CHINA - Media OutReach - 9 April 2020 - Family
ownership in modern corporations -- despite being highly commonplace with
household names such as Walmart, Volkswagen and Ford being high profile
family-controlled examples in the West -- has a bad reputation in emerging
markets. Critics often argue that family managers often underperform their
professional counterparts, and if they make unpopular decisions, it is often
passed off as self-serving behaviour or made at the expense of public
Contrary to this view that family-owned businesses carry
substantial governance burden, new research by The Chinese University of Hong
Kong (CUHK) Business School has found that among Chinese family-owned
businesses, those with high family member involvement in management typically
engage in fewer problematic transactions, benefiting minority shareholders in
Family and Corporate Governance, the study was conducted by Joseph
Fan, Professor of School of Accountancy and Department of
Finance at CUHK Business School in collaboration with Dr. Xin Yu, Senior
Lecturer at The University of Queensland Business School.
Examining more than 1,200 emerging Chinese publicly-traded
private sector firms, Prof. Fan and his collaborator looked at whether and how
the partition and allocation of ownership rights within a firm's controlling
families enhances or weakens corporate governance from both the controlling
owners and public investors' perspective.
The study divided conflicts within family owned businesses
into three types. The first two types are widely recognized; they consist of
conflict of interest between owners and managers, and that between the
controlling family and minority shareholders. The researchers argued that a
third type of conflict may arise as the family size grows and ownership rights
spread among family members. For example, a self-interested family member may
tunnel away firm resources at the expense of other family members.
Recognising these conflicts, the researchers then went on to
examine whether the level of managerial participation by family members led to
more or fewer related-party transactions -- including acquisitions of assets,
sales of assets, and trade of goods and services between a listed firm and a
connected party, sales of equity from a listed firm to a connected party, and
cash payment from a listed firm to a connected party.
These transactions are generally considered highly prone to
conflicts of interest. The idea is that if family involvement in business is a
symptom of weak governance and rent extraction, higher family participation
should be associated with more pervasive related-party transactions suspected
of expropriation, and vice versa, Prof. Fan explained.
"We find a higher degree of controlling family
participation and more diffusion of firm cashflow and decision rights within
the family is associated with fewer related-party transactions that are
suspected of minority exploitation," Prof. Fan said. In addition, the
association between family participation and suspicious related-party
transactions was more pronounced among firms subject to weaker market
governance. The study also found that suspicious related-party transactions
were fewer when more family members were both owners and managers.
"During our sample period, a change in government
regulation occurred that aimed to curtail related- party loans of publicly
traded companies. We find that controlling family participation mitigates
related-party loans pre-regulation, but the effects disappear after the
regulatory enforcement, again suggesting that controlling family participation
in firms has been an important private governance mechanism that substitutes
for the prior weak public governance," says Prof. Fan.
Prof. Fan said the findings were consistent with the theory
that family businesses typically implement measures to align the interest and
incentive of individual family members and to mitigate in-house conflicts, and
that these governance measures often "spillover" to benefit other
shareholders. However, the results also reveal that the family governance
effects are weaker if family managers do not own shares, and even disappear if
family owners do not serve as managers.
The governance effects are stronger when more siblings and
parents of founders participate in the firms, while more children participation
weakens the effects. Prof. Fan explains that this gels with the fact that in
many cultures, the founder of a family business is more likely to have their
decision making questioned by senior family members, rather than their
While participation by the spouse of a company's founder was
not associated with more suspicious related-party transactions, participation
by more distant relatives was associated with substantially fewer such
dealings. This squares with the view that family goals and values diverge and
trust dissipates the farther apart family relatedness becomes. Hence, less
close members of the family are more incentivised to monitor the business.
Speaking of future research, Prof. Fan admits much work
remains. "These results suggest that both ownership incentive and
monitoring ability matter to the effectiveness of family governance, in
contrast to the negative and perhaps dominating view that controlling families
are prone to conflicts with public minority investors," says Prof. Fan. "However,
we have yet to explore specific family governance mechanisms beyond family
ownership and management that induce family incentives and mitigate conflicts
of controlling family members. More research into this topic is warranted."
Fan, Po Hung Joseph P. H. and Yu, Xin, Controlling Family
and Corporate Governance (November 1, 2019). Available at SSRN: https://ssrn.com/abstract=3488539
article was first published in the China Business Knowledge (CBK) website by
CUHK Business School: https://bit.ly/2vOItEo.
About CUHK Business School
Business School comprises two schools -- Accountancy and Hotel and Tourism Management -- and four
departments -- Decision Sciences and
Managerial Economics, Finance,
Management and Marketing. Established in Hong Kong in 1963, it is the first
business school to offer BBA, MBA and Executive MBA programmes in the region.
Today, the School offers 8 undergraduate programmes and 20 graduate programmes including MBA, EMBA,
Master, MSc, MPhil and Ph.D.
In the Financial
Times Global MBA Ranking 2020, CUHK MBA is ranked 50th. In FT's 2019 EMBA ranking, CUHK EMBA is ranked 24th in the world. CUHK Business School
has the largest number of business alumni (36,000+) among universities/business schools in Hong Kong -- many of whom are key business
leaders. The School currently has about
4,400 undergraduate and postgraduate
students and Professor Lin
Zhou is the Dean of CUHK Business School.
More information is available at http://www.bschool.cuhk.edu.hk or by
connecting with CUHK Business School on: