Family-owned business : exploring the role of family governance mechanisms in succession planning

Abstract

Family-owned businesses significantly contribute to global GDP, economic growth, and job creation, yet they face unique challenges due to the interplay between family and business dynamics. This fusion of family and business institutions which have conflicting hierarchical structures, decision-making processes, and objectives, making management more complex than in non-family firms. Notably, only 30% of family businesses successfully transition from the first to the second generation, with that figure declining to just 10% for the transition from the second to the third generation. Compounding this issue, many family businesses operate informally, lacking structured governance and formal business frameworks. This study investigates the role of governance mechanisms in the succession planning of family-owned businesses. Employing an exploratory approach and qualitative methodology, 12 semi-structured interviews were conducted with founders of family enterprises. These interviews provided in-depth insights into how governance structures and succession planning processes are navigated within the unique context of family businesses. The findings reveal that cultivating a culture of governance and adherence to policies within the family is essential for succession planning. Establishing this culture serves as a foundation upon which emotional intelligence, professional etiquette, and mutual respect contribute to both business continuity and family harmony. Once this culture has been built, formal governance mechanisms—such as clear organisational structures, role definitions, and documented agreements—build trust and foster clarity among all involved parties. Lastly, the transfer of knowledge and information from the founder to the successor is a critical, ongoing process rather than a one-time event. This knowledge transfer requires deliberate effort and planning to ensure a seamless transition and uphold the values and continuity of the family business. This research offers a practical framework for succession planning that can benefit family-owned businesses while also enriching academic discourse on this relevant subject. The insights gained highlight strategies for strengthening governance in family firms, thereby enhancing their resilience and capacity for intergenerational success.