The Governance of Family Firms

Abstract

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(John Wiley & Sons) (forthcoming, 2010). 2the common agency conflict that plagues widely-held firms is often superseded by the conflict of interests between controlling and non-controlling shareholders.So why are family firms different?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...

Market opportunities and owner identity: Are family firms different?

“…These studies show that family firms are relatively less frequent in sectors with high capital intensity and scale (Bennedsen et al, 2010), as well as in those sectors where family firm-specific investments are not crucial, as in rapidly evolving industries or in R&D-intensive industries (Pérez-González, 2006), or in markets that are larger in size (Demsetz and Lehn, 1985;Villalonga and Amit, 2010). In almost all these papers, the absence of a direct measure of individual risk preferences makes capital intensity a proxy for individual risk attitude at the organizational level.…”

“…As families make decisions that maximize the welfare of the family, the joint maximization of family and business objectives often entail gains in one sphere at the expense of the other one (Bennedsen et al, 2010). Empirical literature has shown that family ownership has important implications for corporate management and performance (Shleifer and Vishny, 1997).…”

“…Family firms are widespread around the world and are also correlated with significantly more variation than other firms in measures of economic output and firm value (Bennedsen et al, 2010). This is mainly due to the peculiar trait of family governance, which reflects the dynamic interplay between owners' values, organizational history and value-maximizing policies required by the industry competitive conditions (Zahra et al, 2004).…”

Effects of Family Ownership, Debt and Board Composition on Mexican Firms Performance

“…However, studies that have addressed these factors have only studied family firms, and usually study the effect these factors can have on incentives to mitigate agency problems. For example, authors have shown variations in that relationship when introducing mediating variables, as is the case when considering the generation in control [30,42,43], family management involvement [37,44,45], provision of incentives [46], and when distinguishing between lone-founder and family firms [43,47]. Thus, it is increasingly important to study the way in which these factors function in order to discover the nuances that make them successful for family firms and unsuccessful for non-family firms, and vice versa.…”

Psychological ownership, knowledge sharing and entrepreneurial orientation in family firms: The moderating role of governance heterogeneity

“…Previous literature clearly emphasizes the importance of studying heterogeneity among family firms by pointing out that the variance in family firm behaviors is greater than the variance in behaviors between family firms and their non-family counterparts (e.g., Bennedsen, Perez-Gonzalez & Wolfenzon, 2010). It has been observed that the key governance conditions, namely, the characteristics of family ownership and control, the involvement of family members in the top management team (TMT) and the participation of later generations (Miller & Le Breton-Miller, 2006), are major sources of family firm's heterogeneity (Chua, Chrisman, Steier, & Rau, 2012;Li & Daspit, 2016), because they are associated with different organizational goals, processes and routines (e.g., Carney, 2005;Le Breton-Miller & Miller, 2006;Li & Daspit, 2016).…”