This is a study of the relationship between context, internal corporate governance and firm performance, looking at the case of Turkey, an exemplar of family capitalism. We found more concentrated ownership, often in the hands of families, led to firms performing better; concentrated ownership means that controlling families bear more of the risks of poor performance. Less predictably, given that the institutional environment is so well attuned to family ownership, we found that mechanisms that accord room for a greater range of voices and interests within and beyond families – larger boards and foreign ownership stakes – seem to also make for positive performance effects. We also noted that increase in cross ownership did not influence market performance, but was negatively associated with accounting performance. Conversely, we found that a higher proportion of family members on boards had no discernable effect on performance. Our findings provide further insights on the relationship between the type of institutions encountered in many emerging markets, internal corporate governance configurations and firm performance.

Introduction

This is a study of the effect of internal corporate governance (CG) mechanisms on firm performance in an emerging market setting where institutional arrangements are weak and fluid; it further explores whether any relationships follow on the lines of theories developed in the West, or are context specific. The existing CG literature emphasizes two different systems: Market-based (outsider) and relationship-based (insider) ones (Bozec, 2007; Heenetigala, 2011; Hilb, 2006; KyereboahColeman & Biekpe, 2006; Solomon & Solomon, 2004). The marketbased or shareholder value system is mostly seen in Anglo-Saxon countries such as the US and UK, where the protection of minority shareholders is robust, and there is a strong emphasis on maximizing shareholder value (La Porta, Lopez-de-Silanes, Shleifer, & Vishny, 1997). On the other hand, the stakeholder orientated or relationshipbased system is encountered in Continental Europe and parts of Latin America East Asia. Here, the role of the firm is much broader than maximizing shareholder profit, and that it seeks to benefit as wide a range of stakeholders as possible (Berghe, 2002; Demirbag, Wood, Makhmadshoev, & Rymkevich, 2017; Dore, 2008). There are also hybrid systems, such as Turkey, which combine some of the characteristics of each; this may translate to weak ownership rights, but not necessarily stronger countervailing rights for stakeholders (Banks, 2004). There is already an extensive body of literature on the relationship between ownership structure, board composition and attributes, and firm performance (Bauwhede, 2009; Chiang & Lin, 2007; Finegold, Benson, & Hecht, 2007; Górriz & Fumás, 1996; Hillman & Dalziel, 2003; Klapper & Love, 2004; Lam & Lee, 2012; Maury, 2006; Nicholson & Kiel, 2007; Singh & Gaur, 2009). However, rather more contentious is the extent to which such relationships reflect general principles, such as an inherent ‘conflict of interest between the shareholders and managers’; how national institutional frameworks might impact on, mitigate or intensify any such tensions; and, indeed, whether alternative, potentially equally valid approaches to CG are valid, and indeed may work better in specific settings (c.f. Aguilera & Cuervo-Cazurra, 2009). The existing literature on boards, ownership and performance has tended to concentrate on variations in internal CG mechanisms within liberal market frameworks, and on exploring the ways in which shareholder rights may be enforced to maximize shareholder value.