Family-owned firms have proven crucial in pushing an agenda for better business governance structures. The number of family enterprises has allowed this large grouping of companies’ great influence on national economic development in both developed and developing countries. In Europe, family businesses contribute between 30-60% of gross domestic product (GDP) (IFERA, 2003). According to recent surveys released by the Family Firm Institute (FFI), family firms impressively contribute an estimated 70-90% of global Gross Domestic Product (GDP) annually. Besides ownership structure, the main factors distinguishing family firms from other corporations are their management styles, the level of motivation among founders, family values and decision-making processes.
In Malaysia, it is estimated that family businesses contribute more than half of the country’s GDP, resulting in family firms supplying an essential role to one of Asia’s largest economies. Approximately 80% of the companies listed on the Bursa Malaysia (formally known as the Kuala Lumpur Stock Exchange) are family-owned with the exception of quasi-government owned firms, state development corporations, banks and multinational corporations. This current global family business trend supports recent studies which claim that family businesses experience higher firm performance than non-family businesses. In the following article, Dr. Tze San Ong of Faculty of Economics and Management, University Putra Malaysia, Malaysia, explores the challenges and advantages that come with family-ownership by way of agency theory and the correlation between board size and performance.
Advantages of family ownership
There is an emerging view, which emphasises that family-ownership could bring benefits to the private sector by creating value for firms. Based on empirical studies, family-owned firms are broadly believed to contribute greatly to entrepreneurship and are actively involved in innovation and technology. Managerial prejudice is observed at lower rates, helping the long-term strategic focus of firms. The close relationships between founding family members enable them to forge strong ties with shareholders, suppliers, customers and employees, in effect strengthening the company’s environment for good business. Furthermore, the significant presence and involvement of family members in the business often lead to family firms maintaining lower levels of debt than non-family firms.