The effect of family-oriented objectives on board composition

The aim of this paper is to extend the empirical literature on the determinants of a board composition, specifically why family members participate in board of directors. Although both socioemotional wealth approach and agency theory use family-oriented objectives as an important dimension to justify the presence of family members in the board of directors, both approaches bring contradicting arguments to achieve similar predictions. While socioemotional wealth approach argues that board of directors is over-represented by family members who attempt to maintain the discretion in the decision-making and preserve socioemotional wealth, agency theory argues that due to the difficulty of aligning the objectives, board of directors is over-represented by family members who attempt to control the personal interest in the firm. The extant empirical evidence shows that family-oriented objective has a positive effect on family member ratio. In order to bring some light onto this dilemma I assume that not all family members are the same and they should be classified into active or passive family boards according to the fact whether they work or not in the firm. The results show that a strong presence of family-oriented objective has a positive effect on the presence of family members on the board of directors as agency theory and socioemotional wealth predict. However, the presence of family-oriented objectives negative effect on the proportion of external family members in the board of directors, indicating that family-oriented objective creates steward-oriented relationship.