Abstract
Family firms face significant challenges in professionalizing their management, while the professionalization effects on the firms’ performance are unclear. Drawing on stewardship and agency theories, we theorize and test the effects of family ownership and professionalization on firms’ financial performance and sustainability (environmental, social and governance) reputation. Using a large-scale management practices dataset of both public and private companies in the US, UK, Germany, and France, we find that family firms outperform nonfamily ones in terms of both financial performance and sustainability reputation, and professionalization helps strengthen such positive effects. We theorize that this is because professionalization can address agent opportunistic behaviors, while enhancing steward behaviors unique to family firms. The findings contribute to the literature on family business governance and professionalization.
Introduction
Family firms tend to rely on informal governance based on relationships and trust involving family members in their management and operations (Adams et al., 1996; Chua et al., 2004, 2009; Eddleston et al., 2010; Ingram & Lifschitz, 2006; Jeong et al., 2022; Khavul et al., 2009). Prior family business research suggested that this informal governance can lead to agency problems such as shirking or free-riding (Chua et al., 2004; Kellermanns & Eddleston, 2004), nepotism in hiring, and other opportunistic behaviors by family employees due to a lack of effective monitoring and incentive systems (Madison et al., 2016; Schulze et al., 2001).
As family firms are ready to expand their businesses, much of prior family business research suggested that they should hire nonfamily managers or “behave more like nonfamily firms and professionalize” (Stewart & Hitt, 2012, p. 58). This has become a core definition of professionalization under the longstanding assumption that family managers are inherently nonprofessional (Chandler, 1990; Chittoor & Das, 2007; Gedajlovic et al., 2004; Gersick et al., 1997; Levinson, 1971; Schein, 1983, 1995) and the implicit assumption that professionalization may exacerbate agency problems (Madison et al., 2016) when families relinquish control and delegate decision-making authorities to nonfamily managers.
In this paper, we challenge this assumption and define professionalization as the creation and institutionalization of formal, systematic, and high-quality governance and management practices within the firm. Firms can adopt formal governance and control systems to professionalize their management practices regardless of whether they are managed by family or nonfamily members. These professional management practices include four key dimensions (Bloom & Van Reenen, 2007): target setting (setting clear and balanced economic-noneconomic goals), operations management (lean and efficient operational and production processes), performance monitoring (effective performance review and continuous improvement) and talent management (building a high-performance culture through the right incentives and human resource practices). Given our definition, we propose that management professionalization not only can help address agency problems due to the implementation of more effective formal governance and control systems without necessarily diluting ownership and control to outside nonfamily managers, but also enhance stewardship due to trust systems of interest alignment, effective communication, and participative management (Chrisman, 2019; Madison et al., 2016, 2017).
Whereas some prior work found the benefits of professional management on a firm’s financial performance (Bloom et al., 2011; Bloom & Van Reenen, 2007; Dekker et al., 2015; Madison et al., 2018), there is very little evidence of the professionalization effects in a broad dataset of family firms. Moreover, its effects on noneconomic performance have received scant attention in both prior family business and professionalization research despite its importance for enhancing the survival and sustained competitive advantages of family firms. Given this inconclusive and limited evidence, family firms are less likely to adopt such professional practices (Gilding, 2005; Selekler-Goksen & Yildirim Öktem, 2009; Tsui-Auch, 2004). They also face significant barriers for change such as a lack of resources and will (Stewart & Hitt, 2012; Zhang & Ma, 2009). Compared with nonfamily firms, family companies, especially private ones, are embedded within the norms of kinship systems, and many still believe that professionalization may be an unnecessary and expensive overhead (Gilding, 2005; Sharma et al., 1997); therefore, they are more risk-averse to and may not recognize a need to transition (Stewart & Hitt, 2012). In other words, the barriers for family firms to professionalize their management are high, but the benefits from professionalization are still unclear (Chua et al., 2009; Stewart & Hitt, 2012; Zhang & Ma, 2009).
This paper addresses this research gap by examining the effects of management professionalization on both financial and nonfinancial performance of both public and private family firms. We examine the performance effect of professionalization through an integrative lens of the agency and stewardship perspectives considering that both types of governance can coexist in family firms (Chrisman, 2019; Madison et al., 2016). With regards to nonfinancial performance, we focus on firms’ environmental, social, and governance (ESG) sustainability reputation, which is increasingly important for organizations’ long-term sustainable success (Turban & Greening, 1997). While drawing much-needed attention to private family firms’ nonfinancial performance, we systematically examine and compare the effects across four types of firms (public family, private family, public nonfamily, and private nonfamily) in the four major manufacturing countries: US, UK, Germany, and France.
Building on stewardship and agency theories, we theorize that professional management practices (i.e., target setting, operations management, performance monitoring, and talent management) lead to significantly stronger financial performance and sustainability reputation of family firms more than nonfamily firms because professionalization can simultaneously help minimize opportunistic agent behaviors, while promoting stewardship behaviors—these forms of agency and steward governance are particularly unique to and coexist in family firms. Empirically, we test and find empirical evidence in support of our theory.
Our findings challenge and extend prior research on family business and professionalization. First, our study theoretically bridges prior studies that have separately explored the effects of family ownership or professionalization on firms’ financial performance and treat stewardship and agency theory in a dichotomous way. For instance, Chua et al. (2009) suggested that professionalized family firms may have lower economic performance than that of nonfamily firms due to heightened agency problems as professionalization in their study occurs when family members are replaced by nonfamily managers, whereas Chang and Shim (2015) found the benefits of nonfamily managers. We extend this work by broadening both the definition and measurement of professionalization and proposing that the performance benefits of professionalization must be examined through an integrative lens of agency and stewardship theories as both forms of governance coexist in family firms (Chrisman, 2019; Madison et al., 2016). Specifically, our findings suggest that management professionalization benefits family firms the most (on both financial performance and sustainability reputation) compared with nonfamily firms, and we offer a theoretical explanation that both family agency and stewardship governance can be simultaneously manifested through professionalization. In this way, we directly contribute to and extend the scholarship on the coexisting agency and stewardship governance in family firms (Chrisman, 2019; Hernandez, 2012; Madison et al., 2016, 2017) by exploring both contributing factors and resulting outcomes of agency and steward governance (Madison et al., 2016).
Second, we extend family and professionalization research which has largely focused on financial performance (Dekker et al., 2015; Gulbrandsen, 2005) to examine the effects of professional management on sustainability reputation, which is an important nonfinancial performance metric critical for sustainable business success. In particular, our findings suggest that family firms have a stronger sustainability reputation compared with nonfamily firms, and professionalization helps strengthen such positive effects. These findings are theoretically important as they reveal how professionalization can help resolve the tradeoffs that might be involved in achieving both economic and noneconomic goals (Chrisman, 2019; Chua et al., 2009). Specifically, our findings reveal that by adopting professional management practices, family firms can create competitive uniqueness by achieving both stronger financial performance and sustainability reputation simultaneously.
Finally, we extend scholarship on professional management in family businesses (Chang & Shim, 2015; Dekker et al., 2013, 2015; Hall & Nordqvist, 2008; Madison et al., 2018) by broadening both the definition and measurement of professionalization and empirically examining its effects on both financial and nonfinancial performance. Building on Hall and Nordqvist (2008), which has challenged the longstanding assumption that family managers are nonprofessional, we highlight that family managers can be capable, and thus family firms can professionalize their management without the risk of losing control.
Theory
Integrating Agency and Stewardship Governance in Family Firms
Agency and stewardship perspectives are the two main theories that can explain family firm governance. Extant family business literature treats these two theories in a dichotomous way as separate and opposing lenses for viewing family firms. Rooted in economics, agency theory focuses on the principal (owner)–agent (manager) relationship, suggesting that the interests of both parties most of the time are misaligned. In turn, agents will choose opportunistic self-interested behavior over the behavior aimed at maximizing the principal’s interests (Davis et al., 1997; Eisenhardt, 1989; Jensen & Meckling, 1976). Thus, the governance mechanisms such as monitoring and incentives are needed to control the manager’s behavior (Eisenhardt, 1989; Fama & Jensen, 1983; Jensen & Meckling, 1976).
Agency problems can be especially severe in family firms because they are managed by the hands-on involvement of the founders based on relationships and trust, the family firm leaders are more likely to hire family members as opposed to nonfamily members to serve managerial roles regardless of skills and qualifications (i.e., adverse selection agency; Eisenhardt, 1989; Fama, 1980; Karra et al., 2006; Schulze et al., 2001; Schulze et al., 2003) and refrain from monitoring family managers’ performance (i.e., moral hazard agency; Chua et al., 2011; Eddleston et al., 2010). Moreover, there can be a conflict between family and nonfamily shareholders (Ali et al., 2007; Villalonga & Amit, 2006); for example, family firms often pursue noneconomic goals such as investing in ESG practices at the expense of nonfamily shareholders’ short-term financial goals (Berrone et al., 2012; Dyer & Whetten, 2006).
While agency theory adopts the economic model of man, stewardship theory rooted in sociology and psychology, describes a more humanistic model of man and psychological factors such as intrinsic motivation, trust, commitment, and identification that employees have toward an organization, making stewardship the “secret sauce” for creating a competitive advantage in family firms (Davis et al., 2010). The theory addresses the relationship between the principal and the steward managers, who are intrinsically motivated to serve the firm and thus naturally act in the principal’s best interests (Davis et al., 1997).
In recent years, family business scholars argued that agency and stewardship theories should not be treated in a dichotomous way and attempted to integrate these two opposing views, highlighting “the organizational reality that both types of governance may coexist” (Madison et al., 2016, p. 82). Chrisman (2019) suggested that effective governance of family firms requires both agency and stewardship mechanisms of coordination. Governance systems (such as monitoring mechanisms and incentives) can constrain agent managers to refrain from self-serving behaviors and thus reduce agent costs in family firms and at the same time can promote managers’ steward behaviors to build trust, commitment, and participatory management, leading to positive organizational behaviors and performance (Carney, 2005; Craig & Dibrell, 2006; Dibrell & Moeller, 2011; Eddleston & Kellermanns, 2007; Hernandez, 2012; Simons, 1994). Building on this work, we theorize and empirically examine the impact of management professionalization, as a manifestation of the coexisting agency and stewardship governance (Chrisman, 2019; Madison et al., 2016, 2017), on both firms’ financial and nonfinancial performance. In the next subsection, we theorize how professional management practices can benefit family firms’ financial performance as they can simultaneously curb opportunistic agent behavior and enhance stewardship behavior within the firm.
Effects of Professionalization on Firms’ Financial Performance
In this paper, we conceptualize “professionalization” as the creation and institutionalization of formal, systematic, and high-quality governance or management practices within the firm. In contrast to extant studies, which suggested that professionalization occurs when a firm’s management is transferred from members of the founding family to nonfamily managers (Bloom & Van Reenen, 2007; Chang & Shim, 2015; Lien & Li, 2014; Stewart & Hitt, 2012), our definition of professionalization focuses on professional“management practices” regardless of whether family firms are managed by family or nonfamily managers, that is, without relying on the assumption that family members are inherently nonprofessional (Dekker et al., 2013; Hall & Nordqvist, 2008). Accordingly, professional management practices consist of four key dimensions: (1) Target Setting (setting clear, challenging but attainable targets, balancing between financial and nonfinancial goals tied to the organization’s objectives and cascaded down the organization, short-term targets become a “staircase” to reach long-term goals); (2) Operations Management [modern (lean) manufacturing processes and practices, process documentation and continuous improvement]; (3). Performance Monitoring (regular performance tracking, appraisals, review, and consequence management); (4). Talent Management or Incentives (instill a talent mindset, reward employees based on performance, attract, develop, and retain talents, promote top performers and remove nonperformers) (Bloom et al., 2011; Bloom & Van Reenen, 2007).
Professional management practices are therefore “governance mechanisms” that simultaneously help curb agents and promote stewardship behaviors, which are individual-level behaviors unique to family firms (Chrisman, 2019; Hernandez, 2012; Madison et al., 2016). For example, modern management practices such as lean management, agile methodology, empowerment, and good governance emphasize the importance of collaboration with and value creation for stakeholders, employee engagement, transparency, ethical leadership, and continuous improvement, which are key elements of stewardship theory. Steward managers have a long-term perspective in setting clear targets that connect and balance between financial and societal (nonfinancial) goals (“Target Setting”), exposing problems in a structured way (“Operations Management”), creating high-performance and empowerment culture (“Performance Monitoring”), fostering trust and commitment among employees for the long-term sustainable success of the business (“Talent Management”).
With regards to reducing agency problems, firms adopting modern operations techniques such as just-in-time, automation, flexible manpower, and support systems (“Operations Management”), effective monitoring and control systems (“Performance Monitoring”), meaningful metrics for recruitment, performance evaluation and promotion (“Talent Management”) can address both adverse selection, nepotism (Jeong et al., 2022) and moral hazards such as shirking or free-riding, which are more likely among family members (Chua et al., 2009). Madison et al. (2017) suggested that family firms’ financial performance will be highest for firms with high levels of both agency and stewardship governance.
As these professional management practices will simultaneously address agency (e.g., nepotism, adverse selection, and moral hazard) and enhance steward behaviors (e.g., extra-role behavior, psychological ownership, and organizational citizenship) (Eddleston et al., 2018; Wilhelm et al., 2022) unique to family firms, professional management is critically important to help strengthen family firms’ unique competitive advantages, which are key to the financial success of family businesses. Taken together, based on these reasons, we propose that professional management practices will have a greater impact on financial performance of family firms than nonfamily firms.
H1: Professional management practices benefit the financial performance of family firms more than nonfamily firms.
Effects of Professionalization on Firms’ Sustainability Reputation
We propose that family firms put a special emphasis on protecting their sustainable ESG reputation because families are more emotionally invested and tied to their firms (Deephouse & Jaskiewicz, 2013; Zellweger et al., 2013). Whereas an organization’s image is comprised of observers’ general “impressions” of the firm, sustainability reputation refers to the public’s “active judgment” of a firm’s sustainability practices, based on acute events or compounding and externally observable chronic organizational actions (Barnett et al., 2006). Family companies are more conscious of not only their family names but also social sanctions because public criticism directed toward their unsustainable ESG practices or scandals such as board transparency, poor employment conditions, corruption, child labor and human rights, controversial products and services, pollution, among others, can damage not only their companies but also their family names (Adams et al., 1996; Deephouse & Jaskiewicz, 2013; Dyer & Whetten, 2006; Ward, 1987).
This especially pertains to corporate sustainability (ESG) reputation as family firms have increasingly espoused strong values, faith, and social purpose to run their businesses, which motivate concerns for the impact the company may have on nonfamily stakeholders and on the society more widely (Zellweger et al., 2012). For instance, Yvon Chouinard, the founder of an American outdoor recreation clothing family business, said that “we are in business to save our home planet” (Patagonia, 2020), and recently transferred his $3 billion ownership to a specially designed trust to ensure that all of Patagonia’s profits (some $100 million a year) are used to combat climate change and protect undeveloped land around the globe (Gelles, 2021).
Family businesses are likely to uphold these purpose-driven visions and missions because families are closely identified with and embedded in their communities (Sirmon & Hitt, 2003), and accumulate social capital through interconnected and mutual trust among their business partners and other key stakeholders (Arregle et al., 2007; Herrero & Hughes, 2019; Miller & Le Breton-Miller, 2006). Therefore, protecting sustainability reputation is of utmost importance for family firms to sustain their social legitimacy and competitive standing (Berrone et al., 2010). Miller et al. (2008) found that compared to nonfamily businesses, family owned businesses display greater stewardship over the continuity of business, their community of employees, and their connection with stakeholders. This steward orientation drives family firms to care deeply about protecting sustainability reputation. Thus, taken together, we formally hypothesize:
H2: Family firms have more favorable sustainability reputation than nonfamily firms.
Professionally managed family firms would have interconnection of targets, which are tied to family founders’ values and organizations’ objectives, and they can effectively communicate and cascade such targets down to rank-and-file employees across the organizations. They also build a high-performance culture such as through providing a good working environment, the right incentives, an appraisal system, performance review and tracking, training and career paths, to develop, and retain talents (Dekker et al., 2015; Eddleston et al., 2018). Having leaders and all employees who value continuous improvement, quality management, and long-term success reinforces stewardship orientation within family firms, helping the firms mitigate risks of being criticized and thus establish and uphold a strong ESG reputation.
For instance, total quality management is a managerial innovation that focuses on continual internal and process improvements across the whole supply chain over the long-term by having all the organizations’ members—from low-level to highest-ranking executives—focus on improving product and services quality and delivering customer satisfaction (Heikkilä, 2002). Such professional management would help reduce ESG incidents affecting the firms’ reputation. For example, if product defects or food safety incidents can be detected and managed quickly, this will minimize the risk of harming consumers (“S” pillar of ESG) (van Woerkum & van Lieshout, 2007) and thus a firm’s social incidents such as product recalls and impacts on communities. Modern management emphasizing empowerment work culture, social responsibility and stewardship of managers can also minimize the risk of social incidents related to poor employment conditions, social discrimination, and health and safety issues. Lean (modern) manufacturing and environmentally friendly operational processes (Jacobs et al., 2010) can help firms minimize the risk of being criticized on E-related issues (“E” pillar of ESG) such as releasing contaminated wastewater into rivers and producing airborne pollutants. Finally, professionally managed firms have strategic clarity, effective communication, systematic performance review and monitoring, accountability, and transparent reward systems—all of which can help minimize agency problems and thus governance-related incidents (“G” pillar of ESG) such as scandals about fraud, corruption, and money laundering (Yamanoi & Asaba, 2018).
We previously hypothesized that family firms tend to care more deeply about protecting their reputation; here we are arguing that professional management practices will help family firms effectively manage reputational risk through reduced agency and strengthened stewardship orientation, thus leading to a more favorable ESG reputation.
H3: Professional management practices positively moderate the impact of family ownership on sustainability reputation.
Data and Methods
Samples
Our sampled companies are obtained from the World Management Survey, originally described in Bloom and Van Reenen (2007). The World Management Survey team randomly sampled medium-sized firms (employing between 50 and 5,000 employees with a median of 675) across several industries in the manufacturing sector. This sampling frame is reasonably representative of medium-sized manufacturing firms. The data were collected by a double-blinded telephone interview with middle managers, who were senior enough to have an overview of management practices but not as senior as to be detached from day-to-day operations. The trained interviewers are MBA students at top US or European universities from the countries surveyed, so that they can interview managers in their native languages and also have sufficient business experience to conduct the interviews. The response rate is approximately 54% from all the firms contacted; this is a considerably high success rate given the voluntary nature of participation (Bloom et al., 2011). The interview procedure will be discussed in more detail in the next subsection. To reduce potential bias and increase the response rate, the team obtained government endorsements and never asked interviewees for firms’ performance and financial data. We obtained such data from independent sources, which will be described in the following subsection.
Data
Dependent Variables
We examine the impacts of organizational professional management practices on both financial and nonfinancial performance (i.e., sustainability reputation); thus we have two key dependent variables. First, we capture financial performance by profitability as measured by return on assets (ROAs). For private companies, we obtain ROA from the Amadeus database (UK, Germany, and France companies), and from Orbis for US private companies. Amadeus and Orbis are the largest databases that provide comprehensive accounting and financial information from millions of private companies across Europe and the US, respectively. For public companies, we obtain ROA from the Thomson Reuters Worldscope.
Our second dependent variable is sustainability reputation, which we operationalize by the number of negative ESG news stories or instances of public criticism directed by both traditional and social media sources at a firm’s ESG-related practices. We construct this variable by obtaining data from the RepRisk database. RepRisk has screened negative ESG news or public ESG criticism from more than 100,000 traditional and social media, stakeholder, regulatory, NGOs and other third-party sources in 15 languages daily since 2007. Each criticism (news) count is identified and classified into one of 28 predefined ESG issues 1 under five themes: environmental footprint, community relations, employee relations, corporate governance, and cross-cutting issues. We purposefully broaden the scope of prior sustainability research, which has largely focused on a particular sustainability issue in one specific industry and in a particular country, to examine a comprehensive range of 28 environmental, social and governance issues of both public and private companies globally to increase the theoretical generalizability and practical implications of the findings.
In particular, for each firm, each year, and each of the 28 ESG issues, we construct severity-weighted indices by summing and linearizing the three levels of severity—high severity incidents are counted with a value of three, medium with two, and low with one. These three levels of severity of incidents are based on the three equal-weighted subcategories—the extent of consequences (e.g., “health and safety” issue—minor injury, major injury, fatal), the number of people affected (one person, a group of people, a large number of people), and a firm’s intention (caused by an accident, negligence, or systematic malpractice). This same linearizing of RepRisk ESG news is widely used in prior sustainability literature (e.g., Kölbel & Busch, 2013; Kölbel et al., 2017). The key findings remain robust when changing the weighting to higher values or nonlinear scales.
We then aggregate all news from 28 issues into a combined metric of “reputational ESG criticism” measure, and then sum ESG criticism across all 12 months to create annual indices for each firm and each year in order to facilitate merging with all the other variables obtained from the World Management Survey, Amadeus, Orbis, and Thomson Reuters, which are only reported annually.
Independent Variables
Family ownership: According to the global family business index 2023, for a privately held firm, we classify a firm as a family firm if a family has more than 50% ownership. For a publicly listed firm, we classify a firm as a family firm if a family has at least 32% ownership (Robertsson et al., 2023). Family ownership data is directly obtained from the World Management Survey. The World Management Survey project started in 2002 with an aim to “measure one of the unmeasurable” professional management practices in establishments across industries and countries. The research team conducted a systematic survey project, interviewing managers of establishments in many different countries and industries, which will be further discussed in the following subsection. We directly obtain data from the World Management Survey team, and identify family ownership based on a specific question in the survey: “Who ultimately owns the firm (the single largest shareholding block)? If [the firm is] multinational, [then] who owns the parent firm in the home country?” We construct a binary variable equal to 1 if a firm is ultimately owned by a founder or family members, and 0 otherwise.
Management practices: We obtain management practices data of manufacturing firms across the UK, Germany, France, and the United States from the World Management Survey. These are the firms in the manufacturing sector across the four major manufacturing countries, where productivity can be accurately measured (Bloom et al., 2011). As previously mentioned, the first wave of survey projects started in 2002. The time required for assembling and constructing data results in some gap years. In particular, the management practices data obtained from the World Management Survey includes seven survey waves: the years 2002, 2004, 2005, 2006, 2008, 2010, and 2014. We control for year, industry, and country fixed effects in all our analyses.
Professional management score ranges from 1, the least professional, to 5, the most professional. This variable is an equal-weighted average score across all the four key dimensions, originally described in Bloom and Van Reenen (2007): (1) Target setting (clear performance targets with a balance between financial and nonfinancial goals, that is, short-term is a “staircase” toward the main focus on long-term goals; the targets are clear, transparent, demanding but attainable; (2) Operations management (focusing on the introduction of modern manufacturing techniques); (3) Performance monitoring (regular tracking, appraisals, review, and communication of performance to all staff with an expectation of continuous improvement), and (4) Talent management (human resources management and reward designs to effectively attract, promote, develop, and retain talents).
Our professionalization measure is largely aligned with that introduced by Dekker et al. (2013, 2015) apart from that we do not regard nonfamily involvement in board of directors and management team as more professional. We also broaden the scope of Dekker et al.’s (2015) study of 523 private Belgian family businesses to 3,829 companies in four countries. The World Management Survey tool is double-blind. The first part of this double-blind process is that the plant managers were interviewed via telephone without knowing that they were being scored. This enables the interviewers to objectively assess and evaluate firms’ actual practices, while minimizing the interviewers’ subjective evaluation based on their own impression and perception toward managers’ aspirations. On the other side of the double-blind process, interviewers did not have prior knowledge of firms’ financial information and performance. This was achieved by selecting only medium-sized manufacturing firms (above 50 with a median of 675 employees), which are rarely recognized by name or reported on in the media. Only company names and contact details were provided to the interviewers, who are trained MBA students from top European or U.S. business schools.
The target subjects of the interview were plant managers because they were senior enough to have a holistic view of management practices but not too senior to be detached from the day-to-day operations of the enterprise. Firms were contacted in a random order. Each interview lasted about 50 minutes on average. Written endorsements from the central banks such as the Bundes bank in Germany, the Banque de France in France, and the Treasury in the UK, help demonstrate to managers that this project was an important exercise with official support (Bloom et al., 2011). The interview was introduced as “a piece of work” and was conducted in the managers’ native languages as a confidential conversation about management experiences with open-ended questions of actual practices and examples (e.g., talk me through the process for a recent problem—how can the staffs suggest process improvements?) rather than closed questions (e.g., do the staffs ever suggest process improvement? [yes/no]) (Bloom & Van Reenen, 2007 for more details). The discussions continued until the interviewer could assess and score each practice without discussing financial positions in the interview, thereby ensuring its double-blindness and making it uncontroversial for managers to participate. The questions were ordered from the least controversial (e.g., shop-floor operations management) to the most controversial (e.g., pay, promotions, and firing). Finally, the performance of the interviewers was monitored.
Approximately three-quarters of all interviews had a silent monitor who independently double-scored the interview, and approximately 10% of the sample firms were reinterviewed using different interviewers and interviewees. The correlation of the primary interviews with the double-scored interviews was 0.887 and with the repeated interviews was 0.734 (Bloom et al., 2011). These strong correlations ensure the reliability and credibility of the World Management Survey data.
Public versus private companies: We construct a binary variable equal to 1 for publicly listed companies, and 0 for private companies based on the variable listed/non-listed obtained from the Bureau van Dijk (Orbis) database. We also cross-check this classification with the types of firm IDs, which suggest whether a firm is publicly listed, from the World Management Survey data. Our sample includes 3,829 companies, which comprises 2,725 private and 1,104 public firms. Private companies account for 71.17% of our sample, and the remaining 28.83% are public firms.
While the focus of our main analysis is on professionalization of family versus nonfamily firms, we include a binary “listed” company as a control variable and also control for its interaction with management practices for robustness to further test and confirm our hypotheses of whether family ownership or public/private is the factor that would strengthen the benefits of professional management on firm performance.
Other Control Variables
In all the regressions, we control for firm size as measured by the total number of employees (in log), firm age (in log), average hours worked per week of the workforce (in log), a dummy for a multinational company, and the level of competition within an industry, which ranges from 1 (least competitive) to 4 (very competitive), classified by the World Management Survey. These are observable firm characteristics that could potentially influence management practices, financial performance and sustainability reputation. The data for these control variables are obtained from the World Management Survey. We also control for unobserved factors by including three-way fixed effects: year (survey wave), industry, and country. All the independent variables are lagged by 1 year to partly mitigate endogeneity particularly reverse causality. We use an ordinary least squares (OLS) estimator with robust standard errors in all the regression analyses.
Results
Table 1 presents the samples, descriptive statistics, and correlations. Table 1 shows that our merged sample with complete management practices and ROA include 3,829 companies with approximately 52% family firms versus 48% nonfamily firms, and approximately 71% private firms versus 29% public firms.
Total Number and Percentage by Four Types of Firms.
Table 2 presents summary statistics of the key variables of interest (management practices, ROA, and reputational ESG criticism). As expected, public companies on average have higher professional management practice scores, yet a greater degree of public ESG criticism than private firms. The difference in average scores of these key variables between family and nonfamily firms are mixed and not significant. This needs deeper investigation in the regression analysis.
Summary Statistics of Key Variables by Four Groups of Firms.
ESG = environmental, social, and governance.
Table 3 presents summary statistics and correlations of all the variables included in the analysis of the full sample. Family ownership positively correlates with ROA and negatively with reputational ESG criticism.
Summary Statistics and Correlations of Full Sample.
ESG = environmental, social, and governance.
Represents significance at 5% level.
Table 4 presents the regression analysis of the impact of professional management practices on financial performance of companies in the full sample. Column 1 includes only control variables. Although not hypothesized, it makes intuitive sense that longer hours worked are positively associated with high profitability, while greater competition lowers profitability. Older firms also seem to be more profitable. Column 2 includes our key independent variables: family ownership and management practices; column 3 includes our key interaction variable between family ownership and management practices, and finally, column 4 includes all the same variables as in column 3 with an additional interaction between family ownership and a listed dummy. The results from Table 1 support Hypothesis 1: firms that adopt professional management practices perform better financially, and when controlling for public firms (and private firms), professional management practices benefit family firms more than nonfamily firms. For instance, according to column 3 of Table 4, an average increase in overall professional management practices score by one unit increases ROA by 0.917% for nonfamily firms and 1.784% for family firms. Column 4 confirms that family ownership, as opposed to publicly listed (vs. private), is the key factor that accentuates the benefits of professionalization—the interaction effect between management practices and family ownership is statistically significant, while the interaction between management practices and a listed dummy is not statistically significant. In other words, the marginal benefits of professional management on profitability are significantly greater for public family firms compared with public nonfamily firms, and such marginal benefits are also greater for private family firms compared with private nonfamily firms.
Effects of Professional Management on Profitability (Full Sample).
ROA = return on asset.
Robust p-values in parentheses; ***p < .001, **p < .01, *p < .05.
As private firms are not subject to formal stringent regulations and transparency standards, this suggests that professionalization is their strategic decision as they also tend to face impediments to adopting professional practices. We thus further examine the professionalization effects of private firms more deeply in Table 5. The findings from Table 5 are consistent with those of Table 4 and provide further evidence confirming Hypothesis 1. Consistent with Hypothesis 1, column 3 of Table 5 shows that professional management practices significantly benefit private family firms more than private nonfamily firms. Specifically, a unit increase in overall professional management score increases ROA of private family firms by approximately 2.36%, but the effect of professionalization is not statistically significant for private nonfamily firms. Overall, the findings from Tables 4 and 5 provide evidence in support of Hypothesis 1.
Effects of Professional Management on Profitability (Private Companies).
ROA = return on asset.
Robust p-values in parentheses; ***p < .001, **p < .01, *p < .05.
We then examine the impact of professionalization on reputational ESG criticism in Tables 6 and 7. Table 6 presents the findings of the full sample. As expected, column 1 of Table 6 shows that public firms are significantly more extensively criticized for ESG practices than private firms. Moreover, on average, larger, older, hard-working, multinational firms and firms in industries with strong competition are more likely to be attacked, receiving more severe public criticism of ESG practices. Column 2 of Table 6 shows that family firms are significantly less criticized for ESG practices compared with nonfamily firms, supporting Hypothesis 2. Columns 3 and 4 show that professional management practices benefit family firms significantly more than nonfamily firms, supporting Hypothesis 3. One score increase in overall professional management practices of family firms is associated with fewer incidents (reputational ESG criticism) by approximately two negative ESG news stories per year, where its effect on reputational ESG criticism of nonfamily firms is not statistically significant. Although professional management does matter for the financial performance of all types of firms on average as shown in Tables 4 and 5, our findings in Table 6 show that it has significant benefits on sustainability reputation as reflected in reduced public criticism of ESG practices of only family but not nonfamily firms on average. Column 3 of Table 6 also shows that the relative impact of professionalization on reputational ESG criticism of private versus public firms is not statistically significant, which further confirms our Hypothesis 3, highlighting the importance of professionalization on family firms.
Effects of Professional Management on Firms’ Reputational ESG Criticism (Full sample).
ESG = environmental, social, and governance.
Robust p-values in parentheses; ***p < .001, **p < .01, *p < .05.
Effects of Professional Management on Firms’ Reputational ESG Criticism (Private Companies).
ESG = environmental, social, and governance.
Robust p-values in parentheses; ***p < .001, **p < .01, *p < .05.
Table 7 focuses only on a subsample of private companies. The findings in Table 7 further confirm our theory. In particular, private family firms have approximately three negative ESG news stories fewer than private nonfamily firms, reflecting a stronger sustainability reputation, which supports Hypothesis 2. Column 3 of Table 7 offers supporting evidence for Hypothesis 3: professional management significantly benefits only private family firms’ sustainability reputation, helping those firms reduce public criticism of their ESG practices.
Overall, the findings from Tables 1 to 7 provide evidence in support of Hypotheses 1–3.
Robustness
Alternative Weighting Method of Reputational ESG Criticism
In the main analysis, we construct severity-weighted reputational ESG criticism. As an alternative measure, we follow the same method of variable construction apart from weighting ESG news by the three levels of reach or influence of media sources classified by RepRisk. High-influence sources are international media with a strong global presence such as the New York Times, BBC, and the Financial Times, among others. Medium reach sources include national and regional media, international Non-Government Organizations (NGOs), state, national and international governmental bodies with a circulation of at least 150,000. Low reach sources include local media, local newspapers, small NGOs, and blogs with a circulation less than 150,000. We replicate all the analysis with this reach-weighted reputational ESG criticism instead of severity-weighted. All the findings are robust and very similar to the main analysis.
Alternative Measurement of Reputational ESG Criticism
In the main analysis, we construct the variable reputational ESG criticism from RepRisk’s raw data of negative ESG news counts across 28 ESG issues. As a robustness, we replicate all the findings using the RepRisk Index (RRI), which is a proprietary algorithm developed by RepRisk to quantify media and stakeholder coverage of a company’s negative ESG news. The RRI ranges from 0 (lowest) to 100 (highest) reputational risk exposure. All the key findings remain robust.
As noted, the professional management practices database from the World Management Survey is the first large-scale global survey that credibly quantifies intangible aspects of firms’ professional management, which is particularly challenging to measure at a global scale, especially for private firms. Due to the time required for the rigorous management practices survey and data construction process, there might be a few gap years with no data points. Nevertheless, we control for survey wave fixed effects as well as country and industry fixed effects. We also try to address endogeneity particularly reverse causality by using 1-year lags of all our independent variables. Despite the robustness of our findings, future research that can precisely identify causality by employing alternative methods such as field experiments or observational studies might be worthwhile.
Discussion
Our research examines the effects of management professionalization on both a firms’ financial and nonfinancial performance through an integrative lens of the agency and stewardship perspectives. Both agency and stewardship behaviors are unique to family firms and can mutually explain the need for professionalization. Our empirical evidence suggested that professionalization (target setting, operations management, performance monitoring, and talent management) significantly benefits family firms more than nonfamily firms as it can help enable and reinforce both agency and stewardship governance in family firms, leading to an improvement in firms’ financial performance (supporting Hypothesis 1). We also found that family firms have a more favorable sustainability reputation (fewer negative ESG incidents) compared to nonfamily firms (supporting Hypothesis 2), and professional management practices significantly strengthen such positive effects (supporting Hypothesis 3). Our findings thus offer important contributions to the literature on family business and professionalization.
First, we directly contribute to recent studies on the coexistence of agency and stewardship governance in family firms (Chrisman, 2019; Hernandez, 2012; Madison et al., 2016, 2018) by introducing and examining professional management practices as enabling factors that drive and reinforce both forms of governance simultaneously. By adopting professional management practices, family firms can strengthen their unique competitive advantage of steward managers, who have long-term perspectives and deeply care about sustaining a strong reputation and long-term survival of the business (Eddleston et al., 2018; Wilhelm et al., 2022), while at the same time addressing agency problems (i.e., nepotism, adverse selection, and moral hazard), which we argue are more severe among family firms. Once both agency and stewardship governance are mutually manifested by being professional, our findings revealed that family firms benefit more from management professionalization than nonfamily firms in terms of both profitability and sustainability reputation. In so doing, we respond to Madison et al.’s (2016) and Chrisman (2019)’s calls for future research to explore both the contributing factors and resulting outcomes of agency and stewardship theories.
Second, we advance family and professionalization literatures by examining the impact of professional management practices on family as well as nonfamily firms’ nonfinancial performance, particularly sustainability reputation, which we view as a very important nonfinancial metric that influences the long-term survival and success of the business. Prior professionalization research found the benefits of professional management on firm financial performance (Gulbrandsen, 2005; Michiels et al., 2017), while its effects on nonfinancial performance have remained underexplored. Specifically, we found that professional management led to a stronger sustainability reputation reflected in a lower level of public criticism on firms’ ESG practices of only family, but not nonfamily firms, because families care about firm reputation tied to their family names (Deephouse & Jaskiewicz, 2013). Such findings of the professionalization benefits on both financial performance and sustainability reputation of family firms are theoretically useful as they introduce an important factor to existing research, management professionalization that can help compromise the tradeoffs that might be involved in achieving both financial and nonfinancial goals (Chua et al., 2009; Jeong et al., 2022), thereby creating competitive uniqueness to family firms. In this way, we respond to the recent calls for family business research to explore the effects of family ownership on firms’ nonfinancial performance (Madison et al., 2016; Yu et al., 2012).
Third, our findings extend scholarship on professional management in family businesses (Chang & Shim, 2015; Dekker et al., 2013, 2015; Hall & Nordqvist, 2008; Madison et al., 2018) by broadening both the definition and measurement of professionalization and empirically examining its effects on both financial and nonfinancial performance. Building on Hall and Nordqvist (2008), which has challenged the longstanding assumption that family managers are nonprofessional, we highlight that family managers can be capable, and thus family firms can professionalize their management without the risk of losing control. Such findings also provide important practical implications to family business leaders questioning whether they should professionalize their management given the many impediments they face in making the transition.
Family firms are often embedded within the norms of kinship systems and reliant on relationship and trust among family members (Stewart & Hitt, 2012), and thus lack “the will” to become more professional to grow their businesses (Gilding, 2005; Zhang & Ma, 2009). Our findings suggested clear benefits of professionalization on both financial performance and sustainability reputation and in contrast to much prior work, we suggested that this can be done without the risk of diluting control by hiring outside managers. Thus, family firms can be professional simply by having the will and courage to change the existing ways of doing things; for instance, they can professionalize their human resources practices by adopting more formal systems to reward and promote high-quality managers based on real performance with fairness and accountability regardless of family or nonfamily members (Eddleston et al., 2018); this requires a system change without necessarily hiring outside managers. Since many private family firms have yet to adopt professional management practices, they should act right now when seeing clear benefits before such benefits wane once professional management might be more widespread or widely adopted as norms in the future (Heugens & Dentchev, 2007; Heugens & Lander, 2009).
We hope that our work will open many interesting opportunities for future research to deeply explore the potential barriers (e.g., cognitive, cultural, emotional, and managerial) (Stewart & Hitt, 2012) and the ways in which family firms can overcome them to be more professional as well as further explore the process of professionalization. Although we used one of the largest-scale available management practice survey data covering both public and private firms across various countries and industries for our analysis, we acknowledge the limitation that the data may still lack sufficient time-series to test professionalization process. For example, after a family firm grows beyond a certain size, when should this professionalization process kick in? Are there any dimensions of professional management practices that matter more or matter earlier? Is there a sequence of management practice dimensions that could lead to better performance? Might this sequence be culturally and geographically situated, or might it vary across countries and regions? The availability of time-series data will allow future work to test these questions.
Another limitation is that the management practice questionnaire surveys and interviews designed by the World Management Survey did not include a set of questions that allows us to test some of the potential impediments suggested by the literature such as cognitive, cultural, emotional, and managerial impediments (Stewart & Hitt, 2012) and whether they matter more for family firms than nonfamily firms. Thus, this offers a fruitful avenue for future research. Fine-grained qualitative field or case studies may be useful in providing such insights. More generally, an interesting opportunity for future research would be to explore challenges and opportunities of professionalization, that is, examining professional management as a dependent variable. For instance, future work might simultaneously explore which institutional-level factors (such as government regulations, tax benefits, subsidies, or incentives) (Aureli et al., 2020; Dinh & Calabrò, 2019; Ioannou & Serafeim, 2012; Zaman et al., 2022) and organizational-level factors (such as cognitive, cultural, emotional, and managerial capacity and barriers) as well as the interactions between them might significantly accelerate or slow down firms’ professionalization.
We also must acknowledge that despite the robust findings, the R-squared of ROA regressions is very small relative to that of ESG reputation regressions. Yet, our work has practical significance as our focus is not to determine profitability function but to test the effects of the interaction between family ownership and professionalization on ROA, which has strong and consistent statistical significance (p-values < .001). In particular, we consider that good governance and professional management can directly impact firms’ reputation, which results in high R-squared values of sustainability reputation regressions. However, firms’ profitability (as measured by ROA) is driven by revenues and costs generated by products and services offered by the companies. It is likely that there are many indirect pathways through which professional management practices can lead to stronger profits such as employee productivity, turnover rate, innovation, brand value, and customer satisfaction, among others. Our findings thus offer a fruitful avenue for future research to empirically examine these potential mediating mechanisms through which professionalization can translate to high profitability. The availability of complete unbroken time-series data would be helpful in testing these mediating effects, which can help enhance R-squared or an explanatory power of profitability. Despite the robustness of our findings, time-series data will also allow future research to explore other methods such as a Quasi-experiment to further address endogeneity and derive a more precise causal inference.
Finally, we acknowledge that our study focused on the context of the four major manufacturing and economically influential countries: the US, the UK, Germany, and France. Future work might broaden the scope of our study to include more countries in Asia and in other regions apart from Europe and North America. Moreover, although our sample includes firms in many different industries such as Chemicals, Oil and Gas, Aerospace, Apparel, Automotive, Construction, Electronics, Machinery, etc., given the focus of management practice survey data, these industries are mainly in the manufacturing sector. We therefore suggest future research to potentially expand the scope to include more firms in the services sector. As an extension, there is an interesting opportunity to conduct a global study of family business and professionalization to examine the role of nation-level institutions (Ioannou & Serafeim, 2012, 2023; Whitley, 1997, 2005) including the economic, political, labor, education, and financial systems (Ioannou & Serafeim, 2012) that might influence the extent to which private family firms adopt professional management practices, or explore whether and how these nation-level institutional factors may moderate the impacts of professionalization on firms’ financial performance and sustainability reputation.
Conclusion
Family firms tend to rely on informal governance and have yet to adopt professional management practices. Our findings reveal significant benefits of professionalization on family firms in terms of both financial performance and sustainability reputation. We suggest that this is because both family firms’ agency and stewardship governance can be manifested through professionalization. We particularly hope that our findings will help to inform family business leaders to strengthen the families’ and the firms’ competitive uniqueness by making a transition to become more professional.
Footnotes
Acknowledgements
The authors appreciate feedback and guidance from Franz Kellermanns and three anonymous reviewers. We also thank Christoph Loch, Thomaz Teodorovicz and Julian Lewis.
Declaration of Conflicting Interests
The authors declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The authors received no financial support for the research, authorship, and/or publication of this article.
Notes
Author Biographies
. Outside academia, Mat hosts the ‘Professor Mat Hughes Podcast’, a successful podcast series rated 9th by Feedspot in their Top 25 UK Innovation Podcasts of 2023.