Family Firms and the Professional Manager Market

Abstract

In a family firm, the founding family has an influence over firm policy, corporate strategy, personnel issues, and so on, through ownership and participation in management even after the founder retires. Such family firms are prevalent among publicly traded firms not only in emerging countries, but also in developed countries. However, the prevalence and control mechanisms vary by country.

In the US, when a founder steps down, they tend to hire professional managers and sell out their shares; thus, the prevalence of family firms is relatively low. In Western Europe, significant ownership typically remains with the founding family even after the founder retires: their children either hire a manager or run the firm themselves. In emerging markets, both management and ownership tends to remain with the family when the founder retires.

Scholars have suggested that varying levels of family ownership and management across countries can be explained by the degree of legal protection for outside investors. However, they cannot explain the situation of Japanese family firms. In Japan, investor protection is relatively strong; however, when a founder steps down, founding family ownership tends to decrease, and yet the management role tends to stay within the founding family.

Further, scholars have struggled to explain differences across countries in the performance of family firms relative to non-family firms. In the US, heir-managed family firms perform inferior to non-family firms. In France and Japan, however, heir-managed family firms exhibit superior performance.

This paper aims to explain the differences in the prevalent patterns of family ownership, management and performance across countries. Specifically, it examines the role and size of professional manager markets, and suggests that these markets affect the decision of founders in key succession decisions. In testing its hypotheses, the paper presents a comparative data analysis of family firms in Japan, the US and France.

Keywords: family firm, corporate governance, Japan, law and finance

JEL Classification: C32, C34