Family Firms and the Linking Benefits of Control and Corporate Purpose

Family firms have a large presence in the United States, constituting approximately 33% of the S&P 500 and 45% of the S&P 1500. Their success intersects with a perennial debate about controlling shareholders and the risk of increased agency costs that they present. This concern is especially pronounced for dual-class companies that feature a wedge between ownership and control. However, empirical evidence reveals that investors in U.S. dual-class family-firms earn a high risk premium and abnormal positive returns. This fact presents a puzzle - how do controlled family firms achieve these successes despite the prospect of agency costs? 

The conventional view is that controlled family firms can benefit from their unique ownership structure, which gives them a long-term orientation that traditional firms may lack. In new co-authored research, I surface two additional explanations. The first builds work with Cathy Hwang and argues that under certain circumstances, an authentic and specific business purpose can mitigate agency costs. The second draws on forthcoming work with Eric Talley that explores how controlled firms avoid voting pathologies.

As for the first explanation, there is evidence to suggest that family firms are more likely to establish authentic and specific purposes than non-family firms. And as Cathy and I explore in “Purpose and Nonprofit Enterprise,” business purpose can serve as a substitute for shareholder control and monitoring in at least three ways. First, purpose can help provide direction for management that is confronting tradeoffs, and it does this by inverting the purpose and profit relationship. In the typical for-profit business, profits drive purpose, and conventional wisdom states that profit is clearer to pursue than something amorphous like purpose. However, as I’ve explored in other work, shareholder value maximization doesn’t necessarily provide clear guidance given that shareholders have different preferences and time horizons. Therefore, in companies where purpose drives profit, management may actually have clearer direction. 

Second, and relatedly, management of purposeful enterprise that fails to advance the mission will be vulnerable to stakeholder enforcement. Indeed, the family’s commitment to the mission can lead to internal enforcement that operates as a substitute for shareholder enforcement (and our paper contains several examples). Third and finally, purpose can motivate employees and encourage them to work hard and creatively to advance the mission. Not only that, shareholder control can crowd out this positive effect. 

Stepping back, there is a second reason for investors to like controlled family firms—controlling shareholders can help the firm avoid pathologies associated with shareholder voting. As Eric and I explore in our forthcoming paper, “Shareholder Democracy and the Rise of the Controllers,” as shareholder democracy has been given increasing importance in corporate law, it has paradoxically increased the benefits of having a controlling shareholder. Drawing on social choice theory, we show that voting is a less stable and clear preference aggregator than many have recognized. Therefore, as shareholder democracy has been romanticized by scholars and judges alike, it has increased the benefits to having a corporate dictator that brings coherence to corporate decision-making. In this way, therefore, controlled family firms (along with other controlled firms) may benefit from avoiding a panoply of voting pathologies. 

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Dorothy S. Lund is a Professor of Law and Co-Director of the Millstein Center for Global Markets and Corporate Ownership at Columbia Law School, and an ECGI Research Member.

This blog is based on a discussion held at the 2026 IESE-ECGI Corporate Governance Conference Family Firms: Purpose, Economic Performance and Social Impact. Visit the event page to explore more conference-related blogs.

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