An axe to grind: Family outsiders and firms doing good

• Published date: 01 November 2023
• Author: Fuxiu Jiang,Ping Jiang,Xiaojia Zheng
• Date: 01 November 2023
• DOI: http://doi.org/10.1111/corg.12509

ORIGINAL ARTICLE

An axe to grind: Family outsiders and firms doing good

Fuxiu Jiang

1

| Ping Jiang

2

| Xiaojia Zheng

2

1

School of Business, Renmin University of

China, Beijing, China

2

School of International Trade and Economics,

University of International Business and

Economics, Beijing, China

Correspondence

Xiaojia Zheng, School of International Trade

and Economics, University of International

Business and Economics, 10 Huixin East

Street, Chaoyang District, Beijing, China

100029.

Email: xiaojia.zheng@uibe.edu.cn

Funding information

National Natural Science Foundation of China,

Grant/Award Numbers: 72202035, 72073024,

72272144; Fundamental Research Funds for

the Central Universities, Grant/Award

Number: CXTD12-03

Abstract

Research Question/Issue: This paper examines the relationship between having non-

family members (i.e., family outsiders) as board chairs and corporate philanthropy.

Research Findings/Insights: In a hand-collected dataset of Chinese family firms, we

find that firms invest less in philanthropy when the board chair is a nonfamily mem-

ber. However, this impact is mitigated when the chair's discretion is restricted, as in

highly visible firms or firms controlled by the founding family. The negative relation

between nonfamily chairs and corporate philanthropy is also weaker when the inter-

est of chairs is more aligned with that of the controlling family, where chairs are

inside-promoted or members of founding team, when board chairs and the families

have more goal consistency, when stakeholders have higher demands for corporate

social responsibility or investors care less about profitability. Further analysis shows

that nonfamily chairs help firms reduce overinvestment in philanthropy, the board

chair has a more salient effect than the CEO on philanthropic giving, and the results

are not driven by expropriation issues of the controlling family.

Theoretical/Academic Implications: Our study highlights the heterogeneity of board

chairs in family firms, board chair's significant influence on a firm's social perfor-

mance, and the agency problem related with the board chair, which are all underex-

plored topics in prior literature.

Practitioner/Policy Implications: Our evidence offers insights to practitioners about

the impact of board chairs on corporate philanthropy. Family firms need pay atten-

tion to the recruitment of board chairs and hold a comprehensive view of family firm

professionalization as a nonfamily board chair might negatively affect firms' stake-

holder relationship management but bring benefits by mitigating excess philanthropic

activities. Besides, practitioners shall be aware of agency problems originating from

board chairs. Incentives or monitoring over chairs might be useful to address poten-

tial conflicts of interest.

KEYWORDS

corporate governance, agency problems, board chair, corporate philanthropy, corporate social

responsibility, family firms

1|INTRODUCTION

Over the decades, corporate social responsibility (CSR) has gained

extensive attention from academics and practitioners (Zengul

et al., 2021). CSR refers to firm activities that go beyond economic

and legal requirements and serve social good in connection with

stakeholders such as charitable donations (Deniz & Suarez, 2005;

Marques et al., 2014; McWilliams & Siegel, 2001). Because of its sig-

nificant effect on firm value (Bose et al., 2020), engaging in CSR has

become an increasingly important practice (Cheng et al., 2014;

Received: 17 February 2022 Revised: 12 December 2022 Accepted: 15 December 2022

DOI: 10.1111/corg.12509

Corp Govern Int Rev. 2023;31:921–944. wileyonlinelibrary.com/journal/corg © 2023 John Wiley & Sons Ltd. 921

Marquis & Lee, 2013; Shiu & Yang, 2017). Family firms are in general

more active in doing good than nonfamily firms, owing to their strong

motivation to preserve socioemotional wealth (SEW) (Berrone

et al., 2012;G



omez-Mejía et al., 2007).

1

However, whether this moti-

vation is transformed into CSR activities depends on whether the con-

trolling family and the firm's decision-makers have congruent values

and motives (Sharma & Sharma, 2011). Compared with family mem-

bers, nonfamily members do not automatically internalize the desire

to preserve SEW because of their greater psychological distance from

and relatively transitory relationship with the family firm (Gomez-

Mejia et al., 2011). Thus, would the social performance of family firms

be diluted if the family firm is led by a nonfamily member? Are non-

family leaders the same in orientations to manage stakeholder

relationships?

We explore this issue by examining the relationship between hav-

ing a nonfamily member as the board chair and corporate philan-

thropy. As the leader of the board of directors, the chairperson

possesses strong influence over the firm's strategic decision makings

along with external stakeholder relationships. With the increasing sep-

aration of board chairs and CEOs, researchers have shown booming

interest in investigating the role of the board chair in firms (Jiang

et al., 2020; Krause, 2017; Withers & Fitza, 2017), and Banerjee et al.

(2020) provide a solid review of research on board chairs. Although

increasing attention has been paid to the board chair, the previous

studies mainly focused on financial consequences or management.

How board chairs affect firms' social performance remains unknown,

which has spurred our study on the role of board chairs in family firms

where building stakeholder relationships is most critical.

China provides an ideal setting to examine the board chair's influ-

ence. First, theboard chair possesses significant power in Chinesefam-

ily firms. According to China's companylaw, the board chair is the legal

representative of a company and is generally appointed by the firm's

controlling shareholder (Kato & Long, 2006). Most of them work full-

time at the firm and go to work every day (Jiang & Kim, 2015), thus

possessingreal power in daily operations,not just legally, over the CEO

(Firth et al., 2006). The evidence by Krause et al. (2019) also suggests

that chairs are considerably more impactful in firms in China than the

United Statesand the UK. Second, board chair/CEO dualityis less com-

mon in China. Although the separation of roles is not mandatory, the

China Securities Regulatory Commission (CSRC) strongly recommends

it. Jiang and Kim (2015)found that CEO duality for Chineselisted firms

was around 15%–20%during 2000–2012, which is far lower than that

in the United States, which was 75% assurveyed by Korn Ferry (2014)

and 53% for S&P 500 firms surveyed by Spencer Stuart (2015).The his-

toric norm of separation between CEO andboard chair in China allows

us to investigatethe chair's influence overa long-time window.

As one significant specific dimension of CSR (Porter &

Kramer, 2002), corporate philanthropy, a discretionary wealth transfer

of net income to stakeholders for social and charitable purposes (Dou

et al., 2014; Windsor, 2006), is strategically driven by the board (Liao

et al., 2021). The extent to which family firms engage in philanthropic

activities can be affected by the incentive and orientation of board

chairs. Compared with family members, nonfamily members are family

outsiders who might not naturally share values with the controlling

families regarding long-term orientation toward stakeholder relation-

ships. The corporate leaders and controlling families might also be

subject to conflicts of interest when there are nonfamily board chairs

because family outsiders favor profits while controlling families might

prioritize noneconomic goals. Therefore, we hypothesize that family

firms with nonfamily board chairs will have a lower level of philan-

thropy than firms led by family members.

Using a hand-collected dataset of Chinese family firms, we find

that nonfamily member board chairs reduce a family firm's philan-

thropic giving. We attribute this finding to the nonfamily member's

limited commitment to preserve SEW by engaging in socially responsi-

ble activities. To mitigate the endogeneity concern, we employ a

Heckman two-stage treatment effect regression and propensity score

matching (PSM). Using chair turnovers as shocks, we conduct a

difference-in-differences (DID) analysis to further verify our results.

Other robustness checks also support our conclusions. Furthermore,

we compare the impacts of the chair and CEO on the firm's philan-

thropic engagement and show that, after we control for the board

chair's effect, the CEO has little or no impact on corporate philan-

thropy under various measurements of philanthropic giving. We also

conduct tests to rule out the alternative explanation that our main

effect may result from expropriation by the controlling family.

Building on Hambrick and Finkelstein's (1987) work on managerial

discretion, we propose two moderators that may limit the board

chair's discretion: firm visibility (at the environment level) and found-

ing family control (at the organization level). As increased public visi-

bility and control by the founding family will largely push

improvements in corporate social performance and then restrain the

chair's discretion on philanthropy decisions, both might mitigate the

negative impact of a nonfamily board chair on philanthropy invest-

ment. We find that the negative effect of having a nonfamily chair on

corporate philanthropy is weaker when firms have higher visibility

(proxied by media visibility and firm size) and firms are controlled by

the founding family (proxied by the identity of the ultimate controller

and the status of family control when firms were listed).

Besides, we employ the agency theory to explore the conditions

under which family outsider chairs are motivated to treasure stake-

holder relationships in family firms. Although nonfamily chairs as fam-

ily outsiders with economic orientations may not prioritize the

noneconomical goal of controlling families, the divergence of incen-

tives shall be mitigated when nonfamily chairs are inside-promoted or

members of the founding team, as the long sharing work experience

may result in similar management philanthropy or support for family

interests in long-term stakeholder relationships. Consistent with the

prediction, we find that the negative relationship between nonfamily

chairs and corporate philanthropy is weaker in firms with inside-

promoted or founding-team chairs than in their counterparts. In addi-

tion, we show that the negative nonfamily chair effect also decreases

with stronger stakeholder demands for CSR and increases with stron-

ger investor demands for profitability. The results imply that nonfam-

ily chairs balance the interest of the controlling families and that of

nonfamily shareholders in philanthropic activities.

922 JIANG ET AL.