Guests at the Table?: Independent Directors in Family- Influenced Public Companies

David F. Cavers Professor of Law, Duke University School of Law. Many thanks to Evelyn Brody, James D. Cox, Ian Ramsay, and Andrew Tuch for comments on the manuscript. I presented an earlier version of this article as the W.E. Hearn lecture at Melbourne Law School in December 2006 and benefitted from the audience's questions and reactions.

I. Introduction

Companies within the sphere of public capital markets in the United States that retain characteristics of family firms pose a series of intriguing questions about corporate governance that warrant examination in light of the surprising incidence and size of such firms. In particular, a family-influenced or family-controlled firm with nonfamily equity investors is an environment in which directors' roles and duties require careful assessment. Although in many reported cases-some well-known for other reasons-directors' performance within family-controlled companies appears to have ranged in quality from exemplary to deplorable, the underlying issues surrounding directors remain unexplored in legal scholarship. Moreover, questions concerning the governance of such companies regularly surface in highly visible ways. For example, in 2006 directors of the Ford Motor Company confronted the difficult question of whether a descendant of the firm's founder, one bearing the last name "Ford," should continue serving as the company's CEO.1 More recently, directors of Dow Jones & Co.-62% of its voting power represented by shares held by trusts on behalf of the Bancroft family- assessed the company's response to a financially generous offer for its shares made by News Corporation (News Corp.), while the Bancrofts and their trustees determined their responses as Dow Jones's controlling shareholders.2 News Corp. itself, originally Australian but since reincorporated in Delaware,3 is controlled by Rupert Murdoch and, through a trust, the Murdoch family controls around 30% of News Corp.'s shares.4 The past and possibly future roles for Mr. Murdoch's own children within News Corp. bear on the company's future, as do allegiances and disaffections internal to the family.5 On a darker note, members of the Rigas family, who founded and controlled the large telecommunications company Adelphia, were convicted of federal felonies grounded in their apparent disregard of common sense and legal boundaries between the company's assets and their own entitlements, compounded by federal securities fraud.6

Public companies that are either controlled by individual founders or members of the founder's family or, more loosely, influenced by them, are a significant phenomenon in the United States. Definitional and measurement questions aside for the moment, such firms are often said to account for about one third of the Fortune 500.7 Although that is a minority of the Fortune 500, it represents a substantial minority and a substantial fraction of overall market capitalization. Its substantiality calls into question the wisdom of premising one's perspective on corporate governance in the United States on a stylized fact of diffuse ownership8 and then identifying the consequences that stem from a separation between ownership and control as the sole governance concerns for publicly held companies in the United States, in contrast with their counterparts elsewhere.9 That is, a single focus on diffused ownership and its consequences may tend to slight the governance implications of less typical ownership structures. Moreover, within a cohort of family-controlled public firms, dual-voting structures enable the preservation of control in the absence of a proportionate investment in the firm's equity. Within this cohort of firms the market for corporate control does not operate with the immediacy and vigor observed elsewhere. Transactions in control occur only through processes of negotiation and consent, which heightens the importance of governance mechanisms that operate within dual-class firms.

To be sure, the same firm does not necessarily remain family-controlled or family- influenced throughout its existence. Family influence and presence within a publicly held firm may dissipate within a generation of the firm's founding or may endure through multiple generations. Many firms that have a controlling shareholder following an initial public offering (IPO) subsequently have widely dispersed ownership with no controlling shareholder.10 In other firms, control and influence descend from the founder to children and other members of the founder's family, whether during or after the founder's association with the company, thereby creating a cohort of owners who may not view their shares in the family firm as fungible investment interests.11

Additionally, family companies with public shareholders are interesting simply because they may exhibit many of the chara...

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