The Role of Family Involvement on CEO Turnover: Evidence from Colombian Family Firms

• Author: Maximiliano González,Alexander Guzmán,Carlos Pombo,María‐Andrea Trujillo
• Published date: 01 May 2015
• DOI: http://doi.org/10.1111/corg.12083
• Date: 01 May 2015

The Role of Family Involvement on CEO

Turnover: Evidence from Colombian

Family Firms

Maximiliano González*, Alexander Guzmán, Carlos Pombo, and

María-Andrea Trujillo

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: We analyze CEO turnover in closely held f‌irms with some level of ownership dispersion in a

context of low investor protection. In particular, we examine the impact of family involvement on CEO turnover and CEO

turnover/performance sensitivity. We argue that family involvement in management, ownership, and control has both a

direct effect on CEO turnover from the family presence itself, and a moderating effect over CEO turnover/performance

sensitivity attributable to the agency tensions between majority and minority shareholders (whether other family blocks or

non-family shareholders).

Research Findings/Insights: Using data from 1996–2006 for 523 Colombian f‌irms, we f‌ind direct and moderating effects,

depending on the type of family involvement. Family involvement in management and boards reduces CEO turnover, but

familyinvolvement in ownership increases it. Regarding moderating effects, familyinvolvement in ownership reduces CEO

turnover/performance sensitivity, while the opposite occurs with family directors.

Theoretical/Academic Implications: Our results show that closely held f‌irms in emerging markets exhibit a strong negative

CEO turnover/performance sensitivity, which is a somewhat counterintuitive result, and also contribute to a better

understanding of agency conf‌licts within family f‌irms by highlighting the different ways families affect CEO turnover.

Practitioner/Policy Implications: Our f‌indings suggest that even benevolently entrenched family CEOs are not immune to

poor f‌inancial performance. Families that are majority or controlling shareholders may support CEOs even when the f‌irm

performs poorly because of potential benef‌its from control. Family boards are very sensitive to f‌inancial performance even

when the CEO is a family member.

Keywords: Corporate Governance, Family Firms, CEO Turnover, Agency Theory, Emerging Markets

INTRODUCTION

This study considers corporate governance in family

f‌irms by assessing the impact of family involvement on

CEO turnover and CEO turnover/performance sensitivity.

The current literature establishes a negative relationship

between CEO turnover and f‌irm performance. However, we

argue that family involvement in management, ownership,

and control has both a direct effect on CEO turnover from

the family presence itself and a moderating effect on CEO

turnover/performance sensitivity attributable to the agency

tensions between majority and minority shareholders

(whether other family blocks or non-family shareholders).

To the best of our knowledge, this studyis among the f‌irst to

examine the inf‌luence of family involvement on CEO turn-

over in a context of low investor protection. Our sample is

composed mostly of closely held Colombian f‌irms with

some level of ownership dispersion and a limited number of

shareholders and shares not publicly traded.This ownership

structure is common not only in Latin America and other

emerging markets but also in developed economies (Faccio

& Lang, 2002; La Porta, Lopez-de-Silanes & Shleifer, 1999).

Agency theory for family f‌irms highlights the importance

of managing conf‌licts among family blocks (Dyer, 1994;

Sorenson, 1999). When there is a family CEO, problems like

*Address for correspondence: Maximiliano González, School of Management,

Universidad de los Andes, Calle 21 # 1-20, Off. 914, Bogotá, Colombia. Tel: (571)

3394949 Ext. 3367; E-mail: maxgonza@uniandes.edu.co

© 2014 John Wiley & Sons Ltd

doi:10.1111/corg.12083

Corporate Governance: An International Review, 2015, 23(3): 266–284

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sibling rivalry, generational conf‌licts, marital problems,

issues related to the f‌irm’s development (value vs. growth),

and the existence of non-economic preferences hinder

coordination and could lead to sub-optimal decisions

(Eddleston & Kellermanns, 2007; Schulze, Lubatkin, Dino, &

Buchholtz, 2001). Martín de Holan and Sanz (2006) argue

that a negative family dynamic coupled with low levels of

legal protection for investors can result in an increased risk

of expropriation for minority shareholders, even if they are

members of the founding family. Accordingly, effective gov-

ernance mechanisms are as important in family businesses

as in other f‌irms.

To assess the impact of family involvement on CEO turn-

over, we assembled a dataset of 523 Colombian f‌irms, 428 of

which are closely held, for the 1996–2006 period. We f‌ind

direct and moderating effects, depending on the type of

family involvement. First, family involvement in manage-

ment directly reduces CEO turnover but does not have a

statistically signif‌icant moderating effect on CEO turnover/

performance sensitivity, suggesting the presence of benevo-

lently entrenched family CEOs who are not immune to poor

f‌inancial performance. Management entrenchment as pro-

posed by Shleifer and Vishny (1989) occurs when CEOs

invest in specif‌ic assets that generate little or no value for the

company but enable them to protect their job. Palia, Ravid,

and Wang(2008) and González, Guzmán, and Trujillo (2010)

state that founders and heirs who play a management role

work harder than would the most suitable external manager

available in the labor market, which implies a benevolent

entrenchment.

Second, family involvement in ownership (direct or indi-

rect through pyramidal structures) increases CEO turnover,

which suggests the existence of internal labor markets

within business groups. Concerning moderating effects,

family involvement in ownership reduces CEO turnover/

performance sensitivity,which could be explained by a CEO

who places the family’sprivate interests above those of other

shareholders, including other family blocks.

Third, family involvement in boards directly reduces CEO

turnover. Among other potential explanations are the long-

term relationships family members establish with their man-

agement team. Regarding moderating effects, CEO turnover

in f‌irms with boards that are dominated by family members

shows greater sensitivity to performance, a f‌inding that

implies better supervision of management when family

members serve on the board. Overall, we observe a strong

negative CEO turnover/performance sensitivity, a new and

somewhat counterintuitive result in the context of closely

held f‌irms in emerging markets, but we also f‌ind differenti-

ated direct and moderating effects, depending on the type of

family involvement.

This research contributes to the current empirical litera-

ture on corporate governancein family f‌irms in several ways.

It gives a better understanding of the direct and moderating

effects that family involvement has on an important gover-

nance mechanism, CEO turnover. We consider family

involvement in three different dimensions: management,

ownership (direct and indirect), and control in the largely

unexplored f‌ield of closely held family f‌irms. This is impor-

tant because “one of the great challenges in adapting def‌ini-

tions of corporate governance to the privately held f‌irm is

that much of the research and academic debate pertains to

large listed f‌irms” (Uhlaner, Wright, & Huse, 2007: 226).

This study is a step forward from the classical examination

of agency tensions between controlling family shareholders

and other minority shareholders, and it contributes to the

growing literature that explicitly considers agency tensions

within the family (Martín de Holan & Sanz, 2006; Schulze et

al., 2001; Schulze, Lubatkin, & Dino, 2003). Our database

shows that even in a context of low investor protection, we

still observe a negative CEO turnover/performance sensi-

tivity, which is a basic premise in the corporate governance

literature (Coffee, 1999), and empirically demonstrates that

family involvement within closely held f‌irms with some

level of ownership dispersion is not immune to agency

conf‌licts.

Family f‌irms in emerging markets are important but

understudied, as shown in recent surveys (Claessens &

Yurtoglu, 2013; Fan, Wei, & Xu, 2011). Even though our

sample is restricted to Colombia, this study contributes to a

better understanding of family f‌irms not only in Latin

America but also in other emerging markets with similar

characteristics (e.g., low investor protection and high levels

of ownership concentration). Colombia’s institutional char-

acteristics allow access to specif‌ic information on closely

held family f‌irms. From a f‌inancial development standpoint,

Colombia is a representative capital market in Latin

America. It is the region’s fourth largest equity market and

fourth largest economy.

The remainder of the article is structured as follows: The

next section develops the hypotheses. The third section

describes the database and the research design. The fourth

section reports the main f‌indings. The f‌ifth section presents

the robustness tests. The f‌inalsection offers a discussion and

conclusions.

THEORETICAL REVIEW AND

DEVELOPMENT OF HYPOTHESES

The Classical Relationship between CEO Turnover

and Firm Performance

Analyzing CEO turnover and its relation to f‌irm perfor-

mance is one way to assess the quality of corporate gover-

nance at the f‌irm level. According to Coffee (1999), a

successful system of corporate governance penalizes man-

agers who deliver poor f‌inancial performance. This premise

has been extensively tested and conf‌irmed in the f‌inancial

literature on large listed f‌irms – those in the United States

(Coughlan & Schmidt, 1985; Denis & Denis, 1994; Huson,

Parrino, & Starks, 2001; Morck, Shleifer, & Vishny, 1989;

Warner, Watts, & Wruck, 1988; Weisbach, 1988; among

others) and worldwide (Kang & Shivdasani, 1995, and

Kaplan & Minton, 1994, for Japan; Kaplan, 1994, for

Germany; Brunello, Graziano, & Parigi, 2003, and Volpin,

2002, for Italy; Renneboog, 2000, for Belgium; Tsai, Hung,

Kuo, & Kuo, 2006, and Tsai, Kuo, & Hung, 2009, for Taiwan;

and Garay & González, 2007, for Venezuela; among others).

We argue that this disciplinary mechanism also applies in

closely held family f‌irms with some level of ownership dis-

persion, but with a differentiated effect depending on the

type of family involvement. In spite of not being subject to

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

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THE ROLE OF FAMILY INVOLVEMENT ON CEO TURNOVER