OPINIONS Temporal focus and the art of passing the family biz baton

OPINIONS

Temporal focus and the art of passing the family biz baton

China Daily

21:38, May 31, 2021

Tourists gather at the downtown area of Shanghai. (Photo: China Daily)

The process of passing a family-run business from one generation to the next is frequently fraught with challenges. This is a universal phenomenon, and is not irrelevant to China.

The process of passing the baton in a family business can be tangibly affected by a CEO's "temporal focus" (that is, the extent to which the CEO focuses on the past, present and future concerns of the company) when engaged in succession planning.

In China, most members of the first generation of family businesses are now approaching retirement age. Recent estimates suggest that around 75 percent of family businesses in China will undergo succession within the next five to 10 years.

This makes the process of planning for succession more important than ever, especially when you consider the unprecedented volatility and uncertainty that China and the rest of the world experienced throughout 2020.

Comprehensive succession planning is the deliberate, considered and formal transfer of management control from one family member to another. It is known to have a wide range of established benefits, such as maintaining business continuity and investor confidence.

However, it is also a challenging process, one that often involves tension and conflict within the family unit. If the succession planning process is disrupted in any way, it can lead to repeated or indefinite postponement, usually putting present and future business prospects at risk.

There are plenty of specific challenges that have been identified in existing literature on succession planning. One that is frequently cited is poor intergenerational relations-where the members of the younger generation don't agree with the incumbent CEO's business vision, or they simply do not enjoy a close, happy or otherwise harmonious relationship.

Various types of financial constraints are another major challenge, because the CEO(and the rest of the family members involved in the business) may direct their energies toward solving such a pressing issue, rather than planning for the succession.

Finally, there is the possibility that the CEO's preferred successor simply isn't willing to accept the role. This forces the CEO to either look for another candidate, or dedicate their energies toward convincing their unwilling first-choice successor.

For any Chinese family-held business, the question of succession is a compelling and often time-sensitive one. While all the challenges above are legitimate concerns, our understanding of the effects of the individual characteristics of incumbent CEOs is still limited.

In addressing this shortcoming, a recent study undertaken by researchers at Shanghai University, IE Business School and China Europe International Business School examined the effects of a CEO's "temporal focus" (to what extent CEOs focus on past, present and future concerns of the company) on the process of succession planning.

This research also explored how family interactions (both positive and negative) and environmental uncertainty (how stable and/or predicable the current business environment is for the company) influence this process.

As part of our research, we analyzed the succession planning efforts of 198 CEOs of family businesses in China, along with data from 15 semi-structured interviews. Our research uncovered a number of significant findings, each with important practical implications for Chinese (and non-Chinese) family businesses.

First, we found that a CEO's temporal focus-whether it is more strongly past-, present- or future-oriented-can positively influence succession planning in different ways.

Specifically, we found that a CEO's "past focus" can be essential in producing viable succession plans by calling on their past entrepreneurial experience and knowledge to develop the company's long-term vision.

Overall, a CEO's "past focus" appears to be a powerful motivator for them to transfer knowledge to their successor, ensuring that they learn from the incumbent's most significant successes and mistakes.

By comparison, a "present focus" may help CEOs nearing retirement age recognize the urgency of succession planning, rather than remaining too preoccupied with the immediate business needs of the day.

A CEO's "future focus", however, encourages goal-setting and long-term plans for combining their knowledge and business aspirations with that of their chosen successor.

Understandably, a CEO who considers the future will be more naturally inclined to factor in the career development opportunities of their children and to think strategically about how their succession will benefit the family firm.

The second significant finding of our research is that family interactions can strengthen the relationship between a CEO's past focus and succession planning, while weakening its relationship with the CEO's present and future focuses.

In short, when it comes to family interactions, the more frequent and high-quality they are, the more beneficial they will be for the succession planning process.

This can manifest in many different ways, from potential successors being more willing to learn from CEOs' experience, to enlarging the pool of viable successor candidates, reducing familial infighting over the succession, and generally creating a more harmonious environment for knowledge transfer and the strategic consideration of who is the most suitable candidate for the job.

Better family interactions can even help foster agreement on important succession issues. Therefore, as well as helping the succession planning process go smoothly, closer family interactions also improve the chances that such plans will hold firm when the moment arrives.

Finally, our study suggests that environmental uncertainty encourages past-focused CEOs to plan for succession, whereas they might not feel the need to do so in more stable and predictable times.

Regarding this moderating effect of environmental uncertainty, we have found that past-focused CEOs are more likely to consider succession planning when their current business environment is undergoing rapid change or is otherwise unpredictable.

This is because past-focused CEOs rely on their experience and prior knowledge for competitive advantage, but those methods that may have proved effective in the past can quickly become useless in the face of rapidly changing market conditions, evolving consumer needs or disruptive technologies.

Accordingly, it may prove beneficial for past-focused CEOs to carefully consider their approach to succession planning, regardless of how predictable or stable their business operating environment may be.

In addition to the points already discussed here, our study found that CEOs can (and do) hold different temporal focuses simultaneously, potentially combining their benefits regarding succession planning. In fact, 21 percent of our CEOs scored highly on all three time focuses.

Ultimately, rather than waiting for turbulent times to shock them into action regarding the question of succession, CEOs of Chinese family firms should view comprehensive succession planning as an unavoidable necessity, one that presents both tangible long-term benefits for both their families and companies, and equally appreciable risks if postponed or ignored.

(The writer is an associate professor of management at China Europe International Business School. The views don't necessarily reflect those of China Daily.)

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