Skip to main content
SpringerLink
Log in

Controlling shareholders and the composition of the board: special focus on family firms

  • Original Paper
  • Published:
Review of Managerial Science Aims and scope Submit manuscript

Abstract

This article analyses the relevance of the agency problems that exist between shareholders and managers (type I agency problems) and between majority and minority shareholders (type II agency problems), in determining the composition of the board of directors, differentiating between family owned and non-family owned firms. The hypotheses are tested on a sample of 173 Spanish listed companies for the period 2004–2011. The results of our study indicate that, on one hand, as type I agency problems increase, firms increase their percentage of outside directors and, on the other, as type II agency problems increase, firms increase the ratio of independent to nominee directors. Whether the company is a family firm or not does moderate the influence of insider ownership over the composition of the board. Generally speaking, our findings support the view that firms configure their board of directors in such a way as to best signal to the market both efficient management and a balance of the interests of all shareholders. Likewise, these results could be taken into account when formulating recommendations on the composition of the board of directors.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. Villalonga and Amit (2006) define a type I agency problem as the classic owner-manager conflict described by Berle and Means (1932) or Jensen and Meckling (1976). A type II agency problem refers to a second type of conflict that appears when large shareholders can use their controlling position in the firm to extract private benefits at the expense of the small shareholders.

  2. In Spain family businesses make up more than 85 % of the total number of companies, 70 % of the GDP (Gross Domestic Product) and 70 % of private sector employment according to the information published on the Spanish Family Business Institute website. Family businesses also account for 60 and 95 % of the total number of companies in the European Union and the United States respectively, which justifies the interest of their study. Likewise, as Mitter et al. (2014), Ampenberger et al. (2013) and Kraus et al. (2012) note, family firms constitute the vast majority of enterprises worldwide. We refer the reader to IFERA (2003) and Siebels and zu Knyphausen-Aufseβ (2012) for general data about family businesses in the world.

  3. The Spanish National Stock Market Commission (Comisión Nacional del Mercado de Valores) defines significant shareholdings as those exceeding 5 % of the capital.

  4. In a corporation, the shares that are voluntarily pooled so as to constitute an amount of capital equal to, or greater than, the result of dividing the total share capital by the number of Board members shall be entitled to appoint the whole number of directors deriving from that division, excluding fractions.

  5. The principle "comply or explain" means that organizations are free to comply or not the recommendations put forth in the good governance codes. However, when organizational practices deviate from the recommendations, the reasons that have motivated the non-compliance must be explained.

  6. Expropriation can take the form of profit reallocation, assets misuse, transfer pricing, sell bellow market price parts of the firm to other firms that major shareholders own or acquisition of other firms that major shareholders own at a premium (La Porta et al. 2000).

  7. It is also possible, as Lester and Cannella (2006) indicate, that family firms are likely to recruit executives of other family firms, with whom they share common values, onto their boards of directors.

  8. We use the 5 % limit to define this variable since the Spanish National Stock Market Commission defines significant shareholdings as those exceeding 5 % of the capital.

  9. As Kraus et al. (2011) indicate, there are several definitions of a family business. A common definition includes ownership by the largest single family group related by blood or marriage and self-perceptions of whether the business is a family business (Westhead and Cowling 1997). Other authors, as Mitter et al. (2014) consider jointly the family’s share of equity in the firm as well as its influence through governance boards. We use a broad definition of family firm that has been used in Maury (2006), Pindado et al. (2008), Gómez-Mejía et al. (2010) or Sacristán-Navarro et al. (2011), among others, taking as a limit a minimum of 10 % of the company´s capital in the hands of the family.

  10. \({\text{Uit}} = \eta_{i} + \lambda_{t} + \nu_{it}\) where \(\eta_{i}\) represents the individual specific term of the error related to the firm i (unobservable heterogeneity) which includes the unobservable effects that only have an effect on firm i. \(\lambda_{t}\) represents the impacts for the period t that have an influence on all the firms; and \(\nu_{it}\) is a random disturbance. (García and García 2011).

  11. These figures are similar to those found by Sacristán-Navarro and Gómez-Ansón (2006), who analyzed a sample of Spanish listed companies, also using an ownership threshold of 10 %, and indicated that 43 % of them are family firms. Menéndez-Requejo (2006), using a sample of both listed and unlisted Spanish companies, observes in her study that family firms constitute 34 % of large Spanish firms, but 63 % of the medium-sized companies.

  12. We have estimated two alternative versions of Model 1 and 3 using the percentage of nominee members to the total number of directors as dependent variable. The results corroborate a positive and significant relation between ownership concentration (BLOCK) and the percentage of nominee members. However, because of space limitations and in order to not confuse the reader, we have not included these alternative models.

References

  • Ampenberger M, Schmid T, Achleitner AK, Kaserer Ch (2013) Capital structure decisions in family firms: empirical evidence from a bank-based economy. Rev Manag Sci 7(3):247–275

    Article  Google Scholar 

  • Anderson R, Reeb D (2004) Board composition: balancing family influence in SandP 500 firms. Adm Sci Q 49(2):209–237

    Google Scholar 

  • Arregle JL, Naldi L, Nordqvist M, Hitt M (2012) Internationalization of family-controlled firms: a study of the effects of external involvement in governance. Entrep Theory Pract 36(6):1115–1143

    Article  Google Scholar 

  • Baglioni A, Colombo L (2013) The efficiency view of corporate boards: theory and evidence. Appl Econ 45(4):497–510

    Article  Google Scholar 

  • Bammens Y, Voordeckers W, Van Gils A (2011) Boards of directors in family businesses: a literature review and research agenda. Int J Manag Rev 13(2):134–152

    Article  Google Scholar 

  • Banalieva E, Eddleston K (2011) Home-region focus and performance of family firms: the role of family vs non-family leaders. J Int Bus Stud 42(8):1060–1072

    Article  Google Scholar 

  • Barontini R, Caprio L (2006) The effect of family control on firm value and performance: evidence from Continental Europe. Eur Financ Manag 12(5):689–723

    Article  Google Scholar 

  • Bathala Ch, Rao R (1995) The determinants of board composition: an agency theory perspective. Manag Decis Econ 16(1):59–69

    Article  Google Scholar 

  • Bebchuk L, Jolls C (1999) Managerial value diversion and shareholder wealth. J Law Econ Organ 15(2):487–502

    Article  Google Scholar 

  • Berle A, Means G (1932) The modern corporation and private property. Commerce Clearing House, New York

    Google Scholar 

  • Bettinelli C (2011) Boards of directors in family firms: an exploratory study of structure and group process. Fam Bus Rev 24(2):151–169

    Article  Google Scholar 

  • Boone AL, Field LC, Karpoff JM, Raheja ChG (2007) The determinants of corporate board size and independence: an empirical analysis. J Financ Econ 85(1):66–101

    Article  Google Scholar 

  • Braun M, Sharma A (2007) Should the CEO also be chair of the board? An empirical examination of family-controlled public firms. Fam Bus Rev 20(2):111–126

    Article  Google Scholar 

  • Chrisman J, Chua J, Litz R (2004) Comparing the agency costs of family and non-family firms: conceptual issues and exploratory evidence. Entrep Theory Pract 28(1):335–354

    Article  Google Scholar 

  • Chrisman J, Chua J, Kellermanns F, Chang E (2007) Are family managers agents or stewards? An exploratory study in privately held family firms. J Bus Res 60(10):1030–1038

    Article  Google Scholar 

  • Coles JL, Daniel ND, Naveen L (2008) Boards: does one fit all? J Financ Econ 87(2):329–356

    Article  Google Scholar 

  • Corbetta G, Salvato C (2004) The board of directors in family firms: one size fits all? Fam Bus Rev 17(2):119–134

    Article  Google Scholar 

  • Daily C, Dollinger M (1992) An empirical examination of ownership structure in family and professionally-managed firms. Fam Bus Rev 5(2):117–136

    Article  Google Scholar 

  • Demsetz H, Lehn K (1985) The structure of corporate ownership: causes and consequences. J Polit Econ 93(6):1155–1177

    Article  Google Scholar 

  • Denis DJ, Sarin A (1999) Ownership and board structures in publicly traded corporations. J Financ Econ 52(2):187–223

    Article  Google Scholar 

  • Dyck A, Zingales L (2004) Private benefits of control: an international comparison. J Financ 59(2):537–600

    Article  Google Scholar 

  • Fama EF, Jensen MC (1983a) Separation of ownership and control. J Law Econ 26(2):301–325

    Article  Google Scholar 

  • Fama EF, Jensen MC (1983b) Agency problems and residual claims. J Law Econ 26(2):327–350

    Article  Google Scholar 

  • Fiegener M, Brown B, Dreux D, Dennis W (2000) The adoption of outside boards by small private US firms. Entrep Reg Dev 12(4):291–309

    Article  Google Scholar 

  • Florackis C, Ozkan A (2009) The impact of managerial entrenchment on agency costs: an empirical investigation using UK panel data. Eur Financ Manag 15(3):497–528

    Article  Google Scholar 

  • Gallo M, Vilaseca A (1996) Finance in family business. Fam Bus Rev 9(4):387–401

    Article  Google Scholar 

  • García R, García M (2011) Estructura del consejo de administración en la empresa familiar versus no familiar: evidencia empírica en España. Rev Esp Financ Conta 40(149):35–64

    Google Scholar 

  • Gómez-Mejía L, Núñez-Nickel M, Gutiérrez I (2001) The role of family ties in agency contracts. Acad Manag J 44(1):81–95

    Article  Google Scholar 

  • Gómez-Mejía L, Makri M, Larraza-Kintana M (2003) The determinants of executive compensation in family-controlled public corporations. Acad Manag J 46(2):226–237

    Article  Google Scholar 

  • Gómez-Mejía L, Makri M, Larraza-Kintana M (2010) Diversification decisions in family controlled firms. J Manag Stud 47(2):223–252

    Article  Google Scholar 

  • He E, Sommer D (2010) Separation of ownership and control: implications for board composition. J Risk Insur 77(2):265–295

    Article  Google Scholar 

  • Hermalin BE, Weisbach MS (1988) The determinants of board composition. Rand J Econ 19(4):589–606

    Article  Google Scholar 

  • Hermalin BE, Weisbach MS (1998) Endogenously chosen boards of directors and their monitoring of the CEO. Am Econ Rev 88(1):96–118

    Google Scholar 

  • Holderness CG (2003) A survey of blockholders and corporate control. Fed Reserv Bank NY Econ Policy Rev 9(1):51–63

    Google Scholar 

  • IFERA (2003) Family businesses dominate: international Family Enterprise Research Academy (IFERA). Fam Bus Rev 16(4):235–241

    Google Scholar 

  • Jaggi B, Leung S, Gul F (2009) Family control, board independence, and earnings management: evidence based on Hong Kong firms. J Acc Public Policy 28(4):281–300

    Article  Google Scholar 

  • Jensen MC (1993) The modern industrial revolution, exit, and the failure of internal control systems. J Financ 48(3):831–880

    Article  Google Scholar 

  • Jensen MC, Meckling WH (1976) Theory of the firm: managerial behaviour, agency cost and ownership structure. J Financ Econ 3(4):305–360

    Article  Google Scholar 

  • Kaplan S, Minton B (1994) Appointments of outsiders to Japanese boards: determinants and implications for managers. J Financ Econ 36(2):225–257

    Article  Google Scholar 

  • Kotlar J, De Massis A, Chua J, Chrisman J (2014) Ability and willingness as sufficiency conditions for family-oriented particularistic behavior: implications for theory and empirical studies. J Small Bus Manag 52(2):44–364

    Google Scholar 

  • Kraus S, Harms R, Fink M (2011) Family firm research: sketching a research field. Int J Entrep Innov Manag 13(1):32–47

    Google Scholar 

  • Kraus S, Pohjola M, Koponen A (2012) Innovation in family firms: an empirical analysis linking organizational and managerial innovation to corporate success. Rev Manag Sci 6(3):265–286

    Article  Google Scholar 

  • La Porta R, López de Silanes F, Shleifer A, Vishny R (2000) Investor protection and corporate governance. J Financ Econ 58(1):3–27

    Article  Google Scholar 

  • Lasfer MA (2006) The interrelationship between managerial ownership and board structure. J Bus Financ Account 33(7–8):1006–1033

    Article  Google Scholar 

  • Lazarides T, Drimpetas E, Koufopoulos DN (2009) Ownership structure in Greece: determinants and implications on corporate governance. SSRN: http://www.ssrn.com/abstract=1348508. (21/01/2014)

  • Lehn K, Patro S, Zhao M (2009) Determinants of the size and composition of US corporate boards: 1935–2000. Financ Manag 38(4):747–780

    Article  Google Scholar 

  • Lester R, Cannella A (2006) Interorganizational familiness: how family firms use interlocking directorates to build community level social capital. Entrep Theory Pract 30(6):755–775

    Article  Google Scholar 

  • Li J (1994) Ownership structure and board composition: a multi-country test of agency theory predictions. Manag Decis Econ 15(4):359–368

    Article  Google Scholar 

  • Linck JS, Netter JM, Yang T (2008) The determinants of board structure. J Financ Econ 87(2):308–328

    Article  Google Scholar 

  • Mackie R (2001) Family ownership and business survival. Bus Hist 43(3):1–32

    Article  Google Scholar 

  • Mak YT, Li Y (2001) Determinants of corporate ownership and board structure: evidence from Singapore. J Corp Financ 7(3):235–256

    Article  Google Scholar 

  • Maury B (2006) Family ownership and firm performance: evidence from Western European corporations. J Corp Financ 12(2):321–341

    Article  Google Scholar 

  • McConnell J, Servaes H (1990) Additional evidence on equity ownership and corporate value. J Financ Econ 27(2):595–612

    Article  Google Scholar 

  • Menéndez-Requejo S (2006) Ownership structure and firm performance: evidence from Spanish family firms. In: Zata P, Smyrnios K, Klein S (eds) Handbook of research of family business. Edward Elgar Publishing Inc, USA, pp 575–592

    Google Scholar 

  • Mitter Ch, Duller Ch, Feldbauer-Durstmüller B, Kraus S (2014) Internationalization of family firms: the effect of ownership and governance. Rev Manag Sci 8(1):1–28

    Article  Google Scholar 

  • Morck R, Yeung B (2003) Agency problems in large family business groups. Entrep Theory Pract 27(4):367–382

    Article  Google Scholar 

  • Morck R, Shleifer A, Vishny R (1988) Characteristics of targets of hostile and friendly takeovers. In: Auerbach AJ (ed) Corporate takeovers: causes and consequences. University of Chicago Press, Chicago

    Google Scholar 

  • Nieto MJ, Rodríguez Z, Casasola MJ, Usero B (2009) Impacto de la implicación familiar y de otros accionistas de referencia en la creación de valor. Rev Estud Empres. Segunda Época 2:5–20

    Google Scholar 

  • Peasnell KV, Pope PF, Young S (2003) Managerial equity ownership and the demand for outside directors. Eur Financ Manag 9(2):231–250

    Article  Google Scholar 

  • Pindado J, Requejo I, De la Torre C (2008) Does family ownership impact positively on firm value? Empirical evidence from Western Europe. Nuevas Tendencias en Dirección de Empresas, Working Paper No 2. Universidad de Salamanca. http://www.campus.usal.es/~empresa/09_master/pdf/02_08_requejo_articulo.pdf (21/01/2014)

  • Sacristán-Navarro M, Gómez-Ansón S (2006) Family ownership, corporate governance and firm value: evidence from the Spanish market. In: Poutziouris PZ, Smyrnios KX, Klein S (eds) Family business research handbook. Edward Elgar, Cheltenham, pp 593–613

    Google Scholar 

  • Sacristán-Navarro M, Gómez-Ansón S, Cabeza-García L (2011) Family ownership and control, the presence of other large shareholders, and firm performance: further evidence. Fam Bus Rev 24(1):71–93

    Article  Google Scholar 

  • Sánchez G, Baixauli JS, Lucas ME (2013) Retribución de los altos directivos y gobierno corporativo en las empresas cotizadas españolas. Universia Bus Rev 37:16–31

    Google Scholar 

  • Schulze W, Lubatkin M, Dino R, Buchholtz A (2001) Agency relationships in family firms: theory and evidence. Organ Sci 12(2):99–116

    Article  Google Scholar 

  • Schulze W, Lubatkin M, Dino R (2003) Toward a theory of agency and altruism in family firms. J Bus Ventur 18(4):473–490

    Article  Google Scholar 

  • Setia-Atmaja L, Tanewski G, Skully M (2009) The role of dividends, debt and board structure in the governance of family controlled firms. J Bus Financ Account 36(7–8):863–898

    Article  Google Scholar 

  • Shivdasani A (1993) Board composition, ownership structure and hostile takeover. J Account Econ 16(1):167–198

    Article  Google Scholar 

  • Shleifer A, Vishny RW (1986) Large shareholder and corporate control. J Polit Econ 94(3):461–488

    Article  Google Scholar 

  • Shleifer A, Vishny RW (1997) A survey of corporate governance. J Financ 52(2):737–793

    Article  Google Scholar 

  • Siebels JF, zu Knyphausen-Aufseβ D (2012) A review of theory in family business research: the implications for corporate governance. Int J Manag Rev 14(3):280–304

    Article  Google Scholar 

  • Smith A (1776) An inquiry into the nature and the causes of the wealth of nations. Methuen & Co. Ltd, London

  • Villalonga B, Amit R (2006) How do family ownership, control and management affect firm value? J Financ Econ 80(2):385–417

    Article  Google Scholar 

  • Westhead P, Cowling M (1997) Performance contrasts between family and non-family unquoted companies in the UK. Int J Entrep Behav Res 3(1):30–52

    Article  Google Scholar 

  • Xi J, Kraus S, Filser M, Kellermanns F (2013) Mapping the field of family business research: past trends and future directions. Int Entrep Manag J. doi:10.1007/s11365-013-0286-z

    Google Scholar 

Download references

Acknowledgments

We acknowledge financial support from the Spanish Ministry of Economy and Competitiveness and FEDER (project ECO2012-36290-C03-01) and the Regional Government of Aragón and FSE (project S125: Compete Research Group). Financial support for this work was also provided by Cátedra Empresa Familiar (University of Zaragoza). We also thank two anonymous reviewers for their helpful comments on earlier versions of this article.

Author information

Authors and Affiliations

  1. Department of Business Administration, Faculty of Economy and Business (Campus Río Ebro), University of Zaragoza, María de Luna, s/n, Edificio Lorenzo Normante, 50018, Zaragoza, Spain

    Isabel Acero

  2. Department of Business Administration, Faculty of Economy and Business (Campus Paraíso), University of Zaragoza, Gran Vía, nº 2, 50005, Zaragoza, Spain

    Nuria Alcalde

Authors
  1. Isabel Acero
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Nuria Alcalde
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Isabel Acero.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Acero, I., Alcalde, N. Controlling shareholders and the composition of the board: special focus on family firms. Rev Manag Sci 10, 61–83 (2016). https://doi.org/10.1007/s11846-014-0140-x

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11846-014-0140-x

Keywords

JEL Classification

Search

Navigation