Feature Stories


Popularity of Family Business

Family businesses, those owned and/or managed by a family, are probably the most popular form of corporate governance in the world. More specifically, in most countries, many public firms, including renowned large ones, remain under the control of families. This phenomenon appears to be more pronounced in East Asia. Even in advanced countries such as the US, family ownership is observed in many firms in the S&P 500 index.

How is a family business different?


Long-term investment horizons: Relative to non-family businesses (i.e., widely-held firms), family businesses are known for their long-term perspectives, something often lacking in non-family businesses. Indeed, faced with limited career horizons, professional managers in non-family businesses tend to fixate on short-term profitability rather than long-term value. Furthermore, to deliver satisfactory profits and/or avoid any negative earnings surprises, they are inclined to undertake “secure” investment projects that could blossom in the near future, while shying away from riskier ones (those that take a long time to harvest). Even worse, there is evidence that when real profits are not as good as expected, professional managers in non-family firms often engage in accounting “tricks” to inflate reported earnings in order to increase their compensation and secure their positions. If earnings management goes too far, it can become a major accounting scandal such as those in WorldCom or Enron. In contrast, such myopic behavior is less likely to be a concern when controlling family shareholders occupy management positions in their own firms. That is to say, as major shareholders, family executives are better able to resist capital market pressure to achieve short-term profits, suggesting that they are less likely to play number games. Consistent with this, my research finds that on average family firms in the US have better financial reporting quality than non-family firms.[1] Further, we also find that having transparent financial reports is more beneficial for family firms than for non-family firms.[2] At the same time, having a strong desire to pass their shareholdings on to subsequent generations, family executives are able to focus on the long-term welfare of their firms.

Even without serving as executives, controlling families can become effective monitors of professional managers as directors on the board such as the Walton family in Walmart. Their rich knowledge of the industry and substantial holdings give them strong incentives to ensure managers are on the right track.

Strong employee loyalty: Likely due to their long-term horizons, family firms also see employees as a long-term asset. J.W. Marriott Jr. (Chairman and Chairman of the Board of Marriott International, Inc.) specifically indicates in his hotel welcome information, “Take good care of your employees, and they’ll take good care of your customers, and the customers will come back”. While they may demand higher productivity from their employees, family firms also often reward them with better compensation and benefits and lower dismissal rates. Indeed, even the during the global financial crisis, family firms in Europe were noted for refusing to slash workforces (The Economist 2009).[3]  Respecting employees, and treating them as lifelong partners, helps family firms foster strong employee loyalty compared to non-family firms, and such relationships can carry on to subsequent generations.

The ‘dark side’ of family businesses

Despite the benefits described above, family businesses unavoidably have their “dark sides”. Having substantial holdings, as well as holding key management positions in their firms, controlling families are able to expropriate minority investors. For example, controlling shareholders may engage in related party transactions to benefit themselves, or channel company assets into their own pockets. Even in countries with well-established legal systems and sound investor protection, scandals involving family firms are not rare. For example, in the US, corporate scandals in Adelphia Communications, Qwest, and Martha Stewart Living Omnimedia all concerned their founders or the founders’ descendants. Taking the Adelphia scandal as an example, the Rigas family (Adelphia’s founding and controlling family) was accused of using complicated tricks to divert US$100 million from Adelphia into their own pockets. Notably, the Rigas family did not sell a single share in their holdings when they misappropriated company assets, suggesting that it was difficult for minority shareholders to detect their behavior.

Family ownership may also have a negative impact on minority shareholders during economic downturns. Figures show that family firms in 35 countries underperformed compared to non-family firms during the 2008-2009 global financial crisis. The underperformance was due to the family firms’ reducing investment during the crisis. Specifically, it is shown that when a firm in a family business group is severely hit by crisis, the controlling family shareholders reduce investment in the other firms in the group in order to save the family empire.[4] In other words, controlling families intend to divert cash from the other, heathier, firms into the threatened company in order to ensure the business group remains intact, although such behavior may hurt minority shareholders’ welfare. 

Finally, as stated earlier, having been involved in their firms for a long time, controlling family members tend to possess comprehensive knowledge and understanding of them. Their central position in the management team, or on the board of directors, also allows them to get access to all types of important company information. If they so wish, family shareholders can benefit from this information through stock trading i.e., buying or selling shares before announcing unexpected good or bad news. This kind of trading not only hurts minority investors, but also damages the health of capital markets.

The future of family businesses

Family firms in the high-tech era

With the prevalence of computers and the internet at the beginning of the 21th century, many new high tech firms emerged, their market value increasing substantially in a relatively short period. For example, Apple, Alphabet (parent firm of Google), Microsoft, and Facebook are among firms with the largest market capitalization in the world. The emergence of high-tech presents businesses with challenges, even in traditional industries. Specifically, one of the most critical tasks for family businesses is succession, and this is a challenging issue. Traditionally, family businesses are prevalent in industries such as food, retailing, hotel, and real estate, and these industries all face new types of competition. For example, online shopping platforms such as Amazon or Alibaba are taking business away from traditional retailers such as Walmart and Nordstrom (a firm controlled by the Nordstrom family). Similarly, online hospitality service firm Airbnb is threatening hotel chains such as Hilton and Marriott (both being family firms). If subsequent generations of traditional family businesses cannot keep pace with the new business model, the families may have to liquidate their ownership and withdraw from their companies. In other words, it will be interesting to observe whether rapidly changing technology makes families in such traditional businesses less likely to retain control.

Family firms in Asia and Greater China

Relative to family businesses in Europe, Japan, and the US, family firms in Greater China are still in their infancy. In other words, many family businesses in greater China are still helmed by the first generation. However, as noted in an article in the Wall Street Journal on June 20 2017, tycoons in Hong Kong and South Asia are probably the oldest and are handing over the reins to the next generation. In mainland China, many family firms are also on the point of handing over to subsequent generations. However, possibly due to the culture, it is common to see descendants (in particular, male ones) fighting over estates. As such, how to allocate their wealth (or firms) among descendants has becoming a challenging task for Asian tycoons. 

In addition to wealth allocation, whether subsequent generations can manage the company successfully is another problem for tycoons. In the end, as the Chinese old saying has it, “it is difficult to be wealthy for more than three generations”. This is therefore an exciting time to observe succession in Asian family firms in the next decade or so, and business schools in this region can play a role in helping family businesses sustain their legacy.

By Professor Chen Tai Yuan, Department of Accounting, HKUST Business School


[1]Ashiq Ali, Tai-Yuan Chen, Suresh Radhakrishnan (2007) “Corporate Disclosures by Family Firms” Journal of Accounting and Economics, 44, pp238-286.
[2]Tai-Yuan Chen, Sudipto Dasgupta, and Yangxin Yu (2014) “Transparency and Financial Choices of Family Firms” Journal of Financial and Quantitative Analysis, 49, pp381-408.
[3]The Economist (2009),”Dynasty and Durability”.
[4] Lins, Volpin, and Wagner (2013) “Does family control matter? International evidence from the 2008-2009 financial crisis” Review of Financial Studies, Issues 10, pp2583-2619.