The contribution of the external director for Brazilian private family business: a generational approach

Abstract

Purpose

This paper aims to analyze the contribution of the external director to the governance of family businesses (FBs) in different generations. The authors aim to support the literature regarding the heterogeneity of these companies, showing that the generation of the primary decision-maker is an essential factor that differentiates the FBs from each other. These differences have numerous impacts in governance structures as boards' role and composition.

Design/methodology/approach

The authors hypothesized that the main contribution of external directors to FB controlled by family members of the first generation is to provide resources to the company's survival. As it evolves and the later generations begin to participate as owners and managers, dealing with specific agency problems associated with this type of organization becomes essential. Four activities found in literature were tested: control of parental altruism and intrafamily divergences and provision of resources and external relations. Quantile regression (QR) was applied based on the dependent variables' characteristics, which show a strongly asymmetric distribution for all the models proposed.

Findings

The QR techniques and ordinary least squares (OLS) showed statistically significant results for the agency's activities when comparing the first and the second generations. The contribution of the external director in this context is to overcome the challenges associated with the beginning of sharing ownership and management. The resource provision and the establishment of the relations proved to be more critical in third-generation FBs. At this stage, the directors provide the needed resources for these companies' survival in an increasingly dynamic and complex environment.

Research limitations/implications

Among this work's limitations, the authors highlight the lack of a variable that captures the life cycle in which the company is. They believe that the inclusion of this control factor would bring more robust results to the analysis. Besides, they point to the condensation of the countless activities performed by external directors to just four. This generalization fails to capture the other duties and contributions of this director in the family organizational environment.

Practical implications

This study aims to provide guidelines so that external directors of FBs understand more clearly the needs of the companies in which they operate, whether from the first, second or third generation onward. The contribution of this director may be different for each type of organization. By understanding the weaknesses and concerns inherent to each generational stage, the external director can focus his efforts on adopting actions that effectively contribute to organizational performance.

Originality/value

In Brazil, most studies focus on the effects of board's composition and structure on financial results. In these papers, the data is usually secondary, found on companies' websites. The authors step further in this paper by analyzing primary data from privately held companies, which in Brazil is challenging to access. So, they believe they are surpassing the analysis traditionally found in the literature on the composition of boards of directors in terms of scope and methodology.

Citation

da Silva Campos, S.S., Machado Filho, C.A.P., Costa, R.S.d.S. and Santos-Costa, L.d. (2022), "The contribution of the external director for Brazilian private family business: a generational approach", Journal of Family Business Management, Vol. 12 No. 4, pp. 981-998. https://doi.org/10.1108/JFBM-05-2021-0042