HKUST Business School Magazine

Why are family firms unique? In a typical firm, ownership is diffuse, with no individual block holders. Managers hold some shares, but they are not majority shareholders. For example, in Apple, the top five executives together held less than 1% of the firm’s common stocks in 2022 (after including their restricted stocks). In contrast, taking Fast Retailing as an example of a family firm, the founder Tadashi Yanai and his sons and wife together directly hold around 33.21% of Fast Retailing’s outstanding shares based on the 2022 annual report. This very different ownership structure leads to different agency problems in family versus non-family firms. A typical agency problem in these widely held firms is the misalignment between the managers’ and shareholders’ interests. Simply put, a manager may not exert effort to maximize a firm’s performance as he or she only has small share of it. In contrast, he or she may engage in some self-dealing behavior such as using company aircraft for personal purposes or having extravagant meals on a business account. Furthermore, executive compensation in the U.S. is known to be high, and some scholars, such as Lucian Bebchuck and Jesse Fried in the Journal of Economic Perspectives Summer 2003 issue, argue that such pay is excessive and is driven by management’s self-interest. Relative to diffuse firms, family firms are characterized by a better alignment between shareholders’ and managers’ interests when the controlling family is also the CEO, or holds any other senior management post. Notably, while family firms have stronger incentives to maximize a firm’s performance as they are also large shareholders, family firms have their own unique agency problems. With large shareholding and less monitoring by independent directors or institutional owners, controlling shareholders can undertake actions to benefit themselves at the expense of minority shareholders. For example, they can engage in related party transactions or channel benefits to other firms under their control. Family firms may appear to have ‘worse’ corporate governance compared to non-family firms Biz@HKUST 41