Family Firm Governance Research Articles

How does the founding family matter in corporate governance? A study of the entrenchment heterogeneity among S&P 1,500 firms

Drawing on principal-principal agency theory and the socioemotional wealth (SEW) perspective, this paper explores the motivations and mechanisms regarding the founding family’s contingent choices of governance provisions that facilitate managerial entrenchment, which can potentially threaten firm performance. By investigating S&P 1,500 firms between 2007 and 2017 and employing quasi-experimental treatment effects analyses, this study finds that family firms are less likely to utilize the E-index provisions than non-family firms in general. Further, family firms tend to adopt more E-index provisions when the first generation of the founding family remains involved in the firm. However, as these firms age, they rely less on the E-index provisions to entrench family managers. Consequently, this paper expands current research on the governance of publicly-traded family firms by illustrating the differences between family and non-family firms as well as the impact of transgenerational family governance on the use of entrenchment mechanisms over time.

The complex interplay of firm innovation, internationalization and learning capability in driving firm performance: a configurational analysis

PurposeThis study examines how the complex interplay of innovation, internationalization and learning capability is associated with firm performance.Design/methodology/approachThis study employs a qualitative comparative analysis (QCA) over a sample of 2,844 manufacturing firms over the period of 2008–2014.FindingsThis study finds a general complementarity between high process innovation, export breadth and high organizational learning capability, and a substitution between R&D and employee training as sources of learning capability. The analyses by firm size suggest that, contrary to SMEs, large firms do not require high export breadth to achieve profitability, which is likely because they enjoy sufficient economies of scale and scope through their strong domestic presence and multiple business units.Research limitations/implicationsThis study examines specific facets of the three constructs, and the effect of firm size. Future research could consider other facets and contextual factors, such as managers' competencies, family firm governance or network memberships, which have potential effects on the relationships studied here.Practical implicationsFirms may benefit from the various interplay effects of strategic factors to improve competitiveness. For example, leveraging the knowledge and resources stemming from their presence in multiple countries may significantly increase the efficiency and efficacy of innovation activities, eventually enhancing firm performance.Originality/valueThis study is the first to employ a large sample to test the complementarity of the three activities in achieving superior profitability. The paper also provides a more nuanced view of these relationships by considering the interplay of different facets of internationalization (export breadth and intensity), innovation (product and process) and learning capability (R&D and employee training).

The effects of globalization on family firms' business model in Europe

PurposeThe debate over differences in the behaviors of firms facing globalization is ongoing. This study examines whether globalization impacts the behavior of family firms and if this influence differs between family and non-family firms.Design/methodology/approachDrawing on panel data from the Amadeus database on 62 family firms and 98 non-family firms in Europe, the authors employ panel vector autoregression estimation and the Wald test of Granger causality to verify our conjecture. Additional impulse response functions and the forecast error variance decomposition technique were applied to illustrate complementary shock dynamics. Additionally, the KOF globalization index is used as a proxy for globalization.FindingsThe results show that globalization visibly impacts family and non-family firms, but the polarity and extent of the effect are different. The authors demonstrate that family firms are in a more favorable position regarding globalization and are less vulnerable to the adverse effects of the globalization process. In contrast, non-family firms fare worse, generating adverse effects. Non-family firms take a more open stance toward globalization than family firms' more conservative behaviors.Research limitations/implicationsOf course, there are some limitations to the work presented in this paper. On the one hand, the authors’ data span only ten years due to data limitations. This causes the generalizability of the results to be hindered. Therefore, the authors encourage scholars to collect more time series data to increase confidence in the empirical results in future studies. On the other hand, the selection of proxy indicators concerning family firm behavior is mainly focused on financial and employment facets. A multidimensional selection of indicators could make the findings of this study more convincing. Despite its limitations, the study certainly adds to the authors’ understanding of its behavior and globalization activities.Practical implicationsThe authors’ findings have twofold theoretical and practical implications, as they highlight the necessity of developing specific policies aimed at reducing the gap between family and non-family facing globalization and promoting sustainable operations of non-family firms. Although family firms tend to be more frugal and conservative in their overall decision-making, it should be acknowledged that stockholder and stakeholder interest-oriented corporate management policies have made them more capable of steadily improving corporate performance in the sweep of globalization.Social implicationsTo this end, this study deepens the authors’ understanding of the theory of global governance of family firms. It also provides possible paths and directions for future theoretical research on family firms. Globalization affects both family and non-family firms, but our results suggest that family firms are better able to withstand the adverse effects of globalization shocks and adopt efficient governance paths and strategic thinking to gain a competitive advantage. In this regard, the authors encourage non-family firms to actively learn from family firms' operational practices and systems to achieve better adaptability.Originality/valueThis study provides strong empirical evidence on the effectiveness of family firms' governance patterns and business behavior under globalization. Additionally, this study also reveals that managers can learn from the practical experience of family firms to help them confront business crises and gain a sustainable competitive advantage.

Does internal and external governance reduce earnings management in family owned firms in Malaysia

The purpose of this study is to investigate the effect internal and external governance have on corporate governance effectiveness in highly-condensed family ownership structures in Malaysia. The establishment of RMCCG (2007) focuses more on the roles of audit committee independence adopted from developed countries' corporate governance standards. However, given the highly concentrated ownership structure in Malaysia, independence directors' fiduciary roles may be comprised as family firms' attempts to meet stakeholders' expectation. The sample of this study is from 1,206 firm level observations between the years 2004 to 2009 of firms listed in Bursa Malaysia. Our findings indicate that external governance as measured by stock market informativeness influences earnings management. Our research offers insights into the importance of external governance factors such as stock market volatility and market efficiency in promoting good governance in Malaysian family firms.

Advisors in Corporate Governance of Family Firms

This study examines how specialized advisors impact the implementation of good governance practices at the firm and family level. We applied a qualitative case study approach using four cases in four different industries with diverse levels of management sophistication. This revealed that firms’ governance structure outputs, such as a board of directors and general shareholder meetings, and the family governance outputs, for instance, family protocols and family councils, substantially improve with an advisors’ intervention. We highlighted the important but seldom studied in the academic literature of advisors’ role in designing a better governance structure at the business and family level and its implementation. We also stressed the importance of building confidence, transparency, and trust between the advisor and the family.

Intergenerational Knowledge Transfer in Family Firms during Times of Digital Innovation

In the fast-changing digital age, the unique governance of family firms, unifying ownership, management and control, characterized by long-lasting knowledge, makes digital innovation particularly challenging. On one hand, the incumbent generation (especially if senior) has developed specific knowledge throughout the experience in the business, being thus more likely to adopt a traditional and conservative approach towards the business model. On the other hand, the next generation of family members’ (especially if junior) has grown up accessing and developing digital knowledge, but might lack the specific skills, organizational know-how and authoritativeness to make it relevant to the family business model. Therefore, the paradigm ‘incumbent generation teaches, next generation learns’ becomes obsolete. How can family firms manage intergenerational knowledge transfer in times of digital innovation? To address this issue, we conduct a multiple case study on five German family firms that have recently digitalized their business models. Building on our findings we develop a model of intergenerational knowledge transfer through which family firms successfully foster digital innovation and introduce the concept of generational metamorphosis as the role swinging in the apprenticeship process requiring family members of different generations to either acting as teachers or learner depending on the knowledge domain. Our study offers contributions to research on family business generational transition, innovation and knowledge transfer.

Family Ownership and Accrual-Based Earnings Management: Evidence from Tunisia

The aim of this paper is to investigate the effect of family shareholding and chief executive officer (CEO) characteristics on earnings management. We use panel data for a sample of 37 Tunisian non-financial listed firms over the period 2007–2017. We contribute to the literature on corporate governance in family firms by testing the effect of the presence of a family or a founder CEO on earnings management in Tunisia. Our results show that the family ownership and the presence of a family CEO (either founder or not) are positively and significantly associated with earnings management practices. These findings suggest that families’ dominance with a significant equity stake and a CEO position under control leads to an entrenchment effect resulting in poor earnings reporting quality.

For love or money? Family versus financial blockholders in international acquisitions

AbstractResearch Question/IssueWe study the relationship between family blockholding of voting rights and the relative size of international acquisitions, and the moderating effect of two types of financial blockholders (pressure‐resistant and pressure‐sensitive blockholders).Research Findings/InsightsEmploying an international sample of 8,687 non‐financial cross‐border acquisitions conducted by 4,630 acquirer firms from 40 home markets to 66 host countries between 2004 and 2013, we find a U‐shaped relationship between family blockholding of voting rights and the relative size of international acquisitions. Further, we find evidence that this relationship is moderated by the presence and type of financial blockholders. While pressure‐resistant financial blockholders shift this relationship downwards (due to intensified conflicts), pressure‐sensitive financial blockholders shift it upwards.Theoretical/Academic ImplicationsWe contribute to the literature on family firm governance and internationalization on several fronts. First, we revisit the predominant logic of linear effects of the family blockholding. We suggest the family blockholding's effects are related to nonlinear risk preferences of family owners, expressed through socioemotional wealth (SEW) slack. Second, we suggest that the “dominant shareholder interest” assumption of family firms, usually based on the controlling family's SEW should be interpreted contingent upon the interests of other financial shareholders. Finally, using family‐financial blockholder conflicts as the scenario, we suggest that principal‐principal conflicts depend on the composition of the conflicting blockholders, specifically, upon the nature of their relations with the firm.Practitioner/Policy ImplicationsThis study offers insights to policymakers and those interested in incentivizing family ownership that family owners' risk behaviors should be understood and discussed in the context of different financial blockholders as a reference group.

Family Control and Cross-Regional Expansion: Empirical Evidence from Listed Companies

Cross-regional expansion is an important way for firms to solve resource constraints. Through cross-regional expansion, firms can not only find substitutes for current resources, but also make full use of surplus resources and get access to new resources to cope with challenges in the current market. However, the existing literature rarely pays attention to the geographical expansion cross different administrative regions, and seldom discusses the agency conflict between controlling family and non-family member executives, the risk preference of non-family member executives and the incentive effect of equity. Based on the agency theory and the behavioral agency model, this paper attempts to explore the relationship between family control, the proportion of non-family member executives’ involvement and the cross-regional expansion of firms, and the effect of executive incentive mechanism based on equity. Based on the data of listed companies from 2007 to 2018, the main conclusions of this paper are as follows:（1）Family control inhibits the intensity of cross-regional expansion. Compared with non-family firms, family firms are less likely to be engaged in cross-regional expanding in order to maintain family members’ control over the firm and avoid damage to social emotional wealth.（2）With the increase of family involvement, the intensity of cross-regional expansion of family firms will decrease. In addition, the incentive measures based on equity have asymmetric risk characteristics, which will affect the time orientation and risk preference of executives in investment decision-making, and eventually lead to different decisions in the process of cross-regional expansion strategy formulation. Specifically speaking, non-family executives with stock ownership pay more attention to short-term interests and prefer to risk aversion, which alleviates the inhibition of family involvement on the cross-regional expansion intensity of family firms; stock options make non-family executives pay more attention to the long-term development of firms, and strengthen the inhibitory effect of family involvement on the cross-regional expansion intensity of family firms.（3）With the “de-familialization” of family firms, more and more non-family member executives join the governance of family firms, and family firms will be more inclined to make cross-regional development decisions.（4）Cross-regional expansion is conducive to increasing the value of firms, but family firms do not necessarily adopt this strategy, which shows that financial objectives are not the only one to concern for family firms, and the holding family pays more attention to non-financial goals such as social emotional wealth. The possible contribution of this paper is to verify the influence of family control on the cross-regional expansion strategy of firms, explore the effect of stock-based incentive mechanism, enrich the relevant research on the social emotional wealth theory, agency theory and behavioral agent model, and expand the research related to the risk-taking decision of family firms to a certain extent. The conclusions of this paper provide theoretical guidance and empirical evidence for the cross-regional strategy and incentive mechanism of non-family members in family firms.

Family Firm Governance and Long-term Corporate Survival: Evidence from Korean Listed Firms

Purpose - This study aims to examine whether family firm governance is related to long-term corporate survival. To find out whether and why family firms have higher chances of long-term survival compared to non family firms, this study analyzes the relationship between some governance characteristics that are prevalent in family firms and corporate long-term viability. Design/methodology/approach - This study utilizes a sample of 285 family firms listed on the Korea Stock Exchange (KSE) to probe the influence of governance characteristics on corporate survival. This study conducts Cox proportional hazard regression analysis to estimate the influences on the survival duration. Findings - The results indicate that firms with particular governance characteristics show higher long-term survivability. Specifically, the probability of firm’s long-term survival is increased when the CEO is the largest shareholder, which may be related to CEO’s stewardship attitudes. Research implications or Originality - This study has significance in that it examines the direct causal variables that enhance long-term corporate viability through a large scale empirical examination. Also, the study findings provide some clues as to why certain family firms outlive non-family firms.

Decoding the chain of effects of family firm image on consumer behaviour

AbstractWhile there has been plenty of research around family firm governance and management, less is known about the way in which family firm image is perceived by consumers. This research aims at filling the gap by investigating the chained links between family firm status and image, and the key brand elements identified by extant literature. The hypotheses are tested through an application to the wine industry with a sample of over 1,500 wine drinkers residing in Australia, Italy, and the United States. The results reveal several linkages between the distinctive family nature of a business and the loyalty of consumers. All brand knowledge constructs are positively affected by family firm image, and influence brand trust and satisfaction. Individual path coefficients highlight differences between countries. Evidence regarding the cultural interdependencies provides guidance for policy makers. Practitioners can consider this research when defining the relationship with consumers of family firms.

Owner offspring gender and long‐term resource allocation in Chinese family firms

AbstractA long‐term orientation helps companies improve business performance and achieve sustainable competitive advantages. We use data for Chinese family firms listed on the Shanghai and Shenzhen A‐share stock markets during the years 2000 and 2018. We examine the influence of owner offspring gender on family firms' long‐term resource allocation. We find a “son effect” in long‐term resource allocation among family firms, that is, owners raising sons tend to have a longer investment horizon and are more willing to increase innovation. This “son effect” is more significant for owners who were born in patriarchal regions where the social system is controlled or governed by men. We also find that son‐raising owners' long‐term resource allocation is mainly motivated by their willingness of intergenerational inheritance. This study fills a research gap regarding the influence of owner offspring gender on corporate long‐term resource allocation, enriches the literature on the heterogeneity of executive behavior and corporate governance of family firms, and provides important implications for understanding the decision making and long‐term investments of Chinese family firms.

The role of dyadic interactions between CEOs, chairs and owners in family firm governance

The objective of this case-based study is to understand how the dyadic interaction between the key governance actors can influence the decision-making aimed at directing and controlling a family firm. The study provides evidence that dyadic interaction at the back stage of the formal governance process can offer a privileged position for the family firm owners who serve on the board, and the non-family member Chair of the Board, to influence decision-making before, after and between board meetings. The cases studied suggest that dyadic interactions can serve as preparation for formal board processes and complement and clarify them, yet they also have the potential to conflict with them. Dyadic interaction is also shown to offer important relational and emotional benefits that may not necessarily be achieved through larger group interaction. The findings suggest that although the actors can self-regulate their behaviour through informal rules, the rules may imperfectly address one risk of dyadic interaction—the reduced cognitive conflict among the board.

For Love or Money? Family Versus Financial Blockholders in International Acquisitions

Research Question/Issue: We study the relationship between family blockholding of voting rights and the relative size of international acquisitions, and the moderating effect of two types of financial blockholders (pressure-resistant and pressure-sensitive blockholders). Research Findings/Insights: Employing an international sample of 8,687 nonfinancial cross-border acquisitions conducted by 4,630 acquirer firms from 40 home markets to 66 host countries between 2004 and 2013, we find a U-shaped relationship between family blockholding of voting rights and the relative size of international acquisitions. Further, we find evidence that this relationship is moderated by the presence and type of financial blockholders. While pressure-resistant financial blockholders shift this relationship downwards (due to intensified conflicts), pressure-sensitive financial blockholders shift it upwards. Theoretical/Academic Implications: We contribute to the literature on family firm governance and internationalization on several fronts. First, we revisit the predominant logic of linear effects of the family blockholding. We suggest the family blockholding’s effects are related to nonlinear risk preferences of family owners, expressed through SEW slack. Second, we suggest that the “dominant shareholder interest” assumption of family firms, usually based on the controlling family’s SEW should be interpreted contingent upon the interests of other financial shareholders. Finally, using family-financial blockholder conflicts as the scenario, we suggest that principal-principal conflicts depend on the composition of the conflicting blockholders, specifically, upon the nature of their relations with the firm. Practitioner/Policy Implications: This study offers insights to policymakers and those interested in incentivizing family ownership that family owners’ risk behaviors should be understood and discussed in the context of different financial blockholders as a reference group.

Antecedents of good governance of hospitality family firms

This study applies a social identity and social network theory perspective to develop an integrated view of how hospitality firms incorporate family dynamics and tourism specifics as antecedents for good governance in the competitive hospitality industry. Seventeen qualitative semi-structured expert interviews with family hotel owner-managers in the province of Salzburg, Austria are systematically analyzed. The findings highlight the firms’ commitment to their destination as well as regional and social interactions originating both in the family dynamics of the firms and their strong embeddedness within their destinations as central factors for good governance. The results emphasize the need for entrepreneurial behavior and the involvement of family and non-family members in achieving effective governance structures.

Transforming the management and governance of private family firms: The role of venture capital

We analyze the role of venture capitalists (VCs) in transforming the management and governance of China's private family firms. We show, causally, that VC-backed family firms are more likely than non-VC backed family firms to experience departures of family members from top management positions and decreases in the separation between family control rights and cash-flow rights; these effects are stronger when VCs have greater equity ownership or board representation. We show that these changes in top management and governance in family firms are associated with higher IPO firm valuations and better post-IPO long run stock returns.

Bequest motive, information transparency, and family firm value: A natural experiment

Motivated by Cao et al. (2015), we utilize China’s one-child policy reform as a unique and exogenous setting to examine the economic impact of a potential rise in bequest motives among family firms, which is driven by the prospect of family and clanship expansion after the reform. A bequest motive is the economic incentive to accumulate wealth presently for inheritance by heirs in the future. It causes short-term present economic decisions to be influenced by long-term future utility expectations. On the one hand, the reform may strengthen stewardship as a means to maximize firm value for present family wealth enhancement and future inter-generational succession. On the other hand, the reform may weaken innovation and competitiveness by inducing reluctance against takeovers or outsider succession. Consistent with a positive economic impact, we observe that family firms experience (i) favorable ex-ante market reactions to the news of the reform and (ii) ex-post decline in managerial expropriation through tunneling after the reform. These findings of ex-ante investor anticipation and ex-post real effect are both stronger among less transparent family firms where Type-II agency problems are likely to be more pronounced. Further analyses also provide supportive evidence of a post-reform rise in the long-term value, measured by Tobin’s Q, and a decline in stock-selling by controlling shareholders among family firms. Our combined findings imply that this reform could induce positive externality on family firm governance.

Family Control, Political Connection, and Corporate Green Governance

This paper firstly introduces green governance into the empirical research of family firms. Due to the fact that family firms have their own particularity in the principal agent and also have a strong desire to preserve social emotional wealth, this paper deeply studies the driving influence of family control on the green governance of family firms, and analyzes the moderating effect based on the political connection of executives. Taking the 2015–2017 Chinese family-listed firms that released social responsibility reports as the research sample, we find that family control contributes to the improvement of corporate green governance in family firms. However, the political connection of the actual controller weakens the effect of family control on the green governance of family firms. In addition, this research is also carried out under different situations, such as at the regional level and individual level. The research helps family firms give full play to their own advantages, guide the green governance practice of family firms, and improve the level of green governance.

The Potential Downside of Having Non-Family Board Members

It's been generally accepted that family firms benefit from the perspectives of outsiders on the board of directors. Outsiders can bring new knowledge and objectiveness to family firm governance. But our survey of 561 small- and medium-sized Belgian firms showed a potential downside: the presence of outsiders can be detrimental if CEOs are more reluctant to talk about finances, market position, strategy and efficiency with the entire board. This was especially true at companies where the board met infrequently and where the CEO wanted to keep tight control over operations and the flow of information. The unhappy result: the board became disengaged, and firm performance suffered.

Impact of Institutional Overlap on Family Firm Governance: An Institutionalist-Agency Perspective

This study examines how institutional overlap of business and family influences the use of governance in family firms. Due to institutional overlap, family firms pursue business-centered economic (BCE) as well as family-centered noneconomic (FCNE) preferences. Drawing on actor-centered institutionalist framework and agency theory, we argue that owing to this overlap, formal family governance is needed to mitigate FCNE goal conflicts between family shareholders and family managers; and formal family governance and board of directors are complementary mechanisms. Based on a 26-country survey of 960 family firms, we find that the use of formal family governance is determined by the extent business decisions take FCNE goals into consideration, agency relations between family shareholders and family managers, and board characteristics (number and ratio of family board and board activeness). These findings lead us to conclude that formal family governance is actually a form of corporate governance mechanism. This study contributes to a social theory of agency and suggest a way for corporate governance literature to bridge macro vs. micro and economic vs. social divides.