6. Corruption for the Family Firm
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- 2026
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Abstract
This chapter explores corruption in family firms, emphasizing how their hybrid structure—blending formal business systems with informal family dynamics—may contribute to higher corruption risks. While family firms can naturally reduce agency-based corruption by aligning ownership and management goals, it may also enable corruption that benefits the entire firm. Through the lens of corporate crime theories, the chapter examines how centralized authority and the informal cultural norms of the family coordinate corrupt practices within the firm. It highlights the concept of a corrupt organization, where firms pursue illicit strategies not for personal gain but for the organization’s interests, which in this case align with the family’s interests. The Korean chaebol system serves as a central case study of the chapter, illustrating how inheritance conflicts, weak internal controls, and political collusion can lead to a form of family corruption, called corporate state capture, that goes beyond a corrupt organization. Despite their economic significance and ethical aspirations, family firms are especially vulnerable to corruption due to their structure, governance patterns, and familial loyalty, challenging the Weberian ideal of rational-legal corporate order.
The Family Firm
In early 2025, federal prosecutors in California charged David Sanson, chief executive of the Concord-based development firm DeNova Homes, and his son Trent Sanson, the company’s vice president, with conspiracy and bribery (U.S. Attorney’s Office Northern District of California, 2025). According to the indictment, the two allegedly sought to secure favorable treatment from a city council member in exchange for financial inducements linked to one of their residential projects. DeNova Homes has been a prominent developer in the East Bay region, including the Aviano project—a multi-phase, 533-unit residential development in Antioch. Federal authorities reported that the firm had encountered regulatory obstacles when the city’s Engineering and Development Services Division determined that required public infrastructure improvements had not been completed, resulting in the withholding of bond approvals. To address these challenges, prosecutors allege that Trent Sanson initiated private communications with a city council member to seek assistance in resolving issues related to the project’s pending approvals.
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This case highlights features common to many family-run enterprises: overlapping roles of owners and managers, close kinship ties, and a concern for continuity and reputation. Although most of these firms are not corrupt, their hybrid organizational structure might increase the likelihood of corruption. Family firms represent not only a historically significant social form of economic activity but also the prevailing way of conducting business today. The Weberian ideal-type emphasizes a clear separation in “modern” societies between family or household—characterized as a unit of personal, emotional, and private relationships—and business, regarded as a rational, impersonal, and publicly visible profit-driven system. Yet, there is an apparent contradiction between Weber’s model and the empirical prevalence of family-run companies that often blur these boundaries. A family firm, a profit-oriented, family-based business partnership, is a unique hybrid arrangement of legally approved formal and informal elements. Historically, this was the most important form of business organization in Europe. In the Middle Ages, most trading houses had the character of family businesses (Fleischer, 2023). This happened first in the cities of northern Italy, where the so-called compagnia emerged in the fourteenth century. They were organized primarily by banking families, such as the Medici, Bardi, or Peruzzi.
There have also been family firm-type units in non-Western societies, where anthropologists have long examined the phenomenon of the corporate kin group. Although this term does not refer to a private business in the contemporary sense, it designates a social unit that functions as a cohesive entity over time—an enduring group that manages shared responsibilities, property rights, and identity. As self-sufficient units, these groups are deeply engaged in various economic activities, including agriculture, animal husbandry, fishing, trade, property management, labor organization, and producing goods such as pottery and textiles (Wolf & Silverman, 2001). Such corporate kin groups also had a political dimension, since they had the function of enforcing rules, settling disputes, and maintaining traditions, sometimes acting as governing bodies in which members would invariably act together (Campbell, 1964, p. 37).
A contemporary family firm is defined as a private organization owned, managed, and governed by one or more generations of family members. These companies often uphold a strong connection to their founders’ values, vision, and mission (Anderson & Reeb, 2003; Erdem & Gül Baser, 2010). Family-owned businesses are actually the most common type of business around the world (Astrachan & Shanker, 2003; La Porta et al., 1999; O’Brien et al., 2018). These organizations represent more than two-thirds of all enterprises worldwide, contributing an estimated 70% to global GDP yearly (Song et al., 2021). Within the European Union, family businesses constitute 60% of all companies and are responsible for 40–50% of jobs in the private sector (European Commission, 2008). Firms in which the founding family has a considerable or controlling interest constitute over one-third of the Fortune 500 and S&P 500 (Anderson & Reeb, 2003).
Family firms possess a distinct identity, integrating elements from both family and business systems, which intersect to varying degrees (Sundaramurthy & Kreiner, 2008). This characteristic distinguishes these firms from other private organizations because it incorporates various factors, such as non-financial objectives aimed at safeguarding family interests, a tendency towards fewer formal rules, and the prevalence of undocumented and informal practices (Adams et al., 1996; Berrone et al., 2010; Gomez-Mejia et al., 2007). This dynamic suggests a dual and often conflicting structure of interests, as decision-makers within these firms, along with instrumental corporate goals, may face pressure from family members—such as parents, children, siblings, or spouses—who are often not even formal members of the organization (Mitchell et al., 2011). Generally, these non-financial influences are understood through the concept of socioemotional wealth, which family firms tend to prioritize over purely financial objectives. The idea manifests in various ways, including the need for emotional bonds and intimacy among members, the infusion of family values into business practices, and the preservation of the family’s reputation and social status (Gomez-Mejia et al., 2007). Therefore, the ethical decisions of family firms are shaped by both rational and emotional goals, which in turn lead some families to behave ethically while others behave unethically (Vazquez, 2018).
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Given their concern for family reputation, these firms are likely to steer clear of illegal activities (Eddleston & Mulki, 2021; Vazquez, 2018). Empirical studies have demonstrated that family firms often maintain a more positive ethical climate compared to their non-family counterparts and tend to place a higher emphasis on integrity and honesty (Blodgett et al., 2011; He et al., 2012; Payne et al., 2011).
Dark Sides of Family Firms
However, several scholars have pointed out potential dark sides associated with family firms (Graafland, 2020; Le Breton-Miller & Miller, 2024; Mendez & Maciel, 2021; Minichilli et al., 2010; Zientara, 2017). Beyond minor unethical practices, family firms also have unique traits when it comes to illegal activities. Auditors often perceive family firms as having a greater risk of fraud and tax evasion than other enterprises (Krishnan & Peytcheva, 2019). These external audit professionals view these companies as the least desirable clients because they believe family members may act opportunistically to extract rents and potentially divert the firm’s resources illegally. In conflict situations where the family’s control and influence over a company are threatened by other non-family shareholders, the family may resort to illicit means to reclaim their dominance (Ho & Kang, 2013; Kellermanns et al., 2012). These tactics can include insider trading, forgery, blackmail, share dilution, manipulation of financial statements, and/or illegal buybacks. Conflict between family members within firms is also a constant and prominent characteristic of these organizations (Eddleston & Kellermanns, 2007; Mendez & Maciel, 2021). Such tensions often stem from sibling rivalry over succession or marital discord, which can lead individuals to engage in questionable practices such as stealing trade secrets, forging signatures, backdating documents, or transferring assets to secret accounts. Affluent families that build large corporations frequently create foundations funded by their business profits. These non-profit entities enable them to “give back” to society while also providing reputational and tax advantages. Additionally, they can employ family members or finance lavish lifestyles under the guise of “charitable activities” such as extravagant galas and luxury travel.
The common practice of hiring or promoting relatives creates an inherent system of “legalized nepotism” within these businesses. There is even an academic term for the asymmetric treatment of family members over non-family employees in family firms: bifurcation bias (Madison et al., 2018). This concept is narrower than nepotism, as it specifically focuses on family businesses, while nepotism can occur in both family-owned and non-family-owned organizations.
While it may seem paradoxical, one form of corruption, nepotism, can actually contribute to reducing another form of corruption associated with the agency problem (Anderson & Reeb, 2003). As discussed in previous chapters, the principal-agent dilemma or agency problem is a common framework for understanding corruption in an organizational context. This dilemma occurs when an agent (a public official, corporate manager, or lower-level employee) entrusted by a principal (a government, shareholders, owner, or executive) does not act in the organization’s best interest but instead seeks personal gain. Thus, there is a gap between the principal’s interests (e.g., organizational integrity and efficiency) and the agent’s self-interest (e.g., individual profit). Agents can exploit their positions by illegally “selling” organizational resources or their discretion to outsider clients in return for bribes—their actions are often difficult for the principal to fully monitor and control or even just to collect accurate information about. However, alignment theory suggests that the conflicting interests between owners and managers tend to lessen in family firms with nepotistic hiring practices (Anderson & Reeb, 2003; Demsetz & Lehn, 1985; Wang, 2006). The cohesion and trust among relatives inside the firm foster an alignment between family and business objectives, thereby diminishing the separation of ownership and control. As a result, the motivation for agents to act in their self-interest diminishes.
Corruption for the Family Firm
Generally, ethical issues in family firms are under-researched, and the more specific problem of corruption within family firms has received even less attention (De Hadjielias et al. 2022; Lafleur et al., 2025; Vazquez, 2018). As the previous section suggests, people in these organizations may engage in various unethical, illicit, or even corrupt practices, such as nepotism. Yet, there is also a distinct form of corruption that applies to the firm as a whole. While the previously mentioned high cohesion among family members may mitigate agency problems, it could also foster corruption for the firm. A relevant concept for understanding this phenomenon is borrowed from management science, namely the idea of the corrupt organization, where an entire formal private entity is both the client and the primary beneficiary of a corrupt transaction (Jancsics, 2019; Pinto et al., 2008). This issue is also referred to in the literature as corporate crime (Albanese, 1988), collective corruption (Greve et al., 2010), corporate corruption (Castro et al., 2020), or firm-level corruption (de Jong & van Ees, 2014). Such corruption is motivated by the pursuit of an organizational advantage rather than individual gain. Unlike government entities, firms frequently encounter competitive pressures to maximize profits, which heighten the likelihood of this form of corruption (Castro et al., 2020).
A typical form of corrupt organization is when private companies provide kickbacks in return for government contracts. Yet the advantages gained can go beyond simple monetary benefits. For instance, those organizations with political connections often seek and receive improved access to government-subsidized financing (Cull & Xu, 2003; Johnson & Mitton, 2003), reduced equity costs (Boubakri et al., 2012), greater chances of receiving bailouts during financial crises (Faccio, 2006), and favorable conditions for securing contracts compared to competitors (Amore & Bennedsen, 2013; Goldman et al., 2013). The counter-benefits given by private entities can be financial, including kickbacks, political campaign contributions, or subsidized stock options; however, these benefits can also manifest in non-financial ways. Examples are lavish dinners, “conference trips” to appealing destinations, positive media exposure, premium seating at sporting events, or tickets to top-drawing concerts.
Additionally, this kind of corruption can exist solely within the private sector, where employees from one company might bribe other businesses to secure advantages, such as paying a well-known retail chain to showcase their products prominently (Jancsics, 2024, p. 79) or swaying a bank to favorably process a loan application (Castro et al., 2020).
In its more advanced form, a corrupt family firm can extend beyond a simple quid pro quo and evolve into state capture, where private firms can significantly influence the state’s policy-making process to create a favorable environment for themselves. This unique form is exemplified by Korean chaebol—large, family-controlled conglomerates that dominate the country’s economy and are often involved in corruption. Later in this chapter, I will examine this interesting arrangement.
Coordination Mechanisms
Corrupt organization is a top-down phenomenon initiated or approved by organizational elites, but it also involves large numbers of employees and requires sophisticated internal coordination (Jávor & Jancsics, 2016; Palmer & Maher, 2006; Pinto et al., 2008). The two main coordination mechanisms mentioned in the literature are centralized power and a corrupt organizational culture, both of which are readily available in family firms (Jancsics, 2019). In these enterprises, owners and executives have significantly higher decision-making discretion than in non-family businesses (Le Breton-Miller & Miller, 2024). This nearly unlimited formal power allows them to eliminate or substantially weaken internal control mechanisms such as checks and balances, audits, compliance hotlines, and other reporting tools. Consequently, more outspoken, altruistic voices and ethical actors will be discouraged from going against corrupt behavior.
By serving as role models, leaders also function as powerful representatives of the family, thereby possessing the capacity to authorize corruption informally (Ashforth & Anand, 2003). Subordinates, who are often family members, are expected to carry out sanctioned orders without questioning them; the prevailing expectation to adhere to familial obligations typically supersedes professional and impersonal preferences linked to their organizational positions. Although not necessarily involving family, this phenomenon is exemplified in Milgram’s (1974) obedience experiments, which reveal that the ingrained reflex to obey authority figures is so deeply rooted and widespread that a majority of individuals struggle to openly defy directives they do not endorse.
Furthermore, in paternalistic family firms, the founders’ norms and values are often perpetuated due to their strong status or even a cult of personality, thereby fostering a culture of corruption that extends throughout both the family and the firm. When corrupt practices become ingrained in organizational routines, a deviant culture could arise that normalizes corruption. Family-member employees might abandon universal or official ethical norms for particularistic values that benefit their family (Aubert, 1952; LeVine & Campbell, 1972; Ryan & Bogart, 1997). Indeed, if a social identity is chronically more important to the individual, particularism can metastasize into what Banfield (1958) calls “amoral familism,” that is, a tendency to display morality only as it regards one’s “family.” Always prioritizing the ingroup over outsiders clearly paves the way for corruption within the family firm.
Corporate State Capture by Family Firms
Certain family businesses can become so prominent that they are able to influence the government’s policy-making process, shaping a legal environment that serves their interests (Jancsics & Costa, 2024). This phenomenon can be understood as a form of state capture where the processes through which laws and policies are developed can be manipulated by powerful actors to further their particularistic interests (Dávid-Barrett, 2023). State institutions can be captured either by economic (oligarchical or corporate state capture) or political (party or political state capture) actors (Innes, 2014). A family-owned firm capturing the state for the company’s benefits falls in the category of corporate state capture. A distinct variation arises when an entire family exerts influence over most macro-level economic and political institutions, effectively manipulating the legislative process. This scenario illustrates a state not merely seized by powerful actors but instead dominated by a single family. I refer to this phenomenon as dynastic state capture, which I will explore in the next chapter.
Chaebol
Korean chaebols are notable examples of corruption for the family firm with a strong element of state capture. The extensive system of these companies, while essential to South Korea’s meteoric rise as an industrial power, has also been a breeding ground for entrenched corruption, excessive family control, and collusive ties with political elites. These large conglomerates—family-run, diversified, and vertically integrated—have developed institutional, cultural, and political mechanisms that shield them from accountability while reinforcing authoritarian management styles and shady business practices. Collusion between chaebols and the state has been a historical constant since the mid-twentieth century, dating back to the authoritarian developmental regimes of Park Chung-hee and Chun Doo-hwan, and continuing into contemporary administrations. The 1988 National Assembly hearings revealed how Hyundai’s founder Chung Ju-young contributed money to the Chun Doo-hwan regime through the Federation of Korean Industries (FKI), justifying the payments with the phrase, “I contributed money to live comfortably according to the trend” (Seoul Finance, 2023). This underscores how chaebols have long internalized the practice of paying political protection money.
Deeply influenced by Confucian values, these organizations emphasize obedience, seniority, and familial duty, often prioritizing family interests over corporate objectives. Leadership is typically concentrated in the hands of a founding family, fostering dynastic succession practices that prioritize bloodline over merit. This has resulted in challenges to long-term strategic vision and systemic issues such as a lack of transparency and resistance to internal and external oversight, leading to vulnerability to corruption. While some chaebols have attempted reforms, the entrenched culture of deference to authority and top-down management continues to shape their internal dynamics and external reputation.
The 2016 scandal involving then-President Park Geun-hye and her confidante Choi Soon-sil exemplified corporate state capture by a family firm. Samsung executive, Lee Jae-yong’s succession at Samsung involved a calculated series of mergers and financial maneuvers: manipulating market valuations and colluding with state officials to secure approval (Pressian, 2023). Lee Jae-yong was convicted of bribery after providing tens of billions of won in support to foundations controlled by Choi in exchange for government support the merger (Hankook, 2021).
Pressured by the Blue House—referring to the former presidential residence and office complex—the National Pension Service (NPS) approved the merger even though it would negatively impact NPS members. Samsung’s influence also led to other legislation favoring its interests. After courts ordered disclosure of hazardous work environment data, Samsung pushed for and won changes to the Industrial Technology Protection Act, classifying this data as “national core technology” and thus confidential—even when workers’ lives were at stake (Kyunghyang, 2018).
Internal and External Controls
In chaebol firms, internal control mechanisms are often significantly weakened or fully deactivated. Efforts like Samsung’s Compliance Monitoring Committee have been criticized as merely cosmetic. Courts ruled the committee ineffective in preventing white-collar crime, rejecting it as a basis for leniency in sentencing former Samsung executives (Hankook, 2021). Such internal tools often exist for optics rather than substantive control; in this case, the Committee “failed” to create a meaningful compliance mechanism and lacked authority to oversee Samsung’s central decision-making, according to the court’s opinion.
Despite repeated scandals, meaningful macro-level reform remains elusive. Chaebols maintain tight control over media, lawmakers, and bureaucrats. Thus, external audit institutions are also turned off for chaebols. Despite convictions by South Korean courts, chaebol leaders regularly receive presidential pardons. In 2022, President Yoon Suk-yeol pardoned Samsung’s Lee and Lotte’s Shin Dong-bin, justifying the move as a measure to “boost economic recovery” (HanKyuRe, 2023). Critics saw this as yet another reinforcement of the belief that chaebol elites are “too big to jail,” a play on words regarding the US bank bailouts in the late 2000s—“too big to fail.” Convicted chaebol leaders are infamous for the “3–5 rule,” a lenient sentencing practice granting them three-year sentences with five-year suspensions, allowing them to avoid prison while publicly appearing punished. Many company executives were beneficiaries of this informal “chaebol privilege” (Yonhap News, 2015).
Family Logic in Leadership Transitions
Unlike public corporations governed by boards and shareholders, chaebols are family empires. Leadership transitions often prioritize bloodlines, particularly those of male heirs, over managerial competency. The so-called primogeniture principle, when the eldest son inherits leadership, persists in conglomerates like LG and Hanwha. In contrast, others such as Samsung and Hyundai have chosen younger or more compliant sons over the eldest, often leading to legal disputes and succession wars (Money, 2023). Courts also recognized the above-mentioned Lee Jae-yong’s succession strategy as systemic corruption designed to concentrate ownership within the Lee family (Pressian, 2023).
Succession has repeatedly led to damaging feuds: LG’s inheritance dispute in 2023, Lotte’s Shin brothers’ battle, and the Kumho family’s near-collapse after failed illicit coordination during an acquisition crisis (HanKyuRe, 2023). These internal power struggles reveal the fragility of governance and the prevalence of “imperial management” practices, where personal loyalty and internal politics outweigh the Weberian concept of business rationality.
Though Korea’s broader society has seen progress in gender equality, chaebol leadership remains almost exclusively male. While women like Lee Boo-jin (Hotel Shilla) and Lee Mi-kyung (CJ Group) hold influential roles, they operate in satellite businesses or foundation arms—not at the helm of the core business empire. No major chaebol group has ever appointed a woman as its overall leader (Money, 2023). This is not merely a glass ceiling—it is a structural exclusion rooted in patriarchal inheritance systems, despite the increasing presence of capable women in executive roles.
Discussion
The predominant perspective on contemporary corporations reflects Weber’s (1922[1968]) concept of bureaucracy as the most advanced form of rational organization. He believed that firms exemplified “rational-legal authority,” where legitimacy is grounded in law, formal rules, and efficiency rather than tradition or personal charisma. Weber argued that impersonal relationships are essential to achieving efficiency and fairness within these organizations. In a bureaucratic system, decisions are made based on established rules and objective criteria, not personal feelings, favoritism, or social connections. Despite the popularity of this view among scholars, most businesses around the world do not fall into this category; they are typically family-owned, combining rational-formal operations with the family’s informal arrangements. Kinship connections between leaders and employees hold significant importance, but family members who are not formal members of the organization can also exert pressure on official processes.
Such a hybrid structure reveals that family businesses are inherently nepotistic entities, favoring relatives over outsiders in hiring, decision-making, promotion, and other resource allocation processes. Surprisingly, this type of nepotism may even inhibit the form of corruption described by the agency problem. When an agent can easily conceal his/her self-interest-driven corrupt activities from supervisors, stealing the company’s resources and selling them to outsiders may represent the agent’s most profitable choice. However, the strong cohesion and trust among family members within the firm enhance the alignment of family and business goals. Consequently, if the firm is functioning as intended, the incentive for agents to pursue their own corrupt interests vanishes. However, due to stronger emotional ties, frequent interactions, and unresolved past issues, people who are close to each other—such as family members or romantic partners—can experience more intense or serious conflicts than strangers. As the above-mentioned chaebol examples suggest, disputes between siblings can give rise to forms of corruption particular to family firms.
Although the intention to preserve family reputation may foster ethical behavior in family firms, securing a corrupt contract can be attractive for companies facing intense competitive pressures to generate profits or merely to survive (Castro et al., 2020). Certain special features of family firms also provide more effective mechanisms for corruption that benefit the entire organization. The phenomenon of corrupt organizations often involves numerous employees and necessitates sophisticated internal coordination, which can therefore be viewed as a form of collective corruption (Palmer & Maher, 2006). It is essential to note that the above-discussed Chaebols are only one prominent example of this phenomenon, which is also found worldwide.
A known mechanism for such coordination is the simple exercise of power, whereby executives pressure their subordinates to obey authority, engage in corruption on behalf of the company, or cover it up (Jancsics, 2024, pp. 82–83; Needleman & Needleman, 1979; Palmer & Maher, 2006; Scheff, 1988; Trevino, 1986). The highly centralized structure and the founder’s or CEO’s often unlimited power can make the coordination of corruption in family firms easier, as family members naturally submit to the authority of the family head, who may also be the top executive of the firm. Organizational culture—informal norm systems that regulate the employees’ behavior—is another way to facilitate corruption among members (Ashforth & Anand, 2003; de Graaf, 2007). Due to close-knit emotional family ties, the organizational culture in family firms can be especially strong and cohesive, which may make a corrupt organizational culture in those companies even more constraining.
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