In the last few years, economists have documented the tendency of family-run firms to perform worse than other firms. A study of Danish family firms, for example, found that a family-owned firm with a family CEO represented an average decline in profitability of about 4 percent compared to family-owned firms run by professional (non-family) CEOs. Until now, economists didn’t know what family CEOs were doing differently that might account for the differences in performance. New research shows that it may be what they aren’t doing: family CEOs appear to put in fewer hours than their professional counterparts.
Professor Andrea Prat, along with Oriana Bandiera of Harvard and Raffaella Sadun of the London School of Economics came to this conclusion after conducting a time-use analysis of family and non-family CEOs in the Indian manufacturing sector; their results were backed up by subsequent identical studies in the Brazilian, German, French, US, and UK manufacturing sectors. Their study is a more elaborate and statistically rich version of a smaller study run by Henry Mintzberg (now of McGill University in Montreal) in the 1970s, which looked in depth at time use for five CEOS.
Prat and his co-researchers started with India because family ownership is common there and productivity in the manufacturing sector varies widely, giving them robust data. They surveyed CEO time use by talking to CEOs or their assistants, checking in at the end of the day to review what the CEOs actually did that day and to note their planned activities for the next day. About two-thirds were family CEOs; the other one-third were professional CEOs — firm managers who headed family-own firms but were not members of the family. At the end of the 3-month study period, the team checked the consistency of their reports with CEOs through personal interviews.
Here’s what they discovered: founder CEOs logged 8 percent fewer hours than professional CEOs, while next-generation family CEOs (those who had inherited the helm from another family member, usually the founding CEO) were somewhat more dedicated, logging 6.6 percent fewer hours than professional CEOs. For every percent increase in hours per week the CEO put in, firm productivity increased by 1.04 annually. There was no evidence that family CEOs might simply be planning and using their time more efficiently than professional CEOs.
The timing of the study was fortuitous, because it was conducted during monsoon season, when severe rains and floods often snarl traffic and otherwise slow business as usual, and during the window when India hosted the Indian Premier League, an international sporting event that draws superstar cricket players and the eyes of an enthusiastic nation. This allowed the researchers to look at whether outside events might affect CEO’s efforts during the time they were collecting survey data.
On days with extreme rain, family CEOs worked about 5.4 percent fewer hours than usual, while professional CEOs worked about 3.8 percent more hours. On cricket match days, most family and professional CEOs left their offices early to catch the game. But the professional CEOs worked more hours earlier in the day, so in the end the family CEOs were still working fewer hours than professional CEOs.
To make sure that factors specific to India weren’t behind these disparities, the researchers conducted similar surveys of more than 800 CEOs at manufacturing firms in Brazil, France, Germany, the UK, and the United States. There too, they found similar differences: family CEOs in Brazil worked about 11 percent fewer hours on average than professional managers, while family CEOs in the other countries worked about 8 percent fewer hours.
What about informal business interactions — isn’t it possible and even likely that family CEOs conduct business in less formal settings, for example, where a second generation family CEO may carry on a conversation about strategy with the founding relative over dinner? “If these CEOs were doing much informal work away from the office, we would expect their work in the office to be much more structured, to lean more heavily toward formal activities,” Prat explains. “But family CEOs actually do more informal stuff in the workplace.”
When family firms are less productive, the impact is felt beyond the family’s own profit margins and wealth — it affects the entire economy. Family-controlled firms constitute more than half of worldwide firms that have at least 500 million dollars in market capitalization, and in some countries the percentage of family-owned firms is quite high: 70 percent in Italy, and up to 90 percent in India. The dampened productivity can add up to a lot — in reduced profits, in slower growth, and in lagging wages, all of which flow into the larger economy.
While these results don’t directly link CEO working hours to productivity, Prat cautions, they do raise the question of whether family firms should consider looking to professional CEOs.
Prat’s next project is to see if CEO management styles can be correlated to performance. “You’ve seen all these management books at the airport about how to run a firm,” he says. “Typically, it’s just one CEO telling his story. We’d like to go beyond that.”
Andrea Prat is the Richard Paul Richman Professor of Business in the Finance and Economics Division at Columbia Business School.
Watch Professor Prat discuss this reserach in the Program for Financial Studies' No Free Lunch Seminar Series.
Read the Research
"Managing the Family Firm: Evidence on CEOs at Work"