Controlling shareholders and the composition of the board: special focus on family firms

This article analyses the relevance of the agency problems that exist between shareholders and managers (type I agency problems) and between majority and minority shareholders (type II agency problems), in determining the composition of the board of directors, differentiating between family owned and non-family owned firms. The hypotheses are tested on a sample of 173 Spanish listed companies for the period 2004–2011. The results of our study indicate that, on one hand, as type I agency problems increase, firms increase their percentage of outside directors and, on the other, as type II agency problems increase, firms increase the ratio of independent to nominee directors. Whether the company is a family firm or not does moderate the influence of insider ownership over the composition of the board. Generally speaking, our findings support the view that firms configure their board of directors in such a way as to best signal to the market both efficient management and a balance of the interests of all shareholders. Likewise, these results could be taken into account when formulating recommendations on the composition of the board of directors.     

Corporate governance,family ownership and performance

Using a sample of 56 Italian IPOs issued between 1999 and 2005, several hypotheses are tested on the interplay between corporate governance, family ownership and performance. Specifically tested is which approach among all agency, stewardship, and contingency theory is most appropriate for Italian family firms. Findings suggest that board independence increases with family disinvestment at IPO, presence of venture capitalists, establishment of large and active boards, and existence of appointment and compensation committees. At the same time, results indicate that the presence of independent directors affects performance positively but with little statistical significance, while family involvement and the presence of execution committees negatively impact share performance.     

Governance structure and internationalization of family-controlled firms: The mediating role of international entrepreneurial orientation

Stemming from resource dependence theory this article investigates the mediating role of international entrepreneurial orientation on the relationship between the involvement of non-family members in the firms' governance structure and both pace of internationalization and international performance of family firms. Relying on a sample of 113 German family firms, the theoretical model proposed in the study is tested via structural equation modeling techniques. Our findings suggest that a high involvement of non-family members in governance structure has a positive impact on family firms' pace of internationalization, and that this relationship is mediated by the international entrepreneurial orientation of the firm. The discussion section offers implications for family business and international entrepreneurship literature, as well as practical implications.     

The value of board monitoring in promoting R&D: a test of agency-theory in the US context

Prior agency-theory research has presented conflicting findings regarding the importance of board monitoring in motivating R&D. We reinvestigate this literature by examining the value monitoring exerts in abating both the agency costs of underinvestment and overinvestment in R&D. We argue that monitoring that relies on board independence has both benefits and costs associated with promoting R&D. While we assert that intense monitoring by the board heightens underinvestment in the US context, it can also provide discipline over a firms free cash flows. We test our theory using a longitudinal panel data set consisting of a cross-section of S&P 1500 US-firms between 1997 and 2007. On average our study finds inside directors increase overinvestment in R&D, but facilitate better resource allocation when a firm has rich growth opportunities. Also, while too much emphasis on outside directors heightens underinvestment in R&D, a more independent board encourages better resource allocation when firms have high free cash flows that need to be paid back to owners. Thus, our results suggest a more inclusive perspective of agency-theory can help managers make better R&D investment decisions.     

中小企业的董事会结构与战略选择——基于中国企业的实证研究

本文从委托代理理论和资源依赖理论出发,以中国深圳证券市场中小企业板的上市公司为研究对象,探讨中小企业的董事会结构与战略选择的关系。研究结果表明,董事会结构对公司的多元化战略有着显著的影响,而与委托代理理论相比,资源依赖理论能够更好地解释这种影响。笔者认为,这是由于:中小企业规模较小,所有者对于公司经营管理的介入度比较高,所以委托代理问题并不明显;而缺乏资源则是制约众多中小企业多元化扩张的主要瓶颈。     

The Effect of Board of Directors’ IT Awareness on CIO Compensation and Firm Performance

Chief information officers (CIOs) play increasingly strategic roles in firms in this competitive global economy, which is now largely powered by information technology (IT). However, research has shown a lack of board of directors’ oversight on CIO‐ and IT‐related issues. Drawing on agency, resource dependence, and alignment theories, we investigate the effect of board of directors’ IT awareness on CIO compensation structure and firm performance. We conduct cross‐sectional time series analyses of data collected from various sources. Our study underlines three important findings. First, we show that some commonly known executive compensation determinants, such as individual characteristics and governance structure, do not have significant effects on CIO compensation structure. Second, with regard to CIO compensation structure, firms respond to increasing information asymmetry differently according to the level of IT awareness of their boards. Finally, firms perform better when their boards have higher levels of IT awareness, and this positive effect of IT awareness is considerably larger in IT intensive industries. Overall, our study provides empirical support for the important role of boards’ IT awareness in shaping CIO compensation and improving firm performance. Our results suggest that boards with functional area knowledge—or higher IT awareness in this case—can more effectively monitor and better incentivize executives, and consequently lead to better firm performance.     

Firm size and board diversity

This study seeks to understand the relation between firm size and supervisory board composition. Specifically, we ask if and how firm size influences occupational and international background diversity in supervisory boards. Relying on resource dependence theory and theories of organizational behavior, we hypothesize that board diversity with respect to directors’ occupational background will increase with firm size, while the relation between firm size and board diversity with respect to directors’ international background will be concave. Using archival data for supervisory board members of 151 German firms listed in the German stock exchange indices DAX, MDAX, SDAX and TecDAX for the business year 2005, we find empirical support for our hypotheses: Both, occupational and international background diversity increase with increasing firm size, but international background diversity does so at decreasing rates.     

A Multi‐theory Perspective of Board Leadership Structure: What Does the Egyptian Corporate Governance Context Tell Us?

Much of the existing research in corporate governance has been directed at examining the consequences of board leadership structure on various organizational issues, with little to say about the determinants of this structure. By exploring either agency theory or stewardship theory, researchers provide contested conclusions regarding board leadership structure. The underlying premise of both theories is that ‘one universal structure fits all’. However, the main argument of this paper is that the appropriate board leadership structure varies with some contextual variables and certain actors in a given environment. Econometric analysis demonstrates that board leadership structure varies with firm size, age and ownership structure. The implication of this result is that the assertion of both agency theory (CEO non‐duality structure) and stewardship theory (CEO duality structure) may be valid under certain conditions. Thus, existing theories might need to be treated as complementary viewpoints, each of which draws upon a part of the whole picture, because depending on just one single perspective is more likely to result in misleading conclusions about the structure as a whole.     

Independent directors,large shareholders and firm performance: the generational stage of family businesses and the socioemotional wealth approach

The effectiveness of independent directors is empirically addressed in the Southern European context using a sample of 221 publicly traded firms during the 2001–2007 period. Drawing on the socioemotional wealth approach, we focus on family control and influence to test whether there are significant differences in the effect of independent directors on the firm’s performance among non-family businesses (NFBs) that have a non-family large shareholder, and family businesses (FBs). In doing so, we consider the heterogeneity of FBs by testing whether the FB’s life cycle moderates the effectiveness of independent directors. To that end, we differentiate among founder lead family businesses and non-founder lead family businesses. Moreover, we test whether dual leadership structures, in particular when the family chief executive officer is also the chairperson of the board, moderates the effectiveness of independent directors. A cross-country and panel data design was used, taking into account the endogeneity problem arising in studies of corporate governance. The results show that the contribution of independent directors to a firm’s performance differs for NFBs and FBs. Moreover, findings confirm that in FBs, contribution is moderated by the generational stage of the FB and by the leadership structure of the firm.     

Initial resource heterogeneity differences between family and non-family firms: Implications for resource acquisition and resource generation

A fundamental, but overlooked stream of resource-based theory (RBT) is the analysis of combinations of initial heterogeneous resource endowments with homogeneous resources that are acquired in the market. These combinations can generate heterogeneous, specific non-tradable resources, which are a potential source of superior competitive advantage and, hence, performance. In order to operationalize this idea empirically, we analyse the development of internationalization resources (considered a specific category of non-tradable resources) within family and non-family firms. Compared to non-family firms, we argue that family firms are able to combine a particular type of heterogeneous initial resource (i.e. familiness) with homogeneous tradable resources acquired in the market. This question is tested using a panel of family and non-family Spanish manufacturing firms for the period 1990 to 2010. As a result, this study contributes to the literature on RBT, extending previous theoretical and empirical research in this stream.     

The Importance of Compensating Strategic Network Board Members for Network Performance: A Contingency Approach

Firms in government‐supported strategic networks tend to rely on professional network board members for support and assistance. As such, two significant issues arise: should board members be compensated and under which circumstances is compensation more – or less – effective for network performance. Based on yearly panel data from 53 government‐supported strategic networks of small‐ and medium‐sized enterprises over a five‐year period, this study examines the effects of compensating network board members. Advocating for a contingency approach, we combine the agency and stewardship literatures to posit that the effects of compensation are moderated by contingency factors that stimulate either an agency or stewardship relationship between the network board and the networking firms. Our findings indicate that significant funding, network firms represented on the network board, and top‐down network formation stimulate board members to become agents rather than stewards. This therefore explains the higher effect of board member compensation under such conditions.     

A Review of Theory in Family Business Research: The Implications for Corporate Governance

In recent years, increasing scholarly attention has been directed toward the field of family business research. Based on an exhaustive sample of 235 publications, this article provides a comprehensive review and a critical assessment of the theoretical underpinnings and corporate governance issues in family business research. Three predominant theoretical perspectives, namely principal–agent theory, stewardship theory and the resource‐based view of the firm, have emerged and provide empirical evidence that family businesses significantly differ from non‐family firms in important dimensions such as agency costs, competitive advantages or corporate governance structure. On their own, none of the aforementioned perspectives succeeds in addressing all complexities associated with family businesses and their corporate governance. Accordingly, joint approaches combining different theoretical frameworks can help to improve understanding of the family business. The article concludes by discussing possible directions for future research that might further contribute to building a comprehensive theory of the family business and its corporate governance.     

A finance professional who understands the family: family firms’ specific requirements for non-family chief financial officers

Non-family chief financial officers (CFOs) are often the first non-family members recruited into a family firm’s top management team. Based on the extant literature and with reference to the resource-based view of the firm, family firm peculiarities can also be expected to affect the requirements family firms look for when hiring non-family CFOs. To analyze these requirements, this paper draws on interviews with family firm owners, chief executive officers and non-family CFOs. Family firms’ specific requirements for CFOs are analyzed along four dimensions, namely education, professional know-how, career path and social/interpersonal skills, and 11 propositions are then developed. The presented findings suggest that family firm owners seek to integrate non-family CFOs with professional non-family firm experience in order to enrich the family firm’s resource pool. In turn, non-family CFOs are required to adapt to the specific governance characteristics prevalent in family firms.     

The role of internal social capital in organisational innovation. An empirical study of family firms

Using a sample of 172 Spanish family firms and two responders per firm, consisting of a family member and a non-family member (344 returned questionnaires), we examine the effects of internal social capital on organisational innovation. Building on the relational, cognitive, and structural view, and on social capital theory, we propose that internal networking relationships between family members (family social capital) and between non-family members (non-family social capital) in family firms facilitates innovation. Moreover, its benefits flow from the relationships among the firm's internal groups. The results of structural equation models indicate that the social capital of both family members and non-family members has a direct and positive effect on innovation. Further, our findings provide evidence that non-family social capital is just as effective as family social capital for family firm innovation, establishing a new line of research from an empirical perspective. The findings also test whether social factors are key assets of family firm innovation.     

New perspectives on board research: changing the research agenda

Scholars and practitioners have recently devoted considerable attention to boards of directors, but far more research is needed. We still know little about how boards actually work and how their behavior may be improved to contribute to value creation. During more than two decades agency theory has been the dominant theory in studies about boards of directors. When relaxing some of the assumptions in agency theory several new pathways for new research arise. To present new perspectives on board research we follow in this essay some of the pathways arising from relaxing agency theory assumptions about complete contracts. Alternative theoretical approaches, research questions and methods are suggested.     

Do Employees boost opportunities to compete abroad? A longitudinal study of family and non-family firms

This study sheds light on the contingent effect that employee human capital may have on the relationship between family involvement and internationalisation via exporting —both in terms of entry mode (how to export) and degree (how much to export). We formulate several hypotheses by drawing mainly on arguments from the resource-based view and stewardship theory. The empirical setting is a large sample of Spanish manufacturing firms (family and non-family) operating between 1991 and 2016. Our results reveal that the positive (negative) relationship between family involvement and export intensity (direct exporting) is boosted (mitigated) at higher levels of employee human capital. Our findings thus provide statistical support for a positive and significant contingent approach to the effect human capital has on the connection between family involvement and internationalisation.     

The adoption of deferred share unit plans for outside directors: economic and social determinants

This paper investigates the antecedents of adopting deferred compensation plans for corporate directors. Relying on agency and network theories, we compare the economic and social characteristics of firms that have adopted a deferred share unit plan for their directors over the 1997–2005 period (130 firms) to a control sample. Our findings show that firms where outside directors have higher agency costs, firms having a block holder that owns a significant voting power, firms whose outside directors serve on other boards having adopted deferred compensation plans, and firms that hire compensation consultants are more likely to adopt a deferred share unit plan for their directors than other firms. These findings highlight the importance of integrating economic and social perspectives when investigating the diffusion of compensation practices.     

Dual class shares,board of directors’ effectiveness and firm’s market value: an empirical study

This study aims to identify whether a relationship exists between the controlling shareholders’ voting power and outside directors’ effectiveness in maximizing firms’ financial performance. We analyze a panel data with 3057 observations for the 2000–2012 period using a random effects model, logit and probit regressions, and the two-stage model of Heckman in the Brazilian stock market. Our findings show that firms whose controlling shareholders use dual class shares to leverage their voting power have less independence from the board and worse financial performance and market value. Further, the percentage of outside directors tends to be ineffective in increasing the firm’s value, and in changing the firm’s chief executive officer (CEO) when (1) the controlling shareholder’s voting power is leveraged, or (2) when the CEO assumes a position on the board of directors simultaneously. We interpreted that these results are in line with the arguments in favor of the existence of a new agency cost, which is related to the undue obedience of board members to authority, such as the largest controlling shareholder or the CEO in Brazilian listed firms.     

Effects of Executive Characteristics and Venture Capital Involvement on Board Composition and Share Ownership in IPO Firms*

Combining the agency perspective, resource‐based view and upper echelon research, this paper examines factors affecting board selection and share ownership in initial public offerings (IPOs). In line with socio‐cognitive and behavioural research, it shows that board independence, cognitive capacity and the incentives of non‐executive directors are negatively associated with the experience and power of executive directors, and that large‐block share ownership is positively associated with the intensity and diversity of non‐executives' experience. However, the retained equity by venture capitalists negatively affects board independence and non‐executive directors' interests. The paper suggests a number of avenues for a future contextual analysis of the board development process in ‘threshold’ firms.