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Not Good, Not Bad: The Effect of Family Control on Environmental Performance Disclosure by Business Group Firms

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Abstract

We combine research on business groups with the socioemotional wealth approach from family firm research to examine how family control of business group firms affects voluntary disclosure of environmental performance information. Theorizing that disclosing environmental performance information weakens the owning family’s control over its business group firm, but also generates reputational benefits, we expect family ownership and disclosure propensities to relate in a U-shaped way and, further, that this U-shape is accentuated for business group firms with a family CEO. Analysis of longitudinal data on disclosure decisions of South Korean business group firms supports our theory and suggests that the effect of family control on environmental performance disclosure is neither good nor bad; instead, it depends on both the level of family ownership and whether a family CEO is in place. The finding that disclosure propensities are greatest when family control of business group firms is most extensive is provocative: it suggests that the very element that often is seen to encourage inefficiencies and fraud in business groups—family ownership combined with family leadership—can also be leveraged to foster responsible behaviors.

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Notes

  1. An exception is Japan’s keiretsus where family ties play but a minor role.

  2. Pyramiding refers to family dynasties exerting indirect ownership control of numerous businesses through investing capital in cascading parent-affiliate businesses. Tunneling describes a process whereby family owners transfer assets from peripheral business group firms to core enterprises in which they hold greater equity stakes.

  3. It is important to acknowledge that the pursuit of socioemotional wealth is not always a “prosocial and positive stimulus” that serves as an “inspiration for family firms to demonstrate care for their stakeholders” (Kellermanns et al. 2012, p. 1176). Family firms have also been shown to exploit employees and provoke conflict with local communities—all despite of, or possibly because of, strong family identities and intentions for dynastic succession (Kidwell et al. 2012; La Porta et al. 2002).

  4. The BrandStock Top Index, an index provided by a Korean brand value rating agency, showed that the brand value of the subsidiaries of the Lotte group plummeted in 2016 during the prosecution period (http://www.brandstock.co.kr/index.php).

  5. We also created more fine-grained sector controls. Inclusion of these controls confirmed the results for our independent variables but was associated with an inferior model fit.

  6. A drawback of the random-effect specification is that it assumes firm heterogeneity to be randomly distributed across firms. A fixed-effect specification does not have this assumption but is problematic for our analysis because it disregards all observations for which the dependent variable does not vary. As a result, firms that never respond to the survey or always respond to the survey are dropped from our analysis.

  7. We use a Wald test rather than a likelihood ratio test to examine improvements in model fit because fitting a model with robust standard errors violates the assumption of the likelihood ratio test that individual observations are independent. Likelihood ratio tests performed on alternative models without robust standard errors confirm the analysis reported here.

  8. The exact inflection point occurs at 60.25% family ownership \(\left( {= - \frac{{ - \;0.241}}{{2 \times 0.002}}} \right)\).

  9. More completely, changes in disclosure probabilities are as follows: An increase from 0 to 10% in family ownership decreases disclosure propensities by 17.2% points; an increase from 20 to 30% by 16.8% points; and an increase from 30 to 40% by 10.4% points. By way of comparison, an increase from 80 to 90% in family ownership increases disclosure propensities by 10.2% points, and an increase from 90 to 100% by 16.7% points (from 32.9 to 49.6%).

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  1. Wisconsin School of Business, University of Wisconsin-Madison, 975 University Avenue, Madison, WI, 53706, USA

    Ann Terlaak

  2. Bren School of Environmental Science and Management, University of California - Santa Barbara, Bren Hall 2400, Santa Barbara, CA, 93106, USA

    Seonghoon Kim

  3. Department of International Trade and Commerce, Soonchunhyang University, 22 Soonchunhyang-ro Shinchang-myeon, Asan-si, Chungcheongnam-do, 31538, Republic of Korea

    Taewoo Roh

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Terlaak, A., Kim, S. & Roh, T. Not Good, Not Bad: The Effect of Family Control on Environmental Performance Disclosure by Business Group Firms. J Bus Ethics 153, 977–996 (2018). https://doi.org/10.1007/s10551-018-3911-5

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