The Impact of Board Independence on Firm Performance in Family-Owned Businesses

The provided content consists of a collection of research articles, book chapters, and dissertation excerpts that explore the relationship between family ownership, corporate governance, and firm performance. The studies examined various aspects, such as board independence, family ownership concentration, board committees, CEO compensation, and strategic management, in the context of Asian family businesses. The findings suggest that family ownership can have both positive and negative effects on firm performance, depending on factors like corporate governance mechanisms, board composition, and strategic decision-making.

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The role of corporate governance on
the performance of family businesses:
Evidence from Hong Kong

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Abstract
The study highlighted that the corporate governance is mainly one of the most
recognized as one of the vital implications in building the marketplace confidence as
well as attracting the positive investors in the company particularly and the economy
in general. However, it can be said that promoting good corporate governance
standards is also considered to be quite vital in terms of attracting investment capital,
developing the performance of a company and reducing the risk. Family businesses
are growing all over the world, both in developed and developing countries. In Asia,
75% of listed companies are family-owned. As a result of the family business in the
global economy to make a great contribution, so the governance of the family
business has been more and more attention, for which many scholars have made a
lot of research, focus on its characteristics, and determine how these characteristics
impact the performance of the family business.

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Table of contents
Abstract....................................................................................................................... 2
Introduction................................................................................................................. 4
Literature review..........................................................................................................5
Family business.......................................................................................................5
Corporate governance.............................................................................................6
Family organizations In Hong Kong.........................................................................9
Corporate governance business for the family-owned business.............................9
Duality....................................................................................................................10
Board size..............................................................................................................11
Tenure of the CEO................................................................................................ 11
Board independence............................................................................................. 11
Corporate governance structures..........................................................................11
The need for corporate governance in the family business...................................12
The link between governance and the performance of the family business..........12
Corporate governance in Hong Kong....................................................................13
Research design and Methodology...........................................................................14
Conclusion and recommendations............................................................................15
References................................................................................................................17

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Introduction
The family business plan mainly generates a governance structure for the family
business as well as the family. The entire study will be highlighting the role of
corporate governance on the family business performance in Hong Kong. The
corporate governance is mainly one of the most recognized as one of the vital
implications in building the marketplace confidence as well as attracting the positive
investors in the company particularly and the economy in general (Brenes, Madrigal
and Requena, 2011). However, it can be said that promoting good corporate
governance standards is also considered to be quite vital in terms of attracting
investment capital, developing the performance of a company and reducing the risk.
The family business is, however, a firm that is managed and owned by a single root
in the family. The most critical factors that tend to lead towards the problems in the
family business are the equity and the succession control. The main concern of the
families with regards to the business continuity has to mainly do with who will be
taking the role of the entrepreneur. In terms of developing the global economy the
family business plays the most important role. Family businesses are enhancing all
over the world, both in developed and developing countries. In Asia, 75% of listed
companies are family-owned. As a result of the family business in the global
economy to make a great contribution, so the governance of the family business has
been more and more attention, for which many scholars have made a lot of
research, focus on its characteristics, and determine how these characteristics
impact the performance of the family business (Ibrahim and Samad, 2011).
However, this main aim of this particular is to find the relationship between
corporate governance (CG) as well as the family business performance (FBP). In
view of the cultural and economic differences between countries and regions, this
paper only uses listed companies in Hong Kong to study this proposal. The study will
be including the information of the 5 companies based in Hong Kong such as Dorsett
Hospitality International, Sun Hung Kei Property, Sino Group, Crocodile and Regal
Hotel International Holding (Giovannini, 2010).

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Research questions
- The relationship between corporate governance and performance of the
family business
- The role of Corporate governance business for the family-owned business
- What is the need for corporate governance in the family business?
- The role of corporate governance in Hong Kong
Literature review
There are a lot of studies all across the globe that has thoroughly investigated the \
corporate governance variables effect on the firms performance. There are some of
the studies that are quite useful in terms of informing and understanding the present
study.
Family business
It has been observed that the word family business is used numerous times without
having any type of understandable definition of what just family business actually is.
Most of the scholars and researchers have argued with the fact that the family
involvement in the business tends to make the family business completely different
from the others. In other terms family business can be termed as the commercial firm
in which the decision making is mainly influenced by a lot of generations with regards
to a family, related by the adoption, blood or marriage, who has both the ability of
influencing the business's vision and willingness for using the ability in terms of
pursuing the distinctive goals to a great extent (Le Breton-Miller, Miller and Lester,
2011). Furthermore, the researchers have predicted that the family businesses of
Hong Kong need to improve governance in order to succeed. It has been observed
that the family business in Hong Kong in recent times is facing a huge number of
challenges that range from the external risks to the issues of succession planning.
The survey chart of the PWC found out that there is rise at an alarming rate in the
traditional strategies among the family businesses of China and Hong Kong, with a
lot choosing the growth that is steady rather than the aggression as the environment
is seen as quite challenging in nature. In the recent review of the various definitions

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of the family business, it can be concluded that several or one of the following criteria
can be used: Family management, ownership control within a family as well as
realized leadership succession within a family. The emerging of the economy that is
new may inspire for reviewing definitions related to the family businesses (Siebels
and zu Knyphausen‐Aufseß, 2012).
Family business tends to constitute the most dominant and oldest structure of
business firms. In a lot of countries apart from Hong Kong, the family businesses
tend to present more than 75% of the total business and they also play one of the
most important roles in the growth of the economy and the employment of the
workforce. Throwing light on the above-mentioned discussion it can be also said that
the family-owned business tends to account more than two-thirds of the business of
the world and generate a lump sum amount of economic output, wealth and
employment. It can be concluded from the above discussion that a business
managed as well as owned by a nuclear family can be regarded as the family
business. For receiving the maximum amount of advantages the family must hold the
family ownership (Giovannini, 2010).
The family-owned business is also one of the most frequently encountered models in
the entire world and its impact on the global economy is regarded as quite
significant. When the family business is regarded as the businesses that are mainly
possessed by the individual family member and it is assumed that the entire
contribution of the family businesses towards the global GDP is quite a lot (McGuire,
Dow and Ibrahim, 2012).
It has been also observed that there are various types of owners present in the
family business such as : Owner who is active in the governance and has three
simultaneous roles as manager, as a family member along with the role of owner,
owner who is non-active in the governance and is an owner and family member,
non-family member who is quite active in the entire governance can be a member of
the management or the board, and the non-family member is the owner who usually
a managing director or capital investor who owns shares of the family members and
the family company, who have no such role as manager or owner are mainly the
spouses and representatives of the upcoming generation (Schulze and Gedajlovic,
2010).

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Corporate governance
Corporate governance is mainly regarded as the system by which firms are directed
as well as control. From a traditional point of view, corporate governance is mainly
developed so in a short view corporate governance is directed towards shareholder
interest. If corporate governance is regarded as the tree then the branches of the
corporate governance consist of the board directors, audit committee, nomination
committee, board commissioner as well as another committee. Furthermore, it can
be said that the corporate governance tends to cover the issues that consist of the
following financial stakeholders who are the shareholders, the Board of Directors are
also involved in terms of enforcing the balances and checks, controlling environment
that consists of controls, accounting, external as well as internal audit, and the
transparency disclosure (San Martin-Reyna and Duran-Encalada, 2012). If the
corporate was good then it tends to contribute towards the sustainable economic
development by improving the performance of the firms and enhancing their outside
capital. A lot of evidence also suggests that well-governed firms receive a huge
amount of market valuations. If corporate governance is enhanced then it will also
improve other capital flows to the firms in the developing countries. Furthermore, if
corporate is good it also tends to lead towards the best performance for the investee
firms. If the governance processes and structure are enhanced then it tends to help
for making sure high-quality decision making, encouraging effective succession
planning for the senior management and improve the long term prosperity of firms,
irrespective of the type of firm and the sources of finance (Larcker and Tayan, 2015).
For the definition of CG, like the family business, there is no unified consensus. In
the traditional sense, CG is proposed to solve the agency problem, so it is developed
for the benefit of shareholders, of course, this is only a narrow definition. With the
progress of the times, scholars have a broader understanding of the concept of CG,
and today's CG is not just about accountability to shareholders' interests, but more
about the accountability of interest owners.
The guidelines on securities listing rules of the stock exchange of Hong Kong Limited
give a practical overview of the significance of corporate governance reporting: "The
exchange of information and constructive communication between issuers as well as
the shareholders is particularly quite vital for upgrading corporate governance".

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It has been identified that the main skills and capabilities, are the provider of the
uniqueness and hence it enables family businesses in Hong Kong for gaining
competitive advantage, is leadership, corporate governance as well as the family
business values. The values of the family business are regarded as desirable and
clear norms and goals for both businesses as well as family. On the other hand,
some of the families also have a constitution that tends to define all family, values
and business norms. For solving the problems the family business values always
tend to serve as the common ground, and it also helps deal with the conflict of
interest between family and the business and allows both business and family to
achieve their own goals (Lam and Lee, 2012). Furthermore, family business values
tend to help the members of the family to work together and solve conflicts that take
place between business and family and transferring the values in a successful
manner to the next generation, furthermore they contribute towards the sustainability
of the organization in the long run. One of the uniqueness arrives only after
transferring the values in a successful manner. Furthermore, it has been observed
that each and every family business are established by the entrepreneurial family
member and over the years when they are unsuccessful they build capabilities that
are imitable that provides them with the competitive advantage. For gaining the
competitive advantage in the family business in Hong Kong it has to build a
mechanism for enabling transferring those capabilities and skills towards the next
generations. It can be said that one of the most effective mechanisms for doing this
transferring is integrating the principles of the corporate governance and make them
part of this culture they provide useful alternatives for the challenges coming from
the family owned and creating favorable situations for ensuring sustainability of the
organization by enhancing. Another amazing feature of corporate governance is
helping to decrease the costs of the agency (Leung, Richardson and Jaggi, 2014).
There are studies publicly traded family organizations mostly draw upon the agency
theory, suggesting that the equity level of the controlling family can influence the
conflicts between non-family shareholders and family. When the family business
enlarges and grows, it is quite natural that the relationship between the stakeholders
and the owners for managing the potential conflict of interest by simply putting right
control mechanisms into the right place. At this exact point, the corporate
governance decreases the information asymmetric and allows a lot of transparency
and makes it quite possible for the agents for engaging in activities that, if left

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unchecked, would threaten the performance of the organization and may ultimately
harm the agents and owners welfare alike to a great extent. Enhancing the quality of
the corporate governance enables the organization for attracting the foreign
investors by informing each and every stakeholder about the financial condition,
performance, ownership structure as well as other conditions in a timely as well as in
a perfect manner (Globerman, Peng and Shapiro, 2011).
It has been observed that CG also includes watching the financial statements quite
closely along with the individuals generating these financial statements. The CG also
encourages the openness attitude for the various perspectives within the board.
Furthermore, it may also consist of adopting different policies that will be guiding the
operations of business. For instance: diversity policies, conflict of interest policies,
privacy policies as well as investment policies (Che and Langli, 2015). It is believed
by the family business owners due to the nature of the corporate governance that the
attention towards the corporate governance is not at all necessary as there is a
general agreement on the business operations and no individuals are looking over
the management's shoulders for computing how things are actually done. Arguably,
this type of particular assentation is wrong as the situation can alter: the dispute
among the family may take place, the business may hit towards a bad phase, as well
as the creditors may seek for some of the opportunities for enforcing claims against
the shareholders or the directors of the firm (Ibrahim and Samad, 2011).
Family organizations In Hong Kong
It has been already stated that the family business is regarded as the backbone of
the economy across the globe, whereby their sustainability is quite important towards
global economic growth. Interestingly, some of the largest organizations in the world
including BMW, Wal-Mart, Ford, Motorola, and Samsung are the family
organizations. However, when it comes to analyzing the actual role of the family
organizations in Hong Kong, it is quite evident to mention the volatility and instability
of the economic and social issues affected by politics. The family is the capital of the
society of Hong Kong as it tends to play one of the most vital roles in the
development and the formation of the firms. The family also plays a significant role
in the development of the venture in the transitional economies that have
experienced a high amount of socioeconomic disorders. Moreover, the family
business is also considered to be the engine that tends to drive the wealth creation

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and the socio-economic development around the globe, and the entrepreneurship is
regarded as the main element that is the driver of the family businesses.
Corporate governance business for the family-owned business
One of the most vital characteristics of the family-owned business is the strong inter-
relationship between the business and the family. More than 75% of these family
businesses have the manager who is the family member and almost 90% have a
family member as the director of the board (Au and et al., 2013). Some of the leading
researchers and survey have highlighted the fact that there are some of the main
differentiators for the family businesses from the non-family owned businesses
because of the fact that the family business is mainly characterized by having a
broader perspective and a long time thinking and also are able to make some of the
flexible decisions have a huge amount of serious commitment towards the work,
strong mindset of the entrepreneur, as well as a lot more personal approach to
business based on trust. One of the main findings of the family-owned business also
suggests that its owners, business, as well as the family in control are that long-term
business performance that tends to require a family performance that is strong
(Shyu, 2011). A lot so scholars have revealed that within the family business,
governance is not only necessary for the firm but also for the entire family sphere, for
favoring the company's unity standing behind the firm and regulating the relationship
between the firm and the family members. Furthermore, the family-owned business
mainly attracts the public via Initial Public Offer and listing on the exchange, a
corporate governance structure is required for having in their place. The entire
procedure of creating the structures of the corporate governance in business is
guided by the guidelines that have been developed by over time by the capital
market regulators. Most of the family business will make sure that the business does
not lose the identity of the family after listing and it continues to meet the interest of
the family (Lei and Song, 2012).
As per to the agency theory, when there are both family and non-family shareholders
in the enterprise, firms structure becomes quite complicated in nature, it will become
very vital, in this case, proposed three corporate models to manage: The family,
other corporate shareholders, and managers (Li, 2011). On the other hand, we need
to study the structure of the family business so that we can better understand the

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characteristics of the family business. For instance, study duality, board size, board
independence as well as the tenure of the chief executive's office (CEO).
Duality
Some of the researchers have found that when the CEO and director of the company
were in a different position, the firm benefit was better than the company where the
two positions were the same person. Of course, some scholars do not agree with
this observation: for instance, said that only CEOs and directors in a similar position
can make the company develop better (Cheung and et al., 2011). I am personally
quite inclined with the latter's point of view, hence, a hypothesis can be made with
this regards:
Hypothesis 1: Duality is related to family business performance.
Board size
Smaller board size is regarded as much more effective in managing firms as they are
not easily influenced by CEOs. On the other hand, it is also believed by some of the
scholars that the larger board is better as it tends to help for reducing dependence
on external resources. Hence, the hypothesis with this regard can be formulated like
this:
Hypothesis 2: Board size is related to family business performance to a great extent.
Tenure of the CEO
The tenure of the CEO has a U-shaped relationship with the performance of the firm.
The first five years of the CEO's tenure have greatly enhanced the performance of
the firm, but it has gradually declined in the sixth year. Throwing light on the above-
mentioned discussion it can be said that the long-term CEO tenure allows the CEO
to better build a valuable relationship with employees (Cheng, Su and Zhu, 2012).
Hence, the hypothesis with this regard can be formulated like this:
Hypothesis 3: The tenure of the CEO is related to the performance of the family
business.
Board independence
There is no unified conclusion on whether independent directors affect the
company's performance. It has been found that the higher the proportion of

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independent directors, the more likely it is to harm the company's interests. However,
some scholars have found that the more independent directors of the company, the
more beneficial to the company's development. Therefore, make a hypothesis here:
Hypothesis 4: Board independence is related to the performance of the family
business.
Corporate governance structures
Corporate governance is mainly affected by the relationships in the governance
systems participants. The main components for the corporate governance structure
as per Principles for Corporate Governance in Hong Kong are Board Composition,
Shareholding, Board Governance Disclosure, Board Functioning, and Control
Structures (Lee and Barnes, 2017).
The need for corporate governance in the family business
It has been noticed that most of the independent firms are the family business in
Hong Kong; most of the family businesses are also quite small. However, in most of
the small family businesses management along with the ownership coincides.
Family businesses must not underestimate the need for corporate governance. The
family businesses that are smaller are quite often operated with a huge degree of
informality that is both efficient as well as natural. The family business governance
tends to encompass both corporate governances that are in the form of the board of
directors along with the family governance mainly in the form of the family council.
Within each, there are a lot of choices with regards to the degree of formality and
levels of participation (Sharma and Chua, 2013). Family businesses are basically
quite different in corporate governance from widely held firms. The differences derive
fundamentally from the nature of the ownership that is quite discrete in nature. The
family ownership concentrates control as well as a greater agency in the
governance.
There are few families in Hong Kong who have considered developing the family
business from past few years (Amran and Ahmad, 2013).
The link between family business performance and governance
Although the family businesses performance received an average coverage by the
researchers in the field, the true link between the performance of the family business

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and governance is rarely an investigative topic. As per to the some of the
researchers it has been indicated that the family businesses are with a non-family or
the family CFO ((Van Essen, van Oosterhout and Carney, 2012). The main findings
of the researchers showed that the family businesses with a family CFO are quite
smaller, have a smaller market share than those in which the CFO is a non-family
member (Ahmed and Hamdan, 2015). On the other hand, some of the other
researchers have highlighted that the owners of the family are positively connected
with the performance of the organization to a great extent. Additionally, as there is a
positive association with the performance when the family member with some of the
ownership stake is the non-CEO Chairman on the board. The family shareholders
tend to appears for shaping the outcomes of the organization and the owners of the
family are regarded as quite vital, but it is an understudied component in the
management academics (Lu and et al., 2013). It can be clearly depicted the
outcomes concerning the relationship between the performance of the family
businesses and the ownership points out towards the positive relationship between
the family control as well as the ownership on the one side of the organization's
performance on the other. This particular positive relationship seems to be quite
evident from the discussion on the one side and the performance of an organization
on the other. This type of positive relationship also seems to be quite evident for the
publicly listed organizations than for the private ones.
Corporate governance in Hong Kong
The businesses operated by the families are considered to be the norm in Hong
Kong. Most of the main businesses are controlled and owned by families. This is the
topic that has been published by the Corporate Governance Working Group of Hong
Kong. The findings highlighted clearly that family businesses are quite in the
predominant form of listed firms in Hong Kong. It can be noted that there were
almost ninety percent of the listed firms have the main shareholder who with family
members or by himself owns more than 21% or more with regards to the share
capital (Fuzi, Halim and Julizaerma, 2016).
The fundamental legislation that deals with corporate governance and firms is the
Companies Ordinance. It is the law that was first enacted in the year 1865 and it was
also based on the UK's Companies Act. In the past, it has been observed that the
ordinance was continuously altered, revised as well as updated. However, no matter

14
what it became an absolute necessity for bringing a main reform in the law and
hence the Companies Ordinance was adopted in the year 2014 (Jiang and Peng,
2011).
Research design and Methodology
This paper will be collecting some of the secondary data for highlighting the above-
mentioned assumptions, and the data is mainly from the Hong Kong Exchanges and
Clearing Limited (HKEX). The financial statements of the 5 listed family as well as
corporate governance firms will be sampled. In order to make the sample more
accurate, relevant information will be collected from the official websites of 5 listed
companies and other economic websites. The dependent variable is mainly
composited by the return on Assets and return on Equity. The management and
owner status is mainly independent variables. Furthermore, the research also tends
to consider six control variables, which consists of the size of the firm, industries, the
age of the company, structure of the board from a number of family members on the
board. As the data used for testing the hypothesis is the economic as well as the
financial data, the secondary data is mainly collected from the Hong Kong
Exchanges and Clearing Limited (HKEX). After the data collection, frequency along
with the descriptive analysis was presented for analyzing the behaviors of the
sample. For testing the hypothesis, regression analysis, as well as the T-test, is
used.
Statistics on the family businesses does not exist so much in a virtual manner with
regards to Hong Kong. More than 80% of the family operated business answering
the survey developed a family protocol via family member's participation above 20
years. Some of the family businesses have applied the family protocol over the last
few years in their business and setting up policies with regards to the involvement of
the family members in the business. The family protocol is also known as the
formalized corporate governance structure. The remaining 20% have not done it yet,
and some of the specific companies were taken into account by the research teams
as they had the formal board of directors in the environment of the family business.
From a general point of view it can be said that the outcomes highlighted that more
than 75% of the family businesses surveyed had a board of directors or something
same before developing their family protocol. It has been also observed that in terms

15
of playing the formal role the board fails some of the time at its element of corporate
governance. However, rather than this, the board tends to serve as a management
committee that is engaged in following up the operations of firms.
The sample is collected from the companies by the method of survey sampling. It is
the process that is mainly selecting the samples with regards to the elements from
the target population for conducting the survey. Furthermore, the probability
sampling is used as it takes some of the steps for making sure all the members of
the population have an equal chance of being selected.
Findings and discussion
This particular dissertation mainly seeks for studying the relationship that exists
between the role of the corporate governance in the performance of the family
business in Hong Kong. Furthermore, this report also tried to highlight how the
management status affects the performance of the family business. The literature
review also indicated the definition of the family business, coroporate governance
and various views for the family business. The research questions are mainly formed
from the literature review.
It has been observed that the respondents of the survey observe the family protocol
as a guide for both the firm and family structure and order. One of the main benefits
of the family protocol is that it tends to provide extra transparency with regards to the
company management. On the other hand, it has been also observed that it is
believed by the respondents that family protocol implementation is related to the
commitment and leadership of the owners, but they also feel the necessity for the
board of directors for getting involved and assisting in the supervision and
implementation. Family business tends to constitute the most dominant and oldest
structure of business firms. In a lot of countries apart from Hong Kong, the family
businesses tend to present more than 75% of the total business and they also play
one of the most important roles in the growth of the economy and the employment of
the workforce. Throwing light on the above-mentioned discussion it can be also said
that the family-owned business tends to account more than two-thirds of the
business of the world and generate a lump sum amount of economic output, wealth
and employment. The results of family protocol are not at all visible towards the

16
management although the managers assume enhanced decentralization and fluidity
with regards to the firm. However, there are families that have explained that they did
not felt the need for implementing their family protocol but when the family protocol
was created then it mainly resulted in the enhanced unity of the family.
Conclusion and recommendations
The literature review of corporate governance revealed a lot of important findings:
The corporate governance, in general, is regarded as one of the vastest topics in the
entire academic research and the models of the governance developed for the large
public companies with the dispersed ownership cannot be applied in an automatic
manner to the family business context where the large variety of the family company
configurations as well as the family systems itself tends to add a lot more complexity.
It has been observed that the family business plan mainly generates a governance
structure for the family business and the family. The entire study highlighted the role
of corporate governance on the family business performance in Hong Kong. The
corporate governance is mainly one of the most recognized as one of the vital
implications in building the marketplace confidence as well as attracting the positive
investors in the company particularly and the economy in general. However, it can
be said that promoting good corporate governance standards is also considered to
be quite vital in terms of attracting investment capital, developing the performance of
a company and reducing the risk. The family-owned business is also one of the most
frequently encountered models in the entire world and its impact on the global
economy is regarded as quite significant. When the family business is defined as the
businesses that are mainly owned by the individual family member and it is assumed
that the entire contribution of the family businesses towards the global GDP is quite
a lot. It has been also observed that there are various types of owners present in the
family business. On the other hand, it has been observed that More than 75% of
these family businesses have the manager who is the family member and almost
90% have a family member as the director of the board. Some of the leading
researchers and survey have highlighted the fact that there are some of the main
differentiators for the family businesses from the non-family owned businesses
because of the fact that the family business is mainly characterized by having a
broader perspective and a long time thinking and also are able to make some of the

17
flexible decisions have a huge amount of serious commitment towards the work,
strong mindset of the entrepreneur, as well as a lot more personal approach to
business based on trust. One of the main findings of the family-owned business also
suggests that its owners, business, as well as the family in control are that long-term
business performance that tends to require a family performance that is strong. From
the findings it can be also observed that the results of family protocol are not at all
visible towards the management although the managers assume enhanced
decentralization and fluidity with regards to the firm. However, there are families that
have explained that they did not felt the need for implementing their family protocol
but when the family protocol was created then it mainly resulted in the enhanced
unity of the family. One of the main limitations of this research is that it is generalized
in some of the parts because of lack of data.
It can be also concluded that overriding finding of this particular review that there is
no such universally accepted theory or even the view that makes sense either in
governance in general nor the family organizations specifically. There are a lot of
approaches and findings in general and not even one single definition of
governance. On an interesting ground in the family businesses, the families tend to
appear to bring an important element of performance for the businesses.

18
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