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

Goal and Object of the Research  Goal – to define and analyze factors that have a direct influence on founder’s 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

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)

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.

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).

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)

The model and the question  The growth threshold exists  Succession as a natural fact of company’s evolution  Regulations and institutes may have a negative impact on growth  Limited options decision model  So what?

Y N Y N Y N Legal system threats/benefits contract interests, property rights Owner has a network of trust/Family Low probability of succession. High probability of internal succession. High probability of succession. Y N Low probability of succession High probability of internal succession Y N No need for succession Changing org. needs? Business corresponds to legal framework? Low probability of succession. Owner has a network of trust/Family?

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

Hypotheses 4 and 5  H4: If owner’s 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.

Methodology of the Research. Data  «Productivity and the Investment Climate Private Enterprise Survey», by The World Bank Group [  companies (111 countries, )  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

Methodology of the Research. Variables  Dependent variable :  Who manages the company (0F/1NF)  Independent variables:  Legal framework valuations (manager’s 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)

Model  Logistic regression P{Y=1/X}=Λ(ßx)  The model had described connection between Y and X as: Y= ß 0 +ß 1 x 2 +ß 2 x 2 +ß 3 x3+ß 4 x 4 +ß 5 x 5 +ß 6 х 6 + ß 7 х 7 + ß 8 х 8 + ε.  3 groups of variables: 1)Institutional variables (legal framework, bribes, audit); 2)Organizational variables (log employees, log sales, age) 3)Control variable (industry, region)  3 models of logistic regression have been used for all sample, CIS countries and CEE countries

Model 1 (CIS+CEE) Model 2 (CIS) Model 3 (CEE) The constant ***-2.952*** *** The legal system The unofficial payments * The audit0.1633*0.4388*** The size of the company (number of employees)0.1204**0.1756** Age of the company0.0048*0.0106** The size of the company (sales volume)0.1563*** *** The region0.4146*** Industry: Manufacturing *** Industry: Construction *** Industry: Trade *** ** Industry: Transport Industry: Real estate HoReCa0.6512* Other services LR χ Prob > χ Pseudo R N The Results of Logistics Regression

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).

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

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 firm’s value in comparison to the experience of developed countries (Fan, Jian, Yeh, 2008)

Thank you for your attention!