Why Family-Firm CEOs Underperform Professional CEOs

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:

Selling Off the Family Business

With the recent sale of The Washington Post to Jeff Bezos, the less-recent sale of the Wall Street Journal to Rupert Murdoch’s News Corp., and the N.Y. Times’s exuberant denial that it is for sale, one thing came to mind: family businesses.

Not an obvious common thread, perhaps. But I have long been interested in how family-run businesses succeed or fail -- and in fact this week have just re-released an hour-long Freakonomics Radio podcast on the topic, "The Church of 'Scionology'" (subscribe here). It features stories on a pair of family beer businesses -- Anheuser-Busch and Yuengling -- as well as the strange tale of adult adoptions in Japan in the service of corporate stability (i.e., if your son or daughter isn't up for the job of running your company, then you can simply adopt your successor).

The Post and Journal were long-held family businesses, the Post by the Graham family and the Journal by the Bancrofts. The Times, in an ownership structure similar to the Post, is a public company whose voting shares are controlled by the Ochs-Sulzberger family, and Arthur Sulzberger, like his ancestors before him, is the publisher of the newspaper. I haven't worked at the Times for some time but the feeling then -- and I am told that the feeling persists -- is that the Sulzberger family has done an extraordinary job of protecting the editorial integrity of the newspaper, as might be expected of a family steward, but has been less competent than one might wish in shepherding its business interests. (This is all speculation, of course, as there is no counterfactual.)

Why Family and Business Don’t Mix: A New Marketplace Podcast

One Woman's View of the Female Wage Gap

Jennifer Colosi runs a San Francisco executive search firm with a concentration in finance. Here's what she wrote in to say about our analysis of the persistent female-male wage gap:

Agreed with all you wrote about wage gaps between women and men.

Why yes, women do love kids!

You are exactly right - a higher wage isn't as important to some woman - because it comes at a "household" cost.

Introducing "AI: Adventures in Ideas," a New Blog Series from Sudhir Venkatesh. Episode 1: Going Solo

This is the first installment of a new Freakonomics.com feature from Sudhir Venkatesh.  Each AI: Adventures in Ideas post will showcase new research, writing, or ideas.

A new book is garnering significant attention. In Going Solo, Eric Klinenberg, a sociologist at NYU, looks at a growing trend in contemporary adulthood: living alone. How we live, Klinenberg argues, is shifting, and it could be one of the most important developments of the last half-century.

The Italian Debacle and the "Church of 'Scionology'"

The takeaways from our "Church of 'Scionology'" radio program were as follows:

+ Economists have found that family firms that pass the company down to the next generation perform worse than if they had brought in professional management.

+ Family firms are particularly dominant in less-developed countries, which tend to have weaker markets and rule of law. Here's Vikas Mehrotra on that point:

In the developed world, you have good contracting environments, a good system of law enforcement, and so on. So, in the developed world, you can hire professional managers and expect a certain, you know, sticking to the contract law, and so on. It’s rather more difficult to have the same kind of adherence to the rule of law in emerging economies. So, in emerging economies, family firms sort of provide a second-best solution to this poorly developed institutional problem.

The Economic Reasoning of "Ultimogeniture" of Amish Farms

My younger son’s family visited the nearby Amish country and did a tour of several farms. The guide mentioned that the youngest son usually takes over the farm from his father. The older brothers typically learn trades. She thought this happens because the father isn’t ready to give up the farm when the older brothers reach adulthood.

My economic explanation is that this minimizes the frequency of paying estate taxes (no longer a very binding constraint, but it was until quite recently). Perhaps this “ultimogeniture” is an illustration of an unusual excess burden generated by estate taxes. Or perhaps there’s another explanation? (Related: check out Freakonomics Radio on "The Church of 'Scionology.'")

Our Daily Bleg: How to Fairly Divide an Estate?

A while back, we ran a bleg in which a reader needed help dividing up a loved one's furniture and other property. Now a reader named M. writes with a trickier and more philosophical estate-dividing problem:

My grandmother is 93 and in decent health. She has 4 biological children, 10 grandchildren, 23 great-grandchildren and a great-great-grandchild is possible (the oldest great-grandchild is married.) She has a decent amount of assets; barring unforeseen circumstances her estate will be a few million dollars.

From the perspective of fairness, one might say the estate should be divided equally between the four children. From a purely biological perspective, an individual wants to see that his or her genetics be passed on to future generations. In our case, while one of the children produced two grandchildren who in turn have only one of the great-grandchildren, another child produced 5 grandchildren and they in turn 10 of the great-grandchildren.

A Very Interesting Paragraph From …

... Economic Lives: How Culture Shapes the Economy, by Viviana A. Zelizer, an economic sociologist at Princeton: Suppose for a moment that this is the year 2096. Let's take a look at American families: although by now money often takes postelectronic forms unfamiliar to the twentieth century, in the "traditional" home, "housewives" and "househusbands" receive monthly stipulated sums of money as salaries from their wage-earning spouses.

What Is Going on With Marriage?

You've probably heard the latest marriage narrative: With the recession upon us, young lovers can't afford to marry. As appealing as this story is, it has one problem: It's not true.