Family CEOs enhance the performance of family firms, but only when companies are relatively small and ownership is concentrated, Alessandro Minichilli and Guido Corbetta (Department of Management and Technology) state in Is Family Leadership Always Beneficial? (with Danny Miller, HEC Montreal, forthcoming in Strategic Management Journal).
Empirical studies about the benefits or detriments of family ownership and family management have so far produced mixed and conflicting results and the jury is still out. While the three authors list all the shortcomings of previous literature, they think that the major one is its neglect of some key differences among family firms and thus they test a model in which firm size and ownership concentration determine when family leadership augments and when it erodes firm performance.
They draw conflicting predictions from agency theory (on the one hand family CEOs may lower agency costs through the alignment of interests and the minimization of information asymmetry; on the other they can use their superior position and knowledge to exploit less influential owners and benefit only themselves) and stewardship theory (on the one hand, family CEOs could be more attached and loyal to the firm and manage for the long run; on the other they could manifest an excessive, costly altruism towards family members and appoint them to key positions even when not qualified) and suggest the need for a context-based investigation of the performance effects of family managers.
The authors note that the advantages predicted by both agency and performance theories seem to stand in low complexity environments, while the disadvantages seem to strengthen with complexity. Hence, provided that firm size translates into administrative complexity and ownership dispersion into social complexity, they test the hypotheses that firms with family CEOs outperform other firms when they are small and the ownership concentrated and underperform when the firms are large and the ownership dispersed, while there is no effect in small firms with dispersed ownership and in large firms with concentrated ownership.
In order to test the hypotheses, they use a database of all the Italian family controlled firms with revenues of over € 50 million, developed by Bocconi’s AIdAF-Alberto Falck Chair of Strategic Management in Family Business for the AUB Observatory (AIdAF-Unicredit-Bocconi, together with the Chamber of Commerce of Milan). The database includes 2,522 medium and large family-controlled firms over the period 2000-2008, considering a firm under family control when the family’s share is at least 50% (for private firms) and at least 25% (for listed companies). Selecting only the firms led by a single CEO, their sample is of 4,592 firm/year observations. Their model measures performance by return on assets (ROA), size by revenues and concentration by the Herfindahl family ownership concentration index, and confirms all the authors’ hypotheses.
From a theoretical point of view the paper’s findings are “consistent with a contextual approach to theorizing about organizations”, the authors write, while from a practical point of view, “first the paper calls attention to the importance of the fit between types of leaders and the nature of the firms they are called upon to lead; second, our study shows how as they grow and as ownership diffuses, family firms must be able to adapt their leadership structure”.