Power play in Chinese family firms: insiders vs. outsiders

Relying solely on heirs and dynasts isn’t sustainable for family businesses, but opening arms to outsiders may threaten the legacy. A study finds the formula for balance

Featured faculty: Dora Lau
Written by Pan Jingyi

History has shown the instrumental role of family businesses in the economy. A 2025 index from EY shows that 500 global family businesses earn US$17.6 billion annually, with 80 per cent yielding more than US$5 billion. Many of them are headquartered in Asia, including Hong Kong with household names like Jardine Matheson, Sun Hung Kai Properties, Chow Tai Fook and the like.

It is natural to have family members in executive roles to ensure the firms continue their legacy and identity. On the other hand, family firms often hire professionals outside the family at top management levels to sustain growth and remain competitive. The firms’ success then depends on how well these family and non-family managers collaborate, combining their unique skills and perspectives to create a competitive edge.

“Large demographic faultlines between family and non-family managers would benefit firm performance.”

Professor Dora Lau

Inevitably, hypothetical dividing lines or faultlines emerge between the two that can impact company performance in various ways. While these divisions can lead to conflicts and impair operations, they can also enhance information sharing and positively affect the firms’ earnings, like a double-edged sword. The question is, how far can these lines affect the dynamics of family firms?

“While family and non-family managers collaborate as members of the same team, they differ significantly in terms of family affiliation, personal goals, and the treatment they receive from the controlling family,” says Dora Lau, Associate Professor (Teaching) in the Department of Management at the Chinese University of Hong Kong (CUHK) Business School.

To explore the implications of this division among Chinese family firms, Professor Lau conducted a study titled Top management team faultline size and family firm performance, in collaboration with Li Weiwen of Sun Yat-Sen University, He Ai of South China University of Technology and Li Xiaotong of Qingdao University of Science and Technology. “The study found that large demographic faultlines between family and non-family managers would benefit firm performance,” Professor Lau says.

Larger faultlines can be beneficial

The team analysed data from 262 family firms listed on the Shanghai and Shenzhen stock markets from 2004 to 2010. They identified a firm as family-owned if its ultimate owner is a family or an individual. Firm performance was evaluated using return on assets, a financial performance metric to assess how effectively a company utilises its assets to generate profits. Meanwhile, the faultline size was assessed based on demographic factors like age, educational background, and gender.

A clear division inherently exists in the top management based on whether the executives are family members or not. Greater disparities in demographic characteristics between family and non-family members indicate larger faultlines, and the bigger gaps between the two are found to bring more benefits. Professor Lau and her collaborators posit that this relationship stems from “dominance complementarity” and “information and knowledge complementarity”.

Dominance complementarity refers to the power and status differences between family and non-family managers. In the context of family businesses, the controlling family often hires professional managers to supplement the expertise and skills that family managers may lack. However, there are clear-cut power and status differences between them, with family managers typically holding greater authority and influence.

“A well-defined power hierarchy allows the lower-status subgroup to defer to the higher-status subgroup, facilitating faster decision-making, clearer strategic direction, and more consistent execution,” Professor Lau says. “Together, these dynamics contribute to smoother and more efficient team operations.”

In information and knowledge complementarity, when a significant faultline exists between family and non-family managers, their distinct demographic characteristics and knowledge often result in different ideas in decision-making. “As a result, the top management teams will be aware of more issues, delve deeper into these issues, and consequently arrive at more comprehensive and creative strategic decisions,” she adds.

When faultlines become problems

Despite the potential benefits, certain factors can interfere with the positive effects of faultline size. While non-family managers tend to find power centralisation among family members reasonable, experiencing unfair treatment from the controlling family can lead to dissatisfaction.  This dissonance, known as bifurcation bias, refers to a tendency to treat individuals differently based on whether they are inside or outside the family.

“The bifurcation bias poses an identity threat for non-family managers, thus enhancing dissatisfaction, inequity perceptions, or turnover intentions,” Professor Lau says. “As a result, the subgroup of non-family managers might lack the willingness or motivation to collaborate with family managers.”

Another mediating factor is the development of intermediate institutions, including market intermediaries such as auditors and solicitors. In well-developed regions, these intermediaries can facilitate communication between parties and provide essential information for company growth, sometimes replacing non-family executives in sharing external knowledge within families.

Therefore, in regions with poorly developed intermediary institutions, the complementary information and knowledge from non-family managers could be crucial for the performance of family businesses. “If market intermediaries are rare, family firms could hardly find credible and sufficient information and knowledge outside of the firms,” she adds.

Unbiased treatment is crucial

This research also highlights that the dynamics within top management teams in family firms can vary significantly from those in non-family firms. Although it may seem easier for family firms to hire professional managers with similar demographics to reduce conflicts, Professor Lau proposes a different approach. She recommends that these companies intentionally build top management teams with diverse and complementary skillsets, backgrounds and experiences.

“Rather than prioritising similarity or loyalty, controlling families should focus on recruiting professional managers who bring fresh perspectives and expertise that complement the capabilities of family members,” she says.

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Meanwhile, Professor Lau encourages family firms to provide unbiased treatment toward non-family managers to cultivate commitment and foster collaboration. One strategy is offering favourable treatment to non-family members, such as competitive compensation packages.

Additionally, emphasising organisational identity over family characters by promoting a shared vision and core values that transcend familial boundaries can boost team cohesion. “Doing so can strengthen team collaboration, reduce identity-based tensions, and enhance the commitment and motivation of non-family executives,” Professor Lau adds.