Outside Director Compensation in German Public Family Firms: An Empirical Analysis

193 Pages·2015·2.203 MB·English

by  Pascal Engel (auth.)

Familienunternehmen und KMU
Edited by
A. Hack, Berne
A. Calabrò, Witten/Herdecke
T. Zellweger, St. Gallen
F. W. Kellermanns, Tennessee
H. Frank, Vienna
Both Family Firms and Small and Medium Sized Enterprises (SME) feature a
number of distinct behaviors and characteristics which could provide them with a
competitive advantage in the market but could also lead to certain risks. Th e sci-
entifi c series at hand presents research which provides an empirical and theoretical
contribution to the investigation on these specifi c characteristics and their impact
on business practice. Th e overall aim of this series is to advance the development of
theory in the areas of family fi rm and SME management.
Edited by
Professor Dr. Andreas Hack Professor Franz W. Kellermanns, Ph.D.
University of Berne University of Tennessee
Professor Dr. Andrea Calabrò Professor Dr. Hermann Frank
University of Witten/Herdecke Vienna University of Economics and
Business
Professor Dr. Th omas Zellweger
University of St. Gallen
Pascal Engel
Outside Director
Compensation in
German Public
Family Firms
An Empirical Analysis
Foreword by Prof. Dr. Andreas Hack
Pascal Engel
Vallendar, Germany
Dissertation WHU – Otto Beisheim School of Management, Vallendar, 2013
ISBN 978-3-658-07315-2 ISBN 978-3-658-07316-9 (eBook)
DOI 10.1007/978-3-658-07316-9
Th e Deutsche Nationalbibliothek lists this publication in the Deutsche Nationalbibliografi e;
detailed bibliographic data are available in the Internet at http://dnb.d-nb.de.
Library of Congress Control Number: 2014952195
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Foreword V
Foreword
More than 2000 years ago, the Roman satirist Juvenal provoked society with the
question of "who will watch the watchmen?" He never received a reply, however. In many
realms of society, we continue to ask ourselves the same question to this day. Particularly in
the German business world, the issue has been subject to intense discussion ever since stricter
corporate governance guidelines were introduced.
These guidelines are especially relevant for corporations listed at the stock exchange,
as these are required to set up supervisory governance bodies. In addition, the German
Corporate Governance Code contains comprehensive recommendations for how these
governance bodies should work. On the one hand, they are to be given extensive competences
for monitoring management. On the other hand, the Code states that compensation of
Supervisory Board members should be reasonable in reflecting both their responsibilities and
the overall financial situation of the company, and that, in the interests of transparency, they
should be individually published in the annual report.
Governance bodies should serve the interests of shareholders vis-à-vis company
management. But what about family-owned enterprises, in which management and owner are
often identical, and where protection requirements are much lower? In this context, we are
faced with an interesting challenge, in that it is necessary to strike a balance between the
genuine interests of the owner family and the recommendations of corporate governance. In
this context, the ancient question of "who will watch the watchmen?" is still very much
relevant.
It is this tension that is at the centre of Pascal Engel's work. He examines the influence
of the owner family on designing compensation to serve as a controlling element of the owner
vis-à-vis the supervisory body. Engel focuses on three questions: how much is being paid,
what is the ratio of fixed to variable compensation components, and to what extent are details
on compensation published on a voluntary basis. All of these three questions shed light on
important aspects of the issue at stake, and offer valuable insights into the tension between the
value of control and the need to protect the socio-emotional wealth of the owner family.
Pascal Engel is the first author to look into this matter in a scientifically sound way.
His analysis is particularly valuable as he carefully discusses the aforementioned tension on
the basis of various theoretical foundations. This serves to illustrate that designing
VI Foreword
compensation models for supervisory bodies has profound and complex implications, so that
they need to be considered very carefully.
However, Pascal Engel's work is not based on sound theoretical expertise alone – he
also employs a unique set of data from more than 200 listed German companies to examine
the issue in an empirical way. Using state-of-the-art statistical analyses, the author examines
possible intersections, way beyond merely superficial observations. The author illustrates, for
example, that the length of time for which a company has been family-owned has crucial
influence on designing compensation components.
My sincere wish is that this book will find many interested readers, especially among
analysts, family firm stakeholders and of course family firm owners, who can benefit from the
important insights it offers. However, it may also benefit researchers, who I hope will be
inspired to take the research on family-owned enterprises and supervisory bodies to the next
level.

Prof. Dr. Andreas Hack
Acknowledgements VII
Acknowledgements
The time I wrote this dissertation was one of the most challenging of my professional
career but at the same time a period of maximum freedom, autonomy and independence. It
was a quite ingenious combination of demanding and enjoyable moments. Along this way,
many people have accompanied and supported me who I would like to thank.
At first, I would like to thank Prof. Dr. Andreas Hack who has given me the
opportunity to pursue my own ideas while keeping the connection to state-of-the-art scientific
work. With his sincere interest, his brilliant mind, and his thorough knowledge I could have
not had a better mentor guiding me through the jungle of academia. He was always
approachable and the various discussions and working sessions we had were challenging and
inspiring at the same time.
In addition, I would like to thank Prof. Franz W. Kellermanns (Ph.D.), my second
supervisor, for fruitful discussions and especially his advices on methodical matters that
always resulted in a next level solution. Thanks also go to my fellow doctoral students who
provided constructive comments during our research colloquiums at WHU - Otto Beisheim
School of Management.
I am grateful to my fellow BCGers in Frankfurt and Munich who accompanied me
during this time for many mood-lifting lunches, energy-giving coffee brakes and thrilling
table soccer matches. Furthermore, I thank my close friends who never left a slightest doubt
that this project will be a success. In particular, my close friend Peter Baader for his
unmatched joie de vivre with which he accompanied me during these two years.
I also wish to thank my parents-in-law, my sister, and especially my parents, Rita
and Günter, for their continuous support, infinite faith and their loving nature. They
ultimately paved the way so that I was able to pursue this path. Thank you.
Above all, I am deeply grateful to my wife Britta for her unconditional love, sustained
support and continuous encouragement. She was my supporter, challenger, editor, progressive
thinker, and balancing partner in one person. This project would not have been the same
without her. I owe her a lot.

Pascal Engel
Table of Contents IX

Table of Contents
Table of Contents ................................................................................................................... IX
List of Figures ...................................................................................................................... XIII
List of Tables ......................................................................................................................... XV
List of Abbreviations ......................................................................................................... XVII
1 Introduction ......................................................................................................................... 1
1.1 Relevance and Research Coverage .............................................................................. 1
1.2 Research Questions ...................................................................................................... 4
1.3 Structure of the Dissertation ........................................................................................ 5
2 Theoretical Foundation ....................................................................................................... 9
2.1 Family Firms ................................................................................................................ 9
2.1.1 Definition of a Family Firm ............................................................................. 9
2.1.2 Heterogeneity of Family Firms ...................................................................... 12
2.2 Outside Directors ....................................................................................................... 16
2.2.1 Tasks and Compensation ................................................................................ 16
2.2.2 Legal Specifics ............................................................................................... 19
2.2.2.1 One-tier vs. Two-tier System .......................................................... 19
2.2.2.2 Codetermination & Board Constitution ........................................ 19
2.2.2.3 German Code of Corporate Governance ...................................... 21
2.3 Theories About Family Firms .................................................................................... 23
2.3.1 Agency Theory ............................................................................................... 23
2.3.2 Stewardship Theory ........................................................................................ 25
2.3.3 Perspective of Socioemotional Wealth .......................................................... 26
3 Dataset and Method .......................................................................................................... 29
3.1 Construction of the Sample ........................................................................................ 29
3.2 Descriptive Analysis of the Sample ........................................................................... 30
3.3 The Family Firm Subsample ...................................................................................... 34
3.4 Method ....................................................................................................................... 36
3.4.1 Ordinary Least Square Regression ................................................................. 36
3.4.2 Logistic Regression ........................................................................................ 39
4 Appreciating Monitoring Activities – An Analysis of Outside Director Compensation
in Public Family Firms ...................................................................................................... 43
4.1 Abstract ...................................................................................................................... 43
4.2 Introduction ................................................................................................................ 43
4.3 Theoretical Background ............................................................................................. 46
X Table of Contents
4.3.1 Agency Problems and the Need for Monitoring ............................................ 46
4.3.2 Outside Directors ............................................................................................ 47
4.3.3 Monitoring Capabilities .................................................................................. 48
4.3.4 Agency Problems in Public Family Firms ..................................................... 48
4.3.5 Stewardship Theory ........................................................................................ 49
4.3.6 Perspective of Socioemotional Wealth .......................................................... 51
4.4 Hypotheses Development .......................................................................................... 52
4.4.1 Family versus Non-Family Firms .................................................................. 52
4.4.2 Lone-Founder Family Firms versus True Family Firms ................................ 57
4.5 Methods ...................................................................................................................... 60
4.5.1 Sample ............................................................................................................ 60
4.5.2 Dependent Variable ........................................................................................ 61
4.5.3 Independent Variables and Moderators .......................................................... 62
4.5.4 Control Variables ........................................................................................... 63
4.6 Results ........................................................................................................................ 68
4.7 Discussion .................................................................................................................. 71
4.8 Limitations and Future Research Opportunities ........................................................ 74
4.9 Conclusion ................................................................................................................. 76
5 Voluntary Disclosure of Individual Outside Director Compensation in Public Family
Firms ................................................................................................................................... 77
5.1 Abstract ...................................................................................................................... 77
5.2 Introduction ................................................................................................................ 77
5.3 Theoretical Background ............................................................................................. 81
5.3.1 Voluntary Disclosure – Theory, Findings, Costs and Benefits ...................... 81
5.3.2 Distinguishing Family and Non-Family Firms .............................................. 84
5.4 Hypotheses Development .......................................................................................... 85
5.4.1 Stakeholders' Goal Divergence and the Importance of Outside Directors ..... 85
5.4.2 Alignment vs. Entrenchment Effect ............................................................... 87
5.4.3 The FIBER Model – Explaining Goal Sets of Family Firms ......................... 89
5.4.4 The Owning Family's Influence on Business Decisions ................................ 92
5.4.5 Moderating Effects of Different Types of Family Firms ............................... 95
5.5 Methods .................................................................................................................... 104
5.5.1 Sample .......................................................................................................... 104
5.5.2 Dependent Variable ...................................................................................... 104
5.5.3 Independent Variables and Moderators ........................................................ 105
5.5.4 Control Variables ......................................................................................... 106
5.6 Results ...................................................................................................................... 110