Board Composition: Balancing Family Influence in S&P 500 Firms

Abstract

Recent research indicates that founding families have substantial stakes in roughly one-third of the largest U.S. companies and, in these firms, control nearly twenty percent of all board seats. Burkart, Panunzi, and Shleifer (2003) suggest that a key element in the desirability of family ownership is the ability to limit the family's expropriation of minority shareholders. Consistent with this notion, we find that the most valuable public firms are those in which independent directors balance family board representation. In contrast, in firms with continued founding family ownership and relatively few independent directors, firm performance is significantly worse than in non-family firms. We also document that moderate family board presence provides substantial benefits to the firm. Additional tests suggest that families often seek to minimize the presence of independent directors, while outside shareholders seek independent director representation. These findings highlight the importance of independent directors in mitigating shareholder-shareholder conflicts and suggest that considering shareholder-shareholder conflicts provides a richer setting in which to explore corporate governance. Note: A list of the firms classified as family and non-family firms is available from the authors.