Why Family-Firm CEOs Underperform Professional CEOs

(Photo: José Alejandro Carrillo Neira)

(Photo: José Alejandro Carrillo Neira)

The topic of family businesses has long been of interest around here. Stephen Dubner wrote about it a few months ago, and our “Church of Scionology” podcast looked at the research on family firms.  A new working paper (abstract; PDF) from Oriana Bandiera, Andrea Prat, and Raffaella Sadun explores how the behavior of family firm CEOs differs from that of professional CEOs, and why the former seem to perform worse. If you had to sum it up in one word: sloth. From the abstract:

CEOs affect the performance of the firms they manage, and family CEOs seem to weaken it. Yet little is known about what top executives actually do, and whether it differs by firm ownership. We study CEOs in the Indian manufacturing sector, where family ownership is widespread and the productivity dispersion across firms is substantial. Time use analysis of 356 CEOs of listed firms yields three sets of findings. First, there is substantial variation in the number of hours CEOs devote to work activities, and longer working hours are associated with higher firm productivity, growth, profitability and CEO pay. Second, family CEOs record 8% fewer working hours relative to professional CEOs. The difference in hours worked is more pronounced in low- competition environments and does not seem to be explained by measurement error. Third, difference in differences estimates with respect to the cost of effort, due to weather shocks and popular sport events, reveal that the observed difference between family and professional CEOs is consistent with heterogeneous preferences for work versus leisure. Evidence from six other countries reveals similar findings in economies at different stages of development.

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  1. Enter your name... says:

    So successful CEOs (as measured by overall company performance) are those who *want* to be workaholics.

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  2. Alex says:

    These performance measurements are oriented towards public company shareholders interests. It’s probably long past due that people recognize corporations play a much larger role than simply generating profit. There are several other ways to measure performance, such as consumer satisfaction, product quality, employee satisfaction, non-C-level pay growth and ethical behavior. Without the data it’s difficult to determine if professional CEOs trully outperform family-firm CEOs.

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  3. Andrew B says:

    My comment is not very scientific but a great example – Jim Buss, taking the Lakers from a great organization to a mess.

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  4. M McD says:

    Occasional reader but never a commenter here…

    This particular tidbit belongs in the useless category. This smacks of someone setting out to “prove” a foregone conclusion. I wasn’t willing to purchase the paper so maybe there is enough detail in it to substantiate the headline but I doubt it. As another reader pointed out, the definition of performance is at the root of the question. Small, family run businesses can make decisions that adversely affect the traditional or academic view of performance but are in the overall best interest of the owners.

    I would also challenge the use of the term “sloth”. From personal experience in watching a friend grow from nothing to a multi-billion dollar business, no one worked harder, put in more hours or took less from the business in its formative years than he did. He took risk and delayed rewards that no “professional” CEO would have. Trying to compare a business such as his to a publicly owned company in the same market segment is a “Apples” and Oranges” comparison, not relevant in the real world.

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  5. carmen_lence@yahoo.com says:

    I have to say, this is the weakest study about Family Companies I have ever read and the conclusions are just ‘weak’.
    Here you have a research from HBS that proofs just the opposite: http://hbr.org/2012/11/what-you-can-learn-from-family-business
    “Our results show that during good economic times, family-run companies don’t earn as much money as companies with a more dispersed ownership structure. But when the economy slumps, family firms far outshine their peers. And when we looked across business cycles from 1997 to 2009, we found that the average long-term financial performance was higher for family businesses than for nonfamily businesses in every country we examined.”

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