How Are U.S. Family Firms Controlled?

Abstract

Inlarge U.S. corporations, foundingfamilies are theonlyblockholders whose controlrights on average exceed their cash-flow rights. We analyze how they achieve this wedge, and at what cost. Indirect ownership through trusts, foundations, limited partnerships, and other corporations is prevalent but rarely creates a wedge (a pyramid). The primary sources of the wedge are dual-class stock, disproportionate board representation, and voting agreements. Each control-enhancing mechanism has a different impact on value. Our findings suggest that the potential agency conflict between large shareholders and public shareholders in the United States is as relevant as elsewhere in the world. (JEL G3, G32) Corporate governance scholars and regulators in the United States have traditionally been concerned about protecting investors from managerial entrenchment and expropriation—the classic agency problem described by Berle and Means (1932) and Jensen and Meckling (1976). Yet, a growing body of literature has shifted attention toward a different agency problem that seems to be of greater concern in most of the world: the expropriation of small investors by large controlling shareholders (Shleifer and Vishny 1997). We suggest that this second type of agency problem is also significant in the United States. Several important findings have emerged from the international corporate ownership literature. First, most firms around the world are controlled by a large shareholder, typically founders or their families (La Porta, L´ opez de