Optimal monitoring in family-owned companies? Evidence from Asia

Abstract

Manuscript Type: Empirical
Research Issue: We propose that high levels of monitoring are not always in the best
interests of minority shareholders. In family-owned companies the optimal level of
board monitoring required by minority shareholders is expected to be lower than that
of other companies. This is because the relative benefits and costs of monitoring are
different in family-owned companies.
Research Findings: At moderate levels of board monitoring, we find concave
relationships between board monitoring variables and firm performance for
family-owned companies but not for other companies. The optimal level of board
monitoring for our sample of Asian family-owned companies equates to board
independence of 38%, separation of the Chairman and CEO positions and
establishment of audit and remuneration committees. Additional testing shows that the
optimal level of board monitoring is sensitive to the magnitude of the agency conflict
between the family group and minority shareholders and the presence of substitute
monitoring.
Practitioner/Policy Implications: For policymakers, the results show that more
monitoring is not always in the best interests of minority shareholders. Therefore, it
may be inappropriate for regulators to advise all companies to follow the same set of
corporate governance guidelines. However, our results also indicate that the board
governance practices of family-owned companies are still well below the identified
optimal levels.
Keywords: Corporate Governance, Board Independence, Board of Directors, Family
Firms, Monitoring.