Is Diversity Management Related to Financial Performance in Family Firms?

Abstract

Policies and practices designed to foster diversity in organizations are now well integrated into a firm’s corporate strategy. In this article, we examine the role diversity management policies play in the financial performance of family firms, based on the premise that family firms have unique goals and governance structures that may affect the adoption of such policies. Using a longitudinal data set covering 952 publicly listed firms and multidimensional measures for diversity and financial performance, our empirical analyses suggest that family firms underperform nonfamily firms on diversity performance indicators. Interestingly, however, we find that the weaker diversity management practices of family firms may contribute to their robust financial performance.

Keywords

diversity management policies clan control social issues financial performance family firms

Introduction

The reality of current competitive consumer and labor markets compel firms to adopt workforce diversity management policies and practices for strategic and practical reasons. In a review of the literature on workplace diversity, van Knippenberg and Schippers (2007) called for more empirical attention to the contexts that foster or hinder diversity in organizations. A meta-analysis by Joshi and Roh (2009) identified contextual factors that could affect diversity management singling out managerial demography, culture, and leadership as avenues for future inquiry. We believe that family firms offer an interesting context to study diversity management.

Previous research has found that family firms demonstrate better social and financial performance than nonfamily firms. In a study evaluating different dimensions of socially responsible performance among 261 firms (59 family and 202 nonfamily firms), Dyer and Whetten (2006) reported that family firms tend to be more socially responsible than their nonfamily counterparts—principally due to the desire to maintain the firm’s image and the family’s reputation. Similarly, Marques, Presas, and Simon (2014) attributed the comparatively enhanced level of heterogeneity in CSR engagement by family firms to the role of family values. In terms of financial performance, recent studies have indicated that U.S. publicly traded family firms financially outperformed nonfamily firms (Stewart & Hitt, 2012; van Essen, Carney, Gedajlovic, Heugens, & van Oosterhout, 2010). Yet the relationship between specific components of social performance, such as the implementation of diversity management policies and financial performance has not been explored in the family business literature. Although some scholars dispute a link between diversity management and a company’s bottom line, others support the value-in-diversity connection (Herring, 2009; Jayne & Dipboye, 2004; Singal, 2014). Based on the multiple logics of maintaining family values, preserving clan control and social capital, and pursuing parsimonious practices, in this article we posit that family firms will be less responsive to pressures for proactive diversity management than nonfamily firms. The purpose of this study is to (a) examine and compare the diversity management policies and practices of family and nonfamily firms, and (b) test what effect these policies and practices have on the financial performance of both types of firms.

Diversity management refers to policies and practices implemented by a firm that are designed to increase the representation of underrepresented groups (women, minorities, the disabled, the elderly, and the LGBT community) in leadership and top-level positions within the organization, or as contractors and suppliers to the firm. In addition to adding a significant degree of cultural intelligence to an organization, diversity management policies mitigate legal concerns arising from the nonrepresentation of such groups. Diversity management in this study is examined from a corporate strategy perspective rather than a behavioral perspective; as such, we examine policies that are at the firm level and not at the individual or group level.

Based on our empirical analysis of firms in the S&P 500 Index, we find that family firms tend to implement fewer diversity management policies and practices than nonfamily firms. This result is based on a longitudinal sample covering the years 1991-2011 indicating that family firms are less likely to meet the requirements for the MSCI’s ESG¹ (Environmental, Social, and Governance) diversity indicators when compared with nonfamily firms. Specifically, family firms are less likely to have women or minorities in top-line management positions or on boards of directors; they are also unlikely to pursue diverse representation in supplier contracting. Interestingly, however, the lack of diversity in family firms does not appear to detract from their financial performance.

This study contributes to the family business literature in several ways. First, we elucidate the diversity management policies of family firms vis-à-vis issues concerning family values and clan control governance. Second, we use the constructs of parsimony, social capital, legacy building, and culture to explain the adoption of diversity management initiatives among family firms thus addressing the point raised by Sharma (2006) in her review of family business research, that “the impact of family firms at the societal level has largely been ignored . . .” (p. 43). Third, we extend the research of Neubaum, Dibrell, and Craig (2012) who empirically demonstrated that in family firms, external stakeholder pressure—such as promoting environmental responsibility—can be enhanced by leveraging the power of internal stakeholders, namely employees. Finally, we test the strategic effect of socially progressive diversity management policies by comparing the link between diversity management and financial performance in family and nonfamily firms.

Theoretical Background and Hypotheses

Diversity Management and Clan Control

Family firms engage in corporate social responsibility (CSR) on a number of dimensions and for various reasons. Dyer and Whetten (2006) reported that they do so “due to family concern about image and reputation and a desire to protect family assets” (p. 785). More recent studies examining aspects of CSR among family-run businesses—including sustainability and ecocertification (Delmas & Gergaud, 2014), philanthropy (Campopiano, de Massis, & Chirico, 2014) and charitable giving (Dou, Zhang, & Su, 2014)—have indicated that the degree of CSR in family firms is affected by factors such as family involvement and the likelihood that the business will be passed down to future generations.

Marques et al. (2014) attribute the heterogeneity of family firms in CSR engagement to the degree of family involvement in the business and the values derived from the stewardship and the socioemotional wealth perspectives of family firms. In their qualitative study of 12 Spanish family firms, the authors report that in high-involvement firms, identification and commitment are critical values to internal stakeholders such as employees and managers. In selecting the scope of CSR engagement, identification, employee loyalty, binding social ties, and the feeling of being part of a team are important criteria. We contend that diversity management is one such dimension of CSR engagement that will be influenced by family involvement, social values, and economic goals.

Carney (2005) theorizes that the value-creating capabilities of family firms are embedded in their corporate governance structures via the propensities toward parsimony (expend resources carefully), personalism (authority incorporated in the person versus the role), and particularism (ability to apply self-chosen criteria when making decisions). Although these propensities may drive revenue generation, we contend that they may not be conducive to embracing diversity management policies. Family firms are known for encouraging career longevity for top managers and for their reluctance to shed human capital during economic downturns. Nonetheless, the costs incurred for recruiting, training, and developing a heterogeneous workforce and providing family benefits represent initiatives that may negatively affect the bottom line, which in the end contradicts the principle of parsimony. While particularism may allow for freedom of contracting, it may also encourage family owners to rely on a few trusted and long-standing partners for creating deals or appointing suppliers (Sirmon & Hitt, 2003; Uzzi, 1997). Similarly, even though personalism and particularism may create social capital both internally and externally, the idiosyncratic preferences of kinship or community put family firms at higher risk for forming barriers to diversity initiatives in comparison with nonfamily firms.

Even if personalism and particularism are limited in large family firms subject to public monitoring, these organizations are likely to exercise control predominantly along family lines and clan control. Clan control in family firms can arise from ownership stakes that result from investment, inheritance, and social agreements where key members share core values and beliefs. While assessing organizational transitions of Australian family firms, Moores and Mula (2000) identified clan control as a basis for dominant control practices. We believe that conditions described by Wilkins and Ouchi (1983) that encourage the development of clan control readily apply to family firms. First, a long history and stable membership in family firms, sometimes spanning several generations, ensures stability and allows time for traditions and complex social understandings to develop. Second, institutional memory, knowledge of the business, and an organizational culture passed on to successive generations creates the institutionalization of norms, resulting in insulating the firm from outside influences. Finally, close and frequent interactions among members facilitate forming implicit traditions and a common understanding of the organization, thereby fostering a unique culture for the family firm. Clan control thus implies that traditions, values, and social agreements influence the operations of the firm via enactment of policy and the setting of common goals.

We believe that policies relating to diversity management are antithetical to clan control in family firms for two reasons. First, decision makers will be selected and promoted through careful screening to ensure that they bring not only skills but also the potential to sustain the prevailing norms and strong culture of the firm. Hall and Norqvist (2008) argue that the pervasiveness and influence of culture in family firms implies that managers without cultural competence—defined as “an understanding of the family’s goals and meanings of being in business” (p. 58)—will not be effective. Thus, a strong culture, which is often correlated with positive organizational performance, may be resistant to change, leading to conservatism and the inability to adapt to fast-changing external environments and to embrace diversity initiatives (Deal & Kennedy, 1982). Second, family firms are characterized by a unique resource base in terms of their social capital, which also promotes organizational social capital. While social capital adds value by facilitating successful collective decision-making, it may impede the adoption of diversity-related policies. Arregle, Hitt, Sirmon, and Very (2007) propose that family firms derive their organizational capital in large part from the family’s social capital through organizational identity, human resource practices, and social network overlaps. Hence, managers who identify with the organization’s history and accomplishments and share the values of family members may be promoted to further continuity and stability goals, rather than objective merit-based criteria alone. Interestingly, in their comparison study of the career trajectory of Italian CEOs at large family and nonfamily firms, Salvato, Minichilli, and Piccarreta (2012) found that managerial careers of both family and nonfamily CEOs were quicker in family-run firms, and within family firms, family managers reached the penultimate position reporting to the CEO faster than nonfamily managers.

While studying the succession practices of family and nonfamily firms, Fiegener, Brown, Prince, and File (1996), reported that in some cases, family firms tended to undervalue managers considered well-trained by industry standards, evidenced by the fact that they rarely emphasized outside work experience and university training in promotion decisions. Similarly, as noted above, since family social networks constitute a unique resource for the firm (Arregle et al., 2007), long-standing supplier relationships are also likely to be institutionalized. In short, family firms are more inclined to contract with a few trusted dealers, precluding the likelihood of adopting diversity management policies (e.g., hiring minority contractors) unless mandated by law.

An important difference between family and nonfamily firms is often noted in the pursuit of noneconomic goals by family firms (Chrisman, Chua, & Zahra, 2003). Family values such as maintaining harmony or altruistic attitudes toward kin may make family firms more likely to resist the appointment of independent or nontraditional members on boards of directors, even when their inclusion could enhance the firms’ financial interests. Although some research points to the importance of board-member diversity in increasing firm performance (Erhardt, Werbel, & Shrader, 2003), family firms may be resistant to including “others” as it could diminish the decision-making power of often-entrenched family members (Anderson & Reeb, 2004). Furthermore, when family firms choose affiliate directors, they are likely to appoint persons with long-standing close connections to the family who can be trusted to understand and respect the family’s traditions and values (Jaskiewicz & Klein, 2007). In essence, we propose that due to the nature of clan control where (a) entry is restricted by birth or kinship and (b) values and traditions are sustained through stable membership that requires high commitment to, and agreement with, existing implicit rules, family firms are unlikely to initiate proactive diversity management policies that may affect the composition and character of top management.

While clan control and the legacy of past practices may discourage family firms from adopting socially progressive diversity management policies, at the same time they will seek to avoid socially irresponsible behaviors that may draw unwanted media attention that damage both the family name and their business reputation. Dyer and Whetten (2006) argue that even though family firms may be reluctant to incorporate significantly different social initiatives in comparison with nonfamily firms, they are known to be more careful about protecting their cultivated image and guard against loss of reputation that may harm the family’s assets via negative publicity or legal action. Family firms are thus unlikely to act in any manner that may damage their “reputation capital,” especially when there could be negative economic consequences of noncompliance with regulations or controversial actions related to diversity management. Therefore, we hypothesize that

Hypothesis 1: Family firms will incorporate weaker diversity management policies than nonfamily firms. In particular, they will be less likely than nonfamily firms to have diverse representation in top management, on the Board of Directors, in CEO positions, or in engaging external suppliers.

Diversity Management and Financial Performance in Family Firms

As a multidimensional construct, diversity at the organizational level lacks a rigorous definition and accepted measure (Jackson, Joshi, & Erhardt, 2003; van Knippenberg & Schippers, 2007). The most prevalent attributes examined in prior studies relate to individual demographic variables such as sex, racial, and ethnic diversity, and age—while ignoring the inculcation of firm-level initiatives that specifically target diversity management (Jackson et al., 2003). In this article, therefore, diversity management is conceptualized and operationalized as the existence of programs and policies that encourage the participation of a broad spectrum of societal groups at all levels of the organization.

Few studies link diversity management to financial performance—and those that do fail to yield any clear-cut consensus regarding the business case for diversity management (Joshi & Roh, 2009). On one hand, Richard and others (Richard, Barnett, Dwyer, & Chadwick, 2004; Richard, Murthi, & Ismail, 2007) investigated the relationship between diversity and performance, reporting that racial diversity in management is positively correlated with productivity in firms that display an entrepreneurial orientation, although the relationship is curvilinear. They also indicate that racial diversity correlates with long-term performance in supportive environments. On the other hand, while some studies link diversity management to enhanced business performance (Herring, 2009; Singal, 2014; Wright, Ferris, Hiller, & Kroll, 1995), others have found this relationship either nonexistent or even negative (Kochan et al., 2003).

Corporate diversity management policies require the explicit commitment of the top management; they can also be costly and time consuming over a sustained period to implement. As reported by Jayne and Dipboye (2004), an added problem is that the benefits or return-on-investment of instituting diversity management policies may not be immediately tangible, much less measurable in terms of a company’s bottom line (Jayne & Dipboye, 2004). Hansen (2003), for example, estimated that organizations spend more than $8 billion annually on diversity training and other programs such as flexible work arrangements, efforts for diversity recruitment, and sponsored affinity groups. When the benefits of this investment are not readily realized, owners and investors may question the utility of such spending. In the case of family firms, maintaining long-standing relationships with employees and suppliers is both comfortably reliable and fiscally prudent, since it is less expensive for them to hire from a familiar pool of applicants and contractors rather than invest in recruiting from nontraditional sources. Therefore, investing in diversity management policies may prove to be more costly than investing in current employees, which fosters greater loyalty and emotional bonds with the company and its owners. Similarly, contractual and transaction costs may increase when dealing with diverse suppliers with whom the firm may not have had a long-term relationship—again, adding to the overall cost structure of the firm (Williamson, 1979). Therefore, it may well be the case that family firms reap a cost advantage over nonfamily firms due to a lack of implementation of diversity management policies.

Although several studies have demonstrated that large publicly owned, family-controlled firms in the S&P 500 index and Fortune 500 list financially outperform their nonfamily counterparts (Amit & Villalonga, 2014; Stewart & Hitt, 2012),² the mechanisms through which this superior performance is achieved are not clear. Scholars have attributed performance advantages to leveraging social capital (Arregle et al., 2007), lower agency costs (Chrisman, Chua, & Sharma, 2005; Jensen & Meckling, 1976), stewardship behavior (Miller & Le Breton-Miller, 2005), and the “family effect” (Dyer, 2006). In their meta-analysis, van Essen et al. (2010) suggested that future studies should examine moderating influences on the link between family firms and financial performance. Therefore, building on past evidence regarding the link between family firms and financial performance, as well as the role of diversity management in financial performance, we ask the following empirical question: How does diversity management of family firms affect their financial performance?

In our next set of hypotheses, we suggest that

Hypothesis 2: Financial performance will be higher in family firms compared with nonfamily firms.

Hypothesis 3: Diversity management will moderate the relationship between family firms and financial performance.

Methodology

Sample and Sources

To test these hypotheses and examine the broader question of diversity management in family firms, we selected a sample of firms in the Standard and Poor’s U.S. 500 index (S&P 500). This sample represents lead firms in important industries in the U.S. economy and has been used in previous research (Anderson & Reeb, 2003, 2004; Chen, Cheng, & Dai, 2013; Dyer & Whetten, 2006). We used two main data sets—one for diversity management and the other for financial information. Performance on social responsibility including diversity management has been measured in several ways: surveys including Fortune reputation indices (Waddock & Graves, 1997), and MSCI’s ESG database, formerly known as the KLD database (Bingham, Dyer, Smith, & Adams, 2011). According to Liston-Heyes and Ceton (2009), the ESG database is possibly the best instrument for measuring a number of CSR dimensions of publicly traded U.S. firms due to its long history (from 1991 onward) and because it includes a large number of firms. It had 116 indicators until 2009 and 77 indicators thereafter, uses multiple data sources, and independent assessors. We rely on the ESG database for diversity management measures since it has been extensively used and validated for quantitative analysis of firm policies and corporate social performance (Hillman & Keim, 2001; Waddock & Graves, 1997).³ We obtain our financial performance measures from Standard and Poor’s Compustat data set, and our credit ratings from Standard and Poor’s Ratings database.

Our sample period encompasses 1991 to 2011, concurrent with data available from the MSCI ESG data set for diversity indicators.⁴ We matched S&P 500 firms with the ESG data set and Compustat using 8-digit CUSIPs, which were available on both databases. When we were unable to match firms using CUSIPs, we matched those manually using names and ticker symbols. To eliminate survivorship bias we did not drop firms from the sample even if they were eliminated from the S&P 500 (Brown, Goetzmann, Ibbotson, & Ross, 1992) provided they did not cease to exist. Our final sample consisted of 8,430 firm-years when credit ratings were used as a measure of financial performance; it consisted of 10,375 firm-years based on 952 unique firms when Tobin’s Q was used to measure financial performance.

Variables

1. Family firm: Our definition of family firm is based on the conceptualization of ownership and control by Chrisman, Chua, and Litz (2004); its operationalization is based on Anderson and Reeb’s (2003) study, using fractional ownership and membership of family members on the Board of Directors as classification criteria. The binary variable, FamFirm was set to 1 for family firms and 0 otherwise. The key determinant in all cases was the presence of family members on the board of directors to ensure that the family had control over the firm. We did not require a definitive minimum percent of ownership by the family for classification as a family firm because the S&P 500 firms are large firms and many founders/families may continue to exercise control over the firm without substantive ownership. Classification of firms into the family-related categories is laboriously obtained and verified from proxy statements filed with the SEC; Business and Company Center of Gale group; and Hoover’s Online corporate database, along with Corporate and other websites, including company-histories.com.

2. Diversity indicators: Diversity management is determined by specific annual ESG diversity indicators of two types: strength indicators and concern indicators. An indicator denotes strength if a firm’s policies and actions in that arena are positive for diversity management. These include a woman or minority as the CEO, promotion of women and minorities, diversity on the Board of Directors, outstanding work–life benefits, promoting diversity among subcontractors, and a policy for employing the disabled and providing benefits to domestic partners. On the other hand, nonrepresentation of diverse candidates in the top management is a concern indicator. The other concern indicator we use is controversies, an indicator of notable discrimination controversies. Each ESG indicator is a binary variable: 1 if the firm meets the criteria for the indicator, and 0 if the firm does not.⁵

In addition to individual diversity indicators, we aggregate individual indicators into three composites: a Strengths Composite, which is an equally weighted combination of diversity strengths, a Concerns Composite as an equally weighted combination of negative indicators, and a Diversity Composite. The Diversity Composite is an overall index that combines the Strengths Composite and the Concerns Composite into a single index a ratio:

\frac{1 + S t r e n g t h s i n d e x}{1 + C o n c e r n s i n d e x}

The Concerns Composite is in the denominator because higher values of the Concerns Composite indicate poorer diversity management. Similarly, higher values on the Strengths Composite indicate superior diversity management (1 is added to the numerator and denominator because both strengths and concerns indexes can be 0). Although the aggregation of indicators reduces the granularity of individual impact and contribution, composite indicators have been used successfully in the past (Dyer & Whetten, 2006).

3. Financial performance: We use Tobin’s Q, a commonly used measure for financial performance of a firm as an indication of its future growth opportunities (Anderson & Reeb, 2003). We introduce and use an additional measure of performance, credit rating. Credit ratings are useful because they judge the solvency of the firm by using a firm’s past performance, its current performance, and its future expected performance. Rating agencies also use private information from the firm that is not always available in the public domain. The utility and appropriateness of credit ratings as a measure of performance has been validated in previous research (Hand, Holthausen, & Leftwich, 1992). Credit ratings are also easily comparable across different firms and provide direct information about financial slack available for discretionary investments such as investments in diversity management policies and practices. Rating is operationalized by converting the alphabetic scale to a numeric scale: AAA translates to 24 and D at the lower end is equivalent to 1.

4. Control variables: The final group of variables consists of the control variables, that is, size, industry, and leverage. Size of the firm is measured using the logarithm of assets, an accepted measure in studying corporate social performance and other kinds of corporate performance (Brammer, Brooks, & Pavelin, 2006; Waddock & Graves, 1997), Industry is identified using the 48 industries identified by Fama and French (1997) based on SIC codes obtained from CRSP files (Center for Research in Security Prices at the University of Chicago), and Leverage is defined as total debt to total equity (debt–equity ratio).⁶

Method

To test the hypotheses developed above, we use t tests to examine differences between family and nonfamily firms for diversity indicators and measures of performance. In addition, we rely on multivariate regression models to evaluate the relationship between diversity management and family firms, controlling for firm-specific variables. Finally, to mitigate endogeneity issues, we examine how changes in diversity management are related to changes in financial performance in family firms. The full regression model for this approach is estimated by the model below:

Δ F i n P e r f_{i t} = β_{1 i} Δ D i v e r s i t y_{i t} + β_{2 i} Δ D i v e r s i t y_{i t} \times Δ F a m F i r m_{i t} + β_{3 i} L e v e r a g e_{i t} + β_{4 i} L o g S i z e_{i t} + ε_{i t}

Results

Correlation Between Diversity Composites and Firm Characteristics

Table 1⁷ provides descriptive statistics of the sample and a correlation matrix of diversity composite indexes, performance measures, and firm characteristics, showing that 28.7% of the firms are family firms, while the remaining are nonfamily firms. The mean credit rating of 17.38 corresponds to a BBB+ on the alphabetic scale. The mean firm size is $8.43 billion in assets among the S&P 500 firms (when converted from a natural log of 9.04). A firm with limited growth opportunities will have a Tobin’s Q of 1. Thus, a mean Q of 1.78 implies that firms in the sample derive a significant part of their market value from expected future performance. The sample firms have a mean debt–equity ratio of 69%. Since certain accounting numbers may have extreme values, we winsorize total assets, Q, and leverage at the 1% and 99% percentiles. The Diversity Composite, Strengths Composite, and Concerns Composite are 1.85, 1.08 and 0.24. The raw numbers are not meaningful but we discuss their correlations and analyze them in subsamples later. While not tabulated, more than 90% of the 48 Fama-French industries are represented in the sample.

Table 1.

Correlations Among Firm Characteristics and Measures of Diversity.

Variable	Firm-years	M	SD	Family firm (FamFirm)	Credit rating	Firm size	Tobin’s Q	Leverage	Diversity Composite	Strengths Composite
Family firm (FamFirm)	10,375	28.7%	45.2%	1.00*
Credit rating	8,430	17.38	3.09	−0.01	1.00*
Firm size (log of total assets)	10,186	9.04	1.52	−0.16*	0.35*	1.00*
Tobin’s Q	10,171	1.78	1.08	0.15*	0.29*	−0.22^{^}	1.00*
Leverage	10,145	69.3%	13.9%	−0.13*	−0.13*	0.37*	−0.28*	1.00*
Diversity Composite	10,375	1.85	1.29	−0.06*	0.17*	0.37*	0.08*	0.05*	1.00*
Strengths Composite	10,375	1.08	1.35	−0.06*	0.14*	0.44*	0.06*	0.10*	0.91*	1.00*
Concerns Composite	10,375	0.24	0.44	0.06*	−0.11*	0.02^{^}	−0.04*	0.05*	−0.36*	−0.02^{^}

Note. Tobin’s Q, leverage, and firm size have been winsorized at the 1st and 99th percentiles. Strengths Composite Index consists of CEO, Promotion, Board, Contracting, Disabled, Domestic Partners, and Family Benefits. Concerns Composite Index consists of nonrepresentation and controversies.

p < .05. *p < .01.

The correlations reported show that family firms are smaller in size than nonfamily firms, are less leveraged, and exhibit better performance as measured by Tobin’s Q, although their rating is not different from nonfamily firms. The Strengths Composite is significantly negatively correlated with family firms indicating that strength indicators tend to be lower for family firms than for nonfamily firms. The Concerns Composite that measures the diversity concerns exhibited by a firm is larger for family firms than for nonfamily firms. Recall that for concern indicators, a 1 implies presence of a concern, so a higher score shows lower diversity-related performance.

Differences in Diversity Strengths and Concerns

The differences in individual strengths and concerns between family and nonfamily firms are presented in Panel A of Table 2, where the top section contains overall composites, the middle section contains individual strength indicators and the bottom section contains individual concern indicators. The Diversity Composite, including all strengths and concerns, is statistically smaller for family firms than for nonfamily firms (0.179) and is consistent with Hypothesis 1, which states that family firms will have lower diversity management than nonfamily firms. The remaining two sections of Panel A show differences in individual indicators, the Strengths Composite, and the Concerns Composite. The Strengths Composite consists of seven diversity strength indicators and the Concerns Composite consists of two diversity concern indicators. The Strengths Composite is 1.134 for nonfamily firms, and 0.960 for family firms, a statistically significant difference suggesting that family firms take fewer diversity-related initiatives when compared with nonfamily firms, similar to the result in Table 1. The Concerns Composite is significantly higher for family firms (0.281) compared with nonfamily firms (0.222), consistent with the correlations reported in Table 1.

Table 2.

Diversity and Family Control.

Panel A: Differences in diversity due to family control
Variable	Family firms	Nonfamily firms	Diff
Diversity Composite	1.719	1.898	−0.179*
Strengths
Strengths Composite	0.960	1.134	−.174*
CEO	0.033	0.029	.004
Promotion	0.262	0.280	−.019^~
Directors	0.122	0.169	−.048*
Family benefits	0.153	0.208	−.055*
Subcontractors	0.072	0.132	−.059*
Disabled employees	0.045	0.046	−.001
Gay/lesbian	0.275	0.271	.004
Concerns
Concerns Composite	.281	.222	.059*
Nonrepresentation	.188	.121	.067*
Controversies	.093	.101	−.007
Panel B: Regression results for diversity composites and family firms
Dependent variable—Diversity composites
Independent variables	Diversity	Strengths	Concerns
Independent variables	Model 1	Model 2	Model 3
Intercept	−1.927*	−3.419*	0.228*
Family firm	−0.114*	−0.077*	0.061*
Leverage	−0.069*	−0.066*	0.002
Log size	0.412*	0.538*	0.039
Tobin’s Q	0.284*	0.323*	0.000
Rating	−0.022*	−0.052*	−0.022*
N	8,279	8,279	8,279
Adjusted $\bar{R}$	17.3%	24.0%	2.8%

p < .10. *p < .01.

The results in Table 2 for individual diversity indicators show that family firms are less diverse than nonfamily firms based on differences in means. Family firms tend to rate lower than nonfamily firms on the presence of women and minorities in positions of responsibility management (Promotion: 0.262, 0.280) and on the board of directors (Directors: 0.122, 0.169), lower on the utilization of women and minority contractors (Subcontractors: 0.072, 0.132), and lower on the presence of family benefits (Family Benefits: 0.153, 0.208). For other indicators described in the ESG data set like hiring of the disabled, providing domestic partner benefits for gay/lesbian employees, or employing minority or women CEOs, we found no significant differences, probably due to the small number of such occurrences in both types of firms.

Among concerns, there is a statistically significant difference among family and nonfamily firms for the Nonrepresentation diversity indicator, which is consistent with the lack of diversity management in top management and the board of directors (Nonrepresentation: 0.188, 0.121). However, there is no significant difference among firms by type for Controversies. Thus, family firms are less proactive in promoting minorities, including them in the Board of Directors, or using them as subcontractors when compared with nonfamily firms.

Differences in Strengths and Concerns: Regression Results

Since the univariate analysis in Panel A of Table 2 does not control for several other firm characteristics such as size, leverage, financial condition, and industry, in Panel B of Table 2, we examine the relationship between firm ownership and diversity management in a multivariate regression framework. This analysis uses the Diversity, Strengths, and Concerns, Composites as the dependent variables, and size, leverage, financial performance, and industry sector as control variables, while the family firm variable serves as the key independent variable of interest.

In Model 1, with the overall Diversity Composite as the dependent variable, the coefficient on FamFirm, is negative and significant (β = −0.114) indicating that family firms are less likely than nonfamily firms to have strong outcomes related to diversity. Separating ESG indicators into strengths and concerns (Models 2 and 3) shows that the family firms are both less likely to invest in strengths and new initiatives as well as more likely have concerns with diversity management when compared with nonfamily firms. The results of both the univariate and regression analyses thus lend support to Hypothesis 1, showing that there is a significant difference in the policies and investment of family firms and nonfamily firms in diversity management.⁸

The other coefficients in Models 1 and 2 indicate that larger firms, as measured by size of assets, invest more in diversity management, and firms that are less financially constrained as shown by lower leverage also invest more in diversity management. The results for Tobin’s Q and credit rating are inconsistent, whereas higher Q firms have higher diversity management, higher credit rating firms have lower diversity management. We conjecture that this is so because higher Q firms represent firms with high growth opportunities that require a diverse skill set in top management, whereas higher credit rating firms are more stable and conservative in outlook.

Financial Performance and Family Control

Financial performance, measured by Tobin’s Q and credit rating, is reported in Panel A of Table 3. The information presented in Table 3 shows that while family firms exhibit statistically significantly superior performance relative to nonfamily firms when performance is measured by Tobin’s Q, there is no significant difference when performance is measured by credit rating. This relationship is further examined in the regression framework reported below.

Table 3.

Financial Performance and Family Control.

Panel A: Differences in financial performance because of family control
Variable	Family firms	Nonfamily firms	Diff
Tobin’s Q	2.04	1.68	.34*
Credit rating	17.34	17.39	−.05
Panel B: Regression results
	Dependent variables
Independent variables	Tobin’s Q	Rating
Independent variables	Model 4	Model 5
Intercept	1.985*	9.497*
Family firm	0.246*	0.283*
Leverage	−0.114*	0.568*
Log size	−0.041*	0.963*
Industry sectors	Yes	Yes
N	10,145	8,279
Adjusted $\bar{R}$	30.7%	31.1%

p < .01.

Panel B of Table 3 reports regression results while controlling for firm-specific characteristics. The coefficient on family firm is positive and statistically significant for all three measures of financial performance. A coefficient of 0.246 on FamFirm with Tobin’s Q as the dependent variable implies that Q is higher by 0.246 for family firms. Similarly, a coefficient of 0.283 on FamFirm with Rating as the dependent variable implies that Rating is higher by 0.283 for family firms. Consistent with Hypothesis 2, which was based on prior research (Amit & Villalonga, 2014; Anderson & Reeb, 2003; van Essen et al., 2010), these results show that family firms have higher financial performance than nonfamily firms.

The coefficients on Size show that Tobin’s Q decreases as firms become larger while Rating improves with size. This result is similar to the correlations in Table 1 and illustrates the difference in the two measures of financial performance. Smaller firms, presumably in an early stage of their lifecycle, are likely to have greater future opportunities but the uncertainty related to those opportunities results in greater volatility of their earnings. As a result, we observe higher Tobin’s Q in smaller firms due to their growth opportunities but lower credit rating due to greater risk. Leverage is positively correlated with size as larger firms are likely to be mature and stable, enhancing their ability to borrow. As, in the case of Size, leverage is negatively related to Tobin’s Q and positively related to credit rating.

Diversity Management and Financial Performance

Results in Table 2, showed a negative relationship between family firms and diversity management, whereas results in Table 3, showed that family firms have superior financial performance when compared with nonfamily firms, therefore in this section, we examine whether the lower diversity management by family firms affects their financial performance. This analysis is conducted using a change-on-change approach, as modeled in the equation specified in the “Methods” section, and the results are reported in Table 4 for the Diversity Composite.⁹

Table 4.

Diversity Management and Financial Performance.

	Dependent variable
	Change in Tobin’s Q	Change in Tobin’s Q	Change in Tobin’s Q	Change in rating	Change in rating	Change in rating
Independent variables	Model 6	Model 7	Model 8	Model 9	Model 10	Model 11
Sample	All firms	Family firms	All firms	All firms	Family firms	All firms
Intercept	0.288*	0.440*	0.289*	−0.358^{^}	0.127	−0.355^{^}
ΔDiversity Composite	−0.008	−0.062*	0.014	0.025	−0.065	0.051^{^}
ΔDiversity Control × FamFirm			−0.077*			−0.107*
Leverage	−0.010^~	0.031	−0.009	−0.186*	−0.372*	−0.186*
Log size	−0.032*	−0.059*	−0.033*	0.033^{^}	0.018	0.033^{^}
Industry sectors	Yes	Yes	Yes	Yes	Yes	Yes
N	9,114	2,576	9,114	7,369	1,872	7,369
Adjusted $\bar{R}$	0.2%	0.15	0.4%	2.6%	5.3%	2.6%

p < .10. ^{^}p < .05. *p < .01.

From Model 6 in Table 4, we observe that β₁ is not statistically significant implying that a change in the Diversity Composite does not affect Tobin’s Q. However, for family firms only (Model 7), an increase in the Diversity Composite significantly negatively affects Tobin’s Q: Q falls by 0.062 for every 1.0 increase in the Diversity Composite. Further analysis with an interaction term between Change in Diversity Composite and FamFirm (Model 8) confirms that a change in the Diversity Composite does not affect Tobin’s Q of nonfamily firms. However, the coefficient on the interaction term is statistically significantly negative further reaffirming the results from Model 7. The regression estimates with change in Rating as the dependent variable are reported as Models 9 to 11. The results in Model 9 are similar to the results in Model 6 showing that Rating is not affected by a change in diversity management. Read together, Models 10 and 11, show that an improvement in the Diversity Composite improves the Rating of nonfamily firms but hurts the Rating of family firms when compared with nonfamily firms.

Overall, the results in Table 4 strongly suggest that the financial performance of family firms is not hindered by their limited diversity management policies. On the contrary, underinvesting in diversity management efforts may actually enhance their financial performance—providing that they avoid controversy as a result of having consciously neglected to implement diversity management policies. It should be noted, however, that even though family firms engage in fewer diversity management strategies, there does not appear to be any difference between family and nonfamily firms on the controversy indicator. In other words, while family firms may be selectively socially responsible, they are unlikely to act in a manner that may negatively affect their image. This finding is in line with research that suggests that family firms will first and foremost conduct their business practices in ways that protect their reputational capital and family assets (Dyer & Whetten, 2006).

Discussion and Conclusion

Our analyses found that family firms on the whole implemented fewer positive diversity management policies than nonfamily firms. In terms of financial performance, we found that family firms outperformed nonfamily firms when measured by Tobin’s Q, as well as according to credit ratings. While only a few studies link diversity management to enhanced business performance (Richard et al., 2004, 2007; Singal, 2014; Wright et al., 1995), other articles have shown that diversity management can positively affect group-level outcomes such as creativity and innovation (e.g., Bantel & Jackson, 1989). One of the factors essential for the success of diversity management policies in any firm is the consistent support from top management (Jayne & Dipboye, 2004). The problem with family firms, however, is that diversity management policies may erode some of the internal social and kin ties that enhance trust, mutual accommodation, coordination, and knowledge sharing (Stewart & Hitt, 2012).

The debate continues as to whether managing diversity implies a clear-cut, measurable financial performance advantage to organizations. An important finding from this study is that the family firms in our sample did not suffer financially due to lower diversity. In fact, the parsimonious inclinations of family firms may actually provide a financial advantage by being less responsive to social initiatives that do not resonate strongly with their prevailing culture. But does a firm need to be financially successful to engage in socially responsible behavior, such as diversity initiatives? Our tests indicate that superior financial performance does not necessarily lead to adopting diversity management policies. This result is in line with Patel and Chrisman’s (2014) assertion that the variability of family firm investments is the result of differences between their short- and long-term goals and depends on financial performance. Specifically, the researchers concluded that when performance exceeded aspirations, family firms managed economic objectives by making prudent R&D investments, resulting in more reliable, less risky sales levels; in contrast, when performance was below aspirations, family firms engaged in exploratory R&D investments leading to potentially higher but less reliable sales levels. Overall, however, it may not be financial incentives, but other factors such as organizational climate, culture, legacy and strategy that eventually bring about diversity management policies.

Our study makes several contributions to the literature. First, we examined diversity management in family firms, a hitherto underresearched area—especially as a component of the social responsibility dimension that may affect financial performance. Family firms have unique governance structures, values, and culture in comparison with nonfamily firms. Even if a family-owned firm is a step removed in a firm managed by nonrelated managers, the family’s aspirations and values (i.e., their noneconomic goals) are still likely to be reflected in the strategic decisions, resource-allocation choices, and diversity implementation decisions that the company makes (Chrisman et al., 2004; Stewart & Hitt, 2012). Moreover, due to the particularism and parsimony of family firms (Carney, 2005), their assessment and choice of noneconomic goals to pursue may not include diversity management policies. As our study demonstrates, despite their lack of commitment to proactive diversity management, family firms generally experienced better financial performance in comparison with nonfamily firms—thus once again questioning the diversity management-financial performance link. Second, this study’s more nuanced examination of diversity management policies advances the work of Dyer and Whetten (2006), who found that while social performance initiatives were not materially different in family versus nonfamily firms, family firms had fewer social responsibility concerns to protect the family reputation. Although some researchers (Hillman & Keim, 2001) have relied on a total composite index (all ESG diversity indicators combined with equal weight) to determine their findings, we conducted separate analyses for positive and negative diversity indicators. This strategy was implemented to avoid masking the separate contribution of indicators, such that one positive indicator could not compensate or overcome one negative indicator in gross approximation, as pointed out by Mattingly and Berman (2006). Accordingly, in addition to considering traditional measures of performance, we also introduced a new measure for diversity management (the ratio variable), and as a financial performance indicator we added the credit rating variable, which can be used for future research.

Our research also speaks to the recent debate on nepotism and favoritism research in family firms. For example, Jaskiewicz, Uhlenbruck, Balkin, and Reay (2013) recently asserted that reciprocal nepotism, which can lead to “insider” exchanges among family members, improves a family firm’s competitive advantage by facilitating tacit knowledge management. They urge scholars to examine the effect of favoritism in family firms, where friends and individuals with similar social and cultural background are preferred in business dealings. Our findings regarding diversity management—perhaps the antithesis to favoritism—may imply that, similar to nepotism, fewer diversity management policies may play a positive financial role in family firms.

While our analyses and results are robust, their interpretation needs to be tempered by several factors. First, little work has been undertaken in the area of organizational diversity at the macro level, especially in family firms, and there is a strong need for psychometrically sound quantitative measures to assess this concept (Burkard, Boticki, & Madson, 2002). Although the ESG data set provides information about several diversity indicators, a binary measure is limited in its utility to deliver information. As a multidimensional construct, diversity management is conceptualized as having practices and policies to support and provide opportunities to a diverse group of employees. However, data are sparse with respect to a number of diversity management components that could play a role in decision making, such as perceptions of organization and leader support for diversity management, perceptions of the existence of bias, and last, the perceptual experiences of being a dominant group member within the organization (Linnehan, Chrobot-Mason, & Konrad, 2002). Therefore, a qualitative study should be designed to determine how these perceptions translate into firm policies and affect varied outcomes. Similarly, while our study has extended prior work in family firms from the point of view of clan control, parsimony, and how social capital perspectives influence the implementation of diversity management policies in family firms, it does not directly measure these constructs. Considering the extent to which clan control and family embeddedness play a role in both the economic and noneconomic behavior of family firms (Steier, Chua, & Chrisman, 2009), we advocate the development of a clan control scale, which is similar to the stewardship climate scale (Craig, Dibrell, Neubaum, & Thomas, 2011). Such a tool could be applied to family firms to assess quantitatively how varying degrees of clan control can affect financial and social performance in family firms.

Second, while this study showed that Tobin’s Q and credit ratings are useful measures for assessing financial performance—since they represent a more direct link to growth and financial stability—they are mostly relevant to just one of the many important variables of family firms; that is, we do not know what effect the lack of diversity management can have on process variables such as marketing or innovation success. Although we examined the contextual perspectives of diversity management within family firms, in order to achieve a broader understanding of the process by which diversity management can affect financial and important firm outcomes, it is necessary to study behavioral and evolutionary perspectives as well.

Sirmon and Hitt (2003) have suggested that increasing management-level heterogeneity in family firms will reduce any potential deficiencies in their human capital. In this regard, the framework developed by Fitzsimmons (2013) for understanding how multicultural employees contribute to organizations is particularly useful. It may be necessary to examine in depth the effect of diversity, or lack thereof, on employee recruitment and customer satisfaction in estimating the overall concept of social performance (Turban & Greening, 1997). Third, as pointed out earlier, family firms are heterogeneous organizations. In keeping with available literature, we used fractional ownership and control as our delineation between family and nonfamily firms, which is a broad measure of influence of the focal family. Dichotomization of firms, whether family or nonfamily, has the potential to lead to a loss of information. Since data pertaining to how ownership of family firms is split among members are scarce and therefore difficult to gather, several prior studies have used a dichotomous measure of family ownership in public firms (Anderson & Reeb, 2003). It would be useful to study the effects of diversity on different kinds of family firms to gain greater insight into this important topic. It might also be interesting to ascertain how smaller and/or private family firms, who are not under as much scrutiny as large public family firms, deal with the issue of diversity. Although the concept of ownership through financial investment is obvious, there is also the issue of “psychological ownership,” defined as a state of mind having to do with feelings and attitudes, or a kind of possessiveness toward the firm (Hall, 2005). Can small ownership stakes offset psychological ownership by descendants of founding family firms and affect social performance and diversity initiatives in particular?

Finally, although diversity management is an important social value, it is salient primarily in Western countries like the United States, Canada, or the United Kingdom where demographic changes are taking place at a rapid pace. In contrast, it is less a driving force in more homogeneous nations such as Japan, China, and Korea, or even in a heterogeneous nation such as India, which has several subcultures, where the concept of family is broader than the nuclear unit prevalent in Western nations, and where family obligations result in stronger forms of clan governance (Bhappu, 2000). Such cross-cultural studies comparing the meaning and impact of diversity initiatives among family firms in different countries would represent a significant addition to the literature. There is, thus, considerable scope for extensions to this study. For example, future research could examine different contexts, both spatial and temporal, for greater generalizability of findings—not only for the study of diversity management but also several other social issues/actions, such as responsiveness to environmental pressures, transparency in marketing, or other human resource management concerns in the context of family firms.

Similarly, the lack of diversity management and clan control as a mode of governance in family firms spawn several research questions that will contribute significantly to the literature. Can clan-like behaviors that sustain long-term relationships enable lower transactions costs in contracting, both in buying and selling activities? While clans can foster trust and build social networks that enable learning and transfer of tacit knowledge, can they also inhibit innovation and risk-taking? Conversely, can the stronger safety net in the family clan culture and embedded support system encourage greater risk taking without dire consequences? In short, a rich stream of research and empirical questions with both theoretical and practical implications can be drawn from some of the conclusions of this study.

All firms, whether family controlled or not, grapple with the need to satisfy multiple internal and external stakeholders while at the same time remaining financially viable (Neubaum et al., 2012). This study finds that while publicly owned family firms are comparatively sluggish at adopting diversity management policies, they do not generally engage in egregious discriminatory practices that result in controversy or diversity-related legal proceedings. As such, they “fly under the radar,” attracting neither accolades nor brickbats, and continue to perform well financially. Thus, where the link to financial performance is concerned, we can infer that there may be an ideal range of socially responsible behaviors that enhance performance in family firms: Too much may be too costly and affect profitability and investor returns; too little may attract negative media attention and social sanctions. Nonetheless, the realities of the labor market, the changing demographics in the United States, and the expectations of employees, investors, and consumers obligate all firms, including family firms, to generate value through a sustained and long-term approach to diversity and use it as a strategic resource.

Footnotes

Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author(s) received no financial support for the research, authorship, and/or publication of this article.

Notes

Author Biographies

Manisha Singal, PhD, is an assistant professor at the Pamplin School of Business at Virginia Tech. She teaches graduate and undergraduate courses in hospitality strategic management and finance. Her research explores how the ownership and governance of firms influences their strategic decision-making and financial performance. She is the recipient of several best paper awards at international conferences, and has published articles in top-tier management and hospitality-specific journals like Strategic Entrepreneurship Journal, Cornell Hospitality Quarterly, Journal of Hospitality and Tourism Reseaarch, and International Journal of Hospitality Management.

Virginia W. Gerde, PhD, is an associate professor of management at Furman University in Greenville, SC. She teaches courses in strategy, business ethics and sustainability, and conducts research on the relationships among a firm’s financial, social, and environmental performance. Her research appears in journals such as Business & Society, Journal of Business Ethics, Journal of Management History, Journal of High Technology Management, and Business Strategy and Environment.

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