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TVR adoption can help resolve the control-growth dilemma in family-owned firms to the benefit of both insiders and outsiders.

Family-controlled firms are numerous and economically important in most economies. But, do they leave valuable investment opportunities on the table because of the so-called “control-growth” dilemma family owners face? If they do, economy-wide economic growth will be impaired. Do notions of good corporate governance contribute to this potential problem?

The control-growth dilemma arises because family owners might prefer to forego profitable investments if the alternative is losing family control when investment requires new external equity capital to be issued. This problem may prevent a family-controlled firm from going public. But if it is already publicly listed, a family-controlled firm may underinvest as a consequence. There is much accumulated evidence that this is the case. 

A potential solution to the control-growth dilemma is the adoption of control-enhancing mechanisms (CEMs). Examples include multiple voting rights and tenure-based voting rights. CEMs can enable family owners and founders to raise external equity without relinquishing control. Yet, CEMs are controversial because they can enable insiders to impose their idiosyncratic vision without reference to outside shareholders’ interests. They can also be used to expropriate outsiders since they weaken the connection between voting rights and cash flow rights thus deviating from the one share–one vote principle. 

In a recent paper published in the Strategic Management Journal we take a forensic look at the potential role of a relatively new form of CEM– tenure voting rights (TVRs) – a mechanism that grants additional voting rights to longer-term shareholders. Several countries have introduced TVRs, or are considering their introduction, to attract IPOs of promising firms or to retain valuable firms that are controlled by families or founders. 

The Italian government introduced a provision allowing the voluntary use of TVRs by Italian companies in 2014, justifying the decision with claims that TVRs will facilitate the sale of equity stakes in state-owned companies, discourage short-termism, reduce the risk of hostile takeovers, and, above all, incentivize family-controlled public companies to raise external capital for investment. Italian TVRs grant double voting rights to shareholders who have held the shares for at least two years. The adoption of tenure-based voting rights is not mandatory (as it is in France)  ̶firms choose to adopt TVRs through a modification of corporate charter that must be approved by the AGM with a qualified majority (i.e. two thirds). Tenure-based voting rights are not a distinct class of shares. They are rights that any shareholder can obtain if they hold the shares for at least two years and they are lost if the underlying shares are sold or transferred. 

The number of companies adopting TVRs in Italy increased from 8% in 2015 to over 23% in 2019. Smaller, financially constrained companies with greater investment opportunities are more likely to adopt TVRs. Family firms are more likely to introduce TVRs when family control is fragile and new equity issuance is likely to lead to loss of control. We find: 

  1. Family-controlled firms maintain an above-average investment trajectory after TVR adoption. 
  2. Family firms with fragile control actually increase investment after TVR adoption. 
  3. Family firms issue more equity after they adopt TVRs, with an average increase equal to 3.7%
  4. After they adopt TVRs, family firms subsequently increase dividend payout and have a three-fold increase in minority shareholder representation on the board of directors. 

We interpret the last set of findings as evidence of commitment by family owners to outside shareholders that TVRs will used in their interests, and not for expropriation purposes. This increases the attractiveness of the firm to outside investors and enhances new equity issuance. We also find that performance is higher after family firms adopt TVRs, consistent with family owners using TVRs to pursue investment opportunities that increase firm value, not to extract private control benefits.

Our evidence suggests that TVR adoption can help resolve the control-growth dilemma in family-owned firms to the benefit of both insiders and outsiders. Our results should be interesting for capital markets regulators. TVRs do not necessarily undermine good corporate governance or corporate performance. 



By Claudia Imperatore, Bocconi University, & Peter F. Pope, Bocconi University

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This article features in the ECGI blog collection Family Firms

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