Friday, April 01, 2005

All in the family: Strategy+Business (free reg. req.)

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The complex nature of family influence in corporate boardrooms led Professors Villalonga and Amit to make a distinction between ownership, control, and management. As a result, their research ultimately addressed this question: Does family ownership, control, and/or management create or destroy value?

Their central finding was revealing: Family ownership creates value for shareholders - both family and nonfamily - only when the founder is still active in the firm, either as CEO or as chairman with a nonfamily CEO. But when a descendant of the founder serves as CEO, value is diminished - minority (nonfamily) shareholders fare worse than they would in nonfamily firms - even if the founder is chairman.

The effect of control-enhancing mechanisms also varies according to which generation of the family holds the commanding stake. In companies led by founder-CEOs, the presence of control-enhancing mechanisms reduces shareholder value below what it would be without such arrangements. The authors argue that markets penalize the share price because of the CEOs disproportionate level of influence. Despite this, however, minority shareholders are still likely to be better off investing in these companies: On average, firms with founder-CEOs that have control-enhancing mechanisms perform 25 percent better than nonfamily firms.

In firms with CEOs who are descendants of the founder, control-enhancing mechanisms actually have a small positive impact. This is either because descendant CEOs are not perceived by the markets to be as dominating as founder CEOs, or because markets are allocating a tiny premium for continuity. Overall, however, minority shareholders in descendant-CEO companies are still worse off than they would be investing in a nonfamily firm.

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Family owned business is big business in this part of the world. The lessons of this Harvard Business School study no doubt translate well to this region. Both in business and in politics - which are many times one and the same.


Anonymous Anonymous said...

When the CEO is the founder there may be a risk effect. The problem may be that there is no one who can say no to an idea, good or bad. The function of governance mechanisms (including the US Constitution) is to reduce variance. I would like to see a maping of return on standard deviation of returns for various forms of ownership and governance. Anecdotes are almost the enemy of proof (too colorful), but if I remember correctly, Edwin Land almost destroyed Polariod because he successfully, and very expensively, developed instant chemical film movies just as video was emerging.

5:49 AM  

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