The Influence of Family Ownership on Corporate Social Responsibility: An International Analysis of Publicly Listed Companies

• Date: 01 May 2015
• DOI: http://doi.org/10.1111/corg.12086
• Author: Tatiana Rodionova,William Rees
• Published date: 01 May 2015

The Inf‌luence of Family Ownership on

Corporate Social Responsibility: An

International Analysis of Publicly

Listed Companies

William Rees, and Tatiana Rodionova*

Manuscript Type: Empirical

Research Question/Issue: We investigate the impact of family equity holdings on three indicators of corporate social

responsibility: environmental, social, and governance (ESG) rankings. We further evaluate how f‌irm governance mediates

the effect of family ownership on environmental and social improvements and how national governance systems inf‌luence

the response of family holdings to ESG.

Research Findings/Insights: Based on a sample of 23,902 f‌irm-year observations drawn from 2002 to 2012 covering 46

countries and 3,893 f‌irms, our f‌indings show that both closely held equity and family ownership are negatively associated

with ESG performance. When we control for governance, closely held equity is no longer associated with environmental and

social rankings, but family ownership retains a signif‌icant negative association. These results are strong and consistent

across liberal market economies (LME), whereas coordinatedmarket economies (CME) exhibit generally weaker results and

considerable diversity. Japan stands out as different from the other countries examined in depth.

Theoretical/Academic Implications: Our results are consistent with agency relationshipsdriving decisions concerning ESG

commitment in LMEs. They also emphasize the role of institutional differences given the weak and variable association

between ownership and ESG in CMEs. We show that families may be able to inf‌luence decisions, possibly through

participation in management, despite normally effective governance constraints. As the impact of ownership and gover-

nance varies across economies and ownership type, this implies that both agency and governance should be evaluated in the

context of the economic environment.

Practitioner/Policy Implications: Our results offer insights to regulators and policy makers who intend to improve ESG

performance. The results suggest that encouraging diversif‌ied ownership is particularly important in LMEs, that improve-

ments in governance may benef‌it social and environmental performance where equity is closelyheld by institutions, but that

governance may be less effective in the presence of family ownership.

Keywords: Corporate Governance, Corporate Social Responsibility, Environment, Family Firms, Closely Held Equity

INTRODUCTION

We examine the impact of closely held equity, and in

particular family held equity, on corporate social

responsibility as ref‌lected in publicly available scores of the

environmental, social and governance (ESG) performance of

f‌irms. These issues have been receiving increased attention

from regulators, investors, and businesses, and the question

of what drives or hinders environmental, social, and gover-

nance performance is gaining prominence (Aguilera, Rupp,

Williams, & Ganapathi, 2007; Campbell, 2007). Prior work

has addressed this question mostly from an institutional

(Aguilera & Jackson, 2003; Campbell, 2007; Ioannou &

Serafeim, 2012; Kang & Moon, 2012; McWilliams & Siegel,

2001) or a resource perspective (Arora & Dharwadkar,2011).

However, much of the inf‌luence on ESG investment comes

from the shareholders of the f‌irm, particularly inf‌luential

blockholders who monitor management (Barnea & Rubin,

2010; Shleifer & Vishny, 1986). While there is some evidence

of the negative impact of blockholdings on corporate social

responsibility, little attention has been given specif‌ically to

the inf‌luence of family equity holdings (Barnea & Rubin,

*Address for correspondence: TatianaRodionova, The University of Edinburgh Busi-

ness School, 29 Buccleuch Place, Edinburgh EH8 9JS, UK. Tel.: 131-6503789; E-mail:

Tatiana.Rodionova@ed.ac.uk.

© 2014 John Wiley & Sons Ltd

doi:10.1111/corg.12086

Corporate Governance: An International Review, 2015, 23(3): 184–202

184

2010; Mackenzie, Rees, & Rodionova, 2013; Rees &

Rodionova, 2013). This is potentially important as family

owners often retain control of the company management,

thereby increasing their inf‌luence on decision making

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

1999; Le Breton-Miller & Miller, 2006; Silva & Majluf, 2008).

This paper aims to f‌ill a gap in the literature by directly

investigating how family ownership affects the ESG prac-

tices of f‌irms. We expect families to differ from other closely

held blockholders as they have their personal wealth

invested in the f‌irm and have both f‌inancial and socio-

emotional incentives with regard to the f‌irm’s performance

and viability (Kappes & Schmid, 2013). Further, we are inter-

ested to see whether and how corporate governance and the

national economic system inf‌luence the relationship

between family ownership and environmental and social

performance. Corporate governance aims to balance inter-

ests of different shareholders and stakeholders of the f‌irm

and has been shown to inf‌luence corporate social responsi-

bility (Aguilera, Williams, Conley, & Rupp, 2006; Jo &

Harjoto, 2011). It can therefore affect the power that family

owners have overdecision making in the f‌irm, and may alter

the impact of family equity on environmental and social

investments. We also investigate the impact of differences in

the national economic systems, which have been shown to

inf‌luence corporate behavior with regard to social, environ-

mental, and ethical issues (Campbell, 2007; Kang & Moon,

2012). Whilst the national governancesystems may inf‌luence

the baseline ESG performance in an economy,we also inves-

tigate whether these differences inf‌luence the impact of

equity ownership on ESG.

Our sample consists of 23,902 f‌irm-years drawn from 2002

to 2012 for 46 countries, mainly representing developed

economies. The initial results are based on conventional

regression techniques where the social, environmental, or

governance performance is modeled againstthe test variable

identifying the closely held equity and a set of control vari-

ables accounting for year, industry, country, leverage, prof-

itability, market-to-book, and capitalization. We f‌ind closely

held equity, and even more so family shareholdings, to be

associated with lower ESG levels.

However, simply demonstrating an association between

blockholdings and ESG scores does not show that the own-

ership structure causes the low ESG levels. In the case of

family ownership reverse causality would imply that low

levels of ESG attract family investors (or would encourage

them to retain their family ownership), while high ESG

levels prompt family owners to reduce their positions in the

company. The latter implies that high ESG expenditures

(expressed in high ESG ratings) could not be countered by

direct action from powerful entrenched owners. We argue

that in the case of inf‌luential and entrenched family owner-

ship, this is unlikely. We also address the causality issue

empirically by using quantile regressions to investigate the

relationship between ownership and ESG levels for cases

where the ESG level is high. Here we obtain a stronger

negative impact of family ownership on ESG rankings for

f‌irms with relatively high ESG scores. This is inconsistent

with the argument that low ESG levels attract family own-

ership. Our results from the regression models are con-

f‌irmed when we use a propensity score matching (PSM)

approachthat attempts to mitigate the endogeneity diff‌iculty

inherent in conventional regression modeling (Rosenbaum

& Rubin, 1983).

This study offers several contributions. Firstly, we add to

the literature that seeks to understand the relationship

between ownership, governance, and social responsibility.

In particular, investor inf‌luence on corporate social respon-

sibility is a growing but still under-researched area, with

most attention hitherto paid to institutional ownership (Cox,

Brammer, & Millington, 2004; Sjöström, 2008). Our analysis

highlights the role of closely held ownership, and in particu-

lar family ownership, as an important inf‌luence on ESG

investments across an internationally diverse sample of

f‌irms.

Further, we contribute to the literatures on family gover-

nance and the interaction between internal governance,

national governance, and inf‌luential monitoring owners.

Emerging literature suggests that there is an increasing

trend for corporate governance to ref‌lect the interests of

stakeholders rather than solely shareholders of the f‌irm (Jo &

Harjoto, 2012; Ricart, Rodríguez, & Sánchez, 2005; Spitzeck,

2009). Here our f‌indings highlight that family owners differ

from other blockholders. While high levels of internal gov-

ernance counterbalance the inf‌luence of the closely held

equity on environmental and social investment, family

owners are able to circumvent governance and preserve

their inf‌luence regardless of the governance system. We also

show that the impactof ownership on ESG varies depending

on economic and institutional environments. In particular,

the negative impact of ownership on ESG is concentrated in

LMEs. These f‌indings are consistent with recent arguments

suggesting that more attention should be paid not to a par-

ticular governance mechanism per se but to its relationship

with other internal governance provisions and the national

governance system (Aguilera et al., 2006; Yoshikawa, Zhu, &

Wang, 2014).

From the theoretical perspective, our study enriches

understanding of the motivations of family ownership.

Family owners are thought to be extremely long term in

outlook and to be particularly concerned about the relation-

ships with stakeholders to ensure f‌irm survival and well-

being (Le Breton-Miller & Miller, 2006, 2009; Yoshikawa et

al., 2014). Our results, however, indicate that, when it comes

to investments that foster social good but do not guarantee

f‌inancial returns, families tend to act as f‌inancial wealth

maximizers and tend to hinder such expenditures.

PRIOR RESEARCH AND HYPOTHESES

Closely Held Ownership and ESG Performance

Improving environmental, social, and governance perfor-

mance has become a major challenge for the corporations.

Some ESG developments may advance operational perfor-

mance (Berry & Rondinelli, 1998; Edmans, 2011), and aca-

demic evidence suggests that excellent ESG performance

can be a source of competitive advantage (Aguilera et al.,

2006; McWilliams & Siegel, 2001; Porter & van der Linde,

1995). For example, ESG projects may bring strategic ben-

ef‌its by improving relationships with stakeholders, includ-

ing consumers, suppliers, and employees (Becker-Olsen,

185

FAMILIES AND CSR

© 2014 John Wiley & Sons Ltd Volume 23 Number 3 ay 2015

M