The business succession is the most critical event in the life of a family business, and represents a challenging scenario for the decisions that must be made. It therefore becomes a strategic objective to avoid factors that can negatively influence the assessment of the situation by the actors involved. This chapter explores the cognitive mechanisms (biases) that influence the decision-making process at the basis of the business transmission. Although already known and empirically supported in many fields of business and management, these cognitive factors have systematically been overlooked by previous family business literature. By exploring how these biases play a role in affecting business succession planning, and by putting emphasis on the human nature of the decision process of the incumbent, this study adds new insights to recent succession literature that highlights the central role of the cognitive processes during family firm succession.
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The field of organizational studies offers extensive research on family firms, defined by Chua, Chrisman, Sharma (1999, 35) as “organizations for economic purposes owned and / or managed [...] by a coalition of members of the same family or a few families, in such a way as to be potentially sustainable across generations.” According to this definition, a noteworthy feature is that such firms have also non-economic goals (Astrachan, Jaskiewicz, 2008; Berrone et al., 2012; Chua, Chrisman, & Sharma, 1999; Zellweger & Astrachan, 2008), and by definition (Chua et al., 1999), one of the most important non-economic goals is corporate sustainability across generations. Business succession is a process, not an event (Chittoor & Das, 2007; Gimenez & Novo, 2020; Porfirio et al., 2020). It goes through several distinct phases including initiation, integration, joint reign, then withdrawal (Cadieux, 2007; Le Breton-Miller, Miller, & Steier, 2004). This long-term scenario requires the family business to adapt to the surrounding complex environment, and the outcome is often negative. In fact, family businesses show a long-term survival problem: about 40% make a positive transition to the second generation and only 12% to the third (Bridge et al., 2003).
In management and complex adaptive systems literature, exploration refers to the search for new, useful adaptations, and exploitation refers to the use and propagation of known adaptations (March 1991; Mitchell 1996). Hence, exploration seems to ensure more adaptive capabilities for organizations, from a long-term perspective. However, 'lazy organizations' often utilized exploitation due to immediate and certain return (Denrell and March, 2001), but could experience future failures and economic losses. Furthermore, sometimes exploitation could also become an 'invisible trap' for these organizations: in fact, it's possible that the current situation could be appraised as profitable and overall as excellent by organizations, in terms of effectiveness and efficiency, but at the same time neglecting reliability in the long term. As cited by Fang et al. (2010, 626), Holland (1992, p. 69) generalized such a dilemma as follows: “Deciding to what degree the present should be mortgaged for the future is a classic problem for all systems that adapt and learn.”
Indeed, business transmission process should be future oriented, and pursuing organizational reliability in the long term. The strategic choices made at a given moment have an impact on subsequent periods. In a turbulent and unpredictable era, full of unexpected socio-economic phenomena, the ability to plan business transmission properly becomes a fundamental asset for business continuity. Both exploitation and exploration are primarily cognitive processes, and as such they must be investigated. In the business transmission it is necessary to enhance what is already available (exploitation) and to find new organizational structures (exploration). But the available literature highlights that both of these processes are prone to biases (Picone et al., 2021).