Family Businesses & SMEs

When the Former CEO Becomes an Obstacle

Why sustained influence of the former boss after the handover of a family business could inhibit innovation

Organizing and executing a company succession is a challenge in its own right. At the same time, when a succession takes place at the very top of the company, a line in the sand should be drawn with regard to the former CEO. Otherwise, he or she can quickly become an obstacle for innovation in family-run small and medium-sized enterprises (SMEs).

Anyone who takes over a family business from their mother or father with the aim of continuing it has their work cut out. The pressure of continuing the business in the family’s best interest may add to that. It is therefore a good thing for the former CEO to stay on board for a while, to provide the benefit of his or her expertise, and give advice on decisions, right? New research points in the opposite direction and suggests that the former boss can quickly become an obstacle to innovation in SMEs.

Why the former CEO is a hindrance to innovation

Every former CEO of a family business wants to preserve his or her company’s painstakingly built heritage. They have developed an emotional relationship with the products and like to emphasize the tradition of the family business. However, what the former boss may somewhat romantically refer to as “tradition” can, in practice, become a major obstacle to necessary product innovations. Research has shown that the longer a leadership figure remains at the helm of a company, the more their openness to innovation diminishes. They rely on tried-and-tested products and strategies instead of showing interest in new developments. Yet, innovations are crucial if SMEs are to remain competitive in the long term and be able to adapt to changing market environments. In the context of family-owned businesses, we need to remember that innovations happen differently than in non-family-owned businesses due to the specific peculiarities, resources, and goals of these firms. The delay or prevention of important product innovations by former CEOs can be attributed to three main factors.

1. Retention of seat on decision-making bodies

Former bosses often struggle to step away from their business. Even when they do finally make way for a successor, they often stick around and take up a position on the board of directors or another decision-making body. Although formally they have passed on the baton to a new CEO, informally they still hold sway – not only among the employees, who are used to their role as boss, but also with their successor. The era of a former CEO, which sometimes lasts decades, has given them an authority and allows them to act as the legitimate leader – so they can continue to exert strong influence despite the change in their role and block any innovations that they may consider superfluous. In many cases, there is a danger that the long-standing bosses will become éminences grises within the company.

2. Level of influence on the determination of succession

If the former CEO is the only person who decides on the succession, the successor will always have a feeling of great dependency and necessary gratitude. The new boss will therefore take decisions in line with the ideas of his or her predecessor as often as possible and will also follow their recommendations. This perpetuates the predecessor’s powerful influence and implicitly inhibits new approaches and product innovations. The larger the body of decision-makers in the company that determines the successor, the more this effect is diluted. The successor’s personal autonomy is strengthened. Thus, letting the boss decide who will succeed him or her during the succession procedure is not in the interest of the business’s future viability.

3. Internal or external succession

The study shows that a distinction needs to be made between a succession from within the family and a succession by an external candidate. If the boss’s seat in the company is passed on to the next generation and a family member, this is less of an obstacle to innovation. The former boss displays a show of trust in their own offspring, enabling the young blood to take more autonomous decisions about innovations. Family ties ensure that the successor is seen as particularly able and trustworthy when it comes to continuing to run the company. Suggested product innovations are met with less skepticism.

However, this does not hold true in the case of a successor who is not part of the former CEO’s family. Although external successors are usually also selected for their similarities to the predecessor, they first have to prove themselves. They often seem to feel a need to be grateful to their predecessor for handing the business over to them and placing trust in them. Accordingly, they make decisions in the predecessor’s style and neglect their innovative drive to improve the products. The necessary “breath of fresh air” after a business takeover fails to materialize.

Influence ought to be at best limited

Whether it is a question of remaining on the board of directors or determining the company’s new leader: the influence of the former boss ought to be at best limited so as not thwart product innovations in the future. The fewer people who are involved in decisions or consultations alongside the former CEO, the stronger his or her individual influence will remain. Thus, for the area of product innovation, measures should be put in place that greatly minimize the influence of the predecessor or exclude their involvement completely. Nevertheless, their expertise and profound knowledge of the working processes within the family business may well continue to be useful in other areas of the company.

How can innovations still be implemented successfully?

Product innovations can be implemented successfully especially where this topic is largely kept beyond the reach of the former boss after the company handover. The successor should not feel obliged to follow the recommendations of his or her predecessor. It is the successor’s job to actively question where product innovations are necessary or overdue and then to implement these consistently. In doing so, they should not shy away from discussions or conflicts with the predecessor when it becomes necessary to renew the product range.

Tips for practitioners
  • Limit the level of influence of the former CEO after the company is handed over! His or her field of responsibility should be clearly demarcated.
  • Do not feel obliged to follow the predecessor’s advice! As the successor, actively question where product innovations are necessary and do not shy away from possible conflicts.
  • Make sure that the former boss in the family business does not determine his or her successor alone. The more people involved in the decision, the less dependence there is on the predecessor.
  • Do not underestimate the importance of product innovations for SMEs! They ensure that the company can survive in a changing market environment.
  • Feel free to draw on the knowledge of the former CEO for working processes but not when it comes to product innovation.
Literature references and methodology

The findings in this article are based on the recent study by Dr. Stephanie Querbach of WHU – Otto Beisheim School of Management and her co-authors Professor Dr. Miriam Bird of the Technical University of Munich, Assistant Professor Dr. Priscilla Kraft, and Professor Dr. Nadine Kammerlander (both WHU):

The researchers investigated the importance of the retention of former CEOs on decision-making boards of family businesses – an aspect that has been little considered in research so far. They analyzed more than 200 family-run SMEs in Switzerland that were in the process of corporate succession.

Autoren

Dr. Stephanie Querbach

Stephanie Querbach is Affiliated Researcher at the Institute of Family Business and Mittelstand at WHU – Otto Beisheim School of Management. Her research focuses on sustainable entrepreneurship, innovation, succession, and employee satisfaction in family businesses.

 

Professor Dr. Miriam Bird

Miriam Bird is Professor for Entrepreneurship and Family Enterprise at TUM School of Management, TUM Campus Heilbronn. Additionally, she is director of the Global Center for Family Enterprise (GCFE). In her research, Miriam Bird focuses on the topics of company succession, innovation, and entrepreneurial strategies in family businesses. She is interested in the social context companies are embedded in. Her research was honored internationally multiple times and was discussed in renowned media. Her recently acquired project fundings concerning entrepreneurial teams have been classified by the Swiss National Fund (SNF) as a contribution to excellence.

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Assistant Professor Dr. Priscilla Kraft

Priscilla Kraft is Assistant Professor for Technology and Innovation Management at WHU – Otto Beisheim School of Management. Her research focuses on the influence of cognitive characteristics of CEOs and entrepreneurs on innovation and entrepreneurial behavior. Additionally, she researches the influence of networks on innovation activities of companies.

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Professor Dr. Nadine Kammerlander

Nadine Kammerlander holds the chair of Family Business at WHU – Otto Beisheim School of Management. Her research interest comprises innovation, employees, and governance in family businesses and family offices. Her research contributions are regularly published in international journals and receive renowned scientific awards.  

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