CEO Background

(Family Vs Non-Family)
and Firm Performance

By
M Bilal Younus
(37974)

Advisor
Mr. Asad Ali Rind

A thesis submitted in partial fulfillment of the requirements

for the degree of Master of Business Administration to
Research Facilitation Unit - RFU
(Department of Business Administration)
at the Iqra University, main campus, Karachi

Karachi, Pakistan
April, 2020
 Table of Contents
S.NO. DESCRIPTION PAGE
NO.
1. List of Tables…………………………………………………… ii
2. Chapter 1: Introduction……………………………………… 3
1.1 Problem Statement ………………………….
1.2 Research purpose …………………………………………
1.3 Research Questions………………………………………
1.4 Research Significance…………………………………..
1.5 Outline of the Study…………………………………….

3. Chapter 2: Literature Review…………………………… 6

2.1 Introduction…………………………………………
2.2 Theories…………………………………………….
2.3 Hypothesis……………………………………….
4. Chapter 3: Research Method…………………………… 7
3.1 Research Approach…………………………………………
3.2 Research Design…………………………………………….
3.3 Sample and Population……………………………………….
3.4 Statistical Techniques…………………………………………..
3.5 Ethical Consideration…………………………………………..

ii
 Acknowledgment

Thanks to Allah Almighty for being my strength and guide in the writing of this thesis.

Without Him, I Would not had the wisdom or the physical ability to do so.

I also would like to thank my advisor, Dr. Asad Ali Rind of Finance Department at Iqra

University. She always accommodating and have a helping hands if I had question about my

research or writing. She shows support in everything I do and teach me the right direction

for my thesis writing.

 Chapter 1
Introduction

The value of leadership, and the degree at which CEOs stretch to play their roles to achieve

their company objectives and overall success are the important questions that have been

present among people in an economic discussion. Quite a lot of recent studies have brought

into light that individual CEO’s are key influencers on how company management structure

works and how the companies perform; for example, Bertrand and Schoar (2003),

Bennedsen, Neilsen, Pérez-González, and Wolfenzon (2007), and Bandiera, Prat, and Sadun

(2013). These papers present diverse management ways, skills and also the hours worked by

CEOs. Furthermore, significant differences can be observed among the governance structures

of companies across the globe. Significant number of research has shown that in the

comparison between family and non-family firms, the family firms have been observed of

displaying weak performance than non-family firms and are more prone to having bad

governance structures. CEOs of non-family companies are more prone to present themselves

in front of share holders in terms of being held accountable to them and to work with an

objective to benefit share holders equity value maximization in place of maintaining

employment. Being more likely than founders they also choose to pick top talent in place of

keeping monitoring managers and look forward to bring change in business in place of

maintaining already establish strategies.

1.1) Problem Statement

Only few studies for Pakistani market has been conducted for measuring the performance of

the organization. The variables preferred in previous literature were of different contexts than

this research. The variables on which previous researches were focused on was innovation

type (Shaukat et al, 2013), capital structure (Memon et al, 2012) and corporate governance

(Sheikh et al, 2013). Although capital structure and corporate governance are quite related

with our topic but the impact of family or non-family CEO is missing.

1.2) Research purpose

The purpose of my research is to see if the performance of the firm is effected by CEO

background i.e how will the firm perform under management of a family CEO and Non-

family CEO, this research will help the shareholders and different stake holders better

understand the difference in management structure, style and overall performance among

these two types of individuals.

1.3) Research Questions

What is the impact of CEO background (family vs non-family) on firm performance?

What is the impact of other CEO characteristics on firm performance?

1.4) Research Significance

Pakistan is a developing country and also the firms here in Pakistan are developing at some

point, Not much research has been conducted in Pakistan in particular to the relation of an

individual (CEO) to a firm performance, but my research will give proper evidence that a

CEO has great impact on firm performance, firm growth and in achieving its objectives.

1.5) Outline of the report

After introduction this report has four section each section explain about this topic in its

particular manner, first section is problem statement which includes the previous gaps about

our topic which we are trying to fill, second section is the research purpose which includes

the purpose of our study that this study will firms in which manner, third section includes the

research question which are the base of our study which we are finding in our study and last

is research significance it tells about that how it will help our countries firms to develop its

board structure.
 Chapter 2
Literature Review

2.1) Introduction

Vast literature has been stated which focuses on the differences between family and non-

family management firms, on top is the dynamic paper of (La Porta et al, 1999). Research

states that family firms at average are smaller from non-family firms, show lesser

performance, smaller governance structures.

Studies conducted on family businesses has turned its shift on the role of board in decision

making and business performance. (Bammens et al.2011). Based on some consideration’s

researches have been done on how some processes of board is affected by non-family and

family top management. This is important since top managements are the one to make

decisions ignoring the fact that the decision made was effective or not. It is said that for a

non-family CEO his knowledge is a reason through which he success while a family CEO

must survive with his reasoning and intellectual abilities to deal with daily challenges (Zona,

2016).

2.2) Theories
It is seen that for every founder of the successful firm, a times come when he wants to retire

and transfer his authority. Inheritance of such authority is rather not an event but a process.

Next generation taking control of the business is significant for the business success

specifically, when the change of authority takes place from first generation to the second

generation. Findings from previous literature signifies that those firm who are under the

supervision of the founder’s offspring not perform as good as firms managed by professionals

because the successor CEO usually lacks in managing skills and do biasness (Xu et al, 2015).

The findings on family succession from china are very interesting because china’s business

environment has a huge impact of the political climate. If the founder of the business is

politically connected, then he himself is an important asset for the firm and it can become a

competitive edge for business. About 41% of founder of family-based businesses in china

have strong political relations. China also have very strict one child policy because of this the

founder of the family business left with very little options if they want to transfer control of

the business within the family. But at the same time this policy reduces the likelihoods of

continuing the business within the family by 3% and second generation working by 13%

(Cao et al., 2015). Because china has this unique environment of family-based business it

makes it easier for studying the family business inheritance of authority related problems. For

the firms whose founder are politically related the possibility of engaging the outsider for

firm’s management is minimum (Xu et al, 2015).

Sometimes it can be damaging to have family CEOs. Relationships of family are not easy to

deal with. A family can have inexpert people who are not worthy of becoming CEOs and if

they become CEOs that can be very detrimental and can leads to destroying organization’s

performance. Thus, the philanthropy of founder leads to the declining performing CEO and

ultimately damaging the performance of the organization (Jiang & Peng, 2011).
Contrary to the previous results a research on family involvement in the management and in

the ownership was conducted on Poland. The result showed that businesses with family

CEOs have the possibility to beat their opponents who are non-family CEOs (Kowalewski et

al, 2010).

2.3) Hypothesis Development

H1 - In case where firm needs high managerial ability, the firm which has a professional
CEO will perform more better.

H2 – Family vs Non-family CEO on boards affects return on equity.

Chapter 3:
RESEARCH METHOD

3.1) Research Approach

This segment deals with the selection, validity and description of the research design

used in the testing process. Ultimately, various testing approaches and procedure used

for in depth study are clarified and supported. The present thesis opts for a specific

quantitative method.

3.2) Research Design

 Our main highlight towards this research is that return on assets and return on equity

as a dependent variable. In the ratio of non-family CEO to overall assets as an

independent variable.

Equation:

Firm Performance = α + β1 (FCF) + β2 (DIRQUAL) + β3(FS) + β4(debt) + ε

Variable measurement: Measurement

Family controlled firm (FCF)
Family controlled firm is defined as
1. Founder is the CEO is related by blood.
2. At least two family members in the
management.
3. Family directors have managerial
ownership (at least 20% in the firm
shareholding). It is coded as 1 if it is a
family-controlled firm, and 0 for non-
family-controlled firm

Director’s Qualification (DIRQUAL) % of Independent Director with

qualification / Total number of Directors.
Firm Size (FS) Book Value of Total Assets.

Debt The Book value of long term debt / total

assets

3.3) Sample and Population

The data consists of samples collected from audited financial statements and listed

companies in the Pakistan stock exchange. Data will be picked up of 10 years and

data will be panel as it will be collected from multiple firms and years.
 CONCEPTUAL FRAMEWORK

Sector Background Family & Non-

Family CEO Firm Performance
Textile
FMCG
Engineering
Chemical Control
Variable
Automobile
FCF Return of Return of
Assets Equity
Firm Size

DIRQUAL Debt

3.4) Statistical Techniques

The research statistical techniques will be descriptive statistics, correlation and

regression analysis. Through these techniques we will be conducting the test of

hypothesis.

3.5) Ethical Consideration

This research is done while considering the ethical principles of study. In this research

it was taken care of that we did not infiltrated anyone’s privacy and there is no use of
 un-ethical language and material in this study. As we will gather secondary data

which is readily available, so there is no prior ethical requirement to consider for

obtaining it also.

Reference:

Bammens, Y., Voordeckers, W., & Van Gils, A. (2011). Boards of directors in family

businesses: A literature review and research agenda. International Journal of Management

Reviews, 13(2), 134-152.

Cao, J., Cumming, D., & Wang, X. (2015). One-child policy and family firms in

China. Journal of Corporate Finance, 33, 317-329.

Jiang, Y., & Peng, M. W. (2011). Are family ownership and control in large firms good, bad,

or irrelevant?. Asia Pacific Journal of Management, 28(1), 15-39.

Kowalewski, O., Talavera, O., & Stetsyuk, I. (2010). Influence of family involvement in

management and ownership on firm performance: Evidence from Poland. Family Business

Review, 23(1), 45-59.

La Porta, R., & Lopez-de-Silanes, F. A. Shleifer (1999): Corporate Ownership around the

World. The Journal of Finance, 53, 491-517.

Memon, F., Bhutto, N. A., & Abbas, G. (2012). Capital structure and firm performance: A

case of textile sector of Pakistan. Asian Journal of Business and Management Sciences, 1(9),

9-15.

Shaukat, S., Nawaz, M. S., & Naz, S. (2013). Effects of innovation types on firm

performance: An empirical study on Pakistan's manufacturing sector. Pakistan Journal of

Commerce and Social Sciences (PJCSS), 7(2), 243-262.

Sheikh, N. A., Wang, Z., & Khan, S. (2013). The impact of internal attributes of corporate

governance on firm performance: Evidence from Pakistan. International Journal of

Commerce and Management, 23(1), 38-55.

W. Mullins, A. Schoar, (2016). How do CEOs see their roles? Management philosophies and

styles in family and non-family firms. Journal of Financial Economics, 119, 24-43

Xu, N., Yuan, Q., Jiang, X., & Chan, K. C. (2015). Founder's political connections, second

generation involvement, and family firm performance: Evidence from China. Journal of

Corporate Finance, 33, 243-259.

Zona, F. (2016). CEO leadership and board decision processes in family-controlled firms:

comparing family and non-family CEOs. Small Business Economics, 47(3), 735-753.