Business History ISSN: 0007-6791 (Print) 1743-7938 (Online) Journal homepage: https://www.tandfonline.com/loi/fbsh20 Succession in large nineteenth-century Chilean family businesses Juan Ricardo Nazer & Manuel Llorca-Jaña To cite this article: Juan Ricardo Nazer & Manuel Llorca-Jaña (2020): Succession in large nineteenth-century Chilean family businesses, Business History, DOI: 10.1080/00076791.2020.1717471 To link to this article: https://doi.org/10.1080/00076791.2020.1717471 Published online: 26 Jan 2020. Submit your article to this journal View related articles View Crossmark data Full Terms & Conditions of access and use can be found at https://www.tandfonline.com/action/journalInformation?journalCode=fbsh20 BUSINESS HISTORY https://doi.org/10.1080/00076791.2020.1717471 Succession in large nineteenth-century Chilean family businesses Juan Ricardo Nazera and Manuel Llorca-Jañab a CIHEAP-FAE, Universidad de Santiago de Chile, Santiago de Chile, Chile; bDepartment of Economics, Universidad de Santiago de Chile, Santiago de Chile, Chile ABSTRACT KEYWORDS 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. Chile; developing countries; family business; nineteenth century; succession Introduction Succession occurs not only in private businesses, but in all organizations (Friedman, 1986; Ip & Jacobs, 2006; Murray, 2003). Family business1 succession can be defined in many ways, although in this article a standard definition is used: ‘the passing of the leadership baton from the founder-owner to a successor’ (Beckhard & Burke, 1983a),2 usually the offspring of the owner-founder (Lee, Lim, & Lim, 2003; Osborne, 1991; Sharma, Chrisman, Pablo, & Chua, 2001).3 The successful continuity of most family businesses depends on effective succession planning (Alcorn, 1982; Barach & Ganitsky, 1995; Barnes & Hershon, 1994; Colli, 2003; Colli, Fernández, & Rose, 2003; De Massis, Chua, & Chrisman, 2008; Handler, 1990, 1991, 1992, 1994; Handler & Kram, 1988; Hubler, 1999; Lansberg, 1988; Lee et al., 2003; Malone, 1989; Morris, Williams, Allen, & Avila, 1997; Osborne, 1991; Sharma, Chrisman, & Chua, 2003; Ward, 1987). CONTACT Manuel Llorca-Jaña Chile, Santiago de Chile, Chile manuel.llorca@usach.cl © 2020 Informa UK Limited, trading as Taylor & Francis Group Department of Economics, Universidad de Santiago de 2 J. R. NAZER AND M. LLORCA-JAÑA Succession can be so problematic, given the instability and uncertainty it generates (Barnes & Hershon, 1994), that less than a third of all family businesses survive the transition to the second generation, and less than a sixth survive into the third generation (Beckhard & Dyer, 1983b; Birley, 1986; Davis & Harveston, 1998; Ibrahim, Soufani, & Lam, 2001; Morris et al., 1997), regardless of the cultural or economic context (Ip & Jacobs, 2006; Lee et al., 2003).4 The process of succession in family-owned businesses is usually either ineffective or unsatisfying, impacting negatively on the health of host economies (Colli & Rose, 2002; Miller, Steier, & Le Breton-Miller, 2003; Osborne, 1991), and it is a regular issue for family businesses (Colli, 2003; Colli & Rose, 2002). Yet, despite its importance, as a process, there is still no general theory of succession planning in family firms (Bjuggren & Sund, 2001; Morris, Williams, & Nel, 1996; Sharma et al., 2003; Wortman, 1994), perhaps because there are no golden rules to ensure effective succession planning; it is a case-by-case process (Ip & Jacobs, 2006). The most common reasons why succession fails have been identified:5 unclear, poor (or non-existent) succession plans,6 including a lack of active involvement on the part of the founding owner in the succession process;7 unprepared or incompetent successors (who lack the necessary skills, training or work experience to run the business); unwilling or uncommitted successors;8 failure to plan strategically for the future of the firm; family rivalries, e.g. between the heirs,9 or between the owner and the next generation, or between key non-family members and the potential successor; and adverse external contexts10 (Alcorn, 1982; Barach & Ganitsky, 1995; Colli et al., 2003; Colli & Rose, 2002; Davis & Harveston, 1998; De Massis et al., 2008; Handler, 1990, 1994; Handler & Kram, 1988; Ip & Jacobs, 2006; Lansberg, 1988, 1999; Miller et al., 2003; Morris et al., 1996, 1997). The process of succession in family businesses has been thoroughly researched since the seminal work of Christensen (1953), in particular with regard to developed economies,11 and is one of the two most popular topics within family business research (Bird, Welsch, Astrachan, & Pistrui, 2002). Yet there are still many gaps in the literature. Little attention has been paid to succession in family businesses in developing countries, including those in Latin America.12 Nineteenth-century and early twentieth- century succession processes have received less attention than contemporary cases, although there are important lessons to be learnt from historic examples. This article deals with succession in nineteenth-century Chilean family businesses by focussing on several large business groups,13 so that it also contributes to the study of the development of family groups in developing economies. The initial and secondary succession processes of three family business groups are analysed, and core elements in succession planning identified. The three case studies are considered in the light of the theories available, so as to provide a more informed analysis of theoretical aspects of succession issues in large family firms, and to highlight the peculiarities of the Chilean case. Successions from the first to the second generation are usually less problematic than successions from the second to the third generation, and our case studies are no exception to the rule. Adding a third generation involved in the second succession process brings in a new set of challenges.14 More often than not a family business moves from being dominated by a single owner to being controlled by a ‘Society of Brothers’ or ‘Sibling Partnership’, to a ‘Consortium of Cousins’, as a result of the aging and expansion of the founding family. As companies grow in size, it becomes increasingly difficult to preserve the family influence in the business from one generation to the next. The complexity of the family also increases, BuSINESS HISTORY 3 as well as the complexity of the ownership, all factors which pose difficult challenges (Gersick, Davis, Hampton, & Lansberg, 1997). The selected family groups (with a diversified pool of investments),15 which face the first succession in the 1860s-1880s, and the second two to three decades later, are the Errázurizurmeneta, the Cousiño-Goyenechea and the Edwards-MacClure. This was not an arbitrary selection: most Latin American economies are dominated by large business groups (Fernández, 2012; Fernández & Puig, 2007; Lansberg & Perrow, 1991; Miller, 2017; Poza, 1995; Schneider, 2009), and Chile is no exception (Lefort, 2010; Martínez, 2015; Martínez, Bernhard, & Quiroga, 2007). Family firms dominate the economic landscape in developing countries,16 whether they belong to business groups or not (Sharma, 2004), and this is also the case in developed countries (Colli, 2013; Davis & Harveston, 1998; Dunn & Hughes, 1995; Ibrahim et al., 2001; Miller et al., 2003; Morris et al., 1997).17 The importance of these three family business groups within the Chilean economy is well attested. In 1882, El Mercurio de Valparaíso, the most important Chilean newspaper of the time (incidentally owned by the Edwards family), published a ranked list of the 59 richest people in Chile, whose wealth when combined amounted to the equivalent of 24% of the Chilean GDP that year (own calculations based on Díaz, Lüders, & Gert, 2016). The three richest families were those analysed in this article; they accumulated a combined capital equivalent to 10% of the Chilean GDP that same year: three members of the Edwards family were listed in the top7 richest people, and the wealthiest was Juana Ross de Edwards, the widow of the founder of this family business. Isidora Goyenechea de Cousiño ranked third, and Maximiano Errázuriz 14th. Following Handler (1994), our main aims in this article are: to analyse succession as a process in a peripheral nineteenth-century economy, and to assess whether the succession was a success or a failure; to analyse the role of the founder and the next generation in the success or failure of the succession plans (as the founder was usually the most influential person in the succession process);18 to identify the causes of effective (or ineffective) successions in nineteenth -century Chile; to consider them in the light of the existing literature; and to provide a more informed analysis of theoretical aspects of succession issues in large family firms. It is difficult to define what exactly is understood by a failure of succession or an effective succession. For Ip and Jacobs (2006), for instance, an effective succession is when the succession process results in a continuation of the business, at least in the short term. Miller et al. (2003) believe that succession failure is reflected in poor performance in the family business (following the succession) that ends either in the successor’s dismissal or the company’s bankruptcy. Here, we shall conclude that there is a succession failure when either the main company of the family business group goes bankrupt, or when the position of the group within the ranking of the top economic groups of the country is greatly diminished (often due to the fragmentation of the capital of the business group). During the 1860s-1940s the development of the Chilean economy was strongly associated with the performance of mining exports (nitrate and copper), although the agricultural sector was also prominent, and accounted for most of the labour force. The 1860s-1920s in particular was a period of dramatic export-led economic growth, brought to an abrupt halt by the Great Depression, which hit Chile worse than any other country in the region. This period was also characterized by population growth, economic modernization, a transition to capitalism, incipient industrialization, revolutions in transport and communications (on 4 J. R. NAZER AND M. LLORCA-JAÑA the railways in particular), significant development of the financial sector and the codification of economic activity. Research method Our main sources of information were Notarial Records (for many locations relevant to the business activities of the selected family business); Real Estate Registry records; provincial trade records; and judicial records, all from c.1860 onwards. We worked with different sources from several family business studies dealing with succession issues, which usually rely on surveys and in-depth interviews (Bird et al., 2002). This article is therefore a contribution to business history, in line with other studies based on qualitative sources. These records allowed us to establish precisely how the legal process of transferring capital and management from one generation to the other occurred, according to the civil code of 1855, but also according to the valuation of the companies/properties belonging to the family group.19 According to Chilean legislation, once the leading male entrepreneur of the family firm died, the capital of the firm belonged in equal parts to the widow (50%) and the siblings (50%, to be distributed in equal parts amongst all of them), if he died intestate. If a will had been made, the heritage could be divided into four equal parts: one for the widow, one for the offspring, one to improve the situation of either the widow or any of the children, and a fourth one to be given to any person or institution, according to the testator’s will. In the case of a widow’s death, her assets were distributed in the same way, but between her children. As can be deduced from this legislation, widows often played an important role in succession processes in Chile; whenever the founding male owner died before his wife, she not only inherited most of the business but could even take over its management. Finally, it is important to highlight that Chile was closer to coparcenary (equal division of family assets among all descendants) than to primogeniture (the eldest son/daughter inherits the bulk of the family wealth). After this introduction, we have divided the paper into three sections, one for each family business group. The history and nature of the business of each family and the succession process undertaken by them are briefly described, and the succession process assessed. The primary purpose of these sections is to identify the key elements shaping the succession process for each particular case, and to contrast them with the main elements already identified by the literature dealing with other countries and periods. The case histories are also considered in the light of the available theoretical background on succession in family businesses. The main reasons for success or failure can thus be analysed in an evidence-based discussion of theoretical aspects of succession issues in large family firms. In particular, we have focussed on the impact of key family members moving to Europe, an element apparently peculiar to Chilean successions. This factor is underexplored in the literature and raises important questions: what reasons lay behind the decision to travel? Was the impact on the business invariably negative, or were plans poorly implemented? The Errázuriz-Urmeneta family business The leading entrepreneur of this group was José Tomás urmeneta (1808–1878), son of a trader with a Spanish family background, and educated in Britain and the uSA. urmeneta BuSINESS HISTORY 5 made his fortune out of copper exploitation, and soon became one of the richest men in Chile (Nazer, 1993). Copper was the first commodity exported on a sizeable scale by Chile after independence from Spain had been achieved, during the 1810s. urmeneta also invested in rural estates, wheat mills, a gas company, railways, banking and urban estates, greatly diversifying his portfolio. He also entered the political arena and became a member of parliament, before making an unsuccessful attempt to assume the presidency of Chile (Nazer, 1993). Since urmeneta had no male heir and two daughters (Amalia and Manuela, see figure 1), he decided to marry his daughters to men from other wealthy Chilean families, thus incorporating his sons-in-law into the business. This was a conscious decision by the founder of the group to try to retain a family business for the next generation, as patriarchs usually did. His daughters were clearly not regarded as capable of running the business on their own. urmeneta’s intention was to train his sons-in-law on the job, to ensure that succession ran smoothly. This decision is in line with the existing literature that highlights on the one hand the importance of the founder of the business caring about succession, and on the other hand the importance of the successors receiving good training (Daspit et al. 2015; GarcíaAlvarez, Lopez-Sintas, & Gonzalvo, 2002; Osborne, 1991; Sharma et al., 2003). The crucial point was not that urmeneta preferred men over women, but that the chosen successors received training for a long period of time. The selection and the preparation of the heir have been identified as key determinants of a positive succession in a family business, especially if training has been provided for a long period of time, as in this case. The more a potential successor has the opportunity to exercise personal influence in the family business, the more likely it is that the individual will have a positive succession experience (Handler, 1994; Morris et al., 1996; 1997; Osborne, 1991; Sharma et al., 2003; Stavrou, 1998). Amalia was married to Maximiano Errázuriz-Valdivieso (1832-1890), and Manuela to Adolfo Eastman-Quiroga (1835-1908). Amalia’s marriage meant that urmeneta could create a new society, urmeneta & Errázuriz, in 1860. Its purpose was buying and refining copper in mineral form in the north of Chile. The company started to mine coal in the south of the country as a source of energy for copper refining, while it also acquired some steamships to transport it. Coal was the most important source of energy in Chile at that time. In 1861 urmeneta, with his other son-in-law, created urmeneta & Eastman, a company in charge of providing public lighting in Santiago (using gas); urmeneta retained two-thirds of the company, with the other third for Eastman. The company also supplied gas to private homes and companies in Santiago and the surrounding region (Nazer & Martínez, 1996). The founder of the group was planning strategically for the future of the firm, and involving the business successors extensively in this process. These are crucial factors in ensuring a smooth succession, as family firms that consciously plan for continuity are more likely to survive (Ip & Jacobs, 2006; Lee et al., 2003; Malone, 1989; Sharma et al., 2003). But the family was struck by misfortune. Amalia urmeneta (1837-1861) died young, leaving Maximiano Errázuriz with four children to raise (José Tomás, Guillermo, Amalia and Rafael), while Manuela urmeneta acquired a strange disease, which greatly weakened her health, so that she and Adolfo Eastman could not have children of their own (Subercaseaux, 1954). However, this situation does not seem to have affected the first succession process. By the end of the 1870s the Errázuriz-urmeneta children had reached adulthood, while the founder of the family business died in 1878. The first succession process was a success: each branch of the family business was maintained. But the family needed to prepare for 6 J. R. NAZER AND M. LLORCA-JAÑA Figure 1. The Urmeneta-Errázuriz genealogical tree (partial view only). Note: Figure 1 includes only the most important members of the family, as far as business issues are concerned. We have also highlighted the most important business person in each generation. the second process. On the Errázuriz-urmeneta side of the family, the eldest son, who had the same name as his grand-father, José Tomás, had no interest in the business: he became a painter, to the surprise of many. It is not uncommon to find key next-generation family members who have interests other than the family business (Handler, 1992; Sharma & Irving 2005). However such a situation can endanger the succession process if no alternative business successor is found. Fortunately Errázuriz-urmeneta’s two sons Guillermo and Rafael, both lawyers and well trained in business affairs, were natural successors. Their father decided to further train his sons, engaging them as partners and managers, as his father-in-law had done with him. Another recipient of training was his son-in-law Ramón Subercaseaux (18541937), who was married to Amalia Errázuriz (Villalobos, 1968). Training on the job was regarded as crucial to the successful continuity of the business. When Maximiano Errázuriz died, at least two of the heirs were able to ensure continuity. In 1878, the heirs of José Tomás urmeneta were his widow Carmen Quiroga, his daughter Manuela and the children of his other (deceased) daughter. The business was about to be tested, and problems started to arise. On the one hand, Maximiano Errázuriz and his children had notorious differences, although they sided together. On the other hand, Adolfo Eastman (husband of Manuela) and his mother-in-law also quarrelled, but still presented a united front to Errázuriz and his children. These issues eventually led to a division of the family business, a logical result of little emotional capital within the family group. The lack of family harmony could be a mortal blow to any family business, usually leading to a turbulent transfer of power (Friedman, 1991; Daspit et al., 2015). The higher the number of heirs, the greater the likelihood of conflict during succession (Barach & Ganitsky, 1995; De Massis, Sieger, Chua, & Vismara, 2016; Friedman, 1991; Handler, 1992; Ip & Jacobs, 2006; Sharma, 2004). The first succession agreement was on the urmeneta & Errázuriz side of the business, resulting in the foundation of the Chilean Smelting Society. Maximiano Errázuriz was given 50% of the shares, the other 50% being distributed between Carmen Quiroga (25%), Errázuriz’s children (12.5%) and Manuela urmeneta (12.5%), who sold her share immediately to Maximiano, giving him full control of the company.20 The second large deal concerned the Limache estate. In this case the decision was made to divide the business, to separate the BuSINESS HISTORY 7 estate from the vineyard. The estate was given to Manuela, while the country house and the vineyard went to the widow.21 The shares of the Gas Company were distributed among the heirs (Nazer & Martínez, 1996), as well as San Cristobal wheat mills,22 urban estates in Santiago and the mines of Tamaya.23 Constraints of space forbid a detailed analysis of the division of the urmeneta business. The most important point is that the whole business was divided into several parts, but that of these, the largest share remained under Maximiano Errázuriz’s control. He decided to keep the copper and coal business in operation, as this represented the most lucrative side of the business. Despite the clear process of capital fragmentation of the group, Maximiano managed to keep its core companies under his control: those that generated most profits. The negative impact of capital fragmentation, detrimental to any business was thereby lessened. Maximiano made new investments in rural estates, while also continuing with the model of vertical integration: copper mining, copper refining, and coal production to refine copper.24 For two decades the copper-coal business did well, retaining an important share of national copper and coal production (Przeworski, 1980). Maximiano Errázuriz and his partners decided to invest heavily in wine making (Fernández, 2010; Videla, 1887).25 Two of Errázuriz’s sons (José Tomás and Amalia) decided to move to Europe, attracted by the Belle Epoque lifestyle, and left their shares of the business in their father’s hands, supported by their brothers Guillermo and Rafael. Both Guillermo and Rafael also invested heavily in rural estates.26 Although urmeneta’s original fortune was divided into several parts, an important part of it remained under the firm and successful control of Maximiano Errázuriz and two of his sons. Despite some family disputes, the succession from the first to the second generation can be classified as a success. In 1890 Maximiano Errázuriz died, triggering the second succession of the urmenetaErrázuriz family business group, as is detailed in his will. Since he was a widower, he left his four children as sole heirs (the legal 75%), with the remaining quarter of the estate going to the Archbishopric of Santiago, much of which was later rebought by the family.27 The inheritance was thus distributed between the heirs, including: shares of the Chilean Smelting Society, the Errázuriz & Sons business, the coal business, land estates, the winery business, and urban estates. As for the running of the business, it was Rafael Errázuriz, the youngest of the brothers, who took a leading role. This was an unusual development; family businesses are characterized by a monolithic expectation of male primogeniture (Ibrahim et al., 2001; Ip & Jacobs, 2006; Nelson & Constantinidis 2017).28 A combination of apparently unlikely events common to elite Chilean families led to this situation: Guillermo suffered from severe tuberculosis, José Tomás was living in Paris and was more concerned with painting than running a business, while Amalia travelled around Europe following her diplomatic husband, and was also uninterested in business affairs. Only Rafael displayed a clear commitment towards the family business. Lack of interest by successors is a common problem, and makes succession a more challenging process than otherwise (Handler, 1992; Sharma & Irving, 2005). In addition, the business received an external shock from political turbulence . In 1891 a civil war erupted, perhaps the worst in Chilean history, between forces supporting Congress and forces supporting President Balmaceda. Errázuriz’s open support to Congress resulted in the coal complex in Lebu being partially destroyed following orders from the President, and copper production was paralyzed (Pizarro, 1991). The coal business had to borrow heavily from the copper firm in the group to restart operations, to the extent that the latter eventually 8 J. R. NAZER AND M. LLORCA-JAÑA acquired the coal complex, integrating the copper and coal business in a single company.29 New debts, though, would trigger serious consequences for the continuity of the business. This situation confirms that family businesses in Latin America were highly dependent on maintaining good relationships with the government (Pozo, 1995), and that environmental factors can hinder the succession process (Handler & Kram, 1988). In addition to the coal-copper complex, Rafael Errázuriz had decided to increase the wine business. He invested heavily in Panquehue, after buying their shares in the property from his brothers and sister José Tomás, Amalia and Guillermo.30 To fund this investment Rafael sold some agricultural properties and borrowed the rest from his grandmother Carmen Quiroga.31 Thus, Rafael Errázuriz consolidated his position as figurehead of the family business, with regard to both management and ownership, a position which was further strengthened when his brother Guillermo died and Guillermo’s widow asked Rafael to administer the capital left by her deceased husband. Finally, in 1897, Carmen Quiroga, the wife of the founder of the family group, also died, leaving Rafael in charge of Carmen’s portion of the inheritance. With Carmen’s death the first succession was over. Of the second generation only Adolfo Eastman was alive, but as his wife was dead, he was now an outsider as far as the family business was concerned. Rafael Errázuriz-urmeneta was the key player in the family business. Like his father, he controlled the coal-copper complex, as well as the winery, and concentrated most of his energies on these industries, which were the most profitable of the family group. He was thus temporarily able to lessen the negative impact of capital fragmentation by concentrating the capital under his direct or indirect control in the key firms of the family holding. Rafael also participated actively in politics, which had consequences for the business. He was a member of parliament during several periods, becoming the youngest ever senator of the Republic, as well as Secretary of Foreign Affairs (Ramón, 1999). In 1907 he was appointed Chilean Envoy to the Vatican, which meant that he had to move to Rome for long periods. To compensate for his absence, he decided to appoint a cadre of managers, rather than relying on relatives. The appointment of non-family managers usually takes place when the leader’s children are regarded as incompetent, which raises questions about the survival of the family business (Lee et al., 2003). While in Rome, Rafael invested heavily in a luxury residence, and spent large sums in order to sustain an expensive lifestyle, replicating the earlier behavior of his brother José Tomás and his sister Amalia. This meant that the business operations in Chile were weakened by a lack of working capital, as well as the absence of new investments. It is true that family firms must finance both the business and the family. But problems emerge when family expenses take precedence over the health of the business (Dunn & Hughes, 1995). After a few years of successfully leading the family business, Rafael’s commitment to it appears to have waned. Furthermore, much of the original family fortune had already been dissipated in rural estates and urban properties in Chile and Europe, sold by José Tomás and Amalia to finance their luxury lifestyle in Europe. Rafael did not put in place any serious succession plan, which eventually led to the demise of the business group. This is important because a key factor influencing an effective succession is the family commitment to the business (Lee et al., 2003; Sharma et al., 2003), which Rafael clearly lacked at that stage. Authors such as Handler (1991 and 1992), Ibrahim et al. (2001) and Ward (1987) have gone so far as to argue that the lack of succession planning is the major reason for the high mortality of family firms. BuSINESS HISTORY 9 The second decade of the twentieth century was a tough one for the family business. From 1908 copper prices started to decline in the international markets, and Rafael found it difficult to repay some loans previously acquired to expand the wine business. His Chilean Smelting Society suffered from serious financial problems, which led to its final liquidation in 1911 (Oficina Central de Estadística, 1921). The coal complex also had to be sold.32 The extravagant lifestyles of the family in Europe were hitting the business hard. Nonetheless, Rafael kept his faith in copper,33 even injecting some capital into Guayacán Copper Smelting works, borrowing from the copper ore producer Ore Trading Company Ltd, but mortgaging the Panquehue wine complex.34 The start of World War I further depressed the copper market, and Rafael’s businesses. Both the copper and the wine business were now in serious danger. Rafael had no option other than to return from Rome to Chile. The first measure taken by Rafael Errázuriz was to replace the non-family managers of the business with his son, Maximiano Errázuriz-Valdés (1895-1950), a lawyer who had trained in Rome. This was too little too late. Shared decision-making practices and on-the-job training should start when the children are growing up, never when they are about to take over the family business (Stavrou, 1998). Furthermore, Maximiano Errázuriz-Valdés did not have either his grandfather’s or father’s business skills or commitment. To use a Chilean expression, he did not have the right ‘fingers for the piano’. There was also a lack of commitment from Errázuriz-Valdés, who was more concerned with politics and social life, and also entered into conflicts with the non-family managers of the business. This is important, because according to Sharma & Irving (2005), when not all family members are equally qualified or committed to making a positive contribution to the family firm, uncommitted successors can harm rather than benefit the business. From a business point of view, it is also inexplicable that his father Rafael continued to privilege his life in Rome over the family business in a moment of financial crisis. There was a clear lack of full commitment to the business not only by the successor, but also by the head of the family, and no proper succession plan in place. Lack of planning has been identified as one of the most important reasons why family firms do not survive a succession process (Lansberg, 1988; Lee et al., 2003). unsurprisingly Rafael Errázuriz was forced to sell the smelting copper works (to the American Metal Company Ltd), to pay back (part) of the loans with which he had mortgaged the wine complex. He had lost the mining side of the business and was also heavily indebted.35 When the wine business failed, Rafael tried to liquidate it, but could not agree on a fair price for Panquehue.36 He was also forced to sell some urban properties, paintings, and other minor properties, to sustain his lifestyle in Rome, where he died in 1923, leaving his descendants a small fraction of the formerly mighty capital of the family business.37 In turn, Rafael’s offspring liquidated the iconic Panquehue, and the properties in Rome, marking the end of the urmeneta-Errázuriz empire, and family business. An enterprise can be viewed as a family business only when a transfer to the next generation is intended (Astrachan et al., 2002), which was not the case in this instance. The most important reason lying behind the failure of the second succession process was the departure of key family members to Europe: the business was left either unattended, or in the hands of unqualified non-family managers; capital was transferred from Chile to Europe to be wasted in unproductive activities, causing debts to the firms of the group to increase and hampering new investments; no one in Chile was trained to take over the business. 10 J. R. NAZER AND M. LLORCA-JAÑA The Cousiño-Goyenechea family business The founding member of this family business empire was Matías Cousiño (1810-1863), the son of a merchant of Galician background. From an early age he embarked on small business ventures around Valparaiso, but with little success. He married Loreto Squella aged 18, and seven years later they had their only son, as Loreto died following a painful labour (Gaete, 2003). Fortunately for the family, Luis Cousiño-Squella (1835-1873) survived this tragedy. An afflicted Matías decided to move northward with his son, to try his luck in the most buoyant mining region of Chile at that time: Atacama, where both silver and copper were produced. There, he managed to obtain a job with an influential local entrepreneur, Ramón Ignacio Goyenechea, who, in partnership with his brother-in-law, Miguel Gallo Vergara, ran a successful silver mine called Descubridora, in the rich mountain range of Chañarcillo. Chile was by then one of the largest silver exporters of the world. Soon, thanks to his managerial skills, Matías was offered the role of general manager, and he accepted –perhaps the best business decision of his life. Matías gained valuable experience in mining during this period, which led him to start some businesses on his own, registering silver veins under his own name (Illanes, 1992; Nazer, Llorca-Jaña, & Navarrete-Montalvo, 2017). A few years later, in 1840, Matías’s employer (Ramón Goyenechea) died, leaving his widow, Luz Gallo, with two children to look after, Isidora Goyenechea (1836-1897) and Emeterio Goyenechea (1834-1884), but also with one of the greatest fortunes in northern Chile (figure 2). Soon after, Matías Cousiño and Luz Gallo married, a scandalous decision according to the Gallo family, who regarded Matías as a ‘fortune hunter’. Since neither Isidora and Emeterio had reached adulthood, Matías became the administrator of the whole family business, turning it into one of the richest in Chile. There was no fragmentation of the capital of this family business, despite the death of the founder, which is a positive element in a succession process: the larger the business, the more likely it is that it survives a succession (Malone, 1989). Cousiño meanwhile moved back to Valparaiso, the financial and banking centre of the country (Nazer, 2002). There, Matías invested in wheat flour and wheat exports, shares of joint stock companies in many sectors (Araya & Llorca-Jaña, 2018), rural estates, and coal production (Astorquiza y Galleguillos, 1952). He also entered politics, becoming a member of parliament between 1849 and 1864. Matías took the education of his son Luis and his step children seriously, with Luis Cousiño in particular receiving training in Europe (Gaete, 2003). Matías was clearly planning for succession, and his son Luis was to play a crucial role; business education in Europe was perceived as important. This was critical for the continuity of the business, and reflects the importance of both succession planning and the timely selection and training of the chosen successor (Daspit et al., 2015; García-Alvarez et al., 2002; Handler, 1991, 1992; Ibrahim et al., 2001; Ip & Jacobs, 2006; Lansberg, 1988; Lee et al., 2003; Malone, 1989; Osborne, 1991; Sharma et al., 2003). In 1855 Cousiño was ordered to account for the state of the family business, after Emeterio and Isidora had reached the age of majority.38 In an understandable decision, Emeterio decided to take his share of his father’s inheritance, and invested it in a business of his own. In theory, this capital fragmentation could have endangered the succession to the second generation. However Isidora had married Luis Cousiño, his step-brother, which meant that Cousiño’s father and son managed to retain much of the fortune left by Ramón Goyenechea BuSINESS HISTORY 11 Figure 2. The Cousiño-Goyenechea genealogical tree. Note: Figure 2 includes only the most important members of the family, as far as business issues are concerned. We have also highlighted the most important business person of each generation. (Medina, 2007), counterbalancing the loss of Emeterio’s capital. This is a clear example of conscious marriage strategies promoting inbreeding, as part of the succession planning, in order to strengthen the family business model. A sizeable capital provided the Cousiños with the means to expand the business. They invested heavily in coal production, and industries related to it: a factory of refractory bricks for smelting minerals, which was the first brick factory in South America; copper smelting works near the coal deposits; and a fleet of steamships. For nearly a decade father and son worked closely: Luis received excellent business training; successful heirs have usually received a good education and have spent a number of years working at all levels within the family business, when they were growing up. The amount of time an individual has been in the position of successor is crucial to ensure a successful succession (Handler, 1994; Ip & Jacobs, 2006; Stavrou, 1998). Father and son never quarrelled, and enjoyed a stable relationship, and above all, Matías trusted his son. Preparation of the heir is important, but so is trust (Ip & Jacobs, 2006). According to Daspit et al. (2015), the quality of the incumbent-successor relationship is critical to an effective succession, and the relationship in this case was exemplary, another indication that Matías wanted Luis to continue with the family business. There was conscious succession planning, fostering the survival of the family business (Ibrahim et al., 2001). But in 1862 Matías died at the age of 53. His sudden death was the first test of succession for this family group. The heirs were his widow Luz, and his son Luis. Fortunately, they were on good terms, and quickly managed to reach an amicable agreement, leaving Luis in charge of the whole coal complex (and related industries) and Luz in possession of most other urban and rural estates. This family harmony ensured a smooth succession process. When there is mutual respect and understanding between the heirs, it is likely that the succession will be a positive experience, since cohesive family structures foster exchanges based on trust and respect (Daspit et al., 2015; Friedman, 1991; Handler, 1994; Seymour, 1993). Luis was ready for the challenge of running the coal mining complex (Nazer et al., 2017), where he made further investments.39 Despite capital fragmentation, Luis retained the productive capital of the business, leaving less productive properties to his mother-in-law. The first succession of the Cousiño-Goyenechea was a considerable achievement. Matías Cousiño’s transfer of the business to his son Luis can be explained, in part, in terms of the 12 J. R. NAZER AND M. LLORCA-JAÑA long period of time his son was in the position of successor. When the heir is well prepared, and has received a good training in business and management for a long time, a fruitful transition is to be expected (Ip & Jacobs, 2006; Longenecker & Schoen, 1978; Sharma et al., 2003; Stavrou, 1998). Trust, loyalty and commitment on the part of the incumbent and the successor were cultivated as early as possible in the succession process (Daspit et al., 2015; Morris et al., 1997; Seymour, 1993; Sharma et al., 2001). In 1873, almost a decade after the death of his father, Luis himself, like Guillermo Errázuriz, died from tuberculosis, a universal scourge in nineteenth-century Chile. Early death from illness (interrupting succession planning), was a feature of the large Chilean nineteenth-century family groups studied in this article. Luis left as heirs his widow Isidora and six children. This was the second big test of the succession procedure for this large family business group (see figure 2), since Luis did not have enough time to train any of his sons to take over the business, and to ensure a father-to-son leadership transition, the usual practice of the time. Isidora, however, had great entrepreneurial skills, having come from a business family. It is clear that there were no family rivalries between the first and the second generation, and that marrying Matías’ son to his step-sister ensured that the patrimony of the family remained undivided. This family group capitalised on emotional unity, another positive determinant of effective successions. There were no tensions between Matías and his offspring, or between him and his in-laws, or between his son and the relatives of his wife. Successful family firms tend to enjoy family harmony, which helps to achieve effective successions (Lambrecht & Lievens, 2008; Sharma, 2004; Venter, Boshoff, & Maas, 2005), as was the case with the Cousiño-Goyenechea family. Here there was also an adequate transfer of power within the firm, another key determinant of fruitful successions (Handler, 1992). A contemporary witness recorded that Isidora had extraordinary managerial skills, paying attention to every detail of the business, and requesting regular reports from the managers of the business group (Curtis, 1888). The fact that Luis did not have a proper succession plan in place did not affect the succession process because of Isidora’s strong business skills. This example confirms that neither daughters nor wives should be overlooked as potential successors, as Luis must have known (Ibrahim et al., 2001). This case, like that of Juana Ross (see below), demonstrates the significance of the role of women in successful succession processes in nineteenth-century Chile. Isidora’s life exemplifies the relevance of both widows and mothers as managers and as a key element of family (therefore business) cohesion (Cole, 1997). The patriarchal family firm was not always the norm in big business in Chile. Isidora took key strategic decisions, departing from the strategies followed by her husband. For example, she decided to increase their equity shares in the coal complex, until she controlled 90% of the business, taking full advantage of the expansion of the coal business in Chile. She became interested in the winery, bringing experts from France to improve the quality of the vineyards, while she also invested heavily in urban properties in Santiago and Valparaiso, thus further increasing and diversifying the investment portfolio of the family business. Almost a decade after becoming a widow, the patrimony of Isidora further increased, following the death of her brother Emeterio, who did not leave descendants, making Isidora the sole inheritor.40 Thus, the original family fortune coming from Isidora’s father, plus the increase in capital due to both Matías and Luis Cousiño’s endeavours, ended up concentrated in one person only: the mighty Isidora Goyenechea, the richest woman in South America. It BuSINESS HISTORY 13 Figure 3. The Edwards-MacClure genealogical tree. Note: Figure 3 includes only the most important members of the family, as far as business issues are concerned. We have also highlighted the most important business person of each generation. is striking that such a huge fortune was not split into several parts, as usually happened through generations, at least until Isidora’s death in 1897 in Paris, where she was then living. The main assets of the family business group when Isidora died were: the coal complex, copper mines, silver mines, nine large rural estates, and several urban properties.41 The group was to be divided between Isidora’s offspring: Luis Alberto; Luis Arturo; Carlos; Adriana (with psychiatric problems, declared interdicted); Loreto and María Luz (cloistered in a convent). This was not an easy task given the large number of heirs (six), and the problems faced by two of the daughters.42 Furthermore Isidora did not ensure a smooth leadership transition, despite having prepared her will several years before her death. She made her six children universal heirs of the compulsory three quarters of the inheritance, but the remaining free quarter went to Luis Alberto, Luis Arturo and Adriana (perhaps to protect her, as she had poor mental health).43 However, no one was actually ‘appointed’ as Isidora’s business successor, which is not surprising given than more often than not owners lack confidence in the ability of their offspring to run the business (Stavrou, 1998). Owners often do not retire from the family business. Instead, they frequently die while still working, which, if no successor has been properly trained, cannot but damage the succession process (Barnes & Hershon, 1994; Ibrahim et al., 2001). While appointing a successor may feel disturbingly like preparing for one’s own death, it can avoid dramatic consequences for the continuity of the business (Handler & Kram, 1988; Lansberg, 1988; Malone, 1989). The influence of the family leader in a succession process is crucial (Lansberg, 1988), and the inability of Isidora to appoint a de facto business successor led to bitter legal disputes, in particular between the men of the clan, greatly disrupting the succession process, and delivering a mortal wound to the business. All the men wanted to retain control of the main asset of the family group: the coal complex. Eventually the tribunals appointed Germán Riesco, a famous lawyer and politician, as judge of the partition of Isidora Goyenechea’s inheritance (Rivera, 1900). The shares of the coal company were divided equally amongst the six heirs, but Luis Arturo got a better deal in terms of the rest of the inheritance.44 The partition rather than ending the family disputes, exacerbated them: both Luis Arturo and Carlos Roberto wanted to manage the firm. The shares of their sisters were the key to the leadership. Carlos was supported by María Luz and Loreto, since they felt that Luis Arturo 14 J. R. NAZER AND M. LLORCA-JAÑA had been unfairly favoured by the partition, but Luis Arturo was supported by Luis Alberto. Since Adriana was interdicted, she did not participate in the dispute. With the argument still unresolved, Luis Arturo died in 1902 and Sister María Luz a year later, in 1903. Carlos managed to arrange the legal tuition of Adriana, and with that the presidency of the coal company. This case shows that sibling rivalry can be highly destructive to a family business (De Massis et al., 2016; Friedman, 1991; Handler, 1992). The succession from Isidora to her offspring was a traumatic and painful process, which only led to a division of the family’s assets and business interests. The emotional capital of the group, formerly one of its greatest assets, had been destroyed, and within a short period of time. The decline of the family reflects the ideas of Gersick et al. (1997) that each branch of a family in its third generation has its own agenda, which more often than not conflict with each other. These conflicts of interest, combined with adverse external shocks, such as WW1, the Great Depression and competition faced from other sources of energy proved too damaging for the group. Only the interests in the coal company kept the heirs together. Carlos was best prepared to take over the reins of the business: he had received business education in Europe, and from the 1880 s was working actively in the coal side of the business, as the promoter of hydroelectricity generation for the family group, to supply the coal complex (Astorquiza & Galleguillos, 1952). Since Carlos was fully in charge of the coal complex, his first important business decision was to modernize and increase the size of the company by issuing new shares.45 As a result, the average annual coal production increased by 70% between 1905 and 1918 (Compañía Carbonífera e Industrial de Lota, 1942). The company greatly benefited from the impact of WW1, since imports of coal declined dramatically, while coal prices increased (undurraga, 1923). As a consequence, share prices in Cousiño’s coal company increased considerably, which led many members of the clan to sell their shares, including the sons of Luis Arturo and Luis Alberto (some of whom were now adults). Family members who had previously owned 90% of the shares of the coal complex owned just 38% between 1905 and 1921.46 This was a direct result of the lack of family harmony, as well as the lack of commitment to the continuity of the business. This generation was mostly concerned with maximising income revenues in the short term. This factor, however, did not stop Carlos from pursuing further increases in capital to enrich the coal business. The company started to face problems after the end of WW1, when coal prices started to decrease, and there were also some labour conflicts with the industry workers. From the mid-1920s coal started to face fiercer competition from both electricity and oil, as a source of energy, while the company was also hit by the impact of the Great Depression. In the middle of this crisis, Carlos died while on holiday, in 1931, a bachelor without descendants. To the surprise of many, Carlos left most of his fortune to charitable institutions in Valparaiso, Santiago and Concepcion, and only a rural estate to his sister Loreto,47 with whom Carlos had some joint ventures in the urban properties market. Carlos was also the administrator of his sister Adriana’s assets, which he had increased dramatically in size since 1897, when their mother died. Legally, Adriana was now the biggest shareholder in Cousiño’s coal complex, and in a wide range of urban and rural properties, and she became one of the most prominent property tycoons in Chile (Astorquiza & Galleguillos, 1952). After Carlos’ death, another person had to be appointed legal guardian of Adriana and her assets. This time the family managed to reach a quick and amicable solution, appointing BuSINESS HISTORY 15 a trio of relatives. To formalise this agreement, they created a society called Sociedad de Rentas Matías Cousiño SA (Sociedad de Renta Matías Cousiño, 1935), mainly concerned with the management of urban properties, and later another company called Sociedad Agrícola del Maipo SA, with a focus on agricultural properties (Sociedad Agrícola del Maipo, 1940). They founded a charitable institution called ‘Fundación Adriana Cousiño’, and were also in charge of managing what was left of the coal complex. The principal actors of the fourth generation were Luis Cousiño-Sébire and Arturo Cousiño-Lyon, but they were supported by outsiders in the directorship of the coal complex family firm, such as Guillermo Purcell and Eduardo Covarrubias, who were both directors and shareholders. By this time, though, the main company of the group had changed from being a closed family business to an open joint stock company with over 2,000 shareholders. In time, the participation of the Cousiño family waned, in particular after 1948, when Adriana died and most of her inherited shares were sold by the inheritors. The formerly mighty family business was over: it did not survive the second-generation succession process, like most family businesses (Lansberg, 1988; Morris et al., 1996). The Edwards-Mac-Clure family business The last of the family business groups under consideration started with the arrival in Chile of George Edwards Brown (1780-1848), before Chilean independence, in 1804. The first Edwards was a British crew member of a merchant ship engaged in contraband trade on the coasts of Chile. Only two years after arriving in Chile he married a local, Isabel Ossandón Iribarren (1784-1830). They settled in the north of Chile, in La Serena, where he engaged in mining activities associated with two Americans: Samuel Haviland and Daniel Frost, both married to two sisters of Isabel, who thus constituted a peculiar clan, engaged in copper and silver mining (Gallardo, 2004). George Edwards and Isabel Ossandón had eight children, although the one with more developed business skills was Agustín Edwards-Ossandón (1815-1878). From his youth, he engaged in business activities, working for his father in the north of Chile (Ross, 1926). But he was too independent to be content with being just the son of his father. He started an entirely new business, also linked to copper and silver mining, but primarily set himself up as a lender. Soon he became one of the main mining financers in the north of Chile, where no formal banks operated before the 1850 s. He also invested in railways, and engaged in political activities. By 1850 Agustín Edwards had accumulated a large fortune, which impelled him to move to Valparaiso, the financial capital of the country, where he founded the influential Bank of Agustín Edwards & Co., although the mining activities in the north continued. Thanks to the diversification of his businesses, by 1870 he was the richest man in Chile; his main investments were in the financial sector, followed by mining (copper and nitrate), urban estates, amongst others. Since he was by now the richest person in his family, many family members followed suit and also moved to the main Chilean port (Nazer, 2000; Ross, 1926). This move allowed Agustín to employ them as managing partners in many of the group activities (Nazer, 2000). Again, as in the previous cases discussed above, it is clear that Agustín wanted to preserve the family nature of the business. This is important because the leader’s commitment to perpetuating the family business is one of the essential pre-conditions of a fruitful succession (Handler, 1992; Lansberg, 1988; Sharma et al., 2003). 16 J. R. NAZER AND M. LLORCA-JAÑA But descendants were needed. Agustin married his niece Juana Ross (1830-1913), and had eight children in total, although only two of them reached adulthood: Agustín (18521897) and Arturo (1861-1899). Of these, Agustín was the eldest, and as soon as he was old enough his father involved him extensively in the business, in particular in the banking branch, where he was trained, rather than going to university, as most members of the elite did. This is important because often the father-owner lacks confidence in the ability of his offspring to run the business (Stavrou, 1998), which was not the case here. Instead his actions testify to the importance of timely selection and training of the successor (Daspit et al 2015; García-Alvarez et al., 2002; Osborne, 1991; Sharma et al., 2003). Within a few years, Agustín Edwards-Ross was appointed director of many of the companies in the family business group (Vial, 2009). From 1874, his father, the founder of the business empire, started to suffer severe health problems, which further strengthened the leadership of Agustín junior. In 1878 Agustín Edwards-Ossandón died, aged 62. He left as the sole inheritors of his fortune his wife Juana (50%), and his two surviving sons, Agustín (25%) and Arturo (25%), and a small fraction for charity.48 The total value of the inheritance was estimated at uS$14.2 million in 1880, some 7.3% of the Chilean GDP of that year.49 The mother and two sons reached an agreement quickly on how to distribute the assets of the group (Nazer & Couyoumdjian, 2002), but it was a different matter when they had to agree on who was to remain in charge of managing the business. The obvious decision was to entrust Agustín Edwards Ross with this duty, given his long and successful business experience, which his mother partially did, although he was supported (and supervised) by Juana’s brother, Agustín Ross-Edwards, who was twice a member of the Edwards family by marriage. Although this led to some family rivalry, the first succession can be regarded as effective in as much as the main businesses of the family remained united, strong and profitable, without capital fragmentation. The final call on any important business decision was to remain within Juana’s hands,50 as she took on her husband’s role unchallenged. According to Barnes and Hershon (1994), the transfer of power from the first to the second generation rarely takes place while the founder, or in this case his surviving widow, is still on the scene, which can lead to family tensions. Handler (1994) has stressed that when there is no mutual respect and understanding of the predecessor in a succession, the chances of having a positive succession experience are greatly diminished (see also Daspit et al., 2015; Handler, 1992). Luckily, Arturo, the other son, had no interest in pursuing a business career. He was an artist and an artistic muse who died prematurely in 1890, also from tuberculosis. As he was married but did not have children, his sole inheritors were his wife María Sutil and his mother Juana. The latter received 75% of her son’s assets, further increasing the concentrated wealth of the group, and of Juana in particular. Thus, capital fragmentation of the family business was further limited: Juana now managed nearly the same portfolio as her husband had done. The 1880s and 1890s were challenging times for the group. Copper and silver mining were suffering due to a fall in international prices and increasing costs of production. The family decided to re-orient their investments towards the renting of urban and rural properties and agricultural production to supply the nitrate districts and the expanding urban population. Nitrate had replaced copper and silver as the main export of the country. However, they kept investments in the burgeoning financial sector and joint stock companies. The Bank of Edwards & Co. in particular was at the heart of the group (Nazer & Couyoumdjian, 2002). BuSINESS HISTORY 17 In 1897 tuberculosis claimed yet another victim: Agustín Edwards-Ross died, to the dismay of his mother. The heirs of the 75% of Agustín inheritance, were María Luisa, his wife, and their nine children, although only Agustín and Adela were adults (Vial, 2009). In his will Agustin requested that, whenever possible, his daughters receive the urban and rural properties, and that his sons be involved in the primary firms of the business groups. That is, Agustín wanted to keep the productive capital of the group as united as possible: he clearly had the continuity of the family firm as a priority, and was planning for succession. The free quarter of his inheritance went mainly to charity.51 upon Agustín’s death, his assets were estimated at $8.8 million pesos, but he owed $3.45 million to his mother. Fortunately for Agustín’s children, Juana Ross (his mother) agreed with his widow, María Luisa, that if María Luisa gave up her full share of the inheritance in favour of her children, Juana would waive the totality of Agustín’s debt to her (Nazer & Couyoumdjian, 2002). Eventually María Luisa agreed; she had no other option. This is a good example of the positive role of mothers within the family business, which involved defusing conflicts and successfully maintaining the unity of the group (Cadieux, Lorrain, & Hugron, 2002; Cole, 1997). It also serves as a reminder that the succession process does not only have technical dimensions, but also physiological and affective ones (Meier & Schier, 2016). The partition process saw the emergence of the then 19-year-old Agustín Edwards MacClure, the eldest grandson of Juana, who, like his father, did not go to university: he preferred (or was persuaded) to be directly trained on the job, in particular in the banking sector. Soon, he took on the considerable challenge of managing the totality of the assets of the family business group (Vial, 2009). He replaced his father in many positions, including the directorates of insurance and railway companies, which is a clear indication of his father’s and grandmother’s wish to retain a family business, rather than bringing in professional managers from outside. This is not surprising, since in most family businesses the eldest male heir is the first successor to be considered (Ibrahim et al., 2001; Ip & Jacobs, 2006). Agustín Edwards Mac-Clure also opened new businesses or expanded old ones. In addition to the newspapers El Mercurio de Valparaiso, he also created El Mercurio de Santiago and Zig-Zag (a magazine). Yet this was not enough to impress his grandmother. Juana Ross increasingly left the management of her assets in the hands of her brother, Agustín Ross. Juana’s decision led to some tensions within the family, as the young Agustín felt frustrated: it was an unusual situation, since families prefer to hand over their business to their offspring, unless the owner considered them incompetent (Friedman, 1991; Ip & Jacobs, 2006; Lee et al., 2003). According to Barach and Ganitsky (1995) and Daspit et al. (2015), when the natural successor progresses in rank and experience, senior family members in key strategic positions, such as uncles, must trust and respect him, to reduce potential warfare, envy, and insecurity, and to promote the team spirit needed for fruitful transitions, which was lacking in this case. This situation probably led Agustín to dedicate much of his time to politics, to the detriment of the family business: he became a member of parliament, diplomat, and member of the cabinet of President Pedro Montt (1906-1910). Another source of concern lay in the fact that during the early twentieth century the assets of the family business group started to be divided. The six sisters of Agustín Edwards Mac-Clure grew up and got married, and their shares in the inheritance were managed by their husbands. Agustín’s two brothers also reached adulthood, and left the family business, selling part of their shares (Nazer, 2017a and 2017b). In 1913, the matriarch Juana Ross died. 18 J. R. NAZER AND M. LLORCA-JAÑA She left the free quarter of her fortune to the Archbishopric of Santiago, and the remaining 75% was divided between her nine grandsons and granddaughters, the Edwards MacClures.52 The Bank became a joint-stock company to facilitate share distribution amongst the heirs; urban and rural properties were assigned individually to the heirs, as well as shares and bonds of other companies. The fragmentation of the family patrimony between so many heirs would not have been a serious issue if the family members had stuck together and united behind a single strategy for the family business. This, though, was impossible. Juana delayed the transition of power until her death, rarely a strategy which benefits the surviving firm (Daspit et al., 2015). It was clear that her brother would not remain in the business after her death: why not train and empower her grandsons? Clearly, Juana was not planning the succession process, a situation which usually inflicts a mortal blow to family businesses (Handler, 1991, 1992; Ibrahim et al., 2001; Ip & Jacobs, 2006; Lee et al., 2003; Malone, 1989; Sharma, 2004; Sharma et al., 2003; Ward, 1987). The majority of the nine heirs took their assigned properties and either gave them to professional managers, sold them, or rented them out. Most lived in Europe, and were not interested in business affairs. As Nazer has argued (Nazer, 2017a), these family members became rentiers, squandering the family’s fortune. Even Agustín Edwards Mac-Clure, rather than becoming the business leader of the family, accepted a permanent diplomatic position in London, where he lived for many years (compare the case of Rafael Errázuriz above described). This is important because a key factor influencing an effective succession is the existence of a devoted successor to the business (Sharma et al., 2003). More importantly, this lifestyle, which was not unique to Chilean elite families within Latin America, greatly hindered the succession process. Lack of space forbids discussion of the next generation (the most prominent businessman was Agustín’s son, Agustín Edwards-Budge), but what is clear from the extant evidence is that by the late 1910s, the Edwards were no longer a powerful family business group, in possession of the largest fortune in Chile. The majority of the nine heirs of 1913 sold most of their properties to carry on financing a luxury lifestyle in Europe. There was a devastating process of patrimony fragmentation, and family rivalries, which proved destructive for the group. There was no strategic plan in place to enable the regular activities of the family business to be carried out, and this is usually a major reason for the demise of a family firm (Handler, 1994; Lee et al., 2003; Malone, 1989; Sharma et al., 2003; Ward, 1987). There was a marked absence of a good relationship between the heirs, which is critical to ensuring a smooth succession and business continuity (Barach & Ganitsky, 1995; Daspit et al., 2015; De Massis et al., 2016; Friedman, 1991; Grote, 2003; Lansberg, 1999; Morris et al., 1996). There was a clear lack of commitment from most of the heirs to the family business, and the formerly most powerful business group of the country was left in shreds. The potential successors’ willingness to take over the family firms is critical (Daspit et al., 2015; Sharma and Irving, 2005), and here no one was interested in continuing with the family business. Conclusions The three cases analysed here show why it is so difficult to produce a general theory of succession in family firms, and why most of the literature is atheoretical (Daspit, Holt, Chrisman, & Long, 2016). Despite sharing some similarities, all three cases are different, each BuSINESS HISTORY 19 presenting important peculiarities that enforce the idea that any assessment of succession in family businesses needs to be approached with a case by case methodology; there are no golden rules for succession planning (Ip & Jacobs, 2006). We have identified the core themes behind successful and unsuccessful successions, and tested them against the evidence from the literature. Our evidence confirms that, at least for large Chilean family business firms between c.1860s and 1940, the main reasons for fruitful succession were those already identified in the extant literature: a timely selection of a competent successor; a long period of training of the selected successor; a reduced number of heirs when succession takes place; strategically planned marriages; and cohesive family structures, or family harmony amongst successors (i.e., strong emotional capital present in the family firm). These factors also had a positive impact on the economic success of these companies, helping to overcome periods of economic crisis. Our review has implications for the education of future successors in Chilean family businesses. Our evidence also shows that the main reasons for succession failure have been identified by scholars: bitter family rivalries (in particular during the second succession); adverse external economic shocks; conflicts between the family business and the government; lack of commitment of the heirs to the continuity of the family business; the absence of proper succession plans in place; unskilled successors taking over the business; early death from illness; and fragmentation of the capital of the family group, in particular during the second succession, thus confirming Gersick et al. (1997) idea that successions from the second to the third generation are usually more problematic than successions from the first to the second generation. Another reason for failure was the trend towards moving temporarily to Europe, with family members living there as rentiers, wasting the family fortune in unproductive investments or luxury goods. Those leading family members moving to Rome or Paris did not pursue business activities. They intended to enjoy access to what was regarded as a higher culture, or to educate their children, or just to travel extensively. They aspired to mingle with the French, Italian or British aristocracy. But this was expensive and irrational from a purely business point of view. As stressed by Barnes and Hershon (1994), ‘families and their business are not necessarily reasonable.’ The costs of these decisions were further exacerbated from the 1880s, when the Chilean peso started a continuous devaluation process, making it increasingly more expensive to make a living in Europe. These business leaders often spent more than the capital their business in Chile brought in, so that they were usually forced to liquidate some of their assets in Chile, or to borrow, to carry on with their luxury lifestyle in Europe. These actions damaged their businesses at home, in some cases leading to the final collapse of their firms, in particular after the crisis of 1929, which had dramatic consequences for Chile. Given the still poor state of transport and communications for most of our period of study, managing a business in Chile from Europe was a challenging prospect. Often the work of the non-family managers left in charge of the business could not be properly supervised. Furthermore, managers were forced to send most profits to Europe, hampering new investments in Chile. This trend to moving to Europe seems to have been a peculiar feature of the family businesses we have analyzed, previously unidentified in the existing literature on the failure of successions. This is not surprising given that most of the available theoretical literature on succession deals with developed countries, where the leader of a family business would never leave the country to enjoy a better life elsewhere. Furthermore, most of the previous 20 J. R. NAZER AND M. LLORCA-JAÑA works available to us deal with later periods, without the transport and communications problems faced by Chilean entrepreneurs living in France or Italy. Finally, failed successions were rarely exclusively caused by economic factors. Those successions that failed, bringing misery to the family business, were attributable to factors such as the lack of family harmony, uncommitted or selfish successors, or business leaders wasting money. These factors led to the bulk of the family business’s assets being translated into unproductive capital, making it impossible for the family firm to carry on. They led to an irreversible process of loss of capital investment, delivering a mortal blow to their business. Notes 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 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. 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). 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). It is believed that survival rates improve as the size of the business increases (Malone, 1989). 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. 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). 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). The potential successor(s) decline the management and leadership of the business (De Massis et al, 2008). Sibling conflicts during a succession process can be particularly damaging for a family business (Friedman, 1991). For instance, a negative change in market conditions; information complexity; financial turbulence on the market (De Massis et al., 2008; Handler & Kram, 1988). 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). 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. BuSINESS HISTORY 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 21 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). 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). 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. 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). 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). 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). 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). National Archives of the State (ANA), Notarial Santiago (NS), 1880, vol. 607; and ANA, Real State Registry of Santiago (CBRS), 1881, vol. 58. ANA, Real State Registry of Limache (CBRL), 1881, vol. 35; 1882, vol. 37. ANA, NS, 1880, vol. 607. ANA, CBRS, 1879, vol. 51. ANA, NS, 1882, vol. 637. See also ANA, NS, 1882, vol. 644; Real Estate Registry of Los Andes (CBRLA), 24 May 1907. ANA, CBRS, 1890, vol. 94; ANA, Real Estate Registry of Rengo (CBRR), 1893, vol. 22. ANA, CBRLA, 1890; ANA, Notarial Los Andes (NLA), 1890, vol. 57. 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). ANA, CBRL, 1891, vol. 9; ANA, NS, 1895, vol. 972. ANA, NS, 1892, vol. 866; ANA, NS, 1893, vol. 893; ANA, NS, 1894, vol. 924. ANA, CBRR, 1893, vol. 22; CBRS, 1893, vol. 109; ANA, NS, 1898, vol. 1072. ANA, Notarial Valparaiso (NV), 1912, vol. 740; ANA, NV, 1912, vol. 743. It is striking that Rafael decided not to enter the nitrate industry, at that time the main export sector of the Chilean economy. ANA, NS, 1913, vol. 2491; ANA, CBRLA, 29 September 1914. ANA, NS, 1917, vol. 2725; ANA, NS, 1917, vol. 2726. ANA, Archivo Rafael Errázuriz urmeneta (AREu), vol. 19, 25 September de 1918. ANA, NS, 1924, vol. 1636; ANA, NS, 1924, vol. 3115. See also Rodríguez, 1988; and CansecoJerez, 2000. ANA, NS, 1855, vol. 262. 22 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. J. R. NAZER AND M. LLORCA-JAÑA ANA, Registro de Comercio de Santiago (RCS), 1869, vol. 18; Compañía Explotadora de Lota y Coronel, 1870. ANA, Real Estate Registry of Rengo (CBRR), 1884, vol. 36. ANA, NS, 1898, vol. 1079; vol. 1080. ANA, NS, 1898, vol. 1079. ANA, NS, 1898, vol. 1079. ANA, NS, 1898, vol. 1079; vol. 1080; Rivera, 1900. ANA, RCV, 1905, vol. 102. ANA, Registro de Comercio de (RCV), 1918, vol. 221; 1919, vol. 232; 1920, vol. 241; RCL, 1921, vol. 159. ANA; CBRN, 1933, vol. 54. AN, NV, 1866, vol. 215. AN, Archivo Judicial Valparaiso (AJV), 1880; and calculations from Díaz et al., 2016. Evidence of her influence survives. See for example, the decision making process of the Bank of Edwards & Co., ANA, NV, 1891, vol. 38. ANA, Real Estate Registry of Valparaiso (CBRV), 1898, vol. 70. Archivo del Arzobispado de Santiago (AAS), 1914, vol. 88. Acknowledgements We are very grateful to Vanessa Contreras for research assistance, and to Katharine Wilson for improving the English. 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