Governance of family firms
When does the family govern the family firm?
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.