Family members vs family business

Do family firms have too many family members on boards? Recent research by Russell Reynolds Associates, an executive search firm, and Spanish business school IESE, suggests that they might.

They found that 50% of board seats at family firms in Europe are taken by family members, 23% by company executives and shareholder representatives, and 27% by independent directors.

As the average board has 7.4 members, that means that just two are not connected to the family in some sense. And that is before you ask who appointed those so-called independents.

Unsurprisingly, there are variations between countries. In Spain, 62% of board seats are taken by family members, while in Germany it is only 25%. In France and Italy, the figures were 51% and 56% respectively. In Spain just 17% of board members are independents, while in Germany 51% are.

Women make up 16% of board positions Europe-wide, though again there are big variations. In Germany 10% are women, but 25% are in France. Only 8% come from a foreign country.

This are interesting statistics, but should come with several caveats. The sample was only 106 firms, and there is massive variation in the businesses surveyed, in both size and sector.

But it raises an interesting question: what is the optimum number of family members on a board? We have mentioned before on Family Capital a paper by Swedish academics which found that too many family members in top positions can lead to a defensive, fearful attitude in family businesses, and can mean that family issues start to affect business decisions.

The obvious conclusion is that those firms which have almost two-thirds of board seats filled by family members should look closely at how that is affecting their performance.

But there is another way of looking at it. Even if their board composition means that they make less money than they could, it doesn’t necessarily follow that these family-dominated firms should make changes.

Firstly, you might argue that any board – or indeed any group of human beings – involves all sorts of complex psychological jostling. It might be true that family members get bogged down in family affairs, but even the most professional of managers are a bundle of biases and prejudices. If you got rid of family members one type of irrationality would just be replaced by another.

And secondly, boards that are not only fixated with profits could be a very good thing, especially if they value stability and sustainability instead. The risk-averse, conservative decisions that family-dominated firms make might not be all bad.

That these family firms still exist despite their supposedly sub-optimal board composition suggests that they are doing something right.