Family Firm Governance Research Articles

The Governance and Finance of Norwegian Family Firms: Main Characteristics of the Population

Little is known about the family firm as an economic entity except for the very few family firms that are public. Our paper describes a wide range of governance and finance characteristics in the population of all private and public family firms with limited liability. We find that the family firm is the dominating organizational form in the economy, and that family firms behave and perform differently than other firms. We use proprietary data from Norway in 2000–2015 to describe main characteristics of family firms, which we define as firms where more than half the equity is owned by individuals related by blood or marriage. A firm is either an individual entity or a business group. Analyzing about 86,000 firms per year, we find that family firms account for 66% of all firms in the economy, 33% of employment, 22% of sales, and 13% of the assets. We find that family firms have very concentrated ownership regardless of firm size, and that most firms have owners from the controlling family, only. The family’s dominance at the shareholder meeting carries over to the CEO and to the board, which is unusually small. The distribution of firm size is lognormal, growth is independent of size, and family firms are smaller and grow less than nonfamily firms do. Family firms are more labor intensive, and small family firms are particularly liquid, risky, and young. The financing and dividend policy is quite similar in family firms and nonfamily firms. We find a performance premium for family firms. This premium exists for family firms vs. nonfamily firms as a whole, across firms with different size, across firms with and without minority owners, and across most industries.

Reaping what you sow: The family firm innovation trajectory

This study sheds more light on the ‘ability-willingness paradox’, which argues that family firms may be more able but less willing to engage in innovation. Using a longitudinal case study, we investigate the influence of family governance attributes during different stages of innovation and suggest that family entrepreneurship facilitates the conversion of innovation inputs to outputs. Family governance attributes (control, monitoring and networking) support innovation activity during some phases, but impede it during others. We also found the reverse: accumulated innovation capabilities influence family firm governance practices such as monitoring behaviour and control, especially when later-generation family members join the firm. These outcomes partially resolve the conflicting outcomes of prior studies and lead to useful propositions that can redirect future research.

Family firm heterogeneity and CEO compensation in Continental Europe

CEO compensation in family firms is affected by certain corporate governance characteristics, such as the generational stage of the firm (founder or descendant-controlled firms), the level of family involvement on the board of directors (lone or multiple family members sitting on the board) and the family status of the CEO (family or professional CEO).In this paper, we argue that moderating effects arise among these dimensions of heterogeneity. The results show that in firms owned by descendants, the presence of multiple family members is beneficial in lowering family CEO compensation, while the opposite is true in the presence of the founder. Moreover, within founder and descendant firms, the number of family representatives on the board exerts a strong influence on the compensation of family CEOs, whereas it does not affect the compensation of professional CEOs. The results also show that in certain family clusters, CEO compensation is higher than in nonfamily firms, thereby emphasizing that when comparing CEO compensation in family and nonfamily firms, it is important to consider the intersections among the heterogeneity dimensions of the governance of family firms.The findings of the paper contribute to the literature on the governance of family firms by showing that certain family firm types are more effective than others in keeping CEO compensation under control.

Family Ownership, Auditor Choice and Audit Fees: Evidence from Hong Kong

Purpose –The primary purpose of this paper is to examine the impact of family control/ownership on auditor choice and audit fees in Hong Kong. Besides, this paper also addresses the impact of multiple directorship of audit committee members on these two external auditing dimensions.Design/methodology/approach –Panel data technique is used to perform analysis. The unbalanced panel data set consists of 2,724 firm-year observations for nine years from year 2001 to 2009.Findings –The results indicate that family firms have a higher likelihood to appoint Big 5 auditors, it supports the signaling hypothesis. Contrasting the perceived higher audit risk, they incur lower audit fees. The results also show the independent audit committee members with multiple directorships are not affected by their busyness. Our results are also robust to the alternative definition of family firms and by using the sub-sample within 2004 - 2009. We also find that the firms controlled by recognized Big family in Hong Kong society incur higher audit fees but no support for family firm incurring higher non audit fee.Originality/value–First, our paper responds to the recent call for research for auditor choice and audit fees within the context of emerging economies. Secondly, this paper also explores other determinants of auditor choice and audit fees in HK such as the characteristics of the audit committee and multiple directorships. Thirdly, our findings contribute to the family firms’ literature by shedding light on family firms do enhance their external auditing function to improve the credibility of financial reporting of the firms which is expected to help investors and public in HK to know more about the effect of family control on the external auditing to protect their interest. The findings in this paper are also valuable to regulators who might concern the corporate governance and informativeness in family firms.

Family firm internationalization: Heritage assets and the impact of bifurcation bias

Research Summary:We develop a new conceptual framework to uncover governance‐related determinants of family firms’ internationalization, building upon internalization theory. We assess how family firm governance features determine internationalization patterns on two key dimensions: location choice and operating mode. We focus on family governance characteristics that might drive suboptimal internationalization patterns and on removing such suboptimality. We conclude thatbifurcation bias, defined as thede factodifferential treatment of family orheritageassets versus nonfamily assets, represents a critical family firm‐specific barrier to achieving efficiency in international operations. In the short run, the key difference in international governance is between bifurcation‐biased family MNEs and all other types of MNEs. In the longer run, inefficient, bifurcation‐biased decision making will make place for comparatively more efficient governance.Managerial Summary:Family firms are susceptible tobifurcation bias—a default preferential treatment of family members and resource bundles that hold positive emotional meaning to the family, that is,heritage assets. Such preferential treatment contrasts with that afforded to professional, nonfamily managers and other resources, with which the founding family does not entertain a positive emotional connection. If left unremedied, bifurcation bias will lead to poor decisions in family‐owned multinationals that undertake international expansion, in terms of the choices of which markets to enter and how to enter these. These types of dysfunctional decisions will lead to a decline in competitiveness as compared to nonfamily multinationals. Family firms should, therefore, identify and actively prevent bifurcation bias by implementing the specific safeguarding strategies suggested in this study.

Inside the family firms: The impact of family and institutional ownership on executive remuneration

This study empirically examines the impact of ownership structure on executive remuneration of listed family firms in Malaysia. Fixed effects model as the panel analysis of 279-listed family firms from 2010 to 2014 shows that institutional investors could not represent the minority shareholders’ interest in curbing the expropriation via executive remuneration by the controlling family shareholders. When the firm CEOs are non-family directors, both domestic and foreign institutional investors could exert a significant negative impact on executive remuneration. Thus, this study provides a theoretical contribution by affirming that the Type-II agency conflict between controlling shareholders and minority shareholders in family firms is ameliorated when the firm CEOs have no family relationship with the controlling shareholders. In addition, this study also unveils that domestic and foreign institutional investors have a different impact on the executive remuneration, where the governance role of the former prevails over the latter. The findings of this study would be useful for the policy-makers and regulators such as Securities Commission Malaysia and Minority Shareholder Watchdog Group to assess the expropriation issue and corporate governance in family firms.

Institutional logics, family firm governance and performance

Positive and negative views of family firms and their performance abound. Although there have been explanations for this divergence based on conditions of governance and context, the institutional environment has been less thoroughly explored as a source of these differences. We argue that the blend of family and market institutional logics in the regional communities where firms operate can have an important impact on the governance arrangements and financial performance of family firms. Specifically, we find that family-intensive governance is more common where family logic predominates in a region, and does best when this logic remains at modest levels or is countered by market logic. We test and support these notions in a comprehensive sample of private family firms in Italy, an ideal context in which distinct historically-determined logics exists among its 20 regions.

Coexisting Agency and Stewardship Governance in Family Firms: An Empirical Investigation of Individual-Level and Firm-Level Effects

This article theoretically and empirically intertwines agency and stewardship theories to examine their distinct and combined influences on family firms. Primary matched triadic data from CEOs, family employees, and nonfamily employees in 77 family firms suggest that agency and stewardship governance affects individual-level behavior and firm-level performance. Specifically, agent behavior is highest under conditions of coexisting low agency governance and high stewardship governance and is lowest when agency and stewardship governance coexist at high levels. Furthermore, when high levels of agency and stewardship governance coexist, family firm performance is the highest. Theoretical implications and future research directions are discussed.

Compensation of top brass, corporate governance and performance of the Indian family firms – an empirical study

PurposeThe objective of this study is to understand the linkages among executive compensation, corporate governance and performance of the Indian family and non-family firms. Further, the study also analyzes the level of shareholding pattern of the Indian family firms on their performance and the executive compensation.Design/methodology/approachThe authors have collected panel data of the companies listed on the National Stock Exchange of India Limited. The data set consists of 284 companies (both family and non-family) for the period 2005–2014. The authors have made use of a dynamic panel data model with generalized method of moments (GMM) estimation to formulate the hypotheses and used fixed-effects regression model to check the robustness of our findings.FindingsThe authors find support for the agency theory, stewardship theory and resource dependence theory in the paper. Specifically, variables related to executive compensation, corporate governance (board size, proportion of independent directors on board, chief executive officers duality and other directorships held by the executive directors outside the company), firm performance (Tobin’s Q), leverage and shareholding pattern of the family are significant in this study.Practical implicationsThe study has practical implications for all stakeholders of the family and non-family firms, especially in the emerging market economies. It can be used as a reference guide by various other stakeholders of the family firms, viz., customers, educators, tax authorities, government and society.Originality/valueThe authors confirm that their research is original and provides valuable insights on the Indian family firms. The authors study cross-holding of directorships, inter alia, in the Indian family business groups. As most of the previous studies in the Indian context ignored this important aspect, this study is unique in nature.

Independent directors and family firm performance: does one size fit all?

How will the presence of independent directors affect family business performance? This question is still theoretically debated and empirically inconclusive. Because family businesses are a group of heterogeneous companies with different levels of family involvement in the business, the purpose of this paper is to empirically explore how the combination of different family business governance structures jointly shape the effect of independent directors on family business performance in an understudied Collectivist cultural setting. Using Qualitative Comparative Analysis (QCA) on a sample of 74 Lebanese family firms this study finds that, depending on the family firm governance structure, the presence of independent directors on the board can lead to either positive or negative firm performance. Theoretical and practical implications are discussed.

Family Firms and Compliance: Reconciling the Conflicting Predictions Within the Socioemotional Wealth Perspective

We draw on the socioemotional wealth perspective to examine the influence of family ownership on firms’ noncompliance with corporate governance codes. Our results yield an inverted U-shaped effect of family ownership on noncompliance. While the family influence and control dimension leads to high levels of noncompliance, socioworthiness stemming from image and reputation dimension lessens noncompliance. In the presence of potential agency conflict, the control dimension prevails over reputation, even in countries with strong governance institutions. Our findings have critical implications for family business theory, for governance policy making and also for better understanding corporate governance in family firms.

Family Talents in Family Firms: A Signaling Approach

Empirical studies suggest that the business talents of the heir to a family firm can have a large and significant effect on firm prospects. However, we still do not know how heirs, especially those who are good at making and executing business decisions, credibly reveal their talents to other parties, when the signal may be muddied by immense family wealth and high-profile parents. In this paper, I model the turnover of talented family members, and highlight a family firm dilemma. First, a talented heir's talents will be undervalued if they involve themselves in their family business, but family firms will suffer brain drains if talented family members leave for the market. This framework and its extensions illustrate how institutional quality, capital share and technological progress influence heir participation and family firm performance, and how a well-functioned financial system, parental authority and family income sharing can relieve the dilemma. The main results may help to explain some of the differences in governance and performance of family firms across countries or within a given country over time.

Beyond socioemotional wealth: taking another step toward a theory of the family firm

PurposeThe purpose of this paper is to explain how the concept of socioemotional wealth can be combined with other important concepts in the family firm literature to develop a theory of the family firm.Design/methodology/approachThis is a conceptual paper based on a review of the paper of Martin and Gómez-Mejía in this issue as well as the family business literature in general.FindingsMartin and Gómez-Mejía (this issue) present a theoretical model and propositions on the relationship between socioemotional and financial wealth that advances understanding of family firm decision-making. That paper provides an initial step toward a theory of the family firm that can explain why firms select the family form of organization to conduct economic activities, what determines their scale and scope and why heterogeneity is observed among family firms. This commentary takes another step toward such a theory by discussing how the combined consideration of goals, governance and resources could be used to address the above three questions.Originality/valueThe precepts of a new theory of the family firm is presented that incorporates the concepts of goals (socioemotional wealth), governance (family ownership and control) and resources (familiness) of family firms to explain why family firms exist and potentially thrive as well as to explain the heterogeneity among family firms.

Attitudes of family firms toward outside investors: the importance of organizational identification

More and more family firms open their capital for outside investors, yet existing studies mainly conclude that family firms are more reluctant than nonfamily firms to hand over control to outside investors. In this study, we build on an organizational identification perspective to explore why family firms differ in their attitudes toward outside investors. We hypothesize that family members who identify strongly with their firms are less willing to cede control to outside investors and, if they do cede control, have a stronger preference for investors who may readily identify with family firms, such as family offices or high net worth individuals, rather than investors who may not fit well with a familial identity, such as private equity sponsors or financial investors. We also hypothesize that social identification mediates the relationship between important family firm governance characteristics and preferences for outside investor. Exploratory evidence from a sample of Belgian family firms is supportive of most of our predictions.

Peer Effects in Family Firm Governance

I show that a family firm’s decision to appoint non-family directors is strongly influenced by neighboring companies. Confirming the role of geographic proximity, I find that this effect becomes smaller when the distance between a firm and its geographic peers increases, and insignificant when firms are randomly allocated to geographic areas. Studying the mechanisms at play, I suggest that peer effects are driven by imitation of leading firms and social interactions within the local community.

Corporate governance in family businesses from Latin America, Spain and Portugal

Purpose The purpose of this paper is to summarize what is known about corporate governance in family firms from Ibero-American countries based on published research. Methodology The authors conducted a literature search to identify the articles that have been published about the corporate governance of family firms in Latin America, Spain, and Portugal between 1980 and 2014. The authors found 38 articles that provide the sample for this review. Findings The results indicate that research on governance in Ibero-American family firms has focussed on understanding structures and processes related to the business and ownership systems. However, generalization of results across the region is difficult because of the lack of systematic approach of studies and the focus on a small number of countries. Research limitations/implications There are at least two limitations of this work: the small sample of projects identified for the review and the lack of systematic approach to research. Both of these may be due to the importance given to publishing the university context in this part of the world. As the culture of knowledge changes, the authors expect that research in this area will grow. Originality/value Although previous research indicates that cultural characteristics affect governance system choices and understanding of family firms, not many studies explore the importance of culture in governance choices of family firms. This paper provides a baseline of the understanding of governance in Ibero-American family firms, and identifies important area for future research.

The Early Succession Stage of a Family Firm

This article examines the early succession stage of a public family firm through a single longitudinal real-time case study conducted over a period of 10 years. We found that, at this stage, the regulation of interdependent conflicts of interest (between family and nonfamily shareholders, and between majority and minority family shareholders) is a prominent objective of the incumbent generation in the purpose of preparing both the firm and the family to facilitate succession. Moreover, we suggest that stewardship, through reciprocal altruism at the family branch level, combined with a permanent collaborative process between generations and a flexible succession “plan” explains at least partially the observed outcomes (shared vision on future ownership and control, and new family firm governance and interfamily branch relationships).

Family ownership, control and corporate capital structure

Purpose – The purpose of this paper is to explain how family firm ownership and management control affect corporate capital structure strategy after controlling for other significant variables. The authors argue that, although family ownership has a positive effect on a firm’s leverage, family control through the CEO position and equity performance moderate its impact. Design/methodology/approach – Using a stratified random sample of 200 US public firms in the S & P Small-Cap 600 index from 1999 to 2007, this study uses random effect panel regressions to test the impact of family ownership on market value and book value debt ratios and the moderating effects of family control and equity performance after controlling for firm, industry, and macroeconomic variables. Findings – The initial panel regression suggests that family ownership is not related to debt ratios. However, further examination with controls for family CEO and equity performance shows that family ownership is positively related to market and book value debt ratios, but its effect is offset by family control through the CEO position and equity performance. Research limitations/implications – This study’s methodology can be extended to examine how family firm governance factors affect other firm behaviors such as investment, risk management, and CEO compensation. Practical implications – Practitioners should consider family ownership and management control factors when establishing financing strategy. The Small Business Administration and other government agencies should make similar considerations when setting policies. Originality/value – This paper separates ownership and management control factors to explain why family firms use more or less leverage. This study, thus, reconciles the mixed results of prior studies, which do not differentiate between these two governance factors.

High Differentiation and Low Standardization: The Role of Venture Capitalists in Transforming the Governance and Management of Family Firms

Using a theoretical framework based on Rajan (2012) and Burkart, Panunzi, and Shleifer (2003), we empirically analyze how venture capital (VC) investments “standardize” family firms by transforming their corporate governance and top management. We find that family members are more likely to depart from management positions in VC-backed compared to non-VC-backed firms. Further, family control rights, cash-flow rights, and the separation between them drop more in VC-backed firms. These effects are stronger when VCs have greater bargaining power or board representation. The above effects of VC-backing are causal. We find that the standardization of VC-backed family firms yields higher IPO firm valuation and post-IPO operating performance.

How does Quality of Government moderate the influence of Family Firm Governance on the R&D intensity? The empirical research on Chinese listed family firms

The aim of this paper is theory development of RD and secondly, how Quality of Government (QOG) influence RD in addition, this study also focuses on the moderating influence of QOG on the relationship between FF governance and R&D intensity. In the whole research, we observe the Family Firm Governance by distinguishing founder, and other family members. We wish to contribute to bridging the current gap in the literature on the cross-sectional effects of QOG and FF’s governance structure on FF’s R&D intensity. Therefore, the current study addresses the perception of government guidance on initiative and efficiency measurement of FFs’ R&D intensity.