Introduction
Family Businesses (FBs) are the most prevalent form of business in the world and they are highly important in developing economies. The family business literature provides a number of different definitions of family firm, so the way, in which family firms are defined, has a big role on the studies’ conclusions, that are often in conflict between them.
According to De Massis, family business is defined as a firm where family ownership (at least two generations) exceeds 50% of total equity and family members play active roles in the board of directors and/or top management. Companies that fall within this definition represent about 70% of companies worldwide (Caselli and Gennaioli, 2003 Family Firm
Institute, 2003) and 85% of Italian companies (AIDAF, 2014).
Ownership and control
In family firms there is a coexistence of three interdependent systems: the family, the company and the entrepreneur’s estate (Gersick, 1997; Le Breton-Miller et al., 2004; Ward,
1987). This overlap of interests provokes corporate governance problems.
One of the concerns is the influence of family in company’s decisions; there is a concrete possibility that family hires relatives as directors and managers in the company, even though they are less efficient than professional managers, who are available in the market (Mork et al.
2000; Perez-Gonzalez 2001). This behavior is called “ nepotism” and it could hinder growth of family firms.
On the other hand, the cost of reducing information asymmetries and moral hazard is lower when owners directly participate in management of the firm; indeed families are more interested in monitoring managers’ activities, limiting the “ free rider
” problem (Jensen and
Meckling 1976).
Another relevant aspect concerns the interests of minority shareholders: managers may act for the controlling family, but not for shareholders in general.
Moreover, there are three others agency issues: the use of pyramidal groups to separate ownership from control, the entrenchment of controlling families, and non-arm’s-length transactions (“tunneling”) between related companies that are detrimental to public investors.
(La Porta et al. 1999). The use of pyramidal groups allows obtaining control by investing a limited capital and share risk with other investors.
In fact, public shareholders are brought in to provide capital wherever necessary within this structure, but are never allowed a majority of the votes in any firm in the group.

Through this economic mechanism, the controlling family gains by transferring as much wealth as possible from low firms in the pyramidal structure to firms at or near its apex. Firms controlled by the same family often obtain goods, services, or financing from each other in the normal course of business; but by doing this at artificially high prices, the group can transfer profits from the buyer to the seller firm. This phenomenon is called “ tunneling
”.
Finally, FB tends to “ entrench
”, that is the difficulty in raising money by investors because it holds at least 51% of the votes in the shareholder meetings of every firm in the business group. The need to pool capital and share risks is the key limitation of the family firm. Even the wealthiest family’s capital is limited, as is its willingness to take on great risks. Indeed,
Chandra and McConaughy (1999) present evidence that US family firms continue to pass up potentially profitable investments for these reasons.
Furthermore, there are different studies that demonstrate as family businesses, controlled specially by heirs, might suppress innovation to protect their consolidated profits in related businesses. Regarding these arguments, Morck et al. (2000) found that Canadian firms controlled by heirs statistically allocate fewer resources in research and development than benchmark firms of the same age and size in the same industries. However there are contrasting views about investment efficient; for example James (1999) claims that family firms have a greater efficient of investment due to their long-period horizons, that can ease the problem of myopic short-time investment decisions by managers.
Succession
Succession is the most relevant issue of corporate governance in family businesses; it is referring to the transfer of leadership from predecessor to designate heir and it is the main cause of bankruptcy of FB. Indeed 74% of crashes between 1999 and 2003 occurred during a generational shift. On average, in Italy only 15% survive to transition from second to third generation (UE, 2004).
Founders of an organization have a significantly influence on culture, values and performance
(Collins and Porras, 1994; Schein, 1983).
In addition, they fill a central role in their families and firms due to “ tacit knowledge
” related to the business. It has been suggested that the performance of the next generation is likely to be based on the effectiveness with which this tacit knowledge and social network are transferred across generations (Cabrera-Suarez et al. 2001; Steier, 2001) with the aim of increasing business’ autonomy and reducing dependence from founder figure. From this point of view, FB are more vulnerable because the knowledge, that create added value, could be

lost during the switch. The next generation’s performance is linked to skills, abilities and capacities acquired from senior generation (Goldberg, 1996; Morris et al. 1997).
Especially in Italy, founders slow down succession process: a recent survey of Istat displays that until 2016 the 70% of FBs won’t be involved in a generational shift. Moreover there is a high percentage of senior leaders at the top: approximately 20% of FBs is led by over seventy person.
After succession, an excessive presence of founder into the company could hinder the decision-making and personal growth of heir and business. Instead the best practice suggests a progressive formation of heir that starts before nomination and it should continue with the delegation of responsibilities little by little (Handler, 1990).
A successful succession requires four elements:
1) Succession planning: It is advisable to establish the moment of founder’s withdrawal and the duration of period in which predecessor and heir work together.
2)
Potential heirs’ formation: It concerns the selection of possible candidates and the activities of formation and training.
3) Successor selection: During this phase, founder evaluates the candidates to choose new leaders.
4) Succession process conclusion: It is referring to the definitive transfer of leadership to heir and to all the changes of governance.
The involvement of external professional figures is recognized in the literature as one of the factors that increase the probability of success of the succession (Corbetta e Dematté, 1993;
Crego, 1996; Erven, 2004; Poza, 2004).
Some empirical results
There are conflicting results of studies about FB’s performance. De Massis’ studies show that family controlled firms outperform their non-family counterparts in a number of performance indicators (ROE, ROA, ROS), supporting the idea that the interaction between the family and the business systems leads to the creation and the source of a firm’s competitive advantage.
According to him, FBs are significantly older and smaller: indeed family firm size can be retarded because family management tends to be reluctant to raise external funds in order to finance the firm’s growth because of its fear of losing control of the business.
About the financial characteristics, FB and non-family firms are quite similar in terms of liquidity and financial structure. The only differences are the higher independence index, debt/sales and long-term debt ratios. A number of authors suggest that FBs prefer financing their businesses with more equity than debt, because of their risk aversion.

Finally, FBs show significantly lower revenues per capita and workforce productivity. This result could be justified by the negative influence of family on the fairness of human resource decision processes and outcomes.
From “Exploring the Effect of Family Control on the Characteristics of SMEs in Northern Italy”. FCF=family businesses. NFF= no family businesses
Conclusion
FBs are a complex research object to be studied because of their variety. In our opinion, it does not exist a perfect model of corporate governance for this type of company: every model must be analyzed based on the context where it operates.
Family should avoid the error of associating the firm with family estate, in order to not prefer
(overall non-economical) interests of the family instead of the company.
The daily challenge is finding the right balance between family interests and company performance: therefore, we consider it is indispensable the presence of external managers who can help the ownership to overcome internal conflicts.
Gabriele La Ferrara Università degli Studi di Catania
Daniele Greco

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