Rotman School of Management, University of Toronto

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Research Brief: Do standard governance practices matter in family firms?

Family firms are considered ‘second-class’ citizens or pariahs in most conversations about good governance because they do not conform to principles of best practice in corporate governance. But do standard governance practices matter as much with family firms? Or does the concentrated ownership structure of family firms serve as a substitute for other governance mechanisms? A study by Valentina Bruno and Sridhar Arcot in the UK, found that firms where the family is the dominant shareholder, are not only more likely to deviate from standards of best practice in corporate governance, but that this does not hinder their performance because concentrated ownership may in fact act as a substitute for other governance mechanisms. They argue that standard best practices in corporate governance (such as an independent board of directors or disclosure aimed at better monitoring management) may matter more in widely-held companies because they are trying to mitigate against a different set of conflicts that do not apply to family firms, i.e. the conflict between managers and dispersed shareholders (the so-called agency problem). On the other hand in family firms, the conflict between the dominant family shareholder and minority shareholders is more pronounced.

The study looks at the relationship between ownership structures, commonly recognized principles of best practice in corporate governance and firm performance by examining the annual reports of FTSE350 non-financial companies in the UK between 1998 and 2004. Each report has a corporate governance section that states the level of compliance with accepted standards of best practices and reasons in the case of noncompliance with its recommendations.

Key Findings

-Ownership structures do affect the decision to comply with corporate governance provisions. Family firms are less likely to comply with corporate governance standards particularly with regard to the monitoring role of the board (e.g. the existence of independent non-executive directors)

-Family firms disclose less information about their governance choices. Family firms tend to endogenously choose governance structures that are suited to their needs even when they do not disclose the reasons for their choices. Therefore, poor disclosure does not equal bad governance.

-‘Lesser’ governance practices among family firms are not associated with lower performance.

-Standard governance practices such as independent boards, board committees and better disclosure may be less relevant in family firms

Standard governance practices empower the board of directors to in part perform a monitoring and advisory role. However, this may be less relevant in family firms because the dominant family shareholder has the incentive to collect information and the power to monitor managers, and therefore in effect substitutes for the monitoring role of the board. Moreover, since the family’s wealth is connected to the company’s good performance, it is in the interest of the family shareholder to act in the best interest of the company rather than expropriate from minority shareholders.

-Standard governance practices matter more in non-family firms where better governance practices and disclosures are associated with better performance. Corporate governance practices matter in widely-held companies because the board’s adherence to corporate governance standards and greater disclosure can better align the interests of shareholders and managers and thus mitigate against the ‘agency problem’.


-Family ownership should be considered an effective ownership structure because it reduces agency costs.

-A governance regime designed on the ‘comply or explain’ system can afford companies discretion in their governance choices because they are not legally obligated to follow recommended corporate governance practices.

-Family firms should not be forced to adopt governance practices that may be better suited for widely-held companies such as independent boards, board committees or higher quality disclosures. We need to better understand the optimal governance structures for family firms even if they diverge from prescribed corporate governance best practices.

-The conflict between the dominant family shareholder and minority shareholders is more pronounced with family enterprises but might matter less when the firms operate in an institutional environment where there is a high degree of legal protection for minority shareholders such as in the UK.


The findings of the study are consistent with previous research at the Johnston Centre (formerly the Clarkson Centre for Board Effectiveness), which has documented the better performance and longevity of family enterprises compared to other firms and also drawn attention to the problems of applying norms of good governance derived from widely-held companies to family firms. We have also made a case for the merit in developing an alternate governance ranking system to account for the unique features of family firms. 

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