Delayed and Decoupled: Family Firm Compliance with Board Independence Requirements

Abstract

AbstractWe investigate family firms’ speed and degree of compliance with board independence requirements and how willingness and ability affect family firms’ compliance patterns. Using a longitudinal sample of Indian publicly traded firms during a transitional period of corporate governance reforms, we find that family firms are slower to comply with board independence requirements than non‐family firms. Family firms’ compliance speed is even slower as agency costs increase. We also document that family firms are prone to symbolically comply with board independence requirements, as independent directors in family firms are less engaged than their counterparts in non‐family firms. Family firms’ symbolic compliance is even more salient when family firms possess larger agency problems and greater resource constraints. Our results also point to a complementary relationship between family firms’ willingness and ability to comply, as family firms with greater agency costs and larger resource constraints are among the slowest to comply and are also most likely to comply superficially. Overall, we conclude that family firms’ internal logic, agency costs and resource constraints jointly affect their compliance patterns.