Two-tier board system and Indonesian family owned firms performance

The two-tier board system practiced in Indonesia provides greater opportunity for the majority shareholders to place representative on board which may expropriate interest of minority share-holders and increase information asymmetry. This study looks at the influence of family ownership on firm’s performance, by differentiating the influence of family ownership from family involvement in companies listed on the Indonesia Stock Exchange. Family ownership is measured based on family’s equity ownership in the firm and family’s involvement. This study explores family in-volvement in threefold: involvement in the board of commissioners, involvement in the board of directors and involvement in both boards. Firm performance is measured based on Value Added Intellectual Coefficient (VAIC) which comprises of capital employed efficiency, human capital efficiency, and structural capital efficiency. Data was collected for a period of three years from 2007 to 2009 on 155 firms which were identified as family firms. The findings show that family ownership has a positive influence on firm performance. Family involvement, however, shows mixed results. Family involvement in the board of commissioners has a positive but insignificant influence on firm’s performance. Family involvement in the board of directors has a negative influence on firm’s performance. Family involvement in both boards has a positive influence on firm performance. The findings suggest that family involvement in both boards creates a balance between the supervisory function and the management function, thus resulting in a more effective monitoring of firm’s management