When the Boss Is Not from the Family

The comparison between family leadership and the performance of managers that come from outside the controlling family has traditionally been an issue in business as well as in studies on entrepreneurship that evaluate economic results. The idea is that choosing a leader from inside the family rather than bringing him/her from outside is a major decision affecting business performance due to the difference in values, skills, priorities etc. between the two figures. Indeed, there is agreement in considering this the most important decision that entrepreneurial families have to face.

Both in theory and in practice, it's hard to determine whether family leadership is preferable to non-family leadership. Those who argue in favor of managers from the family underline the natural convergence of interests between family leaders and the firms they control. Conversely, those who argue in favor of bringing in external managers emphasize the fact that merging control and ownership favors nepotism and expropriation damaging to the company.

This controversy has not taken into due account the variety of family firms. There is a tendency to generalize results by considering family companies to be all alike, whether they are large or small, or whether their family ownership is concentrated or scattered . In fact, differing scale and concentration require radically different managerial profiles and relationship patterns with the owning family.

In order to try to solve this controversy, we recently wrote a working paper (Is family leadership always beneficial?, with Danny Miller at HEC Montreal), showing how the variance of family firms determines whether a particular context is more or less favorable to family leadership. Drawing from the sample of the AUB Observatory (AIdAF-Unicredit-Bocconi) covering all the roughly 2,500 Italian medium and large family companies over the 2000-2009 period, the study shows how family leadership yields opposite results, according to company size and diffusion of ownership.

In particular, while family leaders positively contribute in terms of current profitability (as measure by ROA) in smaller companies with concentrated ownership, often in the hands of a single person or of a small and tight entrepreneurial family, in larger family companies with more scattered ownership the opposite is true.

There are various reasons behind these results. In smaller and more highly concentrated companies, family leaders enjoy tacit knowledge, family cohesion and a profound identification with company culture, which would be hard for outsiders to penetrate. Conversely, in larger firms with many family holders, business complexity makes managerial skills more important than tacit knowledge. And more scattered ownership often translates in the family leader being leader of a family faction, rather than the whole company, engendering tensions that are hard to defuse. In such contexts, business leadership brought in from outside the family would bring the double advantage of providing the required managerial abilities and brokering agreements to end possible conflicts among company owners.