Family firms, boards and company survival

A concern of family firms is to ensure survival across generations as a family firm. But survival also relates to whether the firm goes bankrupt or not. We know that succession presents major challenges for family firms and that many do not make it beyond the first and second generations. We also know that family firms are more risk averse than non-family firms, a reflection of the desire to see the business handed on to the next generation. However, until we carried out our study there was little systematic evidence on whether family firms are more likely to survive than non-family firms and the factors that drive such differences.

As the boards of family firms play a central role in deciding upon strategy and differ from boards in non-family firms, our focus was on examine the role of board composition. More than any other group, the board has ultimate control of the direction of the firm to ensure its survival as a viable business. Our research uses the population of private firms in the UK and is the largest study to date on this topic.

We show that family firms are more likely to survive as viable businesses than comparable non-family firms. But it is also clear that family firms put together stronger boards that play a key role in avoiding bankruptcy. Certain characteristics of the board are related to lower bankruptcy risk. These are: larger board size, older and more experienced directors, greater gender diversity, director who are located close to the business and directors who have stronger networks of contacts through holding multiple directorships. However, some features of boards are linked to higher bankruptcy risk. Firms with boards that experience greater changes in membership, and where directors have previous failure experiences are more likely to go bankrupt.

The link between family firm ownership and a greater likelihood of firm survival suggests that the family is to construct boards of directors with different kinds of expertise to help survival. Family firms exhibit greater board stability and it is the ability of family firms to hold together in times of difficulty that is important in avoiding bankruptcy. Director proximity to the firm seems important for managing bankruptcy risk. Family members are likely to be in closer communication and to have more informal interactions with other board members and the wider family group than is the case with non-family members.

Family firms generally have fewer outside directors compared to non-family firms. We find that having more outside directors tends to increase the chances of bankruptcy. It may be that outside directors in family firms are more likely to encourage riskier activities but are reluctant to become closely engaged in resolving problems of distress, or they may be unable to intervene successfully to address family conflicts that lead to distress.

Family firms have more female directors and are more likely to have a greater proportion of women directors.  Such gender diversity is strongly linked with reducing bankruptcy risk. Firms with higher levels of gender diversity also have better board stability, suggesting less conflict. Family firms are likely to have older and more experienced boards, and this is associated with lower failure risk. By drawing on the experience of the wider family group, family firms may have a ‘built-in diversity’ in terms of age, experience and gender that work through the interactions between directors and the family members not represented on the board.

Family firms also have a lower incidence of past failures amongst their directors. For family firms the potentially positive learning effects of past failures may be offset by the reputational damage within their networks. This reputational damage may be particularly acute for family businesses that have an interest in protecting the family reputation and take action to mitigate adverse consequences of previous failures.

Family firms may be recruiting board members with the expertise and contacts that can protect the financial and non-financial benefits that the family gets from maintaining its ownership and control of the business that would be lost if the business was to fail.  In contrast, in non-family firms board composition may be associated more with the skills and contacts that preserve purely financial survival.  There may be benefits from improving local director networks and mentoring schemes. Measures to enhance gender balance on boards may also have a contribution to make.

The research was carried out by Professor Nick Wilson, Director of Credit Management Research Centre at Leeds University, Professor Mike Wright, Director of the Centre for Management Buyout Research at Imperial College Business School and Dr Louise Scholes, Senior Lecturer in Entrepreneurial Management at Durham University

Leave a Reply

Your email address will not be published. Required fields are marked *