Abstract
Succession in family firms has historically been associated with risk. However, improvements in laws and regulations along with the consequent improvements in corporate governance can greatly mitigate the potentially negative impacts on succession performance. This study utilizes a comprehensive data set of 280 cases of succession from Taiwan between the years 1997 and 2012, a period which coincides with the introduction of a big bang of new domestic laws and regulations. The results indicate that improvements in the regulatory environment along with the consequent strengthening of corporate governance reduces the probability of family succession while at the same time increases firm performance during the succession period. In many cases the impact of improved corporate governance outweighs the influence of improved laws and regulations. The implications of these findings underscore the importance of the government’s role in establishing robust internal and external mechanisms to enhance corporate governance, so that in significant events such as firm succession, the attendant risks are reduced.
5. Conclusion
Succession in any firm always presents risk. Past studies have emphasized the role of specialized assets in describing the negative effects on succession performance. That is, a higher amount of specialized assets brings a higher likelihood of family succession as well as a higher probability of value loss during the succession period. The chief contribution of this paper is to provide a detailed analysis of the role of improved laws and regulations and the attendant improvements in the quality of corporate governance as determinants in the decrease of the probability of family succession. In addition this study finds that improved external and internal governance can reduce the effect of specialized assets in the maintenance of firm value during the succession period.
In the broader view family succession includes two main mechanisms: family governance and corporate governance. Family governance relates to how the ownership structure is arranged within the family, and how family members are selected as successors or senior managers in the family firm. In reality, the overwhelming majority of family owned firms in Taiwan do not have a strong family governance arrangement in place. Even in firms that do have strong family governance plans, disputes among family members for firm control still occur (needless to say without such plans in place disputes are virtually guaranteed). Blood relationships by their very nature can often make it difficult to establish sound family governance. How to mitigate the negative influence of weak family governance on succession performance is a critical question. The policy implications of these findings underscore the importance of establishing robust external and internal mechanisms to enhance corporate governance, so that in big events, such as firm succession, the value of family firms can be maintained.
