From the Outside for the Better

Recent research by Danny Miller, Isabelle Le Breton-Miller (both HEC Monreal and University of Alberta), Alessandro Minichilli, Guido Corbetta (both Department of Management and Technology and CRIOS), and Daniel Pittino (Università di Udine) can help entrepreneurial families to decide whether to hire a CEO outside of the family, and if they do so, how to arrange their governance structure.

In When do Non-Family CEOs Outperform in Family Firms? Agency and Behavioural Agency Perspectives (Journal of Management Studies, early view online, doi: 10.1111/joms.12076) they find that non-family CEOs can perform better than family members, but only if the firm is exclusively controlled by non-family CEOs that are monitored by multiple major family shareholders.

Foremost, the authors expect that non-family CEOs will perform better financially. Because there are so many more non-family than family member applicants, the group of non-family applicants is more likely to contain a capable manager. Moreover, family CEOs care not only about financial performance, but also about issues unrelated or even detrimental to financial performance, such as employment and liquidity of family members (called socio-emotional wealth). From the results of large scale empirical analyses on 839 Italian firms that they observe over multiple years, the authors conclude that non-family CEOs indeed can perform better. However, as agency theory and behavioral agency theory would predict, their potential is only unlocked under certain governance structures.

First, agency theory focuses on the relationship between owner and manager. It argues that non-family CEOs will try harder to improve performance when they are monitored by family owners that can understand and observe their actions. However, not all family owners have the required knowledge to do this, and therefore the family is more likely to understand the CEO's actions when there are multiple family member major shareholders that monitor the CEO together. Indeed, the authors find that non-family CEOs perform better financially when they are monitored by more than one major family shareholder.

Instead, behavioral agency theory focuses on the relationship between different managers, and predicts that conflicting agendas cause problems such as a lack of unity of command, difficulties in formulating a cohesive strategy, and diffusion of accountability. The chance that these problems arise is bigger when the non-family CEO shares power with a family co-CEO, because the family co-CEO wants to increase socio-emotional wealth, while non-family CEOs care only about financial performance. Here, the authors find that returns of an outside CEO can become negative when he shares power with a family member co-CEO.

Although outside CEOs can boost family firm performance, it is important to realize they only do so under certain conditions. Hiring a non-family member CEO may still pay off if there is only one major family shareholder, but returns might even become negative if this CEO is hired to serve together with a family member.