International Journal of Law and Management

Family firms, board structure and firm performance: evidence from top Indian
firms
R. Rathish Bhatt, Sujoy Bhattacharya,
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evidence from top Indian firms", International Journal of Law and Management, Vol. 59 Issue: 5,
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Family firms, board structure and Evidence from

top Indian
firm performance: evidence from firms

top Indian firms

R. Rathish Bhatt 699
Goa Institute of Management, Goa, India and Vinod Gupta School of Management,
Indian Institute of Technology Kharagpur, Kharagpur, India, and Received 4 February 2016
Accepted 17 March 2016

Sujoy Bhattacharya
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Vinod Gupta School of Management, Indian Institute of Technology Kharagpur,

Kharagpur, India

Abstract
Purpose – Given the prevalence of family-run businesses in India, this paper aims to empirically investigate
the impact of family firms on the relationship between firm performance and board characteristics. The
effectiveness of board characteristics such as independent directors, chairman independence, role duality,
non-executive directors, board busyness, board size, board meetings and board attendance are studied in the
Indian context.
Design/methodology/approach – The sample consists of top-listed firms in India for the period 2002 to
2012. Board index was constructed to capture the governance quality of the firm. The authors also study the
relationship between board structure and firm performance by segregating the sample based on family
management, family ownership and family representative directors. Random effects model was used for the
regression analysis in the study.
Findings – The authors find a negative effect of board structure on firm performance in family firms
compared to non-family firms. Contrary to the most Western literature, family management was not found to
significantly affect firm performance as compared to that of professionally managed firms. In the subset
analysis of family firms, higher proportion of family ownership and family representative directors did not
show any significant impact on the firm performance. Having a higher proportion of independent directors,
larger board size or an independent chairman does not appear to improve this insignificant relationship
between family firms and firm performance. Also, in family firms, no significant difference in performance is
noticed before and during recession period.
Originality/value – The study uses a self-defined corporate governance index to measure the governance
parameters, specifically the board characteristics. The results documented in this study adds to the debate on
the generalizability of the findings in Western governance studies in emerging markets like India with unique
institutional development background.

Keywords India, Family firms, Corporate governance, Firm performance

Paper type Research paper

1. Introduction
Family businesses are the most dominant among publically traded firms across the world
(Shleifer and Vishny, 1986; Burkart et al., 2003; Anderson and Reeb, 2003; La Porta et al., 1999).
In Continental Europe, about 44 per cent of publicly held firms are family-controlled (Faccio International Journal of Law and
Management
and Lang, 2002). In the USA, the equity ownership concentration is modest; among the Fortune Vol. 59 No. 5, 2017
pp. 699-717
500 firms, around one-third is family firms (Anderson and Reeb, 2003). The concentration of © Emerald Publishing Limited
1754-243X
ownership was found to be higher in other developed nations (Faccio and Lang, 2002; DOI 10.1108/IJLMA-02-2016-0013
 IJLMA Franks and Mayer, 2001; Gorton and Schmid, 1996). Family businesses dominate many
59,5 developing economies with about two-third of the firms in Asian countries owned by families
or individuals (Claessens et al., 2000). In India, around 60 per cent of the listed top 500 firms are
family firms (Chakrabarti et al., 2008). These family firms hold large equity stakes and more
often than not have family representation on the board of directors. Family equity stake in
Indian firms may be divided across individual holdings by promoters and their family
700 members, privately held firms and through cross-holdings from other listed group businesses.
The control and influence exerted by family firms may lead to performance difference with the
non-family firms (Anderson and Reeb, 2003).
The impact of organizational form (separate ownership and control or combined
ownership and control) on firm performance has been mixed empirically. Berle and Means
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(1932) and Jensen and Meckling (1976) asserted that with the separation of ownership and
control, there arises a potential for conflict of interest, which leads to the reduction in firm
value. Managers may pursue activities in self-interest at the expense of profit maximization
creating agency costs. The costs involved in monitoring the management and the difficulty
of developing contracts to accurately specify the actions of the managers in the interest of
the shareholders leads to lower market valuation of the firm.
Contrary to this, Fama and Jensen (1983) argue that separation of ownership and control
is advantageous as the efficiency costs outweigh the agency costs. Institutional mechanisms
evolve over time to align with the objectives of managers and the shareholders (James, 1999).
Firms with combined ownership and control may choose to pursue different investment rule
and may have incentive to forgo profitable investment opportunity thereby reducing the
firm value (Fama and Jensen, 1985; James, 1999). Active shareholders act as a mechanism for
monitoring the firm management. However, shareholders who own very few shares of a
firm have little incentive to do so. On the other hand, blockholders or large shareholders who
have a substantial investment in a firm can play a key role to mitigate the agency problem.
Blockholders can be the family or promoters of the company or institutional investors.
Owing to the percentage of votes they hold, blockholders can pressurize the firm
management toward improving investor protection (Shleifer and Vishny, 1997).
Blockholders can force change the management that fails to deliver the expected results
either in an AGM or through proxy fights in the case of a staggered board. A positive
correlation between institutional investor’s involvement and firm performance has been
found in the literature (Agrawal and Knoeber, 1996; Strickland et al., 1996; Shome and Singh,
1995). However, a major problem is that the voting by the institutional investors has been
low historically (Hampel, 1998) and those who vote also may be just “Box Tickers” who vote
without considering the issues appropriately (Solomon, 2007). Others, like the mutual fund
houses and the insurance companies, opt to sell their shares rather than have their say on
the management of the firm. Another issue is that these institutional investors may hold a
highly diversified portfolio, making it difficult for them to focus on any one company. In
some cases, these institutional investors may exert pressure on the management to further
their own gains rather than of all the shareholders (Shleifer and Vishny, 1997).
This potential tradeoff between high agency cost of monitoring and clash of interest
between managers and shareholders may not exist in family firms (James, 1999). Family
blockholders can mitigate the agency problem associated with the separation of ownership
and management (Villalonga and Amit, 2006; Anderson and Reeb, 2003) and, hence, should
have a positive effect on firm value (Berle and Means, 1932). Combining ownership and
management can help mitigate managerial opportunism (Demsetz and Lehn, 1985). Family
blockholders have a strong incentive, by way of protecting their family wealth, to monitor
managers and minimize free rider problem associated with minority shareholders
 (Anderson and Reeb, 2003; Barontini and Caprio, 2006). At the same time concentrated Evidence from
shareholders can, in exchange for profits, extract private benefits from the firm (Fama and top Indian
Jensen, 1983; Shleifer and Vishny, 1997; Demsetz, 1983). Thus, concentrated shareholders
firms
can generate conflict of interest with minority shareholders (Burkart et al., 2003). The impact
of blockholdings by family members on firm performance has yielded mixed empirical
results. Family firms were found to perform better than nonfamily firms more so when a
family member serves as CEO (Anderson and Reeb, 2003; Maury, 2006). Contrary to these 701
results, family firms were not found to have better firm performance (measured by
Tobin’s q) as compared to nonfamily firms (Holderness and Sheehan, 1988; Miller et al.,
2007). The corporate governance practices of family firms are also found to differ from those
of nonfamily firms (Bartholomeusz and Tanewski, 2006).
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So, does family firms improves firm performance or destroys the firm value? Also, how
effective are corporate governance mechanisms in controlling the agency costs in family
firms. Is there any significant difference in the relationship between board structure and
firm performance among family and nonfamily firms? We explore these questions, by
studying the board structure and ownership pattern using a sample of top Indian firms from
2002 to 2012 and comparing family firms and nonfamily firms. Most governance studies on
family firms have used data from the developed countries (Jameson et al., 2014). Given the
predominance of controlling shareholders in emerging economies, a country level study in
the Indian context will help to improve our understanding of the impact of controlling
shareholders on corporate governance and firm performance.
To provide a context for this study, we briefly describe the institutional background in
India. India inherited a financial market developed by the British India and a legal system
based on British laws that had excellent provision for shareholder protection (La Porta et al.,
1998). Despite these advantages, law enforcement remained a problem. India had its share of
issues arising out of poor monitoring of Indian firms, law enforcement, limited information
dissemination and licensing requirements. Those issues resulted in the stock market
scandals, insider trading issues and allotment of preferential shares to family members at a
discount (Khanna and Palepu, 2004; Rajagopalan and Zhang, 2008). Indian legal system
today is characterized by long delays due to limitations in resources. A case in point is the
bankruptcy resolution, which is deemed to take the longest time to resolve and has the
lowest rate of recovery (Kang and Nayar, 2004).
Post-independence, India adopted the development strategy of import substituting
industrialization. The set of regulations laid out to implement this strategy in the Industries
Act 1951 resulted in a system that required businesses to obtain multiple licenses and
bureaucratic approvals (Chakrabarti et al., 2008). This system labeled as “license-permit raj”
created institutional barriers for smaller businesses, thereby weakening the competition
(Reed, 2002). Further, the equity markets were illiquid, and the banks were reluctant to fund
private sector due to weak creditor protection. Thus, the business environment benefitted
those with government connection while discouraging market-based interactions. This
institutional business environment led to the growth of the family business group and
concentrated shareholdings (Chakrabarti et al., 2008).
These behavioral and institutional differences in emerging markets can provide different
insights into corporate governance (Fan et al., 2011). More so for the Asian countries; the
diverse institutional development background makes the corporate governance issues
unique (Peng and Jiang, 2010). As mentioned in the literature above, Indian firms are
characterized by large shareholders and more so by the founding families. This presents a
unique setting for studying their impact or lack of it on the firm’s corporate governance.
 IJLMA This study provides, to our knowledge, the first multi-year comparative analysis of the
59,5 relationship between board structure and firm performance of family firms in India.
The paper is subsequently structured as follows. Section 2 outlines the potential benefits
and negative effects of family firms. Section 3 details the sample data and the methodology
used in the analysis. Section 4 reports the results of the analysis and Section 5 discusses the
results and concludes the paper.
702
2. Potential benefits of family firms
Controlling blockholders like family can have potential benefits and competitive advantage.
The extent literature on family firms focuses mostly on the agency problem. The problem in
widely held firms includes limited ability to select reliable agents, monitor the selected
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agents and ensure performance (Fama and Jensen, 1983). An effective monitoring can
improve firm performance and reduce agency cost (Fama and Jensen, 1983; Jensen and
Meckling, 1976). The principle agent conflict associated with widely held firms may be
reduced by concentrated blockholders, specifically the family blockholders, as they have a
significant economic incentive to monitor the management (Demsetz and Lehn, 1985).
Specifically, the substantial intergenerational ownership stake and having a majority of
their wealth invested in a single business, the family firms have strong incentive to monitor
the management. The lengthy involvement of family members in the business, in some
cases spanning generations, permits them to move further along the learning curve. This
superior knowledge allows the family members to monitor the managers better (Anderson
and Reeb, 2003). Also, this long-term presence of family members in their firm leads to
longer investment horizons than other shareholders and may provide an incentive to invest
according to market rules (James, 1999). This willingness of family firms to invest in the
long-term project leads to greater investment efficiency (Anderson and Reeb, 2003; James,
1999; Stein, 1988). Another advantage of having a long-term presence of family firms is that
the external suppliers, dealers, lenders, etc., are more likely to have favorable dealings with
the same governing bodies, owing to the long-term dealings and reputation, than with
nonfamily firms. This sustained presence of family necessitates having their reputation
maintained (Anderson and Reeb, 2003).
Thus, family firms have several advantages while monitoring managers, superior
knowledge, longer investment horizons and the need to pass on the business to future
generation. Consistent with this argument, several studies have shown that family firms
have superior performance compared to nonfamily firms. In large public US firms, stronger
firm performance was found in family firms compared to nonfamily firms (Anderson and
Reeb, 2003). In Japan, the family firms owned or managed by the founder showed superior
performance (Saito, 2008). In a study of 13 Western European countries, it was found that
family control was associated with higher valuation (Maury, 2006). In listed Swiss firms,
Isakov and Weisskopf (2014) found that family firms were more profitable than non-family
firms.
The controlling families are often involved in the management of the firms, reducing the
agency problem of owner-manager conflict. Combining ownership and managerial control
can help mitigate the managerial expropriation (Demsetz and Lehn, 1985). This
nonseparation of management and ownership also reduces the agency costs involved in
establishing the mechanism to monitor the management (García-Ramos and García-Olalla,
2011). Morck et al. (1988) suggest that founder CEOs bring in innovation and value
enhancing expertise. Family firms intend to maintain continuity by passing on the business
to the next generation of the family (Casson, 1999; Chami, 1999). Thus, to improve the
viability of the company for a longer time horizon, the present generation family managers
 may take decisions to maximize the long-term firm value. The empirical results on the Evidence from
impact of family management on firm performance have been mixed. In the US firms, CEOs top Indian
who are family members had a positive relationship with accounting measures of
performance (Anderson and Reeb, 2003; McConaughy et al., 1998). Family firms, where the
firms
founding family is on the supervisory or the executive board, showed better firm
performance in German firms (Andres, 2008). Villalonga and Amit (2006) found that family
ownership creates value when a family member serves as CEO or the chairman of the firm.
The literature suggests that having a family CEO may be beneficial to the value of the firm. 703

3. Potential costs of family firms

Family firms are also said to be fraught with nepotism, family disputes, capital restrictions,
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exploitation of minority shareholders and executive entrenchment, all of which adversely

affect firm performance (Allen and Panian, 1982; Chandler, 1990; Faccio et al., 2001; Gomez-
Mejia et al., 2001; Perez-Gonzalez, 2006; Schulze et al., 2001, 2003). Expropriation of minority
shareholders by large shareholders may generate additional agency problem (Faccio et al.,
2001). Concentrated shareholders, by virtue of their controlling position in the firm, may
extract private benefits at the expense of minority shareholders (Burkart et al., 2003). Capital
expenditure can be affected by the families’ preference for special dividends (DeAngelo and
DeAngelo, 2000). Employee productivity can also be adversely affected by family
shareholders acting on their own behalf (Burkart et al., 1997). Family firms are found to
show biases toward business ventures of other family members resulting in suboptimal
investment (Singell, 1997). Family shareholders tend to forgo profit maximization activities
owing to their financial preferences which often conflicts with those of minority
shareholders (Anderson and Reeb, 2003).
The empirical evidence has also backed these negative aspects of controlling
shareholding as family firms have been found to have an adverse effect on firm
performance. Family ownership structure in US firms is perceived as less efficient and
profitable than dispersed ownership (Anderson and Reeb, 2003; Morck, 2007; Singell, 1997).
Holderness and Sheehan (1988) using Tobin’s q as performance measure found that family
firms have lower firm performance than nonfamily firms. The proportion of family
shareholdings has also been found to have an impact on the firm performance. Anderson
and Reeb (2003) show that when the family ownership exceeds 30 per cent, the gains from
family control starts to taper off. Studies from other countries have also provided evidence
for the adverse effect of family ownership on firm value. In Canadian and Swedish firms,
family shareholders were found to have a negative effect on firm performance (Morck, 2007;
Cronqvist and Nilsson, 2003). In East Asian countries where transparency is low, the family
firms are shown to harm minority shareholders (Faccio et al., 2001).
Preference for family members for the executive positions in family firms suggests a
restricted talent pool for selection of qualified candidates (Anderson and Reeb, 2003). Family
CEO may also lead to resentment among other senior outside executives of the firm as
talent, merit and tenure are not seen as criteria for top management positions (Schulze et al.,
2001). This limitation in talent pool may lead to competitive disadvantage for the family-run
businesses when compared to nonfamily firms. Also, the accountability of a family CEO
toward minority shareholders may be less than that exhibited by professional managers
(Gomez-Mejia et al., 2001). The role of family members in selection of managers and the
desire to remain in control of the firms may lead to greater managerial entrenchment
(Gomez-Mejia et al., 2001). Shleifer and Vishny (1997) opine that the greatest cost imposed by
large shareholders is by continuing to run the business in spite of being incompetent and
unqualified.
 IJLMA The mixed results on the impact of the family firms on firm performance raise several
59,5 questions. Does family firms perform better compared to non-family firms? How do family
firms impact the relationship between board structure and firm performance? Does having a
family CEO improve firm performance compared to a professionally managed firm? Does
having a family CEO impact the relationship between board structure and firm
performance? Having analyzed the difference between family and nonfamily firms, the
704 following question can be asked for within family firms analysis. Within the family firms,
does having a higher proportion of family ownership improve firm performance? How does
higher proportion of family representative directors impact the firm performance of family
firms? Again, does having a professional CEO improve firm performance compared to
family CEO in family firms? How did family firms cope with the recession period? Also, does
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having a larger board, higher proportion of independent directors and independent

chairman improve the performance of family firm? These are some of the questions that we
address in this study.

4. Research design: data, variables and analysis

4.1 Sample
For our investigation, we use top Indian firms listed on the Bombay Stock Exchange (BSE),
specifically the firms forming a part of the BSE 200 index. We exclude financial institutions
and public sector units as strong government regulations may potentially affect
performance of these firms. Firm-specific control variables were collected from the ACE
Equity database. Governance data comprising of board characteristics such as independent
directors, chairman independence, role duality, non-executive directors, board busyness,
board size, board meetings and board attendance, was manually collected from the annual
reports of the firms from ReportJunction database. As per Clause 49 of listing agreement,
firms are required to file the corporate governance report quarterly; however, for our
empirical analysis, we considered annual performance of the firm and select the financial
year-end corporate governance reports. We excluded the firms where the governance data
was not available for more than one year. Our final sample consisted of 100 firms yielding
1,100 firm-years or observations as our sample was restricted by the publically available
data from 2002 to 2012. The Variance inflation factor (VIF) was calculated for each
independent variable, and all VIF values were less than 10 suggesting that there is no
multicollinearity issue (Myers, 1990).

4.2 Variables and data source

We identify the family firms based on the fractional equity ownership of the family
members and the presence of family members on the board of directors. We were also
guided by the classification of the family firms for listed Indian firms given by the ACE
Equity database. We use a dummy variable that equals one for family firms and zero
otherwise. Our study incorporates variables such as family management, family
shareholdings and family representative directors on the board. We measure
family management using a dummy that indicates the presence of a family CEO. Family
shareholdings represent the percentage of equity held by the family members in the firm.
Family representative directors are the proportion of family members on the board. We also
study the recession period and the impact it had on the family firms. According to National
Bureau of Economic Research (NBER), the recession that began in December 2007 officially
ended in June 2009. We use a dummy variable to specify the period as pre-recession from the
year 2002 to 2008 with a value 0, and recession period from the year 2008 to 2012 with a
value 1 (Table I).
 Variables Description Source
Evidence from
top Indian
Performance Firm performance is measured using Return on Assets AceEquity database firms
(ROA), Tobin’s q, Return on Equity (ROE) and Return on
Capital Employed (ROCE)
Independent Directors We assign a score of 0, 1, 2 for <50%, 50-75% and >75% Annual Report
independent directors on the board, respectively
Separation of CEO and Measured using dummy variable with a value one if the Annual Report 705
Chairman’s Role CEO and Chairman are separate and zero otherwise
Chairman We use dummy variable by assigning a score of 1 if the Annual Report
Independence chairman is independent and zero otherwise
Non-Executive We assign a score of 0, 1, 2 for <50%, 50-75% and >75% Annual Report
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Directors independent directors on the board, respectively

Frequency of Board Measured as the number of times the board has met in a Annual Report
Meetings financial year. We use dummy zero if the number of board
meetings is less than four, one if it is between four to eight
board meetings and two for more than 8 board meetings
Attendance of the We assign a score of 1 if the average board attendance is Annual Report
Board Members greater than 75% and zero otherwise
Board Size We assign a score of zero if board size is less than eight and Annual Report
greater than 15 and one otherwise
Board Busyness We assign a score of zero if average other board Annual Report
membership is greater than 10; one if it is between five and
10 and two if it is less than 2
Board Score a dummy variable with a value of one denoting top 60% Annual Report
firms and zero for the bottom 40%
Family Firms Dummy variable with value 1 for family firms, and zero AceEquity database
otherwise
Family CEO We use dummy variable with value 1 for family CEO and Annual Report
zero otherwise
Family Representative Measured as the proportion of family members on the board Annual Report
Directors
Family Ownership Represents the percentage of equity held by the family AceEquity database
members in the firm
Leverage Measured as total debt to total assets AceEquity database
Firm Age Age of firm since the date of incorporation AceEquity database
Firm size Natural log of total assets AceEquity databas
Sales growth We measure sales growth as the geometric mean of sales AceEquity database
growth over the past 3 years
Stock Volatility We use the four year average of monthly standard deviation AceEquity database
of stock price returns
Industry Dummy We classify the firms based on their two-digit NIC code AceEquity database
Recession We use dummy variable to specify the period of time as pre-
recession from the year 2002 to 2008 with a value 0 and
Table I.
recession period from the year 2008 to 2012 with a value 1
Description and
Notes: This table presents the description of variables used in this study along with the data source. The source of the
sample period for the study is from 2002 to 2012 variables used

4.3 Dependent variable

For our analysis, we use accounting measures of performance namely return on equity
(ROE) and return on capital used (ROCE). As several studies on family firms use Tobin’s q
as a measure of firm performance, we also use Tobin’s q measured using the book value of
debt plus market value of common stock divided by the book value of assets as a proxy for
Tobin’s q (Black et al., 2014; Khanna and Palepu, 2000).
 IJLMA 4.4 Explanatory variables
59,5 We study the role played by the directors of a firm by categorizing the various board-related
factors into two broad categories, namely, board leadership and board activity. On the basis
of the agency theory, we investigate the board leadership roles played by the directors of the
firm and its impact on the firm performance. Board activity is examined using the resource
dependency theory. Board Leadership comprising of factors relating to the board leadership
706 that includes role duality, independent directors, chairman independence and non-executive
directors and Board Activity is measured by variables: board meeting, board size, board
attendance and board busyness.
We operationalize the various board parameters as follows: For our board index,
based on the percentage of Independent Directors on the board, we divide the firms into
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three sets, the top, middle and bottom, and we respectively assign a score of 0, 1, 2 for
<50 per cent, 50-75 per cent and >75 per cent independent directors on the board.
Similarly, we assign the scores of 0, 1 and 2 for Non-Executive Directors on the board. For
Role Duality, we assign a score of one for nonduality (splitting of the role of CEO and
chairman) and zero for role duality. Similarly, for Chairman Independence, we use
dummy variable by assigning a score of 1 if the chairman is independent, and zero
otherwise. The dummy for Board Size is assigned a score of zero if board size is less than
eight and greater than 15 and one otherwise. For the number of Board Meetings, we use a
dummy variable that is equal to zero if the number of board meetings is less than four,
equal to one if board meetings are between four to eight and two otherwise. For Board
Attendance, we assign a score of 1 if the average board attendance is greater than
75 per cent and zero otherwise. To measure Board Busyness we assign a value zero if
average outside board membership is greater than 10; one if it is between five and 10 and
two if it is less than two.
The governance index is constructed by adding the points for each board parameter
discussed above. First, we divide the board parameters into two broad sets, namely, board
leadership and board activity. We then assign weights to the two sets to form governance
index. We assign more weigh to board leadership by assigning 60 per cent weightage in the
overall score. This index is then converted to dummy variables by assigning a value of 1 to
the top 60 per cent of the firms having the strongest board parameters and zero otherwise.
We do this to compare the top firms with bottom firms with respect to the board parameters.
Though this simple index may not reflect the impact of individual board parameters, it does,
however, help in distinguishing between the firms with a stronger board and those with
weaker board parameters.
We use the board index (dummy variable that takes the value of 1 for the top 60 per cent
of the firms having the strongest board parameters and zero otherwise) as the explanatory
variable. Additionally, we also use the proportion of independent directors, board size and
chairman independence (dummy variable that takes the value 1, if the chairman is
independent else 0) as explanatory variables in our subset analysis.

4.5 Control variables

To control for industry and firm characteristics, we use several control variables in our
analysis, namely, leverage (ratio of debt to total assets), firm age (number of years since the
date of incorporation) and firm size (log of total assets), sales growth (moving geometric
average of net sales growth over the past three years), asset tangibility (fixed asset to total
asset), stock volatility (4 year average of monthly standard deviation of stock price returns)
and Industry classification based on two-digit National Industrial Classification (NIC) code.
The data for these financial parameters were collected from ACE Equity database (Table I).
 4.6 Method Evidence from
In our study, we observe the same firm at different point of time, and hence, we use the top Indian
random effects model for our regression analysis (Arellano and Bond, 1991; Blundell
and Bond, 1998). Black et al. (2014) opines that in developing countries a good approach
firms
to study this kind of relationship would be to build a panel data and use fixed or
random effects model. Our primary interest is in analyzing the relationship between
board structure and firm performance in a family firm. The analysis also includes
additional variables such as family management, family shareholdings and family 707
representative directors on the board. Serial correlation and heteroskedasticity are
controlled by using the Huber White Sandwich Estimator (clustered) for the variance.
Panel data analysis was conducted using the R statistical package (Version 3.1.1) with
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add-on package “PLM” (Croissant and Millo, 2008).

The regression we use for the multivariate analysis takes the form:

Performance ¼ b 0 þ b 1 ð Family FirmÞ þ b 2 ðCG ScoreÞ

þ b 3 ð Family FirmÞ * ðCG scoreÞ þ b 4 ðControl VariablesÞ
þ b 5-34 ðTwo Digit SIC CodeÞ þ « (1)

where:
Firm Performance is the accounting measures of performance ROA and ROE and
Tobin’s q.
Family Firms is the dummy variable with value 1 for family firms, and zero otherwise.
Control Variables are leverage, age, firm size, sales growth, tangibility, stock volatility,
two-digit NIC code.

5. Findings and discussions

5.1 Summary statistics
Descriptive statistics for the sample data shown in Table II is broken down into the two
groups: family and nonfamily firms. The last two columns show the difference of means and
the t-values between the family and nonfamily firms. Family firms constitute 73 per cent of
our sample. Among family firms, about half of the sample had promoter CEO or CEO from
the promoter family and about 30 per cent firms had both the CEO and the chairman
from the founder family. This suggests an active participation of founders and founder
families in the management of Indian firms.
The governance characteristic of our sample shows that the mean independent directors
for family firms (5.423) is higher than that for nonfamily firms (4.878), and the difference is
significant at 1 per cent level. The mean independent chairman and mean role duality of
nonfamily firms is higher than family firms and the difference is significant at the 1 per cent
level in both cases. There is not much of a difference in the mean board size and non-
executive directors between the two groups. The mean for the frequency of board meeting is
slightly higher for family firms, but the mean board attendance is higher for nonfamily
firms. The mean board busyness for family firms (5.206) was significantly higher compared
to nonfamily firms (4.424).
The firm level characteristics are reported in Table II. The mean performance (ROE,
ROCE and Tobin’s q) of nonfamily firms is significantly higher than family firms indicating
that nonfamily firms on an average perform better than family firms. Consistent with this
observation we find that the net sales growth is also higher for nonfamily firms. Family
firms exhibit higher stock volatility compared to nonfamily firms. Family firms are
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59,5

708
IJLMA

Table II.

non-family firms
Summary statistics
for family firms and
Family Firms Non-Family Firms Difference
Variable Mean SD Minimum Median Maximum Mean SD Minimum Median Maximum Mean p-value

Chairman Independence 0.039 0.194 0 0 1 0.339 0.474 0 0 1 0.300 0.000

Role Duality 0.710 0.454 0 1 1 0.790 0.408 0 1 1 0.080 0.005
Board Size 10.300 2.464 4 10 18 10.437 2.835 5 10 18 0.137 0.466
Independent Director 5.423 1.668 1 5 12 4.878 1.929 1 4 11 0.545 0.000
Independent Director (%) 0.530 0.118 0.125 0.500 0.900 0.467 0.122 0.083 0.500 0.917 0.063 0.000
Non-Executive Director (NED) 7.662 2.174 1 7 16 7.332 2.063 4 7.500 12 0.330 0.022
NED (%) 0.745 0.123 0.250 0.750 1 0.711 0.119 0.444 0.692 0.923 0.035 0.000
Board Meeting 6.486 2.250 4 6 24 6.280 1.955 3 6 14 0.207 0.140
Attendance (%) 0.802 0.118 0.306 0.815 1 0.805 0.127 0.476 0.826 1 0.004 0.676
Busyness 5.206 2.387 0.111 5.1 15 4.424 1.984 0.444 4.3 16 0.782 0.000
Family Representative
Directors (FRD) 2.792 1.514 0 3 8
FRD (%) 0.271 0.133 0 0.25 0.7
Family CEO 0.409 0.492 0 0 1
Board Leadership Score 51.065 15.183 0 50 100 51.224 16.445 0 50 100 0.159 0.886
Board Activity Score 71.664 12.736 33.333 66.667 100 72.930 12.521 33.333 66.667 100 1.266 0.143
Board Index 0.501 0.500 0 1 1 0.521 0.500 0 1 1 0.020 0.566
ROE 23.578 17.483 22.750 21.170 117.519 32.589 25.087 14.870 27.350 131.090 9.011 0.000
ROCE 22.959 16.957 12.935 19.280 121.820 42.552 31.836 13.206 37.100 153.756 19.593 0.000
Tobin’s q 2.33 1.61 0.210 1.84 13.26 3.902 1.99 0.37 2.32 11.75 1.569 0.000
Leverage 0.245 0.164 0 0.250 0.840 0.080 0.139 0 0.01 0.65 0.164 0.000
Total Assets 81800 228591.7 558.640 26198.75 2951400 62618.150 89224.540 891.540 30084.200 694465 19181.850 0.045
Firm Size 10.200 1.287 7.270 10.170 13.780 10.309 1.241 7.250 10.325 13.450 0.109 0.207
Family Shareholdings 47.156 19.914 0 46.240 97.900
Age 39.135 25.118 2 30 115 48.269 21.911 10 48 102 9.134 0.000
Sales Growth 20.148 19.831 51.268 17.495 179.660 22.340 36.008 14.560 15.140 328.600 2.193 0.3285
Asset Tangibility 0.286 0.154 0.000 0.270 0.700 0.215 0.151 0.010 0.180 0.670 0.071 0.000
Stock Volatility 15.485 5.739 5.298 14.388 45.464 12.859 5.958 5.325 11.457 51.656 2.625 0.000
Notes: This table presents the descriptive statistics for our sample firms. The table reports the mean, median, standard deviation, minimum and maximum value
for relevant variables used in this study for family and nonfamily firms. The last two columns show the difference in means for family and nonfamily firms and
two-sided p-values
 leveraged more compared to nonfamily firms. The mean total assets for family firms are Evidence from
also significantly higher than those for nonfamily firms. These results suggest that the top Indian
nonfamily firms are better performers than family firms.
firms
5.2 Multivariate analysis
The result of the panel data analysis to examine the impact of board index on firm
performance in family firms is presented in Table III. The dummy variable board index 709
takes the value of 1 for the top 60 per cent of the firms having the strongest board
parameters and zero otherwise. We divide the firms into two groups representing the family
and nonfamily firms using a dummy variable, which equals one for family firms and zero
for nonfamily firms. The interpretations of the coefficients of the regression results are
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carried out as follows: The coefficient of the interaction term (family firm  board index)
represents the incremental effect of board index on the performance of family firms with
respect to the reference group non-family firm. Similarly, the coefficient of the board index
represents the incremental effect of board index on the reference group non-family firms.
The incremental effect of board index on the group family firm is given by the sum of the
coefficients of board index and coefficient of the interaction between the family firm and
board index [Board Index þ (FF  Board Index)].
From Table III Column 1, we find that the interaction variable (Family Firms  Board
Index) is negatively and significantly associated with firm performance measured by both
ROE and ROCE. This result suggests that the incremental effect of the board score, for
family firms with respect to nonfamily firms, is having a negative impact on the firm
performance. The coefficient of board index shows that there is a positive effect of board

ROE ROCE Tobin’s q

Variable (1) (2) (3) (4) (5) (6)

Family Firm (FF) 2.411 – 7.256* – 0.647** –

Family CEO (FCEO) – 5.810** – 3.310 – 0.471
Board Index 3.789* 0.944 5.109** 0.378 0.318** 0.097
Board Index 3 FF 4.439* – 5.520** – 0.230 –
Board Index 3 FCEO – 2.975 – 2.632 – 0.121
Leverage 16.885*** 18.251*** 45.069*** 46.200*** 2.575*** 2.728***
Age 0.100 0.126** 0.1752** 0.199** 0.018*** 0.021***
Firm Size 1.868*** 1.903*** 2.396*** 2.406*** 0.011 0.006
Sales Growth 0.123*** 0.121*** 0.123*** 0.122*** 0.004** 0.003**
Asset Tangibility 5.839 7.475 10.283** 11.147** 1.596*** 1.699***
Stock Volatility 0.255** 0.239** 0.256** 0.248** 0.026*** 0.024**
Two Digit NIC Code
Dummies Yes Yes Yes Yes Yes Yes
Intercept Yes Yes Yes Yes Yes Yes
Observations 1094 1094 1094 1094 1094 1094
Adjusted R2 0.099 0.098 0.203 0.193 0.141 0.138
F 3.194*** 3.150*** 7.443*** 6.980*** 4.783*** 4.654***
Notes: This table represents the results of random effects regression of board structure on firm Table III.
performance for family firms, as compared to nonfamily firms, for the years 2002-2012. Columns 1, 3 and 5 Effect of board
show the results of interaction effect of family firm (FF) and board index on firm performance. Columns 2, 4 composition on firm
and 6 present the results of interaction effects of family CEO (FCEO) and board index on firm performance.
The dependent variable is ROE in Columns 1 and 2, ROCE in Columns 3 and 4 and Tobin’s q in Columns 5 performance (family
and 6. The regression has an unreported intercept term. Industry classification based on two-digit NIC code firms vs non-family
is included in all estimations. *, ** and *** significant at 10, 5 and 1%, respectively firms)
 IJLMA index on firm performance of the nonfamily firms. Thus, the incremental effect of board
59,5 index on family firm ( b for ROE = 3.789 þ (–4.439) = –0.65) is negative. Similar results are
shown with the other two performance measures ROCE and Tobin’s q (Columns 3 and 5).
Thus, it is shown that for family firms, any improvement in board score decreases the firm
performance. This result could be because the family firm management may endeavor for
the improvement of the board structure as a reaction to the poor firm performance in the
710 past.
In Columns 2, 4 and 6 of Table III, the Family Firm indicator variable of Columns 1, 3 and
5 is replaced by the indicator variable Family CEO. When we segregate the firms based on
the family CEO and nonfamily professional CEO managed firms, we find no significant
difference in the relationship between board index and firm performance. This shows that
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having a family CEO or professional CEO does not make any significant impact on the
relationship between corporate governance and firm performance. This result is contrary to
the studies which find that family firms managed by family CEO tend to be less profitable
than professionally managed firms (Gomez-Mejia et al., 2001; Singell, 1997). Our results are
also contrary to studies that have showed positive relationship between family management
and firm performance (Anderson and Reeb, 2003). Our results provide evidence on the
irrelevance of family management on the relationship between board structure and firm
performance in large firms in Indian context.
The control variables, leverage, was found to be negatively and significantly associated
with firm performance for both the models and all the three performance measures which
are consistent with other studies (Titman and Wessels, 1988; Friend and Lang, 1988). Firm
age was found to have a positive and significant effect on firm performance indicating
experienced firms have an edge over newer firms. Firm size was negatively related to firm
performance indicating that larger firms are less profitable. Sales growth was positive and
significant. Asset tangibility was found to be negative, significant only in case of ROCE and
Tobin’s q as the performance measure. Stock volatility as expected was negatively related to
firm performance.
In Table IV, we also analyze the result of subsample containing only the family firms to
study the effects of having professional CEO for the family firm, the proportion of family
ownership and family representative directors on the firm performance. Columns 1, 5 and 9
show the results for family CEO for performance measures ROE, ROCE and Tobin’s q
respectively. Similar to our earlier findings, the results for family CEO with respect to
professional CEO did not show any significant difference for all the three measures of
performance. Thus, in a family firm having a professional CEO does not seem to impact the
relationship between board score and firm performance. This result confirms to the study
done by others that find no difference between family-managed and professionally managed
firms (Daily and Dalton, 1992; Willard et al., 1992). This result may be possibly due to
professional CEO being socially connected to the controlling family of the firm who controls
the actions of the CEO. Another reason could be that the role of family members in the
selection of managers and the desire to remain in control of the firms may lead to greater
managerial entrenchment (Gomez-Mejia et al., 2001).
Next, we analyze the results for the proportion of family shareholding. It is expected that
the substantial intergenerational ownership stake and having a majority of their wealth
invested in a single business present a strong incentive for the family firms to monitor the
management (Demsetz and Lehn, 1985). Thus, having higher family ownership and the need
to pass on the business to the future generation, it is expected that the firm performance
would be positively associated with family ownership. Columns 2, 6 and 10 in Table IV
show the results for family ownership. Within the family firms, having a higher proportion
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ROE ROCE Tobin’s q

Variable (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
**
Family CEO (FCEO) 3.571 – – – 1.428 – – – 0.604 – – –
Family Ownership
(FO) – 0.130** – – – 0.02 – – – 0.001 – –
Family
representative
Directors (FRD) – – 1.410 – – – 5.773 – – – 0.056 –
Recession – 0.883 1.371 – 0.003
Board Index 0.971 1.931 1.289 1.018 0.347 0.109 1.384 1.294 0.091 0.202 0.232 0.138
Board Index 
FCEO 1.470 – – – 0.264 – – – 0.067 – – –
Board Index  FO – 0.050 – – – 0.007 – – – 0.001 – –
Board Index  FRD – – 7.269 – – – 0.128 – – – 0.629 –
Board Index 
Recession – – – 0.905 – – – 2.197 – – 0.134
Leverage 14.534*** 14.699*** 14.338*** 14.593*** 39.57*** 45.526*** 39.779*** 39.931*** 2.671*** 2.833*** 2.597*** 2.599***
**
Age 0.018 0.021 0.008 0.004 0.060 0.165 0.051 0.045 0.006 0.019*** 0.003 0.003
Firm Size 1283** 1.140 1.218** 1.045 1.151** 2.261*** 1.442** 1.38** 0.135** 0.011 0.141** 0.168**
*** *** *** *** *** *** *** **
Sales Growth 0.171*** 0.171 0.172 0.169 0.153 0.117 0.154 0.151 0.002 0.004 0.002 0.002
Asset tangibility 3.5191 4.997 3.869 5.204 1.158 9.233** 1.378 2.102 1.043** 1.470*** 0.974** 0.992**
** ** *** ** ** ***
Stock Volatility 0.145 0.194 0.154 0.196 0.206 0.287 0.217 0.240 0.007 0.024 0.011 0.011
Two Digit NIC code
Dummies Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Intercept Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Observations 808 802 808 808 808 802 808 808 808 802 808 808
2
Adjusted R 0.112 0.120 0.111 0.126 0.221 0.202 0.227 0.246 0.125 0.153 0.125 0.120
F 3.120*** 3.346*** 3.069*** 3.579*** 7.055*** 6.992*** 7.294*** 8.112*** 3.533*** 4.986*** 3.379*** 3.386***
Notes: This table represents the results of random effects regression of board structure on firm performance for family firms, for the years 2002-2012. Columns 1,
5 and 9 show the results of interaction effect of family CEO (FCEO) and board index on firm performance for family firms. Columns 2, 6 and 10 present the results
of interaction effects of Family Ownership (FO) and board index on firm performance. Columns 3, 7 and 11 represent the results of interaction effects of family
representative directors (FRD) and board index on firm performance, and finally, Columns 4, 8 and 12 present the results of interaction effects of recession and
board index on firm performance. The dependent variable is ROE in Columns 1, 2, 3 and 4, ROCE in Columns 5, 6, 7 and 8 and Tobin’s q in Columns 9, 10, 11 and
12. The regression has an unreported intercept term. Industry classification based on two-digit NIC code is included in all estimations. *, ** and *** significant at
10, 5 and 1%, respectively

family firms)
Table IV.
top Indian
Evidence from

performance (within
711

composition on firm
Effect of board
firms
 IJLMA of shareholdings by family members did not show any significant impact on the firm
59,5 performance. This result could be because despite having less than majority shareholding,
the family still retains control in the firm by virtue of highly dispersed outside
shareholdings or by being in the management of the firm.
We also examine the impact of family members on the board of directors. Advocates of
stewardship theory propose that the concentration of power and authority to a single person
712 in a firm will lead to better performance (Donaldson and Davis, 1991). Thus, having more
members in the board would strengthen family control over the management of the firm.
Alternatively, the tendency of families to forgo profit maximization activities owing to their
financial preferences (Anderson and Reeb, 2003) and biases toward business ventures of
other family members (Singell, 1997) may lead to lower firm performance. However, as
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reported in Table IV, Columns 3, 7 and 11, we find that for family representative directors,
there is no significant association with all the three measures of performance.
To analyze the impact the recession period had on the performance of the family firms,
we add the coefficient for board score and board score interacted with recession dummy
variable for the sample of family firm. Columns 4, 8 and 12 of Table IV presents the effect of
the recession on the performance of family firms. The results show a negative effect of
recession compared to non-recession period; however, it was not significant. This could be
due the caution exhibited by the controlling family, as family wealth would be at stake in the
case of any substantial losses to the firm. Also, to improve the viability of the company for a
longer time horizon, the present generation family managers may take decisions to
maximize the long-term firm value. Again, the long-term presence and reputation of family
firms helps them to have favorable dealings with external suppliers, dealers, lenders, etc.,
which are likely to continue even during any economic downturn. Hence, no discernable
difference in performance is noticed before and during the recession period.
Additionally, we sought to study the impact of specific governance mechanism in
improving the firm performance in family firms in India. We create subsample based
on above and below the median proportion of independent directors, board size and
chairman independence. Having more independent directors on the board has generally
been associated with better monitoring and improved firm performance. Table V reports the
results for the subsample analysis. From Table V, Column 1, we find that median board
independence does not show any significant relationship with firm performance. The reason
for this result could be that the independent directors may not be truly independent due to
allegiance toward the family who got them on the board. The results were similar for
subsamples of board size and firms having independent chairman shown in Columns 2-3.
Thus, this study does not find any evidence that having a higher proportion of independent
directors, larger board size or an independent chairman, improves the relationship between
family firms and firm performance.

6. Conclusion
In this study, we analyze the interaction effect of the family firms and board governance
factors on firm performance in a sample of top publically traded Indian firms. We contribute
to the growing literature on family firms by providing a multi-year analysis on the influence
of board structure on firm performance in a family firm vis-à-vis nonfamily firm in
the Indian context. In this study, we endeavor to expand our understanding of corporate
governance and to shed light on the impact of the proportion of shareholding, family
representative directors and having a professional CEO in large family firms in India. The
result of the panel data analysis shows that the interaction variable (family firms  board
score) has a statistically significant negative associated with firm performance measured by
 Tobin’s q
Evidence from
Variable (1) (2) (3) top Indian
firms
Median Independent Director 0.123 – –
Board Size – 0.046 –
Chairman Independence – – 0.055
Leverage 2.564*** 2.606*** 2.573***
Age 0.004 0.004 0.004 713
Firm Size 0.149** 0.125** 0.145***
Sales Growth 0.002 0.002 0.002
Asset Tangibility 0.915** 1.013** 0.959**
Stock Volatility 0.011 0.002 0.011
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Two Digit NIC Code Dummies Yes Yes Yes

Intercept Yes Yes Yes
Observations 808 808 808
Adjusted R2 0.119 0.119 0.118
F 3.544*** 3.550*** 3.509

Notes: This table represents the results of subset analysis for random effects regression of three board
variables on Tobin’s q for within family firms, for the years 2002-2012. Column 1 uses median independent Table V.
director dummy as the board variable. Column 2 uses Board Size as the board variable and Column 3 uses
Effect of board
Chairman Independence as the board variable. The dependent variable is ROE in Columns 1 and 2, ROCE in
Columns 3 and 4 and Tobin’s q in Columns 5 and 6. The regression has an unreported intercept term. variables on firm
Industry classification based on two-digit NIC code is included in all estimations. *, ** and *** significant performance: subset
at 10, 5 and 1%, respectively analysis

both Tobin’s q and ROE. This is consistent with the results by García-Ramos and García-
Olalla (2011) in the European context. Our result suggests that the incremental effect of the
board index score, for family firms with respect to nonfamily firms, is having a negative
impact on the firm performance.
When we segregate the firms based on the family CEO and professionally managed
firms, we do not find any significant difference in the relationship between board structure
and firm performance. We obtained similar results with subsample analysis containing only
the family firms. This result is consistent with the results of Daily and Dalton (1992) and
Willard et al. (1992) confirming the irrelevance of the management structure but contrary to
the studies by Gomez-Mejia et al. (2001) and Singell (1997) which find that family firms
managed by family CEO tend to be less profitable than professionally managed firms. Our
results also contradict the studies that show CEO’s who are family members had a positive
relationship with accounting measures of performance (Anderson and Reeb, 2003;
McConaughy et al., 1998).
In the sub-sample analysis containing only the family firms, having a higher proportion
of family ownership, family representative directors and having professional CEO for family
firms did not show any significant impact on board structure and the firm performance.
This result implies that family management and family ownership are irrelevant to the
value of the firm. The impact of the recession on family firms was also not found to be
significant compared to non-recession period. Contrary to the popular belief, we find that
having an independent board and independent chairman does not improve firm
performance. Results for the subsample based on above and below the median proportion of
independent directors do not show any significant relationship with firm performance. The
results were similar for subsamples of board size and firms having an independent
chairman. Thus, this study does not find any evidence that having a higher proportion of
 IJLMA independent directors, board size or an independent chairman, improves the firm
59,5 performance in a family firm.
The research has several limitations that need to be kept in mind while interpreting the
results. This study is limited to the analysis of publically listed top Indian firm and hence
further research needs to be conducted on a sample having a mix of large and small firms to
improve the generalizability of the results. The difficulty in obtaining reliable data on
714 exhaustive governance variables limits this study to board parameters. A natural extension
of this study would be to include a larger number of governance parameters. The
widespread pyramiding in Indian family firms makes it difficult to ascertain the quantum of
actual family ownership and hence limits the accuracy of any study on family ownership. A
cross-country research can also be conducted to analyze how the legal and regulatory
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institutional differences impact the findings presented in this study. The future extension of
this study may analyze the family firms based on the founder led family firms and firms led
by the subsequent generation of the founder family.

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Further reading
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Corresponding author
R. Rathish Bhatt can be contacted at: rathish@vgsom.iitkgp.ernet.in

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