Exploring the role of family governance mechanisms in family business succession planning

Abstract

Orientation: Family businesses contribute significantly to economic growth; yet, they face succession-planning challenges stemming from the interplay between family and business dynamics. Research purpose: This study investigates the role of governance mechanisms in the succession planning of family businesses. Motivation for the study: Governance mechanisms are known, but their role in family succession planning is underexplored. In addition, such research is lacking in developing countries with unique institutional settings. Research design, approach and method: Using a 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 in family businesses. Main findings: The study contributes to agency theory by demonstrating that humaneness is a central governance mechanism that reduces agency costs, particularly in succession planning, where formal contracts are unavailable. The findings also show that power dynamics are implicit assumptions in the agency theory, which affect family interactions; however, existing governance mechanisms can reduce their impact, thereby strengthening succession planning. Lastly, the constellation of governance mechanisms facilitates consensus, which is instrumental in succession planning. Practical/managerial implications: The findings demonstrate that, while formal agreements are essential, practitioners should also focus on informal governance mechanisms that guide succession planning. Contribution/value-add: The study addressed a gap in the literature by applying and extending the agency theory to examine the functionality governance mechanisms in family business succession planning.