Governance of family firms

By definition, family firms have concentrated ownership. The majority (or a large part) of their equity capital is provided by the family. 

An important factor that influences the governance of family firms is their size. Family firms cover a wide range of sizes, from small single-owner entities to large firms active on international markets. Larger firms have more nonfamily owners, perhaps because they need to raise capital from more investors. However, the family usually remains active even in the largest family firms.

In what follows, we rank family firms into ten deciles based on their sales in 2019. Group 1 represents the 10% family firms with the smallest amount of sales, and group 10 represents the 10% with the largest sales.

The ownership stake of the controlling family decreases with firm size, but the decrease is relatively small, and 70% of the firms in the largest decile have no nonfamily owners:

Looking within the family’s ownership stake, most family firms have just one  owner in the controlling family. However, as firm size increases, the average number of family owners also goes up:

Further details on the relationship between majority and minority shareholders can be found here.

Families are usually deeply involved with the family firm: besides being owners of the firm, they are also often represented on the board of directors and in the management team of the firm.

Looking at Norwegian family firms, we find that in four out of five firms, family members serve as both the CEO and the chair of the board of directors. The family has only the chair position in 12% of the firms, and only the CEO position in 7% of the firms. Very few family firms have neither a family CEO nor a family chair of the board.

There are several key firm characteristics that are associated with higher family involvement. Families are more likely to take the CEO and chair position in firms with more concentrated ownership (i.e. when the family owns a larger stake in the firm), in firms that are more profitable, smaller, and less risky. On the other hand, the firm’s location in cities or in the districts, make little difference to the family’s involvement.

Note: OWNERSHIP is the ultimate equity fraction held by the firm's largest family by ownership. PERFORMANCE is operating earnings after taxes divided by total assets averaged over the past three years, while SIZE is real sales in millions of NOK as of year end 2013.

We define family firms as firms where a family controls more than 50% of the shares. That means that the family can decide whether it wants to also take governance positions in the firm – and it leads to an important question about causality. For instance, do families choose to get more involved if the firm is more profitable, or is the firm more profitable as a result of closer family involvement?

In our study, we find that causality goes both ways. If a firm is more profitable – as measured by its return on assets – then the family is more likely to take on the CEO and chair positions. However, it is also true that higher involvement by the controlling family increases the performance of the firm.

The majority of the board of directors usually consists of family members, although nonfamily members are likely to be present especially in large firms:

As the size of the firm increases, the probability that nonfamily shareholders sit on the board increases significantly:

The proportion of women on board is higher in family firms than in nonfamily firms, and it has been slowly increasing in recent years:

The proportion of women CEOs in family firms is also higher than in nonfamily firms, and it has been gradually increasing in recent years: