In the last decade, corporate governance research has documented that families control most publicly-traded firms around the world. This finding has triggered a considerable body of research that seeks to understand the governance of family firms and their impact on firm performance. This chapter critically examines this literature. The chapter highlights that the main governance issue facing family firms is balancing the benefits associated to having a controlling family with the challenges this structure imposes on minority shareholders. Common governance mechanisms are less likely to be effective whenever control and decision-rights are concentrated around a family. The chapter emphasizes the crucial role of family governance on the allocation of resources and reviews recent studies that seek to understand the impact of family characteristics on firm decisions and performance. The chapter also discusses some of the most important topics for future research.1 Forthcoming, R. Anderson and K. Baker (Eds), Corporate Governance, (John Wiley & Sons) (forthcoming, 2010). 2the common agency conflict that plagues widely-held firms is often superseded by the conflict of interests between controlling and non-controlling shareholders.So why are family firms different? Family firms are unique because a family is at the apex of the firms' governance institutions. The most important voice in governance is, in consequence, not necessarily exercised by an individual, but rather, by a group of people who are linked to each other by blood or marriage relations. As a result, the allocation of power within the family, the family governance institutions, the interaction between family members and other stakeholders, as well as family characteristics (such as size, age, and talent) are likely to have a determining impact on firms' outcomes.The arguments for the overlap of family and business structures often rely on market imperfections that make arms-length contracts unattractive or on private benefits that reduce family participation costs. In terms of market frictions, within family labor or capital provision may be less exposed to information asymmetry or opportunistic behavior. Multiple family interactions may facilitate screening and enforcement of contracts, firm-specific investments, and reputation building. The joint maximization of family and business objectives, however, may also entail significant distortions to firms.The central objective of family-firm governance research is, therefore, to understand how family firms balance the protection that the controlling family brings to the firm with the challenges this structure imposes on minority shareholders. The existing literature provides few clues into the specific ways in which family firms use their characteristics or structure to affect value. Direct tests on the effect of family characteristics on performance are rare in the literature. Yet, they provide the distinguishing mark and the future of this area of research.Fourth, family firms can provide an attractive lab...