Family Representatives in Family Firms

• Author: Stephen Gray,John Nowland,En‐Te Chen
• Published date: 01 May 2013
• Date: 01 May 2013
• DOI: http://doi.org/10.1111/corg.12009

Family Representatives in Family Firms

En-Te Chen, Stephen Gray, and John Nowland*

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: Family control in family f‌irms can extend beyond the direct involvement of family members, but

identifying these mechanisms is diff‌icult in most markets. We utilize unique disclosures made by Taiwanese f‌irms to

examine the role played by family representatives in listed family f‌irms. Family representatives are non-family members that

represent the controlling family’s indirect shareholdings in the f‌irm. We examine whether family representatives are used

in the same manner as family members and whether they provide net benef‌its or costs to shareholders.

Research Findings/Insights: In our sample of listed family f‌irms, we f‌ind that omitting family representatives understates

the inf‌luence of controlling families by 46 percent. We show that family representatives are associated with net costs to

shareholders, but to a lesser extent than family members. We also f‌ind that controlling families use family members and

family representatives differently. Family members are more involved in older family f‌irms and in f‌irms founded by the

family. Family representatives are more involved in acquired and second generation family f‌irms and in larger f‌irms with

more f‌ixed assets.

Theoretical/Academic Implications: We apply agency theory to the use of family representatives and show that family

representatives are being used by controlling families to extend their inf‌luence within their f‌irms, increasing agency costs

to minority shareholders.

Practitioner/Policy Implications: For policymakers, our analysis shows that disclosure of family member and representa-

tive relationships within f‌irms is important and value-relevant to investors. Furthermore, our results suggest that f‌irm

performance could be improved by limiting the involvement of family members and family representatives in family f‌irms.

Keywords: Corporate Governance, Family Firms, Family Members, Family Representatives, Firm Performance

INTRODUCTION

Numerous studies of listed f‌irms around the world indi-

cate that family f‌irms are widespread and possibly the

predominant type of listed f‌irm (Claessens, Djankov, &

Lang, 2000; Faccio & Lang, 2002; La Porta, Lopez-de-Silanes,

& Shleifer, 1999). In family f‌irms, controlling families can

utilize individuals aff‌iliated with the family to extend their

inf‌luence within the f‌irm. However, in most markets, iden-

tifying these individuals is diff‌icult as f‌irms are not required

to disclose this information. In this study we use unique

disclosures made by listed f‌irms in Taiwan, where both

family and representative relationships are disclosed in

annual reports, to examine the role played by family repre-

sentatives in family f‌irms. Family representatives are non-

familymembers who act as representatives of the controlling

family’s indirect shareholdings in the f‌irm.1

Prior studies have investigated the economic benef‌its and

costs of family involvement in family f‌irms and f‌ind that

there are situations where there are benef‌its (e.g., founder

family CEO) and costs (e.g., excess control rights) to minor-

ity shareholders (Anderson & Reeb, 2003, 2004; Claessens,

Djankov, Fan, & Lang, 2002; Maury, 2006; Villalonga &Amit,

2006; Yeh & Woidtke, 2005). However, when examining the

extent of family involvement in family f‌irms, these studies

have generally focused on the positions held by family

members. Two prior studies have used a more comprehen-

sive approach to family involvement, by identifying all

directorships controlled by the family (Villalonga & Amit,

2009; Yeh& Woidtke, 2005). They show thatcontrolling fami-

lies can utilize their indirect shareholdings to control more

board positions than those held by family members, but they

do not differentiate between family members and family

representatives in these positions.

In this study, we specif‌ically focus on family representa-

tives because they are a clear example of individuals being

used by controlling families to extend their inf‌luence within

the f‌irm. They are not family members, but they have a

*Address for correspondence: John Nowland, Department of Accountancy, City

University of Hong Kong, Tat CheeAvenue, Kowloon, Hong Kong, China. Tel: 852-

3442-5283; Fax: 852-3442-0349; E-mail: jnowland@cityu.edu.hk

242

Corporate Governance: An International Review, 2013, 21(3): 242–263

© 2012 Blackwell Publishing Ltd

doi:10.1111/corg.12009

documented tie to the controlling family – they have been

entrusted by the controlling family to represent the family’s

indirect shareholdings in the f‌irm. Family representatives

can therefore be considered as an extension of family

control, with family representatives expected to act, to some

extent at least,in the interests of the controlling family,rather

than the interests of minority shareholders.

The two main research questions we pursue in this study

are whether family representatives are used in the same

manner as family members and whether family representa-

tives are associated with net benef‌its or costs to sharehold-

ers. We hypothesize that family members and family

representatives are used differently by controlling families,

with their use related to a number of f‌irm characteristics. We

expect f‌irm age to be positively related to family member

involvement as there is more chance for the family to expand

through birth and marriage (Fiegener, 2010). In family busi-

ness groups, we expect f‌irms closer to the family (i.e.,

founded by the family and with less indirect ownership) to

have more family member involvement, and f‌irms further

away from the family (i.e., acquired by the family and with

greater indirect ownership) to have more family representa-

tive involvement. We also expect the involvement of family

members and family representatives to be related to moni-

toring needs and monitoring complexity (Boone, Field,

Karpoff, & Raheja, 2008; Coles, Daniel, & Naveen, 2008;

Linck, Netter, & Yang, 2008). We expect to f‌ind more

involvement by both family members and representatives in

larger f‌irms, which have greater overall monitoring needs.

However, when monitoring is relatively easier (f‌irms with

more f‌ixed assets), we expect more involvement by family

representatives, as family members effectively outsource this

monitoring to family representatives so they can concentrate

on other activities.

Based on agency theory (Jensen & Meckling, 1976; Shleifer

& Vishny, 1986), we predict that both family member and

family representative involvement are associated with

higher agency costs to minority shareholders. Prior studies

in emerging market settings generally f‌ind that family

involvement is negatively related to performance, due to

higher agency costs between the controlling family and

other shareholders (e.g., Bae, Kim, & Kim, 2012; Bertrand,

Johnson, Samphantharak, & Schoar, 2008; Wong, Chang, &

Chen, 2010; Yeh & Woidtke, 2005). In this study, we apply

these same agency cost arguments to family representatives.

For example, we expect that family representatives, to at

least some extent, will assist the controlling family in con-

suming private benef‌its of control at the expense of minority

shareholders. This means family representatives are associ-

ated with increased agency costs, albeit not of the same

magnitude as those created by the involvement of family

members. As a result, we hypothesize a negative relation-

ship between family representative involvement and f‌irm

performance, with the magnitude of this relationship

smaller than that between family member involvement and

f‌irm performance.

This study provides three contributions to the literature.

First, prior studies have either focused on family member

involvement (e.g., Anderson & Reeb, 2004; Fiegener, 2010;

Villalonga & Amit, 2006) or a more comprehensive measure

of family involvement that includes all positions directly

controlled by the family (Villalonga & Amit, 2009; Yeh &

Woidtke, 2005). However, there has been no comparison

between these two measures. In this study we ask two

important questions. How much does family member

involvement underestimate total family involvement? Do

the results of our analysis differ between these two measures

of family involvement? These questions are important as

numerous studies have documented widespread indirect

ownership (which is the basis for the use of family represen-

tatives) by controlling families around the world (Claessens

et al., 2000; Faccio & Lang, 2002; Villalonga & Amit, 2009).

We f‌ind that solely focusing on family member involvement

understates (by 46 percent) the inf‌luence of controllingfami-

lies in family f‌irms. In both our analysis of the determinants

of family involvement and the effects of family involvement

on f‌irm performance, we f‌ind that results differ between the

two measures. This suggests that studies that focus solely on

family member involvement are likely to underestimate the

overall inf‌luence that controlling families have in their f‌irms.

Second, we investigate whether controlling families use

family members and family representatives differently. This

progresses the work of Yeh and Woidtke (2005) by differen-

tiating between family members and family representatives,

rather than assuming that their use is the same. We f‌ind that

family members and family representatives are used differ-

ently. Controlling families tend to use family members or

family representatives across f‌irm positions. In particular,

we f‌ind that family members are more involved in older

family f‌irms and in f‌irms founded by the family. Family

representatives are more involved in acquired and second

generation family f‌irms, and when more monitoring is

required but is not overly diff‌icult (i.e., larger f‌irms with

more f‌ixed assets).

Third, in our performance analysis we are the f‌irst to

examine whether familyrepresentatives provide net benef‌its

or costs to shareholders. We show that family representa-

tives (particularly family representative directors) are asso-

ciated with net costs to minority shareholders, but to a lesser

extent than family members. This indicates that family rep-

resentatives are an agencyconcern to minority shareholders,

albeit a smaller concern than family members (particularly

descendant family members).

The remainder of this paper proceeds as follows. The

literature review and hypothesis development section

provides further details about family representatives,

summarizes the relevant literature and develops our

hypotheses. The data and variables section describes our

sample selection and provides variable def‌initions and

descriptive statistics. The empirical analysis section details

and discusses our results. Conclusions and limitations are

provided in the f‌inal section.

LITERATURE REVIEW AND HYPOTHESIS

DEVELOPMENT

Family Representatives

The term “family representatives” is new to the family f‌irm

and family business literatures. Theoretically, it is possible to

consider all employees and directors of a family f‌irm or

family business to be working for the controlling family and

FAMILY REPRESENTATIVES IN FAMILY FIRMS 243

Volume 21 Number 3 May 2013© 2012 Blackwell Publishing Ltd