The Role of Governance Structure in the Context of Crisis Management Pedram Faghfouri The Role of Governance Structure in the Context of Crisis Management An Empirical Analysis on a German Sample of Non-Family and Family Businesses Pedram Faghfouri Essen, Germany Zugl.: Dissertation Wissenschaft liche Hochschule für Unternehmensführung (WHU) – Otto Beisheim School of Management, Germany, 2012 ISBN 978-3-658-00595-5 ISBN 978-3-658-00596-2 (eBook) DOI 10.1007/978-3-658-00596-2 Th e Deutsche Nationalbibliothek lists this publication in the Deutsche Nationalbibliografi e; detailed bibliographic data are available in the Internet at http://dnb.d-nb.de. Library of Congress Control Number: 2012952681 Springer Gabler © Springer Fachmedien Wiesbaden 2013 Th is work is subject to copyright. 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Springer DE is part of Springer Science+Business Media. www.springer-gabler.de Foreword In 2011, more than 30,000 German companies filed for bankruptcy. Of these, more than 99 percent fell into the group of small and medium sized companies which are predominantly made up of family firms. These figures are alarming especially for those firms focusing not only on financial gains but also on striv- ing towards preserving their socio-emotional wealth. Management research – and common sense – proves that preparing for crises can make the difference once a crisis occurs. Those firms with early warning systems in place and an overall crisis readiness are more likely to survive a criti- cal situation than those ill-prepared. And this is not only because early warning signs are identified earlier or predefined plans carried out faster. It is the mere dealing with the possibility of a crisis and the constant testing and revision of plans that help people to “roll with the punches” as Mitroff and colleagues once nicely put it. While research has been engaged in looking into the causes of crises and while we have first insights into the actual crisis management process, little is known about the pre-crisis phase. This is especially true for family firms. There is some evidence about the causes of crisis in family firms, such as inadequate governance mechanisms, problems due to the personality of the owner or strained relationships between owner family members. Furthermore, since the work done by Cater and Schwab (2008), we have some ideas about how family firm characteristics influence turnaround management. But we know almost nothing about if and how family firms prepare for future crises and about their crisis readiness compared to non-family firms. This was the motive for Pedram Faghfouri to look deeper into the field of turnaround management, and especially, of turnaround management in family firms. After giving an extensive overview of the research field he pursues the question whether significant differences between family and non-family firms exist in terms of how they cope with the pre-crisis phase. Furthermore, his work attempts to provide a more fine-grained picture of the crisis readiness of family firms by taking governance differences into account. VI Foreword Based on evidence from 218 German family and non-family firms the author shows that family firms are indeed less prepared for future crises than their non- family counterparts. But, and that is the good news for all family firms, this difference diminishes if control bodies are in place such as advisory or super- visory boards. To summarize, the dissertation of Pedram Faghfouri is highly interesting to both family firm managers and management scholars alike. Practitioners find a solid argumentation for setting up a comprehensive crisis readiness system and get to know why and above all how to overcome obstacles to introducing such a system. Management scholars find, among other things, one of the first models of pre-crisis readiness together with a complementing set of propositions for future empirical examination. This doctoral dissertation will therefore surely find the wide audience that it deserves. Prof. Dr. Andreas Hack Acknowledgement My dissertation would not have been finished without the support of many people. I want to thank them here. First, my deepest thanks go to my doctoral supervisor Prof. Dr. Andreas Hack, whom I could always rely upon and who has been supporting me since the very beginning. I have learned a lot from him, both methodically and content-wise, but also personally. I never took it for granted that I was completely free in choosing my research topic while I was supported by him until the very last day. Furthermore, I´m eternally grateful for the inspiring research visit at New York University – Stern School of Business (NYU Stern) where he enabled me to conduct my research under his generous sponsorship. During this research visit I was able to achieve notable progress with my dissertation and had a memorable time. I would like to thank Prof. Franz W. Kellermanns of the University of Ten- nessee Knoxville for inviting me to a visit to his university, during which I re- ceived invaluable advice from him with regards to my data analysis and statisti- cal methods. Without him, my data analysis would not have been like it is today, and I´m very grateful for this. From NYU Stern I would like to thank Prof. Yakov Amihud for the invitation as a visiting scholar at the Department of Finance and for his valuable hints which improved my dissertation. I also want to thank his colleagues Prof. Edward I. Altman and Prof. Viral V. Acharya for their exchange of thoughts and their advice. I would also like to thank Prof. Dr. Utz Schäffer from WHU for accepting the role as second chair supervisor. I would like to thank my department colleague Dr. Nils Kraiczy for his helpfulness, dependability and for the friendly, entertaining time we experienced. I would like to thank my first supervisor and mentor after my graduation, Dr. Hans-Elmar Döllekes, for the pioneering, informative and memorable years in the management consulting industry, for the imparting of practical knowledge to my dissertation topic, and for the encouragement of writing a dissertation since our first meeting. VIII Acknowledgement Often understated is the importance of good and true friends. I’ve known for many years that I could count on, in any situation, a few certain old friends, among others Jan-Philip Stender and Philipp Ballhausen. Without these friends, the last few years would not have been nearly as memorable. In addition, I would like to thank my former consulting colleague, Dr. A-Ram Jo, for the many valuable tips before and during the writing of the dissertation, and for an always open ear while enjoying a delicious Asian meal. I also wish to thank the family Dulac – Pari, Christopher und Alexander, for the support and memorable time I had with them in New York. My own family has, during this thesis as ever before, always supported and encouraged me. So I would like to especially thank my older brother Shayan, who always inspired me with his entrepreneurship and his knowledge, and for so much that I have learned from him not only in his company. I also wish to thank my oldest brother Peyman for his unconditional commitment as well as his endless efforts to hold the family together for years, partly at the expense of his own privacy and freedom. Should there be some sort of a parental duty to promote, this my parents have already fulfilled by saving me from a politically and socially difficult environ- ment. They deserve my eternal gratitude. May this dissertation give them back a small, insignificant part of what I received from them over the past 30 years. This dissertation is dedicated to my father, whose passionate entrepreneurship first ignited my interest in management after my first internship in one of his companies, and whose entrepreneurial power I will never come close to. Last and most importantly, I would like to thank from my heart my longtime and patient companion and my doctoral colleague, Evelyn, without whose loving, generous and wise support I would not have survived the last half year of the dissertation. Thanks to her, the past years of my life have always been marked by love, fulfillment and joy. Pedram Faghfouri Table of Contents Foreword .............................................................................................................. V Acknowledgement ............................................................................................. VII List of Figures .................................................................................................. XIII List of Tables ..................................................................................................... XV List of Abbreviations ...................................................................................... XVII 1 Introduction ................................................................................................. 1 1.1 Motivation ............................................................................................. 1 1.2 Research goals ...................................................................................... 6 1.3 Definition of family businesses ............................................................. 7 1.4 Structure of the dissertation .................................................................. 8 2 Turnaround Management – State of the Art ............................................ 9 2.1 Abstract ................................................................................................. 9 2.2 Introduction ........................................................................................... 9 2.3 Crisis and its causes ............................................................................ 11 2.4 Models of turnaround management .................................................... 17 2.5 Success factors of turnarounds ............................................................ 25 2.6 Recommendations for future research ................................................. 32 3 Crisis management in family businesses – a comprehensive model and research agenda ...................................... 39 3.1 Abstract ............................................................................................... 39 3.2 Introduction ......................................................................................... 39 3.3 Introducing Pearson and Clair’s model of crisis management ............ 42 3.4 Why crisis management in family businesses differs.......................... 46 3.5 A model of crisis management for family businesses ......................... 55 3.6 Call for empirical research .................................................................. 66 X Table of Contents 4 Empirical studies: Methods and sample ................................................. 69 4.1 Methods .............................................................................................. 69 4.1.1 Linear regression ..................................................................... 69 4.1.2 MAN(C)OVAs ........................................................................ 71 4.2 Sample ................................................................................................ 72 5 How family members in the TMT and the existence of supervisory boards affect EWSs in family businesses .......................... 77 5.1 Abstract ............................................................................................... 77 5.2 Introduction ......................................................................................... 77 5.3 Theoretical basis ................................................................................. 80 5.3.1 UET and EWSs ........................................................................ 80 5.2.2 Family influence in the TMT and EWSs ................................. 83 5.3.3 Family business supervisory boards and EWSs ....................... 86 5.3.4 Family business TMT influence, supervisory boards and EWSs ................................................................................ 88 5.4 Method and research design ................................................................ 89 5.4.1 Sample ..................................................................................... 89 5.4.2 Measures .................................................................................. 90 5.4.2.1 Dependent variables .................................................. 90 5.4.2.2 Second-order CFA ..................................................... 91 5.4.2.3 Independent variables ................................................ 95 5.4.2.4 Control variables ....................................................... 96 5.5 Empirical results ................................................................................. 96 5.6 Discussion and conclusion ................................................................ 100 5.7 Limitations ........................................................................................ 102 5.8 Implications for further research ....................................................... 103 6 Differences in the crisis readiness of family and non-family businesses – does a supervisory board matter? ................ 105 6.1 Abstract ............................................................................................. 105 6.2 Introduction ....................................................................................... 105 6.3 Hypotheses ........................................................................................ 107 Table of Contents XI 6.4 Method and research design .............................................................. 110 6.4.1 Sample ................................................................................... 112 6.4.2 Measures ................................................................................ 113 6.4.2.1 Dependent variables ................................................. 113 6.4.2.2 Independent variables .............................................. 115 6.4.2.3 Control variables ...................................................... 115 6.5 Empirical results ............................................................................... 116 Additional findings in post hoc analysis ........................................... 121 6.6 Discussion and conclusions .............................................................. 123 Discussion of additional findings in post hoc analysis ...................... 124 6.7 Limitations ........................................................................................ 125 6.8 Implications for further research ....................................................... 127 7 Summary ................................................................................................. 129 8 References ................................................................................................ 133 9 Questionnaire applied in this dissertation ............................................ 163