choice for Business, a New Study Explains

POST SUCCESSION FIRM PERFORMANCE IS 39% HIGHER WHEN A SUBSEQUENTBORN SIBLING IS AT THE HELM, BOCCONI UNIVERSITY SCHOLARS DISCOVER

Like Abraham and Cepheus, who were willing to sacrifice their firstborn children Isaac and Andromeda, family business owners should be willing to sacrifice their eldest sons, passing their firms to someone else in the family.
 
In a recent paper, Bocconi’s Alessandro Minichilli and Mario Daniele Amore (with Andrea Calabrò and Marina Brogi) conclude that the habit to pass the family firm to the firstborn is the worst financial choice for the firm. Choosing a subsequent-born child significantly increases post-succession firm performance, with returns on assets 39% higher than firms that appoint a firstborn.
 
Selecting a subsequent-born family member also turns out to be a better choice than the selection of a non-family leader. In other words, what might be considered a nepotistic choice can be beneficial to the firm, if made among all available siblings in a large enough family pool.
 
Finally, the positive effect of selecting a non-firstborn sibling is stronger in later-generation successions that in founder successions. This is presumably due to a larger pool of family candidates and more formalized selection practices, that ensure the best possible fit.
 
“The study’s findings clearly suggest that family business owners must have the courage to break the primogeniture rule if they want to find the right candidate for succession, granting all the siblings the same chances”, Prof. Minichilli says.
 
When the leader of a family firm steps down, the firstborn child would seem the natural choice for succession. “In a predicament fraught with emotions and potential conflict, the primogeniture rule combines the preservation of the family dynasty with the advantage of following an established social norm, difficult to be questioned by anyone”, Prof. Amore explains, “but the courage to choose pays out”.
 
The authors conduct their empirical analysis on a unique dataset including family businesses in Italy that experienced a succession from 2000 to 2012. They investigate also the role of the so-called socioemotional wealth (the stock of affect-related value that the family has invested in the firm) in the selection of a new leader in a family firm and conclude that the likelihood of following primogeniture in leadership succession increases when a family’s socioemotional wealth endowment is high and that an unsatisfactory performance of the firm before succession also increases the likelihood of selecting a firstborn, as socioemotional motives prevail especially if the firm is vulnerabile.
 
Andrea Calabrò (Ipag Business School), Alessandro Minichilli (Bocconi), Mario Daniele Amore (Bocconi), and Marina Brogi (Università La Sapienza), The Courage to Choose! Primogeniture and leadership succession in family firms, “Strategic Management Journal”, 2018;1-22.

by Fabio Todesco