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Family Involvement in Management
Family Involvement in Management
Family Involvement in Management
Working Topic:
Corporate investment, capital structure and firm performance: The moderating role of family
CEO
3. Problem Formulation:
• The family business literature suggest that family firm is a distinctive entity compared
to other types of firms because of family participation in management (Sirmon and
Hitt, 2003; Gomez-Mejia et al., 2011; Berrone et al., 2012; Siebels and zu
Knyphausen-Aufseß, 2012). Specifically, Gomez-Mejia et al. (2011) and Berrone et
al. (2012) suggest there are strong family's emotional components, namely socio-
emotional wealth, in the management of family firms. The non-economic objective
may play a significant role in corporate decision making.
• Recent empirical studies demonstrate that family firms have significant influence on
firm business strategies (Gomez-Mejia et al., 2010; Miller et al., 2011).
• Gómez-Mejía et al. (2007) propose the first comprehensive framework, namely socio-
emotional wealth, to demystify the myths of decision making in family firms. The
main assumption of socio-emotional wealth is that family firm relying on its
perceived prime reference point in major decision making.
Contribution
• This study attempts to explore how business strategies in family firms can be
understood using socio-emotional wealth concept. Specifically, we examine the
moderating role of family involvement in management.
Malaysia Context
• The family in Malaysia is a unique economic system that supplies family welfare to
dependent family members. That is, the family role in Malaysia, in contrast to the
family function in developed countries, are likely connected to the socio-emotional
wealth concept proposed by Gómez-Mejía et al. (2007). On the other hand, the family
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firms have a strong presence in corporate sectors, especially industrial product sectors
in Malaysia (Amran and Ahmad, 2011).
In literature, there is general consensus that the family owners have a different degree of
involvement in strategy formulations and business operations (Gómez-Mejía et al., 2007;
Schulze and Gedajlovic, 2010; Gomez-Mejia et al., 2011; Berrone et al., 2012). As a general
rule of thumb, the family owners can influence the business strategy and decision makings
when they appear to be the controlling shareholders. However, the degree of family influence
may differ across family firms ranging from (i) little direct, (ii) some and (iii) a lot of family
involvement (Shanker and Astrachan, 1996). Stated differently, the emotional components in
the business are not uniformly identical even though family is the largest shareholder in the
firm. Based on Berrone et al. (2012) definitions, a family business that is associated with
preservation of social-emotional wealth generally has strong influence and involvement in
management. For example, the appointment of the family Chief Officer Executive (CEO) and
participation of family members in firm management signifies there is a strong family
involvement and influence. This is also consistent with the view that the participation of
family members in management reflects familial orientations and agendas in the firm (Miller
et al., 2011). By contrast, the family firm without familial orientations is associated with
more entrepreneurship rather than 'family nurturer' (Miller et al., 2011). In summary, the
preservation of socio-emotional wealth is generally present in the firm with familial
orientations.
In addition, CEO may also exert significant influence over the judgments of outside directors
in various ways. First, CEO is better positioned to have knowledge and control of firm's
material information (Mace, 1972). By contrast, outside directors must rely on information
disclosed by firm management to perform monitoring duties. Second, outside directors may
feel grateful and obliged to CEO because their appointment rely on voting supports by family
controlling shareholders. Moreover, family CEOs may have stronger influence over outside
directors who are nominated by family controlling shareholders (Johnson et al., 1996). In
emerging economies, many outside directors also have business and personal relationship
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with CEOs and thus they are likely to be more cooperative with family CEOs rather than
performing independent monitoring (Kor, 2006).
To re-iterate, CEO posses the structural power in firm operation and significant influences
over the board of directors. Jones et al. (2008) suggest that family firms are loss averse on
losing firm control in order to preserve SEW (Jones et al., 2008) and thus family controlling
shareholders are unlikely to cede control of the board of directors. This leads to the
following hypothesis:
H1. Family CEOs negatively moderate the relationship between board independence and firm
performance in family firms.
The preservation of SEW in family-controlled firms may emphasize long term security on
business investment strategies. Family-controlled firms in technology industries may face
additional dimension of challenge because industrial firms are generally associated with high
capital expenditures. Carney (2005) suggests that firm investments are a unique resource to
sustain a market niche through product differentiation, increase product quality and cost
saving. However, higher capital expenditures may translate into higher levels of debt, which
may threaten the firm control. Therefore, family owners may adopt conservative investment
strategies in order to preserve the status quo of family control (Schulze et al., 2001) and
effective control over firm resources (Carney, 2005). This means the family owners-managed
will operate under capital constraint.
Interestingly, prior research has identified firm-controlled firms are likely to operate under
different manners (Claver et al., 2008; Miller et al., 2011). The empirical study by Miller et
al. (2011) investigated 896 family and non-family firms in industrial and service firms in the
United States. The results show that family-controlled firms, i.e., the presence of family
CEO, in the United States are associated with conservation strategy in financial structure and
investments. These family firms are generally associated with 'family nurturer' identity
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(Miller et al., 2011). In turn, family firms adopt a conservation strategy to protect the family
welfare and structuring the firm's resources based on family needs. Likewise, the study by
Claver et al. (2008) showed that 92 Spanish family firms perceived the business expansion
into foreign market is risky. Claver et al. (2008) concludes that the family firms are generally
risk averse on to invest in foreign markets to avoid the commitment of large firm resources.
Because family involvement in management (i.e., family CEOs) is more associated with
preservation of socioemotional wealth, we propose following hypotheses.
H2. Family CEOs negatively moderate the relationship between firm investment and firm
performance in family firms.
Sample