Succession in large nineteenth-century Chilean family businesses

ABSTRACT

This article analyses the process of succession in three large Chilean family businesses between c.1860s-1940s, whose combined wealth was 10% of Chilean GDP. Although there is no general theory of succession planning in family firms, the most common reasons for why succession fails or succeeds have been identified in the specialised literature. We have contrasted the evidence we found in our three case studies against the theories available. The theories underpinning effective successions are supported by the case studies under analysis: timely selection and training of a competent successor; a reduced number of heirs; strategically arranged marriages; and family harmony. Some of the theories behind succession failure are also borne out by the existing evidence: family rivalries; adverse external economic shocks; conflicts between the family and the government; lack of commitment on the part of the heirs to the continuity of the business; unskilled successors taking over; early deaths from illness. Two further underlying elements can be identified from the Chilean case studies: fragmentation of the capital of the group; and the fashion for family members to spend time in Europe as rentiers.

KEYWORDS:

• Chile
• developing countries
• family business
• nineteenth century
• succession

Acknowledgements

We are very grateful to Vanessa Contreras for research assistance, and to Katharine Wilson for improving the English.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 For a discussion of the definition of ‘family firm’, see Astrachan et al, 2002. For some authors dealing with succession as a process, a firm can be classified as a family business only when a transfer to the next generation is intended. See, for instance, Birley, 1986 and Ward, 1987.

2 The process by which a family business is transferred from one generation to the next (Morris et al., 1997; Sharma et al, 2003), although we are particularly interested in the transfer from the first to the second generation, and from the second to the third. See also Ibrahim et al, 2001. Succession in family firms has to be taken as a process, rather than as an event, and a process in which the whole family is involved (Barnes & Hershon, 1994; Murray, 2003).

3 But this is not an obvious choice. One of the major issues faced by the incumbent is that of choosing a successor (Malone, 1989). Often, the successor is not a single individual, but many individuals (i.e. family members, such as two brothers, De Massis et al., 2008).

4 It is believed that survival rates improve as the size of the business increases (Malone, 1989).

5 Thanks to the seminal work of Handler and Kram (1988), there is agreement that when analysing the issue of succession difficulties, the founder, the family and the firm must be considered as three interdependent parts (or subsystems) playing key roles in the whole system. See also Morris et al, 1996; Friedman, 1991; Lansberg, 1988.

6 Perhaps to the surprise of many, lack of succession planning is not an isolated phenomenon, but a common experience. Many entrepreneurs do not take the necessary steps to plan upcoming successions (Bjuggren & Sund, 2001; Davis & Harveston, 1998; Lansberg, 1988; Malone, 1989).

7 More often than not, the founder is reluctant to plan for succession, because of many reasons, including fears of death or retirement, or the fact that succession procedures are time-consuming (Bjuggren & Sund, 2001; Handler & Kram, 1988; Ibrahim et al, 2001; Lansberg, 1988; Malone, 1989). Likewise, often key senior non-family employees do not receive any preparation for the succession process, although they should be brought into this process in a timely fashion (Osborne, 1991).

8 The potential successor(s) decline the management and leadership of the business (De Massis et al, 2008).

9 Sibling conflicts during a succession process can be particularly damaging for a family business (Friedman, 1991).

10 For instance, a negative change in market conditions; information complexity; financial turbulence on the market (De Massis et al., 2008; Handler & Kram, 1988).

11 Although it is true that the early writing on family business succession focussed on the founders, rather than on the next generation, or at best on the developmental relationships between fathers (owners) and sons (Handler, 1994).

12 For instance, in the recently published edited book by Fernández & Lluch (2015) on family businesses in Iberian and Latin American countries, there is little coverage of succession plans in Latin America. An exception would be the recently published edited collection by Almaraz & Ramírez (2018), for Mexico.

13 The bigger the business, the greater the likelihood of having a successful succession. Large family businesses are more likely to have business continuity planning in place (Malone, 1989).

14 In the US, 75% of all family business are majority-owned by one person; 20% can be classified as ‘sibling partnerships’, and a distant 5% as ‘cousin consortiums’ (Gersick et al., 1997).

15 Diversified business groups can appear to represent special cases in relation to the succession process, given that the inheritance could be distributed among different companies within the group, without necessarily dividing the property and/or management of the individual firms. What we observed in our three case studies was that the inheritance was not usually distributed among different companies, in particular during the first succession process. Instead shares were given to the heirs of the main companies of the group. Yet, during the second succession process ( from the second to the third generation), there was some fragmentation of the capital of the group, in order to avoid conflicts and to split the inheritance. In many of these cases, the capital of the group was invested in urban and rural estates, which were easily divided among heirs. The main companies of the group were mostly stock companies, whose shares were divided between the heirs, although most of the time one of them retained management of the firm.

16 In the case of Latin America, it is believed that between 80% and 98% of all private firms in Latin American countries are family-owned (Poza, 1995).

17 Even nowadays, many large modern corporations in developed countries are still controlled by family members of the founding families (Bird et al., 2002). Family businesses account for a substantial share of employment, revenues and GDP in most capitalist countries (Ibrahim et al., 2001; Miller et al., 2003).

18 The succession process (from the first generation to the second) is largely under the control of the founder-owner (Handler, 1992; Lansberg, 1988). There is broad agreement on the fact that the founder or owner is responsible for managing the transfer of power (Handler, 1992; Lansberg, 1988). For an effective succession it is crucial that the founder of the firm find succession desirable (Sharma et al., 2003).

19 Every country has a different legal system to deal with succession, and this is why it is important to analyze the effects of an entrepreneur dying with or without carrying out a succession plan (Bjuggren & Sund, 2001).

20 National Archives of the State (ANA), Notarial Santiago (NS), 1880, vol. 607; and ANA, Real State Registry of Santiago (CBRS), 1881, vol. 58.

21 ANA, Real State Registry of Limache (CBRL), 1881, vol. 35; 1882, vol. 37.

22 ANA, NS, 1880, vol. 607.

23 ANA, CBRS, 1879, vol. 51.

24 ANA, NS, 1882, vol. 637.

25 See also ANA, NS, 1882, vol. 644; Real Estate Registry of Los Andes (CBRLA), 24 May 1907.

26 ANA, CBRS, 1890, vol. 94; ANA, Real Estate Registry of Rengo (CBRR), 1893, vol. 22.

27 ANA, CBRLA, 1890; ANA, Notarial Los Andes (NLA), 1890, vol. 57.

28 According to Alcorn (1982), family firms are similar to monarchies, inasmuch as the eldest son is usually the uncontested successor. On this, see also Poza, 1995 (for Latin America in particular).

29 ANA, CBRL, 1891, vol. 9; ANA, NS, 1895, vol. 972.

30 ANA, NS, 1892, vol. 866; ANA, NS, 1893, vol. 893; ANA, NS, 1894, vol. 924.

31 ANA, CBRR, 1893, vol. 22; CBRS, 1893, vol. 109; ANA, NS, 1898, vol. 1072.

32 ANA, Notarial Valparaiso (NV), 1912, vol. 740; ANA, NV, 1912, vol. 743.

33 It is striking that Rafael decided not to enter the nitrate industry, at that time the main export sector of the Chilean economy.

34 ANA, NS, 1913, vol. 2491; ANA, CBRLA, 29 September 1914.

35 ANA, NS, 1917, vol. 2725; ANA, NS, 1917, vol. 2726.

36 ANA, Archivo Rafael Errázuriz Urmeneta (AREU), vol. 19, 25 September de 1918.

37 ANA, NS, 1924, vol. 1636; ANA, NS, 1924, vol. 3115. See also Rodríguez, 1988; and Canseco-Jerez, 2000.

38 ANA, NS, 1855, vol. 262.

39 ANA, Registro de Comercio de Santiago (RCS), 1869, vol. 18; Compañía Explotadora de Lota y Coronel, 1870.

40 ANA, Real Estate Registry of Rengo (CBRR), 1884, vol. 36.

41 ANA, NS, 1898, vol. 1079; vol. 1080.

42 ANA, NS, 1898, vol. 1079.

43 ANA, NS, 1898, vol. 1079.

44 ANA, NS, 1898, vol. 1079; vol. 1080; Rivera, 1900.

45 ANA, RCV, 1905, vol. 102.

46 ANA, Registro de Comercio de (RCV), 1918, vol. 221; 1919, vol. 232; 1920, vol. 241; RCL, 1921, vol. 159.

47 ANA; CBRN, 1933, vol. 54.

48 AN, NV, 1866, vol. 215.

49 AN, Archivo Judicial Valparaiso (AJV), 1880; and calculations from Díaz et al., 2016.

50 Evidence of her influence survives. See for example, the decision making process of the Bank of Edwards & Co., ANA, NV, 1891, vol. 38.

51 ANA, Real Estate Registry of Valparaiso (CBRV), 1898, vol. 70.

52 Archivo del Arzobispado de Santiago (AAS), 1914, vol. 88.

Additional information

Funding

This paper received funding from Proyecto 031962LLJ_POSTDOC of Universidad de Santiago de Chile.