Outside directors and firm performance across family generations in Lebanon

Abstract : This paper investigates the relationship between the percentage of outside directors and financial performance in non-listed family firms while considering the generational effect. Using longitudinal data on 322 Lebanese firms covering the period 2008–2010, a regression analysis indicates that firm profitability depends upon the percentage of outside directors only in second and later generations. In first-generation family firms, the replacement of an inside director by an outsider has no significant impact on performance. In contrast, in the second and subsequent generations, outsiders can be used as an effective governance mechanism to reduce agency costs and thus enhance performance. Local entrepreneurs and regulators could build upon these results to implement better corporate governance practices in order to enrich the growth and prosperity of Lebanese family firms.