Typically, controlling families will choose a CEO who can maximize families’ economic goals and non-economic goals (Burkart et al., 2003). Thus, a family CEO seems to be the first choice for family firms because controlling families can keep their power and control via family management. However, the main cost of limiting the CEO position to family members is the lack of management talent within the family firms (Dyer, 1989). Lin and Hu (2007) show that the ability of family management on average is more likely to be lower than that of professional management. Significantly, appointing an outside professional CEO from professional labor markets can contribute more to firm performance than other CEO types emerging from the pool of family members or of non-family employees within family firms (Lin and Hu, 2007). Also, when family firms require high managerial ability, the discrepancy in management between controlling families and the non-family CEO is more likely to be reduced (Shleifer and Vishny, 1986). Thus, the ability of a CEO plays a vital role in firm performance, particularly when firms’ operations require specific or high managerial skills (Burkart et al., 2003). Based on the discussion and review, when family firms require high managerial ability, the firms having a professional CEO will outperform those having other CEO types.
Burkart, M., Panunzi, F., Shleifer, A., 2003. Family firms. The Journal of Finance 58, 2167-2201.
Dyer, W.G., 1989. Integrating professional management into a family owned business. Family business review 2, 221-235.
Lin, S.h., Hu, S.y., 2007. A family member or professional management? The choice of a CEO and its impact on performance. Corporate Governance: An International Review 15, 1348-1362.
Shleifer, A., Vishny, R.W., 1986. Large shareholders and corporate control. Journal of Political Economy 94, 461-488.