The good and the bad of family firms: when minority shareholder protection becomes relevant for firm performance

Abstract

Purpose – This study aims to examine how minority shareholder protection in family firms affects firm performance. Specifically, we investigate whether the benefits of family control in mitigating principal–agent conflicts are offset by the adverse effects of principal–principal conflicts. Design/methodology/approach – Using 3, 229 firm-year observations from 2005 to 2023 for listed companies in Switzerland, this study uses regression analyses and instrumental variable techniques to explore the relationship between family firm governance structures and performance, with a particular focus on the role of minority shareholder protections. Findings – The findings indicate that dual-class structures in family firms are associated with lower firm performance, reflecting the misalignment of voting rights and economic interests that is detrimental to minority shareholders. In line with this result, firm performance is lower in family firms that deviate from the “one share, one vote” principle. By contrast, the other minority shareholder protection mechanisms considered are not robustly associated with firm performance. Research limitations/implications – This study is subject to several limitations. As with any empirical analysis, the results depend on the chosen sample and may differ across industries, firm characteristics (such as size), time periods or jurisdictions. Because our analysis focuses on Switzerland, the findings may not be fully generalizable to countries with different institutional frameworks. Future research could therefore investigate how variations in legal systems shape the effects of minority shareholder protection on family firm performance. In line with Dyer (2018), scholars could also collect more granular data on firm-specific characteristics to deepen the analysis. Practical implications – The evidence indicates that dual-class share structures in listed family firms are negatively associated with firm performance, while the other minority shareholder protection mechanisms considered do not show a robust relationship with performance. For controlling families and boards of directors, this highlights the importance of avoiding dual-class share structures. For investors, the presence of dual-class shares represents a key governance feature to assess when investing in family firms. In the Swiss context, these findings are also consistent with governance arrangements that strengthen shareholder democracy and limit the separation of voting rights from cash-flow rights. Originality/value – The study advances the literature on family firms by shedding light on the nuanced effects of family ownership on corporate governance and firm performance. It provides empirical evidence on the efficacy of minority shareholder protection mechanisms, thereby contributing to the broader corporate governance literature and informing both policy and practice in family firms.