Corporate governance is an active research area devoted to the study of the diffusion, characteristics, and performance implications of different types of corporate ownership. Studies in this area show the prevalence of concentrated ownership structures in corporations, and in particular the important role played by family ownership and access to control. This section reviews research in this field and solves some of the unanswered questions on corporate governance.
The study of the diffusion, characteristics and performance implications of different types of corporate ownership is an area of very active research, which has delivered many important insights over the past few years. Several studies have shown the prevalence of concentrated ownership structures in corporations around the world, and in particular the very important role played by family ownership and control across both developed and developing economies (La Porta, Lopez-de-Silanes, and Shleifer 1999) (Morck, Stangeland, and Yeung 2000) (Claessens, Djankov, Fan, and Lang 2002) (Faccio and Lang 2002) (Anderson and Reeb 2003) (Villalonga and Amit 2006).
Evidence on the performance implications of family ownership and control is theoretically ambiguous (Bertrand and Schoar 2006). The empirical evidence is mixed: some studies report the presence of a positive cross-sectional relationship between family control and firm performance (Anderson and Reeb 2003) (Villalonga and Amit 2006) (Sraer and Thesmar 2007); however, in studies that take into explicit account the endogeneity concerns associated with ownership choice, the evidence suggests the presence of a causal negative effect of family ownership on firm performance (Morck, Stangeland, and Yeung 2000) (Pérez-González 2006) (Bennedsen, Nielsen, Pérez-González, and Wolfenzon 2007).
Over the past few years, advances in the measurement of managerial capabilities across large sample of firms have provided more evidence to understand the mechanisms linking different ownership types to performance. Ownership appears to be systematically related to significant differences in terms of basic management practices. In particular, firms owned and managed directly by the firms’ founders or their descendants appear to lag behind in the adoption of modern managerial practices relative to other forms of concentrated ownership and to widely owned organizations (Bloom and Van Reenen 2007) (Bloom, Genakos, Sadun, and Van Reenen 2012). Furthermore, recent research has also uncovered systematic differences across different ownership types in terms of overall CEO effort and allocation of time across activities (Bandiera, Prat and Sadun 2013) and business philosophies (Mullins and Schoar 2013) (Hurst and Pugsley 2011).
While the empirical literature has made great advances over the past few years, much remains to be explored. First, most of the available evidence on the characteristics and the performance implications of different types of corporate governance remain limited to public firms in the United States, while very little is known for private companies and in other developed and developing countries. Second, more research is needed to better understand the underlying reasons for the differences in managerial practices across different ownership types, and whether these reflect managerial informational barriers or rational choices (e.g., presence of non-pecuniary benefits of control). Finally, relatively little is known on the role of heterogeneity within different types of family firms, and more specifically on the transmission of power across different generations.
The research summarized in this document is related to studies investigating performance, managerial and organizational differences across different types of ownership. Family owned firms account for a large fraction of economic resources around the world, especially in countries with poor minority shareholders protection (La Porta, Lopez-de-Silanes and Shleifer 1999) (Morck, Stangeland and Yeung 2000) (Claessens, Djankov, Fan, and Lang 2002) (Faccio and Lang 2002) (Anderson and Reeb 2003) (Villalonga and Amit 2006). Therefore, the review will focus on the difference between family owned organizations (i.e., firms in which the majority of ownership is concentrated in the hands of the founders or their offspring) and other forms of concentrated ownership or widely held corporations (i.e., firms whose ownership is held by a large number of minority shareholders).
From a theoretical standpoint, the link between family ownership and control and firm performance is ambiguous (Bertrand and Schoar 2006). On the one hand, the direct managerial involvement of members affiliated with the owning family may enhance firm performance by alleviating agency concerns. On the other hand, family managers may exploit their decisional freedom to pursue non-monetary objectives, such as pet project or nepotistic appointments. This could allow for an inefficient allocation of resources (Bertrand, Johnson, Samphantharak and Schoar 2008) as well as inhibit the recruitment of capable non-family affiliated managers (Bandiera, Guiso, Prat, and Sadun). The empirical evidence on the relationship between family control and firm performance is mixed. Several studies have documented a positive relationship between family control and firm value (Anderson and Reeb 2003) (Villalonga and Amit 2006) (Sraer and Thesmar 2007).
However, the result is reversed in studies that take into explicit consideration the endogeneity surrounding the intertemporal transmission of ownership and selection issues (Morck, Stangeland, and Yeung 2000) (Pérez-González 2006) (Bennedsen, Nielsen, Pérez-González, and Wolfenzon 2007).
The study of managerial and organizational differences across firms has traditionally been hampered by the lack of in-depth information on managerial processes for large and representative samples of firms across countries. This gap in the literature has recently been addressed by the World Management Survey (Bloom, Genakos, Sadun, and Van Reenen 2012), which over the past ten years has collected through high-quality interviews data on the adoption of basic managerial practices and organizational structure across more than 13,000 manufacturing firms in 30 countries. This data suggests the existence of large and significant managerial differences across ownership types. Widely owned firms tend on average to show significantly higher adoption of basic performance enhancing managerial processes, while firms owned and managed by family members (both first and second generations) are on average much less likely to adopt them (Bloom, Genakos, Sadun, and Van Reenen 2012), especially when the selection of the CEO follows non-meritocratic criteria (i.e., primo geniture, Bloom and Van Reenen, 2007). This managerial underperformance is tightly linked to the simultaneous presence of family ownership and control: firms that are owned by family members but managed by external CEOs are statistically undistinguishable from widely owned firms. Finally, firms that are owned by Private Equity firms are on similar to widely held organizations in terms of management practices. (Bloom, Sadun, and Van Reenen 2009)
While the evidence points to the existence of significant differences in management practices across different ownership types, still very little is known about their root causes. Recent papers have started to explore more directly whether these differences can be linked to the specific behavior of top executives. This line of research is motivated by the evidence suggesting the important role played by of CEOs in driving performance heterogeneity across firms (Bertrand and Schoar 2003). Bandiera, Prat and Sadun (2013) collect detailed information on the daily activities of more than 1,000 CEOs across 6 countries and show the presence of significant differences in effort provision between family CEOs and external (i.e., non family affiliated) managers: family CEOs tend to work fewer hours relative to professional managers, and to be much more reactive to negative shocks to the cost of effort. They interpret this finding as evidence of wealth effects among family CEOs, and more generally with the presence of non-pecuniary benefits of control for family affiliated managers.
Direct evidence on heterogeneity in business philosophy and beliefs across CEOs is reported by Mullins and Schoar (2013): using a sample of 800 CEOs in 22 emerging economies, they report significant differences in the business philosophy and organizational structures chosen by CEOs according to their family affiliation. In particular, they report founder CEOs to be more involved in the management and control of the firm, and adopt a more hierarchical management structure relative to CEOs of widely held firms (professional CEOs). The differences extend to issues of accountability (founder CEOs report to place less weight on protecting minority shareholder rights, and more weight on protecting stakeholders such as workers) and business strategy (founder CEOs see their role as maintaining the status quo rather than bringing about change). In contrast, professional CEOs of widely held firms are at the other end of the spectrum and display a management philosophy and style that resembles the text- book view of a shareholder-value-maximizing CEO. Hurst and Pugsley (2011) report evidence of non-pecuniary benefits of control among small business owners in the U.S., although the nature of their sample (business owners are interviewed at birth or shortly before) does not explicitly include second-generation businesses.
Most of what we know in this area derives from studies of companies based in developed economies, typically the U.S. Future research should investigate more systematically whether existing results (e.g., the negative causal effects of family ownership) extend to different economic contexts.
A second important area for future research pertains to the relationship between managerial choices, management practices and firm performance. One major unknown in this area of whether the wide heterogeneity in management practices found in the data reflects informational barriers (i.e., managers do not realize they need to improve their managerial practices, or underestimate their returns), different incentives or coordination failures (Gibbons and Henderson 2013). Furthermore, very little is known on the relationship between CEO choices and the adoption of different business practices.
Finally, it would be important to study in more detail the differences between the managerial choices made by founder CEOs vs. those of family managers in later generations. More specifically, how is managerial capital created (or dissipated) across different generations?
ORBIS provides extensive accounting information on several millions of private and public businesses around the world. Provides extensive information on ownership at a point in time and over time, identifies chains of ownership domestically and internationally. Needs subscription.
The World Management Survey provides detailed management data on about 13,000 firms in 30 countries. The latest version of the data can be downloaded for free on www.worldmanagementsurvey.org.
Anderson, Ronald C., and David M. Reeb. 2003. "Founding-Family Ownership and Firm Performance: Evidence from the S&P 500." Journal of Finance 58(3): 1301-1328. doi:10.1111/1540-6261.00567
Bandiera, Oriana, Luigi Guiso, Andrea Prat, and Raffaella Sadun. "Matching Firms, Managers, and Incentives." Journal of Labor Economics 33(3): 623-681. doi:10.1086/679672
Bandiera, Oriana, Andrea Prat, and Raffaella Sadun. 2013. "Managing the Family Firm: Evidence from CEOs at Work." Harvard Business School Working Paper. doi:10.2139/ssrn.2363528
Bennedsen, Morten, Kasper M. Nielsen, Francisco Pérez-González, and Daniel Wolfenzon. 2007. "Inside the Family Firm: The Role of Families in Succession Decisions and Performance." Quarterly Journal of Economics 122(2): 647-691. doi:10.1162/qjec.122.2.647
Bertrand, Marianne, Simon Johnson, Krislert Samphantharak, and Antoinette Schoar. 2008. "Mixing Family with Business: A Study of Thai Business Groups and the Families Behind Them." Journal of Financial Economics 88(3): 466-498.
Bertrand, Marianne, and Antoinette Schoar. 2003. "Managing with Style: The Effect of Managers on Firm Policies." Quarterly Journal of Economics 118(4): 1169-1208. doi:10.1162/003355303322552775
Bertrand, Marianne, and Antoinette Schoar. 2006. "The Role of Family in Family Firms." Journal of Economic Perspectives 20(2): 73-96. doi:10.1257/jep.20.2.73
Bloom, Nicholas, Christos Genakos, Raffaella Sadun, and John Van Reenen. 2012. "Management practices across firms and countries." The Academy of Management Perspectives: 12-33. doi:10.5465/amp.2011.0077
Bloom, Nicholas, Raffaella Sadun, and John Van Reenen. 2009. "Do Private Equity-owned Firms Have Better Management Practices?" The Global Economic Impact of Private Equity Report 2009. Ed. Josh Lerner, and Anuradha Gurung. Geneva, Switzerland: World Economic Forum, 1–23. doi:10.1257/aer.p20151000
Bloom, Nick, and John Van Reenen. 2007. "Measuring and Explaining Management Practices Across Firms and Countries." Quarterly Journal of Economics 122(4): 1351-1408. doi:10.1162/qjec.2007.122.4.1351
Claessens, Stijn, Simeon Djankov, Joseph P.H. Fan, and Larry H.P. Lang. 2002."Disentangling the Incentive and Entrenchment Effects of Large Shareholdings." Journal of Finance 57(6): 2741-2771. doi:10.1111/1540-6261.00511
Faccio, Mara, and Larry H.P. Lang. 2002. "The Ultimate Ownership of Western European Corporations." Journal of Financial Economics 65(3): 365-395. doi:10.1016/s0304-405x(02)00146-0
Gibbons, Robert and Rebecca Henderson. 2013. "What Do Managers Do? Exploring Persistent Performance Differences among Seemingly Similar Enterprises." Chapter 17 in Robert Gibbons and John Roberts (eds.), Handbook of Organizational Economics, Princeton University Press: 680-731. doi:10.1515/9781400845354-019
Hurst, Erik, and Benjamin Pugsley. 2011. "What do Small Businesses Do?" Brookings Papers on Economic Activity 2011(2): 73-118. doi:10.1353/eca.2011.0017
La Porta, Rafael, Florencio Lopez-de-Silanes, and Andrei Shleifer. 1999. "Corporate ownership around the world." Journal of Finance 54(2): 471–517.
Morck, Randall K., David A. Stangeland, and Bernard Yeung. 2000. "Inherited Wealth, Corporate Control and Economic Growth: The Canadian Disease?" Concentrated Corporate Ownership. Ed. Morck, Randall K. Chicago: University of Chicago Press, 319-369.
Mullins, William, and Antoinette Schoar. 2013. "How do CEOs see their Role? Management Philosophy and Styles in Family and Non-Family Firms." NBER Working Paper 19395.
Pérez-González, Francisco. 2006. "Inherited Control and Firm Performance." American Economic Review 96(5): 1559-1588.
Sraer, David, and David Thesmar. 2007. "Performance and Behavior of Family Firms: Evidence from the French Stock Market." Journal of the European Economic Association 5(4): 709- 751.
Villalonga, Belén, and Raphael Raphael. 2006. "How Do Family Ownership, Control, and Management Affect Firm Value?" Journal of Financial Economics 80(2): 385-417.
Page last updated 9 December 2016
Raffaella Sadun - Harvard Business School, Contributor