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Why are these companies so much better at compliance?

In an earlier post, I said family-owned and -managed companies (or family businesses for short) have an unusually strong FCPA compliance record. Some readers asked why family businesses do so well with compliance. Let’s take a closer look and see what the lessons are.

Family businesses — those retaining significant founding-family ownership or management participation or both — make up more than a third of all Fortune 500 companies and dominate most non-Western economies. They produce around two-thirds of the economic activity in the Americas, Europe, and Asia. Family businesses, however, are grossly under-represented among convicted FCPA violators.

As of this writing, there have been 273 corporate FCPA enforcement actions, according to FCPA Blog+. By my count, just eight of those 273 cases involved family businesses. They are Walmart, Louis Berger International, Tyson Foods, Samsung Heavy Industries, Sargeant Marine Inc., JBS S.A., Omega Advisors, Inc., and Anheuser-Busch InBev.

That’s just 2.93 percent of all corporate FCPA defendants. That means family businesses have been at least 20 times less likely to be prosecuted for FCPA offenses than non-family businesses.

The reasons behind the anomaly are well documented. The Journal of Business Research published a systematic review (a study of studies) in December 2021 on trust and reputation in family businesses. The four co-authors from India, Norway, and Italy consolidated the findings from 159 published studies that spanned two decades and dozens of locations.

Briefly, here’s what they found:

Family businesses strive to “protect their reputations and avoid decisions—for example, compliance with local laws and institutional norms—that conflict with their long-term orientation.”

They prioritize a positive image and reputation because they’re also protecting their family’s legacy. That in turn drives family firms to adopt values shaped internally, not by outside institutions or culture, and adhere to those values more tightly.

Family members generally think of their personal commitment as lifelong and their family’s commitment extending far into the future. That distant horizon transforms how they see themselves vis-à-vis the business. Instead of temporary managers, they’re stewards, more like caretakers or curators but more active. So, for example, family members inside the business are likely “to subjugate their personal goals, align them with organizational motives.”

Typically, then, they want to nurture employees and instill in them a strong sense of loyalty to the business. The leaders-stewards similarly value long-term partnerships with customers, collaborators, and other stakeholders.

Stability inside family businesses enhances all those relationships. From stability comes predictability and familiarity, and those generate mutual trust. The authors of the systematic review didn’t address whether increased trust lowers the pressure to engage in corrupt practices, but I think that’s true. If a family business has been dealing with the government of Country X for generations, both sides are more likely to value the relationship and avoid tainting it through bribery or other abhorrent behavior.

Incidentally, long-term corporate stability also equates to knowledge accumulation, which according to researchers contributes to an ideal environment for innovation. Innovative businesses don’t need to resort to bribery to sell their products.

Family businesses usually play a significant role in the welfare of their communities. Family members who live in those communities make sure Corporate Social Responsibility goals are prominent. They also view CSR as a crucial component of the firm’s long-term competitiveness.

There’s an unexpected CSR dividend relevant to compliance. As the researchers discovered, “Existing evidence indicates that family firms engaged in CSR activities are likely to be more transparent than non-family firms engaged in CSR activities for numerous reasons.”

With so much to lose, it’s easy to see why family businesses stress compliance and do well at it. Perhaps that’s partly why FCPA problems at Walmart generated so many headlines worldwide. Walmart’s behavior was uncharacteristic and unexpected from a family business.

There are lots of compliance lessons here for non-family businesses. And for compliance officers — including those surveying job options — the values that drive compliance at family businesses might matter even more than the size of the paycheck.

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