The Resilient Family Firm: Stakeholder Outcomes and Institutional Effects

• Date: 01 May 2015
• Author: Stephen Sapp,Vanessa M. Strike,Michael Carney,Marc Essen
• Published date: 01 May 2015
• DOI: http://doi.org/10.1111/corg.12087

The Resilient Family Firm: Stakeholder

Outcomes and Institutional Effects

Marc van Essen*, Vanessa M. Strike, Michael Carney, and

Stephen Sapp

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: Our study seeks to explain the relationship between publicly listed family-controlled f‌irms

(FCFs) and investor and employee outcomes before and during the global f‌inancial crisis. Theoretically, we develop

hypotheses suggesting that FCF resilience is benef‌icial to both investor and employees. Employing a large f‌irm-level data

set of 2,949 f‌irms across 27 European countries, we test the hypotheses thatFCFs’ long-term orientation makes them resilient

to the effects of economic shocks. In addition, using hierarchical linear modeling we evaluate family f‌irm investor and

employee outcomes, and the moderating impact of legal institutions protecting minority investors and employees.

Research Findings/Insights: We f‌ind that FCFs f‌inancially outperform non-FCFs during the f‌inancial crisis, beginning in

2007 and reaching its lowest point in 2009, but show no signif‌icant differences during the stable-growth period between

2004 and 2006. We evaluate two employee outcomes: downsizing and wage decreases. We f‌ind that FCFs are less likely to

downsize their workforce or cut wages in both pre-crisis and crisis conditions. Based upon hypotheses founded in the

comparative capitalisms logic, we f‌ind signif‌icant institutional effects that are contrary to our predictions. Our f‌indings

suggest that investors and employees of FCFs achieve more favorable outcomes for their interests when the rules pertaining

to investor protection and their enforcement are poorly developed.

Theoretical/Academic Implications: We contribute to the emerging literature on the institution-based view of comparative

corporate governance by demonstrating that family-controlled f‌irms’ stakeholder outcomes are contingent upon legal

protection for employees and investors under contrasting economic circumstances.

Practitioner/Policy Implications: Family owners, employees and minority investors should consider both f‌irm-level and

country-level governance institutions when investing in different countries, especially in times of economic crisis as

jurisdiction-level institutions and f‌irm ownership choices produce variable outcomes for different stakeholders in both

crisis and non-crisis conditions.

Keywords: Corporate Governance, Family-Controlled Firms, Financial Crisis, Stakeholder Outcomes, Resilience

INTRODUCTION

Following the onset of a f‌inancial crisis, are publiclylisted

family-controlled f‌irms (FCFs) more resilient than other

types of f‌irms in their capacity to sustain performance? If so,

does FCF resilience come at the expense of the interests of

investors and employees? Does the quality of the legal insti-

tutions protecting stakeholders help or hinder FCF resil-

ience? While there is consensus that FCFs differ from f‌irms

controlled by other types of owners (i.e., f‌irms with dis-

persed ownership or non-family-controlled f‌irms, N-FCFs),

a growing body of empirical studies yields mixed and con-

f‌licting results over the value of publicly listed FCFs (Carney,

van Essen, Gedajlovic, & Heugens, 2014; van Essen, Carney,

Gedajlovic, & Heugens, 2014). Several scholars, for instance,

propose that due to their owners’ long-term commitment to

f‌irm welfare, FCFs represent a more durable organizational

form that is more resilient than other organizationalforms to

disruptive economic shocks (Bloch, Kachaner, & Mignon,

2012; Sraer & Thesmar, 2007; Villalonga& Amit, 2010). Yet to

date, there is relatively little empirical evidence in support of

this proposition (Chrisman, Chua, & Steier, 2011). Resil-

ience, def‌ined as a f‌irm’s capacity to perceive, avoid, absorb,

*Address for correspondence: Marc van Essen,Darla Moore School of Business, Uni-

versity of South Carolina, Columbia, SC 29208, USA. Tel: 8037775669; E-mail:

marc.vanessen@moore.sc.edu

© 2014 John Wiley & Sons Ltd

doi:10.1111/corg.12087

Corporate Governance: An International Review,2015, 23(3): 167–183

167

adapt to, and recover from environmental conditions that

could threaten their survival, is subject to similar conten-

tions (Lengnick-Hall & Beck, 2005). Exacerbating this posi-

tion is the reality that family f‌irms around the world are

embedded in environments characterized by different levels

of institutional development and by variations in corporate

governance practices. To address the problem of mixed and

conf‌licting f‌indings, family f‌irm scholars have recently

begun to consider the potential moderating effects of insti-

tutional factors on the behavior and performance of family

f‌irms (García-Castro, Aguilera, & Ariño 2013; Gedajlovic,

Carney, Chrisman, & Kellermans, 2012; Peng & Jiang, 2010).

Given that multi-country comparative studies are sparse,

institutional perspectives hold much promise in throwing

light on conf‌licting theoretical perspectives and f‌indings

currently littering the f‌ield of family business (Schulze &

Gedajlovic, 2010).

Crisis conditions provide a natural experiment for evalu-

ating competing narratives about the value of family owner-

ship because diff‌icult economic conditions accentuate both

the benef‌icial and negative characteristics inherent in family

control. One prominent view suggests that concentrated

owners have increased motivation to misappropriate minor-

ity investors and protect their own interests in times of crisis

by “tunneling” resources out of the f‌irm (Baek, Kang, &

Park, 2005; Jiang & Peng, 2011; Johnson, Boone, Breach, &

Friedman, 2000; Mitton, 2002). An alternative and opposing

perspective emphasizes the resilience of family f‌irms to eco-

nomic shocks and their willingness to “prop up” the f‌irm by

injecting private resources into a f‌inancially troubled f‌irm

to assure long-run survival (Villalonga & Amit, 2010). Other

evidence suggests that FCFs may also be less sensitive to

economic shocks because their long-term involvement in

the f‌irm enables owners to enter into credible but implicit

contracts with employees in which owners gain greater

cooperation in exchange for assurances concerning employ-

ment continuity (Sraer & Thesmar, 2007). In this study we

focus on outcomes for two types of stakeholders, investors

and employees, whose interests are likely to be impacted by

the onset of a crisis. We reason that in periods of stable

economic growth stakeholders can more readily accommo-

date one another’s interests, but with the onset of economic

contraction both investor and employee interests may be

threatened. We hypothesize that how the relative outcomes

for minority investors and employees actually play out

will depend upon both family ownership and the quality

of legal institutions protecting investor and employee

rights.

While agency theory represents the dominant paradigm

for evaluating the positive and negative aspects of family

ownership, we expect that there is much potential in incor-

porating a comparative governance perspective into the

debate about the value of family ownership. Whereas agency

theory emphasizes distributional conf‌licts and self-

interested competition between stakeholders for their share

of corporate value (van Essen, van Oosterhout, & Heugens,

2013b; Zingales, 1998), institution-based comparative gover-

nance perspectives draw attention instead to the potential

for owners and employees to coordinate their respective

interests by entering into mutually benef‌icial agreements

that expandthe size of the pie available to them both (Blair &

Stout, 2006; Ostrom, 2010; van Essen et al., 2013b). One body

of thought conceptualizes corporate governance as a bundle

of national institutional and f‌irm-level governance mecha-

nisms whose functioning is inf‌luenced by national history,

culture, and politics, as well as a society’s openness to the

inf‌luence of international rules and norms (Aguilera &

Jackson, 2010; Hall & Soskice, 2001; Schiehll, Ahmadjian, &

Filatotchev, 2014). Other institutional perspectives suggest

that the capacity for entering cooperative governance

arrangements depends upon the extent to which actors

know and trust one another (Ostrom, 2010) and their capac-

ity for developing shared understandings regarding appro-

priate behavior (Witt & Redding, 2008).

Our hypotheses are founded on the institutional logic of

the comparative capitalisms, or varieties of capitalism

literature (Hall & Soskice, 2001). Based on this perspective

domestic f‌irms can gain a competitive advantage by adjust-

ing their governance structures and labor management pro-

cesses to become isomorphic with prevailing national level

institutions. In particular, Hall and Soskice (2001) distin-

guish between liberal market and coordinated market forms

of capitalism: the former are investor-friendly jurisdictions

where national institution bundles cohere to foster investor-

oriented corporate governance. In contrast, coordinated

forms of capitalism encourage greater employee involve-

ment in decision making and foster stakeholder-oriented

forms of corporate governance.

In this paper we seek to applythe comparative capitalisms

perspectives to consider the effects of variations in the

strength of legal institutions protecting investor and

employee rights across 27 European countries. We reason

that because the quality and strength of governance institu-

tions show signif‌icant variation across Europe (Botero,

Djankov, La Porta, Lopez-de-Silanes, & Shleifer, 2004;

Djankov, La Porta, Lopez-de-Silanes, & Shleifer, 2008; van

Essen et al., 2013b), they are likely to moderate the potential

positive and negative aspects of family control and therefore

inf‌luence investor and employee outcomes. Empirically, we

consider the moderating impact of both general and specif‌ic

legal institutions, including the specif‌ic institutional regimes

protecting minority investor rights against majority owners

(Djankov et al., 2008), as well as rules protecting employees

(Botero et al., 2004). Wealso consider the general quality and

eff‌iciency of the legal environment that provides for the de

facto enforcement of more specif‌ic rights (Kaufmann, Kraay,

& Mastruzzi, 2009). To test our hypotheses we compile a

large f‌irm-level data set of 2,949 publicly listed f‌irms located

in 27 European countries from the years 2007–2009, a period

of severe economic contraction across all European econo-

mies. Since researchers have established that investor and

employee protection regimes have a signif‌icant effect on

f‌irm-level corporate governance mechanisms, employee

outcomes and f‌inancial performance during stableeconomic

conditions (Atanassov & Kim, 2009; Dyck & Zingales, 2004;

La Porta, Lopez-de-Silanes, & Shleifer, 2008), we test the

robustness of our f‌indings by comparing the effects with

data drawn from the years 2004–2006, a period of generally

stable/growth conditions in Europe. Our sample is particu-

larly appropriate for these purposes as FCFs are especially

prevalent among European publicly listed companies

(Faccio & Lang, 2002). Moreover, European jurisdictions

CORPORATE GOVERNANCE

© 2014 John Wiley & Sons Ltd

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