Appreciating Monitoring Activities – An Analysis of Outside Director Compensation in Public Family Firms

Outside directors are a decisive part of a firm's corporate governance and are primarily employed to protect shareholders' interests by monitoring a firm's management. This study investigates the impact of family representation on outside director compensation, based on a firm's monitoring need. We complement classical agency theory with stewardship theory and the perspective of socioemotional wealth to account for particularities regarding the type of manager and the importance of non-economic goals, characteristics that play an important role in the differentiation among family firms and in comparison with non-family firms. We find that family firms in general pay less outside director compensation than non-family firms, but that they exhibit a stronger increase as they grow in size. After further differentiating between lone-founder family firms and true family firms, however, we find that only the former account for the observed behavior.