Is family leadership always beneficial?

The debate about the factors underpinning family firm performance has been heated in recent years. Some experts claim that family management is to blame when these firms do poorly, while others assert that the opposite is true, crediting family leadership for eliminating costly agency issues and encouraging stewardship. What’s more, family-run companies are better at accumulating financial and social resources than other organizations. But what are the real – empirically verifiable – advantages of family leadership?

In our paper Is Family Leadership Always Beneficial?, which we co-authored with Danny Miller and published in 2012 in the Strategic Management Journal, we tried to substantiate these benefits, focusing primarily on certain key differences among various types of family firms.

To conduct our study, we tapped the complete database of all family-controlled Italian companies with turnover in excess of 50 million euro for the period from 2000 to 2008, and we came up with a sample of 2,522 medium to large family firms. What we found is that company size and ownership concentration can be decisive factors when family leadership enhances or erodes company performance. In fact, our results show that when CEOs are family members they improve the performance of family firms, but only when these enterprises are relatively small and ownership is concentrated. Instead the opposite is true for large companies with more dispersed ownership, which see worse performance when headed by family members.

So our findings suggest that we need to distinguish between different types of family firms. As we demonstrate, neither firm size nor ownership concentration alone can decide whether or not family leadership is beneficial. Instead, we have to evaluate the choice of leadership model while at the same time factoring in the paths for growth and the distribution of equity that mark the evolution of each company, and compound managerial complexity.

Our research has implications for managerial practice. First, it calls attention to the importance of matching the right type of leader to fit the nature of the business in question. Second, as family ownership expands (even in terms of family members alone), family firms must be able to adapt their leadership structure. A particularly pertinent point given the tendency of heads of families to resist even simply planning for leadership succession. This aspect makes our study particularly topical, in light of the need to face the issue of generational change and company growth with determination, overcoming cultural resistance which risks being very dangerous in today’s complex and uncertain business context.