The voice of minority shareholders in family-owned firms

Family-owned firms dominate the global economy: according to PwC’s latest Global Family Business Survey, they contribute more than half of the world’s annual GDP and generate around two-thirds of employment. Their strength is also seen in new business ventures: 85% of start-ups are launched with family money.

As outlined in a previous post, an important facet of socioemotional wealth (SEW) in family-owned firms is conserving familial control, influence and binding family ties. For this reason, many turn to IPOs when they need new sources of capital to continue growing or bolster their equity. By securing capital from a diverse pool of minority shareholders, they avoid diluting the family’s long-term influence.

Since publicly traded family firms prioritize these SEW dimensions over short-term profits, many assume frequent tensions and conflicts emerging between family members and minority shareholders. But is this really the case? Do minority shareholders voice their discontent through contentious proposals calling owners’ policies into question?

My colleagues and I decided to test this hypothesis by analyzing thousands of shareholder proposals put before 543 publicly traded U.S. family firms over a ten-year period.

Areas of conflict

Based on our findings, family firms’ primary areas of conflict fall along three main lines: contract issues like hiring, firing and compensation decisions, major strategic directions such as M&As, diversification and divestitures, and finally CSR initiatives, including projects that enhanced the family image without an economic objective.

We also examined other dimensions like the firm’s financial performance and the presence of family members in the firm’s top leadership team. In these cases, tensions were most likely to emerge when a family member serves as the CEO, when the founder is no longer on the scene, or when financial returns fall below shareholder expectations.

Research conclusions

Despite popular belief, conflicts between family businesses and their minority shareholders are few and far between. By and large, minority shareholders generally do not feel expropriated by family owners in our analysis.

The solid financial performance of family-controlled firms is the main reason for this harmonious relationship: despite their “family first” orientation, they consistently outperform non-family companies, showing what’s good for the family is good for the firm.

Prof. Pascual Berrone’s research on socioemotional wealth has led to his distinction as one of the world’s most highly cited scholars for the third consecutive year.

 

Carrousel image: Mikael Kristenson on Unsplash

 

 

 

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