Thank you to Claudia Binz Astrachan for this précis of the FBR article “Do Family Owners Hold Nonfamily CEOs More Accountable Than Family CEOs for Firm Performance? A Dynamic Perspective,” from the September 2024 issue. In this article, Wei Shen, Qian Gu, and Lin-Hua Lu explore the relationship between CEO performance in family-controlled entities in Taiwan and subsequent performance-induced, involuntary turnover.

Introduction

Decades of research on CEO effectiveness, turnover,¹ and firm performance highlight two well-established findings: poor firm performance is linked to involuntary CEO turnover, and a CEO’s effectiveness fluctuates over their tenure.² CEO effectiveness typically improves in the early years, peaks between years four and seven, and often declines after a decade or more, resulting in an ‘inverted U-shape’ pattern. This non-linear trajectory likely explains why performance-induced turnover is not consistent throughout a CEO’s tenure.³

This précis discusses the key takeaways from Shen, Gu, and Lu’s (2024) research and identifies actionable recommendations for family business owners and their advisors.

When Firm Performance Meets CEO Tenure

In their research paper, Shen and colleagues (2024) explore two questions: Do family business owners “consider the stages of CEO tenure in their use of firm performance to make CEO replacement decisions” and do “they treat family and nonfamily CEOs differently … in terms of holding them accountable for firm performance”?⁴

For the purpose of their research, the authors differentiate between three phases of CEO tenure: Early-stage (zero to three years), mid-stage (four to nine years), and late stage (ten or more years). The authors find that during the early stages of CEO tenure, family owners prioritize behavior-based strategic control over outcome-based financial control, meaning that they rely more on evaluating a CEO’s strategic decisions rather than firm performance to assess a new CEO. As time progresses and the CEO enters the mid-stage of their tenure, firm performance becomes more important for assessing their performance. During this stage, CEOs are most held accountable for poor firm performance, which leads to a shift in focus from behavior-based to outcome-based metrics. The authors further hypothesize that it is during this mid-stage that we would expect to see differences in terms of family and non-family CEOs being held accountable for poor performance, with family owners holding non-family CEOs to higher standards. In the late stage of CEO tenure, the focus shifts once more away from outcome-based metrics. The theory-based assumption is that once CEOs have proven their competence and gained the family owners’ trust, poor firm performance no longer strongly predicts turnover. In summary, the authors, based on their review of prior literature, propose that family owners rely on firm performance to assess a CEOs effectiveness primarily in the mid-stage of their tenure and that it is also during that time that family owners hold nonfamily CEOs more accountable for firm performance than family CEOs.

Methodology and Findings

The study is based on a longitudinal analysis of 532 family-controlled firms in Taiwan spanning from 1999 to 2015. The sampled firms are all listed on the Taiwan stock market; approximately 80% are family-controlled, and most have employed both family and nonfamily CEOs over the observation period. Return on Assets (ROA) was used as a measure of firm performance.

The findings support the researchers’ theory-based assumptions that family owners’ use of firm performance as a proxy for CEO performance, and subsequent CEO turnover, varies over the tenure of the CEO. They find that a “negative effect of firm performance on CEO turnover was stronger during the mid-stage of CEO tenure than during the early and late stages,”⁵ and particularly for non-family CEOs. According to their data, low-performing CEOs are most likely to get laid off in the mid-stage of their tenure, especially if they are not family members. So, what can family businesses and their advisors learn from these findings?

This research is a catalyst for meaningful dialogue within business families. It raises several key considerations:

1. What should a CEO be evaluated on during the different stages of their tenure?
2. Do firms—or should they—evaluate a CEO’s performance differently when the CEO is a family member, both in terms of the process used and the metrics applied?
3. What is the board’s role in setting a sensible process to assess CEO effectiveness?

1. CEO Performance Evaluation Across Tenure

The results from this study suggest that family enterprises might benefit from using different performance metrics throughout a CEO’s tenure. During the early stage, firm performance paints an incomplete picture of CEO effectiveness, given that “firm performance is highly path-dependent [and therefore] tends to be heavily influenced by the prior CEO’s strategic decisions during the first few years of a [new] CEO’s tenure.”⁶ Therefore, “instead of emphasizing firm performance, family owners may focus more on monitoring and assessing new CEOs’ strategic decisions and actions, such as resource allocation and investment decisions.”⁷ Early tenure assessment could emphasize qualitative elements such as leadership style and cultural alignment, as well as the quality of strategic decision-making.

During the mid-stage, family owners expect the CEO’s strategic decisions and actions to show a significant impact on firm performance, indicating the need for more traditional, financially based KPIs to assess CEO performance in this period. Any change in performance metrics needs to be thoroughly discussed and communicated.

During the later stages of a CEO’s tenure, once a CEO has proven their capability by delivering strong results, “family owners may focus less on firm performance in their assessments of CEOs afterwards.”⁸ The assumption is that family owners have grown to know and trust the CEO over time. As a consequence, “family owners may encourage these proven competent CEOs to explore new strategic initiatives, rather than to continue focusing on exploiting proven strategies,”⁹ resulting in lower immediate returns but bright prospects. Late-stage CEO performance evaluations might therefore balance accountability with strategic flexibility, ensuring long-term value creation without complacency.

2. Family vs. Nonfamily CEO Performance Evaluation

This research suggests that family owners may hold family and nonfamily CEOs to different standards when it comes to assessing their effectiveness, particularly during the mid-stage of a CEO’s tenure. This leads to the question of whether family owners apply a different process or different performance metrics when evaluating the performance of a family versus a nonfamily CEO.

An important thing to consider here—and a factor that might affect strategic choices made by family versus nonfamily CEOs—is how CEOs are incentivized. Are different financial and non-financial incentives used for family and nonfamily CEOs, and how might that affect the decisions they make, particularly once they are firmly in the saddle, during the mid-stage of their tenure? It might be that family enterprises offer more short-term incentives to nonfamily CEOs, leading them to make investments that might yield short- or medium-term profits, whereas family CEOs, who are often shareholders in the business with long-term objectives, lean towards investments with a longer runway.

3. The Board’s Role in Assessing CEO Effectiveness

The board plays a key role in assessing CEO performance, and it must ensure that both family and nonfamily CEOs are assessed using clear, pre-established criteria. Moreover, the board should advocate for continued performance scrutiny beyond the mid-stage to counteract the risks of stagnation and declining effectiveness.

In private family enterprises, independent board directors can play a key role in ensuring consistency and fairness in CEO evaluations, preventing undue favoritism toward family CEOs, and maintaining high levels of accountability. Making sure that independent directors are, therefore, in fact truly independent is key.

Practical Implications for Family Businesses and Their Advisors

• Tailored Performance Evaluation Frameworks: Advisors can encourage family enterprises to consider stage-specific criteria for evaluating CEO performance. For instance, during the early tenure, they may emphasize behavior-based strategic control over firm performance, while in the mid-stage, evaluation should shift toward performance metrics that align with strategic objectives. Late-stage assessments might incorporate both financial outcomes and the CEO’s contribution to innovation and long-term value creation.
• Independent Director Engagement: Independent directors can take on an important role in the CEO evaluation process. When such processes are led by independent directors, they can ensure impartiality when assessing both family and nonfamily CEOs, thus reducing the risk of favoritism or leniency, particularly in cases where family owners may hesitate to hold long-tenured family CEOs accountable.
• Advising on Incentive Structures: Advisors should encourage clients to regularly review their CEO incentive structures. Since family and nonfamily CEOs may be motivated differently, designing tailored incentive systems, such as balancing short-term performance targets with longer-term value creation goals, can improve decision-making alignment.
• Succession Planning Support: Succession planning must be seen as a continuous process rather than a reactive measure. By building assessment frameworks that evolve over a CEO’s tenure, families can better prepare for leadership transitions while maintaining strategic momentum.
• Board Discussions: Boards should regularly engage in structured conversations about evaluation criteria, ensuring that all board members align on performance expectations for family and nonfamily CEOs alike. This helps establish transparent and credible assessment mechanisms that reinforce accountability across tenure stages.

Implications for Future Research

• Cultural Context and Governance Models: Future research could examine how cultural norms, particularly around respect for hierarchy and elder leadership, influence CEO accountability practices in regions outside of Taiwan.
• Private vs. Public Family Firms: Given the distinct governance pressures faced by private family enterprises, investigating how CEO accountability frameworks differ in privately held firms versus public companies would be valuable.
• Impact of Board Composition: Future studies could explore how variations in board structure, such as the presence of outside directors or committees, affect CEO accountability dynamics.
• CEO-Owner Relationship Dynamics: Exploring the evolving interpersonal dynamics between CEOs and family owners across tenure stages could provide a richer understanding of how trust, loyalty, and influence affect performance evaluations.

Summary Thoughts

Given the substantial body of research showing that CEO effectiveness declines significantly after ten years, the lack of rigorous performance assessment in the later stages of a CEO’s tenure is concerning. This underscores the growing need for agility and systematic performance assessments in the C-suite. However, and while there is limited research available on the topic, several reports indicate that CEO tenure in privately owned family enterprises as much as doubles the tenure of a CEO in a public company (eighteen compared to eight years for public company CEOs).¹⁰

Shen, Gu, and Lu’s (2024) research shows that, at least in this group of family firms observed in the study, performance metrics are applied less rigorously to assess late-stage CEO performance. It is the board’s role to continue to regularly reassess whether long-tenured CEOs remain the optimal leaders for their evolving business landscape and to implement mechanisms to encourage fresh strategic thinking and prevent stagnation. Succession planning must be seen as an ongoing process rather than an end-stage necessity.

By acknowledging the evolving nature of CEO accountability and adapting evaluation frameworks accordingly, family firms can strike a balance between financial discipline and long-term stewardship.

References

Allgood, Sam, & Katherine Anne Farrell. “The Effect of CEO Tenure on the Relation Between Firm Performance and Turnover.” Journal of Financial Research 23, no. 3 (2000): 373-390. https://doi.org/10.1111/j.1475-6803.2000.tb00748.x

BDO. Private Company Executive Compensation Survey Insights Report. BDO USA, 2023. https://insights.bdo.com/rs/116-EDP-270/images/BDO-2023-Private-Co-Exec-Compensation-Survey-Report.pdf

Hambrick, Donald C., & Gregory D. S. Fukutomi. “The Seasons of a CEO’s Tenure.” Academy of Management Review 16, no. 4 (1991): 719-742. https://doi.org/10.2307/258978

Henderson, Andrew D., Danny Miller, & Donald C. Hambrick. “How Quickly Do CEOs Become Obsolete? Industry Dynamism, CEO Tenure, and Company Performance.” Strategic Management Journal 27, no. 5 (2006): 447-460. https://doi.org/10.1002/smj.524

Jenter, Dirk, & Katharina Lewellen. “Performance-Induced CEO Turnover.” The Review of Financial Studies 34, no. 2 (2021): 569-617. https://doi.org/10.1093/rfs/hhaa069

McClelland, Patrick L., & Vincent L. Barker. “CEO Career Horizon and Tenure: Future Performance Implications Under Different Contingencies.” Journal of Business Research 65, no. 9 (2012): 1387-1393. https://doi.org/10.1016/j.jbusres.2011.09.003

Shen, Wei, Gu, Q., & Lu, L. H. (2024). “Do Family Owners Hold Nonfamily CEOs More Accountable Than Family CEOs for Firm Performance? A Dynamic Perspective.” Family Business Review, 37(3), 347-369. https://doi.org/10.1177/08944865241273370

¹ Allgood & Farrell, 2000

² Henderson, Miller, & Hambrick, 2006; McClelland & Barker, 2012

³ Hambrick & Fukutomi, 1991; Jenter & Lewellen, 2021

⁴ Shen et al., 348

⁵ Shen et al., 362

⁶ Shen et al., 350

⁷ Shen et al., 350

⁸ Shen et al., 351

⁹ Shen et al., 351

¹⁰ BDO, 2023

About the Contributor

Claudia Binz Astrachan, PhD, researcher and lecturer at Lucerne School of Business, is the head of the governance practice at Generation6 and chairs the board of IFERA. Her research has been published in peer-reviewed journals, practice-oriented journals, and research reports for the family business community. She can be reached at castrachan@generation6.com.