Financial performance and non‐family CEO turnover in private family firms under different conditions of ownership and governance

Family firms, as insider‐controlled companies, should be less likely to exhibit CEO turnover after poor performance and may thus promote enhanced focus on long‐term goals. However, when a non‐family CEO is in charge, the relatively limited empirical evidence is contrasting. Some studies find that only family CEOs are immune from the threat of dismissal following poor financial performance, while other studies show that family firms discipline their CEOs for poor financial performance regardless of their family status. In this work, we try to reconcile these contrasting findings and investigate what ownership and governance conditions influence the owners’ pressure on the CEO to achieve short‐term financial results. Drawing on a longitudinal dataset that covers the entire population of Italian medium and large family companies, we find that when family ownership is concentrated in the hands of few family shareholders or there is a low number of family members involved in the board of directors, non‐family CEOs are less likely to be dismissed after poor performance. The study, adopting the behavioral agency theory as the guiding framework, highlights the importance for governance decisions of the potential goal divergence among principals in closely held ownership structures. Our results also add to the still scant literature on the relationship between family owners and non‐family CEOs. Our research suggests that, in the decision to hire a nonfamily CEO, family business owners should not only assess their gaps in managerial skills but also carefully consider the ownership structure and family involvement conditions. On the side of professional non‐family managers, our results offer insights on ways to address the employment relationship with the controlling family.