Appreciating Monitoring Activities – An Analysis of Outside Director Compensation in Public Family Firms

Abstract

Outside directors are a decisive part of a firm's corporate governance and are primarily employed to protect shareholders' interests by monitoring a firm's management. This study investigates the impact of family representation on outside director compensation, based on a firm's monitoring need. We complement classical agency theory with stewardship theory and the perspective of socioemotional wealth to account for particularities regarding the type of manager and the importance of non-economic goals, characteristics that play an important role in the differentiation among family firms and in comparison with non-family firms. We find that family firms in general pay less outside director compensation than non-family firms, but that they exhibit a stronger increase as they grow in size. After further differentiating between lone-founder family firms and true family firms, however, we find that only the former account for the observed behavior.

This chapter is based on an unpublished working paper written by Pascal Engel in collaboration with Prof. Dr. Andreas Hack and Prof. Franz W. Kellermanns, Ph.D.