An axe to grind: Family outsiders and firms doing good

Research Question/Issue

This paper examines the relationship between having nonfamily members (i.e., family outsiders) as board chairs and corporate philanthropy.

Research Findings/Insights

In a hand-collected dataset of Chinese family firms, we find that firms invest less in philanthropy when the board chair is a nonfamily member. However, this impact is mitigated when the chair's discretion is restricted, as in highly visible firms or firms controlled by the founding family. The negative relation between nonfamily chairs and corporate philanthropy is also weaker when the interest of chairs is more aligned with that of the controlling family, where chairs are inside-promoted or members of founding team, when board chairs and the families have more goal consistency, when stakeholders have higher demands for corporate social responsibility or investors care less about profitability. Further analysis shows that nonfamily chairs help firms reduce overinvestment in philanthropy, the board chair has a more salient effect than the CEO on philanthropic giving, and the results are not driven by expropriation issues of the controlling family.

Theoretical/Academic Implications

Our study highlights the heterogeneity of board chairs in family firms, board chair's significant influence on a firm's social performance, and the agency problem related with the board chair, which are all underexplored topics in prior literature.

Practitioner/Policy Implications

Our evidence offers insights to practitioners about the impact of board chairs on corporate philanthropy. Family firms need pay attention to the recruitment of board chairs and hold a comprehensive view of family firm professionalization as a nonfamily board chair might negatively affect firms' stakeholder relationship management but bring benefits by mitigating excess philanthropic activities. Besides, practitioners shall be aware of agency problems originating from board chairs. Incentives or monitoring over chairs might be useful to address potential conflicts of interest.