Northeastern Professor Kim Eddleston calls it the “Fredo effect” after the weak-link son in the Godfather movies. “The damage can be devastating,” she says.
What happens to a family business when its leader dies unexpectedly?
A new study led by Northeastern Professor Kimberly Eddleston showed that the most damaging successors were family members who lacked experience in the business. Chosen about one-third of the time, “these unprepared family members, who have little to no idea what they’re doing, often brought businesses to the brink of bankruptcy” says Eddleston, who has been researching family-business dynamics for two decades.
The identity of the successor is crucial, the study found. While all the businesses that continued to operate saw a decline in performance for three years after the CEO’s sudden death, those that had a successor from within the company showed the best recovery by five years. The most effective successors were family members with experience working in the business.
These results remind Eddleston of her research on deviant family members who often think they are more capable than they are but end up hurting the business – something she refers to as the “Fredo effect,” inspired by the weak-link Corleone brother in the “The Godfather” movies.
“So many of the family businesses we surveyed admitted to having what we call a ‘family impediment’ — someone who is there just because of their last name,” says Eddleston, the Schulze Distinguished Professor of Entrepreneurship and Innovation.
As illustrated in “Succession” — the HBO drama inspired by media empires like those of Rupert Murdoch and Sumner Redstone — inheriting a family name does not always qualify someone to lead the business.
“The damage can be devastating,” Eddleston says of company leadership by next-generation Fredos. “In our study on CEO sudden death, we found it takes three years for a business to stabilize their performance — meaning they may face bankruptcy before it starts to recover.
“But then there’s also the other side of family involvement,” Eddleston adds. “The advantage of a family business is the unique opportunity to nurture a leader from within — one who deeply understands its legacy and can drive it to new heights. So it’s this double-edged sword.”
Eddleston’s interest in the Fredo effect goes back to her childhood.
“I come from a family with multiple businesses — as many as nine at one time,” she says. “One of our family’s businesses in particular embodied, for me, a kind of utopia. Everyone pulled together. It was an iconic business in the region.
“And then,” continues Eddleston, “there was a family member who literally destroyed everything. And I thought, if this could happen to this business, it could happen anywhere.”
Eddleston was counseled early in her career to not waste time researching the Fredo effect.
“Some people said I would never get data, that no one would ever admit to it,” says Eddleston, whose research efforts were supported by Northeastern’s Center for Family Business. “But 33% of the family businesses surveyed admitted to having someone working at the business who was only there because of their last name — that anybody else would have been fired for hurting the business.”
Even businesses with reputations for a ruthless pursuit of profit have been diagnosed with a blind spot when it comes to elevating the family Fredo. Eddleston says it’s all about “parental altruism.”
“It’s inherent in most parents, where you will do anything for your child to make their life easier, to help and support them,” Eddleston says. “We tend to be more altruistic toward family members who are closer in blood, so you are more forgiving of your child, as opposed to an uncle or a cousin.
“But it’s the double-edged sword — because if you can make altruism reciprocal, with family members helping one another, then you wind up with family members who are willing to go above and beyond to make sure the business succeeds.”
Constructive family connections can be a boon while the company is growing.
“Family businesses have a higher rate of survival when it comes to entrepreneurship, because many times family members will work for free or for less pay than they would receive elsewhere,” Eddleston says. “So that’s the positive side of familial altruism.
“But then you have the negative side — things like the ‘silver spoon’ syndrome, where mom and dad think their child is better than they are and don’t recognize any faults,” Eddleston says.
Employing family members can lead to diminishing accountability, Eddleston has found.
“It’s common for family businesses, even publicly held ones, to lack clear job descriptions,” Eddleston says. “Then there’s anger when the family member isn’t performing. And the person may say in response, ‘No one told me that this was my responsibility.’ The lack of formalization is a major source of conflict and confusion in family businesses of all sizes.”
Petty family issues can also derail a company.
“You may see nasty family members lashing out in envy or jealousy,” Eddleston says. “My students often bring up [the character] Michael in the show “Peaky Blinders” as a type of Fredo who is not incompetent but rather is devious and manipulative. Michael keeps trying to gain power and control, often hurting the family business, but he keeps being forgiven.”
Eddleston teaches “Understanding Family Enterprise,” a Northeastern course that is popular among students from family businesses. She routinely notices students nodding as they relate to the aspects of Fredos, for bad and for good. Many share stories from their own family businesses, noting the problems and conflicts a Fredo caused for the family and the business.
She also leads four or more workshops annually for family business centers where she offers advice on avoiding the downfalls of employing family members and planning for succession.
“With company founders in particular, it can be incredibly difficult to get them to plan for succession because the business is their identity, it’s their baby,” Eddleston says. “These are not the type of people who are going to retire and take care of grandchildren or play golf. So they put off planning for succession until sometimes it’s too late.”
Eddleston recommends creating a crisis succession plan that defines and prepares the next in line to take over the business, if only on a temporary basis. This is important for the survival of the business, yet less than half of all businesses have one.
“Planning to hand over the business should also go beyond leadership succession,” Eddleston says. “Questions that should be addressed include: ‘What assets do we own? What banks do we use? Where are the passwords to accounts and keys to safety deposit boxes? Where are contracts filed?’ It’s so important to have all these documents and important information in one place. Otherwise, everything a founder worked to build could be lost.”