Effective Governance in the Family Owned Business

Family business is the most prevalent form of organization in the world. It has been estimated that as many as 90 % of businesses are either family owned or family controlled. A third of the firms listed on the S&P 500 and those of the Fortune 500 are family owned or controlled by families. Much of the governance literature focuses on the larger publicly owned non-family corporations rather than on the unique issues of the more prevalent family businesses. This chapter presents information to give the reader an understanding of the unique and complex nature of family owned businesses, their problems and challenges, and the unique governance structures and practices used to effectively manage a family business to greater performance. Due to the predominance of family members in upper management roles, which leads to a reduction of agency costs, family firms have less bureaucracy, allowing for fast decision-making and the creation of competitive advantages. Depending on the organizational structure, family firms have shown superior financial performance compared to their non-family counterparts. Goal congruency among the top management team and a long-term outlook are differentiating factors that lead to improved performance. Family firms, however, can also benefit from an increase in more formal governance mechanisms.