Family matters: Investigating agency problems through CEO compensation in Finnish listed family firms - Empirical evidence on entrenchment and alignment in corporate governance

Abstract

Recognizing the governance dynamics of family firms is paramount due to their substantial global prevalence. Around 66 % of publicly listed firms in Finland fall under the category of family firms. Distinguished by their distinct traits, these family-owned businesses possess unique characteristics that profoundly influence their governance. This study investigates the impact of family ownership on CEO compensation within Finnish listed family firms and examines differences in remuneration between family and non-family firms from 2020 to 2022 with 379 firm-year observations using regression analyses. CEO compensation plays a crucial role in aligning shareholder and managerial interests and can reveal governance dynamics within family firms which remain underexplored.

This thesis adopts a robust theoretical framework that draws from diverse perspectives, including agency theories, socioemotional wealth, entrenchment theory, alignment theory, and prior research on CEO compensation. It emphasizes the heterogenous nature of family firms as an ownership type and highlights the significance of contextual factors in family firm research, addressing the often contradictory findings in the field.

Empirical findings from this study reveal consistent patterns in CEO compensation among Finnish listed family firms compared to non-family counterparts. Family-owned businesses tend to offer CEOs lower overall compensation and allocate a smaller proportion of short-term incentives relative to fixed payments. Moreover, these effects are more pronounced when the company is led by a family CEO. These findings provide evidence in favour of alignment theory, which suggests that family firms management and majority owners have naturally aligned interest with minority shareholders.