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Family Ties as Corporate Power

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Pablo Balán explains that family ties provide firms with an edge in collective action that enables them to be politically active through campaign donations, to engage in financial rent-seeking by obtaining subsidized state credit, and to bypass regulation seeking to curtail the influence of business by substituting individual contributions for corporate contributions. Scholars and advocates can benefit from a deeper understanding of organizational constraints to programmatic reform.

Business interests are powerful players in all political systems, and since Edward Banfield’s classic work, scholars have recognized the historical importance of family ties in economic and political development. Kinship is thought to foster a specific suite of moral values and psychological traits that facilitate cooperation among related individuals. Amoral familism—the tendency for family members to cooperate at the expense of societal interest—is thought to stifle civic values and, ultimately, forestall the development of large-scale impartial institutions—a phenomenon Francis Fukuyama dubs “the tyranny of cousins.’’ Numerous studies document a negative relationship between the strength of kinship ties and levels of democracy, civic values, and political participation. Historically, the Roman Catholic Church’s ban on cousin marriage is thought to have fueled the dissolution of the extended family and, with it, kin psychology, leading to the West’s distinctive path of economic and political development, often abbreviated as “WEIRD”—Western, Educated, Industrialized, Rich, and Democratic.

Less is known, however, about the role of family ties in present-day economic institutions. Family firms, the most prevalent corporate structure in the developing—and, perhaps, the developed—world, offer a unique lens to study the role of kinship ties in naturally occurring, strategic settings. Be it because of their involvement in major corruption scandals—such as those involving the Adani or Odebrecht groups—or the cultural phenomenon of binge-worthy HBO show Succession, family firms are now in the spotlight. Economists have long noted two salient characteristics of family firms: they are less productive and they are remarkably long-lived. The answer to this apparent contradiction might lie in politics.

Family firms are particularly prevalent in Latin America, where family capitalism has been characterized as “endemic” (Figure 1). Students of comparative capitalism have linked the prevalence of diversified family-controlled groups and low-skilled labor—two features of what some observers have dubbed “hierarchical capitalism’’—to the region’s lacking economic performance. However, there is limited understanding of the specific micro-level dynamics that underlie these broader macro-level descriptions.

Figure 1: Prevalence of Family Firms by Region Regression estimated by OLS. The shaded region represents 95 percent confidence intervals. Colors represent regions of the world. A family firm is defined as one that is either owned by their founder or one in which both the owner and the CEO are part of a family. Sources: World Bank and World Management Survey.

Brazil, the largest economy in Latin America, is a natural setting to explore this question. The country is home to some prominent conglomerates, such as COSAN, one of the country’s largest energy groups, and JBS, the world’s largest meat-processing company. The latter squarely fits a working definition of a family firm—a natural person owns a plurality of voting shares, and at least one family member holds a managerial position. A quick glimpse at JBS’ organizational chart reveals the controlling family’s active involvement in both ownership and management. In 2010, Joesley Mendonça Batista held positions as the board chairman, CEO, and CFO. Five other members of the Batista family served as board members, with José Batista Sobrinho, the company’s founder, also serving on the board.

Is this a general phenomenon? Using fine-grained information extracted from reports that companies are legally required to disclose to the Brazilian equivalent of the United States Securities and Exchange Commission, we can measure family ties within all of Brazil’s publicly listed companies. This approach allows us to trace the behavior of family firms at the level of family ties.

The first finding emerging from this research project is that family firms wield substantial political influence. In Brazil, family firms are politically active business actors. In 2014, they accounted for over 53% of corporate campaign contributions made by listed companies in Brazil. In a recent article I wrote with Juan Dodyk and Ignacio Puente, we document that family firms are 20 percentage points more likely to make corporate campaign contributions compared to non-family firms. Opening the black box of firms, we find that members of the firm’s controlling family are also more likely to make individual campaign donations as private citizens—and this probability increases with the number of family members in the business. This strong parallel between the behavior of the firm and the behavior of individuals within the controlling family strongly suggests that family ties serve as the primary driving force behind the political activism of family firms.

Furthermore, our research demonstrates that family firms reap significant benefits from their political activism. We find that contributing family firms are more likely to secure subsidized credit from Brazil’s National Development Bank—an institution widely regarded as apolitical—and that, in turn, receiving such loans induces firms to make further campaign contributions. Notably, family firms that fail to contribute face a penalty, suggesting a dynamic of reciprocity between business and the state. This can be seen as an illustration of the symbiotic relationship between political and economic power, described by Luigi Zingales as the “Medici vicious cycle.”

What explains family firms’ heightened political activism? We argue that family firms’ political activism does not reflect different political preferences but rather family firms’ capacity to establish and sustain relationships with politicians, thereby overcoming the commitment problem inherent in campaign contributions: once a donation is made, there is always a risk that politicians will not fulfill their promises. However, family firms are able to mitigate this risk because of their long time horizons: politicians can expect family members to remain on the other side of the negotiation table in the future. Consistent with this notion, the data reveal that family firms’ contributions are persistent across time: family firms are more likely to make repeat donations to the same candidates and parties across election cycles, suggesting that contributions reflect relationships rather than one-off transactions. Thus, like in other contexts, in the realm of business, families can be an apt mechanism for the intergenerational transmission of capital.

Will family firms keep their political advantage when a reform seeks to curtail corporate influence? One of the most vexing questions for policymakers is how to reduce the influence of money in politics. Recently, scholars and activists have increasingly advocated for regulating corporate campaign finance. As of now, 49 countries have prohibited corporate campaign contributions. In 2015, the Brazilian Supreme Court rendered corporate campaign contributions illegal.

The ban in Brazil was largely effective at limiting the total amount of money in politics—corporate contributions went down to zero, and total contributions decreased by a factor of 10. However, this dramatic drop masks substantial heterogeneity. Indeed, in a Stigler Center Working Paper, we study the effects of this regulation across firm types. We document that family firms were able to overcome the effect of this regulation to a certain extent by substituting individual campaign contributions for corporate contributions (Figure 2). Opening the black box of firms, we find that individuals belonging to the controlling family increase their probability of making campaign contributions as private citizens following the ban. The effect is driven by firms that were politically active before the ban—that is, by those that had (s)kin in the game (Figure 3). Moreover, this effect is higher for individuals with more family ties, indicating that political activism increases as a function of an individual’s embeddedness in the family network. 

Figure 2: Bivariate regression of post-ban individual contributions (2018) on pre-ban corporate contributions (2014), by firm type.

Building on convergent lines of research on the impact of cooperation between kin members, we argue that this is because of family ties’ capacity to facilitate collective action. In Brazil, where corporate contributions are a collective good delivering value to the firm, the ban on corporate donations created a collective action problem among firms’ leadership—individuals may refrain from contributing to avoid the possibility of free-riding by others. Family ties, however, help mitigate this problem because of their capacity to overcome cooperation dilemmas. Furthermore, we find evidence that, after the ban on corporate contributions, family members influence each other’s contribution decisions, giving credence to the idea that kinship ties transmit influence.

Figure 3: Probability of individual contributions for individuals inside vs. outside of the controlling family. Left panel: firms that contributed before the ban. Right panel: firms that did not contribute before the ban. Bars are 95 percent confidence intervals.

All told, our research shows that family ties confer firms an advantage in political activism and allow them to adapt to an adverse political environment. We thus establish that family ties are an important source of the de facto power of economic elites and contribute to what Luigi Zingales calls “a political theory of the firm.” By showing that family ties can create a gap between the intended goal of policy and actual outcomes that favor economic elites, the findings also shed new light on the persistence of political inequality in Latin America, the most unequal region in the world.

Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.

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