Implications and Recommendations for Future Research

The findings reveal that, as far as SEW is concerned, investments in family firms that have an independent board are prudent. I would like to suggest rather tentatively that family socio-emotional motives positively influence investors’ perceptions, as long as healthy corporate governance in family firms’ structure is evident. Healthy corporate governance means sharing the family values with individuals who are not family

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members.Such individualsin positions of board independence could serve to encourage more independent directors onto boards. One can argue that as family firms become publicly listed companies, they are subject to scrutiny that limits how family owners can pursue SEW objectives at the expense of public shareholders (Le Breton-Miller and Miller, 2013). Public listing could be seen as a decision to enhance a firm’s legitimacy by relying on the presence of professional non-family members on the board. This can increase the business reputation of the family firm among investors and creditors and make access to capital easier. Family reputation is essential to preserve the family’s SEW, so these relationships may have both consequences and limitations. The ethos of the fund providers has been undergoing major changes; it is now imperative for fund seeking family firms to demonstrate transparency, fairness and the absence of cronyism or nepotism.

Moreover, beside the reputation of family firms, the suppliers will consider assets and growth opportunities prior to investing in a company (Myers and Majluf, 1984; Smith and Watts, 1992; Hovakimian et al., 2001) as well as default risk (Hugoinner et al., 2015). The fact that growth opportunities have shown significant association with leverage, should be seen as a presentation of market signaling to investors from family firms. Higher growth opportunities present a signal that family firms have good quality long- term investment. For the long-term debt, family firms with high growth opportunities appear likely to finance their positive opportunities by using long-term debt.

6.5.2.

Implication for Family Firm Decision Makers

Indonesia is one of the emerging capital markets that are developing a well-regulated and transparent market to reduce governance and agency problems. I can conclude that with the degree of openness and capital access, listed family firms can add value to the business in several ways:

Firstly, the results imply that family firms should consider several of the investor’s aspirations for healthy corporate governance which have an independent board as they are viewed to be a more effective mechanism in controlling agency problems. Moreover, the presence of independent board members could mitigate the conflict across generations that arise in the post-founder stage. This situation is already regulated by the Indonesia

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Financial Services Authority (OJK) No. 33/POJK.04/2014 article 20, verses 2 and 3. It is now mandatory that a family firm’s board is made up of at least 30 percent of independent non-family members.

Secondly, family firms ought to maintain strong corporate governance by hiring the best people for key roles, rather than exercising altruism in hiring family members. Excessive family involvement in business, unwillingness to hire professional CEOs and the continuing appointment of family members will almost certainly lead to overly centralised decisions and an inefficient business. Thus, reducing the degree of family involvement can decrease the cost of capital, since lenders might perceive there is efficiency in management. In fact, placing family members in management positions does not impact significantly on capital structure decisions, such as the CEO/chairperson duality position. The recognition of no relationship between capital structures and duality positions suggests that family firms should pay attention to the possibility of misalignment as an implication of a CEO and board in the hands of one person.

Thirdly, family firms should consider the inherent strategic role and benefits of the founder as CEO in reducing agency costs and having powerful access to strategic decisions, especially both short-term and long-term loans. The close relationships with lenders might facilitate future access to funding. Moreover, founders ought to consider the implications of their role in influencing capital structure decisions, which might not be followed by the post-founder stage. The findings indicated that despite the presence of a founder descendant as the CEO, their position does not impact on the firm’s capital structure. This finding indicates the reputation and good relationship with lenders should be transferred, due to preserving SEW for the next generations.

Fourthly, at the stage of descendants, continuing the family legacy and tradition is an important goal for a family business. A successful business transfer to the next generation may not be seen as only an asset transfer, but also of reputation, skill and competence. However, there is no significant evidence to support the idea that descendants influence capital structure decisions. It appears likely a family firm that failed due to conflict within the descendants suffers more reputation damage than a family firm that has failed due to macroeconomic events or natural disasters. An example of the latter is ‘PT. Indofood

Sukses Makmur, Tbk’, one of Indonesia’s largest food company, whose factory was

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maintain the family reputation and increase their effectiveness if they are always consistent in increasing their ability, because management and professionalism are processes and not stages of change in a firm’s management (Wright and Kallermanns, 2011). Nonetheless, in many situations when manager-as-agent makes a poor choice, I presume that the person who is misbehaving is often the principal, not the manager. The misbehaviour is in failing to create an environment in which managers can take good risks and make an informed capital structure decision, rather than a constant prediction for the future that could result in inconsistent decision-making. However, the most important thing is the descendant as manager (agent/steward) should be capable of making a decision.

Fifth, for non-family member CEOs, this thesis can give a feedback of evaluation in capital structure decision-making to help avoiding damaging behaviour of family members if the capital structure produce conflicts. Accordingly, non-family member CEOs must be prudent to observe capital structure issues that possible damage the relation within family firms. Moreover, family firms should not need to be concerned that they will lose their family bonds when they hire professional managers. Non-family managers can adopt a clearly set relations, responsibilities and competences in the decision-making processes of family firms. Their roles can contribute to increase the degree of competitiveness of family firms, especially in the more structured and complex business environment in Indonesia.

6.5.3. Implication for Policy Makers

Regulators should be strengthening governance practices of Indonesian issuers and public companies to bring them at least to the same level with the companies in the ASEAN region. This suggestion is made because since 2015, Indonesia has been a part of the ASEAN Economic Community (AEC). There is a sense of urgency and continued efforts to elevate Indonesian competitiveness through improvements in the quality of corporate governance practice as a way to spur financial performance and enhance investor confidence; in turn these positive initiatives could increase access to capital inflow. Here, the environment requires formal rules to prevail for publicly listed companies that will, ensure transparency, for example. Family firms will impose higher costs on pursuing SEW if family firms are filling their strategic decision making positions with non-

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professionals. Such individuals lack the competence, attributed authority and reputation that are needed to manage complexity, including multiple principal interests and access to funding resources.

The implication of this study for the Financial Services Authority (OJK) policy makers in Indonesia is evidence of the need to strengthen the regulation No. 11/POJK.04/2017, 14th _{March 2017, article 2, paragraph 2 regarding ownership reports, as well as every}

ownership change for publicly listed companies,. The regulation enforces the obligation of direct or indirect owners who hold at least a 5 percent shareholding to report their interest in the company, in order to trace the ultimate beneficial owners, as a part of the ownership chain leading to the real owners. The enactment of the regulation since 2018 as an effort of OJK to protect the interests of public investors, and to be able to regulate public listed companies, including family firms, so they can become pillars of the national economy up to a level of global competitiveness. As entrepreneurial spirit is not necessarily inherited by successive generations of the controlling family (Chrisman et al., 2005), it is much easier to pass on the family business by their wealth through political rent seeking, such as self-interested dealings between the political and business elites, rather than through entrepreneurship.

There are several group of family firms in Indonesia that involved in political relationship as founders of political party such as the founder of Media Group is also the founder of

National Democratic Party, the founder of MNC Group is also the founder of Perindo

Party, the founder of Humpuss Group is also the founder of Berkarya Party and the

founder of Nusantara Group is also the founder of Gerindra Party. The impact of business-political relations can indicate unhealthy business environment and reduced economic efficiency at the expense of public interest, indicating a crony capitalism may exist in Indonesia. For this reason, the Financial Services Authority (OJK) should encourage family firms to be more prudent in expensive involvements that can lead to nepotism or oligarchic behaviour. Being prudent and cautious are ways to avoid business failure when it comes to the next generations that sometimes lack capabilities. Family firms need to adopt the best practices of business innovation that can strengthen competitiveness.

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6.5.4. Recommendations for Future Research

At a more general level, these results respond to the call for more research into the variation of variables that could be characterised by dimensions of SEW. Nonetheless, many interesting research opportunities remain open. Future research could be directed towards exploring other dimensions of institutional environments: for example, the potential moderating effects of the specific institutional funding systems (banking-based or market-based) adopted, which are relevant to capital structure decisions. One might expect that the level of family involvement required to succeed in highly dynamic capital markets might not be achieved when the family firm is led by a founder descendant CEO. This possibility could be particularly likely if the firm is embedded in the next generation stages, where skill and professionalism are needed to preserve existing family relationships, due to capital access. The life cycle characterisations of family firms do not make clear the shaping of socio-emotional wealth priorities that can influence capital structure decisions. The underlying dimensions of public listings can help illustrate outcomes in different situations, since the ownership structures are widespread through numbers of family members and non-family members. Bearing this situation in mind it would seem logical to question whether SEW will reduce as it passes to the next generations.

Secondly, future research may expect to develop a measure that captures more precisely every single dimension acting as proxies for the preservation of SEW and relating to capital structure decisions. It is possible to explore the debt-equity choices of family firms by including the five dimensions of SEW: (1) Family control and influence; (2) Family identification with the firm; (3) Binding social ties; (4) Family emotional attachment to firm; (5) Renewal of family bonds in the firm through dynastic succession. Why do founders’ descendants as CEOs have no significant impact on capital structure decisions? This sense of dynasty probably has implications for the time horizons in the decision making process, since the family’s heritage and tradition has become embedded in the next generation (Casson, 1999). Although the long-term view might foster other problems, such as conflict over succession, the roles of CEO descendants may not include sole powerful authority and access to make strategic financial decisions. The power allocation among siblings or cousins should be taken into account in the dimension of