Who Should Take Over When The CEO-Owner Of A Business Suddenly Dies

Summary

When the CEO-owner of a privately held small or medium size enterprise (SME) suddenly dies, who should take over? This new study, published in the Journal of Management Studies, sought to answer this question by exploring how different types of successors influence the business’s recovery from the crises. Leveraging a social embeddedness framework, the study analyzes how successors from the CEO’s family and their organizational tenure affect the business’s financial distress and eventual recovery. Findings reveal that while nonfamily successors mitigate short-term financial struggles better, family successors outperform them in the long run—especially when the family successors have longer tenure in the organization. The research highlights the critical role of choosing the right successor to ensure business survival after a sudden death tragedy.

The Starting Point

The sudden death of a CEO-owner is a devastating event for any SME. As both leader and key resource holder, their absence can lead to chaos, grief, and financial instability. SMEs, unlike larger, public organizations, often lack robust succession plans, making them particularly vulnerable to bankruptcy after a leadership crisis. This study dives into how successor characteristics—specifically their embeddedness in the family (family relation to former CEO) and firm (organizational tenure)—can either exacerbate or alleviate financial distress during this tumultuous period.

Specifically, this study builds on the social embeddedness perspective, which emphasizes how economic behaviors and organizational outcomes are deeply intertwined with social relationships. In the context of succession, this perspective highlights two critical dimensions: family embeddedness, reflecting the successor's familial ties, and firm embeddedness, indicating their tenure and involvement within the organization. The present research extends this framework by integrating insights from crisis management literature, presenting a nuanced view of how embeddedness shapes a business’s recovery trajectory after the sudden death of its CEO-owner. Additionally, the study reveals that after the crisis of a CEO-owner’s sudden death, the financial health of the firm becomes progressively worse before recovery begins, with recovery starting about three years after the leadership crisis.

The study analyzed a longitudinal sample of 416 privately held Swedish SMEs that experienced the sudden death of their CEO-owners between 2000 and 2007. By examining their financial trajectories over five years, the researchers investigated the short- and long-term effects of successor family and firm embeddedness.

Key Insights

1. The Financial Impact of Sudden CEO Death:

• After the CEO-owner’s sudden death, the SME’s financial distress (i.e., the likelihood of bankruptcy) increases gradually in the first two years.

• Around three years after the sudden death, this financial distress peaks, and gradually declines, ushering in recovery during the following years.

 2. The Role of Family Embeddedness:

• Short-term struggles: SMEs with family successors face higher initial financial distress due to grief and limited rational decision-making than nonfamily successors.

• Long-term resilience: Over time, family successors draw on legacy, goodwill, and emotional ties to outperform their nonfamily counterparts.

3. The Role of Firm Embeddedness:

• Successors deeply embedded within the firm (e.g., long-tenured employees) consistently outperform those with less firm experience.

• High firm embeddedness mitigates financial distress in both the short and long term.

4. Combined Impact:

• Family successors with high firm embeddedness are the most effective at leading recovery across time.

• Conversely, family successors without firm experience lead to more severe financial struggles.

Key Takeaways and Recommendations

1. Prepare for Crises Before They Strike:

• SMEs must create emergency succession plans and prepare potential successors to step into leadership roles if a crisis hits.

• Owners should document critical business knowledge and designate interim leaders as part of their crisis management plans.

• Employees, family members, and advisors must understand the challenges of unplanned succession and the process of recovery, which includes a period of decline before the business is able to stabilize and prosper once again.

2. Prioritize Firm Embeddedness and Carefully Evaluate Family Embeddedness:

• Whenever possible, choose successors with strong firm knowledge and tenure. Their familiarity with operations and culture ensures smoother transitions.

• Family members of the deceased CEO-owner should only be chosen if they have experience working in the organization. Family members without experience and knowledge about the firm should not be appointed if alternatives are available.

3. Support Grieving Family Members:

Family members stepping into leadership roles should receive mentoring and emotional support to balance personal loss with professional responsibilities.

Impact

This study has broad implications for business leaders and owners as well as relevant stakeholders. Sudden leadership crises can destabilize even the most successful businesses, but strategic succession planning and careful successor selection can mitigate these risks. Policymakers, business advisors, and owners should take heed and prioritize the creation of emergency succession plans and crisis planning.

Originally published at https://managementstudiesinsights.com.