Family ownership is a remedy for absolutist CEOs

A lot can be said about the governance of family firms, and from the point of view of mainstream Anglo-American business culture, a lot of it is bad. Those who believe that shareholder-owned businesses are more rational, more transparent and that the maximisation of shareholder value is a good raison d’etre for a firm often see family ownership as irrational, nepotistic and blighted by agent-principal problems. Boards in particular, especially if they are crammed with family members and retainers, can be seen as particularly problematic. In reality, though, the boards of family firms might have quite a lot going for them.

New research by Professor John Joseph from Duke University’s Fuqua School of Business has discovered that between 1981 and 2007 many of the boards of S&P250 firms began to display a somewhat bizarre feature: “CEO-only boards” on which the CEO – who is often only the chairman – is the only member of the firm on the board.

The trend began in the 1980s, when it was said that outsiders could hold the CEO to account better than his underlings. Indeed, the NYSE and NASDAQ both have rules saying that companies must have a majority of outside board members, so the business cannot veto board decisions and shareholders’ interests can be defended. 

Prof Joseph found that single CEOs occur more in firms where “a higher proportion of insiders predate the CEO, and in which the CEO has greater formal power and agenda control”, and also that CEOs vanquished their colleagues after regulatory changes or good results.  So these single CEO structures are arguably about control and power, not good governance. 

The implication of Prof Joseph’s research is that when CEOs become absolute monarchs they are probably not acting in the interests of other stakeholders – and anyway, it’s hard to find out because the CEO controls the flow of information. 

All of this makes family firms’ boards look pretty attractive. Research published last year by IESE business school and executive search firms Russell Reynolds found that in a small sample of European family firms (106), 50% of board positions were filled by family members, 23% by company executives and shareholder representatives, and 27% by independent directors.

In Spain, 62% of board seats were taken by family members, while in Germany the figure was only 25%. In France and Italy, the figures were 51% and 56% respectively. In Germany 51% of board members were independent. Across the whole sample, the chairman and CEO was the same person in just 16% of companies, though this varied significantly between countries (see graphic below).

Now, you might say that having almost two-thirds of board seats filled by family members, as in Spain, is too high. And you might add that having family members breathing over the CEO’s shoulder is a bad thing (although this research suggests it is an excellent thing), but if runaway CEOs are a problem then a family that watches the boss’s every move is certainly a solution. Yes, the world’s oldest ownership model has its problems but no system is perfect, and this one certainly checks power-hungry bosses.