Despite the lack of independent directors on their boards and voting power for minority shareholders, family-run companies are still the better bet for all stakeholders as long as the founder of the firm is involved as chief executive officer or chairman. If the descendent of a founder runs the company, value is lost.
Those are some of the conclusions of a paper by Wharton professor Raphael (Raffi) Amit and Harvard Business School professor Belen Villalonga. The paper - "How Do Family Ownership, Control and Management Affect Firm Value?" - suggests that family ownership of corporations performs better than non-family firms when the founder serves as the CEO of a family firm or as its chairman with a hired CEO. When a descendent serves as the CEO of a family-run company - even if the founder remains chairman - the firm's market value declines.
Amit and Villalonga analyzed proxy data on all Fortune 500 firms from 1994 to 2000. For the purposes of the study, a family firm was defined as a company where the founder or member of the family by either blood or marriage was an officer, a director or the owner of at least 5% of the firm's equity either individually or in a group. Some of the most successful U.S. companies, including Wal-Mart, Home Depot, Heinz, Rubbermaid and Black & Decker, are family-run. The hallmark of each of these companies is a founder who had vision and the managerial skills to rally employees around a business.
But performance slips when the founder's vision is diluted by descendents, as shown by such firms as Ford Motor and Motorola. William Ford Jr., a fourth generation descendent of Henry Ford, now runs the giant auto manufacturer, which recently reported that September sales fell 7% from a year ago - in part a reflection of stiff competition from Japanese rivals. William Ford Jr. had been brought in three years ago to revive the company.
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