Factors Influencing Founder-CEO Succession: the Examples of CIS and CEE Countries

1
Factors Influencing Founder-CEO Succession the
Examples of CIS and CEE Countries

• Galina V. Shirokova - Ph.D., Associate Professor
• Alexander Shatalov, Dmitri Knatko - Ph.D students

2
Goal and Object of the Research

• Goal to define and analyze factors that have a
  direct influence on founders decision to
  delegate authority to a hired CEO in conditions
  of transition and emerging economies
• Object of research entrepreneurial firms from
  CIS and CEE countries

3
Factors influencing the Founder-CEO succession

• Size and age of the firm (Grusky, 1961)
• Changes in leadership style (Adizes, 1999)
• Succession is merely an issue of time (Flamholtz,
  1986 Boeker, Karichalil, 2002 Gedajlovic et
  al., 2004)

4
Hypotheses 1 and 2

• H1 The older is the company, the higher is the
  probability that owner-CEO will delegate his
  authorities to a hired manager
• H2 The larger is the company, the higher is the
  probability that owner-CEO will delegate his
  authorities to a hired manager.

5
Failure of Traditional Models to Study Succession

• Firms run by the founder have better results than
  firms run by hired manager (Villalonga, Amit,
  2004 Fahlenbrach, 2006 He, 2008).
• In some situations management by non-founder
  just does not work (Flamholtz, 1986 Beam, Carey,
  1989)
• Most models consider either internal drivers of
  succession or study firms working in developed
  markets (Fan, Jian, Yeh, 2008 Thornton, Ocasio,
  1999).

6
Alternative Approaches to Succession

• Cases of transition and emerging economies (Fan,
  Jian, Yeh, 2008 Oliver, 1991)
• Reactions of firms to change strategy and
  structure may vary under different pressures of
  institutional factors (Oliver, 1991 Thornton,
  Ocasio, 1999 Fan, Jian, Yeh, 2008)

7
The model and the question

• The growth threshold exists
• Succession as a natural fact of companys
  evolution
• Regulations and institutes may have a negative
  impact on growth
• Limited options decision model
• So what?

8
(No Transcript)
9
Hypothesis 3

• H3 The more negative is the valuation of the
  legal framework influence the less will be the
  probability that founder-CEO will delegate his
  authorities to a hired manager

10
Hypotheses 4 and 5

• H4 If owners business is involved in paying
  bribes the probability that founder-CEO will
  delegate his authorities decreases
• H5 If company is practicing independent audit,
  the probability that founder-CEO will delegate
  his authorities increases.

11
Methodology of the Research. Data

• Productivity and the Investment Climate Private
  Enterprise Survey, by The World Bank Group
  http//info.worldbank.org.
• 49584 companies (111 countries, 2002-2005)
• The 2005 survey 26 countries selected (EBRD
  BEEPS CEE, CIS list)
• Only companies with a single owner
• Sample contained 4701 companies, including 1875
  from CIS countries and 2826 from CEE countries

12
Methodology of the Research. Variables

• Dependent variable
• Who manages the company (0F/1NF)
• Independent variables
• Legal framework valuations (managers
  perceptions, 1/6)
• Bribe payments variable (as an annual sales
  percentage)
• Audit variable (0/1)
• Size of the company (log N empl, log sales)
• Age of the company (y)
• Industries (BEEPS classification, dummy)
• Region (0CEE/1CIS)

13
Model

• Logistic regression
• PY1/X?(ßx)
• The model had described connection between Y and
  X asY ß0ß1x2ß2x2ß3x3ß4x4ß5x5ß6?6 ß7?7
  ß8?8 e.
• 3 groups of variables
• Institutional variables (legal framework, bribes,
  audit)
• Organizational variables (log employees, log
  sales, age)
• Control variable (industry, region)
• 3 models of logistic regression have been used
  for all sample, CIS countries and CEE countries

14
The Results of Logistics Regression
Model 1 (CISCEE) Model 2 (CIS) Model 3 (CEE)
The constant -2.8338 -2.952 -3.0045
The legal system 0.0284 0.0436 0.0093
The unofficial payments -0.0356 -0.0393 -0.0240
The audit 0.1633 0.4388 -0.0586
The size of the company (number of employees) 0.1204 0.1756 0.0861
Age of the company 0.0048 0.0106 0.0002
The size of the company (sales volume) 0.1563 0.0881 0.2100
The region 0.4146
Industry Manufacturing -0.4744 -0.0343 -0.3444
Industry Construction -0.6668 -0.3164 -0.4504
Industry Trade -0.5476 0.0708 -0.5307
Industry Transport -0.3510 -0.2105
Industry Real estate -0.2330 0.2288 -0.0594
HoReCa 0.6512
Other services -0.0966 -0.0558 0.2471
LR ?2 163.54 93.78 84.05
Prob gt ?2 0.0000 0.0000 0.0000
Pseudo R2 0.0399 0.0536 0.0360
N 4701 1875 2826
15
Model Limitations

• Likert scales for legal framework valuations
• Problems with definitions of who is the manager
• An assumption was made that there exists some
  significant differences between CIS and CEE
  countries
• Even though the models were significant, pseudo
  r2 shows room for model improvement
• Possible unobserved factors of succession (for
  example tiredness of founder from his own
  business, new business influence, etc).

16
Results and implications

• As company grows in size or in age there will
  appear a threshold of Founder-CEO succession
• There may exist institutional factors that impede
  succession (CIS countries)
• Owner may have alternatives to change ways of
  working according to institutional framework and
  to create the possibility to delegate or to stay
  with specific assets and to solve the succession
  problem by other ways

17
Further research questions

• Influence of succession on the firm value
  creation process
• The Founder-CEO succession in transition
  economies is usually a process that disrupts
  firms value in comparison to the experience of
  developed countries (Fan, Jian, Yeh, 2008)

18

• Thank you for your attention!