Family Firms Rebuild from the Inside Not the Outside

Firms often engage in illicit actions to inflate financial figures, boost profits, or gain an unfair advantage over competitors. Examples of such actions include accounting fraud, environmental violations, bid rigging, bribery, and violations of competition laws. Simultaneously, firms face constant external scrutiny from regulators, the media, and other parties who expose corporate wrongdoing and pressure companies to improve their conduct.

Academic research has studied several determinants of corporate misconduct, including managerial incentives, performance aspirations and deficient organizational cultures. Moreover, existing research has parsed the actions that firms undertake following the revelation of wrongdoing to restore their reputation, such as the dismissal of executives and directors, corporate donations, and social responsibility expenditures. These actions have been studied in isolation, so we don’t know much about why different firms prefer certain approaches over others. We also know that companies react very differently to reputation problems, but we know little about the drivers of these differences.

In a recent work with Riccardo Marzano and Danny Miller, we focused on family ownership—one of the most common ownership structures worldwide—as a factor that might influence how companies respond to sanctions for antitrust violations. While family firms have a different tendency toward misconduct, it is unclear what corrective actions these firms would take once wrongdoing is discovered.

Antitrust enforcement actions impose two types of costs for firms. The first are purely economic and come from the fines that an antitrust authority will impose and from the increased competition that firms will face once the anticompetitive practice is dismantled. The second are reputational costs, which can damage not only the business but also the owners’ status and identity in the local community and alienate customers and other stakeholders.

We argue that antitrust enforcement actions will cause family firms to respond differently from non-family firms. To start, we expect family firms to be less likely than non-family firms to leverage financial tools in dealing with reputational crises. Whereas firms, in general, cope with the increased competition arising from antitrust enforcement by increasing investment and external financing, we expect family owners to be reluctant to raise new equity because this will dilute their shareholdings and threaten family control. Also, family owners will resist incurring debt that could compromise the solvency of the business and is, in any case, a less suitable funding source in facing heightened competition. As a result, family firms will have less capital to invest in new operations or physical infrastructure to cope with the new competitive scenario following an antitrust enforcement action. However, we expect family firms to react on the managerial front to recover from reputational and organizational identity damages engendered by the antitrust enforcement. Specifically, these firms are expected to move family members to the top executive team, leveraging their personal stake in the firm to signal to stakeholders a commitment to restoring ethical standards. Indeed, firm and family’s reputation and market performance are unlikely to be salvaged unless those family members have the status and capacity to do so effectively – a strong incentive for selection based on these merits. A higher representation of family members in top executive positions will benefit the family business as a result of symbolic and substantive effects.

These conjectures were largely borne out by our empirical analysis of a sample of seven thousand family and non-family firms in Italy, of which almost 300 were involved in investigations by the national antitrust authority concerning violations of competition law (primarily cartels, and abuses of dominant position in fewer cases). 

In summary, our research reveals important differences in how family-owned companies handle antitrust sanctions compared to other businesses. When hit with penalties, family firms make fewer changes to their financing and investment strategies but significant adjustments to their top management positions. This strategy is particularly pronounced for family businesses that are well-known in their local communities, where reputation arguably matters most. For these companies, the family name and reputation become valuable competitive advantages that help them recover from setbacks—something that non-family businesses can't replicate. This approach appears to work: family businesses that put more family members in leadership roles after sanctions tend to gain market share.

__________________

Mario Daniele Amore is a Full Professor at the Department of Management & Technology at Bocconi University, a Research Affiliate at the CEPR, a Board Member of the ICGS, and an ECGI Research Member.

______________

The ECGI does not, consistent with its constitutional purpose, have a view or opinion. If you wish to respond to this article, you can submit a blog article or 'letter to the editor' by clicking here.