The Business Ethics Blog

Family firms (or family-controlled corporations) are a bit of an outlier in the modern business world. Modern corporations are typically characterized by a “separation of ownership and control” — that is, companies are generally run by professional managers, who manage on behalf of a very large number of mostly-anonymous shareholders. Most people who own shares own them only indirectly through pension funds mutual funds, and so they have little direct input into the way the company is managed. This pattern is directly responsible for the modern focus on governance standards: when managers are given the task of managing on behalf of anonymous, disempowered shareholders, they have an ethical obligation to take seriously the obligations such an arrangement implies. The CEO has to remember that it’s not her company: she’s a guardian, managing on behalf of others. Modern governance standards take some of the relevant ethical obligations and enshrine them in laws, regulations, and ‘best practices.’

“Family” firms (or family-controlled corporations) are somewhat different. The sort of family firms I’m talking about here are not ‘mom-and-pop’ organizations, but rather large, publicly-traded companies in which a family owns a controlling interest (i.e., 30% or more of stock). So while such firms are typical, publicly-traded companies in some regards, they are unusual in important ways. The family in question may have not just a strong position in terms of the stock it holds; they may also bear the name that’s emblazoned on the company letterhead. And the company’s origins and evolution may be intimately bound up with the family’s own history. This adds up to considerable influence. Is that influence a good or a bad thing? In principle, at least, there’s a worry that the family’s influence might not always work in the interests of other shareholders. And this worry is exacerbated by the fact that family-controlled companies often don’t stick to widely-acknowledged best practices in terms of corporate governance.

To shed some light on this topic, my friends* at the Clarkson Centre for Business Ethics and Board Effectiveness have just released a new study Family Firm Performance Study. Their central finding?

“Canadian family-controlled issuers have outperformed their peers between 1998 and 2012. Moreover, family firms often appear best able to create value for their shareholders when they choose not to adhere to typical best practices in share structure and independence.”

It’s an intriguing finding. The study as a whole is worth reading. I want to comment on just a couple of issues, here.

First, a study like this casts doubt on the one-size-fits all approach to corporate governance. Best practices (such as standards for the number of independent directors on your board) and legal standards (such as the requirement to have an audit committee) typically prescribe how a corporation’s board should be composed and conduct itself, irrespective of the corporation’s history, industry, and so on. And, importantly, such standards don’t draw a distinction between family and non-family companies. And while such standards generally evolve (or are imposed) in response to emerging challenges and scandals, they are liable to be based on the average or typical company. But, of course, the average or typical company is a fiction. Every company is unique, and so one-size-fits-all may mean one-size-fits-none. At very least, it is worth acknowledging that a compromise is being made: uniformity in exchange for mediocrity. Best practices may not be best.

When I asked Matt Fullbrook, Manager of the Clarkson Centre, about this, he was cautious. There will be no immediate change in the way the Clarkson Centre itself ranks companies. He agreed, however, that it’s an open question: “we are actively asking ourselves about whether or not good governance might mean something different to family firms, and that’s the next place we hope to take our research.”

Second, a result like this immediately raises questions and generates hypotheses about why family-controlled firms work so well, despite their frequent violation of governance norms. One theory (alluded to in the Clarkson report) has to do with managing for the long run: a company rooted in a family’s history and tradition and reputation may well be less susceptible to the short-termism that is so notoriously a factor at most corporations today. Alternatively, does success come about precisely because family-controlled companies aren’t subject to the kinds of agency problems that other firms are subject to. Maybe having family members deeply involved keeps the company’s management honest. Or is it a matter of the way family firms cleave to a set of ethical values, in an attempt to safeguard the family name? It’s a question that bears more study.

Finally, it’s worth asking what ethical lessons can be learned by other sorts of companies — that is, by ones that are not family-controlled. If family-controlled companies do so well, should the be imitated? Lots of companies already use the rhetoric of family, encouraging employees to think of themselves as kin, as descendants of a proud lineage, and bound together by corporate “DNA.” To some, that’s a way of improving morale, and perhaps thereby improving performance. But if family control is itself a strength, that suggests another reason to think this way.

In sum, research like this is essential. Family-controlled corporations are already the subject of some ambivalence. On one hand, they evoke the traditional affection most of us feel for a family-run business. On the other hand, many of us mistrust dynasties in general, and the mismanagement and indeed malfeasance that nepotism can bring. But our attitudes toward them are more properly guided by research on whether (and how) they get the job done, than it is by emotion.

*Disclosure: I was a Visiting Scholar at the Clarkson Centre during the 2011-2012 academic year.