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02/08/2023

Too Young. Too Female. Too Diverse.

Why the boardrooms at family businesses are less diverse than those at other companies

Khadija Mubarka / Nadine Kammerlander - February 8, 2023

Tips for practitioners

The more diverse the executive board, the more successful the company—a rather common scientific finding. And it’s true that ideas and procedures conceived in a boardroom with a high level of diversity (across age, gender, nationality, and many other dimensions) are often more creative than those coming from a boardroom where there is a notable lack of diversity. Heterogeneous teams are particularly better able to solve complex problems that require out-of-the-box thinking. And yet, a governing body’s level of diversity is, contrary to popular belief, often not the result of free, independent deliberation and people being promoted based on their merit. More often than not, that level of diversity is highly contingent on the structures set in place by the owners of the company. At family businesses in particular, executive boards tend to be less diverse demographically than their counterparts at non-family-led businesses. But why is this the case?

Primary goal: securing the family’s control over the company

One key factor leads family businesses to foster homogeneity in their board rooms: At non-family-led businesses, focus is often on growth and a maximation of profit. By comparison, family businesses tend to pursue both financial and non-financial goals. The concept of “socio-emotional wealth” comprises five dimensions: the ability for the family to exert control and have influence, self-identification of members of the family with their company, the social ties of the business, emotional connection, and the maintenance of the family’s legacy.

Both in their decision-making process and their actions, family businesses are chiefly guided by non-financial goals that are closely linked to ownership. This has an influence over the composition of the board of directors. With the primary objective being to secure the family’s control over the business, there is a tendency to reject diversity in the boardroom. The owners feel they have more control that way, working with trusted, like-minded allies whom they understand on a deep level—and whom they can influence. That this kind of control could become harmful during volatile and uncertain times is something that is often lost on these owners.

Also apparent is that, in family businesses, employees who are a member of business family (i.e., the family that owns the company) often reach higher positions in the company and do so more quickly than others. Employees who are not related to the family, however, also stand a good chance to getting ahead in the company so long as they share the same sensibilities of the family members and identify with the organization’s history, traditions, and (often conservative) values. As a result, younger talent, or people who hail from other countries, may find they have fewer opportunities at the company in question. The high concentration of ownership within the family and access to capital from members of said family also help shield the business from external pressures to diversify its board of directors.

Generally speaking, a family business aims to establish long-term, steadfast relationships with their managers and especially with their board members. In doing so, they are favoring stability, so they tend to select longstanding members for executive-level positions. In particular, they opt for those who wish to preserve the values upon which the business was founded and those who have similar norms and goals at home. Women in (junior) leadership positions also struggle here, at least if they are not related to  the family in ownership. Because of this, they tend to lack the subject-specific expertise that comes with years of experience, which, in turn, leads decision-makers to not consider them viable candidates.

All in all, it is clear that family businesses have problems with how they perceive diversity and how to implement it. Moreover, it may even seem, at first sight, a better decision economically to simply not make any effort at all to fill open positions with a diverse pool of candidates. After all, it’s more cost-effective to recruit new employees from a known source rather than from an external one. Moreover, managers are still more likely to promote employees who have been with the company for a long time. This also reinforces that employee’s identification with the company, as they will develop even more loyal ties both to it and to the family in ownership. But in reality, that approach will only save on costs in the short-term, and those loyal ties might turn out to be a double-edged sword in times of disruptive change.

Diverse management teams are not always accepted

The benefits that diversity has been empirically proven to bring to a company can only take effect if said company’s culture and current conditions allow for it. For example, all board members must know how to work in diverse teams and deal with any resulting communication problems. Such abilities are not a given at family businesses, particularly as it pertains to gender diversity, with which many companies continue to struggle despite studies having shown an overall increased presence of female family members inside the boardroom over the last decade. In fact, many women in leadership positions find that they are, in a sense, invisible and are often not perceived in a way that mirrors their actual role. This has an effect, i.e., that women overall will feel less motivated to apply for higher ranking positions at family businesses.

All too often, family businesses unfortunately lack an environment in which diversity is practiced to the benefit of all parties involved. Although they could, in fact, benefit from skills commonly found in women—such as creativity, the ability to handle various conflicting goals, and even different ways of processing information—family businesses are more characterized by a lack of gender diversity than are their counterparts.

Should one see diversity as a threat—or an opportunity?

For the reasons mentioned above, family businesses are, on the whole, much more hesitant than their competitors to make their boardrooms diverse. Often, diversity is regarded as unimportant or even as a threat to the business. While the study indeed shows that a high level of demographic diversity in the boardroom increases performance at family businesses, at least in principle, it is also true, according to the empirical results of the study, that said performance does not necessarily improve. Family businesses in recent years have often failed to prepare their companies to work in more diverse teams—i.e., the working world of the future.

Tips for Practitioners

  • Diversity has many different facets—gender, age, background, mindset. The more facets considered, the better it is for your company.
  • Think of diversity as an opportunity for your company and not as a threat. By doing so, you’ll be able to tackle future challenges head on.
  • Diversity is not something that simply happens on its own. It requires the right management culture and spaces for open dialogue to be able to flourish. Be sure to make your working environment a constructive place for that to happen.

Literature reference and methodology

For “A closer look at diversity and performance in family firms,” data was collected from 341 German companies, both from the public and private sectors, from 2014 to 2018. 36% of these companies were family businesses; 64% were non-family businesses. On average, 12% of these companies had women active on their supervisory boards; 20% of all board members did not hold German citizenship.

Co-authors of the study

Dr. Khadija Mubarka

Khadija Mubarka worked as a research assistant at the Chair of Family Business and Mittelstand and, in 2022, earned her doctorate in family business from WHU.

Professor Nadine Kammerlander

Nadine Kammerlander is the Chairholder of Family Business at WHU – Otto Beisheim School of Management. Her research focuses on innovation, employees, and governance in family businesses and offices. Her academic contributions are routinely published in international journals and have won several renowned awards.

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