Corporate Governance Provisions, Family Involvement, and Firm Performance in Publicly Traded Family Firms

1. Introduction

Many corporations in the U.S. and around the world exhibit family involvement (Aguilera et al. [ 1 ], Villalonga and Amit [ 2 , 3 ]). The involvement of family in the firm is usually through ownership and management (Chrisman et al. [ 4 ], Neubauer et al. [ 5 ], Siebels et al. [ 6 ]). Since these can lead to the pursuit of family-centered goals and associated strategies (Carney [ 7 ]), family firm behavior and performance tend to differ from not only those in nonfamily firms, but also other family firms (Miller et al. [ 8 ]). Examining the use of corporate governance provisions can improve our understanding of the relationship between family involvement and firm performance in publicly-traded family firms. Research generally draws attention to principal-principal agency problems between controlling and noncontrolling shareholders in corporate family enterprises. This is because of families’ stock ownership being relatively more than that of minority shareholders and control over the business through involvement in management and board of directors. By this, families are able to pursue family-centered goals (e.g., behaving altruistically toward family members) which may not be beneficial for noncontrolling owners (Ali et al. [ 9 ], Maury [ 10 ]). The use of control enhancing corporate governance provisions, such as unequal voting rights in favor of the controlling family, can further enhance the family’s ability to pursue noneconomic and economic goals primarily benefiting the family, if they intend to do so. Gompers and colleagues [ 11 ] show that governance provisions ( i.e. , provisions allowing management to resist shareholder activism, and prevent or delay takeovers) can lead to higher agency costs (Daily et al. [ 12 ], Daily et al. [ 13 ]). They also suggest the use of such provisions can be related to performance differences among firms. However, the authors do not distinguish between family and nonfamily firms. A recent work by Memili, Misra, and Chrisman [ 14 ] classifies these governance provisions by considering family firm idiosyncrasies. There has been a stream of research investigating whether family firms outperform nonfamily firms. There seems to be mixed findings and performance differences tend be a function of the type of family involvement (e.g., founder control) (e.g., Anderson and Reeb [ 15 , 16 , 17 ], Miller et al. [ 18 ], Villalonga and Amit [ 2 , 3 ]). For instance, Villalonga and Amit [ 19 ] found that the impact of control enhancing mechanisms on firm performance depends on the mechanism used. Nevertheless, only a few of the governance provisions such as voting agreements, dual-class stock, cross-holdings, pyramids 1 , and their impact on firm performance have been investigated in publicly traded family firms (e.g., Villalonga and Amit [ 2 , 3 ]). These provisions generally elevate voting rights of the families even at low levels of equity ownership (Villalonga and Amit [ 3 ]). Hence, more research is needed concerning governance provisions in order to better understand corporate governance in publicly-traded family firms.

There has been a call for studies examining family firm performance and its antecedents, owing to the critical role of firm value in buy out decisions, tax payments, executive compensation, capital raising strategies, and selling the company (Villalonga [ 21 ]). Family ownership and management can enhance firm value since the controlling family can provide superior oversight through lengthy tenure, invest in long-term projects, or exhibit reputation concerns that diminish the possibility of questionable or irresponsible business practices (Anderson and Reeb [ 17 ], Dyer and Whetten [ 22 ]). However, the use of control enhancing mechanisms, which may be driven by intentions to maintain family control to preserve socioemotional wealth (Chrisman et al. [ 23 ], Gomez-Mejia et al. [ 24 ]), may also negatively influence the effects of family ownership and management on firm performance. To date, the interaction effects of family involvement and control enhancing governance provisions on firm performance have not been fully investigated. Instead, the focus has been mostly on the direct effects of some of the governance mechanisms on firm performance (Daily et al. [ 12 ]). Control enhancing mechanisms within the context of publicly traded family firms require more research attention, since some of them may be associated with principal-principal agency costs (Chrisman et al. [ 25 ], Crutchley et al. [ 26 ], Morck et al. [ 27 ]) through enhancing the power, authority, and legitimacy of the family. However, we do not know enough about the factors that enhance or mitigate controlling owners’ ability and willingness to pursue policies that lead to the expropriation of minority shareholder wealth and entrenchment in family firms (Chrisman et al. [ 25 ]).

In an attempt to fill these gaps, this paper 2 applies agency theory (Fama and Jensen [ 29 ], Jensen and Meckling [ 30 ]) and the extant family governance literature to develop and test the model in this paper. The model in this paper addresses the research question: “How do governance provisions affect the link between family involvement ( i.e. , family ownership and family management) and firm performance?” and hence demonstrates how the use of these provisions moderates the relationships between family involvement ( i.e. , family ownership and management) and firm performance.

This paper contributes to the literature in several ways. First, the model in this paper illustrates the interplay between family involvement and corporate governance provisions in influencing firm performance when studies mostly focus on the direct effects of family involvement components or governance provisions on firm performance. Indeed, both family involvement and the use of governance provisions are likely to be influential on firm performance in publicly-traded firms. Hence, the model reflects the reality better. Second, this paper contributes to a better understanding of the differences among family firms, shedding light on to the heterogeneity among family firms. Third, findings of this paper inform us about the principal-principal agency costs since some of the provisions may be associated with agency problems in publicly-traded family firms by elevating the power of the controlling family which can enable the family to act opportunistically, if they intend to. Fourth, we test our hypotheses longitudinally, allowing stronger causal inference and increased statistical power over cross sectional design.

In the remainder of this paper, a theoretical overview is provided and hypotheses are developed. Then, the hypotheses are tested. Finally, results, future research opportunities, and implications for practice are discussed.

5. Discussion

Studies highlight the distinctive effects of family involvement ( i.e. , ownership and management) on the behavior and performance of publicly traded firms (Anderson and Reeb [ 15 , 33 ], Claessens et al. [ 51 ], Villalonga and Amit [ 2 , 3 ]). However, to date, we do not know enough about how and why firm behavior and performance in family firms differ from those in nonfamily firms and among family firms themselves, and what the outcomes of the family involvement in the business are through the use of control enhancing governance mechanisms (Villalonga and Amit [ 2 , 3 , 21 ]).

To fill this gap, this paper suggests that the theory of the family firm will be advanced by the investigation of the link between family involvement components ( i.e. , family ownership and family management), control enhancing governance provisions, and firm performance. Accordingly, this paper addresses how the use of different types of control enhancing mechanisms moderate the relationship between family involvement components and firm performance. We develop and test a model linking family involvement, control enhancing corporate governance mechanisms, and firm performance on a sample of 386 of the S&P 500 firms. The model in this paper is concerned with the moderation effects of the use of governance provisions on the relationship between family involvement and firm performance. It is expected that the frequency of the use of governance provisions will have a negative moderating influence on the relationship between family ownership and family management and firm performance.

The model is tested via panel data analyses. Findings support the hypotheses suggesting the moderation effects of (a) the use of provisions protecting owners’ control status on the inverted U-shaped relationship between family ownership and firm performance (H1b); (b) the use of provisions protecting management legally on the inverted U-shaped relationship between family ownership and firm performance (H4c); (c) the use of provisions protecting controlling owners in terms of their voting rights on the inverted U-shaped relationship between family management and firm performance (H2a); (d) the use of provisions protecting noncontrolling owners on the inverted U-shaped relationship between family management and firm performance (H3b); and (e) the use of provisions protecting management monetarily will moderate the inverted U-shaped relationship between family management and firm performance (H5b). The results are consistent with the expected interplay between family involvement and the use of governance provisions in influencing firm performance.

The supported moderation effects of the frequency of the use of provisions protecting controlling owners in terms of their sustainability of controlling status on the inverted U-shaped relationship between family ownership and firm performance (H1b) appears to be negative. This may be because the higher use of provisions which secure sustainability of controlling owners’ status can inflate family owners’ power and authority, enabling them to engage in opportunistic behaviors. Family owners’ equity rights at moderate levels enable them to effectively monitor and control, which can be beneficial to firm performance. However, enhanced power and authority through the use of provisions protecting controlling owners’ status can weaken the positive effects of family ownership on firm performance since family owners may have the freedom to pursue family-centered noneconomic goals and enjoy the private benefits of control when their controlling status is secured. Particularly after an optimum level of family ownership, excessive power deriving from the combination of the higher levels of ownership and the use of provisions sustaining controlling owners’ status can exacerbate principal-principal agency problems (Anderson and Reeb [ 15 , 33 ], Andres [ 34 ], Gomez-Mejia et al. [ 31 ], Shleifer and Vishny [ 39 ]) by allowing family owners to pursue family agendas primarily benefiting the family, which can be detrimental firm performance.

The hypothesized positive moderation effect of the frequency of the use of provisions protecting noncontrolling owners on the relationship between family management and firm performance (H3b) was also supported. Hence, the use of provisions protecting noncontrolling owners strengthens the positive effects of family management up to an optimum level and then weakens the negative effects after an optimum level is reached. The use of secret ballot provision assuring confidentiality in voting can facilitate noncontrolling shareholders’ activism directed toward the replacement of managers and directors or the transfer of control to a hostile takeover bidder in case of underperformance. Particularly, the secrecy of voting, which gives noncontrolling owners’ a larger voice in firm governance, can constitute an internal control mechanism by monitoring managers and directors’ actions and allowing potentially beneficial takeovers to take place by weakening the family managers’ resistance and prevention tactics. As a result, the threat of shareholder activism can be an internal monitoring mechanism and thereby discipline family managers, enhancing their positive impact on firm performance up to an optimum level of family management. Also, after an optimum level of family management is reached, this can weaken the negative effects of family management on firm performance, policing their expropriation and entrenchment attempts which can be triggered by their excessive power and authority.

The hypothesis suggesting the negative moderation effects of the use of provisions protecting controlling owners in terms of their voting rights on the relationship between family management and firm performance (H2a) was supported. Family managers’ discretion to generate strategic ideas and their timely implementation can be beneficial to firm performance up to an optimum level of family management. However, the higher use of provisions, which create a discrepancy between controlling owners’ cash flow and voting rights, can further enhance both family owners’ and managers’ power and authority. Controlling family’s excessive discretionary power on strategic decisions and actions may weaken the positive effects of family management on firm performance since family management combined with the use of provisions enhancing controlling owners voting rights can enable family managers to focus primarily on the attainment of noneconomic goals that primarily benefit the family and to consume perks. Particularly after an optimum level of family management, the combined enhancement of voting rights of the controlling family and higher levels of family involvement in management and the board can increase family managers’ ability to expropriate noncontrolling shareholder wealth and entrench themselves in management and board positions (Anderson and Reeb [ 15 , 33 ], Andres [ 34 ], Gomez-Mejia et al. [ 31 ], Shleifer and Vishny [ 39 ]), reducing firm performance.

The significant findings in the opposite direction may initially seem paradoxical since the use of provisions protecting managers and directors monetarily has positive moderation effect on the relationship between family ownership and firm performance (H4b), while having negative moderation effect on the relationship between family management and firm performance (H5b). When family members participate in the business through ownership only, monetary protection for managers and directors diminishes managerial risk bearing for nonfamily managers, enabling their taking more risk to engage in potentially fruitful projects which may be beneficial to firm performance. Family owners’ effective monitoring can also limit nonfamily managers’ opportunistic behaviors. Hence, combined effective monitoring of family owners and nonfamily managers’ reduced risk bearing and increased risk taking may strengthen the positive effects of family ownership on firm performance and then weaken the negative effects of family ownership on firm performance. However, the combination of family management and the use of provisions protecting managers and directors monetarily can reduce the concern for monetary consequences of managerial wrongdoings and enable family managers and directors to engage in expropriation of noncontrolling shareholder wealth and managerial entrenchment activities, which can be detrimental to firm performance.

The other conflicting set of results is regarding the use of provisions protecting managers and directors legally. The use of such provisions has negative moderation effect on the relationship between family ownership and firm performance (H4c), while having positive moderation effect on the relationship between family management and firm performance (H5c). The reason for the positive interaction between those governance provisions and family management may be that when family members directly benefit from reduced legal risk bearing because of being managers as well as owners, they may be more likely to formulate and implement aggressive business strategies with potentially high returns. However, when legal protections are provided to managers, the family owners, who may not be managers, may veto the aggressive business strategies formulated by nonfamily managers, owing to a lack of trust or a concern for socioemotional wealth, even though they may yield high returns.

There were also several hypotheses (H1a, H2b, H3a, H4a, and H5a) that were not supported concerning the moderation effects of the frequency of the use of provisions protecting (a) controlling owners’ voting rights; (b) noncontrolling owners; and (c) managers and directors’ positions on the relationship between family ownership and firm performance and the moderation effects of the use of provisions protecting (a) controlling owners’ status and (b) managers and directors’ positions on the relationship between family management and firm performance.

The frequency of the use of provisions protecting controlling owners’ voting rights have significant moderation effects on the relationship between family management and firm performance (H2a), whereas it has insignificant moderation effects on the relationship between family ownership and firm performance (H1a). Accordingly, the combined effects of family management and the enhancement of controlling owners’ voting rights appear to be more influential in determining firm performance than the combination of family ownership and the enhancement of controlling owners’ voting rights. This may be because family owners tend to have substantial voting rights naturally deriving from their equity rights. Hence, the use of provisions enhancing controlling owners’ voting rights may not substantially affect the impact of family ownership on firm performance. However, the use of provisions enhancing controlling owners’ voting rights combined with family management seem to have substantial impact on firm performance because family’s participation in management and board combined with the controlling owners’ elevated voting rights facilitate family influence over the business through multiple dimensions.

The lack of reinforcing effects of the frequency of the use of provisions protecting noncontrolling owners on the relationship between family ownership and firm performance (H3a) may be because of the noncontrolling owners’ relatively low level of influence over the business compared to controlling owners even though provisions protecting noncontrolling owners may be in use. Also, the use of provisions protecting managers and directors’ positions may not have significant influence on the effects of family ownership on firm performance (H4a) since any benefits or costs associated with those provisions may be mitigated by the monitoring abilities of family owners. Similarly, the use of provisions protecting managers and directors’ positions (H5a) do not have significant moderation effects on the relationship between family management and firm performance. This may be because family managers and directors may be naturally expecting a relatively long tenure and higher levels of job security regardless of whether the provisions protecting their positions are in place or not. Hence, the use provisions protecting managers and directors’ positions do not have substantial impact on the relationship between family management and firm performance. Finally, the use of provisions protecting controlling owners’ status does not seem to influence the relationship between family management and firm performance (H2b). This may be due to family’s already assuming its control over the business through participation in management and board regardless of the use of provisions protecting their controlling status.

Moreover, the assumed, but not hypothesized, inverted U-shaped relationship between family ownership and firm performance was not significant in this study, whereas the assumed, but not hypothesized, inverted U-shaped relationship between family management and firm performance was significant. This finding draws attention to the importance of family’s involvement in management and board in determining firm performance, while ownership itself does not seem be sufficient to influence firm performance. On the one hand, this finding may be contrary to some studies suggesting that family ownership, rather than family management, is the key in differentiating family firms from nonfamily firms in other countries such as Germany and Chile (e.g., Klein [ 95 ], Silva and Majluf [ 96 ]). On the other hand, this finding is in line with Maury’s [ 10 ] distinction between active ( i.e. , family holds at least one of the top officer positions) and passive family control. The author also shows that active family control is associated with higher profitability compared to nonfamily firms, whereas passive family control does not influence profitability. Similarly, Andres [ 34 ] shows that family firms may perform better than nonfamily firms only when the founding family is still active either on the executive or the supervisory board in Germany. The author also demonstrates that if families are only large shareholders without board representation, their firm performance is not distinguishable from that of nonfamily firms. Westhead and Howorth [ 97 ] also illustrate that family management, rather than family ownership, is associated with performance in firms in the UK.

This paper contributes to the literature in several ways. First, it draws attention to the importance of family involvement within the context of corporations. Second, it adds to the understanding of how publicly traded family firms are heterogeneous in terms of the impact of the frequency of the use of different types of control enhancing governance mechanisms on the relationship between family involvement ( i.e. , family ownership and family management) and firm performance, whereas studies mostly focus on the direct effects of family involvement or governance mechanisms on the firm performance (e.g., Anderson and Reeb [ 15 ], Andres [ 34 ]). This paper is one of the few attempts to use agency theory and family governance perspective to explain differences among family firms enlightening us regarding the heterogeneity among family firms. Third, this paper introduces the interplay between family involvement and the use of governance provisions as an explanation for the existence of principal-principal agency problems in publicly traded firms. Consequently, the contributions of this paper move us forward in the advancement of the theory of the family firm (Chrisman et al. [ 98 ], Conner [ 99 ]).

The limitations of this paper can also lead to a number of future research directions. First, as stated above, the regulatory context can affect the observed relationships and generalizability to the corporations around the world since the sample included S&P 500 firms headquartered in the U.S. Even though increased globalization tends to cause similarities in business conduct in world economies, different legal regimes (e.g., common versus civil law) in different countries can result in differences in corporate governance (Peng and Jiang [ 100 ]). For example, the legal system prevents pyramiding in the U.S., whereas it is permissible even in many developed countries in Asia and Europe (Peng and Jiang [ 100 ]). Since legal context may be influential on the findings of this paper, future studies can test or extend the model in other countries with different legal systems.

Similarly, we examine years 2001–2007. The findings may vary in other time periods (e.g., in 1990s) owing to the changes in the legal system. For example, the examined time periods in this paper involves the enactment and the aftermath of the Sarbanes-Oxley Act in 2002, also known as Investor Protection Act, as a reaction to corporate accounting scandals. This act enhanced the reliability of financial reporting, transparency, and accountability through increased internal controls and auditing (Coates [ 101 ]). Hence, future research can compare or contrast the findings of this paper to earlier periods than the periods examined in this paper. This can also illustrate whether legislation is influential on corporate governance.

Another limitation is that, in this paper, the seven categories of governance provisions that group the 24 provisions identified by Gompers et al. [ 11 ] according to the purposes of their usage by firms are formed by a judgment-based categorization (Perreault and Leigh [ 84 ]). Future research using different categorizations can provide further insights.

Aside from the future research directions suggested in the discussion of findings and limitations, there may be other factors that may affect the relationship between family involvement and performance in publicly traded family firms. The imminence of succession (Chua et al. [ 102 ]) is one of them. Furthermore, the effects of family involvement and control enhancing corporate governance mechanisms might vary in family firms depending upon diversification (Anderson and Reeb [ 17 ], Jones et al. [ 67 ]), entrepreneurial orientation (Dess and Lumpkin [ 103 ], Lumpkin and Dess [ 104 , 105 ]), corporate entrepreneurship (Dess et al. [ 106 ], Lumpkin et al. [ 107 ]), and life-cycle phases. All these contingencies suggest additional applications of corporate governance to the study of family businesses.

6. Conclusions

In conclusion, we hope that our paper will inform scholars, publicly traded family firms, and policy makers about the proper use of corporate governance mechanisms, which can help mitigate agency problems and maximizing shareholder value.

Author Contributions

Authors contributed equally to research and writing of the manuscript, deriving from the first author’s dissertation.

Conflicts of Interest

The authors declare no conflict of interest.