Family-owned businesses hold non-family CEOs more accountable than family CEOs for firm performance

Family-owned businesses account for 59% of the U.S. private workforce, with 35% of Fortune 500 companies being family-owned. Although family-owned firms employ more than half of the U.S. workforce, little is known about their operations due to the secretive nature of their corporate governance.

When it comes to leadership succession, it’s well-known that family-owned firms tend to “keep it in the family” to ensure control and loyalty among other reasons, but some situations arise when non-family CEOs are considered the best successors. But are there differences in the accountability standards to which non-family CEOs are held compared to those applied to family CEOs?

“We expect non-family CEOs to be treated differently than family CEOs, but we wanted to identify the difference and at what stage in the CEO’s tenure the difference becomes more pronounced,” said Cecilia Gu, associate professor of international business at Georgia State University’s J. Mack Robinson College of Business.

To answer that question, Gu and a team of academic researchers analyzed 20 years of data from a sample of family-owned firms in Taiwan spanning 1995–2015, looking at how family CEOs were measured on financial performance compared to non-family CEOs across different stages of CEO tenure.

Eighty percent of firms in Taiwan are controlled by founding families, with many led by non-family CEOs. The sample analyzed by Gu and team included 532 family-controlled firms, examining the tenure of 680 non-family CEOs and 674 family CEOs.

Their research, published in Family Business Review, found at the mid-stage of CEO tenure (typically five-seven years) non-family CEOs are held more accountable for financial performance than family CEOs.

During this stage, both non-family and family CEOs are evaluated closely for financial performance. Either could be fired due to negative financial performance, but the odds are far higher for a non-family CEO, with more than a 40% chance of firing, compared to a less than 20% chance for a family CEO.

“Family-owned firms tend to be long-term oriented, and they don’t always use financial performance as a reason for turnover decisions. But when financial performance does come into play, we found it usually happens at the mid-stage of CEO tenure,” said Gu.

“During the early and late stages of a CEO’s tenure, other metrics are used to evaluate CEO performance and financial performance is less scrutinized, which is unique to family firms.”

During the early stage, the controlling members of family firms are focused on observing non-family and family CEO behavior, such as loyalty and other behavior-based outcomes, and are less concerned with their company’s financial performance .

Both family and non-family CEOs also are less likely to be held accountable during the late stages of their tenure because they have established trust and proven their abilities to grow the company.

“Controlling members of family firms tend to be more patient with financial performance than other firms, because they are focused on building long-term financial wealth and long-term succession, rather than short-term performance,” said Gu.

“This research helps us better understand how family firms make leadership decisions and findings reveal it’s not as simple as family always favored over non-family leadership,” Gu said.