# **I. Introduction**

Many countries entrust the governance of their large corporations to a handful of wealthy families. These families use control pyramids to effect these powers. We show that such control pyramids make firms vulnerable to a range of serious governance problems. We also argue that these problems can have adverse macroeconomic effects when they extend across a sufficiently large part of the country’s corporate sector. We consider the reasons why family control and control pyramids predominate in emerging market economies and in some developed economies, and also the reasons why widely held free standing firms predominate in the United States. We conclude by discussing policies countries might adopt to discourage family control pyramids, but caution that control pyramids are but one feature of an institutionally deficient economy. A concerted effort to improve a country’s institutions is needed before diffuse ownership is desirable.

# **II.   What is a “Family Firm”?**

Various studies come to different conclusions about the performance of family firms relative to that of other firms. To some extent, this is because they use the term “family firm” differently. Anderson and Reeb (2003) refer to any firm with a dominant shareholder as a family firm. By this definition, Microsoft is a family firm, even though Bill Gates has given no notice of any clear intention to pass control on to his sons or daughters. Likewise, their definition would classify Andrew Carnegie’s turn of the century Carnegie Steel as a family firm, even though he sold out and gave the $480 million he received away to charities. Indeed, Carnegie’s famous maxim “A man who dies rich dies disgraced” would be incomprehensible to the ruling families of multigenerational European family businesses. Nonetheless, Carnegie’s general ethos is important and widespread in America: One gets rich to change the world, not to found a dynasty.

In this study, we define ‘family firm’ more narrowly to encompass only companies run by heirs of the people previously in charge or by families that are clearly in the process of transferring control to heirs. This definition may seem incomplete in that it misses firms where the current controlling owner ends up founding a dynasty. Bill gates might leave Microsoft to his son, rather than endow universities and concert halls so as to die poor, like Andrew Carnegie. However, we believe that understating the importance of family firms, rather than overstating it, is the more judicious approach for the purposes of this study.

Many small businesses throughout the world are family firms. Small stores, carpentry shops, farms, and restaurants are often family affairs. Casual inspection of any shopping area in virtually any free market country shows that these businesses are important parts of the economy. These businesses are also not the focus of this paper. This is mainly because data on small businesses, unlike data on larger listed companies, are not publicly available. While survey data of various sorts have been compiled for small businesses in some countries, they are, for the most part, not comparable from one country to another. It is to be hoped that this situation might change as more and smaller companies list on stock markets and begin publishing financial data. At present, however, we must pass by these firms.

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