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FAMILY BUSINESS Handbook of Research On Family Business PDF
FAMILY BUSINESS Handbook of Research On Family Business PDF
Edited by
Edward Elgar
Cheltenham, UK • Northampton, MA, USA
© Panikkos Zata Poutziouris, Kosmas X. Smyrnios and Sabine B. Klein, 2006
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or
transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or
otherwise without the prior permission of the publisher.
Published by
Edward Elgar Publishing Limited
Glensanda House
Montpellier Parade
Cheltenham
Glos GL50 1UA
UK
Printed and bound in Great Britain by MPG Books Ltd, Bodmin, Cornwall
Contents
v
vi Contents
Index 619
Contributors
Joseph H. Astrachan (PhD) is the director of the Cox Family Enterprise Center, holds the
Wachovia Eminent Scholar Chair of Family Business, is Professor of Management and
Entrepreneurship in the Coles College of Business at Kennesaw State University and is a
distinguished research chair at Loyola University Chicago (USA). He is a founding board
member of IFERA and serves as editor of Family Business Review and as an editorial
board member of several other academic journals.
Åsa Björnberg holds the Institute for Family Business (IFB UK) Research Fellowship in
association with LIFBRI at London Business School (UK). Her background is in
Organizational and Clinical psychology, and her research interests centre on family
development/functioning in relation to leadership, culture and performance of family
firms. Åsa Björnberg also works as a personal development coach and an academic
translator.
Kristin Cappuyns is Research Associate at IESE Business School, Barcelona Spain. She
has co-authored numerous research papers, books and case studies on the subject of
family business in different disciplines including governance, business management, busi-
ness ethics and values systems. She is a founding board member of International Family
Enterprise Research Academy (IFERA).
Justin Craig received his PhD from Bond University in Australia. He is an assistant pro-
fessor of entrepreneurship at Oregon State University.
Rik Donckels is managing director of Cera and the former director of the Small Business
Research Institute at the Catholic University Brussels (Belgium).
viii
Contributors ix
She was recently selected as a Family Owned Business Institute Research Scholar by the
Family Owned Business Institute of the Seidman College of Business at Grand Valley
State University. She received her PhD in Management from the University of
Connecticut. Her research has appeared in journals such as the Academy of Management
Journal, Academy of Management Executive, Academy of Management Perspectives,
Human Resource Management Review, Journal of Occupational and Organizational
Psychology, Entrepreneurship Theory and Practice, Journal of Business Venturing, and
Journal of Applied Psychology.
Silvia Gómez Ansón (PhD) is Associate Professor of Finance at the University of Oviedo
(Spain). She graduated in Business Administration at the Complutense University of
x Contributors
Toshio Goto is on the Faculty of Integrated Engineering at the Graduate School for the
Creation of New Photonic Industries, Hamamatsou (Japan). His background is in busi-
ness strategy and his research focuses on strategies for sustainable growth, and especially
for that of family businesses.
Timothy G. Habbershon (EdD) is the founding Director of the Institute for Family
Enterprising at Babson College in Wellesley, Massachusetts, USA. He is also an Assistant
Professor of Entrepreneurship and holds the Presidents Term Chair in Family Enterprising.
His articles on family-based entrepreneurship have appeared in the Journal of Business
Venturing and the Family Business Review and he has a regular column in Business Week’s
Small Business Magazine. In addition he is the founder and principal of the Telos Group,
a consulting firm specializing in transition and growth strategies for family firms.
Annika Hall (PhD) is a research fellow and lecturer at Jönköping International Business
School (Sweden), specializing in the fields of organization theory, strategy and family
business. She is a board member of International Family Enterprise Research Academy
(IFERA).
Frank Hoy (PhD) is director of the entrepreneurship programme and the Family and
Closely Held Business Forum at the University of Texas at El Paso (USA). From 1991 to
2001, he served as dean of the College of Business Administration at UTEP. Prior to that
he held the Carl R. Zwerner Professorship of Family-Owned Business at Georgia State
University. Dr Hoy is a past president of the United States Association for Small Business
and Entrepreneurship and a past editor of Entrepreneurship Theory and Practice.
Contributors xi
Cynthia R. Jasper (PhD) is Professor and Chair of the Department of Consumer Science
at the University of Wisconsin-Madison (USA). She is interested in decision-making
within family businesses, especially pertaining to retirement and estate planning, and busi-
ness management issues.
Zhao Jing (PhD) is the Professor of Management Information Systems at the College of
Management, China University of Geosciences, Wuhan, China.
Andrew Keyt is the Executive Director of the Loyola University Chicago Family
Business Center (USA) which is widely recognized as a leading think tank in issues
unique to business owning families. In addition, he is the President and Founder of a
private consulting firm, Keyt Consulting. Having served as a manager in two family-
owned firms, and as member of his own family partnership, Keyt has experienced the
challenges of family business at first hand. As a consultant to family firms he special-
izes in dealing with family conflict and communication, working with adult
sibling/cousin teams, succession planning strategic planning and emergency manage-
ment transition. A cum laude graduate of Kenyon College (BA), Keyt completed a
Masters in Family Systems Theory from Northwestern University with a concentration
on family business.
Sabine B. Klein (PhD) is the Academic Director of the European Family Business Center
and Assistant Professor in Family Business at the European Business School at Oestrich-
Winkel, Germany. She is founding member of IFERA and, since 2003, President of
IFERA. Her research has been awarded several prizes. She is serving on the review board
of several journals and academic conferences.
Gaston J. Labadie (PhD) is Dean and Professor of Human Behaviour and Organizational
Behaviour at Universidad ORT Uruguay. He is the research director of Study Group in
xii Contributors
Economics, Organization and Social Policies (GEOPS) and member of the editorial
boards of Management Research and Latin American Business Review.
Suzanne Lane is Program Director of the Loyola University Chicago Family Business
Center (USA) and has been extensively involved in the Center’s programming and
research initiatives. She specializes in working with President/CEOs, board directors, and
senior management in areas such as strategic planning, leadership transitions, board
development and corporate governance. Susanne currently serves on many boards of
advisers for non-profit organizations throughout Chicago.
Ian C. MacMillan is the Executive Director of the Sol C. Snider Entrepreneurial Center and
Dhirubhai Ambani Professor of Entrepreneurial Management, Wharton School,
University of Pennsylvania (USA). He has published numerous articles and books on orga-
nizational politics, new ventures and strategy formulation. His articles have appeared in the
Harvard Business Review, the Sloan Management Review, the Journal of Business Venturing
and others. He is co-author with Rita McGrath of the best-selling books The
Entrepreneurial Mindset, which focuses on how managers and entrepreneurs can create a
continuous stream of growth opportunities for their firms, and MarketBusters, which
focuses on strategies firms can use to dramatically change and grow their existing businesses.
Contributors xiii
Pietro Mazzola is the director of the Master in Investor Relations e Financial Analysis
holds at IULM University in Milan (Italy) in collaboration with the Italian Stock
Exchange, he is Full Professor of Management at IULM University and is Senior Faculty
Member at the Strategic and Entrepreneurship Management Department at SDA
Bocconi, Bocconi University School of Management, Milan.
Kristi McMillan is the Associate Director of the Cox Family Enterprise Center at
Kennesaw State University, which she joined in 1994. Ms McMillan has a Master of
Science in Conflict Management and is co-author of the acclaimed book Conflict and
Communication in the Family Business.
Xavier Mendoza Mayordomo (PhD) is Dean of the ESADE Business School, Barcelona,
Spain, and Professor of the Business Policy Department and the Institute of Public
Management. He is the Academic Vice-Chair of the Supervisory Board de la European
Academy of Business in Society and member of the Editorial Advisory Committee of the
Corporate Governance.
Corporate Governance and Business Administration. His research mostly deals with
boards of directors in large companies, with a focus on a behavioural perspective on
board activity. He is also concerned with the development of evaluation systems for the
corporate boards in quoted companies.
Sandra L. Moncrief-Stuart holds dual Masters Degrees in Marriage and Family Therapy
and Social Work. Sandra is currently an individual and family therapist in Michigan.
Previously, Sandra worked with Joe Paul and the Aspen Family Business Group design-
ing and refining consulting methodologies and working with multi-generational family
businesses.
Ken Moores (PhD) is the Director of Bond University’s Australian Centre for Family
Business – a centre he established in 1994 and in which he served as Foundation Director
from 1994 to 1998. Professor Moores pioneered research and recognition of family
business in Australia and has achieved wider recognition for his work including his 2003
book, Learning Family Business: Paradoxes and Pathways (co-authored with Mary
Barrett). Professor Moores served as Vice-Chancellor and President of Bond University
from 1997 to 2003.
Mattias Nordqvist (PhD) is a research fellow and co-director of the Center for Family
Enterprise and Ownership (CeFEO) at Jönköping International Business School
(Sweden). He is also Research Associate and Visiting Scholar for Family Enterprising at
the Arthur M. Blank Center for Entrepreneurship at Babson College (USA). His main
interests are strategizing, governance and entrepreneurial processes within the context of
family businesses.
Joe Paul specializes in family business leadership and the resolution of family issues that
interfere with asset development. He authored several family business assessment instru-
ments, is a Fellow and Director Emeritus of the Family Firm Institute, and a partner in
the Aspen Family Business Group and Global Family Business Advisors.
David Pistrui (PhD) is the Professor of Business at the Illinois Institute of Technology –
Chicago (USA) where he holds the Coleman Foundation Chair in Entrepreneurship.
Contributors xv
Melissa Carey Shanker is an accomplished consultant, educator and researcher in the field
of family business. Shanker played a key role in the growth and development of the
Chicago-based Loyola University Family Business Center (USA), one of the oldest and
most respected centres in the world where she designed and directed the innovative Next
Generation Leadership Institute, an educational programme designed to develop family
business leaders.
Kosmas X. Smyrnios (PhD) holds the position of Professor and Director of Research in
the School of Management at RMIT University, Melbourne, Australia and is Associate
Editor of the Family Business Review. Kosmas has developed an extensive applied research
record with over 70 international refereed publications across the disciplines of marketing,
psychology, physics, management and accounting. Kosmas has been involved in a number
of prominent national and international research projects. He is a founding board member
of the International Family Enterprise Research Academy (IFERA). In 1998 and 2001, he
was awarded prizes for the Best International Research Papers at the 9th and 12th World
Family Business Network Conference in Paris and Rome, respectively. Kosmas is a recip-
ient of over $1.5 million in research funding, and is frequently called upon to provide
expert media commentary on pertinent matters relating to family firms and SMEs.
Lucrezia Songini is a Lecturer in Bocconi University, Milan and senior faculty member of
the Accounting and Control Department of the SDA Bocconi School of Management,
Milan (Italy) She is professor of Management Accounting in the Università degli Studi
del Piemonte Orientale ‘Amedeo Avogadro’, Novara, in the Business Administration
Department in Casale Monferrato.
Kathryn Stafford (PhD) is an Associate Professor at the Ohio State University in the
Department of Consumer and Textile Sciences. She teaches a course on Businèss-Owning
families and conducts research on the management practices of business-owning families
and family businesses.
Josep Tàpies (PhD) is professor in the departments of general management and finance
and holder of the Chair of Family-Owned Business at IESE, Barcelona (Spain). His areas
of specialization include family business, strategic management, private equity, mergers
and acquisitions and management buy-outs. He writes and teaches courses in manage-
ment and governance of family business in the MBA programme, and strategic manage-
ment in several executive education programmes.
boards of directors and family businesses. In 1983 and 1999 he received the FBN Award
for the best research paper presented at the FBN Annual World Conference. He is
a founding board member and Fellow of IFERA and member of the Strategic
Management Society. He is also partner of Family Business Consulting Group
International and FBCG Spain.
Paul Westhead (PhD) is the Professor of Enterprise in the Enterprise Division at Warwick
Business School. He is also a Visiting Professor at Bodø Graduate School of Business,
Nordland Regional University, Bodø, Norway. His research interests include family
firms, habitual entrepreneurs, internationalization of small firms, training programme
take-up and benefits, technology-based firms, and Science Parks.
Mary Williams is Professor of Management and Department Head of the MIS and
Decision Sciences Department at Widener University in Chester, Pennsylvania, USA. She
has presented research in entrepreneurship at the Academy of Management Meetings, the
International Atlantic Economic Meetings, and the National Business and Economic
Society Meetings. Her entrepreneurship research appears in the Journal of Business
Venturing, Frontiers of Entrepreneurship Research, and Research in Entrepreneurship and
Management. Her research in family business appears in the Journal of Family and
Economic Issues and the Family Business Review.
xviii Contributors
Mary Winter (PhD) has recently retired from the position of Professor of Human
Development and Family Studies and Associate Dean for Research and Graduate
Education at the College of Family and Consumer Sciences, Iowa State University. Her
research interests have focused on the responses of ordinary families to extraordinary cir-
cumstances. She has studied the responses of families in Mexico and Poland to changes
in their country’s economy, and resource development and allocation among US families
with a family business.
Shaker A. Zahra (PhD) is the Robert E. Buuck Professor in Entrepreneurial Studies at the
Carlson School of Management, University of Minnesota (USA). His research covers
corporate, technological and international entrepreneurship. He has published nine books
and his research has appeared in several journals such as Academy of Management
Journal, Academy of Management Review, Academy of Management Executive, Strategic
Management Journal, Journal of International Business Studies, Journal of Management. He
has been awarded several grants and has garnered dozens of prestigious honors and awards.
Foreword
xix
Acknowledgements
The publishers wish to thank the following who have kindly given permission for the use
of copyright material:
Blackwell Publishing Ltd for articles: Astrachan, Joseph H. and Melissa Carey Shanker
(2003), ‘Family businesses’ contribution to the US economy: a closer look’, Family
Business Review, 16(3), 211–19; Sharma, Pramodita (2004), ‘An overview of the field
of family business studies: current status and directions for the future’, Family Business
Review, 17(1), 1–36; and Astrachan, Joseph H., Sabine B. Klein and Kosmas X.
Smyrnios (2002), ‘The F-PEC scale of family influence: a proposal for solving the
family business definition problem’, Family Business Review, 15(1), 45–58.
Elsevier Ltd for articles: Miller, Danny, Lloyd Steier and Isabelle Le Breton-Miller (2003),
‘Lost in time: intergenerational succession, change and failure in family business’,
Journal of Business Venturing, 18(4), 513–31 and Habbershon, T.G., M. Williams and
I.C. MacMillan (2003), ‘A unified systems perspective of family firm performance’,
Journal of Business Venturing, 18(4), 451–65.
Every effort has been made to trace all the copyright holders but if any have been inaver-
tently overlooked the publishers will be pleased to make the necessary arrangements at
the first opportunity.
xx
Introduction: the business of researching
family enterprises
Panikkos Zata Poutziouris, Kosmas X. Smyrnios and
Sabine B. Klein
1
2 Handbook of research on family business
owing to its rigour, richness and relevance. Investigators have moved beyond descriptive
case study and survey research, employing triangulation approaches driven by theory.
Recent developments
During the new millennium, family firm research has demonstrated significant
advances, not only in terms of quality, but also in articulation of new developments and
establishment of prominent international bodies. Below, we outline a number of these
developments.
(a) Following the early push of a family business agenda by the Family Firm Institute
(FFI) which has traditionally been geared to educationalists and practitioners, we saw
the emergence of the Family Business Network (FBN) International, establishing
close links with family business owner-managers and academics. Since these times,
the International Family Enterprise Research Academy (IFERA), a group of aca-
demics committed to the advancement of family business as a science-based disci-
pline, has arisen.
(b) The International Family Research Enterprise Academy has been actively cam-
paigning for the advancement of family business through international collaborative
projects and work with emerging researchers. Its vision is to be a driving force of an
international network that ensures that family business, as a multi disciplinary field,
becomes a leading topic of business research. The Academy comprises a global
network for scholars (including new doctoral students), committed to family business
research, providing investigators with valuable resources; and access to literature,
family businesses, business families, and a network of scholars. Through its associa-
tion with FBN-International in staging annual Global FBN research forums, IFERA
has helped to bridge the gap between research, theory and practice, on the one hand,
and professionals that service these businesses, business families, owner-managers
and the community, on the other. The valuable contribution made by IFERA is
amply demonstrated by the quality of refereed conference proceedings and publica-
tions (see Poutziouris, 2000; Corbetta and Montemerlo, 2001; Koiranen and
Karlsson, 2002; Poutziouris and Steier, 2003; Tomasselli and Melin, 2004).
(c) Another indicator afforded to the recognition of this field is the inclusion of the
Family Business Review journal in the Social Citation Index by Thomson ISI, recog-
nizing the academic standard of FBR by the scientific community.
(d) The Canadian Theorization Initiative, in response to calls for the deployment of
alternative research methodologies essential for theory development and research per
se, has published a series of special issues in the Journal of Business Venturing, and the
Entrepreneurship Theory and Practice journal. Similarly, in the North America, the
Family Enterprise Research Conference has helped to promote family business at
the Academy of Management-Entrepreneurship Division.
Consistent with these developments, research in this field has broken through the glass
ceiling and is being published in top-tier journals, particularly in areas focusing on listed
family businesses and their performance (Anderson and Reeb, 2003; Anderson et al.,
2003; Burkart et al., 2003; Gomez-Mejia et al., 2001; Villalonga and Amit, 2004), agency
costs (Morck and Yeung, 2003) and nepotistic altruism (Schulze et al., 2003). These
Introduction: the business of researching family enterprises 3
notable investigations, inter alia, have helped elevate the family business theme. Within
this backdrop, the Handbook of Family Business Research raises the bar further, demon-
strating an interdisciplinary and multidimensional field of research, traversing process
theory, case studies, application of quantitative and qualitative procedures that employ
primary, secondary, narrative and ethnographic methods, along with papers that con-
tribute to the validation of theoretical constructs.
Unequivocally, this volume contributes significantly to the advancement of family busi-
ness research, theory, and practice. This selection of extant research and conceptual articles:
● helps to validate the protagonist role family firms play in social-economic milieus;
● provides an in depth treatment of operational and definitional issues surrounding
what constitutes a family business;
● offers a systematic account of the historical development of the field of family
business;
● embraces methodologies encompassing micro and macro perspectives;
● introduces theoretical bases, conceptualizations, and paradigms underpinning
family business entrepreneurship, the papers of which challenge the orthodox
microeconomic view of homo-economicus firms by highlighting the virtues of
family influence, familiness and social capital; and
● finally, proffers a selection of empirical studies addressing the current family busi-
ness research agenda.
● Frank Hoy and Pramodita Sharma provide a chronology detailing the evolution of
educational programmes and research.
● Pramodita Sharma, based on a review of 217 published studies, reflects on the
status of the field and scope of family business.
● Joseph Astrachan and Melissa Shanker present an empirical research framework
for assessing the economic role of family firms.
Part Two ‘Theorizing Family Businesses and Business Families’ is a selection of papers
dealing with pertinent theoretical constructs concerning family business entrepreneurship.
● Timothy Habbershon, Mary Williams and Ian MacMillan propose a unified systems
perspective of family firm performance, their model of which encapsulates the notion
of familiness, and the systemic relationship between resources and capabilities as
sources of advantage (or constraint) and performance.
4 Handbook of research on family business
Part Three ‘Family Business Research: Metrics and Methodologies’ comprises a col-
lection of papers dealing with definitional, methodological, and measurements issues.
● Joseph Astrachan, Sabine Klein and Kosmas Smyrnios report on their pioneering
work concerning the Family: Power–Experience–Culture (F-PEC) scale, a system-
atic measure of family influence on businesses.
● Paul Westhead and Carole Howorth examine variables relating to family firm
objectives and ownership, and management structures, leading to an identification
of a taxonomy of private family firm types.
● Ken Moores and Justin Craig demonstrate how elements of the Balanced Scorecard,
an accepted strategic management and measurement tool, can be adapted to the
family business context for use as a strategic tool and as a means of contributing to
the professionalization of family firms.
● Sandra Moncrief-Stuart, Joe Paul and Justin Craig present a methodological paper
validating the Aspen Family Business Inventory, an assessment tool designed specif-
ically for use by consultants working with families in business.
Part Four ‘Family Business Themes in Focus’ incorporates a series of in-depth papers
focusing on functional areas of the family business strategic management.
● Ercilia García-Álvarez and Jordi López-Sintas present evidence from in-depth cross
case analysis to delineate a model encompassing value transmission and successors’
socialization, for facilitating family business continuity.
● Annika Hall, Leif Melin and Mattias Nordqvist, utilizing a case study approach
identifying key parameters associated with everyday, micro and human aspects of
organizational life, submit a theoretical framework concerning family business
strategizing and direction.
● Lucrezia Songini reflects on the theory and practice of professionalization pro-
cesses in family firms.
Introduction: the business of researching family enterprises 5
● Miguel Angel Gallo and Salvatore Tomaselli explore the theoretical and practical
dimensions of protocols in family business strategic planning processes.
● Joseph Astrachan, Andrew Keyt, Suzanne Lane and Kristi McMillan focus on the
governance schemes of family and non-family businesses, and tender propositions
concerning accountability in firms.
● Rosa Nelly Trevinyo-Rodríguez and Josep Tàpies conceptualize a knowledge trans-
fer model of family firms concentrating on internal and external relationships in
family-enterprise next-generation systems.
● Franz Kellermanns and Kimberly Eddleston furnish a conceptual paper targeting
management strategies relating to task and relationship conflict in family firms.
● Danny Miller, Lloyd Steier and Isabelle Le Breton-Miller, within the context of
inductive and case study methodologies, examine the main issues associated with
business successions that fail.
● Johan Lambrecht and Rik Donckels develop an explanatory model of business
transfer derived from an examination of transitional paths associated with family
business succession.
● Pietro Mazzola, Gaia Marchisio and Joseph Astrachan explore the specific benefits
of strategic planning processes as a next-generation training tool, particularly
during the post-succession stage of the business transfer planning process.
● Vassilios Pyromalis, George Vozikis, Theodoros Kalkanteras, Michaela Rogdaki
and George Sigalas advance an integrated framework for evaluating the success of
the family business succession process according to gender specificity.
Part Six ‘Family Business Performance: Global and Trans-cultural Issues’ presents inter-
nationally based research initiatives.
● Kristin Cappuyns, through a prism of multiple case studies of Spanish family firms,
reports on internationalization via strategic alliances.
● David Pistrui, Wilfred Huang, Harold Welsch and Zhao Jing describe seminal
attributes, characteristics and growth orientations of mainland Chinese entrepre-
neurs, highlighting the contributions of relationships, roles, family and culture in
the development of private small and medium enterprises (SMEs).
● Guido Corbetta and Alessandro Minichilli examine the essential features of boards
of directors in Italian publicly listed companies.
● Luca Gnan and Daniela Montemerlo compare Italian family versus non-family
SMEs in terms of ownership and governance issues.
● Toshio Goto documents the historical development of the Japanese family business
economy, providing solid explanations for its longevity.
‘Epilogue’
● Shaker Zahra, Sabine Klein and Joseph Astrachan undertake an element of crystal-
ball gazing and provide reflections on the future directions and new frontiers open
to this field.
Reviewers
On behalf of authors, reviewers, and the editorial team we trust that you find this volume
of scholarly papers not only of interest, but also relevant.
References
Anderson, R. and Reeb, D. (2003), ‘Founding-family ownership and firm performance: evidence from the S&P
500’, Journal of Finance, June (3), 1301–28.
Anderson, R., Mansi, S. and Reeb, D. (2003), ‘Founding family ownership and the agency cost of debt’, Journal
of Financial Economics, 68, 263–85.
Barnes, L.B. and Hershon, S.A. (1976), ‘Transferring power in the family business’, Harvard Business Review,
July/August, 105–114.
Brockhaus, R.H. (1994), ‘Entrepreneurship and family business research: comparisons, critique, and lessons’,
Entrepreneurship Theory and Practice, 19(1), 25–38.
Burkart, M., Panunzi, F. and Shleifer, A. (2003), ‘Family firms’, Journal of Finance, 58(5), 2167–201.
Corbetta, G. and Montemerlo, D. (eds) (2001), The Role of the Family in the Family Business. Book of Research
Forum Proceedings: 12th Annual Family Business Network World Conference, FBN Roma – SDA Bocconi
Publication.
Donnelley, R.G. (1964), ‘The family business’, Harvard Business Review, 42, 93–105.
Gomez-Mejia, L., Nunez-Nickel, M. and Gutierrez, I. (2001), ‘The role of family ties in agency contracts’,
Academy of Management Journal, 44, 81–95.
Koiranen, M. and Karlsson, N. (eds) (2002), The Future of the Family Business: Values and Social Responsibility.
Research Forum Proceedings, Book of Research Forum Proceedings: 13th Annual Family Business Network
World Conference, FBN Helsinki – University of Jyvaskyla Publication.
8 Handbook of research on family business
Morck, R. and Yeung, B. (2003), ‘Agency problems in large family business groups’, Entrepreneurship Theory
and Practice, 27(4), 367–82.
Poutziouris, P. (ed.) (2000), Family Business: Tradition or Entrepreneurship in the New Economy, Book of
Research Forum Proceedings: 11th Annual Family Business Network World Conference , FBN London –
Manchester Business School Publication .
Poutziouris, P. and Steier, L. (eds) (2003), New Frontiers in Family Business Research: the Leadership Challenge,
Book of Research Forum Proceedings: 14th Annual Family Business Network World Conference, FBN –
IFERA Lausanne Publication.
Schulze, W.S., Lubatkin, M.H. and Dino, R.N. (2003), ‘Toward a theory of agency and altruism in family firms’,
Journal of Business Venturing, 18(4), 473–90.
Tomaselli, S. and Melin, L. (eds) (2004), Family Firms in the Wind of Change, Research Forum Proceedings,
Book of Research Forum Proceedings: 15th Annual Family Business Network World Conference, FBN –
IFERA Copenhagen Publication.
Villalonga, B. and Amit, R.H. (2004), ‘How do family ownership, control, and management affect firm value?’,
EFA 2004 Maastricht Meeting, Paper No. 3620.
PART I
FRONTIERS OF A FAMILY
BUSINESS
1 Navigating the family business education maze
Frank Hoy and Pramodita Sharma
Introduction
Although we can safely assume that family businesses predate recorded history (Colli,
2003), formal educational and research programs focusing specifically on family-owned
firms are recent phenomena (for example, Hoy and Verser, 1994; Wortman, 1994). Litz
(1997) provided a persuasive analysis of the reasons for the neglect of family business
studies in the business schools citing a ‘longstanding pattern of interaction between
business firms, business regulators, academic institutions, and individual academic
researchers’ (p. 56). However, fuelled by a growing awareness of the importance and dom-
inance of family firms in most countries (for example, IFERA, 2003), the interest in
family business studies is growing at a rapid pace, as reflected in recent review articles
(Bird et al., 2002; Sharma, 2004; Chrisman et al., 2005).
Findings
In hindsight, it seems remarkable to us that the early contributions, coming as they
did from prestigious business schools such as Indiana University and Harvard, had so
11
12 Handbook of research on family business
1953 Grant H. Calder completes the first doctoral dissertation on family business studies
in North America entitled ‘Some management problems of the small family
controlled manufacturing business’, School of Business, Indiana University
1953 Christensen’s book, Management Succession in Small and Growing Enterprises
published by Harvard University Press
1954 Cases in the Management of Small, Family-Controlled Manufacturing Businesses
published at the Indiana University Press (first family business-specific case book)
1958 English’s book, Financial Problems of the Family Company published by
Sweet and Maxwell, London.
1961 Trow’s article ‘Executive succession in small companies’, published in Administrative
Sciences Quarterly, 6
1964 Donnelley’s article entitled ‘The family business’, published in Harvard Business
Review, 42(3)
1968 Churchman publishes The Systems Approach, Dell Publishers, New York
1968 Alfred Lief’s Family Business: A Century in the Life and Times of Strawbridge &
Clothier published by McGraw-Hill Book Company
1968 Léon Danco holds first interdisciplinary seminar on family business
1971 Levinson’s article entitled ‘Conflicts that plague family business’, published in
Harvard Business Review, 49(2)
1972 Ianni and Ianni’s book entitled A Family Business published by Russell Sage
Foundation, New York
1974 Levinson’s article entitled ‘Don’t choose your own successor’, published in
Harvard Business Review, 52(6)
1975 Léon Danco’s Beyond Survival: A Business Owner’s Guide for Success published
by Reston Publishing
1975 Simon A. Hershon completes his dissertation entitled ‘The problem of management
succession in family businesses’, Harvard University
1976 Barnes and Hershon’s article entitled ‘Transferring power in the family business’,
published in Harvard Business Review, 53(4)
1978 Streich Chair in Family Business established at Baylor University (Chair holder:
Nancy Upton)
1978 Becker and Tillman’s book entitled The Family-Owned Business published by the
Commerce Clearing House, Chicago
1978 Longnecker and Schoen’s article entitled ‘Management succession in the family
business’, published in Journal of Small Business Management, 16(3)
1981 Chair of Private Enterprise established at Kennesaw State College (first Chair holder:
Craig Aronoff appointed in 1983)
1981 Elaine Kepner presents a workshop on ‘Family dynamics and family owned
organizations’, at the Gestalt Institute of Cleveland conference
1982 Wharton Family Business Program launched at the Wharton Applied Research Center
(Founding Director: Peter Davis)
Navigating the family business education maze 13
1982 John A. Davis completes his dissertation entitled ‘The influence of life stage on
father–son work relationship in family companies’, Harvard University
1982 John Davis and Renato Tagiuri develop the first compendium of literature on
family-owned business entitled ‘Bibliography on family business’, unpublished
document, Harvard Business School
1983 Organizational Dynamics publishes a special issue on family business studies
(Co-editors: Richard Beckhard and Warner Burke)
1983 Karen L. Vinton completes her dissertation entitled ‘The small, family-owned
business: a unique organizational culture’, unpublished document, University of Utah
1984 Gibb W. Dyer Jr completes his dissertation entitled ‘Cultural evolution in
organizations: the case of a family owned firm’, Sloan School of Management,
Massachusetts Institute of Technology
1984 Yale establishes program for the Study of Family Firms (Founding members: Joe
Astrachan, Ivan Lansberg, Sharon Rogolsky)
1985 The College of Business, Oregon State University starts the second Family Business
Program in the US (Founding Director: Patricia A. Frishkoff)
1985 First ‘for credit’ family business course offered
1985 Rosenblatt and deMik publish The Family in Business, Jossey-Bass
1985 First Family Business Research Conference, University of Southern California (Chair:
John Davis)
1986 Founding of the Family Firm Institute Inc. (FFI) (Founding President:
Barbara Hollander)
1986 John Ward’s book Keeping the Family Business Healthy published as part of the
Jossey-Bass series on Management of Family Owned Businesses (Consulting Editors:
Richard Beckhard, Peter Davis, Barbara Hollander)
1986 Kennesaw State College establishes the Family Business Center and runs the First
Family Business Forum (Founding Director: Craig Aronoff)
1986 Andrew Errington edits, The Farm As a Family Business: An Annotated Bibliography,
Agricultural Manpower Society, University of Reading Farm Management Unit
1987 First Family Business Chair launched in Europe at IESE Business School, University
of Navarra, Barcelona (Chair holder: Miguel Ángel Gallo)
1987 Institute for Family Enterprise established at Baylor University (Founding Director:
Nancy Upton)
1988 Family Business Review began publication (Editor-in-Chief Ivan Lansberg). A
Jossey-Bass publication
1988 First FFI research conference hosted by Boston University School of Management,
chaired by Marion McCollom Hampton (20 attendees)
1988 Carl R. Zwerner endowed professorship in Family Business established at Georgia
State University in the US (Chair holder: Frank Hoy)
1989 Baylor University establishes Institute for Family Business conducts first conference
(Chair: Nancy Upton)
14 Handbook of research on family business
1989 ‘The outstanding outsider and the fumbling family’, by Thomas A. Teal and
Geraldine E. Willigan, first family business case published in Harvard Business Review
1989 FFI established the Best Doctoral Dissertation Award (first award recipient: Colette
Dumas) and the Best Unpublished Research Paper Award (first award recipient:
Stewart Malone)
1989 Wendy Handler completes her dissertation entitled ‘Managing the family firm
succession process: the next generation family member’s experience’, Boston University
1990 Founding of the Family Business Network (FBN)
1992 First FFI Educators Conference hosted by Northeastern University Center for Family
Business, Boston
1993 First Mass Mutual Annual Gallup survey of family businesses (the first large sample
study of FBs in the United States)
1994 Family Business Division established at the United States Association
of Small Business Enterprise (USASBE)
1994 Entrepreneurship Theory and Practice publishes a special issue on family business
studies (Co-editors: Gibb W. Dyer Jr and Wendy Handler)
1994 FFIs Case Series Project launched (Editor: Jane Hilburt-Davis)
1994 FAMLYBIZ listserv established by Scott Kunkel, University of San Diego
1994 Max Wortman publishes first major review article of family business studies in
Family Business Review
1995 The first annual Psychodynamics of Family Businesses (PDFB) conference hosted
by the Northwestern University (Chair: Ken Kaye)
1995 FFIs Body of Knowledge (BOK) task force created
1996 A Review and Annotated Bibliography of Family Business Studies by Sharma,
Chrisman and Chua published by Kluwer Academic (first major bibliography
of family business studies)
1996 First Family Business major offered at the Texas Tech University
1997 First National Family Business survey (first large study using household sample).
Findings reported in Family Business Review special issue 7(3)
1997 Gersick, Davis, Hampton and Lansberg’s book entitled Generation to Generation
published by Harvard Business School Press
1998 Sharma’s dissertation receives the NFIB Best Dissertation award (first family
business dissertation recognized by the Entrepreneurship division of the Academy
of Management)
1999 First Family Business professorship established in Northern Europe at the
University of Jyväskylä, Finland (Chair: Matti Koiranen)
2000 Doctoral program for family business studies established at the University of
Jyväskylä, Finland
2001 International Family Enterprise Research Academy (IFERA) founded (Founding
President: Albert Jan Thomassen). First IFERA conference hosted by INSEAD
Fountainbleau (co-organizers: Christine Blondel and Nicholas Rowell; 35 attendees)
Navigating the family business education maze 15
2001 First Theories of Family Enterprise (ToFE) conference co-hosted by the universities
of Alberta (UoA) and Calgary (UoC) at the School of Business, UoA, Edmonton
(co-organizers: Jim Chrisman, Jess Chua and Lloyd Steier)
2003 Journal of Business Venturing publishes two special issues on family business studies
(Co-editors for 18(4) issue: Jim Chrisman, Jess Chua and Lloyd Steier, and for 18(5)
issue: Ed Rogoff and Ramona Heck)
2005 International Masters Programme for Family Business established at the University
of Jyväskylä, Finland (lectured in English and Finnish)
2005 FITS-project established, a strategic alliance between Finnish (Jyväskylä), Italian
(Bocconi), and Swiss (Lugano) universities to offer Doctoral and Post-Doctorals
in Family Business.
2005 First Family Enterprise Research Conference (FERC) hosted by the Austin Family
Business Program, Portland (co-organizers: Mark Green and Pramodita Sharma;
55 attendees)
2005 Miller and Le Breton-Miller’s book entitled Managing for the Long Run published
by Harvard Business School Press
2005 Family Business Review is listed in Social Science Citation Index (SSCI) and Current
Contents/Social and Behavioral Sciences (CCBS) (Editor: Joe Astrachan)
little initial stimulative effect on the field. More critical appears to have been the
influence of practitioners – family business owners and family business consultants.
Popular trade books by authors such as Léon Danco and the launch of university-
based outreach programs such as the one at the University of Pennsylvania demon-
strated that there was a latent demand in the business community for education,
training and development focused on issues peculiar to organizations characterized by
family ownership and control. This recognition precipitated more scholarly research in
order to have a knowledge base for instruction. To complete the circle, researchers
returned to the early contributions for theoretical and empirical justifications for
investigations.
Also in retrospect, the formation of associations whose memberships consisted of indi-
viduals and organizations with family business constituents or clienteles, that is, the
Family Firm Institute (1986) and the Family Business Network (1990), fostered further
research investigations for benchmark information and best practices that could be
learned and used to serve family enterprises. In 1988, the Family Firm Institute-sponsored
Family Business Review began offering an outlet for refereed publications. This break-
through encouraged more academics to produce new knowledge for the field. The aca-
demic community is characterized by the axiom, ‘publish or perish’. Journal access is an
incentive to contribute to a stream of research.
Future
Guided by lessons of history, our critical reflections of the past enable us to speculate
about our future (cf. Van Fleet and Wren, 2005). At the time of writing this chapter, it
was estimated that there were in excess of 200 family business educational programs based
16 Handbook of research on family business
at institutions of higher education worldwide. To this can be added other colleges and uni-
versities offering courses addressing family business issues, but short of academic con-
centrations or outreach programs. All this suggests that a critical mass has been reached
with family business studies gaining acceptance as a legitimate field of study.
For over a decade at the annual meeting of the Family Firm Institute, an award has
been presented for the best doctoral dissertation on the subject of family business. Every
year multiple dissertations are submitted for consideration. This has two implications.
The first is that both new faculty entering the field and faculty at their degree-granting
institutions value family business issues as significant areas of study. The second is that
the continuous streams of research assure that topical issues will be investigated using
up-to-date research designs and analytical tools. Further, these dissertations are coming
from all regions of the globe, with recent award winners being from Canada, Spain, South
Africa, Sweden and the United States, indicating widespread appeal of family business
studies for young scholars.
Methods
Multiple sources of information were used to develop the chronology of key events
shaping family business studies (Table 1.1). These include:
1950s and 1960s – era of rugged pioneers The decades of the 1950s and 1960s were
marked by negative connotations of family businesses both within the circles of higher
education as well as within the business community. At this time of perceived negativity
towards family business, it was the rugged efforts of entrepreneurial pioneers who ven-
tured into exploring and writing about family firms.
In the broader community, an interesting schizophrenia has been extant. Business
founders frequently labeled their firms by the family name. It is not unusual to see signs
declaring ‘John Doe and Sons’ or ‘Jones Brothers’ (the gender bias implied by these hypo-
thetical examples reflects the historic male dominance of the family firm, particularly
regarding succession). Despite these appellations, many company owners objected to
being categorized as family enterprises. Their assumption was that a family business was
somehow less professional than a non-family firm. The stereotype for many family-owned
enterprises could be summarized in the negative connotation, nepotism (Ewing, 1965).
Within the confines of academia, efforts were devoted to develop scientific knowledge
based on rigorous empirical investigations and to disseminate it in the classroom.
Application of the scientific method translated not only into content, but also into ped-
agogical processes. In business education specifically, students were taught to be analyt-
ical in their approach to management. For many in the education profession, this resulted
in encouraging students to focus on objective data and to apply quantitative analysis
tools (Bennis and O’Toole, 2005). Emotions and affective behavior were addressed as
variables to be controlled by practicing effective managerial techniques in leadership,
organization, communication, motivation, and so on (for example, Dyer Jr, 2003). On
those rare occasions when family issues might arise in course material or class discus-
sions, students would be taught to segregate what was perceived to be irrelevant variables
from business management in order to prevent them from entering into the decision-
making process or from disrupting the organizational system (cf. Ghoshal, 2005). While
some valiant efforts at conduct of academic research on family firms are visible especially
at Harvard and Indiana universities, most of the writings at the time were completed by
rugged pioneers such as Donnelley and Trow who were working against the prevailing
norms and trends.
1980s – the decade of institution building By 1980, there were published indications that
awareness was arising in the practitioner community regarding the need for education,
and for educating more than just the business owner/founder (Poe, 1980). Additionally,
popular books about family-owned enterprises brought attention to the interactions
between families and the firms that they owned and/or managed (Ward, 1986). A small
number of academic scholars who believed that family business warranted study joined
the practitioner-consultants in their pursuit of aiding family business owner-managers.
These early scholars tended to blend research, consulting and teaching. Research investi-
gations often relied on convenience samples, participant observation or case studies. Thus,
the books published by the academics were generally directed toward practitioner markets
rather than the academic community. Few courses were offered at American universities
specifically oriented towards the ownership and management of family companies.
The most distinctive trend of the 1980s, however, is that of institution building. Family
business programs started to emerge in universities. The Wharton Family Business
Program at the University of Pennsylvania was the first to be launched, in 1982. Oregon
State University started its program in 1985 and was followed by Kennesaw a year later.
In 1988, Nation’s Business magazine identified 20 universities in the United States as
having established some form of family business program within or affiliated to their
business schools. For the most part, these were outreach or continuing education-type
programs designed for business owners in the communities or regions served by the insti-
tutions. Family business programs have proliferated at universities. Today there are more
than a hundred in the United States plus programs in at least 10 other countries (Family
Firm Institute (FFI) and www.ffi.org).
For many universities, the creation of a forum was imposed by external pressure.
Successful entrepreneurs and individuals involved in troubled family enterprises pressed uni-
versities to go beyond standard business education and offer help and advice to this segment
of the business community. When Carl R. Zwerner endowed a professorship in family busi-
ness in the United States at his alma mater, Georgia State University, he commented that he
received an invaluable education in how to manage a business successfully, but the program
taught him nothing about how to get along with family members in his companies. In 1988,
he called upon Georgia State to infuse family business issues into the curriculum so that
future entrepreneurs would not encounter the same obstacles he experienced.
As the forums began to spread across the nation and into other countries, the educa-
tional programs were initially targeted towards the same market segment that the
practitioner-consultants targeted, that is, business owners and their immediate family
members. In many ways, this was highly logical. This was the group that was in immedi-
ate need of education. They were confronting family issues daily that facilitated or hin-
dered commercial operations. Additionally, adjunct faculty who gained their experience
in consulting or were from a family business background directed many of the new pro-
grams. As professional, tenured or tenure-track faculty became involved, they often relied
on practitioner-consultants to lead seminars and workshops or to work directly with the
Navigating the family business education maze 19
family enterprises that were seeking help. The success of these programs led to the iden-
tification of internal markets at the universities: undergraduate students and graduate
students whose families owned businesses and who had expectations of working in those
businesses. It naturally followed that business schools would begin to experiment with
introducing family business courses. Many schools anticipated that there would be a
latent market beyond the students with family business backgrounds. Other targets
included students intending to start their own companies with family business participa-
tion, either in employment or investment; students seeking professional degrees such as
accounting and expecting to have family enterprises among their clientele; and students
who could foresee that they might have opportunities for employment as non-family
managers in family-owned businesses.
Another significant event occurred in the 1980s. The Family Firm Institute was founded
in 1986 as a nexus for those concerned with family enterprises. The diverse membership
of the FFI includes consultants, attorneys, accountants, therapists, financial advisors,
academics and others who have family-owned firms as there clientele. In 1988, the FFI
launched the Family Business Review (FBR), the only scholarly journal devoted to family
business. Through the FBR, researchers have an outlet for the findings of their family
enterprise investigations.
1990s and beyond – growth escalates Interest in family business studies has been escalat-
ing since the 1990s, with large studies being commissioned to understand the influence of
family firms in various nations (for example, Mass Mutual study, National Family
Business Survey). Entrepreneurship associations such as the United States Association of
Small Business Enterprise (USASBE) started to recognize and establish separate divisions
focused on family business studies. Efforts to consolidate knowledge and provide guid-
ance for future directions started to be seen as evidenced by published bibliographies (for
example, Sharma et al., 1996) and establishment of the Body of Knowledge (FFI).
Emphasis started to increase on doctoral education in family firms especially both in
Europe and North America, as rigorous empirical studies on family businesses started to
emerge (for example, Bornheim, 1997; Handler, 1989; Sharma, 1997; Thomas, 1999).
New avenues to share research started to be established, for example, the International
Family Enterprise Research Academy (IFERA), the Theories of Family Enterprise
(ToFE) and the Family Enterprise Research Conference (FERC). Scholars from various
disciplines started focusing their research on family firms (Miller and Le Breton-Miller,
2005), special issues of entrepreneurship journals started to appear (Entrepreneurship
Theory and Practice, 27(4), 28(4), 29(3); Journal of Business Venturing, 18(4), 18(5)), as
some top-ranked journals published family business research (for example, Andersen and
Reeb, 2003; Gomez-Mejia et al., 2001; Schulze et al., 2001). The recent selection of Family
Business Review for coverage in the Social Science Citation Index (SSCI) and the Current
Contents/Social and Behavioral Sciences (CCBS) marks a major milestone. An exciting
future lies ahead for family business studies!
● Behavioral science;
● Financial;
● Law; and
● Management science.
The task force also decided that they should acknowledge different levels of expertise in
each category, labeling them as aware, knowledgeable and skilled.
An interesting aspect of the Body of Knowledge formulation process is that it not only
identifies content areas for curricula development, but also helps in segmenting markets
for family business education. As previously explained, the membership of the Family
Firm Institute is heterogeneous, including such diverse backgrounds as law, accounting,
psychology, psychiatry, education, and even the occasional practicing family business
owner-manager.
Looking at the various professions active in the family business arena, and thinking of
the normal disciplinary and degree-level divisions within academic institutions, we can
propose a list of prospective audiences for family business education. From the foregoing
discussion, we find that the original audience for education was, logically, family business
owners and other family members in the firm, especially prospective successors. With the
advent of programs at universities, undergraduate and graduate students became target
Navigating the family business education maze 21
markets. Although these groups could be further segmented, few programs would be large
enough to direct courses specifically at sub-groups, such as students already in family
enterprises versus students who anticipated a family business clientele at some future time.
Thus, educational course offerings have to be sufficiently broad to encompass multiple
groups. Distinctions between graduate and undergraduate education are more readily
formed. The initiation and growth of the Family Firm Institute demonstrated a demand
for education among individuals and firms working with family businesses. As the organ-
ization matured, members recognized that there was an additional need for education,
training and consulting to non-family employees of family businesses, as well as for family
members regarding how to recruit and retain non-family members in a family enterprise.
Table 1.2 contains a matrix listing content areas from FFI’s Body of Knowledge, indi-
cating the market segments that might benefit from educational programs, and is intended
as a guide or example. Educators would be expected to modify the rows and columns of
the table in accordance with the market segments that they identify for their programs.
In this example, it will be noted that most boxes are marked for each of the target
market categories. This is not surprising. There is a need for content acquisition across all
groups if they are to be effective in fulfilling their roles. Recall also, the BOK acknow-
ledged varying depths of learning. Thus, the matrix could be extended by indicating which
groups should become aware, which should become knowledgeable and which should
become skilled. One might reasonably assume that the expectations for teaching under-
graduate students would fall primarily into the ‘aware’ level. For business owners, ‘know-
ledgeable’ might be appropriate in most content areas. Professionals and consultants
should certainly be ‘skilled’ in their purported expertise, but must be ‘aware’ or ‘know-
ledgeable’ in broad content areas as well.
Conclusions
With apologies to Harriet Beecher Stowe, family business education, like Topsy, has just
‘growed.’ After being long ignored by academia, the family business market was discov-
ered by consultants and others with family business clienteles. Universities initiated pro-
grams in response to market demand more than from inspiration or research-based need
determination. Programs and course offerings proliferated primarily as a function of
expert opinion more than a careful assessment of constituent needs. One university
program stands as a unique model for future program development: Stetson University.
At Stetson, their family business program takes a holistic approach and includes a com-
bination of research, teaching and outreach. As momentum is building, we need to main-
tain our focus on the distinctiveness of family firms based on a reciprocal influence of
family on business and vice versa (Astrachan, 2003; Hoy, 2003; Rogoff and Heck, 2003).
Thanks to the opinions of experts in multiple disciplines, it is possible to determine edu-
cational content and access course materials. These opinions have value in that they come
from individuals who have direct and frequent contact with family businesses. The experts
often have experience as members of family firms. Such membership may occur in child-
hood and youth, may be either as family member or non-family employee, may have
resulted from a change in career after being a family business owner-manager, or other
such experience. There is reason to expect, however, that the course content proposed
from the work of the Family Firm Institute’s Body of Knowledge Committee, in partic-
ular, is an appropriate starting point for curriculum development.
Table 1.2 Topics and targets of family business education
Under Non-family
CORE KNOWLEDGE graduate Graduate Owners Successors employees Professionals Consultants
BEHAVIORAL SCIENCE
Individual and family development X x x x x x
Life cycle issues X x x x x X
Family system theories x x X
Conflict management X x x x X X X
Gender issues X x x x X X
Birth order issues X x x x X
Ethics of consulting x X
FINANCIAL
Roles of financial advisors x x x X
Reading financial statements X X X X
Business valuation X X X X
Accessing liquidity X X X X X
22
Employee stock ownership X X X X X
Insurance X X X X X
Wealth management X X X X X X
LAW
Choosing a lawyer X X X X X
Lawyer’s mission and role X X X X X X X
Forms of business organization X X X X X
Estate planning X X X X X X
Role of trustees X X X X
Contract dispute and resolution X X X X X X X
Ownership agreements X X X X X X
MANAGEMENT SCIENCE
Role of management consultants X X X X X X
Strategic planning X X X X X X X
Basic management theories X X X X
Human resource management X X X X
Boards of directors X X X X X X
Leadership X X x X x X
Navigating the family business education maze 23
Note
1. Please bring to our attention other key events that have helped shape family business studies by sending a
note either to [email protected] or [email protected].
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2 An overview of the field of family business studies:
current status and directions for the future
Pramodita Sharma
25
26 Handbook of research on family business
However, before presenting the highlights of the literature, the following section
engages in a discussion of the domain or the scope of the field of family business studies.
This is accomplished through a discussion of definitional issues, basis of distinctiveness
of the field, and various facets of family firms’ performance. Strategies for efficient cre-
ation and dissemination of knowledge that should enable the field of family business
studies to progress toward being considered a legitimate scholarly field that is theoretically
rich and practically useful are shared in the last section.
Definition
A challenging task in most social sciences,9 the importance of establishing clear definitions
of family firms cannot be denied as these will assist in building a cumulative body of
knowledge. Numerous attempts have been made to articulate conceptual and operational
definitions of family firms. Various scholars have reviewed existing definitions, made
attempts of consolidation of thoughts, and conceptualized another definition of family
firms (for example, Chua et al., 1999; Handler, 1989a; Litz, 1995). The focus of most of
these efforts has been on defining family firms so that they can be distinguished from
nonfamily firms. Although none of these articulations has yet gained widespread accept-
ance, most seem to revolve around the important role of family in terms of determining
the vision and control mechanisms used in a firm, and creation of unique resources and
capabilities (for example, Chrisman et al., 2003a; Habberson et al., 2003).
Reflecting on the well-established fact that a large majority of firms in most countries
have a significant impact of ‘family’ in them (for example, Astrachan et al., 2003;
Corbetta, 1995; Klein, 2000), scholars question the homogeneity of these firms (Sharma,
2002). Empirical research has revealed that these firms are only rarely an either-or sce-
nario (Tsang, 2002). Instead, they vary in terms of degrees of family involvement.
Attempts to capture the varying extent and mode of family involvement in firms have been
directed in three general directions: articulation of multiple operational definitions of
family firms (for example, Astrachan and Shanker, 2003; Heck and Stafford, 2001;
Westhead and Cowling, 1998); development of scales to capture various types of family
involvement (Astrachan et al., 2002b); and development of family firm typologies
(Sharma, 2002).
An overview of the field of family business studies 27
Using three modes of family involvement, Astrachan and Shanker (2003) provide three
operational definitions of family firms.10 Their broad definition uses the criteria of
family’s retention of voting control over the strategic direction of a firm. In addition to
retention of such control by the family, the mid-range definition includes firms with direct
family involvement in day-to-day operations. The most stringent of definitions classifies
firms as family firms only if the family retains voting control of the business and multi-
ple generations of family members are involved in the day-to-day operations of the firm.
Using these definitions, these researchers estimate between 3 to 24.2 million family firms
in the United States that provide employment to 27–62 per cent of the workforce, and con-
tribute 29–64 per cent of the national GDP.
Astrachan et al. (2002b) have presented a validated ready-to-use scale for assessing the
extent of family influence on any business organization. This continuous scale is com-
prised of three subscales: power, experience, and culture (F-PEC scale). Particularly
impressive in this study is the power scale, which articulates the interchangeable and addi-
tive influence of family power through ownership, management, and/or governance. The
experience scale measures the breadth and depth of dedication of family members to the
business through the number of individuals and generations of family members involved
in the business. Family’s commitment to the business and values are used for the culture
scale. These scholars encourage researchers to move away from a bi-polar treatment of
firms as family or nonfamily firms toward exploring the mediating and moderating effects
of family involvement in their studies.
Using the well-established overlapping three-circles model (Lansberg, 1988), each circle
representing family membership, ownership, and managerial roles of internal family firm
stakeholders, Sharma (2002) has proposed a typology that identifies 72 distinct nonover-
lapping categories of family firms according to the extent of family involvement in terms
of ownership and management. This ‘collectively exhaustive,’ ‘mutually exclusive,’ and
‘stable’ system of classification meets some of the key criteria of a good classification system
(Chrisman et al., 1988, p. 416; McKelvey, 1975, 1982). Subjecting this classification system
to empirical tests should help identify the types of family firms that prevail in each nation
at any point in time. Research has revealed that the national fiscal laws (for example, inher-
itance and capital gains taxes) influence the type of family firm that prevails in a country,
as firm leaders make attempts to minimize tax payment and retain the fruits of their labor
within their family and business (for example, Burkart et al., 2003; Foster and Fleenor, 1996;
Wells, 1998). An important task that lies ahead for the field is to subject the theoretical tax-
onomy developed to empirical tests in different nations. Such an effort should assist in the
development of empirical taxonomies that can operationally distinguish family from non-
family firms and between different types of family firms (cf. Miller, 1996).
Distinctiveness
In 1994, after conducting a thorough review of the family business literature, Wortman
commented: ‘no one really knows what the entire field is like or what its boundaries are
or should be’ (Wortman, 1994, p. 4). Perhaps the lack of definitional clarity at the time
compounded the difficulties of pinpointing the source of distinctiveness of the field (cf.
Hoy, 2003). As progress is being made on the development of definitions of family firm
based on the varying extent and nature of family involvement in a firm, some clarity on
the domain and distinctiveness of the field of family business studies is being experienced.
28 Handbook of research on family business
FAMILY DIMENSION
Positive Negative
I II
Warm hearts Pained hearts
Deep pockets Deep pockets
Positive
BUSINESS DIMENSION
III IV
Warm hearts Pained hearts
Empty pockets Empty pockets
Negative
what ‘success’ means to them could be an important predictor of success of family firms,
as such an alignment can lead to agreement on appropriate mode and extent of involve-
ment of key family and nonfamily members in the firm. On the contrary, a mismatch in
the definitions of success or goals that different stakeholders strive to achieve for the family
firm could point toward a tenacious source of conflict (Astrachan and McMillan, 2003).
If family firm performance refers to high performance in terms of family and business
dimensions, at any point in their lifecycle, family firms may be successful on either one or
both these dimensions. Using a two by two matrix (Figure 2.1) four variations of the
performance of family firms can be conceptualized based on whether a positive perfor-
mance is experienced on one or both dimensions (cf. Davidsson, 2003; Sorenson, 1999).
Although good performance on the family dimension indicates firms with high cumula-
tive emotional capital, good business performance indicates firms with high cumulative
financial capital.
Warm hearts–deep pockets Firms in Quadrant I of Figure 2.1 are the successful family
firms; they experience profitable business as well as family harmony. In other words, they
enjoy high cumulative stocks of both financial and emotional capital that may help
sustain the family and business through turbulent economic and emotional times. Staying
in this quadrant over a sustained period of time would be the most desirable performance
30 Handbook of research on family business
combination for family firms. Haniel in Germany, Cranes papers, S.C. Johnson, J.M.
Smucker, Cargill, and Nordstorm in the United States, Kikkoman in Japan, Beaudoin,
Thomson, and Molsons in Canada, and Antinori, Ferragamo, and Torrini in Italy are
examples of such firms.
Pained hearts–deep pockets Quadrant II firms are characterized by business success but
also are tension prone or exhibit failed family relationships. This scenario has been
observed in many large family firms, such as McCains in Canada and Pritzkers in the
United States, that continue to expand globally and experience increased profits, but the
family relationships have been strained by discontent and conflict (for example, Pitts,
2001). Such firms carry high stocks of financial capital but are low on family emotional
capital. Relational issues have been found central to the sustainability and success of
family firms as good relationships can overcome bad business decisions but the opposite
is more difficult to achieve (Olson et al., 2003; Ward, 1997). This is because, unlike with
unrelated parties, relationships among family members are densely linked, wherein the
tremors of one bad relationship are felt throughout the tight web of other relationships
(Astrachan, 2003). Emotional capital and stability provide the fuel to reap the benefits of
other types of capital (Puhakka, 2002). Thus, the long-term survival of firms in this quad-
rant is dependent on them developing support mechanisms aimed at mending family rela-
tionships and moving toward Quadrant I.
Warm hearts–empty pockets Quadrant III firms enjoy strong relationships among
family members, though their businesses are low performers. In other words, they are
endowed with high levels of emotional capital but low financial capital. The Southam
family of the Southam newspaper chain in Canada, Agnelli’s of Italy, and Ford Motor
Company in the past few years exemplify such firms. The strength of the glue among
family relationships can aid these firms to endure poor business performance for some
time. However, over longer periods of time, accumulated resources are likely to deplete,
causing stress in family relationships as well. Although the nature of intervention required
to turn these firms toward Quadrant I is different than that required by firms in Quadrant
II, a move toward Quadrant I will be needed for long-term sustainability of such firms.
Pained hearts–empty pockets Quadrant IV firms are failed firms that perform poorly on
both the family and business end. Although failure on the business dimension can be used
as a learning experience that may even enable these family members to launch another
venture in future (Davidsson, 2003), failure on the family dimension is likely to create
long-term, far-reaching tremors that may take several years to fade, if they do so at all.
Although the most desirable position for these firms would be Quadrant I, they may have
to follow the path through Quadrant II or III to reach that happy state.
Care must be exercised in the path followed and strategies used to move toward a more
favorable quadrant such that firms avoid tripping into the next worst quadrant instead.
For example, firms in Quadrant II may be enticed to pay family members with hopes of
achieving family harmony and moving into Quadrant III, while their aim is ultimately to
achieve a position in Quadrant I. However, over time, they may find themselves unable to
pay those fees for sustaining family harmony, which in turn may land them in Quadrant
IV instead of I.
An overview of the field of family business studies 31
Summation
The discussion thus far reveals an increasing interest in the field of family business
studies. The intertwinement and reciprocal relationships between the family and busi-
ness systems is being recognized as the key feature distinguishing this field of study from
others. Efforts are underway to develop conceptual and operational definitions of
family firms. Instead of one definition, a range of definitions that capture varying extent
and mode of family involvement in these firms are being used. Some preliminary efforts
are underway to develop general purpose classification systems that distinguish family
firms from nonfamily firms and between different types of family firms. A framework
to understand firm performance along business and family harmony dimensions is
presented.
Individual level
Stakeholders have been defined as ‘any group or individual who can affect or is affected
by the achievement of firm’s objectives’ (Freeman, 1984, p. 47). Freeman (1984) identified
16 generic stakeholders12 and distinguished between primary (those who affect a firm’s
objectives) and secondary (those affected by a firm’s objectives) stakeholders. However,
he did not include ‘family members’ as a distinct generic category. In an extension of this
concept into the family firm context, Sharma (2001) distinguished between internal and
external family firm stakeholders. Those involved with the firm either as employees13
(receive wages), and/or owners (shareholders), and/or family members are referred to as
internal stakeholders. On the other hand, stakeholders not linked to a firm either through
employment, ownership, or family membership, but that have the capacity to influence
the long-term survival and prosperity of a firm, are referred to as external stakeholders.
At the individual level of analysis, family business studies have devoted varying attention
to four categories of internal stakeholders: founders, next-generation members, women,
and nonfamily employees. Research related to each is discussed below.
Founders Due to their anchoring role in a firm, organizational leaders have been recog-
nized as having a significant influence on culture, values, and performance of their firms
(Collins and Porras, 1994; Schein, 1983). Family business literature recognizes the influ-
ential position of founders. Due to their long tenures and the centrality of their position
in their family and firm, founders exert considerable influence on the culture and perform-
ance of their firms during and beyond their tenure (Andersen et al., 2003; García-Álvarez
et al., 2002; Kelly et al., 2000; McConaughy, 2000). Efforts have been made to understand
the leadership styles adopted by these leaders and their relationship with other family and
nonfamily members (Aldrich and Cliff, 2003; Lubatkin et al., 2003; Sorenson, 2000).
As compared to nonfamily executives, tenures of family business leaders have been
found to be longer. In a sample of publicly traded American firms, McConaughy (2000)
found the tenure of family business leaders to be almost three times longer than that of
nonfamily executives (17.6 years vs. 6.43 years). These long tenures have been attributed to
these CEOs facing higher cognitive costs and psychological barriers to exit their firms
(Gómez-Mejia et al., 2003, Lansberg, 1988). Although some have been reported to experi-
ence loneliness and boredom in their positions (Gumpert and Boyd, 1984; Malone and
Jenster, 1992), others remain energetic and rejuvenated throughout their tenure (Keynon-
Rouvinez, 2001). It can be speculated that a combination of individual traits, family struc-
ture and values, future goals for the enterprise and the envisioned role of the founder in it,
and contextual factors such as the state of economy or industry growth, would influence
the disposition of founders during the course of their tenure. Perhaps those involved in
mentoring of future leaders or philanthropic activities may continue to feel an excitement
in their work lives. It would be useful to understand the reasons for the observed differences
in the energy and excitement levels of founders with respect to their jobs and firms.
Using the social network theory (Brass, 1995), Kelly et al. (2000) have developed the
concept of founder centrality within a family firm and its influence both during and after
the tenure of a founder. They suggest three dimensions of centrality – betweenness
(central to the flow of information), closeness (direct linkages with top management
group), and connectivity (ability to influence the most connected members). A variety
of hypotheses are proposed, such as that high founder centrality should lead to (1) an
An overview of the field of family business studies 33
alignment of perceptions between founder and other family and nonfamily executives,
(2) better firm performance along the dimensions of success that are important to a
founder, and (3) a stronger influence of the founder on the firm after his or her tenure ends.
Using 13 cases of Spanish family firms, Garciá-Álvarez et al. (2002) observe that the
founders’ view of the role of business in their family influences the mode and process of
socialization they use for next-generation family members, thereby influencing the culture
of the firm beyond their tenure. Those who regard their business as a means to support
the family, value the feeling of family and limit the growth of their firm. They communi-
cate higher values of group orientation to their successors, who were found to join the
firm at a young age, lower position, and with low levels of formal education. On the other
hand, founders viewing business as an end in itself encourage successors to achieve high
levels of formal education and experience outside the business before joining the family
firm at senior levels.
Research conducted on publicly traded firms by Anderson and Reeb (2003) and
Anderson et al. (2003) reveals a positive role of founder on firm performance in terms of
accounting profitability measures, market performance, and cost of debt financing for
family firms. This performance compares favorably with performance of family descen-
dants as well as outsiders as CEOs, suggesting that founders bring unique value to the
firm.
Family business leaders have been observed to adopt five leadership styles: participa-
tive, autocratic, laissez-faire, expert, and referent (Sorenson, 2000). Participative leaders,
who value the input from and consistently evaluate family and nonfamily employees, were
found to achieve high performance both on family and business dimensions. However,
this study did not reveal conclusive findings on the affects of other leadership styles on
performance related to family or business dimensions, suggesting a need for further
research on this topic. Research on personality traits and attitudes regarding appropriate
power distance between family and nonfamily members may inform why founders adopt
different leadership styles. Moreover, a clearer understanding of the long-term goals of
founders in terms of performance on family and business dimensions may influence their
management and leadership styles and any observed differences in these styles over the
course of their long tenure. Stage of life through which an individual, family, and the busi-
ness are going may further influence the observed leadership style of founders.
The relationship of founders with other family members has received some attention.
Two recent conceptual efforts are noteworthy.
1. In a crisp articulation of the linkages between the fields of entrepreneurship and
family business studies, Aldrich and Cliff (2003) suggest that families aid founders to rec-
ognize the opportunities around which to create a venture and lend support to ensure its
birth and sustenance over time. Other research has provided empirical support for the
integral role played by family in providing both the financial and nonfinancial support to
founders for creating new ventures (Astrachan et al., 2003; Erikson et al., 2003).
2. Using behavioral economics and organizational justice theories, Lubatkin et al.
(2003) propose that the extent of self-control exerted by founders differenti-ates ‘far-
sighted’ founders from those suffering from ‘myopic altruism.’ Although far-sighted
founders are able to withhold immediate gratification of each and every need of family
members in favor of actions that enhance long-term value for the family and the firm,
myopic altruists find it difficult to take such actions, thereby violating rules of procedural
34 Handbook of research on family business
and distributive justice, leading to their being perceived as unjust by family and nonfam-
ily members.
As is evident from this account, at this point in time, a significant amount of research
focused on family firm founders is in theory development stages. Although this is a good
starting point toward developing clearer insights regarding the role of family firm
founders, these conceptual ideas need to be subjected to empirical tests to gauge their
validity and generalizability for practice. It would be useful to understand the role of
family composition, values and beliefs, and individual personality and dispositional traits
of founders on their position in the business; how different types of family involvement
during founding and later life stages of a firm influence founder and firm performance
along different dimensions; and factors that lead to far- versus near-sightedness of
founders in terms of careful planning that leads to sustainable family firms. Although, so
far, this literature has focused on individual founders or controlling owners, research
needs to be directed toward understanding founding teams of the same or different
genders and ethnic backgrounds, given the predicted trend toward team leadership in
family firms (Astrachan et al., 2002a).
Next generation Handler (1989b) successfully directed the attention of the field toward
the importance of focusing on next-generation family members and understanding their
perspectives. Following her suggestions, research has focused in three general directions:
desirable successor attributes from the perspective of leaders; performance enhancing
factors; and reasons these family members decide to pursue a career in their family firms.
Exploratory research conducted both in Western and Eastern cultures revealed
‘integrity’ and ‘commitment to business’ as the two most desirable next-generation attrib-
utes from the viewpoint of the firm leaders (Chrisman et al., 1998; Sharma and Rao,
2000). Other attributes found important are ability to gain respect of nonfamily employ-
ees, decision-making abilities and experience, interpersonal skills, intelligence, and self-
confidence. The attributes considered important by the leaders are relatively versatile in
their applicability to different situations and cultures. However, it would be important to
understand why attributes are rated higher or lower, if there are differences based on
current and future performance objectives of a firm. Despite the central position of firm
leaders, given their emotional involvement with the next generation and their bounded
and parenting rationalities14 (Ling, 2002; Simon, 1957), leaders may not be in the best
position to accurately assess either the list of desirable successor attributes or the extent
to which members of the next generation possess them. Future research in this area will
benefit from collecting such data from multiple respondents in family firms and drawing
on the psychology literature to develop mechanisms to assess amounts of each attribute
possessed by the next generation of leaders. Moreover, whether possession of different
attributes leads to high performance on financial and/or nonfinancial dimensions must be
studied.
Due to their long tenures, family firm leaders possess a significant amount of idiosyn-
cratic or tacit knowledge related to the firm (Lee et al., 2003). It has been suggested that
the performance of the next generation is likely to be based on the effectiveness with which
this knowledge, and social networks, are transferred across generations (Cabrera-Suárez
et al., 2001; Steier, 2001). Research on effectiveness of knowledge transfer between a source
and recipient has unequivocally revealed the importance of the absorptive capacity of the
An overview of the field of family business studies 35
recipient and the nature of the relationship between the source and the recipient (Cohen
and Levinthal, 1990; Szulanski, 1995). Defined as the ability to acquire, assimilate, trans-
form, and exploit new knowledge, recipients’ absorptive capacity has been found to be
dependent on the existing stocks of knowledge and skills (Szulanski, 2000; Zahra and
George, 2002).
Mirroring this research, the family business literature has revealed that the level of pre-
paredness of the next generation and its relationship with the senior generation have a sig-
nificant influence on the next generation’s performance (for example, Goldberg, 1996;
Morris et al., 1997). A supportive relationship characterized by mutual respect enables the
smooth transition of knowledge, social capital, and networks across generations (Steier,
2001). With this research, preliminary steps have been taken to understand some of the
factors that enhance firm performance and knowledge transfer from one generation to the
next. In the future it would be useful to understand whether the mode of preparedness of
the next generation should vary based on the goals of family firms, and the interests, atti-
tudes, and psychological traits of involved family members. Effort should also be directed
to understanding the contextual factors that impede or enhance transfer of knowledge
across generations.
As compared to their peers who come from nonfamily business settings, junior-
generation members of family firms were found to have lesser clarity about their abilities,
talents, goals, and career interest (Eckrich and Loughead, 1996). Although this observa-
tion reveals a difference in vocational clarity of family members, it would be interesting
to understand why this lack of clarity prevails, and its implication for individual dispo-
sition and firm performance. Perhaps it is a product of the socialization processes that
inculcate a sense of obligation among juniors to pursue a career in their firms (García-
Álvarez et al., 2002). Knowing they have no real choices to make, they subdue consider-
ation of what their own interests might be. However, these are only some speculative
explanations and need to be subjected to careful theoretical development and empirical
testing.
Stavrou (1998) observed several reasons for next generation decisions to join the family
firm. Why were these differences observed? Would differences in motivating factors impact
the performance outcomes of these family members? Drawing on organizational commit-
ment literature, Sharma and Irving (2002) have developed a theoretical model to understand
the behavioral and performance implications of next-generation family members based on
their reasons for pursuing a career in their family firms. Behavioral and performance vari-
ations are expected depending on whether juniors join their family firms because they want
to, from a sense of obligation, due to involved opportunity costs, or from a sense of need.
Research directed to assess the validity of this model would improve our understanding of
the motivational factors directing next-generation members toward family firms. Also fruit-
ful would be to understand the role of environmental context (family, industry, and busi-
ness) on the motivations to join and performance of next-generation family members.
Women Research on this topic suggests that a majority of women in family firms continue
to remain in the background, frequently occupying the role of a household manager and
taking on the primary responsibility for the household and child-rearing tasks (Cole, 1997;
Fitzgerald and Muske, 2002). Although they may seem to occupy a subdued role, such a
positioning provides them with a unique vantage point that aids in the development of a
36 Handbook of research on family business
rich understanding of the prevailing issues and relationship dynamics (Dumas, 1998;
Lyman et al., 1995). They can also provide the emotional reservoir to be drawn on for
efficient conduct of the business and management of relationships among family members
(cf. Puhakka, 2002). If used astutely, their observations, intuition, and emotional capital
can make a difference between the success and failure of a family firm, though formal
research has still not reached these topics.
Based on interviews with 11 spouses of successful family firms, Poza and Messer (2001)
describe six different types of roles adopted by these women: jealous spouse, chief trust
officer, partner or co-preneur, vice-president, senior advisor, and free agent. In another
similar attempt, Curimbaba (2002) interviewed 12 potential heiresses of Brazilian family
firms to report that they occupy either a professional, invisible, or anchor role in their
firms. Although these studies based on small convenience samples provide an indication
of the varying types of roles that women in family firms tend to adopt, they do not explain
the reasons that prompt their adoption or the implications these role adoptions have on
firm performance. This leaves an opportunity to conduct theoretically oriented large-
sample studies to understand the role of females in family firms.
The last few years have witnessed a number of female leaders taking over the reins of
their family businesses, in some instances alongside their male relatives while in others
outcompeting them. Some examples include Marcy Syms (Syms Corporation), Gina
Gallo (E&J Gallo Wineries), and Abigail Johnson (Fidelity Investments) in the United
States and Gail Regan (CARA operations) and Martha Billes (Canadian Tire) in Canada.
Despite this trend, no systematic research has yet been directed toward understanding the
contextual and individual factors that buoy these women into leadership positions, their
performance goals in terms of family and business dimensions, or the leadership and
managerial styles adopted by them, pointing toward an interesting and ripe area for
serious study.
Nonfamily employees In terms of number of individuals involved and the impact on the
success and growth of family firms, nonfamily employees are an important stakeholder
group (Chrisman et al., 1998; Gallo, 1995; Ibrahim et al., 2001). Moreover, these individ-
uals may possess idiosyncratic knowledge of the firm that may be prove valuable in men-
toring of future-generation leaders, or filling in the leadership role should a need arise
(Lee et al., 2003). In larger firms, nonfamily executives have been found to play a critical
role in strategic decision making (Chua et al., 2003). However, it is only recently that some
efforts are being directed to understand the complexity of their role and their perceptions.
Using transaction costs and social cognition theories, Mitchell et al. (2003) have the-
oretically demonstrated that in comparison to employees in nonfamily settings, family
business employees need to manage dramatically complex cognitions even for performing
simple transactions. This conceptualization provides a theoretical explanation of why
some individuals may prefer not to work in family firms.
Lubatkin et al. (2003) use behavioral economics and distributive justice theories to
suggest that nonfamily employees’ perceptions of fairness, in terms of resource allocation
exhibited by controlling owners, will be dependent on the extent of self-control exhibited
by these individuals. If they are perceived to make decisions that gratify immediate needs
of family members as opposed to promoting long-term value for the family firm, they will
be perceived as unjust. Such perceptions are likely to lead to dissatisfaction of nonfamily
An overview of the field of family business studies 37
employees and reduce the likelihood of high performance or long tenures of these
employees.
We have hardly scratched the surface of understanding this stakeholder group. The the-
oretical models proposed need empirical verification. Clearly, there is a need to devote
more attention to understanding the perspective of nonfamily employees, issues that are
important to them, and that would lead to superior performance of these individuals
along various dimensions.
Interpersonal/group level
Significant research attention has been devoted to this level of analysis. Three topics
related to interpersonal or group levels that have been investigated are nature and types
of contractual agreements, sources of conflict and management strategies, and intergen-
erational transitions.
Nature and type of contractual agreements In the field of family business studies, inter-
est in this topic was kindled when two sets of scholars – Gómez-Mejia et al. (2002) and
Schulze et al. (2001) – began to question the applicability of the central tenets of agency
theory in the context of family firms. As their works received acceptance in mainstream
journals of organizational studies, they attracted immediate and widespread attention in
the field, leading to a number of subsequent conceptual developments and empirical
studies (for example, Burkart et al., 2003; Chrisman et al., 2002a; Gómez-Mejia et al.,
2003; Greenwood, 2003; Ling, 2002; Lubatkin et al., 2003; Schulze et al., 2003a, 2003b;
Steier, 2003).
Built on the central tenets proposed by Adam Smith (1796), Berle and Means (1932),
and Max Weber (1947) agency theory was conceived and popularized in organizational
studies by Jensen and Meckling (1976) and Ross (1973).15 It is based on the idea that the
separation of ownership and management in firms leads to a principal–agent relationship
in which the managers (agents) may not make decisions that are in the best interest of
owners (principals). Thus, suggestions were made to develop mechanisms to align these
interests (Jensen and Meckling, 1976). It was expected that an alignment of ownership
and management within a family would alleviate the agency problems in family firms
because individual family members would engage in altruistic behaviors wherein they sub-
jugate their self-interests for the collective good of the family.
Two different perspectives exist on the reasoning that motivates family members to
engage in other-regarding behavior as opposed to self-regarding acts. The economist per-
spective is that ‘altruism is self-reinforcing and motivated by self-interest because it allows
the individual to simultaneously satisfy altruistic (other-regarding) preferences and ego-
tistic (self-regarding) preferences’ (Schulze et al., 2001, p. 102). From this perspective,
family members are viewed as utility maximizers who are rooted in economic rationality.
Research related to majority and minority family member shareholders points toward
examples of family members who may be motivated partially or exclusively by their self-
interests rather than other-regarding family-oriented behavior (Morck and Yeung, 2003;
Morck et al., 1988).
However, an alternate viewpoint, rooted in theological perspective, is offered by steward-
ship theory (Davis et al., 1997; Greenwood, 2003). Following the views of McGregor (1960),
Maslow (1970), and Argyris (1973), this theory uses a humanistic and self-actualizing model
38 Handbook of research on family business
the hope of improving the training and fostering the interest of future generations in the
business. In other words, some generations may primarily act as bridge – or connector –
generations, maintaining family harmony and financial performance at par or subpar
levels until more competent or prepared family members become available. Clearly, the
time horizons under consideration in this instance are significantly longer than in cases
discussed currently in agency theory. Perhaps systematic study of dynastic family firms
may be informative in understanding how these firms have sustained through multiple gen-
erations with varying levels of alignment of skills, abilities, and interests of family
members of different generations with tasks undertaken by the firm. As the field engages
in this inquiry, it would be fruitful to examine the differences between explicit and psy-
chological contracts among the different stakeholders (Argyris, 1960; Kotter, 1973;
Levinson, 1962), and take into consideration the role of the family’s culture, beliefs, and
value systems on the nature and effectiveness of contracts among different stakeholder
groups in family firms.
Sources of conflict and management strategies An embeddedness of the family and busi-
ness systems, which in their original forms are based on fundamental sociological differ-
ences, makes family firms a ripe context for misunderstandings and conflict (Boles, 1996;
Miller and Rice, 1988; Swartz, 1989). Conflict has been described as ‘awareness on the
part of the parties involved of discrepancies, incompatible wishes, or irreconcilable
desires’ (Jehn and Mannix, 2001, p. 238).
Based on work-groups conflict literature (for example, Jehn, 1995,1997), three types of
conflicts have been conceptualized: task (disagreement on what tasks should be accom-
plished), process (disagreement on how to accomplish the tasks), and relationship (based
on interpersonal incompatibilities about values, attitudes, and so on). Cross-sectional
studies in this literature (for example, Jehn, 1995; Shah and Jehn, 1993) have revealed that
relationship conflict is detrimental to individual and group performance, reducing the
likelihood that members of a group will work together in the future. A moderate level of
task conflict has been found to increase group performance in cognitively complex tasks
as it allows groups to benefit from different opinions and avoid group thinking (Janis,
1982). Process conflict has been associated with lower levels of productivity and group
morale (Jehn, 1997). Most of these studies, however, have been cross-sectional in nature,
focusing on static levels of conflict and ignoring temporal issues. Even in a case where an
attempt was made to understand patterns of conflict over time (for example, Jehn and
Mannix, 2001), the study was conducted on graduate students who, at best, have to work
together on projects for the relatively limited duration of their program of study.
The family business literature is just beginning to develop conceptual models to under-
stand the nature, causes, and implications of different types of conflict. Scholars recog-
nize the positive and negative aspects of conflict, comparing it to ‘social friction’
(Astrachan and Keyt, 2003; Mitchell et al., 2003). Cosier and Harvey (1998) have pro-
posed that process and task conflicts can be beneficial because they promote creativity and
innovation. Preliminary evidence of cross-generational innovation would support this
notion (Litz and Kleysen, 2001). Building on this idea, Kellermanns and Eddleston (2002)
suggest that task and process conflicts interact with relationship conflict to influence firm
performance. These researchers also theorize that the relationship between conflict and
performance is moderated by the ownership structure of the firm.
40 Handbook of research on family business
Intergenerational transition Since the inception of this field of study, significant research
efforts have been devoted to the topic of succession (Handler, 1994). The interest contin-
ues (for example, Burkart et al., 2003; Le Breton-Miller et al., in press; Lee et al., 2003;
Sharma et al., 2003a). Earlier reviews revealed the importance of this topic and described
efforts devoted to describing the phenomenon of succession process and observed best
practices (Bird et al., 2002; Sharma et al., 1996; Wortman, 1994).
A majority of family firm leaders have been found to be desirous of retaining family
control past their tenure (for example, Astrachan et al., 2002a). Although the initial reac-
tions to such preference were relegated to the propensity of family firms toward nepotism,
recent conceptual thinking suggests such preference to be a rational and efficient choice
when: (1) the prevailing legal system accords low shareholder protection, such that sepa-
ration of ownership and control becomes inefficient, (2) the family gains significant non-
pecuniary and reputational benefits from retaining the leadership within the family, and
(3) the competitive advantages of a firm are based in idiosyncratic knowledge that can
only be transferred efficiently to family members or the most-trusted outsiders (Burkart
et al., 2003; Lee et al., 2003).
An overview of the field of family business studies 41
Both incumbents and successors play critical roles in this process, although they
attribute more importance to the others’ role (Sharma et al., 2003a). Significant differ-
ences in perceptions about the process have been identified repeatedly (Handler, 1989b;
Poza et al., 1997; Sharma, 1997), pointing toward the importance of engaging in processes
that lead to development of collective beliefs (Habbershon and Astrachan, 1996). Using
the theory of planned behavior from the social psychology literature, Sharma et al.’s
(2003b) study of 118 family firm leaders revealed that the presence of a trusted successor
willing to take over the leadership of a firm was the spark that controls the succession
planning process. This suggests a need to engage the next-generation family members in
succession planning, as it is their careers and lives that are involved in this decision. The
pursuit of understanding the extent of interest of next-generation family members in their
firms and the best mode for getting these individuals involved in the firm must continue
(Fiegener et al., 1996).
Attempts have been made to reveal various dimensions and phases of the succession
process, differentiating between successful and unsuccessful successions, and identifying
the factors that contribute to effective successions (Cadieux et al., 2002; Davis and
Harveston, 1998; Gersick et al., 1997; Harveston et al., 1997; Morris et al., 1997; Murray,
2003; Poza et al., 1997; Sharma et al., 2001; Sharma et al., 2003a). Most of these studies
subject theoretically developed models to empirical tests, thereby improving our under-
standing of the succession process (Rogoff and Heck, 2003). This process has been
revealed to be a multistaged phenomenon with trigger events or markers distinguishing
one stage from the other (Cadieux et al., 2002; Gersick et al., 1997; Keating and Little,
1997; Lansberg, 1999; Murray, 2003). For example, using an analogy of a relay race, Dyck
et al. (2002) suggest the importance of sequence (appropriateness of successors’ skills and
experiences), timing, technique (details by which succession will be achieved), and com-
munication between the predecessor and successor. It is generally agreed that this process
extends over time and needs to be carefully planned (Davis and Harveston, 1998;
Harveston et al., 1997; Sharma et al., 2003a). Recently, Le Breton-Miller et al. (in press)
developed an excellent integrative model for successful successions that describes the suc-
cession process while taking into account the contextual variables within the family,
industry, and society. Although research needs to be directed toward subjecting this model
to empirical testing, this effort is successful in providing a comprehensive conceptual
framework to understand the succession process in family firms.
Parallel efforts have been directed toward understanding the reasons that successions
fail when failure is defined as successor dismissal or firm bankruptcy (Dyck et al., 2002;
Miller et al., 2003). Based on their study of 16 failed successions, D. Miller et al. (2003)
note that at the heart of failed successions is the misalignment between an organizational
past and future. Three observed patterns of this alignment are conservative (attachment
to the past), rebellious (wholesale rejection of the past), and wavering (incongruous
blending of the past and present). Each pattern leads to different performance implica-
tions. These studies present conceptual models that are simply waiting for large-scale
empirical testing. In related efforts, it would be useful to carefully consider the effect of
performance objectives, family values and beliefs, and other contextual variables that
might influence the effectiveness of a succession process.
In the past few years, questions have been asked about whether continuity of a family
business is always a good thing (Drozdow, 1998; Kaye, 1996). Although experience and
42 Handbook of research on family business
intuition point toward a negative answer to this question, systematic conceptual develop-
ment of this issue has not yet been undertaken. Some have made suggestions for adopt-
ing broader definitions of ‘success’ of succession (Kaye, 1996) and differentiating between
elements of a family business that should and should not be transferred across gener-
ations. Research based on a resource-based view of the firm suggests the importance of
transferring the tacit embedded knowledge (Cabrera-Suárez et al., 2001), networks and
social capital (Steier, 2001), passion (Andersson et al., 2002), and innovative spirit (Litz
and Kleysen, 2001) across generations, as such transfers would lead to competitive advan-
tages for family firms. Future research needs to be directed toward understanding effective
ways of transferring these resources across generations, as well as exploring the extent of
importance of their transfer in different types of family firms located in varied cultures
(Dyer, 1988). Literatures on diffusion of innovation and knowledge transfer could be
informative in this regard (for example, Rogers, 1962; Szulanski, 1995, 2000).
Organizational level
At the organizational level of analysis, efforts have been largely directed toward the iden-
tification and management of resources in family firms. Resource-based theory of the firm
has been used to inform the research directed toward identification and management of
the unique resources in family firms. Habbershon and Williams (1999) suggest that it is
the ‘familiness’ or the idiosyncratic internal resources built into a firm as a result of the
involvement of family that makes family firms distinctive. Further, they argue that ‘fami-
liness’ can used either as a source of strategic competence (distinctive) or encumbrance
(constrictive) by family firms.
In an article that conceptually consolidates different types of capital, Sirmon and Hitt
(2003) distinguish between five types of capital resources and the characteristics that dis-
tinguish family from nonfamily firms. These sources of capital are human, social, surviv-
ability, patient, and governance structures. They suggest that to gain competitive
advantage, family firms need to evaluate, acquire, shed, bundle, and leverage their
resources efficiently. The interaction between family and business in these firms provides
some advantages and challenges to pursuing these activities.
To truly understand the strategic decision processes of family firms, it is important to
incorporate the role of family beliefs and culture. In one related attempt, Sharma and
Manikutty (2003) have presented a conceptual model for understanding the interactive
role of prevailing community culture and family beliefs on resource-shedding decisions in
family firms. They hypothesize varying levels of inertia to divest unproductive business
units by family firms depending on the values held by the owning family and the culture
that prevails in the community where the family business is located. However, empirical
testing of the conceptual models developed in this research stream is necessary.
Research directed toward understanding the sources of financial capital used by family
firms has consistently revealed a ‘pecking order’ with highest preference given to internal
financing, followed by debt and equity financing (Coleman and Carsky, 1999; Erikson
et al., 2003; Morck and Yeung, 2003; Poutziouris, 2002; Romano et al., 2000). External
financing is generally avoided because it is a source of accountability. However, research
focused on understanding the cost of debt financing in publicly traded family versus non-
family firms has revealed a lower cost of debt financing in family firms (Anderson et al.,
2003). The rationale offered for this finding is that the bondholders perceive lower conflict
An overview of the field of family business studies 43
of interest with family firms due to their long-term orientation and undiversified port-
folios. This perception, in turn, leads to a reduction in the cost of debt financing
(Anderson et al., 2003).
Clearly, more attention needs to be directed toward the firm level. For example, there
is a need to understand the mechanisms family firms use to develop, communicate, and
reinforce desired vision and organizational culture over extended tenures of leaders and
across generations; strategies used to maintain long-term relationships with external
stakeholders and other organizations; ethical dilemmas faced and resolution strategies
used; and human resource strategies used, especially as these firms provide limited lead-
ership opportunities for nonfamily executives.
Societal/environmental level
A majority of the research efforts directed toward understanding the role of family firms
at the societal level have focused on establishing the extent of economic importance of
these firms in various nations such as Germany (Klein, 2000), the Gulf region (Davis et al.,
2000), Italy (Corbetta, 1995), Spain (Gallo, 1995), Sweden (Morck and Yeung, 2003), and
the United States (Astrachan and Shanker, 2003; Heck and Stafford, 2001). As a consis-
tently high influence of family firms has been found in most nations where such studies
have been undertaken, perhaps it is time to get to the question of why these firms endure,
try to understand the impact of fiscal systems on the formations that persist in different
environments, and take a look at the role of these firms in their communities. Theories
such as institutional theory and population ecology might be used in such endeavors.
Summation
Overall, the majority of research on family firms in the past decade or so has been directed
toward the individual or group levels, with only scant recent interest in the organizational
level. Topics such as organizational vision and culture development, marketing strategies
used, human resource practices, interorganizational relationships, and so forth remain
unstudied. Further, the impact of family firms at the societal level has largely been ignored,
except for the documentation of a large number of these firms in different nations.
At the individual level, founders and next-generation members have received the most
attention, with only some attention shown women and nonfamily employees. The long
terms and significant influence of founders on their firms during and after their tenures is
well established. However, the reciprocal impact of family on founders and the firms is
only just beginning to gain attention. Although different leadership styles have been
observed, there is still lack of clarity on styles that may be more effective given different
organizational goals and personality traits of founders or leadership teams. The focus has
largely remained on individual founders; issues related to team founding and leadership
await attention. From the perspective of leaders, committed next-generation family
members with high integrity are desirable successors, even though such individuals might
remain unclear about their abilities, skills, or career interests. Women are found to play
multiple roles. Nonfamily employees face a complex environment in family firms. Our
understanding of either of these stakeholders is preliminary at this stage, showing a need
for more systematic research attention in future.
At the interpersonal level, agency theory has dominated the research related to the
nature of contractual agreements between family owners and family employees. These
44 Handbook of research on family business
efforts have revealed that an alignment of ownership and management within a family
may not reduce the overall agency costs because, although some costs are alleviated, new
types of problems arise. The dark side of altruism has been revealed, displaying human
limitations in terms of accurate understanding of how actions taken today might influ-
ence the future of a firm, or the impact of one’s control impulses in decisions related to
family members. Research on the nature of conflict and resolution strategies has high-
lighted different types of conflicts and varying degrees of effectiveness of resolution
mechanisms, although this stream is still in its infancy. In terms of the leadership transi-
tion process, it is now clear that this process is a long one and marked with trigger events.
Both the departing and incoming leaders play a critical role, although their perceptions
on key dimensions may vary significantly. Comprehensive conceptual models of the suc-
cession process have been developed, and are awaiting empirical testing.
Knowledge creation
Three aspects related to creating knowledge about family firms merit some consideration:
What topics deserve attention? How can we effectively organize our ideas around ques-
tions of interest? How can we design effective scientific investigations?
Choosing research topics and questions Asking the right questions is the first critical step
in finding the right answers. A major difficulty in a new field of study is to determine the
projects that must be undertaken and intelligently formulate the research questions.
Review papers and directions for future research listed in research articles provide some
suggestions to individual scientists. However, the level of thoughtfulness and sophistica-
tion with which projects are chosen can be greatly enhanced by a mutually interactive
process among scientists, and between scientists and practitioners, in which the system
achieves a rationality superior to that of any individual in it.
Some efforts along this dimension are underway. For example, the International Family
Enterprise Research Academy’s (IFERA) annual researchers meeting and the scholars
program at the Family Owned Business Institute (FOBI) at Seidman School of Business,
Grand Valley State University have initiated efforts to aid critical evaluation of research
proposals related to family business studies. Such efforts can avoid uncoordinated efforts
of isolated individuals and help make good choices for research projects. Moreover, such
meetings enable development of coordinated efforts among scholars, as exemplified by the
F-PEC study that involves nine scholars in four nations. Another good example of
research collaboration is the 1997 National Family Business Survey that involved 25
An overview of the field of family business studies 45
scholars from 17 institutions across the United States and Canada (Winter et al., 1998),
with follow-up US reinterviews in 2000 (Winter et al., in press). Further progress can be
made by involving family firm practitioners and the scientific community more closely in
relation to issues faced by both communities.
Organizational theories
Family
firm
filter
THEORIES OF
(when the two FAMILY FIRMS
systems
operate as
one)
Family system theories
Designing effective studies Research designs must be chosen based on the research ques-
tion of interest and the prevailing level of understanding on the issue. In the ‘full cycle’ of
research, there is an important role of both qualitative/process and quantitative/variance
approaches to develop rich generalizable theories (Cialdini, 1980; Mohr, 1982). Although
the process theories use events and states to tell a story about how outcomes are achieved,
the variance theories use independent variables as necessary and sufficient causes of vari-
ation in dependent variables (Elsbach et al., 1999). In an emerging field of study as stan-
dards are being laid down, it is critical to understand and adopt widely accepted tenets
and guiding principles of the chosen approach (for example, Langley, 1999; Whetten,
2002). Research on succession in family firms has made good progress through its pursuit
of rigor in both qualitative (for example, Handler, 1989a) and quantitative (for example,
Sharma, 1997) methods.
As significant differences in perceptions of leaders and other family members have been
revealed (for example, Poza et al., 1997; Sharma, 1997), it is necessary for researchers to
use multirespondent data-collection methods to capture different prevailing perspectives.
Topics of interest in family firm studies such as firm performance along financial and non-
financial dimensions across generations, sources of conflict, efficacy of resolution strat-
egies, and succession process extend over long periods of time, and suggest a need for
longitudinal studies or cross-sectional studies repeated over time.
As we work toward building cumulative knowledge on family business studies, it is
extremely important to share in detail the methods used, definitions of variables of inter-
est and their operationalization, and research instruments (Handler, 1989a). The trend in
the field is in the right direction as good descriptions of methods are beginning to emerge
(for example, Cole, 1997; Danes et al., 2002; Keating and Little, 1997; Mustakallio et al.,
2003; Poza and Messer, 2001; Smyrnios et al., 2003), and definitions and research instru-
ments are being shared more often (for example, Astrachan et al., 2002a; Olson et al.,
2003; Westhead and Cowling, 1998).
In our role as reviewers, we should strive to maintain the highest standards by encour-
aging research that is developed on a theoretically strong foundation and is method-
ologically sound (Bird et al., 2002). Although our judgments should be based on high
quality, our reviews should be developmental so that we can support each other toward
the conduct of good research. In short, the field can benefit from using rigorous
designs both in qualitative and quantitative research methods, longitudinal or repeated
cross-sectional studies using multiple respondents, and adoption of a culture of sharing
and mutual support.
An overview of the field of family business studies 47
Dissemination of knowledge
Efficient dissemination of acquired knowledge is at least as important as its acquisition.
Scholars of an emerging field of study need to find effective ways to share their ideas both
within the academic community and among practitioners. Below, strategies that can
enable effective dissemination in both these communities are presented for consideration.
Dissemination within the academic community It is largely through academic journals and
conferences that research is communicated within the academic community. Although we
are fortunate in this field to have this journal [Family Business Review] devoted exclusively
to family business studies, in order to attract more scholars to the field and generate wide-
spread interest and credibility, it is important to continue our efforts to disseminate our
research in a variety of journals and conferences, and invite scholars from other fields of
study to conferences devoted to family business studies in an effort to increase awareness.
At the community level, efforts can be made to organize meetings where successful
senior scholars are placed in mentoring roles for junior family business researchers so as
to generate interest in a wider community of academics and aid the new scholars to learn
the craft of publishing (Whetten, 2002).
Summation
Overall, this review has revealed a positive trend in the field toward more sophisticated
research that is based on rich theory-based conceptualizations of various phenomenon of
interest. Although such efforts should continue in future, it is equally important to subject
the theoretical models developed to carefully designed empirical (qualitative or quantita-
tive) studies. Only through continuous theory development and testing can we find
ourselves closer to the creation of usable knowledge.
48 Handbook of research on family business
In conclusion, the state of the field of family business studies can be described using
Jim Collins’s analogy (2001) of a huge heavy metal flywheel mounted horizontally on an
axle. The aim of interested scholars is to turn this wheel of understanding family firms
fast and long. At first, through persistent efforts of early researchers in the field such as
Beckhard, Danco, Dyer, Hollander, Lansberg, Levinson, and Ward, it inched slowly and
imperceptibly. As more individuals joined the field, the wheel gained momentum. At this
point in time, the wheel seems to be turning slowly using its own weight. Before it gains
unstoppable momentum, it is worthwhile to take stock of its current direction and take
care that future efforts are made in a desirable manner so as to ensure that the wheel of
understanding family firms moves expeditiously. This is my attempt at stock taking for
the field of family business studies.
Acknowledgements
I am grateful for the detailed suggestions and comments provided by Joe Astrachan and
Ramona Heck that helped improve this paper significantly. Thanks also to Jim Chrisman
and Jess Chua for their encouragement and support.
Notes
1. An ABI inform search indicates the number of articles on ‘family business’ in peer-reviewed scholarly jour-
nals has shown a dramatic increase: 33 articles up to 1989; 110 from 1990 to 1999 (an average of 11 arti-
cles per year); and 195 articles in the four-year period from 2000 to 2003 (almost 49 articles per year
indicating over fourfold increase!).
2. Family business research has begun to emerge in mainstream journals such as Academy of Management
Journal, Academy of Management Review, Journal of Finance, and Organizational Science (for example,
Anderson and Reeb, 2003; Anderson et al., 2003; Burkart et al., 2003; Gómez-Mejia et al., 2002, 2003; Lee
et al., 2003; Schulze et al., 2001, 2003a). Special issues of family business research of some of the top-
ranked entrepreneurship journals such as Entrepreneurship Theory and Practice (27(4)), and Journal of
Business Venturing (18(4) and 18(5)) have been published in the year 2003.
3. The AACSB (Association to Advance Collegiate Schools of Business) website http://www.aacsb.edu/
members/communities/interestgrps/familybusndoc.asp lists nearly 50 accredited schools with family busi-
ness programs. Aronoff and Ward (1995) report that more than 70 universities, including leading schools
such as Harvard, North-Western, Notre Dame, the University of California in Los Angeles (UCLA),
Wharton, INSEAD, and IMD, have active family business programs.
4. Some notable examples include the Coleman, Cox, Kauffman, Mass Mutual, and Raymond Foundations in
the United States; Lombard Odier Hentsch and Cie in Europe; and the Tanenbaum foundation in Canada.
5. Examples include the Family Firm Institute (FFI), which was founded in 1986, had about 500 members
in 1992, and now has nearly 1200 members; Canadian Association of Family Enterprises (CAFÉ), which
was established in 1983 with 15 founding members and now boasts more than 2400 members representing
almost 900 family firms across Canada.
6. In addition to these broad-based literature reviews, Bird et al. (2002); Chrisman et al. (2003b); Dyer and
Sanchez (1998), Handler (1994), and Wortman (1994) have presented more focused reviews of a selection
of the family business literature.
7. Although not included in this article, some insightful experiential and prescriptive articles include Hubler
(1999); Kaye (1999); Krasnow (2002); McCann (2003); Mendoza and Krone (1997); and Murphy and
Murphy (2001).
8. Evidence of the prevalence of family firms has been provided by Klein (2000) in Germany; Morck and
Yeung (2003) in Sweden; and Astrachan and Shanker (2003) and Heck and Stafford (2001) in the United
States.
9. For example, a struggle for resolving the issue of definitions continues in the literatures of entrepreneur-
ship (Shane and Venkataraman, 2000), corporate entrepreneurship (for example, Sharma and Chrisman,
1999), and leadership (Yukl, 1989).
10. Two other examples of multiple operational definitions include:
1. The 1997 and 2002 National Family Business Surveys that use four different definitions of family firms
based on the level of involvement of family in the business. These studies indicate a significant influ-
ence of family firms in the United States with over 8.6 million families (one out of every 10 households)
An overview of the field of family business studies 49
in the United States owning family firms. Collectively, these businesses generated between $1.3–10.4 tril-
lion in gross revenues in 1996, depending on the definition used (Heck and Stafford, 2001; Heck and
Trent, 1999).
2. Westhead and Cowling (1998) present seven operational definitions to classify firms in the United
Kingdom according to varying levels of family ownership, managerial involvement, and CEO percep-
tion of the firm being a family business or not, and conclude that these firms are a numerically impor-
tant group of businesses in the United Kingdom.
11. For example, Aldrich and Cliff (2003) explore linkages of family business studies with entrepreneurship;
Stewart (2003) does it with anthropology; Sirmon and Hitt (2003) and Zahra (2003) link it to strategic
management.
12. Owners, employees, unions, customers, consumer advocates, competitors, suppliers, media, environmen-
talists, governments, local community organizations, political groups, financial community, trade associa-
tions, activist groups, and special interest groups (Freeman, 1984, pp. 25, 55).
13. The term ‘employees’ is used broadly and includes all levels of the employed workforce in a firm.
14. Bounded rationality refers to the limited ability of human beings to process information and understand
the environment around them (Simon, 1957). In the context of family firms, it is the limited understand-
ing of parents as to the attributes of the next generation that would lead to highest expected returns
(referred to as parenting rationality by Ling (2002)).
15. For a more detailed account of development of this stream of research, see Chrisman et al. (2003b).
16. In equity, allocations are commensurate with contributions; in equality, equal allocations are made regard-
less of contributions; and allocations are based on need to survive with dignity in need-based systems
(Cohen, 1987; Gilliland, 1993; Lubatkin et al., 2003).
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3 Family businesses’ contribution to the US
economy: a closer look
Joseph H. Astrachan and Melissa Carey Shanker
Introduction
How has the available research on family businesses’ economic impact changed since
1995, amid greater attention by the White House on estate tax reform, seamless access to
information on the Internet, and more university-based family business centers than ever?
Unfortunately, there is not much new research.
There is still little doubt that family-owned and operated businesses are large contrib-
utors to the US economy. However, just how to determine the exact extent of their impact
continues to be difficult. A vast study of all of the family business literature and research
since our original findings has convinced us that our definition-based formulas for esti-
mating family businesses’ overall economic impact is still the most accurate information
available. With greater access to government information, we were able to refine our ori-
ginal data greatly and apply these new figures to our existing formulas, resulting in a new
and improved framework with which to evaluate just how important family businesses are
to the US economy.
56
Family businesses’ contribution to the US economy 57
Founder/descendant runs
company
Multiple generations
Family participation
the business or a role on its board but very little interaction in day-to-day operations. The
other requirement – intention – is a tricky concept to quantify, but, we believe, an import-
ant delineator. We believe that if an entrepreneur’s long-term vision for his or her busi-
ness is to build something for his or her children, then the planning and strategic decisions
he or she makes will be different from those of a nonfamily business.
A family business in the center ring, our narrowest definition, may involve a grand-
parent/founder as chairman, two or three siblings in top management, one sibling with
ownership but no day-to-day responsibilities, and younger cousins in entry-level posi-
tions (see Figure 3.1). In this scenario, multiple generations have a significant impact on
the business. Although a common example of a family business at this stage of its life
cycle, the founder no doubt had a similar profile to many of the ‘entrepreneurs’ included
in the other circles of the bull’s-eye just a generation or two earlier.
Although we agree with the importance of the intangible aspects that make family busi-
nesses unique, they make quantifying family businesses’ economic impact more elusive.
Unlike the impartial measurements used to identify other business types, that is, sales,
number of employees, etc., the characteristics most often used to define family businesses
are difficult, if not impossible, to collect. This is the primary reason why more research in
this area has not been conducted.
include more businesses and result in larger economic contributions. A narrower defin-
ition results in a more homogeneous group of businesses, but less total economic impact.
We have used existing information to extrapolate and make educated estimates on the size
and impact of the family business universe in terms of its total size, contributions to the
gross domestic product (GDP), and employment of the US workforce.
The Internal Revenue Service (IRS) provides one of the very few accessible sources of
information on privately held companies. Every legally operating business in the United
States, large or small, public or private, family or nonfamily, files a tax return with the IRS.
Looking at each component separately, we made logical judgments about each group’s
propensity to include family businesses.
In 2000, 17.9 million sole proprietor businesses, 2 million partnerships, 5.5 million cor-
porations, and 1.8 million farms filed for a total of approximately 27.2 million tax returns
(see Figure 3.2).
A study by Kirchoff and Kirchoff (1987) finds that smaller family businesses very often
use both paid and nonpaid family labor, especially when starting out. (It is also likely that
if family members are paid, they receive cash that is not reported.) A family farm is an
example of a business in which family members work for the business but are unlikely to
be listed as paid employees. In keeping with this theory, we have included all of the 17.9
million sole proprietorships and 1.8 million farms in our broadest family business uni-
verse, based on the belief that although only one family member is officially running the
business, the family dynamics involved in businesses of this type qualify it as a family busi-
ness in our broadest definition.
Partnerships and corporations may be somewhat less likely to exhibit this level of direct
family involvement. Although the majority of partnerships and corporations are private,
research done on public companies gives us a rare glimpse at empirically based data on the
total number of family businesses present in public corporations. Burch (1972) finds that
47 per cent of the 1965 Fortune 500 were family businesses, McConaughy (1994) finds that
21 per cent of the Business Week 1000 list qualified, and Jetha (1993) finds that 37 per cent
of the 1992 Fortune 500 businesses qualified as family businesses under his definition.
Although the definitions and methodologies used were different, this research seems to say
that one-third to one-half of the very largest public companies are family businesses.
Unfortunately, this research on public companies represents only a small sliver of US
businesses. Even in terms of public companies, the majority are not traded on the big
exchanges but rather via the over-the-counter market and ‘pink sheets,’ where smaller and
closely held companies as well as high-tech start-ups go to gain access to capital. In many
cases, these ‘public’ companies remain in the owner’s or family’s strategic control and are,
therefore, more likely to be family businesses that fit our broad definition, despite being
considered ‘public’ companies.
With what the research on public companies tells us, and based on what we know to be
true about other large family businesses, we estimate that 60 per cent of all public and
private partnerships and corporations are family businesses under our broad definition.
This is a conservative estimate based on years of experience working with these types of
family entities.
Therefore, the model we use to determine the total number of family businesses and
their impact on the economy for our broadest definition is 100 per cent of sole proprietors
and farms and 60 per cent of partnerships and corporations.
about this. According to its research, which is based on special runs of the 1997 Census
data, of the 21 million businesses listed in the 1997 Census, only 12 million represented
the owner’s ‘principal occupation’ (US Department of Commerce, 1997). Although inten-
tion is impossible to measure, we believe that if the business is not the primary focus of
the family and the primary source of income, it is unlikely that the time and effort has
been given to plan to keep it in the family for the future generation. With this in mind, the
middle definition universe will consider only ‘principal occupation’ sole proprietors. We
have assumed that all partnerships and corporations represent the owner’s principal occu-
pation and, thus, subtracted the total number of these tax returns from the 12 million
‘principal occupation businesses.’ This move left us with approximately 4.5 million ‘prin-
cipal occupation’ sole proprietors to consider.
Thus, when we apply our family business formula to the middle universe, we use the
same framework as the broad model, but now limit the number of sole proprietors from
17.9 million to the 4.5 million that declare that their sole proprietorship is their ‘principal
occupation.’
is counting all business tax returns, not individual business establishments. As mentioned
earlier, many sole proprietors operate multiple businesses and file multiple tax returns. In
addition, whenever two different sources of information are used, differing methodolo-
gies will result in different data.
So, how does the Census’ nonemployer information pertain to our family business def-
initions? Our narrow definition requires, among other things, that ‘more than one member
of the owner’s family have significant management responsibility.’ This implies that the
firm is an employer and that family members are on the payroll.
Therefore, in this definition, we will consider only the 5.6 million employer businesses
in our formulas. Although not included in the Census’ employer statistics, we add farms
because they are traditionally family-run operations that ‘employ’ many family members’
efforts and meet the criteria of our narrowest definition.
In addition to requiring that family members be employed in the business, our narrow
definition also states that multiple generations must be involved. Two earlier research
studies help us here. John Ward’s 1987 research on succession finds that approximately one-
third of post-start-up family businesses survive and reach the second generation of owner-
ship (Ward, 1987). In addition, a Mass Mutual family business study, which surveyed 1002
family businesses, supports Ward’s statistic by finding that 35 per cent of the businesses it
contacted had multiple generations working in the business (Arthur Andersen, 1995).
Therefore, the narrow definition requires that we eliminate a majority of the 27.2
million tax returns in 2000. We can consider only the 5.6 million employer businesses, and
then, the existing research tells us that within the family business universe, only 35 per cent
of those family businesses employ multiple generations of the same family. Thus, the
formula for our narrowest family business definition will include only 35 per cent of the
businesses included in our broad definition, or 35 per cent of sole proprietors, and 21 per
cent (35 per cent of the estimated 60 per cent used in our broad definition) of partner-
ships and corporations.
These family business formulas for the broad, middle, and narrow definitions explained
above are applied below to determine the total number of family businesses in the US
economy, their contribution to GDP, and the number of workers they employ.
24.2 million
89% of business family businesses
tax returns
10.8 million
family businesses
39% of business
tax returns
11% of business 3 million family
tax returns businesses
62% of workforce
= 82 million 27% of workforce 29% of GDP =
individuals = 36 million $2.6 trillion
individuals
58% of workforce
= 77 million
59% of GDP = individuals
$5.5 trillion
64% of GDP =
$5.9 trillion
Source: US Department of Labor, Bureau of Labor Statistics, ERS-William Edmondson (farm) (2000).
Conclusion
No matter what criteria are used, family businesses represent a substantial portion of the
US economy and have a massive impact on the economy as a whole. This research pro-
vides a range of estimates based on the degree of family involvement in a business. The
difficulty in more accurately quantifying this impact stems from the lack of a universally
agreed-upon definition for a family business and the fact that many of the criteria most
important in defining a family business are difficult, if not impossible, to collect.
Clearly, more research is needed to study family businesses’ importance to the US
economy, particularly as our leaders argue over the right tax policy to stimulate our
lagging economy.
References
Arthur Andersen Center for Family Business (1995), American Family Business Survey, St Charles, IL.
Burch, P. (1972), Managerial Revolution Reassessed: Family Control in America’s Largest Corporations,
Lexington, MA: Lexington Books.
Jetha, H. (1993), ‘The industrial Fortune 500 study’, unpublished research, Loyola University, Chicago.
Kirchoff, B.A. and Kirchoff, J.J. (1987), ‘Family contributions to productivity and profitability in small busi-
ness’, Journal of Small Business Management, 25, 25–31.
McConaughy, D. (1994), ‘Founding-family-controlled corporations: an agency-theoretic analysis of corporate
ownership and its impact upon performance, operating efficiency and capital structure’, doctoral dissertation,
University of Cinncinati.
US Department of Commerce (1997), 1997 Economic Census, US Census Bureau, Washington, DC.
US Department of Labor, Bureau of Labor Statistics (2000, August), Employment in Perspective. Earnings and
Job Growth, Washington, DC: Government Printing Office.
US Department of Treasury, Internal Revenue Service (2000), Statistics of Income, Washington, DC: US
Government Printing Office.
US Small Business Administration, Bureau of Economic Analysis (2000a), The Nation, Washington, DC: US
Government Printing Office.
US Small Business Administration (2000b), The State of Small Business, Washington, DC: US Government
Printing Office.
Ward, J. (1987), Keeping the Family Business Healthy: How to Plan for Continuing Growth, Profitability and
Family Leadership, San Francisco, CB: Jossey-Bass.
Appendix
THEORIZING FAMILY
BUSINESSES AND BUSINESS
FAMILIES
4 A unified systems perspective of family firm
performance
Timothy G. Habbershon, Mary Williams and
Ian C. MacMillan
1 Introduction
Achieving strategic competitiveness is difficult in today’s turbulent and complex market
place. These difficulties are compounded when firms do not have a clear understanding of
what affects their performance. Recognizing the antecedents to firm performance allows
leaders to exploit their organizational resources and capabilities and to make the requi-
site strategic choices to pursue future opportunities. The heart of the strategic manage-
ment process is to achieve the performance outcomes that allow firms, including
family-influenced firms, to be competitive over time.
To date, the family firm literature has generally emphasized improving family relation-
ships without a strong strategic management focus on firm performance (Sharma et al.,
1997). Anecdotal descriptions of organizational behavior are often substituted as strat-
egy models, and attempts to define a family firm or to delineate between the performance
requirements of so-called family firms and nonfamily firms have left family and business
leaders confused at best (Chua et al., 1999; Gudmundson et al., 1999). More often, the
response is to discount, ignore, or isolate the family factors from the business and resort
to traditional strategy models for the business. The end result is that these leaders fail to
account for major systemic influences that impact their performance outcomes. In short,
they do not have an adequate performance model.
Theory and practice indicate that in family-influenced firms, there are complex arrays
of systemic factors that impact strategy processes and firm performance outcomes.
Habbershon and Williams (1999) have suggested that these unique systemic family influ-
ences can be captured through the resources and capabilities of the organization. The
idiosyncratic firm level bundle of resources and capabilities resulting from the system
interactions is referred to as the ‘familiness’ of the firm.
In this chapter, we pursue the thinking of Habbershon and Williams (1999) and more
specifically develop a unified systems model of family firm performance that demon-
strates how the systemic interactions of the family unit, business entity, and individual
family members are linked to performance outcomes. The performance model blends
systems theory thinking with strategic management theory in order to show how family
influences can lead to a potential competitive advantage.
The first section presents the current thinking from the field of family business studies on
the family business as a strategic entity and evaluates it from a strategic management per-
spective. The second section builds the performance model for family-influenced firms. It
begins with a general utility function of value creation for the family business social system
and moves to a more specific wealth creation function for a subset of firms we refer to as
‘enterprising families.’ Enterprising families are those committed to transgenerational
67
68 Handbook of research on family business
a. b.
Family Manager
Family Business
Ownership
Because the overlapping circles models descriptively picture a static degree of interac-
tion (overlap) between the family and business, they perpetuate a trade-offs approach to
strategy. The prevailing view in the overlapping circles models is that the family and busi-
ness are two complex social systems that, when combined, differentiate family businesses
from other organizations by the degree to which the systems boundaries overlap (Ibrahim
and Ellis, 1988; McCollom, 1990; Stafford et al., 1999; Whiteside and Brown, 1991). The
dominant perspective is that the business system is interpenetrated by the family system,
resulting in constraints on the performance outcomes of the business (Stafford et al.,
1999; Whiteside and Brown, 1991). This ‘dual systems approach’ (Swartz, 1989) empha-
sizes managing the boundaries between two qualitatively different social systems in order
to develop coping strategies for addressing the inherent contradictions (Davis and Stern,
1980; Lansberg, 1983). There are those who stress the equal power and importance of the
family and the business (Carlock and Ward, 2001; Hollander, 1984; Stafford et al., 1999;
Ward, 1987), but strategy development is still presented as a satisficing process that bal-
ances the competing interests of the subsystems or that manages the changing needs and
interests of the constituency groups represented in the overlapping circles of the system
through time (Carlock and Ward, 2001; Gersick et al., 1999).
The dualistic stereotyping of the subsystem functioning – family as emotional based
and business as task based – creates an exaggerated notion of overlap and subsystem
boundaries (Whiteside and Brown, 1991). It establishes an a priori classification of inputs
and actions that predisposes the assessment of strategic processes and outcomes. Using a
dual systems approach, strategy making for family businesses focuses on a series of inter-
nal negative trade-offs to manage the overlap between family and business rather than a
process for finding the systemic synergy that can lead to strategic competitiveness for the
firm. We avoid the limitations of the dual systems approach by introducing a unified
systems perspective of performance in the family business system.
Actions
Business
Business
entity
entity
Outcomes
Actions
Family Actions
Family unit
Individual Individual
unit Outcomes
members members
Outcomes
While we acknowledge that on the surface the unified systems model does not seem
useful in analysing specific stakeholder interactions and relationships, we deliberately
keep the model broad in order to capture the ‘systemic influences’. Each subsystem does,
however, lend itself to a more in-depth stakeholder analysis. By defining the arguments in
the utility function of the system according to the stakeholder(s) of interest, the perform-
ance analysis of the system becomes stakeholder specific.
The point of the models (a and b) is to show the circular feedback processes with con-
tinuous influence rather than picturing degrees of subsystem overlap and isolated points
of influence as in the overlapping circles model described earlier. To capture systemic
strategic influences, it is necessary to show how events in one of the parts of the system
ultimately are both a cause and effect in the other subsystem components.
Figure 4.2b shows how the subsystems have their own action and outcome interactions
that continuously feed back into the metasystem. These subsystem interaction loops rep-
resent the stakeholder interests of the subsystem – goals, traditions, life cycle stage, values,
and so on – that generate subsystem performance or success measures. In this regard, the
utility function of the metasystem is, either implicitly or explicitly, dependent on the sub-
systems and the interactions in and between the subsystems. The model also recognizes
that influences from external stakeholders or the environment that enter the family busi-
ness social system through a subsystem component are included in the metasystem. It is
impossible to bracket off the influences of one subsystem from the other, or to speak as if
one part of the system can be pulled apart from the other.
We now take the first step in building our performance model by looking at arguments
that may be included in the metasystem utility function: the income levels of sharehold-
ers, the number of family members active in the business, the role of family members in
the business, family reputation, short-run profit, long-run profit, market share, return on
investment, the level of community involvement, philanthropy interests, dividend levels,
the quickest sale of the business, and/or long-run wealth accumulation, and so on. The
arguments would be any outcome that has value to any members of a subsystem. It is not
our intent to further define or judge the value of the possible utility arguments noted
A unified systems perspective of family firm performance 71
above, but rather to hint at the type of arguments that might be defined as creating trans-
generational value to a familial coalition who is in control of defining and pursuing the
‘vision’ of the metasystem. The model is highly general and is no different than that for a
public company stating that their goal is to maximize shareholder value. We are inten-
tionally stating the obvious – that the metasystem defines its own utility function based
upon subsystem components and the systemic influences between and within the subsys-
tem components. We do so in order to make the point that defining a utility function for
the family business social system must include systemic activities.
In proposition form, the utility function for transgenerational value creation in the
metasystem is
Once the defining function of the metasystem is outlined, the utility function will focus
on a more narrow set of arguments specific to this paper.
A system is a whole that cannot be divided into independent parts . . . . The whole has one or
more defining functions . . . The defining function of a system cannot be carried out by any one
part of the system taken separately . . . . When an essential part of a system is separated from
the system of which it is a part, that part loses its ability to carry out its defining function . . . .
Synergy is the increase in the value of the parts of a system that derives from their being parts
of the system – that is, from their interactions with other parts of the system. Such an increase
in value can occur only if the parts can do something together that they cannot do alone . . . . A
social system should serve the purposes of both its parts and the system of which it is a part. It
should enable its parts and its containing systems to do things they could not otherwise do.
(Ackoff, 1994, pp. 21–31)
The implications of Ackoff’s (1994) views are significant for a systemic approach to
family business strategy and performance assessment. First, the system must have a defin-
ing function that is identifiable, positive, and cannot be generated by the subsystem com-
ponents taken separately. A healthy family, a profitable business, and a fulfilled individual
are positive outcomes, but they could each exist without the systemic interactions of the
metasystem and cannot in and of themselves be called defining functions.
Second, systemic interactions must create synergy that increases the value of the com-
ponent parts and the system as a whole. The system should be able to synergistically do
something that the parts cannot do separately. If the synergy must increase the value of
the parts in the system and has an outcome that is synergistically positive, then viewing
the family and the business as competing entities that are more effective when they are
kept apart cannot be said to form a synergistic system. It is difficult to imagine making an
72 Handbook of research on family business
argument that a family and a business comprise a social system if the system becomes
more synergistic as it is pulled apart.
Third, it is possible for a ‘collection of parts’ to be what Ackoff (1994) refers to as an
‘unsystemic aggregation’ (p. 25). He specifically mentions a holding company that cannot
identify a defining function other than the common ownership of the entities. This analy-
sis implies that a family business (with their subsystem components) does not inherently
possess the attributes of an effective social system. If the system does not generate pos-
itive synergistic outcomes that can be called a defining function, then it must be consid-
ered an unsystemic aggregation of parts (family, business, and individuals). A family
business by any definition should not de facto be considered a social system. It must meet
a definitional hurdle that includes generating a positive synergistic outcome that fulfills
its defining function as a system. Much of the family business literature that attempts to
explain the negative outcomes of family firms may be trying to explain unsystemic behav-
ior as if it is normative and systemic – families, firms, and individuals that interact without
positive and synergistic systemic outcomes (aggregations) versus those in which a positive
value-added defining function can be identified (social systems).
In the general unified systems performance model we have developed so far, it is difficult
to identify a defining function since we have ‘permitted’ the system to pursue the vague
goal of value creation. We now move beyond the general model and focus on a subset of
family-influenced firms, specifically those pursuing wealth rather than value creation out-
comes. We refer to these families as ‘enterprising families’ and to the metasystem as the
‘enterprising families system.’
This proposition has a number of implications for developing our unified systems
model. First, the assumption underlying the model is that the system is directed towards
transgenerational wealth creation. Second, to generate wealth, we must articulate a per-
formance model such that the business entity subsystem captures rents, and thereby is the
engine for wealth creation. Third, since our stated interest is in family-influenced wealth
creation and not just wealth creation, we must articulate a performance model such that
it captures the distinctive systemic influences of the family unit and individual family
member subsystems on the performance outcomes of the business entity. To build such a
system performance model, we utilize the strategic framework of the resource-based view
of the firm.
The definitional distinction between a resource and a capability highlights the systemic
nature of the resource-based approach. Broadly speaking, resources refer to all of a firm’s
assets and organizational attributes (Barney, 1991) including knowledge and processes
controlled by them. Examples of how organizational processes can be related to perform-
ance include assessing the long-term impact of outsider assistance on the growth of new
ventures (Chrisman and McMullan, 2000), researching the impact of technological innov-
ativeness on small firms (Hadjimanolis, 2000), determining the effects of different human
resource policies on firm outcomes (Olalla, 1999), understanding how the cognitive and
74 Handbook of research on family business
emotional biases of decision makers impact the way in which they allocate resources
(McGrath and Dubini, 1998), and determining how resource picking and capability build-
ing enable managers to create economic rents for firms (Makadok, 2001).
Makadok (2001) defined a capability as a ‘special type of resource – specifically, an
organizationally embedded nontransferable firm specific resource whose purpose is to
improve the productivity of other resources’ (p. 389). Amit and Schoemaker (1993) dis-
tinguished resources and capabilities by conceptualizing resources as factor stocks that
are deployed through a firm’s capabilities. Teece et al. (1997) argued that capabilities must
be built rather than bought, and Makadok (2001) made the distinction between ‘resource-
picking’ and ‘capability-building’ (p. 389). Miller and Shamsie (1996) distinguished
between ‘systemic’ resources that are embedded in the organization and ‘discrete’
resources that are more readily transferable.
Research has shown that resources and capabilities create ‘chains’ of interactions that
are directly and indirectly (Yeoh and Roth, 1999) linked to firm performance, competitive
advantage, and firm wealth creation. For example, social capital has been shown to
enhance knowledge acquisition (Yli-Renko et al., 2001), alliance formation (Chung et al.,
2000), and interunit linkages (Tsai, 2000). Similarly, learning has been shown to affect the
ability of organizations to build alliances (Khanna et al., 2000) and to positively change
other capabilities (Helfat, 2000). Identifying these systemic links in the resource and cap-
ability chain is an important step in understanding firm level performance outcomes.
Due to the systemic interaction of the family unit, business entity, and individual family
members, family-influenced firms are unusually complex, dynamic, and rich in intangible
resources and capabilities. Many of the potential advantages associated with family firms
are found in their path-dependent resources, idiosyncratic organizational processes, behav-
ioral and social phenomena, or leadership and strategy making capabilities (Habbershon
and Williams, 2000). These systemic influences lead to the idiosyncratic resources and
capabilities unique to the enterprising family and which we in turn can link to their per-
formance outcomes (for a more complete literature review of the resource-based view and
its link to the family business literature, see Habbershon and Williams, 1999).
Actions
Business
entity
Outcomes
Resourcef
Capabilitiesf
Actions
Family Actions
unit Individual
Outcomes Resourcef members
Resourcef Outcomes
Capabilitiesf
Capabilitiesf
In light of the model in Figure 4.3, we present our fourth enterprising families perform-
ance model proposition:
The ‘familiness’ of the firm can thus be referred to as the summation of the resourcesf
and capabilitiesf (f) in given firm. This idiosyncratic familiness bundle of resources and
capabilities provides a potential differentiator for firm performance and explains the
nature of family influence on performance outcomes. Hence:
As noted above, it is ‘distinctive familiness’ (f ) that holds the potential for providing
firms with a competitive advantage. We now present the fifth enterprising families per-
formance model proposition:
We conclude, therefore, that rent-generating performance for the family form of business
organization is a function of those advantagesf that stem from the distinctive familiness of
76 Handbook of research on family business
Actions
Business
entity
Outcomes
Resourcef
Capabilitiesf
ADVANTAGE f
BASED RENTS
Actions
Family Actions
unit Individual
Outcomes Resourcef members
Resourcef Outcomes
Capabilitiesf
Capabilitiesf
a particular firm. The final proposition for our enterprising families’ performance model is
presented as the following:
Figure 4.4 presents the completed unified systems performance model for enterprising
families. It shows how the resourcesf and capabilitiesf generated by the interaction of the
subsystems lead to advantagef and the possibility of generating supernormal rents.
Wealth creation is thus tied to the systemic influences in the system as they create an idio-
syncratic bundle of distinctive familiness resources for the firm.
Going a step further, the defining function of an enterprising families system must also
identify the strategic intent of the system as a whole or define the utility function for the
system in a cohesive fashion. Chua et al. (1999) get at this point in their theoretical defi-
nition of a family business. They argued that strategic intent is captured in the vision of
an organization, and stated that a family business is defined by the vision of the dominant
coalition of one or more families who have the intent to sustain it across generations.
Combining their theoretical premise concerning strategic intent with our systemic model
for wealth creation, we present the defining function of enterprising families system as
The systemic vision of the familial coalition that leads them to pursue distinctive familiness for
the purpose of transgenerational wealth creation.
Our defining function for the enterprising families system fulfills Ackoff’s definitional
requirements. (1) It includes the systemic interaction of the family unit, the business
entity, and family members as individuals in order to fulfill the defining function and can
therefore be said to be both positive and synergistic. (2) Following on this, the value of
the whole can be said to be greater than the sum of its parts because the parts cannot
create the same outcome when they operate as individual subsystems. (3) The model also
requires the system to be unified about its purpose (utility maximization) and to clarify
the antecedent functions in the performance model (distinctive familiness) in relation to
the performance outcomes (transgenerational rents) of the system.
4 Conclusions
Wernerfelt (1997) challenged resource-based scholars to gain a more specific understand-
ing of the nature of different resources and capabilities rather than discussing them only
in terms of their effects. Our ‘f factor’ approach describes the nature or source of the
resources and capabilities in family-influenced firms and adds depth to the explanatory
power of the antecedents in the performance model.
The unified systems performance model does not make an a priori judgment about the
degree or nature of the f factor influence. In this regard, the model applies to all types of
firms – from the copreneurial couple, to the multigenerational owned and managed firm,
to the family-controlled public company. It allows the researcher to identify and describe
the f factor influence as antecedents to the resources and capabilities and link them to spe-
cific advantages and performance of the firm. The model overcomes the constraints of
debating the definition of a ‘family business’ or of establishing boundary conditions that
limits the investigation. It focuses on the degree and nature of the systemic family influ-
ences with a clear line to the impact on outcomes.
The unified systems performance model for enterprising families addresses a number
of other critical issues for exploring the nature of family influence on business and wealth
creation. First, it isolates the performance of the business entity as the appropriate
outcome measure for a system intended to create wealth (Sharma et al., 1997). By defin-
ing the arguments in the utility function of the metasystem as those that create wealth, it
removes the confusion concerning the role of the business entity subsystem in relation to
the other subsystems.
Second, it identifies the systemic conditions and constituencies generated by the system
as influences or inputs into the wealth creation process. Rather than downplaying the role
of the family in relation to the business or creating dualistic tensions, our model
78 Handbook of research on family business
demonstrates how the influence of the family and individual family members can be
evaluated more positively and synergistically in relation to the business entity.
Third, it clarifies the use of dependent and independent variables in the systemic model.
For example, generation of economic rents is the dependent variable, and subsystem and
metasystem outcomes are the independent variables. Further, it is possible to isolate any
one of the subsystems and develop stakeholder models that assess the systemic influences
of that subsystem on any appropriate outcome measure. As is the circular nature of
systems, each of the outcome measures (dependent variables) for a given subsystem can
also serve as systemic inputs (independent variables) into the outcome measures of any
other subsystem or for the metasystem as a whole.
Fourth, the model calls enterprising family leaders to be metasystems leaders. By this,
we mean they need to intentionally manage the interaction of the family unit, business
entity, and individual family members as an important source of their resource and cap-
abilities pool. Ignoring the systemic family influences or attempting to bracket them off
will negatively impact performance outcomes. Family leaders should clarify the defining
function of their family business system as a vision that pursues distinctive familiness for
the purpose of transgenerational wealth creation.
Lastly, the model calls for researchers to more aggressively study the degree and nature
of family influence on firms and wealth creation. The resource-based unified systems per-
spective provides an accepted strategic management framework for identifying the
antecedent f factor resourcesf and capabilitiesf to performance outcomes and for devel-
oping models to empirically test the relationships derived from maximizing the utility
function of enterprising families. As the f factor resourcesf and capabilitiesf are identified
and tested, a fuller understanding of the ‘familiness’ of firms will be developed.
References
Ackoff, R.L. (1994), The Democratic Corporation, New York: Oxford University Press.
Amit, R. and Shoemaker, P. (1993), ‘Strategic assets and organizational rent’, Strategic Management Journal,
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5 The family’s dynamic role within family business
entrepreneurship
Ramona K.Z. Heck, Sharon M. Danes, Margaret
A. Fitzgerald, George W. Haynes, Cynthia R. Jasper,
Holly L. Schrank, Kathryn Stafford and Mary Winter
This chapter offers a conceptual and analytical review of the Sustainable Family Business
Model (Stafford et al., 1999). The SFB Model is a comprehensive and flexible model that
enhances the understanding of the dynamic role of family within family business entre-
preneurship through its systems orientation. It explores the entrepreneurship of the busi-
ness within the social context of the family. Unlike many other models that take an
individual approach to the study of the family business, it emphasizes the overlap of the
family and business systems while recognizing the unique characteristics of each of the
systems. The chapter presents the theoretical perspective and major premises of the SFB
Model of family business. One of the features of the model is its recognition that processes
differ in times of stability versus times of change; it includes the Family Fundamental
Relationship Orientation Model (FIRO Model) as a working model that explicates the
reconstruction that is needed during times of changes for family businesses to remain
resilient and, thus, sustainable over time. The chapter offers specific illuminations of the
SFB Model’s major components/concepts. The methodological issues of the 1997/2000
National Family Business Surveys (1997/2000 NFBSs) are discussed relative to their com-
parative advantage for studying the owning family and its business. The chapter offers an
analytical model for study of the family business based on the SFB Model. Additionally,
it more fully identifies the salient family factors that influence the business and vice versa
as well as placing the family business within its community context. Suggestions for
further applications and future research using the SFB Model are offered.
Introduction
Throughout history and world wide, families and business have always existed to a large
extent in tandem (Morck and Yeung, 2002; Narva, 2001). The economic necessity of
earning a living and supporting a family is often the underlying motivation for starting
and growing a business (Winter et al., 1998). Among other motivators, lifestyle and wealth
accumulation goals play an important role in whether a particular family member or
members choose to start a business in conjunction with their family. At the same time that
the business provides income to the family, the family may serve as a critical supply of
paid and unpaid labor, as well as contribute additional resources such as money, space,
equipment and other factors of production in the business.
A comprehensive and flexible conceptual model such as the Sustainable Family
Business Model (SFB Model) (Stafford et al., 1999) can enhance our understanding of the
dynamic role of the family in family business entrepreneurship. Astrachan (2003) has com-
80
The family’s dynamic role within family business entrepreneurship 81
mented that the SFB Model both conceptually and empirically ‘exemplifies what is at the
heart of the family business field: the study of the reciprocal impact of family on business’
(p. 570). The SFB Model will be delineated in this chapter along with several empirical
applications, demonstrating its integration of the family, business, and community.
enhances annual shareholder return, return on assets, annual revenue growth and income
growth. Five key factors for superior family firm performance may include: (a) leadership
development from within the family, (b) quick decision-making ability, (c) employee
loyalty, (d) investing in growth by family owners, and (e) no absentee landlords via family
boards. Despite these logical keys to superior performance, surprising little study has been
made of the family’s role.
Previous research
Few researchers have noted the connections between entrepreneurship and the family
(Gartner, 2001; Upton and Heck, 1997). Moreover, entrepreneurship research literature
has given little attention to the interrelatedness of families and businesses (for example,
Davidsson and Wiklund, 2001; Shane and Venkataraman, 2000; Timmons, 1999).
Entrepreneurship research, in particular, rarely acknowledges the underlying family
dynamics of the owning family and its effects on the business. Some recent attention has
been given to family ownership and its relationship to the ongoing performance of extant
businesses (Anderson and Reeb, 2003). The effects of the business on the family have been
entirely omitted by most entrepreneurship researchers (Aldrich and Cliff, 2003; Rogoff
and Heck, 2003).
In contrast, the SFB Model has been conceptually developed (Stafford et al., 1999) and
tested empirically (Olson et al., 2003), a model which fully encompasses the family per-
spective relative to the business enterprise and vice versa. In this model, family and busi-
The family’s dynamic role within family business entrepreneurship 83
ness are equal and overlapping systems that move simultaneously towards mutual sus-
tainability. Families and businesses, according to Olson and her co-authors (2003), tend
to move in parallel, with success in one leading to success in the other. Similarly, problems
or changes in one result in problems or changes in the other.
business launch, locating and mobilizing resources and founding. These processes then
produce outcomes such as survival, objective performance and subjective success through
a sequential and progressive path that provides feedback to the family system.
that may be of value to the family system such as independence, family security, and being
able to choose where the family will live (Kuratko et al., 1997). In other words, success
within a business helps families meet goals other than just those connected to financial
well-being or making a profit. Conversely, success within the owning family helps busi-
ness meet its goals (Danes et al., 2002; Danes et al., 1999). Two different approaches have
evolved to examine determinants of success within the business. One approach is to
examine a business as part of the larger economy. The other approach is to examine the
role of the individual as entrepreneur within the business.
The business within the economy approach is exemplified by the work of Davidsson
(1991) and Greenburger and Sexton (1987). Davidsson (1991) contended that business
growth is the result of the sum of three factors – ability, need, and opportunity; however
in studying these factors, he found that only explained 25 per cent of the variance in busi-
ness growth was explained. Greenberger and Sexton (1987) developed a business success
model focusing on the role of the entrepreneur and how that role changed depending on
the extent of business success. They contend that business success depends on the
capabilities of individuals within the business but, also, on such aspects as organizational
vision and empowerment of subordinates. Clearly, this approach has resulted in limited
understanding. Entrepreneurs start businesses for lifestyle reasons, too (Davis-Brown and
Salamon, 1987; Winter et al., 2004). Although growth and profits are important to
business owners, they may want more time with family and friends, more leisure time, or
more control over the time they spend at work.
The individual within the business approach is exemplified by the work of Becker
(1993) and others (Ehrenberg and Smith, 1997; Zuiker, 1998), who note that individuals
within family businesses bring their unique human capital to a business. These authors
contend that this unique human capital often determines the success of the business. In
these studies human capital was defined as the amount of skills, knowledge, intelligence,
and health that an individual brings to a business. This capital can be used to gain both
monetary and nonmonetary resources for the individual as well as for the business. This
approach further assumes that the individual, as entrepreneur, is economically mobile and
that as the amount of human capital grows, so do the rewards associated with it.
Utilizing both family systems theory and business system frameworks enables
researchers to study the owning family and the business entity as well as the overlap
between these two major systems. Exploring the family business from a broader vista
offers richer understandings. The SFB Model offers a means to explore this richness and
provide more satisfying answers to questions about the nature of family business.
Times of stability
Available Interpersonal transactions Achievements
resource and Resource transactions
constraints Objective success
Subjective success
Times of change
Interpersonal transactions
Resource transactions
Community
context
Responses
Disruptions
to disruptions in Sustainability
in family/business
family/business
transactions
transactions
86
PROCESSES
Resources can be economic (for example, assets and liabilities), demographic (for
example, number of children, number of family and nonfamily employees), functional (for
example, skills, number of hours worked in the business), or psychosocial (for example,
perceptions, attitudes, beliefs). The SFB Model is a dynamic theory that incorporates
change as a major premise (Figure 5.1). The model is flexible enough to address either
family or business issues independently and in conjunction with each other. The flexibility
of the SFB Model facilitates the study of family businesses with all their complexity and
diversity in such things as size, stage of the family and business cycles, mix of family and
nonfamily employees, types of businesses, and ways of legally structuring the business. It
emphasizes the sustainability of the family business system as a holistic entity and treats
the family and business systems equitably. The SFB Model implies that the sustainability
of a family business is a function of both business success and family functionality
(Stafford et al., 1999). The model also rests on the notion that an individual in either system
may affect both systems (Heck and Trent, 1999). The diagram of the SFB Model indicates
that the boundaries of the family and business are permeable; the degree of overlap in the
systems varies as do the desired goals and realized achievements of each system.
(Lansberg and Astrachan, 1994; Rodriguez et al., 1999). Yet, the family is also likely to be
a source of support that can help a family business overcome adversity and social change
(Simon and Hitt, 2003). In particular, Werbel and Van Auken (forthcoming) suggest that
family members may be likely to provide financial resources through outside sources of
earned income, emotional support in the form of encouragement, and instrumental
support in the form of knowledge or physical assistance in helping the family business to
survive (Procidano and Heller, 1983).
A unique feature of family businesses is that family members often work in the business
system. This human capital (as depicted in Figure 5.1) can be a resource or constraint
depending on the life cycle stage of either the family or the business. For example, during
the early years of a family venture, the family often provides the firm with a steady supply
of trustworthy human resources (Ward, 1997). In fact, Chrisman et al. (2002) stated that
new family firms might not face the same liability of newness because of the support pro-
vided by family members. In their formative years, family firms often benefit from the
overlap of family and business systems because the informal nature of family relations fre-
quently carries over into the firm and serves to foster commitment and a sense of identifi-
cation with the founder’s dream (Haynes et al., 1999; Van Auken, 2003; Van Auken and
Neeley, 2000; Winborg and Landström, 2000). Human resources are also critical in later
years relative to expanding the business or in identifying and training a potential successor.
The human resource pool of the owning family may be limited or eventually outstripped by
the demands of a growing business. Succession remains a tremendous challenge to family
businesses as they transition between generations, and it clearly demonstrates the impor-
tance of family as a source of critical resources.
they recognize and solve problems (Olson et al., 2003). Objective and subjective measures
are each an important part of a complete outcome assessment of outcomes or achieve-
ments (Cooper and Artz, 1995; Cooper et al., 1988).
examining more precisely the resource and interpersonal transactions that occur during
change located at the intersection of family and business systems within the SFB Model.
ture, connectedness, and shared meaning) will need to be reassessed and reconstructed
within the family business to maneuver through any change successfully. If the subcate-
gories of structure, connectedness, and shared meaning from the inclusion dimension are
not reconstructed after a change, conflict and stress result, affecting the incorporation of
the change and the long-term achievements of the family business system.
The control dimension of the Family FIRO Model reflects the responses to change (as
depicted in the SFB Model) among family business members. Control refers to interac-
tions that concern influence and power that people hold during times of change. The
responses within the change process include tensions resulting from the disruption that
evolves out of change. Those tensions may either be creative tensions or distracting ten-
sions. Creative tensions (for example, collaborative) project the current reality within the
business toward the vision that family business members hold for the business. These ten-
sions create energy and excitement that motivate family business members to engage in
behaviors that lead to business success. Distracting tensions (for example, dominating or
reactive) pull the vision back toward the current reality and prevent the business from
moving successfully toward its goals.
In order for the family business to remain sustainable in times of change (defined as
achievement, health, and fellowship within the integration dimension of the Family FIRO
Model), the inclusion dimension components need to be revisited and reconstructed to
minimize the level of distracting tensions and maximize the level of creative tensions. The
control dimension of the model suggests that conflict is a normal part of healthy change
(Danes and Amarapurkar, 2000; Danes and Morgan, 2004). However, because of the vari-
ability in how and whether families who own businesses reconstruct the subcategories of
inclusion after experiencing the disruptions of change, an interesting paradox seems to
exist regarding family conflict over business issues (Danes et al., 1999). On the one hand,
a certain level of tension acts as a creative mechanism and can increase the achievement,
health, and fellowship (integration) of the family business (Danes and Morgan, 2004;
Danes et al., 2000b). Very high levels of distracting tension, on the other hand, can have
the opposite effect: reduced achievement, health and fellowship (Danes and Olson, 2003;
Danes et al., 1999, 2000a).
For example, a husband and wife might be embroiled in a disagreement about expand-
ing the family business. The underlying issue might be the question of who has more author-
ity to make the decision. If the wife does not feel that she has a full voice, she may assert
her position more strongly or disagreeably than she would otherwise; in the same way, if the
husband feels that his legitimate leadership is being threatened, he may be more stubborn
than otherwise. The result can be a stalemate and poorer family business functioning. In the
lens of the Family FIRO Model, the couple would be wise to begin with an airing of per-
ceptions from each member of the couple, and desires about who should participate, and
how, in the decision-making process. Clarity there, which may take repeated conversations,
can often lead to a more collaborative decision-making resulting in better outcomes.
If a couple concentrates on the conflict (control dimension of the Family FIRO model)
rather than addressing the issues representative of the inclusion dimension, the planning
for change will most likely not occur (Danes et al., 2002). In the long term, conflict that
remains unaddressed could not only stalemate a decision, affecting the health of the busi-
ness, but it could mire the system over time (Ward, 1997). Investing in family processes
and responses to disruptions caused by change could potentially yield large returns. For
92 Handbook of research on family business
instance, one study has shown that reducing family tension alone would substantially
increase annual firm revenues (Olson et al., 2003).
bounds of what constitutes a ‘small’ business (Haynes and Avery, 1997). Investigating the
intermingling of finances between the family and business, Haynes et al. (1999) found that
two-thirds of family businesses intermingled household and business finances, indicating
that those finances are inextricably intertwined. Business to family intermingling was
more likely to occur when the location of the business was in a rural or small town as
opposed to an urban area or if the business borrowed money or operated as a C or S cor-
poration.1 Sole proprietorships were more likely to use family resources in the business
than other types of businesses, as were those who borrowed money, were younger owners
and were owners without children.
The intermingling of financial resources is not necessarily completely positive and
without cost. A potential negative is the inability to capture these interchanges in the finan-
cial records of either the family or the business. The lack of such data, while confusing for
the family’s financial picture, may be catastrophic to a business. Simply put, the business
may not know if it is making a profit and may be jeopardizing its long-term future. The
need to establish and maintain separate financial accounts is crucial to business manage-
ment (Burns and Bolton, 2001). Separation of business and personal records remains a key
in helping the business plan and in responding to bankers and governmental entities.
Another potential negative includes the inability to repay a debt at the time needed; when
borrowing business capital, the lending agency assumes that the money will be used in the
business venture. Intermingling the financial resources makes it virtually impossible to
predict the impact that the loan transaction has on business financial results and success.
Community context
The original SFB Model (Stafford et al., 1999) has been enhanced to guide the evaluation
of the economic and social contributions of family businesses to their communities, and
the impact of the community context on the family and its business. The original model
provided a framework for assessing the resources, constraints, processes and achievements
of the family and business and the interplay between the two systems. The enhanced SFB
Model provides a framework to examine the interconnection between family businesses
and their community host by acknowledging the interconnectedness of the family, the
business, and the community.
According to Post (1996), a business has responsibilities to its consumers, employees,
owners/shareholders, environment, and community. The enhanced SFB Model enables
researchers to assess the economic and social responsibility of the business to the commu-
nity, as well as the contributions of the community to its businesses and families. The eco-
nomic contributions of the family business might include provision of merchandise or
services, taxes paid and jobs created. Social contributions could include involvement in the
community, leadership positions in civic or other local organizations, financial or technical
assistance provided to the community, donations to local schools or youth programs, other
philanthropic contributions, and the contributions of time, space and products businesses
make. One specific process of interest is the altruism of the family and business systems
amid changes (perturbations to) in the family or business systems or in the community.
Altruistic behavior as defined by economists is when one individual’s utility function
includes the utility function of at least one other person (Feldstein, 1975) Altruistic behav-
ior can be pure, where one person’s actions are for the benefit of another person(s), or impure,
where one person’s actions benefit themselves and at least one other person. For instance, a
94 Handbook of research on family business
business owner might donate money to the local food bank to purchase food for a holiday
where the benefit is received by the person receiving the food (an example of pure altruism).
He/she might donate money to public radio because he/she likes listening to public radio and
without his/her contribution, and many others, public radio would not be available to
anyone, including himself/herself (an example of impure altruism). In the former case, the
business owner receives no particular benefit, but in the latter, he/she does receive a benefit.
Profit motives can be intertwined with altruistic motives. For instance, business owners
may donate to a local school because they realize that keeping the school in the commu-
nity will keep families and their children in the community and increase the sales volume
of their business. However, business owners may have a very pure motivation for being
altruistic because they realize that without their giving, the community will decline and
eventually may fail. In addition, altruism may engender information asymmetries in the
family and business (Schulze et al., 2000). One of the challenges of the SFB Model is to
provide some guidance in unbundling profit from altruistic motives and distinguishing
between pure and impure altruism.
The community is important to the examination of family business. The community
provides employees, educational institutions, security, and partners that a business needs
to operate. On the other hand, family businesses success is closely intertwined with that
of the community. Business owners and their families not only benefit from what the com-
munity offers families and businesses, but family businesses bring jobs, income and wealth
to the community. Families and businesses also donate their time, talents and resources
to the community to help sustain it. This enhanced SFB Model is important because
family businesses are vital to communities and communities are vital to family business.
Lack of attention paid to the influence of public policy on economic and social contri-
butions made by these family businesses jeopardizes not only the businesses but also the
communities where they reside and operate.
More the 14 000 household telephone numbers were called in 1997 to ascertain whether
someone in the household was either the owner of a family business who was involved in
the day-to-day operations of that business, or was the manager of a family business that
he/she expected to inherit. A total of 1536 households included someone who met the cri-
teria. However, even further restrictions were placed on the sample because of its focus
on the interaction of business and family in a family business setting (see Winter et al.,
1998 for details). Qualifying families identified by a screening questionnaire, were recon-
tacted for two different 30-minute telephone interviews, one for the business manager and
one for the family manager. The family manager was defined as the ‘person who actually
manages the household, that is, the one who takes care of most of the meal preparation,
laundry, cleaning, scheduling family activities, and oversees child care.’ (Winter et al.,
1998, p. 244) When the family manager and the business manager were the same individ-
ual, a 45-minute combined interview was administered. The final sample size was 708
households that owned a family business.
To provide data about family businesses over time, researchers reinterviewed the 1997
NFBS sample three years later. In households in which two different people were
interviewed, attempts were made to reinterview each individual. When only one indi-
vidual in a household was interviewed in 1997, only that individual was reinterviewed
in 2000. To enhance the possibility that the 1997 individuals could be located in 2000,
every six months between survey waves, the research group mailed a one-page summary
of research results to each household interviewed initially. Address correction was
requested with each mailing, and addresses in the database were updated after each
mailing. Only 61 of the 708 households could not be located for the 2000 survey; an
additional 94 households were contacted, but either refused to be interviewed or were
deemed ineligible for the study in 2000. Data were gathered in 2000 from 553 house-
holds, more than three-quarters of the 708 households surveyed in 1997.
Tracking changes over time can be done in a variety of ways. Panel studies, defined as
gathering data from the same individuals at different points in time, are among the most
fruitful when attempting to understand factors that influence characteristics and behav-
iors over time. It is unlikely, however, that all the initial sample members will be reinter-
viewed through the panel period. Attrition can be a serious problem if the characteristics
of individuals who remain in the sample differ significantly from those people who were
not reinterviewed because statistical inference based on information from those still in the
sample may no longer be representative of the target population. One of the most impor-
tant conclusions of the post-stratification analysis of the 2000 NFBS data is that attrition
had affected the representativeness of the sample, but in a way that could be corrected
by including measures of business stability in future analyses. Age of the manager of
the business, number of employees, and gross income are all variables that should be
included in analyses using that data because those reinterviewed in 2000 were in estab-
lished businesses.
included opposite-sex and same-sex cohabitors. Some researchers have adopted Hollander
and Elman’s (1988) definition of a family business as a business that is owned and managed
by one or more family members. This definition, which can be implemented using the
NFBSs, is less restrictive than others are (Heck and Trent, 1999) because it is not dependent
on the involvement of multiple family members. A less restrictive definition permits a more
restrictive definition if desired, yet allows empirical analyses of the data assessing the effect
of type and degree of family involvement (Heck and Trent, 1999; Winter et al., 1998).
97
Defer or skip business tasks
Family helps in business
Hire temporary help
Business
on scale development work from the ground up and included replication testing (Miller
et al., 1999; Winter et al., 1993).
It is important to recognize that for each of the empirical measures in Figure 5.3, they
are only examples of possible empirical measures that could be utilized. However, these
same chosen empirical measures are a very important first attempt at the empirical testing
of the interrelationships among the major components of the SFB Model including the
family, the business and their overlap relative to the sustainability of both the family and
the business.
Using this operationalization of the SFB Model, Olson and her colleagues (2003) found
that the business variables affected both the objective business outcome measure of gross
business revenue and the subjective business outcome measure of perceived business
success; however, business variables affected only the objective family outcome measure
of income that the family received from the business but not the subjective family outcome
measure of functional integrity. Moreover family variables and responses to disruption
variables contributed to explaining the variance of all the subjective and objective
outcomes investigated for the family and the business. These significant empirical results
suggest that the family and the business are, indeed, interlinked systems working together
to affect sustainability of both systems. The empirical evidence from this initial testing of
the SFB Model illuminate that the family dimension of family business entrepreneurship
can no longer be ignored and, if ignored, a relevant omitted variable problem inherently
exists (Kmenta, 1986; Wooldridge, 2003). In other words, the family and the business are
inextricably intertwined and both systems must be acknowledged and examined in our
research, teaching and practice (Rogoff and Heck, 2003).
Again, various research questions or foci might necessitate employing other empirical
measures in representing the family system dimension. Such variables as the family life cycle
stage might further describe the family. Gender and age combinations of children in the
family as well as the more complex nature of today’s blended families might warrant addi-
tional detail in representing exactly who comprises the family unit. Also, there are many
other theories of family interaction that would require additional measures to represent
interacting styles or the nature of family relationships. For example, the notion of power
and status within the family might require additional measures of perceptions and attitudes
about the power of various family members. Power or status of various family members has
received little empirical attention relative to succession issues within the family business as
a whole (Chrisman et al., 1998). Other researchers have begun to explore new empirical
measures for family influence including measures of power and their relationships to out-
comes such as success, failure, strategy and operations (Astrachan et al., 2002).
recognizes the intermingling of resources between the family and business, and reduces
the misspecification bias in the model.
holders? Do families and businesses combine in different ways by industry type? For
example, does the industry type relate to the prevalence or likelihood of a family busi-
ness? Do family businesses function differently in different industries? The SFB Model
could also be utilized to examine the business system over time as it interacts with the
family and the community. As the business system adapts and grows over time, how does
this affect its interactions with the family system and the community? Do businesses in
various stages of development act differently towards their owning families and their
communities?
The community
The extended SFB Model examines the interactions between the family, business and
community. Further research is needed to better understand the impact of selected public
programs and policies on both the family and business entities. This research will help
business owners, community leaders, politicians and others develop programs to sustain
and grow family businesses and communities. Three important to research questions are
as follows:
This research agenda could be accomplished using existing data from the 1997/2000
NFBSs and a new wave of panel data. The new wave of panel data would focus on a more
comprehensive inventory of the contributions of family businesses to the community and
a retrospective assessment of the influence of public programs and policies on the family
business and communities. This study is important because family businesses are vital to
communities, and lack of attention paid to the influence of public policy on economic and
social contributions made by these family businesses jeopardizes these families, businesses
and the communities where they reside.
The importance of the family business to the community is often paramount. Typically,
the family business enhances its community or communities via generating revenues and
102 Handbook of research on family business
employment; it also may provide leadership, time, space, products and services, and finan-
cial support. A comprehensive view of the family business allows researchers to further
understand the internal dynamics and how the community can support and benefit from
such enterprises. The SFB Model affords the ability to study the owning family in relation
to the business and acknowledges that both the family and the business make economic
contributions, among other contributions, to their communities. In addition, the SFB
Model affords the ability to examine community inputs and policies as they affect the
family and the business.
Final summary
The SFB Model offers a comprehensive view of the family business and suggests that such
businesses are far more complicated than was previously realized. Only careful delin-
eation of the components of the family and the business in the context of the community
will afford researchers a sufficiently rich understanding of the internal dynamics of the
family business and how they relate to external environments such as their communities.
Future research must continue to take a broader view while encompassing the detailed
richness of the basic components of systems and subsystems that make up this larger
system, namely, the family business.
Acknowledgement
This chapter reports results from the Cooperative Regional Research Project, NE-167R,
‘Family Businesses: Interaction in Work and Family Spheres’, partially supported by the
Cooperative States Research, Education and Extension Service, US Department of
Agriculture, and the Experiment Stations at University of Hawaii at Manoa, University
of Illinois, Purdue University (Indiana), Iowa State University, Michigan State University,
University of Minnesota, Montana State University, University of Nebraska, Cornell
University (New York), Baruch College (New York), North Dakota State University, Ohio
State University, Pennsylvania State University, Texas A&M University, Utah State
University, University of Vermont, University of Wisconsin-Madison and the Social
Sciences and Humanities Research Council of Canada (for University of Manitoba).
This chapter also reports results from the Cooperative Regional Research Project, NE-
167 ‘Family Business Viability in Economically Vulnerable Communities’, partially sup-
ported by the Cooperative States Research, Education, and Extension Service (CSREES);
US Department of Agriculture; Baruch College, the experiment stations at the University
of Arkansas, University of Hawaii at Manoa, University of Illinois, Purdue University
(Indiana), Iowa State University, University of Minnesota, Cornell University (New
York), North Dakota State University, The Ohio State University, Oklahoma State
University, Utah State University, and University of Wisconsin-Madison.
Note
1. US Small Business Administration definition: the main differences between S and C lie in the fact that a C
corporation is taxed a Federal Corporate Income tax. An eligible domestic corporation can avoid double
taxation (once to the shareholders and again to the corporation) by electing to be treated as an S corpora-
tion. Generally, an S corporation is exempt from federal income tax other than tax on certain capital gains
and passive income. On their tax returns, the S corporation’s shareholders include their share of the corpo-
ration’s separately stated items of income, deduction, loss and credit, and their share of non-seperately
stated income or loss.
The family’s dynamic role within family business entrepreneurship 103
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6 Critical leader relationships in family firms
Nigel Nicholson and Åsa Björnberg
106
Critical leader relationships in family firms 107
Although there is scarcely a literature to draw upon in terms of dyadic leadership con-
figurations, two practitioner-oriented publications do offer encouragement however. The
first was a book by David Heenan and Warren Bennis (1999) who forcefully made the case
that leadership is often practised in too much isolated singularity, when co-leadership
would enhance their effectiveness. At the same time they showed how in many cases the
common view over attributes leadership to the single designated chief, overlooking the
key role of a leader’s principal partnership. The co-leadership theme was subsequently
taken up in an article by O’Toole and colleagues (O’Toole et al., 2002) who discuss the
preconditions for its success or failure. We shall revisit their ideas later, but first there is
need to clarify what this concept means and how it manifests itself.
The use of the concept of ‘co-leadership’ in these works and in family business discus-
sions tends to be rather loose and undifferentiated. We wish to advance the case that this
potentially important phenomenon requires a more precise treatment if we are to advance
knowledge about it. Accordingly we propose the adoption of a new concept to aid the
study of leadership, what we shall call critical leader relationships (CLR henceforth), to
cover the range of ways in which leaders cooperate with other individuals.
We concur with Heenan and O’Toole and colleagues that the reality of leadership is
that individuals often have key partnerships, alliances and adjacent roles that contribute
not just additively but interactively with the leader’s personal qualities to deliver unique
business outcomes. In the family business field one can see that CLRs are a significant
force, and many differing in form from the models that may be found elsewhere – often
close and personal, and sometimes traversing the boundaries of the firm. Indeed, this may
be one of the most important contributory causes to the ‘bivalence’ of family firms
(Tagiuri and Davis, 1996) – their tendency to outperform non-family businesses, while
simultaneously being vulnerable to untimely demise.
Leadership in context
It is generally accepted that the personality, skills and style of a leader make a difference
to the performance of even the largest businesses (Hogan et al., 1994; Miller and Toulouse,
1986). They do so principally in relationship to the outer and inner challenges of leader-
ship. The outer challenge is the leader’s role in scanning the environment, scouting for
talent and resources, networking with external stakeholders and formulating a mission for
the business to pursue. The inner challenge is the leader’s role in setting up the systems and
structures that make a business efficient and effective, and attending to the values, prac-
tices, and relationships that build a distinctive and healthy culture. Overarching both is the
leader’s symbolic and emblematic position, as a figurehead and focal point for the identity
of the business. When all three are vested in one person there are the recognized dangers
of an excess of unitary power, which when accompanied by charisma can drift into dem-
agoguery (Conger, 1990), contrary to the heroic and ‘romantic’ ideal of leadership
(Meindl, 1993).
Within the literature there are two correctives to the singular leader concept. One is the
idea of institutional ‘substitutes for leadership’(Kerr and Jermier, 1978) – systems, pro-
cedures, rules and the machinery of bureaucracy – that can buffer or even minimize the
impact of leaders. The other is the idea of situational leadership, which focuses on con-
tingencies that require the leader to adapt his or her style in order to be effective. These
contingencies include the level of maturity or self-managing capability of followers, the
108 Handbook of research on family business
leader’s powers and position in the hierarchy, and the nature of the strategic challenge the
leader faces (Yukl, 2002). The most popular current framework for partitioning these
factors resolves to a typology of three main types, each with merits for a class of circum-
stances: transactional, transformational and charismatic leadership (Bass, 1985; Conger
and Kanungo, 1987).
The literature in these areas does put the leader in context but maintains the individ-
ualistic presumption. We have no wish to completely discard this assumption, since the
personal characteristics of the leader are important and irreducible, and often leaders
do act and make decisions in relative isolation. However, we submit that this might be
more the exception than the rule; more often leaders are framing their decisions after
intense deliberations with one or more other parties. Our thesis here is that in many
firms – family and non-family alike – there is one critical relationship axis that can be
identified that tends to eclipse others. We do not rule out the possibility of multiple
CLRs, or the existence of leaders who give over areas of decision-making to collective
bodies, such as corporate boards and top management teams, but we assert here that the
dyad as a unit of analysis has special significance (Gonzalez and Griffin, 2002;
Thompson and Walker, 1982).
We appeal to the psychology literature to support this assertion – namely that human
capacity for intense or continuous relationships is limited (Hendrick and Hendrick, 2000).
Moreover, we tend to enact these relationships either serially, or in parallel in distinctive
domains, to avoid the likelihood of role and relationship conflicts (Jackson and Schuler,
1985). The applied psychology literature has devoted a lot of attention on this presump-
tion to dyadic leader–member exchange (Dienesch and Liden, 1986). In management
practice, and particularly in family businesses, dyadic leadership is a well-known phe-
nomenon. Many leaders have a ‘number two’, and the key partnerships of the chief
executive with the person responsible for the finances (chief finance officer – CFO
typically) and the chief operating officer (COO), are familiar in the corporate landscape,
as is the partnership between chairman and chief executive officer (CEO) in many larger
businesses.
Our general case, therefore, is that business success and failure may be as much attrib-
utable to a web of relationships as to the character of the person nominated as leader,
especially in family business, where co-leadership is often the declared model. We believe
this topic needs to be unpacked, for some leadership is more ‘shared’ than others, and the
form of the sharing matters.
CLR forms
Our analysis is based upon observations we have made formally and informally in the
field – that is, the reports of informants in the family business arena, and our ongoing
studies of family firms – and in our case analyses of archival material. From these sources
we observe that CLR partnerships exist on a continuum with varying degrees of power
distance and role differentiation. Distinctive forms of CLRs can be identified as points on
the continuum. We perceive the main forms to be the following.
Autonomous This refers to cases where there is a single acknowledged leader of a busi-
ness who generally makes decisions alone, either with or without receiving advice and
information. Owner-managers of new enterprises may be in this position, but so also may
leaders in high power-distance organizations, where they have no single person they
choose to consult with regularly. In some cases the leader may refer only to a group struc-
ture – a board or executive team – for advice and guidance, without making regular
recourse to any single partner.
Assistant The leader here relies on one person more than others to execute decisions and
anticipate their feasibility. This is where the leader has a preferred chief of staff or a key
personal assistant on whom s/he depends for decision-making. Most of the influence
flows from top down, but support is primarily bottom up, from the number two to the
number one. Power distance and role differentiation are both high.
Reciprocal These are CLRs where there is a clear separation and division of labour,
usually hierarchical, as in junior–senior partnerships where a leader makes policy with the
counsel of a close subordinate. The chairman–managing director (MD) relationship has
this character where the former is the acknowledged leader of the business and the MD
or CEO has bounded responsibility for business operations. CEO’s relationship with
CFOs, COOs and other designated domain specific leaders fall into this category.
Influence and support are bi-directional usually, but asymmetrical within domains. Power
distance and role differentiation are moderate to high.
Balanced This is where co-leadership is declared, but power and responsibility are not
differentially distributed across roles. One may be nominally superior to the other, but
their contributions are mutual as co-leaders of a business. Support flows both ways, and
influence from party to party according to their domains of expertise and authority. The
chairman–CEO relationship has this character where both share an interest in the exter-
nal and internal environments and both consider themselves to be leaders of the business,
yet they retain distinct domains of responsibility. Power distance and role differentiation
are medium to low.
Equal This covers cases where leadership is genuinely shared between two people (rarely
more). Influence and support are notionally equal and mutual, though this will depend
upon the personality dynamics of the relationship. They may share the same title, but not
necessarily. If they do not, then they still treat each other as co-leaders, have equal rights
of access to the main domains of decision-making and are both are able to substitute for
each other. Power distance and role differentiation are both low.
110 Handbook of research on family business
Transitional In some cases the distribution of power and authority is in flux, with a
leader transferring authority to a protégé. Here support and influence are mainly top
down to start with, but changing as the process unfolds, if it is able to do so for this process
is notoriously fraught with difficulty in family firms, where seniors fail to withdraw and
successors are not adequately mentored. Power distance and role differentiation are
changing; reducing where this is a straightforward transfer of leadership.
These CLR forms may be found in all types of business, but they are not equally dis-
tributed across types of firm. Family businesses present a stark contrast in some forms of
preferred CLR. This is not widely understood outside the family business area. In the UK
a BBC television programme has featured a former corporate chief executive, each week
trouble-shooting a family business case, under the programme title, I’ll Show Them Who’s
Boss. The underlying presumption was that no business can prosper without secure and
monolithic leadership, and generally hostile to the co-leadership forms that many family
businesses adhere to.
In Table 6.1, examples that we have come across in family businesses are used to illus-
trate different CLR forms and dyad types.
Our proposal raises some important questions, to which research needs to seek answers,
to do with what factors shape the character of CLRs: (1) what are the ‘inputs’ or deter-
minants of CLRs? and (2) which CLR forms and partnership combinations of CLR work
best, that is, what are their ‘outcomes’, especially their effectiveness? The two questions
are linked. We shall consider the first question here, then review the dyad types in
family business CLRs in greater detail. We will conclude the chapter with a discussion of
critical leader relationships and leadership effectiveness.
Critical leader relationships in family firms 111
played out in different ways. Parents and children often have insights that enable them to
exercise restraint or to depart from the stereotypical model. Parent–child partnerships are
a familiar phenomenon in the family business scene, and they may enjoy long periods of
stability; but mostly it is an evolving relationship that requires continual mutual adjust-
ment, which may prove difficult to implement.
Siblings are also locked into an ambivalent bond of love and rivalry, according to the
literature (Dunn and Plomin, 1990; Hertwig et al., 2002; Sulloway, 2001). Age gaps and
gender differences mitigate the rivalry, though it depends upon the other factors discussed
below: the character of the individuals and contextual factors that determine whether the
bond will sustain a working relationship. In the case of cousins, the Darwinian perspec-
tive predicts that the bond will be genetically and emotionally weaker. Here the struggle
may be less to withstand conflict so much as to maintain enough interest to cooperate.
Finally, there is the bond of affinal partners (marriage or its equivalence). Here the
genetic bond is absent, except through the equal (genetically) shared interest in offspring.
Asymmetries in offspring relationships (step-relationships) are a source of potential
divergence in marital relationships, and the absence of offspring makes the association as
fragile as any friendship or love alliance (Danes and Olsen, 2003; Fitzgerald and Muske,
2002; Foley and Powell, 1997). In extended family networks, the non-blood ties of mar-
riage that link branches can be a fracture line (Gersick et al., 1997). The relevance of
genetic relations to CLRs is that they represent different ‘pulls’ of potential commitment
to collaborate. They are, of course, moderated by other factors such as age gaps, family
size and available alternative CLRs.
empathy and exchange to take place, and contrast in those that are most instrumental in
mastering the challenges facing the leader. We shall return to this theme at the end of this
chapter.
Milieu and structure This refers to the ambient culture and networks within which rela-
tionships form. This is a function of firm, family and national culture (Shams and
Björnberg, 2006). Biases towards different dyad types and forms of CLRs can be expected
in different cultures, depending on such factors as power distance and prevailing cultural
norms to do with family life. For instance, in Latin societies, high levels of emotional
cohesion could act as a buffer against sibling rivalry in intragenerational CLRs. Similarly,
in Japan, reciprocal CLR forms may be more common owing to a high degree of power
distance. Factors such as these govern the availability of candidates for a CLR and the
prevailing norms of conduct that would support a CLR.
All families develop their own cultures (Björnberg and Nicholson, 2005; Nicholson and
Björnberg, 2004), and these too will support or discourage the possibility of a family
based CLR. Likewise, the prevailing organizational culture: local norms govern the CLRs
that may be considered feasible. Shared leadership may be a feature of the founding
period – where relatives, buddies or marriage partners are working together – and con-
tinue thereafter. In other businesses the leader can be a more remote figure. The causes
can be both structural and cultural; with high power distance, linear hierarchies are rein-
forced by local norms of leader remoteness. In some cases the form of the CLR is deter-
mined surrounding organizational or governance systems. By virtue of the strictures of
boards a chairman and a CEO may be locked into a partnership that neither of them
might otherwise willingly choose. Tradition may also play a part. In many businesses the
finance director has a critical role and is often a party to a CLR. But structures are
mutable, and one of the first acts of many incoming leaders is to revise structures to
support the CLRs they prefer. Changing the culture may be more difficult.
CLRs in family firms – a closer look at the partnership combinations and their specific
challenges
Table 6.2 summarizes what might be predicted for the most common intersections
between CLR forms and dyad types. These derive more from our archive of case reports
and the observations of commentators than from systematic research, of which there has
been little or none. Predictions at this stage are tentative, although initial results from
current and ongoing pilot work is providing strong support for the viability of the overall
conception. More systematic empirical investigations seek to underpin the validity of the
approach.
Intergenerational CLRs
The key feature of the intergenerational CLR is that it grows. It has antecedents in imma-
turity and dependency, and it has a future in succession or transition. This trajectory has
several implications. One is that early roots of the relationship need to have been healthy
and nurtured. A second is that some mentoring should take place to bring the junior party
into partnership with the senior (Wright and Wright, 1987). A third implication is that the
mature form of the relationship will transit into another form, if the parties are sensitive
to the need for it to evolve. The relationship is never likely to be of the equal or balanced
Table 6.2 Predominant CLR forms and family dyad types – likely patterns
114
Assistant Short-term Rare Common Possible Common Common
Reciprocal Possible Common Common Common Possible Rare
Balanced Short-term Common Possible Common Rare Rare
Equal Rare/unstable Possible Rare/unstable Rare x x
↔
Transitional Common Rare Rare Possible x Rare
Power distance/
Role differentiation
Low
Critical leader relationships in family firms 115
Intragenerational CLRs
Many family businesses develop in the second generation around the sibling bond. The
so-called sibling partnership (Gersick et al., 1997) usually rests upon one ascendant
sibling, with others content in junior roles or as disinterested shareholders. True equality,
as in intergenerational CLRs, seems to be a rarity, though honour may be served by having
titles that denote equality. More usually there will be mutual acceptance of the ascen-
dancy of one sibling over the others. Where strong norms of primogenitor prevail in the
local culture, incongruent hierarchy – the superiority of a younger over an older sibling –
may be difficult to institute, but necessary to achieve a good fit with the different qualities
of the parties (Barnes, 1988). Successful family firms are those where conflict can be pos-
itive force (Harvey and Evans, 1994; Kellermans and Eddleston, 2004), which it has the
unique opportunity to be because the strength of the kinship tie allows more adaptable
and therefore dynamic problem-solving than would otherwise be possible.
Cousin leaders have a different set of challenges to face. At this stage of the life cycle,
the firm and the family are often more complex, and ownership is more dispersed. Cousins
do not share the same parents, and loyalty to the company does not rest on a personal
bond to the founder, who is removed by at least one generation. Thus, cousin relationships
tend to be less intense and more purely political than the greater emotional bond of sib-
lings (Gersick et al., 1997; Ward, 2004). For example, different family branches may
present a source of cousin rivalry, in which one cousin will struggle to keep the firm in
his/her branch of the family (Lansberg, 1999).
It is rare for intragenerational CLRs to take on the assistant form. However, the
exception to this rule is when one sibling acts as a surrogate parent. Reasons for same-
generation siblings or cousins assuming a parental stance include wide age gaps and/or
116 Handbook of research on family business
the premature death of a parent. The degree of conflict or rivalry depends on whether this
is an accepted role division in the family or not.
Similarity in age and possible similarity in family stages may lead to competing needs,
but also to increased understanding. As such, reciprocal and balanced forms of intra-
generational relationships are quite common. These often build on division of labour, as
the following quote from a team of sisters in a two-generation family business illustrates:
‘Elina will be responsible for the financial and marketing issues of the company, whereas
I will be responsible for issues related to research and development . . . but at the same
time the final decision about every aspect concerning the business will be made by both
of us’ (Sakellariou, 2004, p. 26).
The way in which the succession process is handled is of great importance to avoid con-
flicts in intragenerational CLRs. The transitional intragenerational CLR is more of a
rarity, with the exception of the surrogate parenting form or alliances between widely age-
separated cousins.
contingency view of leadership, which has a long pedigree in the literature (House,
1971). Second, there is a literature on individual differences that does identify certain
traits (such as the personality dimension ‘conscientiousness’) with high performance,
and others as risk factors, impelling leader ‘derailment’ – sometimes called the ‘dark
side’ of leadership (Conger, 1990; Van Velsor and Leslie, 1995). Third, there is a litera-
ture than can be broadly characterized as processual; to do with the skills that every
leader should master in order to secure success. These include relationship-building,
effective communications with followers, sound methods of decision-making, and
ability to influence (through vision, story-telling, and trust) (Bass, 1998; Collins, 2001;
Denning, 2004).
These three aspects of leadership effectiveness – leadership situations, processes and
qualities – would seem equally applicable to CLR effectiveness. The two works referred to
at the outset of this chapter point in this direction. In the Heenan and Bennis (1999) book
it is clear that what they call ‘co-leadership’ is much more than what we have called the
reciprocal model, and their recommendations are really focused on what it takes to be a
great number two. Their conclusions amount to the need for a second in command to be
resilient, cooperative, committed, insightful and flexible – necessary to sustain teamwork
with often dominant and difficult bosses. This is fine as far as it goes, but these worthwhile
case-based reflections sharpen the feeling that the field needs a more systematic analytical
approach to the interdependencies.
The article by O’Toole et al. (2002) charting ‘the promise and pitfalls of shared leader-
ship’, moves a step closer to this, by implicitly embracing several of the CLR forms we
have identified earlier, but in a somewhat undifferentiated fashion. Sally (2002) lists a
number of qualities, structures and rules from the Republican Roman model of shared
leadership to describe how effective co-leadership can be achieved in modern society.
Like Heenan and Bennis their focus is mainly what on we have designated ‘reciprocal’ co-
leadership. Their conclusion is that shared leadership is needed when ‘the challenges a cor-
poration faces are so complex that they require a set of skills too broad to be possessed
by any one individual’ (O’Toole et al., 2002, p. 68). This is a good but partial answer to
the question, and in the remainder of the article the authors do go beyond their own for-
mulation to discuss many of the elements we shall try to capture, using the SPQ frame-
work, summarized in Figure 6.1.
Leadership processes
Network/alliance access
Risk management
Creativity and adaptation
Stress buffering
Leadership processes
The list of processes relevant to leadership situations is potentially as long as the
varieties of positions in which leadership is possible. Without the guidance of prior
research on CLRs we are forced to speculate on which of these are likely to be key.
Again we focus on four. First is access to networks and alliances. This is a key aspect of
partnerships – and of course the partnership model is par excellence a CLR model.
Parties pool their contacts with potentially great economic benefit to the business.
Second is risk management. In environments were the costs of failure are potentially
high and the probabilities uncertain, a close partner in decision-making may be a vital
backstop to protect against catastrophic misjudgement. Usually risk management is
widely shared within businesses where it is a factor, but leaders have a constant need for
devil’s advocates and critical restraints against the driven qualities of many leaders.
Third is creative and flexible adaptation. A CLR can be the source of challenged
assumptions, fresh perspective and open ideas, against the predominant tendency of
leadership to be task-driven and convergent. Fourth CLRs are a buffer against stress.
It is often said that it is lonely at the top, and wherever the buck stops there is pressure
to be borne. Stress has unpredictable effects – driving some people to conservatism and
other to high risk-taking. A CLR is not a guarantee against this but there is an exten-
sive literature about the buffering effects of social support, and a CLR is likely to be
powerful in this direction.
Critical leader relationships in family firms 121
Leadership qualities
The four areas of principal relevance are personality, abilities, values and knowledge/
experience. One can argue that ideally in a CLR one requires homophily on values and
diversity in abilities, so that centrifugal and centripetal forces are in balance. Within the
domain of personality the answer is likely to be much more complex – what has been called
a contingent configural approach (Moynihan and Peterson, 2002). For example, low emo-
tionality might be something that both parties need in highly conflictual settings, but in
other circumstances diversity in emotional responsiveness might be more appropriate. We
lack space to develop all relevant hypotheses here, but various triangulations of person-
ality, situation, and CLR form would seem to be implicated. Finally, in the domain of
knowledge and experience, again one can assert that some common ground can help to
ensure an easy flow of communication and trust, and some diversity in order to compre-
hend the diversity of the leadership situation.
It will be apparent that to take these ideas further requires a more fully worked out set
of predictions around the complex interdependencies of S, P and Q factors, and the forms
of CLR that may be enacted. For example, one can hypothesize, and indeed the literature
supports the idea, that family–non-family shared leadership would be best suited to lead-
ership situations where family and non-family interests are both powerful, and leadership
situations where diverse alliances are needed.
Looking at the SPQ diagram one can see that CLRs are a means, as Heenan and Bennis
(1999) and O’Toole et al. (2002) point out, for the contents of the Q box and the P box to
be enlarged to encompass more of what is in the S box, that is, a broader repertoire of
attributes and skills to be deployed.
Conclusion
To conclude, this analysis has several implications.
1. A CLR can actually increase the range of challenges an organization can face and
master.
2. Duplication of qualities and processes is only desirable where the magnitude of the
challenge requires weight of numbers.
3. Self-awareness by both parties to a CLR is essential if they are to know what they
have to attend to.
4. Insights into each other and a stream of relevant communication between parties to
a CLR are essential maintain alignment.
5. Regular attention needs to be paid to how the CLR should adapt its form to a chang-
ing environment, and respond to changes in the relationship through the personal
development or needs of either party. CLRs have their life span and there will come
a time to disband them without rancour.
6. Leaders and other agents need to think dispassionately about which form of CLR fits
the situation and the qualities of the people, rather than creating, for example, a sham
equal CLR model that will not in reality be sustainable.
122 Handbook of research on family business
7. The more flexible the family firm’s approach to types of CLR that can be sustained,
the more likely the firm is to capture the positive premium of ‘familiness’.
Further research is needed to shed light on this clearly important and neglected topic.
There is a need for descriptive studies on the extent of CLR forms as they appear in firms
of all types, and for research to assess whether some are more sustainable in the family firm
context than others. In our work we are deploying a psychometric approach to the analysis
of qualities of CLRs, and the consequences of particular combinations, taking a contingent
approach to identify the forms of CLR and leadership challenges that particular dyadic per-
sonality configurations are able to deal with least problems and most effectiveness.
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7 Business family as a team: underlying force for
sustained competitive advantage
Lorraine M. Uhlaner
Introduction
One of the challenges in past research on family owned and managed firms has been to iden-
tify the family characteristics that matter, in prediction of firm strategies and business per-
formance. The purpose of this chapter is to introduce a new concept, that of business family,
and to identify aspects of the business family likely to impact business strategy and perform-
ance. The proposed framework draws on a wide range of research from different social
science and business disciplines. The basic premise is that business families can be viewed
as a specific type of team. Similar to teams more generally, the effective business family
shares values and norms, has clear roles and procedures, and is able to resolve conflicts
effectively among its members. A model and propositions are generated that relate different
aspects of the business family, including business family cohesiveness, performance norms
and characteristics of business family effectiveness, with business performance.
For the purpose of this chapter, the Dynamic System Planning (DSP) Model, a general
systems theory based model of organization effectiveness, is used to identify different
dimensions of business performance. Also important in the development of the frame-
work are the notions of family orientation and business orientation, viewed in this chapter
as two types of business family performance norms.
The first section of this chapter presents background from the existing literature,
including definitions of key terms such as the family, family business, business family,
teams and groups. Parallels are drawn between the concept of business family and teams
which form the basis for propositions and a framework later in the chapter. The second
section of the chapter presents other relevant background from the family business liter-
ature including family and business philosophy or norms (Carlock and Ward, 2001; Ward,
1987), as well as a description of the DSP Model in the context of the family business.
The third section of the chapter presents a model that focuses on the relationship between
different aspects of the business family (its norms, cohesiveness and degree of
effectiveness as a team) and business performance. The final two sections of the chapter
provide guidelines for future research and conclusions.
Background
Definition of key concepts: family, family business versus business family, group and team
Among the many definitions provided in the family therapy literature, family has been
defined as ‘people who have a shared history and shared future, bound by blood, legal
and/or historical ties’ (Carter and McGoldrick, 1999, p. 1). In the context of family busi-
ness research, however, one can more clearly define family as the group of people related
either by blood or marriage to the founder or founders of the business. A characteristic
125
126 Handbook of research on family business
that sets families apart from many other social systems is the fact that membership can be
biologically determined, and as such, membership in the family can be permanent – at
least with respect to blood relationships (Borwick, 1986).
For purposes of the present discussion, family business is defined as a firm – regardless
of company size, sector, or legal structure (though most typically privately held) – in
which the majority of the ownership resides in the hands of one family and in which at
least two members of the same family either own and/or manage the firm together. In the
present context, the business family refers to the subgroup of individuals from the family,
as defined above, who either own or work in the same business enterprise. This can include
family members in paid or unpaid positions, including governance roles on the family
council or board of directors.
A parallel can be drawn between the concepts of family and business family and the
social-psychological concepts of a group and team, respectively. The social psychology
concepts of group and team date back at least to the early 1950s (Cartwright and Zander,
1953, 1968). For the purposes of present discussion, group is defined as a ‘collection of
two or more persons who interact with one another in such a way that each person
influences and is influenced by the others’ (Wagner and Hollenbeck, 1995, p. 310). Team
is defined as ‘a collection of individuals who are interdependent in their tasks, who share
responsibility for outcomes, who see themselves and who are seen by others as an
intact social entity embedded in one or more larger social systems . . . and who manage
their relationships across organizational boundaries’ (Cohen and Bailey, 1997, p. 241).
Furthermore, group norms are defined as acceptable standards of behaviour that are
shared by a group’s members.
The family can be viewed as a relatively stable group: family members interact with
influence, and identify themselves with one another. The business family, in contrast, is a
type of team. At a moment in time, the business family forms in order to share responsi-
bility for the success of one or more business enterprises. In contrast to passive owners in
large publicly held firms, the business family is likely to view itself as an intact social entity
and is furthermore embedded in other social systems (the core family, the ownership
system and the business enterprise). The distinction between family and business family
is that of choice. People usually cannot choose the family of their birth (although, of
course, partners form new families by choice). However, individuals entering into a busi-
ness family have at some point made a conscious choice to do so.
The concept of team is found in only a few past references in the family business research
literature. For instance, Stevenson recommends that families pursue a transition over time
from a dependency relationship between child and entrepreneur parent to one of more
equal footing, noting that ‘the ultimate goal of a family business is interdependence – where
the family is able to work together as a team’ (Astrachan, 1996, p. 212). Filbeck and Smith
(1997) also refer to the family team, but primarily in the context of management.
group), storming (a stage of conflict where cliques and factions may form and team
members vie for position), norming (where agreement and consensus begins to form, and
which is characterized by close relationships and cohesiveness) and performing (where the
team works effectively with a shared vision). In later research, Tuckman and Jensen (1977)
add a fifth stage, mourning, to reflect the stage when a team dissolves. In the family firm,
Gersick and colleagues emphasize the shift that takes place when family members begin
to enter the firm (entering the business stage), parallel to the forming stage, and when
family work together productively (working together stage) which can be seen as parallel
to the norming and performing stages (Gersick et al., 1997). Of course, as with teams
more generally, not all business families manage to reach Tucker’s fourth stage of per-
forming, which requires a shared vision among business family members. However, the
model provides some clues as to the changes that take place in developing an effective
team, including the decision to work together, development of consensus about the
purpose of the group, roles and procedures, and a shared vision.
According to more recent team research, team effectiveness is multifaceted. Hackman
(1990) proposes three criteria including team performance, quality of team process and
team satisfaction. Team performance is the extent to which the group’s productive output
(that is, its product, service, or decision) meets the standards of quantity, quality, and
timeliness of the people who receive, review and/or use that output. Quality of team
process is the degree to which in the process of working together, the team enhances the
capability of members to work together interdependently in the future (that is, the degree
to which the whole is greater than the sum of the parts). Finally, team satisfaction is the
degree to which the group experience contributes to the growth and personal well-being
of team members (Mohrman et al., 1995).
Other team-focused research identifies characteristics of teams which may determine
team performance (Cohen and Bailey, 1997; Stewart, 2006). Huszczo (1996) provides a
helpful list of these characteristics including: a shared vision, purpose, goals and values;
talented members – not only a full range of abilities or competencies, but also their proper
development and utilization; clear responsibilities – (role) expectations that are well estab-
lished; reasonable and efficient operating procedures to carry out work and make deci-
sions; constructive interpersonal relationships and effective conflict management;
appropriate rewards – both monetary but nonmonetary as well; and constructive exter-
nal relationships (Huszczo, 1996, p. 16).
One can draw parallels between the team and family business literature. For instance,
family business researchers identify a shared family vision, climate of trust, and open
honest communication as prerequisites for successful interaction among family members
in the family business (Carlock and Ward, 2001; Habbershon et al., 2003; Ward, 1987). In
an empirical study, Mustakallio (2002) reports a statistically significant linkage between
shared vision among family members and a family’s commitment to business decisions.
But much more research is needed to confirm the importance of these other aspects to
business and family performance.
group members, agreement on group goals, frequency of interaction, and isolation from
other groups. Research carried out by Rokeach and Rokeach (1989) supports the conclu-
sion that parents and family influence values and that people’s values have their roots in
early childhood (Schermerhorn et al., 2000). Cohesiveness of the family is also likely to
be enhanced in many families through other determinants such as frequency of interac-
tion, and isolation from outsiders (common in the modern Western family), although the
strength of such determinants may diminish as frequency diminishes and as grown chil-
dren move away from parents and each other.
Bowen’s family systems theory, rooted in general systems theory (Bowen, 1981; Von
Bertalanffy, 1968), provides yet another explanation for the cohesiveness of the family.
According to Bowen, families are viewed as social systems, with individuals making up
parts of the family system. These individuals develop predictable patterns of interaction
which evolve into rules or beliefs about acceptable behaviour (Guttman, 1991; Kerr and
Bowen, 1988). Many interactions among family members are seen as the result of the
pressure to maintain and/or restore equilibrium or balance in the family system (the
concept of homeostasis). Similar to cohesive groups more generally, when a family
member deviates too strongly from the prescribed norms, for instance, pressure is exerted
by the others to conform. The tension between the opposing forces of individuation
(expression of self) and togetherness or loyalty to the family is an outgrowth of this pres-
sure to maintain balance in the family system, and also helps to explain the highly emo-
tional level found within many families (Friedman, 1986; Gersick et al., 1997). Given the
strong emotional forces that may be found in the family system, one might also surmise
that business families, built upon the family system, tend to be more cohesive, and thus
may have more intense relationships and other dynamics than a similar, nonfamily group
of owners and/or managers.
Research on cohesiveness may help to explain why the influence of family on the busi-
ness may be a competitive advantage for some firms but a detriment for others. Research
on group cohesiveness supports the conclusion that, rather than improving team product-
ivity, cohesiveness serves the function of reducing variability around group norms. Thus,
performance may be higher, if the norm is for high productivity, but can actually be lower
if the group norm is for lower productivity (Schermerhorn et al., 2000). Thus the cohe-
siveness of the business family, and related performance norms associated with that busi-
ness family, need to be considered together in predicting business performance and other
business behaviours.
the family on the business rather than characteristics of the family itself. Thus family
leadership refers to the leadership of family in the business. Family vision relates to the
vision the family has with respect to the business, and so forth. Thus, in considering these
characteristics, they can best be seen (with the possible exception of family relationships)
as characteristics of the business family, rather than of the family as a whole.
Based again on analogy to the broader research on teams, reward systems provided to
family members participating in the business family may also be important determinants
of individual and group performance. These rewards may be monetary, with respect to
stock dividends for owners or salary to family managers. But one should also consider
nonmonetary rewards as well, such as opportunity for social interaction or fulfilment of
the need for self-expression and achievement. Money can create a source of conflict and
misunderstanding, especially between passive owners and family working within the busi-
ness, the former often expecting some form of dividend for their shares while the latter
often see greater need to keep funds reinvested in the firm to assure its long-term survival
and growth (Astrachan, 1993).
Examining the business system: past work from strategic management and organization
theory
Before presenting a model that links business families with business performance, this
section presents two remaining streams of literature relevant for the present discussion:
the notions of family and business orientation and an introduction to the Dynamic
System Planning (DSP) Model, in the context of the family firm.
Competing objectives of the business family: family orientation and business orientation
Critical to a family firm’s survival and success is its ability to balance and integrate the
demands or needs of the family and the business (Carlock and Ward, 2001; Ward, 1987).
In one interpretation, family and business are seen as opposite ends of the same spectrum,
with balance between family and business seen as a point midway on the continuum.
Empirical research by Leenders and Waarts (2003), however, based on an empirical study
of 220 Dutch family businesses, supports the more general conclusion that family and
business should be treated as independent factors rather than inverse functions of one
another. Using terminology from the group and team literatures, these orientations may
be viewed as types of group performance norms. Thus business families high on family ori-
entation place importance on behaviours fulfilling the needs and demands of family,
whereas business families high on business orientation place importance on behaviours
fulfilling the needs and demands of the business.
According to Carlock and Ward (2001), families who can balance family and business
systems create a positive environment where the family thrives and the business performs
well. However, as Leenders and Waarts warn, and Carlock and Ward (2001) allude to, it
is not such a simple task to balance the objectives of both the family and business systems,
especially when the orientation towards both is high.
Business family as a team 131
Market strategy in the family firm Market strategy refers to a firm’s ability to select the
right mix and characteristics of products or services, with appropriate target market,
pricing, and distribution channels to assure the necessary sales. Effectiveness criteria for
market strategy include sales growth and total sales. The business family may impact
market strategy in several ways. Market strategy and company direction in general, may
change as a new generation takes over. Or certain family values may be instilled in the
mission of the business – for instance, making the customer feel like one of the family by
providing more personalized service.
Resource allocation in the family firm Resource allocation refers to the firm’s ability to
assign the various resources so that different departments and individuals in the firm get
the resources they need to do their work. Budgeting and inventory control are examples
of more formal resource allocation strategies with the ‘squeaky wheel’ approach (the one
complaining the loudest getting the resources), and other informal means often used in
smaller and/or less professionally run firms. Effectiveness criteria for resource allocation
include adequate cash flow and, more generally, a sense by employees and management
that resources are available where and when needed. In the family business, managers
132 Handbook of research on family business
from the business family may have easier access to resources within the company. This
phenomenon may be accentuated in firms lacking a formal budgeting process. Family
firms may also assign a family member – even one not thoroughly trained for the posi-
tion – as corporate treasurer or bookkeeper, in order to keep a close eye on the family’s
assets.
Resource acquisition in the family firm Resource acquisition relates to a firm’s ability
to obtain needed inputs: money, people, materials, and external information. Examples
of resource acquisition strategies include investor relations, recruitment, purchasing,
and research and development. Effectiveness criteria for resource acquisition include
adequate staffing, finances, materials and information. Regarding family influence, sup-
pliers may have family ties. Family members are frequently an important source of
capital (Hendrickson and Psarouthakis, 1998). And, of course, family members form a
frequent recruitment pool for both start-up and managerial positions (Hendrickson and
Psarouthakis, 1998).
Work flow and the family firm Work flow relates to the firm’s ability to structure and
coordinate work appropriately among its employees. Examples of strategies for structur-
ing the firm include specialization, centralization of decision-making and departmental-
ization. Hierarchy of authority, informal meetings or the team approach are examples of
coordination strategies. Effectiveness criteria for work flow include smoothness with
which tasks are carried out. This is often difficult to determine except when things go
wrong. Thus role conflict and resulting role stress may provide evidence of poor structure.
Signs of coordination problems may include slow or inaccurate fulfilment of customer
orders or other work ‘slipping through the cracks’ (Georgopoulos, 1986; Hendrickson
and Psarouthakis, 1998). Information flow and the division of decision-making responsi-
bilities are other aspects of effective work flow. Information may also flow differently as
a result of family dynamics, passing outside the formal chain of command and with the
possible consequence, for example, that a more senior nonfamily manager may be left out
of the loop. Decision-making responsibility may also be distributed differently as a result
of family dynamics.
Employee relations and the family firm Employee relations relates to the firm’s ability to
motivate and satisfy employees, and to instil a positive corporate culture. Strategies may
include incentive programmes and techniques to build awareness of company values, such
as a company handbook or company-wide meetings. Effectiveness criteria for employee
relations can thus include both attitudinal measures (employee satisfaction, motivation,
commitment to the firm) as well as behavioural measures such as level of absenteeism and
employee turnover. Although nepotism in allocation of rewards comes immediately to
mind as a negative impact of the business family on the firm, there may also be a positive
influence. For instance, business family members may have a stronger sense of loyalty and
commitment and willingness to make short-term sacrifices for the long-term good of the
firm. Supporting evidence based on research of the Dutch economy suggests family busi-
nesses provide an important stabilizing force in the economy because they are less likely
to close their doors during periods of economic downturn (van Engelenburg and
Kommers, 2001).
Business family as a team 133
Technical mastery and the family firm Technical mastery is the ability of the firm to
produce goods and services with adequate quality, efficiency and timeliness. Technical
innovation may also be considered an aspect of this issue. Effectiveness criteria for tech-
nical mastery include technical quality, technical innovation (that is, new products and
processes) and overall productivity. Training programmes and investments in new tech-
nologies are two examples of technical mastery strategies. In companies where tacit
knowledge is handed down from one generation to the next, family businesses often have
an advantage in preserving technical know-how within the firm. On the other hand,
family businesses who fail to encourage the younger generation to get outside work
experience and training before joining the firm may lag behind firms who recruit outsiders.
Government and community relations and the family firm The seventh and final DSP issue
relates to a firm’s ability to get along with everyone other than with those stakeholders
linked to the transformation of inputs to outputs. Examples of such stakeholders include
the government, community groups, and family members outside the business. Effective
criteria for government and community relations include goodwill and a good company
reputation in the community (local, regional, or business) as well as the absence of con-
flict with outside groups. Positive handling of the government and community relations
issue is often evidenced by the absence of problems – thus a lack of lawsuits from former
employees, consumer action groups or the government. Positive evidence may include
conformance with environmental protection laws, positive recognition from the general
community for its reputation towards employees or customers, and level of harmony with
family members outside the business family.
A proposed model for examining the influence of the business family on the firm
This section presents a rudimentary framework for examining the impact of the business
family on the firm, considering such variables as performance norms, effectiveness, and
cohesiveness of the business family. Other variables, such as talents of individuals and
commitment of the business family to firm goals, are included in the framework, although
propositions involving these variables are beyond the scope of this chapter. Business per-
formance is a multidimensional concept which includes effectiveness of each of the DSP
issues, financial viability, and the quality of the overall vision for the firm by the top man-
agement team. The overall model is presented in Figure 7.1.
The intervening variables of ownership and management composition represent the
percentage of ownership and management, respectively, which come from the business
family, as opposed to nonfamily. The business family is thought to have a greater impact
the more highly it is represented in either the ownership or management groups. Note also
that that the model suggests that members of the family may impact business perform-
ance, but this is most likely indirect by way of the business family. Thus, the spouse of a
son who works in the firm, but who is not herself employed by the firm or assigned to
some other role such as a family council representative, may influence the son’s behaviour,
but is assumed to have a limited direct effect on the business itself.
A thorough development of the model, including related propositions, is beyond the
scope of this chapter. However, an initial set of propositions and suggested relationships
are presented in the remainder of this section of the chapter to give some direction for
future research.
Family
Harmony
Satisfaction
with business
decisions Nonfamily
Attitudes
Business performance
Business family
Quality/clarity of vision of the firm
Performance norms ----------------------------------------------
– family orientation Ownership Effectiveness of DSP issues
– business orientation composition – Market strategy
---------------------------
– Resource acquisition
Effectiveness
Management – Resource allocation
– shared vision
– Work flow
134
– clear roles composition
– Human relations
– established procedures
– Technical mastery
– conflict resolution
– Government/community relations
– relationships -------------------------------------------------
---------------------------
Financial viability
Cohesiveness
– profitability
---------------------------
– (growth of) assets
Capabilities of
– long-term survival of the firm
individual members
---------------------------
Commitment to firm
goals and decisions
Note that by definition, members of the business family are all part of the larger family
system. Thus, aspects of the business family logically will influence the family and vice
versa. Therefore it would seem logical that performance norms related to family would
influence family behaviour.
Proposition 3 The more effectively a business family functions together as a team, the
better the business performance is expected to be.
family will have on management. Restating proposition 3, keeping these ideas into
account, one can state the following:
Proposition 3a Under the condition that the majority or all the business family owns
the firm, the greater the influence the business family’s performance is likely to have on
business performance.
And similarly:
Proposition 3b Under the condition that the majority or all the business family
manages the firm, the greater the influence the business family will have on business
performance.
It is beyond the scope of this chapter to elaborate upon which aspects of business per-
formance are more likely to be influenced by greater business family ownership versus that
of business family management. However, this distinction may be important as may the
difference in the way business family owners or managers function together as a subgroup
of the total business family. For the remainder of this section, we speak in general terms
of business families that run a business, whether or not individual business family members
are legal owners, managers, and/or members of a business or family-related governance
board (for instance, a family council or board of directors) but future research may benefit
from examining finer nuances among subgroups, especially within large family firms.
Proposition 4 Under conditions of high business family cohesiveness, the stronger the
business orientation, the better sales growth is likely to be.
On the other hand, following the format of proposition 2 above, cohesive business fami-
lies with a strong family orientation may place a stronger emphasis on continuity and inde-
pendence of the firm, even if this comes at the expense of sales growth and profits, to assure
that wealth remains in the family over the long term. Note that the effect of family orienta-
tion is not thus necessarily a negative influence on the business. For instance, emphasis on
Business family as a team 137
continuity may improve the odds of survival of the firm. Other possible consequences
resulting from a strong family orientation may be less helpful however. For instance, a
strong family orientation may result in a market strategy that accommodates the preferences
of the founder or other family, even if that strategy is not sound. For instance, geographic
expansion may be based on the need to create an opportunity for a son or son-in-law
wanting to move to a particular city, rather than a rational decision based on market analy-
sis in that region. And companies often continue particular products or services, or even the
company itself, in honour or homage to the founder, even when it no longer makes business
sense to do so. Again, these latter decisions are expected more likely in situations where
family orientation is high, especially in combination with low business orientation.
Proposition 5 Firms run by cohesive business families with a stronger business ori-
entation are more likely to use more ‘rational’ or formal allocation strategies that focus
on business needs, whereas
Proposition 6 Firms run by cohesive business families placing a strong emphasis on
family orientation (especially in the absence of a strong business orientation) are more
likely to allocate resources favouring family interests.
Examples of more rational allocation strategies might include use of formal budgeting
and inventory control, professional cash flow management techniques and reliance on a
capital expenditure plan – in short, allocation as much as possible on business needs.
On the other hand, allocation to favour family over nonfamily might include allocation
(arbitrarily) of funds to family-run over nonfamily-run departments, or large issuance of
dividends to family owners at the expense of accommodating the capital needs of the firm.
These are, of course, propositions that would need to be tested empirically.
Proposition 7 Firms run by cohesive business families with a stronger business ori-
entation are more likely to select people and material that are most efficient or suitable
for the business, even when this runs counter to family demands or needs.
Thus, in firms run by cohesive business families with a strong business orientation, sup-
pliers would be selected on rational selection criteria (best price, best quality for the price)
138 Handbook of research on family business
rather than favouring suppliers that have friendships or long-standing relationships with
the firm. And the most qualified applicants would be hired, even if this meant passing over
family members. Such firms may also be more likely to choose to expand the firm using
financial resources from outside investors, even if this dilutes family interests.
On the other hand, where family orientation performance norms predominate, one
might state the following proposition:
Proposition 8 Firms run by a cohesive business family with a stronger family orien-
tation (especially where business orientation is weak) are more likely to take family
considerations into account in selecting resources for the firm, including people hired,
suppliers selected or equity sources used for raising funds.
Thus, it may be that where family comes first, the firm’s managers may hire family over
nonfamily, even when less qualified (especially where business orientation is low), remain
with suppliers that have been loyal to the family even when better suppliers emerge over
time and retain family control by refusing nonfamily investors, choosing instead either
to borrow from banks or to accept equity from family only, regardless of business oppor-
tunity. On the other hand, cohesive business families with a strong family orientation
may benefit more highly from access to investment funds or loans from other family
members.
In the cases where both business and family orientation are high, one can see that com-
peting goals may lead to conflicting resource acquisition strategies. In this latter case,
it may be that business families that function as effective teams have worked out such con-
flicts by setting up a family constitution or other family institutions to resolve such
conflicts, or by creating mechanisms for improving the qualifications pool of potential
family applicants.
Proposition 9 Firms run by cohesive business families with a stronger business ori-
entation are more likely to assign roles to those employees most capable of doing the
work, decisions are handled by the person most qualified to do so, and information and
decisions flow according to a formal chain of command, regardless of family status.
On the other hand, in firms run by cohesive families with a strong family orientation,
especially where business orientation is weak, family demands may take precedence over
business demands to the extent that assignment of key roles, access to information and
decision-making responsibility is given to family even when they may be less qualified to
carry out the job, leading to poorer work flow. Thus, one might state:
It may be a mistake to assume, however, that family orientation always runs counter to
effective business performance. For instance, a cohesive business family that functions as
an effective team may be able to work smoothly together making mutual adjustments
needed to informally coordinate efforts.
Proposition 11 Firms run by cohesive business families with stronger business orien-
tation, are more likely to reward employees according to business criteria (position,
seniority or performance level) and therefore result in a more motivated and satisfied
workforce.
On the other hand, family orientation (especially with a balanced business orientation)
may have a positive impact in that it may lead to stronger organization commitment by
family members (Uhlaner and Hunt, 1999). Family values may also have more influence,
for better or worse, on the business culture. One might also assume that business families
that function as an effective team will also share stronger commitment to the firm’s success.
Proposition 12 Firms run by cohesive business families with stronger business orien-
tation, are more likely to use professional practices to assure better quality and produc-
tivity, and more likely to obtain outside information to improve technical know-how.
On the other hand, business families with a stronger family orientation (especially com-
bined with a weak business orientation) may permit tolerance of low-quality work by less
competent family members (Uhlaner and Hunt, 1999). However, companies run by cohe-
sive families with a strong family orientation may also benefit with improved technical
mastery. For instance, case studies suggest that in family firms, a firm’s reputation for
quality is a direct reflection of the family itself (Uhlaner and Hunt, 1999). Also, long
family apprenticeships, often beginning at a young age, can help to carry on knowledge
that assures quality of the product.
140 Handbook of research on family business
Proposition 13 Firms run by cohesive business families with stronger business orien-
tation, are more likely to use professional personnel to stay abreast of legal require-
ments for employment, the environment, and so forth.
On the other hand, family orientation may have a positive effect on social responsibil-
ity as well. For instance, in one study based on a relatively small set of Dutch firms
(Uhlaner et al., 2004), family firms often view their employees, and even suppliers, as an
extension of the family. Furthermore, particularly in firms bearing the family name,
concern for the environment seems stronger: soiling the environment reflects badly on the
family name. The same study also finds that family firms are most likely to show their phil-
anthropy outside the firm by supporting organizations linked with family members (such
as a family member’s church, school, or sport club). On the other hand, one might predict
that companies run by cohesive business families with a stronger business orientation
approach these issues in a more professionalized manner – staying abreast of rules gov-
erning employment, the environment and other regulations.
the concept of team should be viewed in the family business. It is proposed here that a dis-
tinction is made between the concepts of family and the business family, but a review of
existing cases as well as new research may help to clarify whether this distinction makes
sense in practice. As a part of this exploration, it may also be helpful to clarify whether it
is useful to consider the business family members who are owners separately from those
that work in the firm, rather than combining them as was proposed in this chapter.
However, future research needs to clarify this concept further and, in particular, to con-
sider whether only current or also potential family owners and workers should be
considered part of the business family.
Qualitative research, especially the use of structured interviews of several business
family members in each of several firms, (using a multiple case study approach) would
provide an initial means to clarify the way in which techniques and concepts from the
team-building literature should map onto that of the business family and family business.
In short, initial qualitative research may help to clarify the suitability of the concept of
team and how it applies to the family firm.
However, without quantitative research, it will be difficult to test the propositions and
framework adequately. Large samples are needed that reflect not only from a range of
company sizes and sectors, but also reflect different performance norms and cohesiveness
of the business family. Validation of the team characteristics described by Huszczo (1996)
is needed in the context of business families to see whether these characteristics do indeed
predict different aspects of team effectiveness as defined by Hackman (1990). It is import-
ant either to control for the ownership and management composition, furthermore, either
by sampling adequately from family businesses where ownership and management by
family members range widely, or expressly to choose only those firms where the majority
of owners and managers are family members and draw conclusions for that population
only. With large samples and random sampling to assure variation on the relevant vari-
ables, data analysis techniques such as multiple regression analysis and/or other multi-
variate techniques such as structural equations can be applied to test these propositions
more adequately.
Conclusions
This chapter reviews a variety of concepts from the social science and business literature
to propose a preliminary framework for understanding the influence of the business
family on the family owned and managed firm. Past research is unclear about the nature
of the family system and, in particular, which characteristics might help to explain under
which conditions family orientation can be viewed as a strategic advantage or disadvan-
tage in the family owned and managed firm.
This chapter suggest that rather than examine the family as a whole, research should
concentrate on the subgroup of people within the family, referred to as the business
family, and that by viewing the business family as a team, interesting linkages can be made
to conclusions already drawn from the group and team research literature. In particular,
similar to teams, family business writers have suggested that successful family businesses
need to have a shared vision, clear expectations, protocols or procedures for interaction
(including but not limited to various family institutions such as informal social gather-
ings, family councils and family plans), positive reward systems for both family owners
and employees, and capable individuals.
142 Handbook of research on family business
This chapter also highlights some of the past research on family business and strat-
egic management. A finding that is important is that business families may vary in their
group norms: with varying emphasis on the demands or needs of family and firm. The
Dynamic System Planning Model, a model derived from general systems theory, is pre-
sented as a means to define different aspects of the business performance that may be
influenced by the business family. A model and propositions are suggested that might
link different aspects of the business family to business and family performance, derived
from assumptions built from the group and team research literature, and the added
assumption that the business family can be viewed as a type of team. Past research on
group cohesiveness, group performance norms and team effectiveness are used to make
predictions about business and family performance. In particular, differences in norms
regarding family and business orientation may help to explain differences in business
strategy and performance outcomes, especially when controlling for cohesiveness of the
business family.
The field of family business research is still a relatively young, emerging field compared
with more established fields such as social psychology, sociology, economics family
therapy, and more established specialties in business (such as organization behaviour and
strategy) and can benefit from reviewing key findings from those fields. At the very least,
in spite of many remaining unanswered questions, it is hoped that this chapter might serve
to stimulate further thinking regarding the integration of the vast body of research on
groups and teams with research in the field of family business, in order to provide better
insight into determinants of effectiveness of the family firm. Future research will have to
determine whether or not the business family is really a force for competitive advantage,
but the answer is likely to require a fairly complex combination of factors, rather than a
simple comparison of the composition of ownership and management between family-
and nonfamily-owned and managed firms.
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8 Internal factors of family business performance:
an integrated theoretical model*
Alberto Gimeno Sandig, Gaston J. Labadie, Willem Saris
and Xavier Mendoza Mayordomo
Introduction
This chapter puts forward a theoretical model that identifies the internal factors explain-
ing family business performance. Studies of family companies have mainly compared the
performance of these firms with the performance of non-family companies. In our view,
the results of such studies are contradictory given the enormous variety of both family
and non-family companies, and the partial scope of the models and tests performed.
Hence, there is a need for an integrated model that systematically considers the internal
factors that influence the performance of family businesses and that is not based on
flawed comparisons with other kinds of firms. This work presents such a model, exam-
ining theories and evidence on how the family condition and its dimensions influence
performance.
We define family firms as those in which one or several families exercise influence, iden-
tified in the literature by the term familiness (Habbershon and Williams, 1999). We
propose an approach to family companies based upon two dimensions: the family and the
company. Such an approach is similar to the one suggested in early family business liter-
ature (Davis and Stern, 1980; Lansberg, 1983; Rosenblatt et al., 1985; Vilanova, 1985). We
model the contingency and structural factors that have an impact on family and business
management (the factors chosen being based upon the literature review). In so doing, we
introduce the relationships among these constructs and number them, so that a cumula-
tive graphic representation of the model is developed in ‘stages’, with the full systemic
model represented in the final section. A more extensive justification of the theoretical
relations proposed in this chapter can be found in Gimeno et al. (2005).
145
146 Handbook of research on family business
this case, the entrepreneur is usually the owner of significant resources that are directly
associated with him or her. The transfer of these resources is only partially possible.
The lifecycles of the family and ownership can be linked by employing the concept of
family complexity. A family with three generations will be much more complex merely
because more people are involved. A company founder may also have siblings and cousins,
but that does not mean that the firm constitutes a ‘sibling partnership’ or a ‘cousin con-
sortium’ (since, although those relations are part of the family, they do not constitute part
of the company). We are, therefore, solely interested in cases where the family is linked to
the company and influences its behavior and the complexity of the family subset holding
material or psychological ownership of the firm. Accordingly, when referring to the
‘family’, we mean the business family: specifically, that sub set of the extended family that
currently determines company behavior or will do so in the future.
Family complexity is defined by the number of family members and the kind of rela-
tionships established among them, the number of generations alive at a given point in
time, and so on. Greater family complexity implies bigger differences between family
members in terms of personality, abilities, interests, personal circumstances, education,
and so on. The influence of each family member is also contingent on his or her position
relative to the nuclear family. The combination of the individual lifecycles of the various
family members also constitutes a complexity factor, as Davis and Taguiri (1989) have
indicated.
Family complexity can be modified by the family itself through its inheritance policy.4
The modern Western practice to apply egalitarian criteria to all family members of the
same generation will increase the complexity of the family company over time. As Ward
and Dolan (1998) observed, family complexity increases with each succeeding generation.
This underlines the first proposition of the model:
Company development is also shaped by time. Various authors propose the existence
of a time pattern in company lifecycles. Time affects positively the complexity of the
company through a process of accumulation of resources that leads to further business
growth, internationalization, number of processes, amount of knowledge, and so on. This
implies the second proposition:
Thus, time affects complexity at both the family and the company levels (Figure 8.1).
Age of the
1 2
company
3 Satisfaction Profit
The literature has also linked a company’s development and size to its performance,
arising from factors such as: market share (Buzzell et al., 1975; company size (Scherer,
1980); exploitation of barriers to entry (Porter, 1982); economies of scale (Besanko et al.,
1996); learning curve (Ghemawat, 1985); development of the resource base (Sobel, 1984)
and financial capacity (Palich and Cardinal, 2000).
This suggests the following relation:
Business management
Management of a family firm involves two kinds of governance structures and practices.
Some of these management aspects are not unique to family companies, while others only
make sense for family firms. For instance, a board of directors is a useful body for a very
150 Handbook of research on family business
wide range of companies, whereas a family council is only applicable to those owned by
families.
Accordingly, one can distinguish between two kinds of management: business man-
agement and family management:
For the present purposes, BM can be grouped in three large dimensions: institutionaliza-
tion, professionalization, and succession.
A board of directors (BD) is the main element in institutionalizing the governance of
a company. The two main functions of the board of directors are the control function and
the advisory function (with respect to senior management) (Birgit, 2002). The senior man-
agement control function decreases with the CEO strength in the board of directors
(Warther, 1998) and increases with the role of external advisors (Byrd and Hickman,
1992). The advisory function is affected by information the CEO shares with the board of
directors, and depends on the CEO’s perception of job risk (Holderness et al., 1999). A
CEO who feels his job is at risk will be less willing to share information with the board.
There is an agency problem in family companies (Schulze et al., 2001) that stems from
the influence of family loyalties and ties on the decisions taken by family managers. This
makes it even more important that the board makes adequate succession plans (Ward,
1991), develops the management team (Lansberg, 1999), and facilitates communication
between family members (LaChapelle, 1998).
Management is a professional discipline because of its content (the description of man-
agers’ tasks), its instruments (how managers behave in their jobs), and its contingency
aspects (what impinges upon managers’ actions) (Squires, 2001). This implies stressing the
importance of regularities in administrative decision-making.
Another approach to the management role, stresses the importance of the entrepren-
eurial behavior by creating discontinuities (Schumpeter, 1985). The differences between
both schools (professional and entrepreneurial) are reflected in the various aspects of busi-
ness management, such as information, knowledge, decision-making processes, and organ-
izational structure. The professional manager relies much more on explicit knowledge
(Nonaka and Takeuchi, 1995), and develops abstraction and codification processes
(Boisot, 1995) so that knowledge can be passed on and shared. By contrast, entrepreneur-
ial management relies more in tacit knowledge (Dreyfus and Dreyfus, 1986). There are also
differences in the strategic decision-making processes. Professional management tends to
rely on planned strategies (Porter, 1996), while entrepreneurial management tends to
develop emergent strategies (Mintzberg and McHugh, 1985). Professional management
and entrepreneurial management also tend to institute different organizational structures.
The variable that most clearly defines an organizational structure is its level of centraliza-
tion (Chandler, 1977). Professional management tends to develop more decentralized
firms, whereas entrepreneurial management is associated with centralized companies.
Internal factors of family business performance 151
Company complexity also has an impact on BM. Various authors (Chandler, 1962;
Greiner, 1972) have argued that BM eases a firm’s transition to the next stage in its devel-
opment. Inevitably, this will bring new challenges that must be overcome in order to avoid
future crises. This implies that a company’s growth stage influences the way a company is
managed.
This argument, in turn, implies the following proposition:
The resource based theory states that a company is capable of achieving a competitive
position through its various resources and capabilities (Collis and Montgomery, 1995;
Grant, 1991; Wernerfelt, 1984). The development of BM is a way of transferring part of
the company’s resources that fosters the development of the firm. These authors consider
acquisition, maintenance, and exploitation of resources to be the basic activities of man-
aging a company. In this context, BM is the development of the firm’s resources and cap-
abilities in order to achieve corporate growth.
This suggests the following relationship:
Other authors (Miller and Friesen, 1984; Scott and Bruce, 1987) consider that new
demands on the company arise during each stage of development. These demands must
then be addressed by appropriate internal changes. Each change helps to propel the
company forward to a new stage of its development (7 and 8; see Figure 8.3).
Family management
As stated earlier, our model groups the different management practices that are only
applicable to family businesses, within the construct of family management (FM). Those
management practices that constitute FM can be grouped in four general management
dimensions. Three of these coincide with those also found in BM (institutionalization,
communication and succession), and one is specific to family firms (family–company
differentiation). The fact that FM and BM share the same management dimensions does
not mean that the management variables are the same; but, rather, that they can be grouped
in the same category despite being different. For example, the ‘succession’ dimension
Internal factors of family business performance 153
7 8 5
Business management
(BM)
Profit
needed. The differentiation between family and company mainly involves economic rela-
tions and human resource policies regarding family members (Vilanova, 1985). In the
human resource field, this differentiation concerns the criteria applied to the incorpora-
tion and promotion of family members, the demands placed upon them, and authority
and hierarchical relations based on corporate criteria. Applying special criteria, such as
equality between various members, or the protection of the least able member, would
signal a low differentiation between family and business.
The relational aspect of communication plays a fundamental role in the literature on
family firms. Family companies have often been hampered by communication issues (Kets
de Vries, 1993). Conflicts, understood as a communicative phenomenon, arise from
differences either with respect to tasks (information) or relations (Watzlawick et al., 1981).
It is especially important to differentiate between the two levels in family companies,
owing to the strong interrelationship between content and relations. Logically, relations
are of great importance, as they constitute the basis of the family system. Content is also
important, since a business family must be able to discuss business matters effectively.
From a communication standpoint, FM consists of clarifying matters, so that relational
aspects and content do not interfere with one another.
Succession in family businesses has a double component: management succession and
ownership succession. The first has already been considered in the context of BM.
Management succession involves aspects relating to the lifecycle of the first CEO or his
or her performance. In contrast, there are aspects of ownership succession that are spe-
cific to, and characteristic of family firms. In non-family companies, there are situations
involving shares changing hands, yet there are no changes in the structure of ownership
arising from shareholders’ lifecycles.
An increase in family complexity involves an increase in the number of shareholders
and a dilution in their relationships with one another. When the ‘nuclear family’ threshold
is surpassed, the family starts to lose cohesiveness. One implication is the need to con-
struct the identity of the business family in the form of a ‘common dream’ (Lansberg,
1999) or the ‘entrepreneurial family group’ (Habbershon and Pistrui, 2002). This common
identity is a mechanism to help unify the family unit beyond just nuclear families and the
branches they comprise.
Family management succession means preparing the ownership transmission from the
legal and financial point of view but also creating family cohesion based upon the concept
of value creation.
As noted earlier, effects (1) and (2) suggest that an increase in family complexity reduces
company performance in terms of satisfaction and business results. The effects identified
in the preceding paragraph (9) and (10) also suggest that FM has a direct positive impact
on satisfaction and business results. Consequently, FM can counteract the negative effects
produced by an increase in family complexity.
It therefore implies that:
The family influences the way the company operates (Astrachan, 1988; Chua et al.,
1999), in either a positive or negative fashion (Steier et al., 2004). The agency problem in
family companies (Gómez-Mejía et al., 2001; Schulze et al., 2001) may indicate a negative
influence stemming from altruism.
Family management limits the power of the founder and family managers in relation
to non-managers, thus allowing greater company professionalization (Hofer and Charan,
1984).
This supports the following proposition:
Satisfaction Profit
and a willingness to act. This vision is not subject to family interests. Profitability is not
an end in itself but rather simply a means to attain growth and development. The
company’s purpose is to provide work and support for family members. Given that the
aim is company development, there should be an associated increase in business com-
plexity. Habbershon and Pistrui (2002), in stating the role of a business family, actually
characterize what we define as a family adopting a venture orientation.
In a company with a financial orientation, the aim is to maximize profits and optimize
assets. The value of the company lies in its capacity to generate economic value for the
family. In this case, the central objective is the optimization of financial variables, such
as profitability, liquidity, risk, and so on. This orientation supports the idea that the
company must have a principal, as required by agency theory.
These three orientations correspond to radial categories that cannot be defined from
characteristics shared by each member in the category. As a result, the orientations
are characterized by a variation of the central model (Lakoff, 1987). With regard to radial
categories, family companies could belong to all the categories, but in varying degrees.
Dominant orientations influence BM decisions. A purely functional board of directors
is superfluous in a company whose raison d’être is family service. Family capacities define
the management practices, which, obviously, leads to less professionalization. Under the
protective orientation, succession planning is irrelevant since continuity is not one of the
family’s objectives. All this implies that the protective orientation has a net negative
impact on BM.
The prevalence of a venture orientation means that the family entrepreneur runs
the company in accordance with his own egocentric management style, which makes it
illogical for the BD to orient the company towards greater professionalization and to
exercise control over the managers (Cannella and Lubatkin, 1993). The family entrepre-
neur creates management models that represent alternatives to the professional ones.
Furthermore, it would be unreasonable for the BD to demand performance that goes
beyond the personal demands the entrepreneur places upon himself (Fredrickson et al.,
1988). In this case, succession is relatively straightforward. Effectively, this requires simply
repeating the model, with a new ‘entrepreneur’ picking up the reins from his or her pre-
decessor during the transition process. The greatest challenge is finding the right person
to succeed the entrepreneur (Gimeno and Baulenas, 2003). This implies that a venture ori-
entation has a negative impact on FM.
The financial orientation also influences BM in positive terms, stressing company per-
formance. The BD focus on results and CEOs who fail to deliver them are likely to be
replaced (Mizruchi, 1983). Management professionalization is a logical approach under
this orientation as it reduces risk, and provides more control of the CEO and the
company. It reduces the firm’s dependency on the CEO too. This orientation should
encourage succession planning in order to sustain financial performance. This means that
financial orientation should have a positive effect on BM.
In summary, we expect the following causal relations (see Figure 8.5):
16 Protective O. (PO) 13
17 Venture O. (VO) 14
18 Financial O. (FO) 15
The ideological dimension should also affect family management. Self-imposed limits
appear logical, depending on the family’s dominant orientation. However, such limits are
unwarranted if the family has a protective orientation since this entails the company being
at the family’s service. Consequently, a protective orientation specifically does not foster
institutional systems, differentiation between family and company, and development of
pertinent communication skills to facilitate family relations. This last concept is funda-
mental to establish limits on the family’s influence. This implies a negative effect of pro-
tective orientation on FM.
On the other hand, it is sensible for the family to establish limits to intervention within
the company in the case of the venture orientation. There are more important objectives,
such as the business project, to which the family is willing to subordinate its interests.
Developing management instruments that limit the family’s ability to divert resources is
consistent with an venture orientation. These policies help ensure that resources are
employed sensibly. The venture orientation hence fosters FM.
The financial orientation also has an impact on FM. Company financial interests delin-
eate a clear differentiation between the family and company spheres. The family organizes
itself in such a way as to maximize returns, accepting numerous self-imposed limits, if nec-
essary. The company does not cater to special interests involving, for instance, occupa-
tional status or family satisfaction. In this case, there is a logical need to clearly define
spheres delimiting the family and company. This therefore implies that the financial ori-
entation has a positive impact on FM.
Hence:
Summary of model
The various effects of internal factors influencing family business behavior are summa-
rized in the model shown in Figure 8.6.
Internal factors of family business performance 159
Age of the
1 2
company
16 Protective O. (PO) 13
17 Venture O. (VO) 14 7 8 5
18 Financial O. (FO) 15
3 Satisfaction Profit
company results, helps the company expand, incorporate knowledge and technology,
widen its product range, and so on. This increase in business complexity has a positive
impact on the firm’s results (5). The growth in company complexity leads to new man-
agement challenges that must be addressed by improving management practices. This
process, in turn, has positive repercussions on BM (7).
Ideology, in terms of one’s interpretation of reality, has a strong influence on FM. A
protective orientation that emphasizes family needs may jeopardize both FM (13) and
BM (16). This results from an understanding of reality that is inconsistent with restrict-
ing the family’s scope-of-action.
For the welfare of the organization, it is logical to limit the family’s influence when the
corporate objectives focus on the business project and leadership (that is, venture orien-
tation). Accordingly, such an approach has a significant influence on FM (14).
Nevertheless, personalized leadership is important too, under this orientation, and it has
a negative impact on BM (17). Indeed, venture orientation places more emphasis on per-
sonal leadership and development than on formal management practices.
Under a financial orientation, it is logical to limit family interference and to foster pro-
fessional management in order to maximize corporate value. This implies that financial
orientation should have a positive impact on both FM (15) and on BM (18).
The proposed model indicates that there is a tendency for family company perform-
ance to decline over time. This situation can be avoided by judicious management of the
relations between family and company. This, in turn, would improve business manage-
ment and, ultimately the firm’s results. The business family’s ideological framework may
either help or hamper management of both family–company relations and the company
itself.
Concluding remarks
The model provides an integrated framework for analysing the performance of family
firms and for interpreting pre-existing findings and relationships posed among some of
the variables included in the model. The model presented is a typical example of a struc-
tural equation model. Specific estimation and testing procedures have been developed
(Jöreskog, 1969) for these kinds of models. To validate this model, the various concepts
have to be measured for a sample of family businesses. The effects hypothesized in this
chapter can then be estimated and the model as a whole can be tested. This not only pro-
vides information about the direct effects specified in the model but also about indirect
effects and spurious relationships. If the model does not fit the data, there is scope for
refinements. The authors have already collected data for the empirical testing of the
Family in Business Performance Model.
Notes
* Acknowledgement: we are thankful to Marcel Planellas, Pedro Parada, Joan Manel Batista, Joan Sureda,
Eugenia Bieto, Iván Lansberg, Fernando Casado, Emil Herbolzheimer, Panikkos Poutziouris and two
anonymous reviewers for their valuable comments.
1. Complexity implies the emergence of new system properties arising from the dynamic relationships between
its constituent elements (Morel and Ramanujam, 1999). A more complex system is both more adaptable to
its environment, but also has greater potential to become disordered (Luhmann, 1996). Thus, a more
complex company will have more elements (staff, products, suppliers, clients, technologies, countries, cul-
tures, and so on), which will create richer behavior patterns, but which will also require systems to impose
order and limit the company’s propensity to become chaotic.
Internal factors of family business performance 161
2. Families perform two main functions in human society: nurturing and socialization (Minuchin, 1979; Reiss,
1981). The first consists of supporting the physical and emotional development of family members, while
the second involves passing on values, rules, and social position to those members.
3. Controlling owner, sibling partnership and cousin consortium.
4. For example, the primogeniture model widely used in farming societies in which, unlike in the modern
world, management and technology played little or no role in either creating or destroying value.
5. Often referred to as a ‘zero agency-cost firm’.
6. Hambrick and Finkelstein (1987) define managerial discretion as the freedom managers have in making
decisions and shaping the company’s organization.
7. This formal definition of rules has been given various names: shareholders’ agreement, protocol, family con-
stitution, capital principles.
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PART III
167
168 Handbook of research on family business
necessarily additive. Given this situation, we suggest in such circumstances that the influ-
ence of each family must be considered within any measure that assesses family influence.
To be functional, a definition must be unambiguous and transparent in such a way that
it can be quantified. For example, Lea’s (1998) definition is very difficult to operationalize:
A business is a family business when it is an enterprise growing out of the family’s needs, built
on the family’s abilities, worked by its hands and minds, and guided by its moral and spiritual
values; when it is sustained by the family’s commitment, and passed down to its sons and daugh-
ters as a legacy as precious as the family’s name. (p. 1)
Furthermore, a definition should measure what it purports to measure and assist in pro-
viding reliable (replicable) research results.
In an early attempt to view family businesses as nonmonolithic, Shanker and Astrachan
(1996) classify definitions by degree of family involvement. Their three-tier categorization
ranges from broad (little direct family involvement), to middle (some family involvement),
to narrow (a lot of family involvement). In contrast, Klein (2000b) prepared a modular
classification in which different criteria are regarded as independent rather than additive.
Definitions that differ only slightly make it difficult not only to compare across investi-
gations but also to integrate theory. Smyrnios, Tanewski, and Romano (1998) point out
that ‘complexities associated with arriving at a sound definition of a family firm raised a
number of methodological concerns related to sampling issues, appropriate group com-
parisons, and establishing appropriate measures used to derive statistics’ (p. 51). This
complexity can raise confusion and call into question the credibility of family business
research (Habbershon and Williams, 1999). It is our view that a family business definition
should be clear about to which dimensions it refers. Moreover, a definition should be
transparent and unambiguous. Perhaps most important, a definition should be modular,
and its operationalization should lead to reliable and valid results.
A detailed review of definitions employed in studies reveals that there is no clear demar-
cation between family and nonfamily businesses and that no single definition can capture
the distinction between the two types of entities. Artificially dichotomizing family vs. non-
family firms when no such clear-cut dichotomy exists creates more problems than it
attempts to solve. In this paper, we propose that there are discrete and particular qualities
or characteristics of a business that are more appropriately measured on a continuous
rather than dichotomous scale. We also suggest measures that can be used to tap different
qualities of businesses. These measures make it possible to differentiate levels of family
involvement. In addition, these measures provide a framework integrating different the-
oretical and methodological approaches to the study of family business.
A relevant issue, therefore, is not whether a business is family or nonfamily, but the extent
and manner of family involvement in and influence on the enterprise. In our view, there are
three important dimensions of family influence that should be considered: power, experi-
ence, and culture. These three dimensions, or subscales, comprise the F-PEC, an index of
family influence. This index enables comparisons across businesses concerning levels of
family involvement and its effects on performance as well as other business behaviors.
The F-PEC also allows researchers to utilize data derived from subscales and total
scores as independent, dependent, mediating, or moderating variables. Interestingly,
during the late 1930s, Lazarsfeld (1937, p. 127f, quoted after Schnell et al., 1995, p. 161)
identified three reasons for developing a scale: functional reduction, arbitrary numerical
reduction, and pragmatic reduction. With respect to the F-PEC, pragmatic reduction is
perhaps the most important reason for its development.
As well as pragmatic implications, the F-PEC will herald objectivity and standardiza-
tion of measurement across investigations. F-PEC development is based on main themes
derived from an in-depth content analysis of various definitions of family business. Scales
of the F-PEC provide an overall measure of family influence. A discussion of the three
subscales of the F-PEC follows.
This interest has focused on a number of different topics, including legitimate leadership
(Kehr, 1996), performance (Monsen, 1996), principal-agent theory (Aronoff and Ward,
1995), and governance structure (Neubauer and Lank, 1998). Although these topics are
important, the F-PEC is not concerned with whether a nonfamily CEO would serve the
business better, whether a family CEO will reduce control costs, or whether a family CEO
is highly motivated (Aronoff and Ward, 1995). The F-PEC power subscale assesses the
degree of overall influence or power either in the hands of family members or in those
named by the family. This level of influence via ownership, management, and governance
is, therefore, viewed as interchangeable as well as additive.
In line with this view, Klein (2000a, 2000b) integrates ownership, governance, and man-
agement involvement of the family into a definition in which the level of influence in
another could balance a lack of influence in one of these three domains. Although the
Klein definition provides only a discrete determination (family vs. nonfamily), it does
combine several criteria into one continuum and, thus, shows a number of precursor char-
acteristics appropriate for the development of an index or scale. Discussing how this con-
tinuum functions, Klein (2000a) states that ‘influence in a substantial way is considered if
the family either owns the complete stock or, if not, the lack of influence in ownership is
balanced through either influence through corporate governance or influence through
management’ (p. 158).
Notwithstanding, Klein did not comment on the importance of indirect influences for
international comparisons. This issue is important as tax and legal structures across
national boundaries encourage different forms of ownership. In some countries, for
example, it is an advantage to own a company through other entities (for example, trusts,
companies, or holding companies), and understanding the actual levels of family owner-
ship and governance control can be difficult to decipher. For instance, it can be difficult
to assess the extent of influence of a family who owns a business through a holding
company. Faccio and Lang (2002, p. 10) take into account the indirect influence of a
stakeholder through ‘the product of two ownership stakes along the chain’ of owning
companies or family members. An example of this ownership chain includes a family that
owns 100 per cent of a holding company that itself owns 100 per cent of the company.
Obviously, this family has 100 per cent influence through ownership. However, a family
that owns 50 per cent of a holding company that itself owns 50 per cent of the stock of a
company has only a 25 per cent influence via ownership.
Family influence through governance and management can be measured as the pro-
portion of family representatives who are members of the governance or management
boards. In contrast, indirect influence might mean members of a board who are named
through family members but are not family members themselves. A family’s influence
through this means, although indirect, is usually considerable. To assess this direct influ-
ence optimally, a weighting system must be employed. In mixed cases, the proportion of
family members on the board will be added to a weighted proportion of members.
Consider the following example: two of five board members are family, two are nom-
inated or elected by family members, and one is representative of a minor nonfamily
shareholder. Our weighting system suggests that this board comprises 44 per cent of
family influence to the overall power subscale. This proportion is calculated by aggregat-
ing 40 per cent of family influence (that is, two of five members are family) and 4 per cent
of indirect influence (two of five multiplied by 0.1).
The F-PEC scale of family influence 171
100%
80%
Value of experience
60%
40%
20%
0%
n
n
io
io
io
io
io
io
io
io
io
io
t
at
at
at
at
at
t
ra
ra
ra
ra
ra
er
er
er
er
er
e
ne
ne
ne
ne
en
n
ge
ge
ge
ge
ge
ge
ge
ge
ge
tg
th
1s
2n
3r
4t
5t
6t
7t
8t
9t
10
field is undeniable, even given the recent difficulties facing the Schmidt bank itself and,
therefore, Consors as well. The family gained substantial experience as a result of their
son’s entrepreneurial input. Therefore, the number of family members dedicated to the
business is viewed as an important indicator of how much experience the business receives
from the family. Figure 9.3 shows the dimensions of the F-PEC experience subscale.
Psychometric properties
Internal reliability (consistency) coefficients (Cronbach’s alpha) for the F-PEC subscales
and overall scale were also determined. Cronbach’s alpha assessed the degree to which
items making up a factor are intercorrelated or share similarities in their measurement of
a particular construct, such as culture.
Items that make up the three subscales of the index were then evaluated for unidimen-
sionality and reliability. A unidimensional factor comprises items that share a similar trait
or construct. Congeneric measurement models were produced by allowing each item to
174 Handbook of research on family business
Overlap between
Ownership Generation of Family business
family values and
(direct and indirect) ownership commitment
business values
Governance
[family and nonfamily Generation active in
(external) board management
members]
Management
Generation active
[family and nonfamily
on the governance
(external) board
board
members]
Number of
contributing family
members
respond to its underlying concept (Jöreskog and Sörbom, 1989). Goodness of fit of a
measure was used to assess the degree to which observed data scores are predicted by an
estimated model. Results should indicate whether items adequately fit hypothesized
models and whether items have acceptable reliabilities (Hair et al., 1995).
External validity
To demonstrate external validity (that is generalizability), the F-PEC was tested on large
sample groups (for example, n 500) in different countries, including the United States,
Germany, Australia, and Britain as well as in Europe. Cross-cultural comparisons also
involved subjecting the F-PEC to the rigorous statistical procedures outlined previously.
Discussion
The F-PEC index of family influence on the business provides researchers, for the first
time, with a tested standardized instrument that allows integration of different theoreti-
cal positions as well as comparisons of different types of data. Once the F-PEC’s relia-
bility and validity are demonstrated, it will encourage researchers to conduct more
international research on a solid basis, as well as encourage researchers from outside the
family business field to include family business issues in their research. The time so far
spent on definition problems might be invested in either pure research of fundamental
The F-PEC scale of family influence 175
Notes
1. This paper is seeded in the thoughts of the first named author, though these early ideas were fully realized
only following the second meeting of the International Family Enterprise Academy in Amsterdam in 2000.
Since this time, a number of discussions have been held on this topic and researchers around the world (for
example, Germany, United States, Australia) have begun an international collaboration on this research.
The operationalization of family vs. nonfamily enterprises has been a matter of concern from the very begin-
ning of family business research. In most studies, the categorization of firms has culminated in the use of
the classification as an independent variable. This approach, while important, has contributed to several
problems, such as the lack of comparability of empirical data, confusion over what is meant by the term
family business, and unconstructive discussion among researchers.
2. We would like to thank the participants of the 2000 (Amsterdam, the Netherlands) and 2001 (INSEAD,
Fontainebleau) International Family Enterprise Research Academy for their valuable, provocative, and
challenging thoughts and comments.
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The F-PEC scale of family influence 177
Definitions
● Family is defined as a group of persons including those who are either offspring of
a couple (no matter what generation) and their in-laws as well as their legally
adopted children.
● Ownership means ownership of stock or company capital. When the percentage of
voting rights differs from percentage of ownership, please indicate voting rights.
● Management board refers to the company board that manages or runs an
entity(ies).
● Persons named through family members represent the ideas, goals, and values of
the family.
1. Please indicate the proportion of share ownership held by family and nonfamily
members:
(a) Main company owned by: (i) direct family ownership: ____ %
(ii) direct nonfamily: ____ ownership: ____ %
(iii) holding company: ____ %
(b) Holding company owned by: (i) family ownership: ____ %
(ii) nonfamily ownership: ____ %
(iii) 2nd holding company: ____ %
(c) 2nd holding company owned by: (i) ____ family ownership: ____ %
3. Does the business have a governance board? 1. ❑ Yes 2. ❑ No
If YES:
(a) How many board members does it comprise? __________ members
(b) How many board members are family? __________ family members
(c) How many nonfamily (external) members
nominated by the family are on the board? ________ nonfamily members
4. Does the business have a management board? 1. ❑ Yes 2. ❑ No
If YES:
(a) How many persons does it comprise? _____________members
(b) How many management board members are family? _______ family members
(c) How many nonfamily board members are chosen
through them? _________nonfamily members
178 Handbook of research on family business
Definitions
1. Your family has influence on your business. Not at all To a large extent
1.......... 2........... 3.......... 4........... 5
2. Your family members share similar values. Not at all To a large extent
1.......... 2........... 3.......... 4..........5
3. Your family and business share similar Not at all To a large extent
values. 1.......... 2........... 3.......... 4........... 5
Introduction
The importance and powerful influence of family in all aspects of entrepreneurship and
business has recently been highlighted (Aldrich and Cliff, 2003; Rogoff and Heck, 2003).
Despite their significant contribution to the economy, research into private family firms
is relatively neglected. Perhaps this is because they are believed to be less interesting owing
to a lack of agency problems, little separation of ownership and control and shared goals.
Many view private family firms as a homogenous group, but casual observation suggests
that they differ with regard to their ownership and management structures and the extent
to which family objectives dominate. Currently, there is limited understanding of how,
why, or the extent to which, private family firms differ. This has implications for the future
of family firms research, because the use of an overarching family firm definition, and the
failure to recognize contrasts between ‘types’ of family firms may impact on the validity
and generalizability of findings. Also, most studies fail to explore the link between the
‘type’ of family firm and its performance, which is important for the development and
efficacy of practitioner and public policy support.
The stereotypical family firm with good relationships and low information asymmetries
may occur less frequently than expected. Indeed, family firms may not be the corporate gov-
ernance panacea predicted by agency models (Schulze et al., 2001). Limitations of agency
theory in the family business and entrepreneurship context (Arthurs and Busenitz, 2003;
Astrachan, 2003; Greenwood, 2003; Randoy and Goel, 2003) indicate it only provides a
partial explanation of private family firm dynamics (Howorth et al., 2004). Agency theory
focuses on firm-level ownership and management, but the family system increases complex-
ity (Neubauer and Lank, 1998). Ownership and management are, generally, part of a
performance-based system, while the family is a relationship-based system. Where a system
is performance based and rational economic objectives can be assumed, agency theory can
be applied. In a relationship-based system, where non-financial objectives prevail and behav-
iour may not be economically rational, the explanatory power of agency theory is more
limited, especially where goal congruence exists (Arthurs and Busenitz, 2003). Nevertheless,
separation of ownership and control does occur in some family businesses, indicating that
agency theory has some explanatory power. However, complementary theories are required
which incorporate the relationship aspects and long-term interactions of family firms.
We utilize agency and stewardship perspectives to formulate a conceptual framework
highlighting differences between private family firms. Variables relating to family firm
objectives and ownership and management structures are used to empirically identify a
taxonomy of private family firm ‘types’.
The following research question is the focus of this chapter:
Can ‘types’ of private family firms be identified?
180
Identification of different types of private family firms 181
The following discussion reports several stages in the classification of private family
firms. In profiling ‘types’ of family firms, we characterize the ‘average’ private family firm
and the variants. Seven ‘types’ of family firms are identified. Data on the size and perform-
ance differences between the detected ‘types’ of family firms are provided. Superior (and
weaker) performance is found to be associated with ‘outlier’ family firm ‘types’.
Implications relating to the findings are discussed.
Theoretical perspectives
The popular image of a family firm negates agency problems, owing to close matching of
owners’ and managers’ motivations and attitudes, and little information asymmetry.
Stewardship theory suggests managers’ and employees’ motives are aligned to those of the
organization (Davis et al., 1997). Further, stewardship theory does not assume financial
goals or economic rationality, and thus may be more applicable to family firms. Unlike
agency theory, stewardship theory can encompass pure altruism, which is selfless and not
motivated by economic returns. Thus, in the stereotypical family firm, stewardship theory
would expect behaviour that puts the organization first, a strong psychological ownership
of the family firm and a high occurrence of altruism. Altruism stems from loyalty and com-
mitment between family members (Schulze et al., 2003). Where altruism is high, commu-
nication and cooperation will be high but information asymmetries will be low. The flip
side is that offspring may take advantage of parents’ altruism leading to free-riding, shirk-
ing, squandering and increased information asymmetry. Biases and filters may also com-
pound information flows in an altruistic environment. Thus, in some family firms there
may be a high level of information asymmetry, in contrast to the stereotypical family firm.
Westhead et al. (2002) suggest that some private family firms do not conform to the
stewardship perspective. Family firms exhibit a variety of motivations, more and less
complex management and ownership structures, and differing levels of company perform-
ance (Westhead and Howorth, 2004). For some, financial objectives are important
(Smyrnios and Romano, 1994). A number of family firms may, for example, introduce
agency control mechanisms such as performance related pay (Schulze et al., 2003) and
non-executive directors (NEDs) (Westhead et al., 2001).
In determining where an agency or stewardship perspective is appropriate we need to
consider the assumptions of the perspectives. Agency theorists assume a focus on finan-
cial objectives and individuals that are self-serving (Astrachan, 2003). Conversely, stew-
ardship theorists assume a focus on non-financial objectives and individuals that are
organization-serving. In considering family firms and the applicability of agency or stew-
ardship perspectives, we focus on the dominant coalition, that is, the group of individu-
als (owners and managers) who have power and influence within the firm. Where the
dominant coalition is organization-serving they will put the needs of the family and/or
the firm before their own desires, in line with a stewardship perspective. Where the dom-
inant coalition is self-serving, individuals needs and desires will dominate and agency
mechanisms may be in place to align owners’ and managers’ interests. Figure 10.1 presents
these variations as a basis for identifying ‘types’ of private family firms. The stereotypical
family firm is expected to conform to the classic stewardship perspective of organization-
serving and focus on non-financial objectives, such as maintaining family control and
avoiding debt, rather than on establishing ownership and management structures that
encourage superior firm performance. This latter family firm resides in quadrant C in
182 Handbook of research on family business
Objectives
Financial
B
A
Cluster 4 = 36 firms
Cluster 2 = 3 firms
C D
Non-financial
Figure 10.1. Firms that exhibit the classic agency perspective of the firm reside in
quadrant B. Variations in the extent to which the prevailing culture within a firm is
organization- or self-serving, and/or in the importance of financial objectives, provide
potential for firms to reside in quadrants A and D. It is expected that family firms will
exhibit varying degrees of organization-serving and self-serving motivations with altruis-
tic and self-serving behaviours, at times, occurring simultaneously (Jensen, 1994). There
will also be differing emphases on financial and non-financial objectives, and often a com-
bination of the two. Therefore, the lines within the framework in Figure 10.1 represent
continua rather than mutually exclusive extremes.
Operationalization
In operationalizing this framework, family firms can be asked directly about the extent to
which they focus on various objectives. It is more difficult to identify the extent to which
they are organization- or self-serving. However, where self-serving behaviour prevails,
firms will more closely resemble the agency perspective of the firm and are more likely to
implement agency control mechanisms, such as the appointment of NEDs and larger
boards of directors. Thus, differences between private family firms are expected to mani-
fest themselves in variations in their ownership and management structures. We, therefore,
focus on ownership and management structures, as well as company objectives. These
three factors may be interrelated, and this can shape the formation of ‘types’ of private
family firms.
Identification of different types of private family firms 183
Objectives
Family and business motives are intertwined in family firms. Family firms may differ with
regard to the reported importance of particular family objectives (Chua et al., 2003).
Important objectives cited by owners of family firms include: survival of the family busi-
ness as a going concern (Westhead and Cowling, 1997); continued independent owner-
ship of the firm (Binder Hamlyn, 1994); transfer of ownership to the next generation
(Gersick et al., 1997); maintaining financial independence (Donckels and Fröhlich,
1991); and employment of family members (Westhead, 1997). There may also be varia-
tions in the extent to which financial objectives are emphasized (Feinberg, 1975;
Smyrnios and Romano, 1994).
Nine company objectives variables were utilized (Table 10.1). In identifying ‘types’ of
family firms, we expect that there will be variations in the extent to which family firms
emphasize financial and non-financial (or family) objectives. Family firms that focus more
on financial objectives may reflect the agency perspective of the firm. The latter firms may
be associated with greater separation of company ownership and control, and they may
be more likely to employ agency control mechanisms.
Clusters
Variables
related to
principal Global Std
Variables (a) components 1 2 3 4 5 6 7 mean dev
Number of directors (a) 1 2.11* 8.67** 2.21 3.78* 3.08 2.50 3.41 2.91 1.53
Number of people in the management team (a) 1 3.56 24.00** 2.53* 6.61* 4.65 3.48 5.28 4.49 3.68
Proportion of directors from the largest 1 85.19 33.73** 89.47 62.35* 66.70* 89.71 82.99 81.31 25.31
family group (a)
Proportion of management team from family (a) 1 51.69 12.58** 81.93* 35.56* 44.59 69.84 55.38 59.65 33.29
Board employed a non-executive director (b) (c) 1 0.00 0.67** 0.05 0.56** 0.08 0.06 0.31 0.17 0.38
Proportion of shares owned by family (a) 1 91.78 75.33* 96.90 77.44* 85.73 94.64 89.07 90.20 15.77
A prime objective is to accumulate family 2 4.00 4.33* 2.90* 2.83* 3.39 3.97 4.38* 3.70 0.95
184
wealth (a) (d)
A prime objective is to maintain/enhance owners 2 4.11 4.33* 3.63 2.89* 3.42 4.02 4.48* 3.81 1.03
lifestyle (a) (d)
A prime objective is to ensure survival of the 3 4.89 4.33* 4.32* 4.83 3.89** 4.84 4.86 4.69 0.55
business (a) (d)
A prime objective is employees job security 3 4.44 3.33** 3.37** 4.31 3.54* 4.44 4.17 4.19 0.77
A prime objective is to ensure independent 3 4.44 5.00** 3.68* 4.06 2.92** 4.29 4.79* 4.13 0.87
ownership (a) (d)
Second or more generation family firm (b) (c) 4 0.56 0.33 0.21 0.78* 0.46 0.30 0.76* 0.45 0.50
A prime objective is to pass business to next 4 3.00 4.00* 3.05 3.36 2.69* 3.39 4.10* 3.36 1.04
generation (a) (d)
A prime objective is increase market value of 5 4.22 4.67* 2.79** 4.19 4.15 4.32 3.24* 4.03 0.89
business (a) (d)
A prime objective is reputation and status 5 4.56* 3.00* 3.05* 4.42* 3.62 4.14 2.97* 3.90 1.01
in locality (a) (d)
Number of ordinary shareholders 6 3.66** 0.69 0.37 0.70 0.44 0.42 0.59 0.61 0.72
(logs to base 10) (a)
It is important that day-to-day operations are the 6 2.56* 3.67 3.47 2.69* 2.81 3.50 3.62 3.28 1.03
responsibility of family members (a) (d)
Number of companies in the cluster 9 3 19 36 26 115 29
Notes:
185
(a) Kruskal-Wallis coefficient statistically significant at the 0.001 level of significance for the seven clusters.
(b) A chi-square statistic could not be calculated because more than 20 per cent of the observed categories had less than five expected observations. Chi-square
coefficient statistically significant at the 0.001 level of significance for five clusters (excluding the respondents in clusters 1 and 2).
(c) Measured on a scale where 1 = ‘yes’ and 0 = ‘no’.
(d) Measured on a scale where 1 = ‘strongly disagree’, 2 = ‘disagree’, 3 = ‘neutral’, 4 = ‘agree’, and 5 = ‘strongly agree’.
** Cluster mean which deviates by more than a standard deviation from the respective global mean.
* Cluster mean which deviates by more than half a standard deviation from the respective global mean.
186 Handbook of research on family business
However, difficulties may arise from the conflict of the economic objectives of non-family
members and the non-economic objectives of family. Relatively few family firms employ
NEDs (Westhead et al., 2001). In the majority of family firms the CEO is a family member
(Kelly et al., 2000), which may lead to greater emphasis on family objectives. Larger
boards of directors and more outside directors may be associated with agency problems.
Many family firms have small boards, dominated by family directors, but this may be asso-
ciated with size of the firm (Daily, 1995).
Six variables relating to the size and composition of the board and management team
were ascertained (Table 10.1). In identifying ‘types’ of family firms, we expect variations
in the size and composition of the board of directors and the management team. Larger
boards and more outside (non-family) representation on the board and within the man-
agement team are expected to be associated with family firms that focus on financial
objectives, more diverse shareholdings and smaller proportions of family ownership.
Outside representation may include (but is not restricted to) the employment of one or
more NEDs.
associated with ‘types’ of family firms with more outside involvement on the board of
directors and in management, employment of one or more NEDs and less emphasis on
family objectives.
Multiple measures of firm size and performance were ascertained. This is especially
important for family firms where wealth creation may not be the major objective
(Chrisman et al., 2003). Financial data can be difficult to interpret, particularly for small
unquoted companies, where compensation strategies of owners can have a profound influ-
ence on recorded profits. Absolute scores on financial performance criteria can also be
affected by industry-related factors. Moreover, financial results may not match the per-
ception of performance. Firm size was explored in terms of absolute gross sales revenues
(£s), people (full-time and part-time) employed, and absolute gross sales revenues as a pro-
portion of people employed. Six additional performance indicators were collected relat-
ing to absolute change in gross sales revenues (£s), 1991–94; absolute change in number
of people employed, 1991–94; whether the business exported outside the UK; percentage
of gross sales exported; profitability of the business in 1994; and a weighted average per-
formance score (WEIGHTED) (that is controlling for industry differences between firms)
(Naman and Slevin, 1993; Westhead and Cowling, 1997).
Research design
Information from a stratified random sample of family and non-family independent
unquoted companies in the UK was collected in 1995 (Westhead, 1997). In total, 427 valid
questionnaires were obtained. A noteworthy 48 per cent valid response rate was reported.
Response bias tests were conducted. Chi-square and ‘t’ test analyses indicated that the
respondents to the survey were not significant different from the non-respondents with
regard to industry; location of the business by standard region as well as urban and gov-
ernment designated ‘assisted’ area location; age of the company; employment size of the
company; and the sales revenue of the company.
A company was regarded as a family firm if more than 50 per cent of ordinary voting
shares were owned by members of the largest single family group and the company was
perceived to be a family business (Westhead and Cowling, 1998). In total, 272 private com-
panies (64 per cent) were regarded as family companies. In 98 per cent of the surveyed
companies the CEO provided data. In total, 146 first generation family firms (54 per cent)
and 126 multi-generation family firms (46 per cent) were identified. Respondents that filed
missing information returns to any of the selected 18 variables were excluded from any
further analysis. In total, 237 respondents provided complete data sets for the selected
variables.
An R-mode principal components analysis (PCA) was utilized to transform and ortho-
normalize the original data, identifying six underlying constructs. Cluster analysis then
explored the standardized component score matrix (that is, six orthogonal variables for
each firm). Seven ‘types’ of private family firms were identified. The predictive validity of
the taxonomy was assessed by discriminant analysis. Bivariate analysis was conducted to
compare the ‘types’ of family firms, and to examine size and performance differences.
Results
An R-mode PCA was utilized to detect the links between the 18 selected variables. The
variable relating to whether the CEO is a member of the single dominant family group
188 Handbook of research on family business
that owns the business had a low communality, and was removed from the model. All
the assumptions of the model were satisfied with regard to the inclusion of the remain-
ing 17 variables. The varimax rotated model identified six components with eigenvalues
greater than unity, and the model accounted for 62 per cent of the total variance. Each
variable had a component loading of 0.50 or higher on only one component. Adequate
convergent validity was evident. Labelling of components was based on loadings that
were statistically significant at the 0.05 level. The components were labelled as follows:
closely and family owned and controlled (Component 1); family lifestyle objectives
(Component 2); security and survival objectives (Component 3); family succession
objectives (Component 4); wealth maximization objectives (Component 5); and con-
centrated shareholding and family control objective (Component 6). Trends isolated in
the rotated component structure appeared to have meaningful expression in that they
highlight contrasting financial and non-financial objectives, as well as the concentration
of family ownership and management. Component 1 scores will be positive for family
firms that align with the stewardship perspective, and negative for firms that align with
the agency perspective. High positive Component 5 scores represent a focus on financial
objectives, while high positive scores on Component 2 represent a focus on non-financial
objectives. High positive scores on the other components represent a focus on non-
financial objectives.
The 237 firms by six components matrix of component scores formed the data matrix
for an agglomerative hierarchical QUICK CLUSTER analysis. The seven-cluster solu-
tion is interpretable, and occurs before the distances at which clusters are combined
become too large. The seven clusters highlight different permutations of company objec-
tives, as well as company ownership and management structures. One-way analysis of
variance tests showed significant differences between clusters on all components.
Because the QUICK CLUSTER analysis explored a component score matrix that
accounted for 62 per cent of the variance in the ‘raw’ data, Kruskal-Wallis and chi-
square statistics were also calculated between each of the seven clusters with respect to
the original ‘raw’ data relating to the 17 variables analysed by the PCA. Table 10.1 shows
that statistically significant contrasts were recorded among the seven clusters with
respect to all 17 ‘raw’ variables.
Descriptive labels for each of the seven clusters were based on differences between
cluster means and global means for each of the 17 ‘raw’ variables (Table 10.1). Further,
the cluster mean for each of the earlier identified principal components was calculated.
The results from the two analyses are reasonably consistent and allow ‘types’ of private
family firms to be labelled as follows:
Cluster 1 – Diverse shareholdings but family management not emphasized. The nine
firms in cluster 1 have diverse shareholdings, they attach less importance to family
management but place greater emphasis on the status of the firm. Cluster 1 firms do
not differ significantly from the average with regard to the proportion of family own-
ership or control, and the importance of other objectives.
Cluster 2 – Diluted control and focus on family lifestyle objectives. The three firms in
cluster 2 are significantly different from other firms across a wide range of variables.
Firms have larger boards of directors and management teams, more outside (non-
family) representation on the board and management team, less family ownership,
Identification of different types of private family firms 189
and they are more likely to employ a NED. Family wealth and lifestyle are empha-
sized with less emphasis given to long-term security. Independent ownership of the
firm and increasing market value are important objectives.
Cluster 3 – Family owned and controlled with less emphasis on wealth maximization and
security objectives. The 19 firms in cluster 3 are family owned and controlled and they
are not focusing on family wealth maximization or security company objectives.
Increasing market value and employee job security are less likely to be emphasized.
Cluster 4 – Diluted ownership and control with less focus on family lifestyle objectives.
The 36 firms in cluster 4 have diluted ownership and control and they are more likely
to be multi-generation firms. Less emphasis is placed on family lifestyle objectives.
Firms have more directors and managers but a smaller percentage of them are family
members. Cluster 4 firms are more likely to employ a NED. Further, family members
own a smaller percentage of shares.
Cluster 5 – Dilution of family control and less focus on security or inter-generational
ownership transfer objectives. The 26 firms in cluster 5 highlight less family control and
less focus is being placed on the survival of the business, employee job security, inde-
pendent ownership, or inter-generational succession objectives.
Cluster 6 – Family owned and controlled firms with a focus on family objectives. The
115 firms in cluster 6 are family owned and controlled and they focus on family objec-
tives. We can infer that they are ‘average’ (or stereotypical) family firms.
Cluster 7 – Multi-generation family firms with a focus on family objectives. The 29 firms
in cluster 7 are generally multi-generation family firms focusing on family lifestyle
and inter-generational ownership transfer objectives. Independent ownership is more
likely to be emphasized and less focus is given to increasing market value.
The seven ‘types’ of private family firms were allocated to the quadrants suggested by
the earlier theoretical discussion. In doing this, each type was compared with regard to
their emphasis on financial or non-financial objectives and the presence of agency control
mechanisms as discussed earlier (see ‘Operationalization’). Family firm ‘types’ with
agency control mechanisms such as larger boards of directors and use of non-executive
directors tended to emphasize financial objectives in line with the agency perspective.
Figure 10.1 shows that the family firm ‘types’ appear to fall into either quadrant B or C.
There was no evidence of family firms reporting objectives and ownership/management
structures which would situate them in quadrants A or D. In line with agency theory, this
suggests that family firms predominantly focusing upon financial objectives report a self-
serving culture. Moreover, in line with stewardship theory, family firms predominantly
focusing upon non-financial objectives generally report an organization-serving culture.
This provides some confirmation of the validity of these two theoretical perspectives.
The appropriateness of the seven-cluster taxonomy was tested using discriminant
analysis. Classification results from the final model showed that the seven-cluster solution
is optimal. Approximately 92 per cent of firms were correctly classified to the cluster iden-
tified by the cluster analysis.
Table 10.2 summarizes the differences between the seven ‘types’ of family firms with
regard to their demographic characteristics. A larger proportion of cluster 3 firms were
engaged in services, while a larger proportion of cluster 5 firms were engaged in con-
struction. No marked differences were detected in location of the firms. Fewer firms in
Table 10.2 Cluster characteristics of family companies by company demographics and performance (a)
Cluster
1 2 3 4 5 6 7 Chi-square stat
significance level
No. % No. % No. % No. % No. % No. % No. %
1. Main industrial activity (b)
Agriculture, forestry 1 11.1 1 33.3 1 5.3 2 5.6 1 3.8 15 13.0 5 17.2
and fishing
Manufacturing 1 11.1 0 0.0 1 5.3 2 5.6 2 7.7 8 7.0 1 3.4
Construction 1 11.1 0 0.0 2 10.5 6 16.7 6 23.1 17 14.8 5 17.2
Services 6 66.7 2 66.7 15 78.9 26 72.2 17 65.4 75 65.2 18 62.1
2. Location (b)
Rural 2 22.2 1 33.3 6 31.6 9 25.0 2 7.7 38 33.0 7 24.1
Urban (c) 7 77.8 2 66.7 13 68.4 27 75.0 24 92.3 77 67.0 22 75.9
190
3. CEO is a member of the single dominant family group that owns the business (b)
No 1 11.1 1 33.3 2 10.5 12 33.3 4 15.4 7 6.1 3 10.3
Yes 8 88.9 2 66.7 17 89.5 24 66.7 22 84.6 108 93.9 26 89.7
4. Business exported sales outside the UK in 1994 (b)
No 6 66.7 3 100.0 13 72.2 25 71.4 20 76.9 78 68.4 20 71.4
Yes 3 33.3 0 0.0 5 27.8 10 28.6 6 23.1 36 31.6 8 28.6
5. For the financial year ending in 1994 the business operated at: (b)
Loss or break-even 1 11.1 0 0.0 2 11.1 4 11.4 8 30.8 17 15.0 5 17.2
Profit 8 88.9 3 100.0 16 88.9 31 88.6 18 69.2 96 85.0 24 82.8
Notes:
(a) Derived from postal questionnaire survey.
(b) A chi-square statistic could not be calculated because more than 20 per cent of the observed categories had less than five expected observations.
(c) Business located in an area with 10 000 or more people.
Identification of different types of private family firms 191
clusters 2 and 4 reported that their CEO was a family member. Table 10.3 shows that the
firms in clusters 7 and 4 were, on average, older.
The seven ‘types’ of family firms were compared with regard to their size and perform-
ance. Table 10.3 shows that firms in clusters 2, 4 and 7 reported significantly higher sales
revenues (SALES94), while firms in clusters 1 and 3 reported significantly lower sales. Firms
in clusters 2 and 4 were larger in employment size (EMPLOY94), whilst firms in clusters 1,
3 and 6 were smaller. Further, a weakly significant difference with regard to the absolute
change in gross sales revenues (SALESCH) was detected. Firms in cluster 2 reported larger
increases in sales, while firms in cluster 1 reported the smallest increases in sales.
Correlation analysis showed that the WEIGHTED variable was significantly associated
with five of the size and performance variables. The WEIGHTED variable can, therefore,
be viewed as a reasonable surrogate measure of overall firm size and performance. Firms
in clusters 2 and 1 reported significantly higher WEIGHTED scores, while firms cluster
3 reported the lowest scores.
No marked differences were detected between the ‘types’ of firms with regard to the
propensity to export or to report a profit in 1994 (Table 10.2). Further, no significant
differences between the ‘types’ of firms were detected with regard to sales revenues to
employees (SALESR94); change in number of employees (EMPLOYCH); and percent-
age of sales exported (%EXPORT) (Table 10.3). However, significant pairwise differences
with regard to absolute employment change were noted. Cluster 2 firms, on average,
reduced their employment size by 51 people and cluster 3 firms only reported increases of
0.16 people.
Clusters
No. Kruskal-
1 2 3 4 5 6 7 of Wallis
Obs sig
Varibles Mean Median Mean Median Mean Median Mean Median Mean Median Mean Median Mean Median
AGE (i, ii, iii, iv) 36.67 15.00 42.33 37.00 27.79 25.00 54.08 47.50 36.89 26.50 29.46 19.00 61.55 43.00 237 0.0000
SALES94 (v, vi, vii) 988 670 58 666 35 000 1021 400 9625 2356 3908 1650 1394 783 4171 1710 216 0.0000
EMPLOY94 18.11 11.00 321.67 280.00 11.32 6.00 130.77 42.00 40.89 24.50 19.97 12.00 45.00 21.00 233 0.0000
(viii, ix, x)
SALESR94 73 443 40 476 260 882 96 429 131 876 58 452 98 343 53 571 88 805 65 517 88 766 65 553 121 209 73 529 215 0.6290
SALESCH 286 182 15 333 13 000 329 29 1264 212 827 121 302 92 616 223 212 0.0549
(xi, xii, xiii)
EMPLOYCH 3.33 0.00 51.00 51.00 0.16 0.00 14.11 1.00 1.12 1.00 2.37 0.00 4.39 0.00 231 0.7298
(xiv, xv)
%EXPORT 3.33 0.00 0.00 0.00 10.67 0.00 8.31 0.00 5.39 0.00 5.49 0.00 2.50 0.00 233 0.9298
WEIGHTED 13.56 15.33 18.72 20.67 9.93 9.67 12.49 12.25 11.19 10.92 12.58 12.33 11.43 11.33 233 0.0336
192
(xvi, xvii)
Notes:
Total absolute gross sales revenues financial year ending 1994 (£000s) (SALES94); total employees (full-time and part-time) end of 1994 (EMPLOY94); total
absolute gross sales revenues financial year ending 1994 (£s) as proportion of total employees (SALESR94); total absolute gross sales revenue change 1991 to 1994
(£000s) (SALESCH); total absolute employment change 1991 to 1994 (EMPLOYCH); percentage of sales exported in 1994 (%EXPORT); weighted average
performance score was calculated for each company (Naman and Slevin, 1993), based upon the importance respondents attached to six selected performance
indicators (that is, sales revenues level, sales revenue growth rate, cash flow, return on shareholder equity, gross profit margin and net profits from operations, each
rated on a scale ranging from 1 ‘very little importance’ to 5 ‘extremely important’) and the level of satisfaction their business had achieved with regard to each of
these indicators (that is each reported on a scale ranging from 1 ‘highly dissatisfied’ to 5 ‘highly satisfied’). This scale has a Cronbach’s Alpha of 0.85
(WEIGHTED).
(i) At the 0.1 level significant difference between clusters 2 & 3.
(ii) At the 0.05 level significant difference between clusters 5 & 6.
(iii) At the 0.01 level significant difference between the following pairs of clusters: 1 & 4, 1 & 5, 2 & 4, 2 & 5, 3 & 5 and 4 & 5.
(iv) At the 0.001 level significant difference between the following pairs of clusters: 1 & 6, 1 & 7, 2 & 6, 2 & 7, 3 & 4, 3 & 6, 3 & 7, 4 & 6, 4 & 7, 5 & 7 and 6 & 7.
(v) At the 0.05 level significant difference between the following pairs of clusters: 1 & 2, 1 & 3 and 5 & 6.
(vi) At the 0.01 level significant difference between the following pairs of clusters: 3 & 5, 5 & 7 and 6 & 7.
(vii) At the 0.001 level significant difference between the following pairs of clusters: 1 & 4, 1 & 5, 1 & 6, 1 & 7, 2 & 3, 2 & 4, 2 & 5, 2 & 6, 2 & 7, 3 & 4, 3 & 6,
3 & 7, 4 & 6 and 4 & 7.
(viii) At the 0.05 level significant difference between the following pairs of clusters: 1 & 2 and 6 & 7.
(ix) At the 0.01 level significant difference between clusters 1 & 3 and 2 & 3.
(x) At the 0.001 level significant difference between the following pairs of clusters: 1 & 4, 1 & 5, 1 & 6, 1 & 7, 2 & 4, 2 & 5, 2 & 6, 2 & 7, 3 & 4, 3 & 5, 3 & 6, 3 & 7,
4 & 6, 4 & 7, 5 & 6 and 5 & 7.
(xi) At the 0.1 level significant difference between the following pairs of clusters: 1 & 5, 1 & 6 and 1 & 7.
(xii) At the 0.05 level significant differences between the following pairs of clusters: 1 & 2, 1 & 3, 1 & 4, 2 & 4, 2 & 5, 2 & 6 and 2 & 7.
193
(xiii) At the 0.001 level significant difference between clusters 2 & 3.
(xiv) At the 0.1 level significant difference between clusters 1 & 2.
(xv) At the 0.05 level significant difference between clusters 2 & 3.
(xvi) At the 0.1 level significant difference between clusters 3 & 6.
(xvii) At the 0.05 level significant difference between the following pairs of clusters: 1 & 3, 1 & 4, 1 & 5, 1 & 6, 1 & 7, 2 & 3, 2 & 4, 2 & 5, 2 & 6, 2 & 7 and 3 & 4.
194 Handbook of research on family business
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11 From vision to variables: a scorecard to continue
the professionalization of a family firm
Ken Moores and Justin Craig
This chapter builds on previous projects we have conducted that have concentrated on the
key areas of corporate governance and strategic planning in family businesses. Whereas
our previous projects have enlisted an additive approach (that saw the family perspective
added to the business), this current research takes on an integrated approach and seeks to
integrate issues that influence the family and business systems. Specifically, in this research
we use innovation action research (Kaplan, 1998) to illustrate how the Balanced
Scorecard that includes reference to family business challenges has been introduced and
used to assist family members, board members and management in a third-generation
Australian family-owned business by the lead author who is a non-executive director of
the business. The process of scorecard development is discussed and the development of
the core essence, vision and mission statements, strategic objectives, measures and targets,
which can be scrutinized by family business stakeholders to ascertain consistency with the
vision of the company, is outlined. A conceptual mapping framework is introduced and
propositions that will guide future projects are detailed.
Introduction
Families that work together face many challenges. Much of the friction in family busi-
nesses can be attributed to the overlap of the family and business systems. The emotional
bonds between family members become intertwined with business issues (Craig and
Lindsay, 2002; Lansberg, 1983). As a result, the family business is rarely, if ever, viewed
as a total system (Schneider, 1989). Family business is usually seen from either the business
perspective, from the family perspective, or as two conflicting systems. A family business,
from the business perspective, is a system that is task orientated and competency based
(Davis and Stern, 1980). The primary task is the generation of goods and service through
organized behaviour for the purpose of making a profit. As a result, social relations are
very much influenced and guided by the norms and principles that facilitate the produc-
tive process. As such, ‘the family business is an enterprise that is based upon the concept
of merit and is a system that values the person based upon what s/he does’ (Lansberg,
1983, p. 42). Alternatively, from the family perspective, the family business is a kinship
system in which members are related by blood or law. This system operates within the
environment of the household, is not a place, but rather a ‘pattern of appropriate conduct,
coherent, embellished and well articulated’ (Goffman, 1959, p. 75). In this system, the glue
that holds the family together is cooperation and unity, its emotional bonding and
affectionate ties that develop between and among its members, as well as a sense of
responsibility and loyalty to the group as a system (Schneider, 1989). It is a system largely
based on the concept of need. That is, the family’s primary social function is to assure the
care and nurture of its members. Specifically, ‘social relations in the family are structured
196
The professionalization of a family firm 197
to satisfy family members’ various developmental needs and tend toward valuing the
person based upon who he/she is’ (Kepner, 1983, p. 60).
Family business research has now evolved to the point where ‘to understand the family
business we must recognise that the two subsystems (family and business) co-exist and it
is their relative powers that make a family business unique’ (Sharma et al., 1997, p. 20).
Strategic planning and strategy formulation has been seen as a way in which family and
business goals can be integrated. However, as Sharma et al. (1997) point out ‘family busi-
ness is more likely to have multiple, complex, and changing goals rather than a singular,
simple, and constant goal’ (p. 17). These authors also suggest that, although more atten-
tion has been paid to the process of strategy formulation and the content of strategy in
family businesses, relatively little is still known. Harris et al. (1994) agree that ‘the assess-
ment of family business characteristics and their influence on strategy leaves more ques-
tions than answers’ (p. 171), and Chrisman et al. (2003) contend that this situation is still
largely the case.
The purpose of this chapter is to demonstrate using an accepted strategic management
and measurement tool, the Balanced Scorecard (BSC), how family and business goals can
be integrated. Specifically, we enlist an innovation action research (Kaplan, 1998) process
to address the following research question: How can the four perspectives of the Balanced
Scorecard be adapted to integrate the potentially divergent family and business goals that
exist in family-owned businesses? We show how the BSC can be adapted to the family
business context as a measurement and management, as well as a communication, tool
that is easily interpretable by those involved in family business (see also, Craig and
Moores, 2005). We address a gap in the literature by focusing on how family and business
goal integration can be concurrently addressed. Specifically, we highlight a framework
that can assist family businesses understand that, as their firm morphs into an increas-
ingly complex business, strategy becomes increasingly important as strategic decisions
effect, and need to be communicated to, an increasingly diverse group of family and non-
family stakeholders.
First, we review the BSC literature including an outline of the foundation vision and
mission statements, which are at the core of the scorecard development process. We then
introduce the family business action research site to which the BSC is applied. We proceed
to outline the process that illustrates how the four perspectives of the BSC have been intro-
duced to the family business and include the objectives, measures and targets that the
family has established to ensure the integration of family and business strategic goals.
Finally, we include a conceptual process model and introduce a series of propositions that
will drive future projects.
Literature review
Organizations use various systems to measure financial and non-financial indicators. The
Balanced Scorecard is one such measurement and management system that has received
endorsement from many of the world’s most successful organizations. The BSC was devel-
oped by Kaplan and Norton (1992) and links the measurement of financial and non-
financial indicators to firm strategy.
Originally developed as a performance measurement tool (Kaplan and Norton, 1992),
the BSC has evolved into an organizing framework, an operating system, and a strategic
management system (Kaplan and Norton, 1996). As exclusive reliance on financial
198 Handbook of research on family business
Customer perspective
The unique mix of product, price, service, relationship, and image that the company
offers, is at the core of any business strategy, and are introduced in the BSC via the
customer perspective. This customer-value proposition defines how the company
The professionalization of a family firm 199
position, a belief in the strategic direction of the operation through their input, a say in the
development of their skills and an understanding of how their performance is measured.
Method
Research design
The method adopted in this research is a form of action research. People, however, have
different meanings and interpretations about action research. The form adopted here is that
which Balanced Scorecard creator, Robert Kaplan, labelled ‘innovation action research’
(Kaplan, 1998). In innovation action research, scholars develop and refine theory (of new
management practice) they believe to be broadly applicable to a wide variety of organizations.
Scholars engaged in innovation action research play an active role in implementing
their ideas in actual organizations. The concepts must promise sufficient benefits (that is,
they represent a solution to a real problem) and be articulated clearly enough that organ-
izations are willing to commit their own resources to an implementation experience. The
research cycle in innovation action research involves:
● observing and documenting innovative practice (see, Craig and Lindsay, 2002;
Craig and Moores, 2002, 2004; Moores and Barrett, 2003)
● teaching and speaking about the innovation (see, Moores and Craig, 2002, 2003)
● writing articles and cases (see, Craig and Moores, 2005)
● implementing the concept in a new organization (current chapter).
Board of director reporting was targeted as an area to improve further in 2004. To that
end, an external consultant was engaged to examine the key financial drivers with a view
to targeting areas to improve performance, and the reporting thereof. Coinciding with this
initiative, senior management were encouraged to align their reports to the board of direc-
tors more closely with the key objectives in the current strategic plan. This was to be
refined following the adoption of the 2005–08 strategic plan, which was to be considered
by the board of directors in the March/April period. In preparation for this planning, it
was necessary for family stakeholders to clarify their expectations in terms of the vision
and goals that they held for the family firm. The BSC was adopted as the mechanism to
frame the new reporting policies.
Family as owners
To grow the family business.
To consolidate the Guesthouse operation.
To diversify and grow the business, thereby providing increased opportunities for family
to work and have career paths within the business.
To implement structures (that is ownership, financial, strategic) to aid this growth and
diversification.
Family as employees
To encourage family members to pursue career options via employment in the diversified
business.
202 Handbook of research on family business
To develop two distinct employment policies for family members – (1) for operations
(lower level/internships and vacation employment), and (2) for management.
To emphasize that respect has to be earned and is a vital part of the company framework.
A separate induction programme will be required for family members so that they
know and appreciate the extra demands and expectations placed upon them in the
family business work environment.
Family as family
To encourage all family members (including those not working in the business) to con-
tribute to the perpetuation of the family’s values by their representation of the family
in various forums.
To further improve communication, especially to celebrate milestones that will be main-
tained in part via internal newsletters.
To encourage family to stay (holiday/visit regularly) in the mountain resort.
To ensure the development of succession plans and to consider developing more flexibil-
ity to enable the identification of exit strategies for those needing them.
Family as community
To be known as a leader of eco-tourism in Australia.
To build further the family’s reputation as ethical, honest, fair and supporters of the
broader local community.
To be known as an employer of choice.
To recognize the indigenous heritage of the region.
Using this shared and articulated vision for the family and the business, senior family
members and non-family managers held their strategic planning meeting in February
2005. The purpose of this meeting was to identify a three-year plan and direction for
O’Reilly’s in accordance with the family’s (owners) expectations and within the board of
director’s planning parameters.
Subsequently, each manager developed objectives, measures and targets within a
Balanced Scorecard framework for their assigned area of responsibility. These were to
be consistent with the agreed direction and plan, and be available for team discussion
and agreement for submission to the April board of director’s meeting. From this agreed
three-year plan, a budget for 2005–06 will then be developed to resource the achieve-
ment of agreed targets. This budget will accompany the three-year plan in the board
submission.
Core essence Whereas vision and mission statements at the centre of the BSC are
effectively management tools, in family businesses, there is a need to identify the core
essence of the family and therefore the family business. The O’Reilly family’s core essence
statement was established earlier in the professionalisation process as part of the second
to third generation transition, as:
This core essence statement encapsulates the values that serve as the foundation for the
vision and mission. The current senior management team confirmed the key values for the
business as:
Vision statement A company’s vision is arguably at its strongest in the founder genera-
tion and is at risk of being diluted over time (Gallo, 2000). Members of the O’Reilly family
team developed their vision statement (that addressed their core ideology and envisioned
future) by taking cognizance of family expectations, origins and history of the business
and parameters suggested by the board as follows:
To grow the business by applying professional management guided by our core values
and the strong ethical business ethics of the founders, to achieve global recognition as
a leader within Australia’s ecotourism sector.
Mission statement In their aim to make every guest feel special by exceeding expecta-
tions, members of the O’Reilly family team developed their mission statement as follows:
With the core essence, the vision and mission decided upon, the BSC framework then
enabled the O’Reilly family to decide what is required to adhere to these statements in
order to remain financially sound, customer focused, professional and innovative.
The financial perspective (FP) From a financial perspective, family businesses have been
found to have long-term rather than short-term financial goals (Anderson et al., 2003) and
this influences strategic decisions. Family business success has typically not been tied to,
or established from, the same performance measures as other business types. Often, own-
ership transition and efficiency of the family business system rather than wealth-creation
and financial performance are used to monitor successful performance (Habbershon and
Pistrui, 2002; Sharma et al., 1997; Sorensen, 2000).
The O’Reilly family divided their financial perspective objectives into (1) return, (2)
growth, and (3) sustainability, with the understanding that the business is a family busi-
ness and that the incumbent leadership develop strategies that address both current and
future generational needs. As illustrated in Table 11.1, the identified measures and targets
ensure that, from a financial perspective objective, capital investment is directed to achieve
long-term growth and sustainability.
204 Handbook of research on family business
Customer perspective (CP) The O’Reilly family divided their customer perspective
objectives into (1) the experience, (2) the differentiation on our value proposition, and (3)
market share. Specifically, the customer perspective objectives are to make every guest feel
special through the provision of enjoyable and educational experiences strongly linked to
nature. This is to be achieved by remaining relevant to customers through competitive
management of the destination. The identified measures and targets for these customer
perspective objectives are outlined in Table 11.2 and, as can be seen, the stated objectives
include adherence to the family aspect of the family business.
Internal process perspective (IPP) It has been suggested that the family, as a family,
develops internal processes that facilitate the containment, confrontation and resolution
of family problems (Davis and Stern, 1988). Moores and Barrett (2003) suggest that
(1) managers of family firms should adopt management systems which are adequate for the
demands of their external and internal environments, as well as their firm’s stage of develop-
ment, (2) management approaches should form an internally consistent package of strategies,
structures and systems, (3) management systems must dynamically evolve as the business grows
and matures, (4) professionalism in management is vital for systems development, and (5)
without succession plans, professionalization of the firm is seriously inhibited. (p. 148)
Thus, internal processes for family businesses (like all businesses) are necessary to include
in strategy development. Arguably, what makes internal processes (particularly changing
these processes) more problematic in family businesses, is the influence of the founder or
the incumbent generation and the preparation for succession.
The O’Reilly family divided their internal process perspective objectives into (1)
operational excellence, (2) ecotourism leadership, and (3) good corporate citizenship.
Specifically, the family business decided to plan to build further the culture of the
organization that was founded on ecotourism leadership and ensure that this feature is
communicated both inside and outside the business, thereby enhancing its reputation
as a good corporate citizen. The identified measures and targets for these internal
process perspective objectives are summarized in Table 11.3. The stated objectives are
influenced by the values that have been established by previous generations of the
O’Reilly family.
The professionalization of a family firm 205
Innovation and learning perspective (ILP) Family firms have been shown to place sub-
stantial importance upon innovation practices and strategy. Successful family firms have
been found to manage and adjust their innovative strategy (Craig et al., 2005). Like innov-
ation, continual learning in the family business is crucial to survival, as highlighted by
Moores and Barrett (2003):
Just as the element of ‘family’ in family owned businesses influences how they are managed, that
is, how the manager deals with the contextual factors such as life cycle stage, context and control,
the element of ‘family’ can be expected to influence how people in family owned businesses learn
to manage them. In fact, having to deal with the additional layer of complexity created by the
family means that the tasks and priorities involved in learning to manage a family business lead to
specific and enduring paradoxes. The family will turn out to be just as important a contingency
factor as any of the others in the business context – and often more so. And just as understanding
the stage of the business life cycle helps illuminate management priorities in general, it can help in
understanding the paradoxes that come with each stage of learning the family business. (p. 32)
The O’Reilly family divided their innovation and learning objectives into (1) culture, (2)
capabilities, and (3) technology; specifically, to become an employer of choice by devel-
oping both a learning culture and internal succession processes with particular reference
to developing competent family members to fill the needs of the growing family business.
The identified measures and targets for these innovation and learning perspective object-
ives are summarized in Table 11.4.
Discussion
To ensure that the strategy map adhered to the direction and expectations that the family
had decided upon in their prior meetings, the Board was able to summarize and tabulate
their progress. This provided them with two outcomes. First, it enabled them to ensure
that both the family and business systems were integrated and, second, they were able to
identify areas that still needed to be addressed. The summary table appears in Table 11.5.
As a consequence of this process, we are able to introduce the first propositions result-
ing from this innovation action research as follows:
ILP1 Have a learning culture Documentation of training Completed by April each year
throughout our company plan that includes detailed Implementation of the plan –
and, in particular, ensure strategies to ensure that monthly
that family members are O’Reilly family members
given the opportunity to have the opportunity to
develop an understanding of make a contribution to
the O’Reilly family business the family business
ILP2 Develop people for internal Internal appointments 10 personnel per year are
succession and continue to include, where suitable, promoted to a new position
ensure that family members are involvement of O’Reilly
aware of their responsibilities family members
while acknowledging that each
generation knows that the
challenges that they will face
will be different to the ones
faced by generations that have
preceded them
Performance reviews for Full review each year in May
all employees including with a review in November
objective reviews of family
members’ contribution.
Employee feedback ensur- 75% state they are developing
ing that family members skills to assume greater
are treated equally responsibility
Management growth 40% of all management
includes developing positions to be filled
family members’ internally
competence as managers
ILP3 Be seen as an employer of Recruitment spending $ Budget as retention rates
choice which will include increase
providing an attractive working
environment for family
members who wish, and have
the required competencies, to
join the family business
Rating against other 75% above average
employers
Compare with similar
family businesses
Staff recommend 75% above average
O’Reilly’s as a place of
employment
Family members
demonstrate willingness
to be actively involved in
family business matters
Retention rates 80% turnover 2005/06
decreasing by 5%
The professionalization of a family firm 209
Increased family harmony was evident at the May 2005 family meeting at which
family members could see that their ‘expectations’ had been clearly acknowledged in the
business plans by the directors and senior management. Specifically, family members
articulated without prompting that it was ‘refreshing’ to see that their input was valued.
The CEO also commented that he was less burdened with the responsibility of consis-
tently communicating all facets of the business to family members and was able to focus
his energies on the business. We therefore introduce our second proposition as follows:
210
Business outcome Business outcome Business outcome Business outcome
Figure 11.1 Conceptual mapping framework integrating family and business system integration
The professionalization of a family firm 211
With the BSC framework now introduced to the business and family members seem-
ingly satisfied and confident with the process, this project is now entering the monitor and
evaluation stage. We are not, therefore, able to assess or report significant long-term
advantages for both the family and the business systems. However, given the initial
response and informal feedback from family and non-family stakeholders, and for the
sake of completing the innovation action research cycle, we tentatively introduce the final
proposition as follows:
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Chandler, A.D. (1990), Scale and Scope: The Dynamics of Industrial Capitalism, Cambridge, MA: Harvard
University Press.
Chrisman, J.J., J.H. Chua and P. Sharma (2003), ‘Current trends and future directions in family business man-
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business’, Family Business Review, 15(1), 59–70.
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Family as owners
● The business needs to keep a family orientation, as that is what makes us different
to our competitors. A long-term focus of growth is necessary, with emphasis on
minimal environmental impact.
● To grow and become more successful. To still be a family company in 10, 50 or 100
years.
The professionalization of a family firm 213
● For the future, I see the expansion and updating of the company as being funda-
mental, however, the maintaining of the current culture will be as important.
● Avenues found for diversification of the core business.
● I personally want a successful and profitable business to hand onto the 4th genera-
tion. We should consolidate our business and make it the very best it can be, which
I believe is the best in the industry.
● As the business continues to grow I think that it should not just look at future pro-
jects before first looking after what it has already achieved, making sure that it is all
up to the family standards.
● I feel that, though we need to grow and take risks, we should also look at consoli-
dating what we have already.
● To my mind, the guest house and accommodation is big enough considering it is a
family business.
● I think we sometimes forget what a great business we have. We should be bursting
with pride, and at the same time, striving to do better.
● To become the ‘best’ resort/guesthouse in the region. Certainly a goal of this mag-
nitude is 5–10 years away but if we strive for this goal by ensuring every single guest
encapsulates the ‘O’Reilly experience’ after every visit, it is not unachievable in the
long term. I want people to come to O’Reilly’s with no expectations and leave as
though they’ll never find an experience like it anywhere else.
Family as employees
● All family members should be encouraged to work in the business but it is not an
automatic right. They must be able and be prepared to contribute to the business.
● Continue to provide opportunities for future involvement of family members and
encourage them to be involved.
● Educate - 3rd and 4th generation in business basics via family courses.
● I have a personal goal to one day be associated with management in the company.
Currently doing business at university to aid in achieving this goal!
Family as family
● Acknowledge history and sacrifice that was made before the current leadership i.e.
what they gave.
● Our family business needs to always retain that ‘personal’ touch and not leave it to
staff. Family in the business must lead the way. People (guests) need to be made to
feel ‘special’ – that is part of our Mission Statement.
● Ownership structure with more flexibility to enable continued generational involve-
ment without adversely affecting the business.
● The problems at the moment are to do with exit strategies of the business. I hope
that the family does not become too concerned with the money factor, as growth
within the company is rising at a level not seen before in the company.
Family as community
● The main goal I would like for the family business is to be more environmentally aware
and focused. As the business has expanded we have lost our obligation to preserve the
natural environment, which was the key ideology of the founding generations.
● I would also like to see a greater emphasis placed on our environmental responsi-
bilities.
12 Working with families in business: a content
validity study of the Aspen Family
Business Inventory
Sandra L. Moncrief-Stuart, Joe Paul and Justin Craig
This chapter reports on a research that uses Lawshe’s (1975) individual item method and
Gregory’s (1996) overall assessment method, on order to measure the content validity of
the Aspen Family Business Inventory (AFBI), an assessment instrument designed specif-
ically for use by consultants working with families in business. Nineteen experts in the field
of family business consulting rated the AFBI’s scales and items for relevance, fit, clarity
and overall content. In addition to establishing the content validity of the AFBI, this
research is designed to familiarize family business consultants and researchers with, and
encourage them to use, techniques similar to those introduced in this chapter as a first step
in establishing the validity of the instruments that they use in working with families in
business.
Introduction
Businesses are usually categorized by the type of service they offer. These categories
include retailers, manufacturers, and service providers. Family businesses are a subset of
business found in each of these categories that are made up of organizations formed
around a family unit. Despite operating within a wide realm of industries and functions,
family businesses possess a number of similarities with each other.
Over the past 15 years there has been an increased understanding of the unique
dynamics found in family businesses. Understanding family business dynamics involves
integrating a variety of disciplines, including family systems theory. In order to provide
comprehensive services, professionals working with family businesses often seek consult-
ation with other professionals who specialize in related fields. For example, a family ther-
apist may consult with an insurance agent, or an accountant may consult with a lawyer.
This is necessary to ensure that the broad range of family-firm needs are addressed and
understood. In assisting a family business under stress, family business consultants must
tackle the task of determining where intervention is most needed. Until recently, there
has been limited research into, and limited formal assessment tools available to help with,
this task.
The Aspen Family Business Inventory was designed as a constructive first step to help
understand the special set of dynamics that influence families and to begin dialogue
among the key players about these key dynamics. The purpose of this research is to deter-
mine the content validity of the AFBI, and use the results to evaluate the instrument’s
degree of success at capturing crucial elements of family business assessment. The inter-
related disciplines of family business will be first discussed in order to provide back-
ground into the complex web of processes typically found in family businesses. Then, we
will outline how prominent family business experts were asked to rate and critique the
215
216 Handbook of research on family business
relevance of the scales and items that make up the AFBI. Based on this, we report the
quantitative measures for content validity that were calculated.
Governance structures
The governance, or power structure, of a family business may take on a variety of forms.
The terms authoritarian, democratic, dictatorial, and laissez-faire are all potential
descriptions of how power may be utilized and distributed on other members in the
family firm system (Deacon, 1996). Clear governance structures illustrate how a
company’s values help to guide a firm’s decisions, but family firm governance structures
are often clouded by multiple roles created by family and family business. Governance
initiatives are more likely to be successful once there is a clear understanding of all the
multiple levels of perspectives of individuals involved in the decision-making process
(Magretta, 1998).
Working with families in business 219
Succession planning
Succession planning is a crucial part of planning for, and ensuring the survival of, the
family business. Many family firms are unable to survive generational succession intact.
For example, Paul (1996) reviewed the results of a study which indicated that the death of
the founder was the catalyst for the downfall in 78 per cent of family business failures, and
when the founder lives to retirement, it is often difficult for the founder to turn over the
reign of leadership (see also, Davis and Harveston, 1999; Moores and Barrett, 2003).
McClendon and Kadis (1991) report that only 30 per cent of family businesses succeed in
the second generation. For this reason, articles related to succession and succession plan-
ning are common in family business literature, and were over-represented in the early
family business research agenda.
Kaslow (1993) focuses on problems intertwined with family power and loyalty in suc-
cessor planning. He believes that most families involved in family businesses could benefit
from family therapy interventions and argues that interventions often assist families in
moving through succession planning by creating awareness around problematic family
and business patterns that could make the process unsuccessful. Kaslow highlights many
potential obstacles in succession planning. One obstacle relates to the representation of
family members, however, this obstacle’s impact is not simply limited to difficulties in suc-
cession planning.
perceptions. This is consistent with Boszormenyi-Nagy and Krasner (1986), who used an
integrative stance when they wrote that a ‘truly comprehensive grasp of human existence
is inevitably composed of both individual and relational realities’ (p. 7). The AFBI seeks
to uncover these realities and determine how they are both similar and different. Then this
information can be used to understand and improve problematic relationships.
Jaffe (1996) and Paul (1996) agree that exploring individual perceptions with all family
members, including those not employed in the family business, often leads to improved
family relations. Based on contextual theory, the AFBI allows family businesses to explore
individual and system perceptions of all family members.
The AFBI is composed of 10 scales with 10 questions each. The first five scales focus
on how the family manages its personal relationships, and the next five address how the
family manages its relationships in business. A five-point Likert scale is used for all
responses that vary from strongly disagree to strongly agree (see Appendix).
Instrument development
Gregory (1996) suggests that ‘creating a new (instrument) involves both science and
art’ (p. 129). The American Psychological Association (APA, 1999) focuses on the science
of instrument development by providing 25 standards for test instrument development.
The standards covered item provisions, item selection, and evaluation of tests for specific
222 Handbook of research on family business
purposes. Gregory concurs and highlights the many stages of instrument development,
while stressing the importance of defining the purpose, selecting the scale, constructing
the items, testing the items, and revising the test as required.
In defining the purpose of the test, a developer must start with a ‘hypothesis that implies
a domain of content’ (Nunnally and Bernstein, 1994, p. 292), and then link concepts and
items appropriately (Tilden et al., 1990). Ideally, a focused test definition will result in a
clearer picture of the domain of content. Gregory (1996) and Nunnally and Bernstein
(1994) agree that in isolating the domain of content, the test developers need to consider
many factors including who the test will be directed towards, what the instrument is
intended to measure, and how the test will differ from other available inventories.
Item selection procedures vary depending on the nature of the scale’s purpose. The
APA (1999) recommends that test developers tailor questions to suit the intended popu-
lation of users. Nunnally and Bernstein (1994), Gregory (1996) and Klakovich (1995)
emphasize the importance of creating clear items suitable for the scale. Gregory also raises
questions about the homogeneity, range, number and type of items that should be used.
Once items are created, they need to be tested to determine if they are successful in
tapping the expected domains. Assessing the reliability and validity of the items accom-
plishes this. Finally, after the initial assessment is complete, any problematic items should
be removed or improved in the next version of the instrument.
Method
Procedure
With the goal of the study being to collect and calculate content validity ratios of the
AFBI scales, and the AFBI’s individual item’s relevance, fit and clarity, 100 family busi-
ness consultants were mailed a package containing a letter, a copy of the Aspen Family
Business Inventory, a questionnaire sheet, and a stamped return envelope. The letter
asked the potential subjects to complete a five-page questionnaire about the items appear-
ing on the AFBI. A content validity questionnaire was developed with a focus on content
relevance, conceptual fit, and clarity. These areas have been proposed by several content
validity researchers (Imle and Atwood, 1988; Messick, 1980; Tilden et al., 1990). Potential
subjects were assured that their responses would be kept confidential.
Three weeks after the initial mailing, all potential participants were called and
reminded that there was still time to return the response sheet.
Subjects
All participants were members of the Family Firm Institute, a national organization
based in the United States with family-firm specialists in a number of fields. Expert par-
ticipants were chosen from the Family Firm Institute directory. The participants are
termed experts on the basis that they are all consultants to the world of family business
and, in their related fields, they all have several years experience working with family
businesses. The Family Firm Institute directory lists experts in several fields of family
business including: insurance, finance, psychosocial, law, and management. Twenty spe-
cialists were randomly selected from each of these fields. From the 100 surveys sent, there
was a 19 per cent response rate. The family 15 male and 4 female business experts who
participated came from a diverse field of specialties. The group included two lawyers, four
Working with families in business 223
Results
Nineteen family business experts returned useable response sheets. Content validity was
calculated using two methods: Lawshe’s (1975) individual item method, and Gregory’s
(1996) overall assessment method.
Using Lawshe’s quantitative approach to content validity, the content validity ratio
(CVR) was calculated for relevancy, fit and clarity of each item in the AFBI.
(na) (N2)
CVR N2
where na is the number of experts who agree or strongly agree, and N is the total number
of experts participating. Using this formula, when less than 50 per cent of the experts
agree with an item, the CVR will be negative. When all experts agree the CVR is 1.00.
According to Lawshe (1975), items with CVRs below 0.49 are not considered to have
acceptable content validity. This represents a 75 per cent level of agreement among sub-
jects. Other content validity researchers have suggested a more stringent 80 per cent agree-
ment (Post, 1991).
The inventory’s overall content validity was adapted from a formula presented by
Gregory (1996) and Topf (1986):
where B is the number of items found to be have acceptable content validity, and A B
represents all the items on the instrument. See the appendix for comprehensive results.
Relevance
Scale Every scale’s overall CVR was over 0.79, which means agreement on each scale’s
relevance was 90 per cent or greater. Though all CVR scale relevance scores were within
the acceptable range, the Business of the Family sections received significantly lower CVR
scores than the Business of the Business sections (t 3.797, p 0.001).
Item With few exceptions, the relevance of individual items was found to be quite good.
All individual items in Scales 3, 4, 6, 7, 8, 9 and 10 scored CVRs higher than 0.60, or 80
per cent agreement. Looking at all items in the acceptable range (above 75 per cent agree-
ment), only 8 scored less than a CVR of 0.60, or less than 80 per cent agreement. All of
the lower scoring items were found in Scales 1, 2 and 5.
224 Handbook of research on family business
Items in Scale 2 (Quality of Family Life) scored the lowest content validity. Four items
(5, 6, 7, and 10) had lower than acceptable content validity scores, and two of these items
(7 and 10) also had lower than acceptable scores for fit in that scale.
Fit
Of the 100 items, 96 received acceptable CVR rating for fit in the category. Seven items
received scores above 75 per cent, but less than 80 per cent. Two items in Scale 2 (7 and
10), one item in Scale 1 (8), and one item in Scale 4 (4) had lower than acceptable scores.
Clarity
Three of the items did not score within the acceptable range for the CVR for clarity. Six
items were at the lower end of acceptability. Five of the unacceptable or lower range of
acceptable items were found in Scale 1.
Overall assessment
At the end of the response sheet, subjects were given the opportunity to share written
comments about the assessment. Twelve participants chose to do this, and 10 made sug-
gestions for additional scales and/or individual items. In this section, all respondents were
asked if the response sheet directions were clear. All respondents indicated that they were.
Written response from the ‘Overall assessment’ section provided more insight into the
thoughts of the family business experts. Participants offered a variety of suggestions, add-
itions and critiques. Scale ideas that respondents indicated were missing from the assess-
ment included: ownership and estate and family board council meeting. Additional items
were requested on topics relating to individuals’ desire to participate and future participa-
tion, roles of non-family business executives, planning and succession issues for non-family
business members, career planning and development. Other respondents requested more
specific questions on conflict resolution and on family business boundaries.
Further suggestions were related to question wording and assessment style. A partici-
pant suggested that items with the word ‘all’ should instead include the word ‘most’.
Another suggested that a ‘not applicable’ answer option should be added, while yet
another recommended that paragraph-style questions should supplement the Likert scale
items.
Discussion
Overall, the AFBI scored very high in terms of overall category relevance, item relevance,
item fit and item clarity. There are several possible explanations for such a positive
response. First, the developers of the inventory have a combined experience in the field
that totals over 60 years, and each could be described as a pioneer of the family firm
field. This experience prepared them to format a comprehensive assessment for this field.
Second, there are few available instruments designed for use with family businesses.
Several family business experts indicated that they were intrigued with simply the concept
of the AFBI. This may have skewed their answers favorably. Without strong theoretical
constructs, participants, though experts in the field, may lack clear theoretical frameworks
against which to assess the AFBI. And, since there is little written information on family
business assessment, the AFBI may have brought expert participants new clarity to their
understanding of their field, which, in turn, resulted in high CVR results. Finally, it should
Working with families in business 225
be noted that subjects who chose to respond might have done so because they were inter-
ested in, and had a positive response to, seeing a copy of the AFBI.
Even with the overwhelming positive response, the validity assessment did produce
some interesting findings and trends. The AFBI is divided into two sections: the Business
of the Family (Scales 1–5), and the Business of the Business (Scales 6–10). Interestingly,
the Business of the Family scale relevance scores were lower than the Business of the
Business scales, and all of the Business of the Business items was found to have CVR rele-
vance ratings well above acceptable levels. Seventeen of the 50 questions in the Business
of the Family scales had CVR below 0.60, or 80 per cent agreement, with seven of these
items’ relevance falling into unacceptable levels. This produced a significant difference
between the relevance scale CVR scores for Section I versus Section II. This may suggest
that family business professionals are able to find more agreement around business opera-
ting related issues. Clearly, the family business consultants in this sample found more
agreement in the business rather than the family sphere.
Items that scored the lowest CVRs were only tangentially related to both the relation-
ship between family members, and the business related issues. These included five ques-
tions from Scale 2 (Quality of Family Life):
Other items in the same scale that reflected more directly on relationships between
family members had higher, and acceptable, CVRs. These results suggest that family busi-
ness experts place more importance on issues that are more directly related to relation-
ships, or business functioning.
Though there are too few subjects to make significant observations, further analysis of
the professional focus of each of the respondents indicated that subgroup family business
expert participants with careers in accounting, investment services, or finance were more
likely to disagree about the relevance of the unacceptable items in Scale 2. In a larger study
it would be possible to make more comparisons between the responses of the subgroups
of participants.
The survey responses suggest that, with only a few exceptions, a majority of the experts
agreed that most items fit their categories. Two of the items that scored below acceptable
CVR ratings for relevance, also scored below CVR rating for fit. These items were both in
Scale 2:
The developers of the scale need to evaluate the place of these items in the AFBI.
Though an average person may agree that caring for one’s health, and families learning
together are good things, the experts clearly questioned whether these issues serious
impact family business functioning.
226 Handbook of research on family business
For the most part, the AFBI received acceptable CVR ratings for clarity. All items were
composed in the one direction meaning high scores produce more favorable results.
However, this did not appear to affect the participants’ ratings of clarity. The nine items
that received lower that 80 per cent agreement on clarity should be reviewed, with a special
focus on:
Scale 1
5. Love and affection is shown equally to all children and grandchildren.
8. Family members are not jealous of what other family member have.
Scale 3
6. Our family has clear and separate processes for making decisions about ownership,
management and family issues.
There were no items that scored below acceptable CVR levels in all categories (rele-
vance, fit and clarity). This would suggest that experts did not give unacceptable ratings
to an item simply because they did not understand the meaning of the item.
The authors of the AFBI clearly divide the inventory into two sections: the Business of
the Business, and the Business of the Family. One of the instrument’s developers and
several other family business researchers have conceded that family business dynamics
encompass more elements, especially as the business grows into the successor stage
(Gersick et al., 1997; Paul, 1996). To be a successful inventory for all the dynamics of family
business, perhaps an entire section should be devoted to the ‘Business of the Outsiders’.
The experts also provided interesting input for the overall AFBI. In this section, expert
subjects were given full range to express their opinions about this assessment inventory.
The area that the AFBI does not cover, and that both the expert subjects and the litera-
ture suggest that it should, is the role of non-family member participating in the business.
An expansion of questions designed for non-family business participants would enhance
the overall assessment’s ability to capture the beliefs of all family and business key players.
Limitations
Litwin (1995) recommends that content validity studies include both the review of
experts, and review by those for whom the scale is intended. This content validity study
would be strengthened by the addition of content validity assessment by members of
family businesses. Only 21 per cent of the experts who completed the survey were women.
An equal number of male and female participants would have eliminated possible gender
bias. Robinson and Phillips (1995) recommend that content validity questionnaires add
items not included in the original assessment to see if experts can distinguish between
items that are included versus not included. To gain more credibility the AFBI should also
be further evaluated for reliability, and construct and criterion-related validity.
Traditionally, content validity studies include limited subjects and this study would have
been improved had more family business experts participated.
Recommendations
Content validity assessment is the first step in determining the validity of a new instru-
ment. The AFBI faired well in this initial content validity analysis. Future studies looking
Working with families in business 227
at other aspects of validity and reliability are under way, including confirmatory factor
analysis and internal consistency assessment of the AFBI’s items.
Conclusion
This project offers many opportunities for future research in the field of family business.
The results from the preliminary content analysis of the Aspen Family Business Inventory
suggest that this instrument satisfactorily covers many relevant elements of family busi-
ness assessment. Moreover, family business consultants and researchers are encouraged
to use techniques like those introduced in this project as a first step in establishing the
validity of the instruments that they use in working with families in business.
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Working with families in business 229
Appendix: Content validity ratio and percentage agreement of AFBI scales and items
In this chapter we delineate a model that presents the different coherent options of value
transmission and successor’s socialization that facilitate family business continuity from
first to second generation. Our findings are grounded on combined qualitative and quan-
titative techniques from an extensive research project of in-depth cross-case analysis.
Thus, based on our results we now highlight some issues that families and practitioners
should take into account to keep the coherence during the succession process. That is,
professionals can assist families in preparing the continuity by (1) identifying family
value systems, (2) analysing key variables at play in the family-business system, and (3)
proposing a coherent option of continuity that both family and business can pursue.
Consequently, families and practitioners can benefit from following the paths suggested
here as they are coherent combinations among values and characteristics belonging to
each family business and different successor’s socialization processes that increase the
probability of achieving a successful founder–successor’s transition.
Introduction
Some years ago Hambrick and Mason (1984) pointed out that organizations are shaped
by their top managers. In this vein the CEO’s role has been described as the most power-
ful, representing the ultimate decision-maker and the person with absolute authority
(Kesner and Sebora, 1994). Parties external to the firm are likely to view succession as a
signal about the institution’s future (Beatty and Zajac, 1987), this makes CEO succession
a critical event for virtually every organization (Chaganty and Sambharya, 1987; Davis,
1968; Zald, 1969). If this is, the CEO’s role in family business’ succession will be even more
dramatic because his or her decisions can affect both the family and the business spheres
that are intimate interlocked in this kind of firm.
Researchers have shown the importance of CEO values in shaping the future of the
organization (Hambrick and Mason, 1984; Hofstede, 1983, 1994; Hofstede et al., 1990).
This occupant of key role has enduring effects on the organization owing to his or her
ultimate power in deciding who will be the successor and to his or her influence in
shaping the value structure of that successor (Vancil, 1987). The latter is especially true
in family business when the potential successor is a descendant or a group of descen-
dants of the founder, and the CEO is also the founder of the firm (Dumas, 1990;
Handler, 1994).
In this chapter we focus our interest on the value structure that founders try to pass to
their family successors. Next, we compare this value structure to that of the founder in
order to look for a model that explains the match or mismatch between the founder’s and
successors’ value structure. Finally, we discuss the implications of our results.
237
238 Handbook of research on family business
Literature review
Founder’s typologies
So far research has showed that entrepreneurs do not form a homogeneous group. Thus
many authors have tried to classify entrepreneurs’ heterogeneity by typologies. These clas-
sifications pursue different objectives, for example, differentiating entrepreneurs from
managers (Collins and Moore, 1964), identifying distinctive types of entrepreneurs
(female entrepreneurs versus male entrepreneurs [Fageson, 1993; Kaish and Gilad, 1991]),
successful entrepreneurs vs. unsuccessful entrepreneurs (McClelland, 1987), and linking
entrepreneurs’ mental systems and values to their firms (Donckels and Fröhlich, 1991).
This heterogeneity allows authors to build typologies that identify relevant factors in busi-
ness set-up and management connected to entrepreneurs’ behaviour in their firms. The
idea was to identify different types of entrepreneurs and to examine the possibility that
the type of firm reflected differences among the entrepreneurs.
The pioneering work of Smith (1967) obtains two contrasting types of entrepreneurs,
craftsmen and opportunistic, that he links to two different classes of firms. Later research
adds to, and modifies, Smith’s typology, producing a huge body of literature that com-
monly describes several groups of entrepreneurs, but does not agree on their labels, vari-
ables to study, or methodology (Chell et al., 1991; Collins and Moore, 1970; Donckels and
Fröhlich, 1991; Kets de Vries, 1977; Lafuente et al., 1985; Vesper, 1980). However, the lit-
erature recognizes the relevance of entrepreneurs values to their business activity, even
though, the majority of typologies do not take values into consideration.
One exception is the research conducted recently by García and López (2001) that explicitly
took into account founders’values and their heterogeneity. They found that at least two struc-
tural dimensions were needed to represent founders’values: the business value dimension (firm
versus family orientation) and the psychosocial value dimension (self-fulfilment versus group
Founder–successor’s transition 239
orientation). According to the founders’ position in these two value dimensions a taxonomy
of four groups of founders was constructed, in which the different groups were named as:
1. Founder of family tradition, characterized by group value and business as an end ori-
entation, where the firm is something beyond a mere means to earning a living but its
development is constrained by founder’s orientation towards the family.
2. Founder achiever, that is oriented towards the family in the business value dimension
(he sees the firm as a means to earn a family living) and toward the group in the psy-
chosocial value dimension.
3. Founder strategist, oriented towards the firm (the business is an end in itself) and
towards the self-realization in the psychosocial value dimensions, a fact that has its
reflection in the steady growth in the size of their firm and the number of additional
businesses whose activities are closely related to the original one.
4. Founder inventor, whose personal development is based on the possibility to innovate
and invent continually inside his firm (oriented towards the self-realization in the psy-
chosocial value dimension), but being that a means to earn a living, to invent (ori-
ented towards the family in the business value dimension).
These two perspectives show us different points of view as we consider the value of the
founder’s transmission of values to the next generation. The actual value can range from a
clear advantage for successors at the start of their business life, to compromising the firm’s
future success. Consequently, a study of the content of values founders intend to transmit
to the next generation can be helpful as we attempt to understand better this specific context.
Based on the literature review, the aim of our work was to find answers to the follow-
ing questions:
Research method
Selecting cases
We focused our research on founders with more than 25 years in business and still in full
control of their firm’s ownership on the verge of transferring the business from one genera-
tion to another. We used several steps in building our sample: (1) We identified first-genera-
tion family businesses and their founders from Las primeras 500 empresas de Galicia (Gómez
and Martínez, 1992), which lists firms with sales above 60 million euros in 1989, and pre-
sents their main characteristics, ensuring that they were family firms managed by a founder
who currently works with the potential successors; (2) we verified that these firms were still
family-run in 1996 by checking the several business directories. We obtained a final list of 28
founders who owned firms of varying sizes that had all the required characteristics; this was
our theoretical sampling (Glasser and Strauss, 1967). We sent these founders a personal
letter and later phoned them to make an appointment for an interview. In the end, 13 male
founders agreed to participate once we guaranteed confidentiality. Their firms’ characteris-
tics vary in size (for example, number of employees or sales), sector and market (Table 13.1).
Fieldwork
We wanted to obtain the founders’ own point of view, so we used an in-depth, semi-
structured interview to produce extensive texts (see appendix). We began our sequencing
of questions with a description and then asked questions about experience, behaviour,
opinions and values. We included several questions to verify information, looking for con-
tradictions (Patton, 1990, ch. 7). All interviews were conducted by García-Álvarez and
took place in each founder’s office, lasting from two to six hours. Each interview was tape
recorded. Both authors handled the transcription and analysis of the 13 interviews to
ensure a thorough knowledge of the process. During these visits to founders’ firms we
used non-participant observation focusing our attention on contrasting and comple-
menting founders’ answers during the interviews regarding their firms.
We compiled all published data we could find on these 13 founders, regarding their busi-
nesses and family lives, from annual company reports, newspapers, business magazines,
business directories and business rankings. We used this information to contextualize each
case and to help us during the fieldwork phase. Later, we added secondary data to our
analysis to supplement the information obtained from interviews and observations.
Founder–successor’s transition 241
Notes:
(a) With respect to the year 2000.
(b) Business turnover in millions of euros.
Analytical procedure
We analysed our qualitative data with the programme Atlas.ti. This software is one of the
more advanced for qualitative data analysis (text, sound and video) and allowed us to
extract, compare, explore, and reassemble meaningful pieces from our extensive amounts
of data in a flexible and systematic way (Muhr, 1997). In all 13 cases we pursued a multi-
variable analysis in three main steps: (1) we initially carried out an in-depth, case-by-case
examination by coding for themes until obtaining the final codebook, as a result we got a
founders-by-values matrix; (2) we then used quantitative techniques of matrix analysis to
look for and display graphically patterns in the coded data; (3) finally, we developed a
qualitative back-up of our cross-case patterns.
This iterative qualitative analytical procedure can be described in the following sequen-
tial steps. First, we performed the textual analysis which comprised: (1) full transcription
of the interviews, (2) adaptation of the transcription form to work with Atlas.ti, (3) creation
of textual quotations, (4) revision, (5) descriptive coding, (6) revision, (7) descriptive code
reduction, (8) revision. This was followed by the conceptual task, that is: (9) conceptual
code reduction, (10) revision, (11) networks and (12) revision. The main objective of these
completely qualitative 12 steps was to elaborate a final codebook containing, among other
codes, values that founders intend to transmit to their potential successors from our sample.
We then moved the codes-primary document contingency table (the frequency matrix
of founders’ values for their potential successors) generated by Atlas.ti to SPSS to visu-
ally explore the relationship between codes (values) and primary documents (family firm’s
242 Handbook of research on family business
founders), with the aid of a non-metric multidimensional scaling technique (Kruskal and
Wish, 1978). To do this, we produced a derived dissimilarity chi-squared distance (Dillon
and Goldstein, 1984, p. 124). The chi-squared distance is similar to the Euclidean dis-
tance, with the distinction that each squared difference between profiles is weighted by the
correspondent element of the average founder profile (Greenacre, 1993, pp. 24–31).
Finally, we returned to Atlas.ti and built a conceptual matrix focused on cases that
included secondary data and evidences from our observation notes. We continued with a
textual analysis and finished by building a summary matrix for each group of founders
that contains the main variables and links our theoretical memos.
Entrepreneurship
Hard work
Growth
Seriousness
Determination
People orientation
Simplicity
Honesty Rigor
Internal control
Ethical orientation
Sense of family
Business orientation Economic interest
Ambition
Negative human relations
Satisfaction
Dependency Autonomy
Active life
Prosperous life Innovation
Stability Postive human relations
Constancy
Long-term Orientation
Gratitude
Family orientation
Notes:
1st Horizontal axis: psychosocial dimension
Right orientation, self-fulfilment values.
Left orientation, group orientation values.
2nd Vertical axis: business dimension
Upper orientation, business as an end.
Lower orientation, business as an means.
Figure 13.1 Plot of the values for potential successors in the Euclidean space
seriousness (25), simplicity (24), ethical orientation (18), and internal control (6) on the
upper orientation. This second axis appears to reflect how founders want their successors
to see the firm: business as a means for the family (the downward direction) or business
as an end (the upward direction). If founders are located near the ‘business as a means’
direction, they typically want successors to believe that the aims of the firm are con-
strained by the family. On the contrary, in the case of those located on the ‘business as an
end’ axis orientation, they want successors to feel that the firm predominates over family.
Based on these results, the socialization of the next generation apparently considers the
transmission of social values to be most important, followed by those directly related to
the business.
Comparing founders’ values systems and values they wish to pass on to potential
successors
In order to answer the third research question first, we decided to compare the leading
founders’ values with those they intend to convey to potential successors, as shown in
Table 13.2.
This comparison shows that the priorities are different. Most importantly, the founder
most frequently selected business orientation as the leading value for potential successors,
even though family orientation was most important to them. Determination and ambi-
tion were commonly considered to be part of the founder’s profile in his or her task of
setting up a business, and appear among the founders’ leading values. However, they are
not considered as important for successors, with preference given to transmitting auton-
omy and the pursuit of their own entrepreneurial path by entrepreneurship.
We continue by comparing and analysing the value dimensions between each group in
the founders’ taxonomy and what they intend to convey to potential successors (García
and López, 2001). Both dimensions are the same; however, the business dimension is most
important for founders and the psychosocial dimension is most for potential successors.
Generally speaking, we observed the highest concordance in value dimensions between
founder’s type and the values conveyed to the potential successor when both, founder and
successor, were male. The highest variation, however, appeared when the successors were
a team of women who were the only children of the founder. In teams of potential suc-
cessors, founders were more likely to attempt to convey group orientation when sons and
daughters worked together. Specifically, when reviewing the four groups of founders
(García and López, 2001), founders strategists generally agreed most on transmitting
Table 13.2 Leading founders’ values versus leading values to transmit to potential
successors
both business and psychosocial dimensions, and attempted to convey self-fulfilment and
business as an end to the potential successor. The family tradition founders showed the
most change, with most cases showing a shift from ‘business as an end’ to ‘business as a
means’ for successors. A group orientation is retained in male or mixed teams of poten-
tial successors and changes to self-fulfilment in female teams when they are the only avail-
able candidates. Founder achievers keep both social and business dimension, and
inventors retain the business dimension, and switch to a social dimension in the case of a
team of women.
work and responsibility among a team of successors. Relevant for transmitting the busi-
ness value dimension are the number of firms that founders own and the socialization
model their successors follow. Business-as-an-end values are coherent with large-scale
business (several firms) and a socialization process that facilitates future successors’ role
of leadership in this business context. However, business-as-a-means values fits better in
cases of medium- to small-scale business (one firm) with successors following a founder
reproduction socialization model. Columns show that the variables are the same for each
group of dimensions for successors but we can analyse the variations in rows.
In order to facilitate the succession process and not compromise the future success of the
firm, founder strategists and family tradition should keep their successors on the left-hand
side of Figure 13.2 (business as an end). Thus implies continuing to emphasize among their
successors business-as-an-end values and pursuing a new leader development model of
socialization. On the other hand, founders achievers and inventors, present four cases of
coherence on the right-hand side of the table by transmitting business-as-a-means values
and following a reproduction socialization model. Coherence here represents a trade-off
between reducing conflict among founder and potential successors and increasing the pos-
sibilities of firm’s competitiveness and growth. If these types of founders want to provide
future challenges for their firms they should consider moving from right to left by chang-
ing from business as a means to business as an end and encouraging the new leader devel-
opment model of socialization for their successors.
The grey diagonal of cells going down to the right-hand corner in Figure 13.2 presents
the coincidence between founders’ value dimensions and what they intend to transmit to
their successors. These cases exemplify values’ coherence as pointed out by Santiago
(2000, p. 15) and founders’ homosocial reproduction, that is a total fit between founders’
values and values to be conveyed to potential successors (Hall, 1986; Handler, 1994;
Kanter, 1977). These four cases also cohere with the number of firms and the socializa-
tion model. In contrast, there are also four cells that represent the total misfit of value
dimensions that we rule out from our proposal because is not possible to transmit oppo-
site value dimensions.
The existence of concordance among the founders’ values, the values that the founders
try to transmit to their potential successors, and successors’ socialization process is of
high relevance in avoiding distortions between statements (espoused theory) and actions
(theory in action). For example one conflictive case appears at the bottom right (just near
the corner). Here the founder has a team of potential successors to whom he or she tries
to convey group values and business as a means, but successors’ socialization models in
action are often different. For instance, if the firstborn is male, the founder reproduction
model is normally followed. On the other hand, the new leader development model is
usually followed with other successors, particularly if they are female. In these cases, the
professional adviser encounters a value system that limits the business dimension (busi-
ness as a means), making the development and effective integration of the entire team of
successors more difficult. Moreover, efforts are also needed to manage the coexistence,
sometimes, of different socialization models within the team of successors. This aspect is
an enormous source of conflict if the founder sets up a hierarchical structure on the basis
of birth order and gender rather than skills, especially if the role of each team member in
the company is not clarified, and even more if the working relationships and guidelines
are not well structured.
Founder–successor’s transition 247
Figure 13.2 Proposed model of coherent value transmission and transition process
However, it cannot be inferred that the founder is certain about the best actions to follow
in the firm and the family, nor that potential successors will end up reflecting the value
structure that founders try to instil in them (other experiences will influence their resulting
value structure, for good and for bad). However, the model of coherent value transmission
paths that we have just proposed will serve families and practitioners to increase the prob-
ability of achieving a successful founder–successors’ transition from first to second family
business generation, the most difficult transition according to the evidence.
248 Handbook of research on family business
Conclusions
First, we have shown the legacy of values that founders intend to pass to their potential
family successors by building value systems that blend family and business. Founders try
to emphasize their entrepreneurial spirit to the next generation (expressed by autonomy
and entrepreneurship), instead of only managerial values (for instance, focusing on con-
tinuing with the family business through growth). Literature on management acknowl-
edged the influence of CEO values on the future of the organization; however, as far as
we are aware, there is no previous research on the influence of incumbent founder’s values
on the successor’s values.
Second, we found that value heterogeneity between founders influences heterogeneity
in the values they intend to convey to their successors. We present clear differences in
the nature of values to be transmitted to successors, depending on founder type. Thus
strategist-type founders emphasize self-fulfilment and business as an end whereas the
other three groups of founders – although agreed on business as a means as a value for
transmission – opt for different blends of psychosocial values.
Third, we identify that founder’s influence is moderated by several structural variables.
Within this heterogeneity of values, homosocial reproduction is mediated by two vari-
ables: number of firms owned by the founder and the number and gender of potential suc-
cessors. We compile the variations in a proposed model of value transmission that shows
the different legacy of values for each group of founders. This can be used to help iden-
tify the values involved, to understand their most immediate effects and to assess both the
possibilities for action and the content.
Finally, based on our results we now propose issues that families and practitioners
should take into account to keep the coherence during the succession process. In this
vein, professionals can assist families in preparing the continuity by (1) identifying family
value systems, (2) analysing variables at play in the family-business system, and (3)
proposing a coherent option of continuity that both family and business can pursue. The
model in our chapter intends to help families and practitioners to follow this path by
pointing out the coherent combinations among values and characteristics belonging to
each family business and different successor’s socialization processes. The final aim is to
achieve the best possible generational transfer without adversely affecting the business’s
competitiveness.
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250 Handbook of research on family business
14 Based on what you’ve just said, what are the tasks you enjoy most? The ones you
enjoy least?
15 After all these years, do you feel that you have achieved the objectives you had set
when you started your business activity?
16 Do you have any activities outside the company? (business organizations, commu-
nity activities, hobbies, etc.)
17 Now I would like you to describe how the responsibilities and tasks of your
company are organized and who handles them.
18 How are decisions made?
19 When differences come up in terms of criteria, how is an agreement reached?
20 How do you find out what is going on in the firm?
21 What do you like people working in your company to be like?
22 When you need to hire more staff, how do you select them?
23 Once selected, how are they included in the company?
24 In general, how would you define the staff of this company? (qualified, flexible, etc.)
25 Is there anything you try to instil in the members of your team? If so, how?
26 How do you relate to the staff?
27 How would you define the working style of your company?
28 Do you ever hold any kind of ceremony or celebration within the company?
29 Have you made any kind of innovation over the years? Why?
30 Where did the ideas come from?
31 On what does maintenance of customer and supplier relationships depend?
32 What do you think this company will be like in . . . years?
33 What qualities and/or skills do you feel will be needed to manage it in (time period
according to founder’s age)?
34 What aspects would you like your company to be known for? What words would you
like to be used to define it?
We have talked about you as a businessman and about your company, now let’s discuss
the family . . .
35 Could you tell me how many members there are in your family, explaining which
ones work in the company and which position they hold?
36 Do you have any reservations about including family members in the company? Do
you follow any kind of criteria?
37 Do you talk about issues related to the company at home? With whom? And nor-
mally when?
38 At times of difficulty or success in your company, did your family participate in it in
any way?
39 Is there anything you feel must be instilled in your children? If so, how do you do it?
40 Do you have any expectation(s) in regard to one or more family members continu-
ing with the company in the future? Would you mind if it were someone outside the
family?
252 Handbook of research on family business
Introduction
This chapter introduces and gives argument for strategizing as a fruitful perspective for
researching and understanding the practice of strategy in family firms. Strategy processes
are crucial in the development and survival of every family firm. However, the increasing
interest from academic research in family businesses is not correspondingly manifested in
a large number of studies of strategic processes and outcomes in these firms. So, this
chapter’s focus on the strategizing perspective also calls for more studies about strategy in
the field of family business.
The strategizing perspective is a new stream in the general development of the field of
strategic management. Strategizing can be defined as ‘the detailed processes and practices
which constitute the day-to-day activities of organizational life and which relate to strat-
egic outcomes’ (Johnson et al., 2003, p. 14). Advocates for this emerging research per-
spective have argued for the need to pay more attention to the micro-processes and
detailed activities of strategy-making, for instance, to focus more on what people actually
do when strategizing, who they are, where they do it, how they do it and why they do it.
The mainstream strategy literature has not arrived at this detailed level, but instead stayed
at a more general macro level when investigating strategy. The same can be said of the
current literature on strategy in family firms.
Strategizing is highly relevant in the context of family businesses – especially for its
special attention to social actors and their interaction. In family firms the interaction
between family members plays an influential role in strategy formation and the dynamics
in which strategies emerge are deeply rooted in family values, emotions and the socio-
psychological dimension of ownership (cf. Hall, 2003; Nordqvist, 2005). Consequently,
the strategizing perspective outlined in this chapter helps to uncover specific characteris-
tics of strategic activities in family businesses.
In the next section, we briefly review the current literature on strategy in family business
research, followed by a more thorough introduction of the strategizing perspective. Then
four theoretical perspectives – values, role, arena and legitimacy – are introduced as means
of giving strategizing a more precise theoretical direction. A short case description is
included, illustrating a period of strategizing activities in a family firm, followed by an analy-
sis of the case using the four theoretical perspectives, and with the purpose of providing an
understanding of strategizing in the family business. The chapter concludes with a short
summary of the relevance of the strategizing approach in research on family businesses.
253
254 Handbook of research on family business
In conclusion, a common factor in the existing literature on family firm strategy is that
the research is mainly done at a distance from actual strategic activities. The current lit-
erature tends not to arrive at the detailed levels of the everyday activities that constitute
the actual strategic development in every family firm. To do this, researchers need to
examine strategic processes much closer to the actual situations in which they occur. This
means focusing on real-time processes and the micro-level activities in which many
different strategists may be involved, that is, to focus on the actual strategizing that takes
place. In the next section, we further introduce and discuss the strategizing perspective
and its relevance for understanding strategy in family firms.
of strategic patterns (Melin et al., 1999), which could be labelled an activity-based view
on strategy (Johnson et al., 2003), concerned with the details of organizational work and
praxis. The activity-based view ‘goes inside the organizations, their strategies and their
processes, to investigate what is actually done and by whom. It is concerned with the activ-
ities of strategizing’ (Johnson et al., 2005, pp. 176–7).
The strategizing perspective means a re-definition of the unit of analysis in strategy
research that so far has been dominated by studies and theorizing with the business firm
as a whole as the given unit of analysis. This new call for a micro emphasis implies a sup-
plementary demand for understanding and developing strategy theory starting from the
micro aspects of strategy process, the everyday activities of the practising strategist(s) as
the unit of analysis. As already emphasized, strategizing also implies a stronger focus on
the human element of strategy research as human beings have been largely discarded from
strategy research as a whole. If considered at all, human actors examined in strategy
research have mainly been the managerial elites, and then mainly the single CEO, over-
emphasizing their general importance in strategy processes. In the actual praxis of strat-
egy, the pattern of human involvement and influence is much more diverse; sometimes it
is rather the whole top management team, sometimes the middle managers, sometimes
lower-level employees, sometimes consultants and, as in family firms, sometimes it is non-
executive family members. Furthermore, quite often it is the interaction and dynamics
among all these groups that shape the strategic outcome (Hambrick, 2004). The challenge
of strategy researchers is to uncover the people involved and how they actually get on with
their strategic activities (Whittington, 2003).
When focusing on micro-activities and human beings, simultaneously we need to con-
textualize these activities in institutional, social and emotional contexts. In other words,
we need to integrate micro activities with macro, societal conditions. Such integration will
give new light to a crucial question in strategy research: what activities and processes
produce specific strategic outcome on the organizational level? So, even if the micro-
strategizing perspective empirically, in the fieldwork, implies almost a phenomenological
focus on daily activities, in analyses and theory generation it is intended to be a multilevel
approach, integrating the individual and group levels with more macro levels, that is, the
organizational level and the societal level. As will be shown, many characteristics of the
strategizing perspective fit very well with the typical micro aspects of the family firm’s
strategy process.
Values
The importance of values in family businesses has been stressed by numerous researchers
in the field (for example, Aronoff and Ward, 2001; Prokesch, 2002; Schein, 1983). The
family tends to be described as perhaps the strongest institution for the transmission of
values over generations (Berger and Luckmann, 1966). Through processes of primary
socialization, children of business families internalize core family values, thus making
them their own (Hall, 2003). Owing to the often close integration between the family and
the business, and the common stability of ownership and leadership, these values are
spread and translated in the family business, thus constituting a basis for strategizing
through interpretations, interactions, and decisions.
Values can be defined as the ‘social principles, goals and standards . . . (that) define
what the members of an organisation care about’ (Hatch, 1997, p. 214), or what is desir-
able (Shamir, 1991). Also referred to as ‘moral or ethical codes’ (Hatch, 1997), values
underlie judgements about what is right, wrong and desirable. Values are the underpin-
nings of human action and, as such, they are relevant to the understanding of strategiz-
ing activities and practices in the family business context.
Values exert a major – yet often unconscious – influence on organizations, for instance
through determining their final goals (Simon, 1947). Organizational processes and prac-
tices, such as goal-setting, are based on an ethical component that cannot be objectively,
or factually, understood as right or wrong. Given the complexity of the world, values
might be regarded as a prerequisite for action. By constituting lenses, or perceptual filters,
values reduce the complexity and render the world manageable. The more deep-seated and
unconsciously held, the more influential are the values. As they are taken for granted, they
are quite unlikely to be questioned or challenged. In this sense, values specify the indi-
vidual’s relations to the environment and thus, they influence strategizing activities and
practices. One implication of this for family businesses is the existence of multiple goals
typically characterizing these organizations. In addition to profit-making, family busi-
nesses tend to have goals related to values stemming from the family such as family unity,
concern for individual family members and employees, as well as responsibility for the
local community. Hence, strategizing activities and practices tend to be heavily influenced
by the special logic provided by the core values of the family.
Role
The three-circle model of the family business (Gersick et al., 1997; Tagiuri and Davis,
1982; Ward, 1987), with the more or less overlapping roles of family member, owner and
business manager, points to the fact that roles are complex in family business strategizing.
The role perspective is used to show the ‘context bound nature of human life’ (Burr, 1995,
p. 25). Individuals, as members of social settings, occupy several roles, for example, pos-
itions in a social context (Ashforth, 2001), with different expectations of their behaviour.
These role expectations are important contributions to the role identity, for example, the
‘goals, values, beliefs, norms, interactions styles and time horizons that are typically asso-
ciated with a role’ (Ashforth, 2001, p. 6). Since roles have an impact an individuals’
vantage points and on how they view the world, these role-specific expectations (that is,
the role identity) influence the emotions and actions of the role occupant. However, these
expectations are not fixed once and for all. Like identity, the essence of roles is their con-
tinuous development: ‘the meaning imputed to a given position and the way in which an
258 Handbook of research on family business
Arena
Strategizing emphasizes interaction between actors and interaction always takes place
somewhere, that is, in some type of arena. The arena perspective, here expressed through
‘the strategic arena metaphor’ (Ericson et al., 2000, 2001; Melin, 1998), is useful for under-
standing strategizing in the family business context. Ericsson et al. (2001, p. 68) suggest
that the ‘strategic arena is defined through the dialogues around the issues that are strat-
egic to the individual organization’. The strategic arena includes all possible meeting
places that offer an opportunity for communication on strategic issues that can reproduce
or change strategies of an organization. The strategic arena can emerge both in formal
occasions, such as top management and board meetings, and in more informal situations,
such as ad hoc meetings, spontaneous small talk in the hallway, dinners and during travels,
and the actors populating the arena may come from different hierarchical levels in the
organization as well as from outside the focal organization (Ericson et al., 2000). This
means that both formal position and other characteristics such as possessing the right
knowledge or social relations with key actors can grant access to the strategic arena. The
strategic arena perspective implies viewing the arena as a process that unfolds in different
kinds of representations, where the arena is a multiple and changing meeting place for dia-
logues between actors on strategic issues (Ericson et al., 2000).
The strategic arena metaphor is especially useful and relevant for understanding stra-
egizing, since it does not take its point of departure in the formal organizational structure
Understanding strategizing in the family business context 259
and hierarchy, but in the situations, settings and venues where strategizing actually occurs
(Nordqvist, 2005; Nordqvist and Melin, 2003). The arena is a conception of the actual
social context for strategizing activities. In family firms a few actors from the same owner-
family often occupy several positions and roles that the strategy and governance literature
tend to separate. This overlap creates a blurry organizational structure in which it is not
always explicit where, when and by whom different strategic activities are performed. For
instance, even if the family firm has top management team meetings and/or an active
board with external members, it is not a given that strategizing always occurs in these firm
connected arenas. The family context also gives room for relevant strategic arenas, such
as a family gathering with family members interacting on strategic issues (Karlsson-
Stider, 2001; Nordqvist, 2005). Having said this, the following different aspects of the
arena are particularly relevant in the family firm context.
The arena can be described as either formal or informal depending on the characteris-
tics of the social situation where the arena emerges. A typical example of a formal strat-
egic arena is a periodical board meeting where strategic issues are discussed and settled.
A typical example of an informal strategic arena is when actors strategize during a coffee
break or in small talk in the hallway.
The arena can be characterized as a front-stage or a back-stage arena also depending
on the characteristics of the social situation where the arena emerges. Following Goffman
(1959), a front-stage strategic arena is when one or several actors perform some type of
strategic activity with a specific audience in mind. An archetypical example of this is a
CEO holding a convincing speech explaining the firm’s new strategy to employees. The
back-stage strategic arena emerges when and if the CEO after the speech continues to
strategize with key actors, addressing issues and using information that was not brought
up in the official and communicated version.
The arena can be characterized as current or historical. This includes a time dimension
and refers to whether the strategic arena is a presently or previously important arena. The
history and tradition is often important in family firms with actors referring to ‘how we
used to strategize’. Sometimes this also means a desire to revert to a previous situation.
The strategic arena can be characterized as closed or open. This means that it can be
controlled by the ‘power centre’ of a dominant actor/coalition, or be more fragmented
where many actors are given the possibility of participating in and influencing the
outcome of arena dialogues (Melin, 1998).
Regarding what type of arena dominates strategizing in a particular family firm, there
is often a blend of arenas in action in strategizing and these arenas can both facilitate and
constrain each other. And even if there is a dominant arena where actors strategize at a
particular point in time, this arena typically changes over time. Furthermore, different
generations in a family firm may prefer different types of arena where they discuss and
settle strategic issues.
Legitimacy
The legitimacy perspective contributes to an understanding of strategizing through a
focus on how and why firms adopt, implement and act in accordance with different strat-
egic tools and practices not only for their technical and instrumental qualities, but also
their symbolic, ritualistic and culturally embedded qualities (Meyer and Rowan, 1977;
Suchman, 1995). This means giving attention to institutionalized strategic practices and
260 Handbook of research on family business
activities, for instance, how and why different practices and activities in use are related to
structures and processes on more macro, societal levels.
Legitimacy can enhance both the stability and comprehensibility of organizational
activities. A legitimate organization is often perceived as more worthy, more meaningful,
more predictable and more trustworthy (Suchman, 1995, pp. 574–5). According to
Suchman (1995) there are three forms of legitimacy: pragmatic, which is based on various
stakeholders’ self-interests; moral, which is based on normative approval and appropri-
ateness; and cognitive, which is based on comprehensibility and taken-for-grantedness
within a specific cultural context. From this broad perspective, legitimacy can be defined
as: ‘a generalized perception or assumption that the actions of an entity are desirable,
proper, or appropriate within some socially constructed system of norms, values, beliefs
and definitions’ (Suchman, 1995, p. 574). The socially constructed system refers to the
shared beliefs of some social group and means that legitimacy depends on a collective
audience, yet independent of particular observers. This can be a specific organizational
field (DiMaggio and Powell, 1983), which is similar to an industry or a sector, or a popu-
lation of firms, like family firms (Nordqvist and Melin, 2002), as well as smaller or larger
cultural communities such as professions, nations or specific networks of firms and indi-
viduals (Scott, 2002).
Family firms face specific challenges regarding how to gain and maintain legitimacy.
These challenges have their origin in the overlap between family and the business, and in
the supposed negative influence of family on business (for example, Donnelly, 1964;
Levinson, 1971) which has caused family businesses to be labelled irrational (Hall, 2002).
In business practice, this notion can also be fomented by both internal (for example,
employees and shareholders not operatively active in the firm) and external (for example,
banks, customers and suppliers) stakeholders who are worried that their interests are not
adequately taken into account. As a response to this, family firms may adopt and imple-
ment tools, practices and activities to structure the strategic work that signals legitimacy
both towards themselves and towards different stakeholders. In other words, the legitim-
acy perspective suggests that adopting a strategic practice or activity such as, for instance,
a strategic planning model or including external members on the board as strategic
advisers, can be a way to signal rationality as well as an up-to-date and efficient mode of
organizing.
Activities and practices stemming from a search for legitimacy are often spread and
translated as ‘ideas’ and ‘best practices’. In relation to family firms, they are of two kinds:
first, ideas and best practices successfully implemented by other family firms and, second,
and perhaps more commonly, ideas and best practices successfully used by non-family
firms. These are often spread through carriers such as popular management books, pro-
fessional associations (for example, the FBN and the FFI, but also industry-related trade
associations), management training courses and business schools, as well as through
exchanges among colleagues and networks. In many cases, ideas and practices are not
consciously adopted for the sole reason of gaining legitimacy; in many cases the legitim-
acy reason is largely unconscious among the individuals in question.
market. Growth has been modest but stable over the past five years. Wiretech is located
in a small town, here called Greenbay, in the south of Sweden.
In Wiretech being socially responsible has always been one of the core values of the
owning family. The present owners – children of the foundering generation – describe
themselves as influenced to a great extent by the values of social responsibility. Through
the close interaction between family and business these values were also spread to the
business, considerably influencing the practices, processes and modes of interaction char-
acterizing strategizing in the company. Being in business implies, to the owning family, in
essence a social commitment.
This is not a way of making money. I don’t run around with the balance sheet in my hip pocket.
It’s kind of satisfactory that people have a job here, and that it works, and that I enjoy coming
here. But in terms of dollars or cents . . . no. I want it to be a secure working place for people
living in Greenbay. I want to be able to walk through the village of Greenbay, knowing it’s a plea-
sure to meet. (Steve, CEO and owner)
The family’s way of interacting with customers and suppliers is based in respect and
friendship. This implies negotiation and employment practices aiming at long-term rela-
tions, sometimes at the extent of financial disadvantages.
No profit maximization. They do business with the ones that conduct well, or have right com-
petencies, or provide quality, that’s been more important than prices. (Profit maximization) is
nothing big, quite on the contrary, I would say. When I first came here I was astonished by the
fact that they worked so hard and made so little profit. (Michael, external manager)
They care. Many (employees) live close by and they know them quite well. . . . They have a rela-
tion to the employees also outside of work. (Thomas, external manager)
We’ve never fired anyone. They have not thrown out anyone just because we make less profit.
Although, when thinking of the situation we face today, it would perhaps have been needed.
(Burt, long-term employee)
After 30 years as CEO of Wiretech, Steve decided to leave this position to bring in an
external successor. Apart from the fact that his health at the time was poor, one import-
ant reason for the decision was that Steve believed that the company was in need of a new
management style. Over the years, Wiretech had been run rather ‘spontaneously, with
intuition and feeling, not very much planning or calculus . . . but more emotional’ (Tom,
external manager). For its further development, the company was thought to benefit
from a ‘professional manager’ who could ‘make truly wise, rational decisions through an
objective perspective’ (Steve). Steve had, however, no thoughts of leaving the company
completely – ‘it would be like depriving oneself from one’s beliefs, from one’s personal-
ity’ – but to stay as function manager and board member.
When David, the external CEO came to the company he was very welcome. Both the
owner-family and the employees put lots of faith in David’s formal competence and long
working experience in the publicly held company where he had held several management
positions during an extended period of time. As expected, the external CEO brought
with him a quite different way of thinking compared with the traditional Wiretech way.
Although this had been one of the reasons for hiring David, the family soon ended up with
262 Handbook of research on family business
a situation they did not fully approve of. The company was formalized, with clear hier-
archies and areas of responsibility. David also started to put into practice quite different
decision and selection criteria, such as efficiency, productivity and profitability. In addi-
tion, David did not have the same local and relational commitment as the owners. His goal
was to expand the company and to increase profit, if necessary by dismissing employees.
Cooperation between the family and the external CEO eventually became more
difficult. Steve was not content with the ‘rigid constraints of the system which I, as an
entrepreneur can never accept’ in the form of a formal hierarchy, not allowing him to have
a say in practices and processes with which he did not agree. From being used to being
‘involved in everything’ (Marion, controller and owner), the siblings’ influence was
severely restricted. ‘I wasn’t’ supposed to interfere, I was told I was too dominant . . . I
shouldn’t disturb the development’ (Steve).
David tried to formalize and, hence, delimit Steve’s influence to being mainly that of an
owner in the boardroom. Steve, for whom the ability to influence is ‘incredibly important’
and one of the ‘great advantages’ of being a family business, did not find this easy. Having
been CEO for almost three decades he was unsure of how to exert influence only through
the owner role. Even one and a half years after David’s appointment, he found the roles
‘totally integrated’ and ‘inseparable’. An ongoing recession helped to worsen the situation,
and Steve got all the more irritated and frustrated with circumstances. In spite of this,
David was very optimistic, thinking that matters would improve once profits increased.
When this is the case, my situation in the company will be a whole lot different. That’s the key to
it. After all, that’s why I am here: to make the company grow, and to earn money to the family.
I mean, that’s rather obvious. . . . Money is what it is all about. (David)
In spite of the optimism, the situation in the company soon passed the point of possible
cooperation between the external CEO and the family. Less than two years after his
appointment, David left Wiretech, along with other key employees, leaving behind a
rather uncertain strategic situation.
Values
One important dimension of strategizing in Wiretech is the prevalence of strongly held
family values. The case illustrates how deep-seated family values of social responsibility
Understanding strategizing in the family business context 263
constitute a frame of interpretation, action and, hence, strategizing. Even if David was
informed of these values when entering Wiretech, he did not realize the extent to which
they would influence his day-to-day work. Coming from a publicly held company, he
focused on implementing ‘rational’ changes in activities and practices without consider-
ing the degree of congruence between these changes and the prevailing values.
Interestingly, it seems as if Steve and his sister, although being conscious of the values per
se, were not aware of the meanings and implications of these for the daily running of the
company. Not until the values were severely challenged did the depth of their influence on
daily practices and activities become apparent.
As long as family members are the sole managers, they, as a result of primary social-
ization, are likely to have a common understanding of the company values. The bringing
in of external managers implies, however, a radical change to this unanimity, making it
essential to take the values seriously. As illustrated by the case, family values are among
the most deep-seated and pervasive dimension of strategizing in family businesses. It
therefore takes lots of communication and interaction to reach a sufficient degree of
mutual understanding of the meaning of the values in the daily strategizing of the orga-
nization. That the main strategizing actors in Wiretech never came close to this point is
exemplified by David’s intentions of rapid expansion, if necessary at the cost of lay-offs,
and by the way in which he referred to money-making as the way out of his experienced
problems in the company. This stands in sharp contrast to the business goals of the family,
of which short-term profit-making has never been given priority over the responsibility
felt to its various stakeholders.
Role
A further perspective relevant for understanding strategizing in Wiretech is that of role.
Having enacted the role as CEO for almost three decades, Steve had come to identify very
closely with it. He refers to himself as an ‘entrepreneur’ and as an action-oriented ‘doer’
in the company, used to have a direct influence on all activities and practices. As David
succeeded him, this was radically changed. Steve was now supposed to act, think and
behave primarily as owner. Until the entrance of David, the roles as owner and CEO had
been highly integrated, with priority given to the latter. For this reason, Steve had tremen-
dous difficulties decoupling the roles and disengaging from thinking and acting as CEO.
One and a half years after the succession, he still described the roles as blurred. Since no
serious efforts were made in specifying the content of the role as owner, it remained
ambiguous to Steve and so he never came to identify closely enough with it to use it as a
platform for strategizing. As consequence, Steve came to lack an alternative role, or an
alternative identity, to fall back on when he exited the role as CEO. This provides an
understanding of Steve’s reluctance to let go of the role as CEO, based in deep human
needs such as having and manifesting a distinct identity, without which any individual
would feel bewildered and frustrated. Even though he had formally left the role as CEO,
his identity was still based in that role, which explains why Steve continued to seek oppor-
tunities to enact it. As David counteracted these efforts, the interaction pattern between
David and Steve was increasingly characterized by a struggle for power, not only over the
company, but over their own identities (within it). This coloured strategizing in general,
not least by creating an even more tense atmosphere in the company with orders and
counter-orders given.
264 Handbook of research on family business
Framing the Wiretech case by the concept of role, highlights the importance that indi-
viduals about to leave highly valued roles are (made) aware of the need of continuous
manifestation of their identity through other roles. Had this been the case in Wiretech, it
would most likely have resulted in quite different patterns of interaction between the
former and present CEO. Also, it would probably have turned the board and perhaps also
a family council into relevant means by which Steve could continue to – and more peace-
fully and efficiently – influence strategizing in the company.
Arena
The last part of the discussion stresses the arena as a perspective with the potential to
provide an enhanced understanding of family businesses strategizing. In family firms,
with owners active on a daily basis, formal arenas such as the board might not be the most
important for strategizing. One reason for this is highlighted by Steve’s difficulties in
transferring his involvement in strategizing to formal arenas, such as the board and the
management team, regarded by David as the dominant strategic arenas. Never really
exiting the role as CEO, Steve continued his everyday interactions in informal arenas, such
as small talk and ad hoc conversations with trusted employees. Historically, the typical
outcome of this had been quick and intuitive strategic decisions. Now, it merely created
confusion and frustration in the company. It also led to tension between informal/formal
arenas as well as current/historical arenas, with the former CEO acting primarily on infor-
mal and historical arenas, and the present CEO mostly on formal and current ones. What
they lacked, however, were common arenas for fruitful discussion. The case, hence, illus-
trates the difficulties of arriving at an efficient ongoing communication when the charac-
ter of different arenas for strategizing, and their corresponding roles, is not clearly defined
and communicated.
This is further linked to the extent to which the arena is open or closed and the import-
ance of knowledge and social relations for accessing the dominant arena. David lacked
the heritage of the firm’s history and was never really interested in learning it. Still –
indeed, perhaps because of that very reason – he tried to centralize the strategic work and
to formalize practices and interaction on formal management arenas. Over time this
implied a closing of the dominant strategic arena, especially since David never developed
close social relations with other key actors, including family members. Quite radically, this
contradicted the strategizing behaviour of the former CEO. Being quite autocratic, Steve
was nevertheless always careful to keep his arenas open, in the sense of talking to know-
ledgeable and trusted employees and other advisers.
The unclear relation between arenas also had impacts on the outcome of strategizing,
in the sense that Wiretech’s strategies were neither fully reproduced nor fully changed.
David worked hard with changing activities and practices, with the intention of altering
Wiretech’s strategic direction. The spontaneous ‘interference’ of Steve led, however, to an
obstructed change process. In other words, there was a difference between strategizing on
back-stage arenas and front-stage arenas.
Legitimacy
The final theoretical perspective turned to for an enhanced understanding of family busi-
ness strategizing is legitimacy. Upon his arrival the new CEO was welcome and the expec-
tations high. This can be interpreted as being caused by legitimacy claims, although
Understanding strategizing in the family business context 265
perhaps not exclusively or consciously. In much literature and practice there is a tendency
to advocate the recruitment of external, supposedly professional, managers to the top
management of family firms that need renewal and strategic change (Hall and Nordqvist,
2005). These managers are often assumed to hold special insights and knowledge that can
revitalize a maturing small business (Fletcher, 2002). Recruiting managers with formal
management education and significant work experience, often from non-family firms, is
seen as a way to break loose from the chains of nepotism, introverted character and close
family ties, and instead embrace a universal, objective, rational, analytical and impersonal
approach to strategizing. In the Wiretech case, bringing in the new CEO was seen as a way
to introduce more ‘planning or calculus’ and a ‘professional manager’ who could ‘make
truly wise, rational decisions through an objective perspective’. Moreover, the new CEO
did not just want to introduce new and more formal strategic practices and activities in
order to structure the strategizing process formerly based on ‘intuition and feeling’, but
was also expected, by himself and others, to do so. Coming from a publicly held company,
with a formal management education David had been socialized into the norms stating
the goals and means of a legitimate professional manager (that is, short-term profitabil-
ity, objectivity, rationality and formalization).
There is, however, a dilemma inherent in the search for legitimacy interpreted in the
recruitment of the external CEO in Wiretech. This is related to the difficulties and nega-
tive outcomes for strategizing previously observed in this analysis. Since legitimacy, by
definition, refers to a generalized perception or assumption, the actions taken to legitim-
ate a certain organization downplay the uniqueness and context-boundedness of that very
organization. In other words, in searching for general and universal solutions that are
accepted by a wider audience, the particularities and heterogeneity of family-firm strate-
gizing is forgotten. In the case this is illustrated by the importance of family-related core
values, history and family members’ role identification for the activities, practices and out-
comes of strategizing. The introduction of the new CEO in Wiretech implied, over time,
dysfunctional and inefficient strategizing. Thus, severe difficulties may sometimes emerge
when changing actors, practices and activities of strategizing for reasons of legitimacy, no
matter if it is normative, pragmatic or cognitive.
responsible actor within the local community. The case also illustrates how closely the per-
spectives of role, values, arena and legitimacy are interrelated. Indeed, they can be seen
as four integrated perspectives that jointly constitute a coherent framework for under-
standing strategizing in the family business context.
This chapter has argued for the relevance of the strategizing approach in strategy
research on family businesses. The particular strength of strategizing lies in its focus on
everyday, micro, human aspects of organizational life. This focus implies an interest in
the activities that really take place in the organization, that is, the daily, continuous
practices, processes and interactions through which strategy evolves over time. This
micro focus also means that no details of organizational life could, a priori, be dis-
qualified from being strategic. Seemingly unimportant practices such as the daily coffee
break or spontaneous hallway meetings could have important strategic consequences.
Further, strategizing implies an interest in human aspects of organizational life, such
as the interactions and interpretations of strategizing individuals. From this point of
view, strategizing is, in essence, ‘a theory of social action’ (Johnson et al., 2003, p. 11).
Taken together, strategizing focuses on ‘tacit, deeply embedded, and therefore hard-
to-get-at phenomena’ (Balogun et al., 2003, p. 199) traditionally neglected – even dis-
carded as irrelevant – by strategy research. As illustrated by the Wiretech case, such
phenomena are, however, crucial parts of strategizing activities and outcomes,
especially in family businesses, where organizational and family lives are intimately
intertwined.
The interest in tacit and hard-to-get-at phenomena as potentially strategic implies the
need for an understanding of theoretical perspectives and their strategic relevance. This
chapter has provided a theoretical framework for understanding strategizing through four
perspectives, all stressing different dimensions of micro, everyday, human aspects of
organizational life. The application of values gives meaning to how strategy practices,
activities and interactions are based on deep-seated, traditional family values, and how
insensitive challenging of these by external actors might lead to decreased efficiency in
strategizing. The role perspective emphasizes strategizing as based in human needs such
as identity manifestation. The perspective of arena highlights the need for platforms and
meeting places for communication, mutual understanding and respect, all aspects crucial
for efficient strategizing. The legitimacy perspective is, finally, helpful in understanding
the meaning of adopting certain strategic practices as well as the outcome of their imple-
mentation.
Together, the applied perspectives provide an understanding of the multidimensional-
ity and complexity of family business strategizing. In a corresponding way, other per-
spectives could supplement this understanding. Given the special characteristics of family
businesses, examples of other relevant perspectives would be power, emotions, identity,
culture and sense-making. The application of theory is essential, both for the generation
of an understanding of strategizing and for the possibility of generalizing this knowledge
analytically (Yin, 1989). The theoretical perspectives not only shed light on the tacit and
non-obvious (roles, power, legitimacy, emotions) aspects in a specific case; they also assist
in creating a language for understanding other family businesses. In turn, such a lan-
guage also provides the potential for conscious reflection and action on behalf of family
business practitioners and advisers which might, indeed, enhance strategizing in these
organization.
Understanding strategizing in the family business context 267
Note
* The authors contributed equally to this chapter and are therefore listed in alphabetical order.
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15 The professionalization of family firms:
theory and practice
Lucrezia Songini
269
270 Handbook of research on family business
family’s influence on the strategic direction of the firm (Davis and Tagiuri, 1989; Handler,
1989; Pratt and Davis, 1986; Shanker and Astrachan, 1996), while others the intention of
the family to maintain the control of the business during generations (Litz, 1995). Both
the control of the dominant coalition (Chua et al., 1999) and the presence of unique and
peculiar resources and capabilities, such as familiness (Habbershon et al., 2003), were con-
sidered features of family-owned businesses too. Chrisman et al. (2003, p. 9) stated that
the essence of a family firm consists of: ‘1. intention to maintain family control of the
dominant coalition; 2. unique, inseparable, and synergistic resources and capabilities
arising from family involvement and interactions; 3. a vision set by the family controlled
dominant coalition and intended for trans-generational pursuance; and 4. pursuance of
such a vision’. Astrachan et al. (2002) considered three dimensions of family influence:
power (involvement of the family in ownership, governance and management), experience
(succession and number of family members who contribute to the business) and culture
(overlap between family values and business values, and family business commitment).
According to Mustakallio (2002), the various definitions of family business can be sum-
marized into six categories: ownership, management, generational transfer, the family’s
intention to continue as a family business, family goals and interaction between the family
and business.
In this work, we use the term ‘family firm’ to refer to a company which is both owned
and managed by members of one or more families and is perceived as familiar. In particu-
lar, a family business is a company where one or more families, with family ties, relation-
ships or solid alliances, own the majority of the capital and are in charge of the
governance and management roles (Corbetta, 1995).
used, little planning and coordination activities are run and decision-making processes
are centralized by the entrepreneur. In family businesses, social or relational governance
and control mechanisms are strong and long lasting. However, other authors stated that
formal mechanisms can help the family-owned businesses to cope with the interests and
problems of both the company and the family (Rue and Ibrahim, 1996; Schulze et al.,
2003; Ward, 1987, 1988, 1991, 2001). Strategic planning has a peculiar role in family firms,
owing to the fact that it can consider the objectives and strategic programmes of both the
business and the family (Rue and Ibrahim, 1995, 1996; Sharma et al., 1997; Ward, 1988;
Wortman, 1994). For instance, Ward (2001) suggested developing two distinct strategic
plans: the company strategic plan, which deals with the company’s mission, strategic
direction, objectives and programmes, and the family plan, which aims at making explicit
personal and professional objectives of family’s members and systematically coping with
family’s issues, such as the future family’s involvement and commitment to the company,
the uncertainty in the succession process, the rivalry among brothers, sisters and cousins,
the uncertainty on the future commitment of the founder, and so on.
Concerning the involvement in the management and boards of non-family members, the
professionalization of family-owned businesses does not necessarily imply the involvement
of family members in management roles (Gnan and Songini, 2003). Dyer (1996) identifies
three different paths: the professionalization of family members; the professionalization of
non-family employees, and the employment of new professional managers. The involve-
ment of outsiders/non-family professionals in the governance and management structures
and boards can bring objectivity in a family firm’s decision-making processes, strategic and
succession planning and management (Ibrahim et al., 2001).
To understand the process of professionalization of a family firm, its actual positioning
in the life cycle has to be considered too. Actually, the authors agreed on the fact that in
the life cycle of a small enterprise a phase emerges, characterized by the increasing com-
plexity of the competitive environment and the company strategy and organizational
structure. The separation between power to take decisions (the managers) and the power
to control (the owners of the capital) emerges too. This phase is usually positioned in a
middle/advanced stage of the life cycle of the company, characterized by the need for a
more managerial approach in strategy formulation and management than merely an entre-
preneurial one, which asks the company/entrepreneur to delegate the decision-making and
management to professional managers and to introduce formal governance, planning and
control systems (Deakins et al., 2002; Irvin, 2000; Kroeger, 1974; Perren et al., 1999). In
the growth of the enterprise, the division between ownership and managers leads also to
the appearance of different interests of shareholders and managers, which are liable to
diverge, requiring the introduction of procedures such as governance and control mech-
anisms, aimed at controlling the activities of managers (Berles and Means, 1932).
family firms pursue not only economic, but also non-economic goals, with the conse-
quence that the measurement of overall performance becomes much more complex. A
study made on the S&P500 (Standard and Poors 500 Stock Index) showed that enter-
prises influenced by the founding families outperformed those that are not (Anderson
and Reeb, 2003). Family firms seem to outperform on a number of aspects, as a conse-
quence of a unique economic vision and lower agency costs (Kirchhoff and Kirchhoff,
1987; Kleiman et al., 1995). A study on the performance and capital structure of large,
publicly traded firms controlled by founding families found that these companies have
higher profit margins, faster growth rates, higher sales and cash flow per employee, more
stable earnings and lower dividend rates (Aronoff and Ward, 1995). Family businesses
can have lower costs of family-provided capital, and a longer-term horizon. However,
other studies reported that family-owned businesses have lower performance in the long
run, owing to the weak family members and succession difficulties (Adams et al., 1996).
The way professionalization is managed can have a significant impact on the performance
and survival of the family firm in the long term (Dyer, 1996). Some studies found a correla-
tion between some governance processes, such as that between regular family meetings and
board meetings, and business longevity and size (Astrachan and Kolenko 1994). Strategy
development and planning can impact on firm performance (Aram and Cowen, 1990) and
the growth too (Astrachan and Kolenko, 1994; Ward, 1997). Ward (1988) reported that
family businesses tend to have lower performance, owing to a limited use of strategic plan-
ning. A study by Chrisman et al. (2002) showed that strategic planning had a greater posi-
tive impact on the performance of non-family firms, implying that agency costs are lower in
family-owned businesses. Schwenk and Shrader (1993) pointed out that formal planning and
control mechanisms are positively correlated with company performance. Gimeno et al.
(2004) identified a relationship between business development and complexity and the fea-
tures of governance structures. Recent studies found that the articulation of agency-costs
control mechanisms can have a positive impact on the performance of family firms (Gnan
and Songini, 2003). However, the existing evidence about the relationships between the struc-
ture of the board, the use of strategic planning and control mechanisms and the enterprise’s
financial performance is not conclusive (Johnson et al., 1996; Dalton et al., 1998, 1999).
The agency theory The agency theory considers the formal governance and administra-
tive control systems as a way to align interests and actions of managers and owners
The professionalization of family firms 273
(Jensen and Meckling, 1976; Myers, 1977; Roos, 1973). Owing to the moral hazard and
opportunism which the agents could pursue, in a professionally managed firm, control
systems are widespread to monitor company operations. The board’s main function is to
monitor management actions and results on behalf of shareholders (Eisenhardt, 1989;
Hillman and Dalziel, 2003; Mizruchi, 1983), dealing with three main roles: output
control, behavioural control, strategic control (Fama and Jensen, 1983). Williamson
(1981) highlighted that when ownership is concentrated the conflict between managers
and owners should disappear. A company performs better to the extent that management
and ownership overlap. Family ownership had to be particularly efficient to minimize
agency problems owing to the fact that shares are in the hands of agents who can control
agency problems, without separating management and control decisions, because of the
special relationships with other decision agents (Fama and Jensen, 1983). However, some
features of family firms, such as free-riding, ineffective managers, predatory managers, the
non-alignment of interests among the non-employed shareholders and the top manage-
ment team, can increase agency costs (Bruce and Waldman, 1990; Gallo, 1996; Gallo and
Lacueva, 1989; Morck et al., 1988). In fact, when one individual or a very few people cen-
tralize decision-making process, in order to maintain control within the firm, and do not
favour dissention and autonomy among managers, this situation is potentially costly for
the family firm, whose performance is likely to suffer (Daily and Dollinger, 1993).
Conflicts of interests between family members in different roles can reduce altruism and
efficient collaboration and information exchange. Family firms, owing to the scarce finan-
cial resources and the reluctance of owners to dilute the company’s control, cannot offer
the same conditions to their managers as the publicly owned companies. This fact has
some consequences: the risk of attracting less competent employees and of employing
people with opportunistic behaviours is higher; it is more costly to protect the firm against
adverse selection; it is difficult to give shares of the company to better managers. Limited
opportunities in a career and lower remuneration decrease the motivations and incentives
of competition among people to pursue company goals. The salaries are not aligned with
the market levels owing to the tendency to compensate family members without consid-
ering their real performance. The altruism in the relationship between father and
sons/daughters can hide moral hazard, owing to the fact that parents are likely to be gen-
erous with their sons/daughters. Incentives related to the results obtained can avoid
opportunistic behaviours by the sons/daughters and favour the pursuit of objectives con-
sistent with those of the company (Bruce and Waldman, 1990). Entrenchment allows
managers to extract private benefits from owners, thereby decreasing firm value (Morck
et al., 1988). According to some authors, this causes bigger problems in family firms than
in non-family ones (Gallo and Vilaseca, 1998; Gomez-Mejia et al., 2001; Morck and
Yeung, 2002, 2003). Researchers have shown that altruism and entrenchment have both
positive and negative effects on family firm performance. For instance, the implications of
management entrenchment are not one-sided. Pollak (1985) states that family enterprises
have advantages in incentives and monitoring vis-à-vis non-family firms. Shleifer and
Vishny (1997) argue that family ownership and management can add value when the polit-
ical and legal systems of a country do not provide sufficient protection against the expro-
priation of minority shareholders’ value by the majority shareholder. Burkart et al. (2003)
showed that in economies with a strong legal system to prevent expropriation by major-
ity shareholders, the widely held professionally managed firm is optimal. However, where
274 Handbook of research on family business
the legal system cannot protect minority shareholders, keeping control and management
within the family is optimal.
To promote unity and commitment among shareholders and other family members,
who are likely to be future owners of the business, family businesses can adopt different
practices (Tagiuri and Davis, 1982), mostly based on governance and control systems.
Actually, budgeting, reporting and incentives can help to limit the opportunistic behav-
iours of agents, because they aim at defining and assigning objectives, monitoring results
and compensating adequate performance. Boards of directors can also be useful to com-
municate to agents the principle’s objectives and to control their performance. The
involvement of non-family members in the boards and management can help to avoid
opportunisms too. Strategic planning is another mechanism for controlling agency costs.
For these reasons, many authors said that research in family business can benefit from the
agency theory approach (Daily and Dollinger, 1992). In fact, the introduction of formal
governance and administrative control systems can help a family firm to cope with its
peculiar features, such as free-riding, ineffective managers, predatory managers, and so
on. Recent studies founded that the level of professionalization of family firms is mostly
related to the adoption of agency cost control mechanisms, that is, formal governance,
planning and control systems (Gnan and Songini, 2003; Montemerlo et al., 2004). In par-
ticular, the use of agency cost control mechanisms, especially boards of directors and
strategic planning, was proposed to increase the company performance of family firms
(Schulze et al., 2001, 2003). Other studies pointed out that the more the complexity
of ownership and the bigger the size of the enterprise, the greater is the need to adopt a
principal–agent relationship and to articulate governance and control structures
(Montemerlo et al., 2004). The need for good information systems derives from the agency
costs arising from the conflict of interest between owner-managers and lenders, too
(Poutziouris et al., 1998). These results point out the need to analyse the role of agency
cost control mechanisms in family firms more in depth.
It is worth noting that the agency theory has been criticized, especially by the steward-
ship theory, for ignoring the effects of good social relationships that might exist among
owners and managers, such as in the family firms (Ghoshal and Moran, 1996).
The company growth theory The company growth theory analyses the features, the prob-
lems and the advantages of the development and growth process of a firm, aiming at
becoming a large enterprise, passing through different stages in its life cycle (Christensen
and Scott, 1964; Greiner, 1972; McGuire, 1963; Normann, 1977; Rostow, 1960;
Steinmetz, 1969). Specific models to explain the SMEs growth and development towards
large size were developed, that pointed out the role of information and administrative
control systems to support the enterprise’s development process (Churchill and Lewis,
1983; Cooper, 1981; Dodge and Robbins, 1992; Scott and Bruce, 1987). In fact, the use of
formal governance and administrative control systems can be related to environmental
and firm complexity. According to company growth theory, a small company progresses
through distinct stages as it develops (Churchill and Lewis, 1983; Greiner, 1972; Irwin,
2000; Kroeger, 1974; Scott and Bruce, 1987). Successful growth leads to a critical stage,
namely professionalization, which requires the owner-manager to change his/her entre-
preneurial approach to a more professional one (Deakins et al., 2002; Perren et al., 1999).
After this stage of the life cycle, family firms tend to adopt formal control mechanisms
The professionalization of family firms 275
The stewardship theory The stewardship theory argues that managers whose needs are
based on growth, achievement and self-realization, and who are intrinsically motivated, can
make better use of organizational objectives than of personal ones. If they identify with
their organizations and are strongly committed to organizational values, they are more likely
to pursue organizational objectives. When applied to family firms, the stewardship theory
suggests that the coincidence of family and business values and objectives, at least among
the first generations, brings individuals to follow collaborative and altruistic behaviours,
aimed at pursuing the company goals (Davis et al., 1997). Some studies highlighted that in
some situations altruism and kinship obligations can mitigate agency problems (Eaton et
al., 2002; Wu, 2001), mainly as a consequence of four elements: they create a unique family
firm’s history, language and identity; they produce a collective ownership; they reduce infor-
mation asymmetries among family agents, due to the incentives to communicate and coop-
erate; they create a unique capability of loyalty and commitment to the firm’s long-run
performance and strategy (Van den Berghe and Carchon, 2003). As a consequence, in family
firms agents tend to pursue the owners’ objectives (Jensen and Meckling, 1976), reducing
the agency costs. The owner directly manages the company; the interests of owners and
managers are aligned, as a consequence of the fact that agents and principles are linked by
peculiar relationships, based on familiar ties. Inside family firms an overlap among different
roles develops, owing to the fact that people are both family members, owners and managers
(Tagiuri and Davis, 1982). This theory indicates that it is the alignment of ownership and
control that produces advantages for the family business. The identification of family
members with the firm creates a sense of loyalty and trust towards the organization
(Menendez-Requejo, 2004). In this context, management is considered a good steward and
the role of board is to interact with management to create value, as a mentor, and participate
276 Handbook of research on family business
in strategic decision-making with management value (Huse, 2000). In this perspective, the
roles of boards are mainly networking, legitimacy, advice and strategic participation.
Moreover, in family-owned enterprises the need to account for actions to the owner should
not be necessary, explaining the use of less formalized systems which substitute the control
ones (Whisler, 1988). The stewardship theory states that in family-owned businesses formal
governance and control mechanisms are not necessary, because of the relationships among
people. However, these mechanisms can have negative effects on the agent’s behaviour. Other
authors state that the prevalence of either stewardship or agency relationships depends on
some psychological and situational factors. The first considers the degree of identification
of the individual with the enterprise and the way power is exercised; the second concerns
management philosophy and organizational culture (Craig et al., 2003).
The resource-based view (RBV) of the firm theory The RBV of the firm theory (Barney,
1991) identifies the resources and capabilities that make family enterprise unique and
allow it to develop peculiar and family-based competitive advantages. This theory sug-
gests a firm is a family business where the role of a family impacts on its functioning and
performance. According to this theory the combination of the family and business
systems in a family firm create both economic and non-economic value and ‘lead to hard-
to-duplicate capabilities or “familiness” ’ (Chrisman et al., 2003, p. 7). Familiness is a
peculiar feature of family enterprise that explains its survival and growth, in addition to
two other aspects: emotional involvement of individuals in firm activities and the private
language of relatives (Habbershon and Williams, 1999; Habbershon et al., 2003). Studies
based on the RBV of the firm theory deal with several topics: which are the peculiar cap-
abilities and competencies of family firms? How do they identify and develop such
capabilities? How do they transfer them to new generations and continuously develop
new capabilities? The evidence of the RBV of the firm theory with regard to the impact
of professionalization is not conclusive. In fact, professionalization can have both posi-
tive and negative effects on family-owned businesses.
On the one hand, the overlapping owner and agent relationship can have advantages,
such as the reduction of financial reporting, the decrease of regulatory compliance and
administrative costs, faster decision-making, longer time horizons, family unity which
engenders family commitment and allows longer-term investment return horizon (Poza
et al., 2004). On the other hand, some studies pointed out that elements, such as close
kinship, ownership and management transfer, conflict of interests and altruism can nullify
the value of existing capabilities and obstruct the creation and renewal of new distinctive
familiness (Cabrera-Suárez et al., 2001; Steier, 2001a, 2001b, 2003; Stewart, 2003; Wu,
2001). These studies are based mostly on an agency theory approach, which points out
that opportunistic behaviours in family enterprises can lead to agency costs that destroy
or reduce the specific capabilities of family firms (Gomez-Mejia et al., 2001; Morck and
Yeung, 2003; Schulze et al., 2003). Finally, some authors pointed out that boards, man-
agers and planning and control systems can be considered relevant resources for family
firms. In particular, the role of strategic planning and control systems consists of identi-
fying the strategic resources of the firm, the strengths and weaknesses of competitors and
the opportunities for better using these resources; identifying the capabilities and allocat-
ing scarce strategic resources to relevant capabilities; and selecting the strategic decisions
that better use resources and capabilities (Grant, 1991). The final goal is to allocate
The professionalization of family firms 277
The organizational control theory The way decisions are carried out in an organization
is related to the concept of organizational control. In effect, methods of decision-making
and interaction between people and organizational units influence control processes. The
organizational control theory identifies three different kind of control systems: social
control, administrative control, and individual control. A person’s behaviour can be influ-
enced by the rules of the groups in which he/she is involved (social control or clan), by the
rules, the plans, the programmes and the incentive mechanisms which define organiza-
tional objectives, allocate strategic resources, programme and coordinate the management
decisions and evaluate performance (bureaucratic or administrative control) or by identi-
fication with organizational goals and objectives, values and management philosophies
(individual control) (Child, 1972; Galbraith, 1977; Herzberg, 1968; Hopwood, 1974;
Johnson and Kaplan, 1987; Mintzberg, 1994; Prahalad and Doz, 1981). With regard to
strategic planning, the design school approach suggests that a firm can formulate and
implement effective business strategies through the use of models of analysis of the inter-
nal and external business environments (Lorange, 1980). However, this approach is often
not appropriate for small businesses; instead an incremental, emerging, intuitive and
informal approach is more suited to them (Mintzberg, 1994; Normann, 1977; Quinn,
1980). The literature suggests that firms adopt managerial control mechanisms for various
purposes, such as the need to cope with increasing firm’s and environmental complexity,
the need for the entrepreneur to delegate activities, the need to look for external funding
or quotation, and so on. These mechanisms can enable any firm, even those managed by
stewards rather than agents, to make better strategic decisions in light of its environmen-
tal and resource circumstances (Ford, 1988; Schwenk and Shrader, 1993; Ward, 1988).
The organizational control theory points out that clan and social control systems are
more effective than bureaucratic and administrative control when the strategy formula-
tion, the decision-making processes, and the power in the organization are managed by a
few people who share common values and coordinate themselves by informal relation-
ships (Hopwood, 1974; Mintzberg, 1983; Ouchi, 1981). In family firms the social interac-
tions among family members allow the use of informal and cultural mechanisms that
substitute or complement the formal administrative systems. Daily and Dollinger (1992)
reported that family firms use more informal control processes and systems. Recent
research pointed out that informal mechanisms, based on auto-coordination, auto-
control and clans are more used in family firms (Uhlaner and Meijaard, 2004).
businesses points out that social and individual control systems are more suited to these
enterprises, owing to common shared values and languages, informal and kinship rela-
tionship, and a small group of people being in charge of ownership, governance and man-
agement. However, agency theory and the company growth theory highlight the need for
family firms to adopt formal governance, strategic planning and control mechanisms and
to involve non-family members in governance and management. Agency theory consid-
ers the agency cost control mechanisms necessary for family-owned businesses to cope
with their peculiar features that increase the agency costs. However, an inconclusive
picture emerged from the analysis of theories, which point out both the advantages and
the uselessness of professionalization of family firms. Moreover, to better understand the
role, the drivers and the features of the professionalization of family firms, it has to be
considered that there is a life cycle in the introduction of different mechanisms and
involvement of non-family members, which is related to both the business and the family
development. According to company growth theory, a board of directors and strategic
planning seem to be introduced in earlier stages than administrative control systems,
because they can manage and coordinate the development and growth of both the family
and the business during generations. Administrative control systems are implemented in
late stages, when the company’s large size, strategic and organizational complexity and the
competitive environment do not allow a single individual or to a few people to cope with
all strategic and management issues and require more delegation. It could be of interest
to better compare the diffusion, the features, the objectives and roles of governance,
strategic planning and control systems among family firms and non-family enterprises, as
well as to analyse the degree of involvement of family and non-family members in own-
ership, governance and control mechanisms. The drivers of professionalization and the
effect on company performance have to be studied too.
According to the evidence of literature analysis, the following propositions and
hypotheses are proposed, which deal with the features, the process and the drivers of pro-
fessionalization of family-owned businesses and its impact on the economic performance:
Research design
Sampling frame
The initial sample consisted of 7964 manufacturing SMEs drawn from AIDA database
(by Bureau Van Dijk Electronic Publishing), of Milan province, defined at the four-digit
level of the ATECO91 Classification System. Small and medium-sized enterprises are
defined as enterprises which:
Independent enterprises in which 25 per cent or more of the capital or the voting rights are
owned by one enterprise, or jointly by several enterprises fall outside the definition of an
SME. The AIDA database contains 1994 to 2001 balance sheet data of about 130 000 incor-
porated SMEs, representative of the Italian population and operating both in manufactur-
ing and non-manufacturing industries. The Milan province was chosen so that the sample
had a high level of internal homogeneity and achieved a broader representativeness of Italian
SMEs. The 7964 companies were articulated by range of turnover and industries (Table 15.1).
280 Handbook of research on family business
Turnover (million €)
Industry 0–4 4–8 8–20 20–40 40–80 Total
Chemical 331 123 128 84 48 714
Food 108 50 44 14 16 232
Electronic 847 219 169 72 36 1343
Textile 514 123 128 51 27 843
Mechanic 936 280 229 96 41 1582
Raw material transformation 2117 541 361 141 90 3250
Total 4853 1336 1059 458 258 7964
Procedure
The data collection process proceeded in four phases. First, measurement scales were
developed by reviewing relevant literature, by completing five on-site interviews with
CEOs from medium-sized firms, with academics and consultants, and by pre-testing the
resulting scales with a group of academics and consultants. Next, a single researcher pre-
tested the preliminary versions of the resulting questionnaire with some senior executives
of SMEs. The third stage consisted of on-site interviews with CEOs or executives in ten
SMEs, resulting in the final versions of the questionnaire. In the final stage, the survey was
mailed to the companies included in the sampling frame described above. We addressed
the surveys to the chief executives of the firms. A single informant was used for each
acquisition. Although the use of multiple respondents would have reduced concerns
about potential response biases, respondents had to be knowledgeable about the firm and
its competitive environment (Campbell, 1955). In a large sample study, identifying and
obtaining responses from multiple well-informed respondents is extremely problematic.
The key methodological solution in using a single respondent approach is to find the most
appropriate respondent. Thus, we qualified our respondents as individuals who held a
CEO or equivalent position (president, executive chair and managing director).
Achieved sample
From the initial sample, questionnaires were mailed to 1122 companies, in such a way as to
be also representative of the reference population by range of turnover and industries, and
for whom we obtained addresses. A total of 166 completed questionnaires were returned,
representing a response rate of 15 per cent. This response rate is reasonable given the setting
of the survey (small firms), firm diversity, the positions of the respondents (CEO, president,
executive chair and managing director), and the sensitivity of the information. Following a
check to ensure that these cases all represented family firms, 15 responses were eliminated.
Family firms were defined as those companies that met at least one of the following require-
ments: (1) 51 per cent of equity or more owned by the family; (2) family owns less than 51
per cent but controls the company in partnership with friends, other entrepreneurs, employ-
ees; (3) respondents perceive the company to be a family business, whatever the family share,
which actually happened in four cases (Greenwald and Associates, 1995). The final data-set
included 151 family businesses. Non-response biases were evaluated by comparing the
industries represented in the sample with the initial sample used. No differences in the
The professionalization of family firms 281
industries represented were found. Early respondents (first half) were also compared with
late respondents (second half), following the Armstrong and Overton procedure (1977). No
significant differences were found on key characteristics such as age of the company, size
(employees and turnover), market conditions or industry characteristics, suggesting that
non-response bias might not be a problem. Overall, the data-set represented a wide range
of industries, firms and typology of the firm, as shown in Tables 15.2–15.6.
Descriptive results
Family involvement, board of directors and formal strategic planning and control systems
Consistent with agency and organizational control theories, it was stated that profession-
alization of family firms is related to the diffusion of governance mechanisms, formal
strategic planning and control mechanisms, and the involvement of non-family members
in governance and management roles. Accordingly, we hypothesized that (H1): ‘The
282 Handbook of research on family business
Valid 150
Mean 1972.5
Median 1982.0
Mode 1989.0
Std. deviation 22.6
Percentiles 25 1956.0
Percentiles 50 1982.0
Percentiles 75 1989.0
Table 15.7 Family involvement versus board of directors and formal strategic planning
process
greater the involvement of family members in running the company, the lower the adop-
tion of governance, strategic planning and control mechanisms.’
Table 15.7 reports the extent of family involvement both in governance and in man-
agement processes. We cannot state a real strong relationship between the degree of
involvement of family members in strategic and managerial decision-making processes
and the presence of board of directors and strategic planning (there are only two sig-
nificant differences, one between the percentages of family involvement in governance for
firms with a board of directors – ANOVA F 14.683, p0.01 – and one between the per-
centages of family involvement in management for firms with a strategic planning –
ANOVA F 3.087, p0.05). In other words, the professionalization of family firms
The professionalization of family firms 283
seems not to imply the involvement of family members in management positions and
activities as a condition for a greater alignment between the interests of owners and man-
agers. Actually, the use of board of directors and strategic planning is related to the pres-
ence of managers in charge of the company governance, but they do not necessarily have
to be members of the family which owned the firm.
consistent with the literature that shows a positive relationship between those mechanisms
and economic performance (Schwenk and Shrader, 1993).
Sum of Mean
Squares df Square F Sig.
Sales CAGR* Between Groups 0.488 3 0.163 5.368 0.002
(98–00) (Combined)
Within Groups 3.788 125 0.030
Total 4.277 128
Invested Capital Between Groups 0.485 3 0.162 5.304 0.002
CAGR* (98–00) (Combined)
Within Groups 3.779 124 0.030
Total 4.263 127
Net Assets CAGR* Between Groups 0.620 3 0.207 0.326 0.807
(98–00) (Combined)
Within Groups 79.299 125 0.634
Total 79.919 128
ROS (average Between Groups 0.071 3 0.024 6.299 0.000
98–00) (Combined)
Within Groups 0.518 138 0.004
Total 0.589 141
ROI (average Between Groups 0.072 3 0.024 8.835 0.000
98–00) (Combined)
Within Groups 0.374 137 0.003
Total 0.446 140
ROE (average Between Groups 0.443 3 0.148 1.270 0.287
98–00) (Combined)
Within Groups 16.042 138 0.116
Total 16.485 141
(42.8 per cent), it distracts from day-to-day activities (41.5 per cent), it is too complicate
(38.4 per cent), it is useless (37.7 per cent), and it hinders creativity (36.2 per cent).
Enterprises which use strategic planning assign to it the following objectives: strate-
gic goals definition (96 per cent), strategy formulation (94.2 per cent), defining a
common vision (95 per cent), spreading a common language (68.5 per cent), identifying
opportunities (72.9 per cent) and threats (65.8 per cent), points of strength (91.4 per
cent) and weaknesses (84.7 per cent). The diffusion of managerial accounting and
control systems are generally widespread in the majority of Milan’s enterprises.
However, incentives, investment analysis and responsibility accounting point to a limited
diffusion (Table 15.14).
With regard to the importance assigned to managerial accounting and control systems,
Milan’s companies consider very important management accounting (81.6 per cent),
budget (71.7 per cent) and standard costing (64 per cent). They give less importance to
responsibility accounting (42.2 per cent), investment analysis (36.6 per cent) and incentives
The professionalization of family firms 287
Managerial accounting
and control systems Presence (% of total)
Managerial accounting 67.5
Standard costing 66.5
Budget 81.4
Managerial reporting 71.3
Investment analysis 46.9
Responsibility accounting 45.9
Incentives 28.2
(29.1 per cent). With regard to budget objectives, 76.1 per cent of sample companies give
importance to the definition of short-term and operative goals, 72.3 per cent to the assign-
ment of objectives to managers, 58.8 per cent to the motivation of managers and 50.1 per
cent to the variance analysis. As far as the diffusion of strategic planning and control
systems and their goals is concerned, we can say that control mechanisms mostly focused
on short-term horizons and aimed at defining and assigning objectives and measuring per-
formance are widespread (managerial accounting, standard costing, budget, and manage-
rial reporting).
The results indicated that management accounting is the most widespread mechanism,
followed by a board of directors and other control mechanisms, such as budget and stand-
ard costing. Strategic planning has the lowest diffusion among family enterprises. These
results only partially confirmed agency theory, which states that the most widespread
agency cost control mechanisms in family-owned businesses are a board of directors and
strategic planning.
Strategic and organizational complexity and strategic planning and control mechanisms
According to the company growth and organizational control theories, the increase in the
complexity of strategy and organizational structure plays a significant role in the wide
spread of both strategic planning and formal control mechanisms.
All things being equal, the following hypotheses were defined: Hypothesis 7 (H7) ‘The
increase in the strategic business differentiation requires a wider adoption of strategic
planning and formal control mechanisms’, and Hypothesis 8 (H8) ‘The increasing com-
plexity of organizational structure requires a wider adoption of strategic planning and
formal control mechanisms’.
With regard to strategy complexity, it was defined as the degree of strategic business
differentiation, articulated according to three levels: low differentiation (an enterprise oper-
ating in one strategic business area), medium differentiation (a firm operating in not more
than three strategic business areas) and high differentiation (an enterprise operating in more
than three strategic business areas). Of the sample companies 50.8 per cent had a low
differentiation; 36.7 per cent had a medium strategic business differentiation, while 12.6 per
cent had a high differentiation. Hypothesis 7 was partially confirmed (Table 15.15). In fact,
the relationship between the degree of strategic business differentiation and the presence of
strategic planning was not confirmed. However, a relationship was found between the
The professionalization of family firms 289
Table 15.15 The relationships between strategic business differentiation and the
presence of strategic planning and control systems
Strategic planning,
managerial accounting Degree of strategic Anova
and control systems business differentiation Mean test – F
Strategic planning Low strategic business differentiation 0.2323 0.557
(monobusiness enterprise)
Medium strategic business differentiation 0.2585
(not more than 3 SBA)
High strategic business differentiation 0.1633
(more than 3 SBA)
Total 0.2257
Managerial accounting Low strategic business differentiation 0.6828 1.185
(monobusiness enterprise)
Medium strategic business differentiation 0.7309
(not more than 3 SBA)
High strategic business differentiation 0.5749
(more than 3 SBA)
Total 0.6750
Budget Low strategic business differentiation 0.7001 4.822**
(monobusiness enterprise)
Medium strategic business differentiation 0.8689
(not more than 3 SBA)
High strategic business differentiation 0.9270
(more than 3 SBA)
Total 0.8137
Standard costing Low strategic business differentiation 0.5932 2.798
(monobusiness enterprise)
Medium strategic business differentiation 0.6425
(not more than 3 SBA)
High strategic business differentiation 0.8240
(more than 3 SBA)
Total 0.6648
Managerial reporting Low strategic business differentiation 0.7969 3.149**
(monobusiness enterprise)
Medium strategic business differentiation 0.7186
(not more than 3 SBA)
High strategic business differentiation 0.5589
(more than 3 SBA)
Total 0.7133
Investment analysis Low strategic business differentiation 0.4598 7.520**
(monobusiness enterprise)
Medium strategic business differentiation 0.3077
(not more than 3 SBA)
High strategic business differentiation 0.7161
(more than 3 SBA)
Total 0.4687
Responsibility accounting Low strategic business differentiation 0.3148 14.842**
(monobusiness enterprise)
290 Handbook of research on family business
Strategic planning,
managerial accounting Degree of strategic Anova
and control systems business differentiation Mean test – F
Medium strategic business differentiation 0.3697
(not more than 3 SBA)
High strategic business differentiation 0.8218
(more than 3 SBA)
Total 0.4586
Incentives Low strategic business differentiation 0.2578 2.884
(monobusiness enterprise)
Medium strategic business differentiation 0.2048
(not more than 3 SBA)
High strategic business differentiation 0.4341
(more than 3 SBA)
Total 0.2823
Note: ** Sig.0.05.
degree of strategic business differentiation and the presence of investment analysis, budget,
managerial reporting and responsibility accounting. It seems that in the sample enterprises,
strategic goals and programmes are not defined adopting formal strategic planning, con-
firming that in SMEs an incremental, informal, emerging and intuitive approach in strat-
egy formulation is used, even though the relationship with investment analysis indicates a
rational evaluation of strategic alternatives, when strategic complexity increases. However,
it seems that the sample enterprises adopt mechanisms based on a short-term horizon when
defining their objectives and programmes, instead of strategic and long-term horizons. The
increase in strategic complexity requires delegation of objectives and responsibilities, and
monitoring and evaluation of the achieved results by formal mechanisms. This is partially
consistent with the organizational control theory.
With regard to the complexity of organizational structure, it was hypothesized that it
is related to the presence of strategic planning and control mechanisms. The complexity
of the organizational structure was defined with regard to four kinds of structures: func-
tional structure (the simplest one), divisional structure (more complex), matrix structure
and project structure (the most complex ones). Of the sample enterprises, 64.9 per cent
adopt a functional organizational structure, 6.0 per cent a divisional structure, 19.2 per
cent a matrix structure and 9.0 per cent a project structure. A relationship between the
presence of strategic planning and control mechanism and the complexity of organiza-
tional structure was found (Table 15.16). In particular, the use of different mechanisms
in different organizational structures, such as managerial accounting, standard costing,
managerial reporting, investment analysis and responsibility accounting, can be
observed. These are mostly mechanisms aimed at delegating and measuring performance.
However, no relationship was found with mechanisms aimed at defining goals and pro-
grammes, and reward results, such as strategic planning, budget, and incentives.
The results obtained seem to confirm that as long as organizational and strategic com-
plexity (for example, complexity of organizational structures and strategic differentiation)
The professionalization of family firms 291
Table 15.16 The relationships between the complexity of organizational structure and
the presence of strategic planning, managerial and control systems
Note: ** Sig.0.05.
292 Handbook of research on family business
increase, the enterprises adopt control mechanisms to cope with the new issues of dele-
gation, coordination of managers’ actions, and definition of objectives and strategies.
This evidence is consistent with the organizational control theory propositions. However,
the relationship with managerial control mechanisms, on the one hand, but the non-
existing relationship with strategic planning and incentives, on the other hand, confirms
the propositions of stewardship theory. In SMEs and family-owned businesses the strat-
egy formulation is carried out by the entrepreneur or a very few people with familiar ties.
It is based on an incremental, emerging process. The identification of family members
with firm’s objectives, loyalty and trust towards the organization do not require formal
mechanisms to reward performance.
Conclusions
This chapter is intended to contribute to the debate on the professionalization of family
firms. The most relevant theories dealing with this topic have been highlighted and their
propositions and evidences compared. An inconclusive picture emerged from the analy-
sis of theories, which revealed advantages and uselessness of professionalization of family
firms. Some propositions and hypotheses were derived from the analysed theories and
tested on a sample of Italian SMEs family firms.
This study aimed at advancing research on family business in many ways. First, the rela-
tionship between professionalization and the use of governance, strategic planning and
control mechanisms was identified. The relationship between the involvement of man-
agers and these mechanisms was identified too, even though they have not necessarily to
be members of the family. Secondly, the diffusion of governance mechanisms and strat-
egic planning and control systems was presented. It is worth pointing out that the most
widespread mechanisms are a board of directors and those control systems focused on
short-term horizons and aimed at defining and assigning objectives and measuring per-
formance, such as budget, managerial reporting and managerial accounting. Strategic
planning is not as diffused as many authors suggested. It seems that it is not considered
by the sample companies as a mechanisms to manage both the family and the company
development and growth. Thirdly, family involvement in governance and management
roles seems to have an impact on the economic performance of the enterprise. This evi-
dence is consistent with those researches and theories which showed that family enter-
prises outperform, owing to the family commitment to the company. Fourthly, a board of
directors and strategic planning have a relationship with the economic performance of
family firms, consistent with the propositions of the agency theory. Finally, strategic and
organizational complexity seems to be drivers of professionalization, consistent with the
organizational control theory.
From a practitioner standpoint, we can draw some lessons. Family involvement is sug-
gested owing to the positive effect on the company performance. However, it has to be
related to the use of governance and strategic planning and control mechanisms, which
can positively impact on the performance too. There is a sequence in the introduction of
these mechanisms in family firms, which has to be appropriately managed. A bigger role
for strategic planning could be useful to cope with both family and company growth issues
and to avoid a focus mostly on a short-term horizon.
The limitations of this study can be summarized as follows. It considered only family-
owned businesses. However, it could be of interest to compare the diffusion, the features,
The professionalization of family firms 293
the objectives and roles of governance, strategic planning and control systems among
family firms and non-family enterprises. It focused mostly on governance, strategic plan-
ning and control mechanisms, while the involvement of non-family members in owner-
ship, governance and management was not identified. It could be of interest to analyse
the role and impact of non-family members in governance and management, especially
with regard to some top management positions, such as the CEO, the managing director
and the CFO, who can have great autonomy in decision-making. Other drivers of pro-
fessionalization and their effect on company performance have to be studied too, such as
age of the company, number of generations, actual phase in the company life cycle, and
size of the enterprise. A similar study applied to large enterprises could be useful to iden-
tify the peculiar feature of professionalization consistent with different kinds of firm size.
Many studies suggest that large family firms outperform small ones. More attention could
be paid to these sources of performance differences.
Although evidence from a large number of firms in a varied set of industries and sizes
was presented, this study is subject to the limitations that generally apply to cross-
sectional survey-based research: the response rate, although typical, renders the conclu-
sions subject to potential response biases; the fact that the sample is focused on
manufacturing firms (although many different manufacturing industries were represented
in the sample) limits the possibilities for generalization of results. Studies including non-
manufacturing firms could obviously extend the findings.
To conclude, it can be said that the professionalization of family firms to be properly
analysed requires adopting a theoretical framework based on the propositions of different
theories. Empirical results confirm that to better explain the features, the drivers and the
impact of the professionalization of family firms, different theories can contribute, each
highlighting specific and peculiar aspects of family-owned businesses. The theories
analysed in this work apparently emphasize different features of family-owned businesses,
but some convergence can be found among some of their propositions, such as the impact
of professionalization and family involvement on company results, the sequence of intro-
duction of governance, strategic planning and control mechanisms, and the relationship
between strategic and organizational complexity and professionalization.
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16 Formulating, implementing and maintaining
family protocols
Miguel Angel Gallo and Salvatore Tomaselli
Introduction
This chapter discusses the main variables that influence the process of writing and imple-
menting a family protocol, and the cause–effect relationships that emerge during that
process.
Family protocols are commonly considered by both scholars and practitioners a valu-
able instrument to govern the relationship between the family and the business; further-
more, most of the authors we encountered point out that the process through which the
family goes while writing the protocol is even more important than the content of the final
document. On the other hand, most literature we encountered is prescriptive and, with
very few exceptions (Corbetta and Montemerlo, 2001; Leon-Guerrero et al., 1998), we
have not found any contribution based on empirical surveys that corroborate (or discon-
firm) those statements and test the real sturdiness of such tools.
The term ‘family protocol’, coined by Gallo and Ward (1991), is rooted in the stream
of studies on strategic planning in family businesses, developed from the beginning of the
1980s and it is part of the most recent tide of research on corporate governance in family
businesses (see, among others, Carlock and Ward, 2001; Corbetta, 1995; Corbetta and
Montemerlo, 2000; Gallo, 2000; Gersick et al., 1997; Harris et al., 1994; Lank and
Neubauer, 1998; Lansberg, 1999; Tomaselli, 1996; Ward, 1988; Gallo and Ward, 1991).
As such studies developed and researchers concentrated their attention on specific
aspects, they have coined different terms that, as Lank and Neubauer (1998, p. 89) under-
lined, assume a variety of forms and cover an ample range of denominations.
A family protocol, as it is intended in this chapter, is a document aimed at maintaining
and reinforcing over time and generations unity among family members and their com-
mitment to the success of the family business (Corbetta and Montemerlo, 2000; Gallo,
1994, 2000; Tomaselli, 1996). By writing a family protocol the owning family makes an
effort to identify and make explicit and transferable to the subsequent generation and to
other stakeholders the main reasons for its own commitment to the business; the philoso-
phy that inspires the family in its relationship with, and control of, the business (owner-
ship, government, management, and so on); the goals pursued by the family and the
business; and the rules that govern the relationship between the family and the business
(Corbetta and Montemerlo, 2000; Gallo, 1994, 2000; Tomaselli, 1996).
The typical structure of a family protocol we refer to includes two main sections, each
of which is usually divided into chapters. The first section states the foundation of the
common project of the family concerning the future of the family business, defines the
framework for a realistic knowledge of the family business among family members and
sets the stage for any kind of rule to be defined and implemented. This section is made up
of four pillars: reasons for continuity as a family business and the main values of the
298
Formulating, implementing and maintaining family protocols 299
family; what kind of relationship the family wants to maintain with the business and, con-
sequently, what type of relationship the family is going to maintain in the future with the
business; realistic expectations of family members concerning the family business; and the
conditions and circumstances that will determine the end of the family business (either its
liquidation, or its division, or its selling out). The glue among these four pillars is the
common vision for the future of the family business and the definition of its mission
developed by the owning family.
The second section of the family protocol includes norms and rules aimed at fostering
trust among family members, by generating consistent and predictable behaviour in
family members in their relationship with the business, and vice versa, coherently with the
framework set in the previous section. Such norms and rules basically concern: work in
the family business (conception of the family concerning work relationships between
family members and the family business, prerequisites for working in the family business,
selection processes, career paths, and so on); the exercise of power both in the business
(top management and governance bodies, control and voting agreements, and so on) and
in the relationship between the family and the business (family council, committees,
and so on); issues concerning ‘money’ (buy–sell agreements, evaluation of shares, divi-
dend policies, liquidity funds, common investments, philanthropy, and so on).
As we stated before, this chapter concentrates its attention on the dynamics character-
izing the process of writing and implementing a family protocol, as they result from the
in-depth observation of some cases.
The survey which this chapter draws on was conducted by the authors from October
1999 to June 2002 to investigate the results of family protocols on a sample of Spanish
family businesses. The key questions of our research can be synthesized as follows: what
happens after a family protocol has been written and signed by the members of the
family? Is it really implemented or does it become a leather-bound book to be placed in
the archives? What are the main results (positive or negative) attributable to the formula-
tion and implementation of the family protocol in terms of impact on the degree of unity
and commitment? What are the dynamics created in the formulation and implementation
(or lack of implementation) processes? What are the elements of the formulation and
implementation processes that contributed most to the success of the results? Reasons of
space do not allow us to make a complete report on our survey in this chapter, so we will
make a brief presentation and discussion of the main results, and concentrate our atten-
tion on a case study that discusses the causal relationships characterizing the process of
writing and implementing a family protocol.
The chapter is structured as follows: first, we present the theoretical framework of ref-
erence of our analysis; secondly, we present the research method we adopted; thirdly, we
present our empirical results and discuss them; and fourthly, through the analysis of a case
study, we analyse the dynamic relationship characterizing the process of writing and
implementing a family protocol.
Theoretical framework
Since our interest was in both structural variables and cause–effect relationship, we
adopted for our survey two different theoretical frameworks that, in our opinion, have
some complementary characteristics which helped us to analyse in detail the relationships
among the different variables.
300 Handbook of research on family business
The first theoretical framework used for the analysis is a version of the model
‘structure–conduct–performance’ (Caves, 1964) suited for the phenomenon in observa-
tion, where we define the variables as follows. The structure is constituted by the struc-
tural conditions of the family and the business. The structural dimensions of the family
that have finally been taken into account after several trials are: how many and which gen-
erations will be immediately or very shortly involved in the existence of the family proto-
col; how many persons are involved, their age and sex; the economic wealth of these
people; the degree to which they are economically dependent on the family business, and
the eventual existence of important differences in their economic situations; their level of
business knowledge; attitudes in their relations with other family members and the family
business; human virtues; the quality of the relations between family members; the level
of ‘unity’ and ‘commitment’ before starting the formulation and implementation of the
family protocol; the existence of one or several family members who act like, and are rec-
ognized as, family leaders; and the existence of a common family project in relation to the
family business (Lansberg, 1999).
The ‘structural’ dimensions of the business that were finally taken into account are:
absolute size expressed through turnover; size in relation to other businesses in the same
industry and in relation to the size of the family; historical growth path of the business.
Reasons for the possible crises and periods of heavy development include: diversification
of the company into different ‘strategic business units’, scope and diversity; geographical
configuration; level of ‘dispersion’ of business activities in different geographical areas;
level of the technology related to products and processes compared with their business
competitors’; how adequate the structuring of responsibilities is to the characteristics of
the family business and its strategy; level of inclusion and development of non-family
executives (Gallo, 1991a); levels of independence given to executives to fulfil their respon-
sibilities; and level of equilibrium in the development and implementation of the different
management systems.
The conduct is constituted by the collective path followed by the participants during
the formulation and implementation of the family protocol, in terms of ampleness of the
areas covered by the protocol and the speed at which the process advances. The follow-
ing variables were considered to analyse ‘conduct’: the main reasons why a family decides
to formulate and implant a family protocol should be taken into account, because of their
impact on the entire process (considering the difficulty involved in identifying if these
reasons are part of the ‘structural’ dimensions analysed in the previous section, the ‘final
point’ that leads to the start of the formulation process, or derived from the ‘conduct’, we
considered them as the first element in the ‘formulation’); the overlapping between the
formulation and the implementation; the ‘business and family’ balance, meaning the level
to which the development of the strategy, the professional management systems, the
business management and government processes and capacities are ‘balanced’ with the
know-how and qualities of the members of the family; and the ‘balance between the gov-
ernment of the family business and the government of the family’, which refers to a
similar idea but in relation to the implementation of the family protocol. When both
bodies and systems of government are capable of handling the power in their relevant
areas, balance is good, but if the government of one of the institutions is ‘stronger’ than
the other, then there is an unbalanced situation. The performance is evaluated by the level
and quality of implementation of the family protocol and positive and negative results
Formulating, implementing and maintaining family protocols 301
produced by the formulation and implementation of the family protocol in terms of unity
and commitment.
Through this framework we wanted to understand the relationship existing among the
structural characteristics of the family business, the conduct followed during the formu-
lation and implementation process, and the results achieved through the protocol in terms
of unity and commitment.
On the other hand, reasoning about the dynamic relationship among ‘structure’, ‘conduct’
and ‘performance’, and the interaction among their constituents during the process lead us
to imagine the existence of circular relationships among different variables. Such an idea
induced us to also adopt a second theoretical framework of reference that allowed us to iden-
tify and describe, in a systemic perspective, such relationships. For this purpose we used, even
though in simplified way, the methodology known as systems dynamics.
Systems dynamics developed initially from the work of Jay W. Forrester. His seminal
book Industrial Dynamics (Forrester, 1968) is still a significant statement of philosophy
and methodology in the field. Since its publication, the span of applications has grown
extensively and now encompasses work in corporate planning and policy design, public
management and policy, biological and medical modelling, energy and the environment,
theory development in the natural and social sciences, dynamic decision-making, complex
nonlinear dynamics. This is a methodology for studying and managing complex feedback
systems consisting of multiple components of highly heterogeneous characteristics, such
as business and other social systems. In fact it has been used to address practically every
sort of feedback system. While the word ‘system’ has been applied to all sorts of situ-
ations, feedback is the differentiating descriptor here. Feedback refers to the situation of
X affecting Y and Y in turn affecting X, perhaps through a chain of causes and effects.
One cannot study the link between X and Y and, independently, the link between Y and
X and predict how the system will behave. Only the study of the whole system as a feed-
back system will lead to correct results.
We considered this methodology useful for several reasons: it increases our level of
understanding of problems; it helps to identify the cause and effect relationships and the
feedback circuits that determine the dynamic behaviour of a ‘system’; it facilitates com-
munications between several components of the ‘system’, based on a sufficiently objective
common premise; it provides an instrument, the simulation model, that allows for a rapid
exploration of the effects of alternative policies and behaviours; and it generates a debate
on the structure and the dynamic behaviour of the system’s variables.
The use of ‘dynamic systems analysis’ in this chapter does not include the design of a
simulation model, and is restricted to the first level of analysis, that is, the definition of
diagrams representing the cause and effect circuits between relevant variables in the family
protocol formulation and implementation process.
Research method
Since our survey was an exploratory one, aimed at getting an insight on the multiple ques-
tions we illustrated in the introduction and also at offering an explanatory model, we
decided to adopt a qualitative approach and to use cross-case studies.
Although in the past decade the use of large databases and sophisticated statistics has
become the most recurrent research method in the area of family businesses, we consider that
qualitative methods and the in-depth analysis of a reduced number of cases can be helpful.
302 Handbook of research on family business
Our sample comprised 12 family businesses, selected among the 31 that during the
1990s had formulated a family protocol with the professional assistance of the IESE’s
Family Business Chair and advisers related to this. The selected businesses were all big
companies from very different industries, ranging from second to fifth generation, and
had formulated their protocol at least four years before our survey started, some of them
successfully, some unsuccessfully.
The research has been conducted in different phases. In the first phase we selected six
family businesses. For each of these we collected, through different (public and private)
sources, information useful to define its characteristics, and examined the protocol to
know its content. Then we made semi-structured interviews, based on a list of topics that
were prepared in advance. On average, each interview lasted around two and half hours.
All the interviews were run by Professor Tomaselli, in consideration of the following: he
had not participated in the formulation and implementation of any of the protocols, and
therefore he did not have any possible bias on the situation of any family business in the
sample; he has in-depth knowledge of both the model of protocol drawn and the method
of work followed by the Chair, given his his long-lasting relationship with the IESE’s
Family Business Chair; he has experience in the formulation and implementation of
family protocols with different models and in countries other than Spain.
In almost all cases, we interviewed three people: the top person in the family business,
the president of the family council or a representative member of the board of directors,
and one shareholder, preferably last generation. Subsequently, we discussed the informa-
tion collected during the interviews with the advisers who had participated in the process
of formulation and, eventually, implementation of the protocol. Then we studied the
results of our survey using the two different theoretical frameworks, introduced in the pre-
vious section.
Based on the results we encountered, we formulated some hypotheses, which we tested
through a new sample of six businesses. At the same time, we conducted a two-year follow-
up analysis in four of the six businesses of the first sample, to verify if in the mean time
new elements had intervened, which could be useful to understand long-term dynamics.
Results
Based on the information collected, we identified the structural dimensions of the family
and the businesses that showed to have the highest influence on the formulation and
implementation of family protocols. Then, for each identified dimension we assumed as
a benchmark the family businesses that showed the best situation, and classified all the
other businesses using a five-level Likert scale.
Tables 16.1 and 16.2 report the result of the classification that includes all the businesses
in our sample.
With a similar process we examined and classified the elements characterizing the
conduct followed during the formulation and implementation process, which we report in
Tables 16.3 and 16.4.
Although the dimensions reported in the tables presented here are rather intuitive, we
recognize that a comment for each dimension would help the reader to better understand
them. On the other hand, reasons of space make it impossible in this chapter. We apolo-
gize to the readers for this and intend to give further information in a more extensive
report about our research.
Formulating, implementing and maintaining family protocols 303
Economic
situation – Existence
absence of Knowledge Attitudes Quality Presence of a
differences of the and of the of common
Company in the family business virtues relations leadership project Total Average
ACL 4 2 2 4 4 3 19 3.17
Fonoll 4 3 4 4 3 4 22 3.67
Goiria 4 4 4 5 5 5 27 4.50
Grufor 3 4 2 5 1 1 16 2.67
Oester 3 2 3 4 3 3 18 3.00
Opujol 3 1 2 1 2 1 10 1.67
Rofra 5 4 4 4 5 4 26 4.33
Rogilsa 3 1 3 3 5 4 19 3.17
Sadia 4 5 3 3 2 4 21 3.50
Tarasa 4 4 4 3 4 2 21 3.50
Tonsa 4 1 3 3 2 2 15 2.50
Utiel 5 2 4 2 3 2 18 3.00
Performance
Since the purpose of the family protocol is to increase the ‘unity’ in the family business
by an ordered, intense and long-lasting ‘commitment’ of the members of the family to
their ‘common project’, within a framework developed to prepare active shareholders and
to prevent and solve conflicts, it is logical that this part of the research examines the results
of the formulation and implantation of the family protocol more in terms of the levels of
commitment and unity obtained than in relation to the ‘economic’ success of the busi-
ness, although commitment and unity have a natural and significant impact on this and
an economically successful firm is necessarily part of the ‘common project’.
With respect to the main results those who participated in our survey attributed to the
family protocol, it is interesting to notice that several interviewees commented as positive
the fact of having a ‘live’ document that raises opportunities to meditate on the future of
the company and that can be adjusted over time, as understanding of current circum-
stances increase.
While the protocol offers to family members positive results such as opportunities to
better know each other, to clarify their wills, to discuss problems and to prevent conflicts,
in other circumstances it seems that contrary results occur for example, the relatives’
resistance to participate actively, loss of unit, conflicts, and so on. In such cases, the same
interviewees’ admit, the protocol decreases to a ‘book of desires’.
Table 16.2 Business dimensions
Geographic Management
Growth configuration– Executives’ and control
Company story Profitability Diversification dispersion Technology Organization authonomy systems Total Average
ACL 5 5 5 5 5 5 5 5 40 5.00
Fonoll 5 5 4 3 4 4 5 5 35 4.38
Goiria 5 5 5 4 5 5 4 4 37 4.63
Grufor 3 3 4 4 3 2 1 1 21 2.63
304
Oester 3 4 1 1 3 4 2 1 19 2.38
Opujol 3 4 3 1 3 2 1 1 18 2.25
Rofra 3 5 3 3 5 2 2 3 26 3.25
Rogilsa 4 4 4 4 4 5 4 4 33 4.73
Sadia 2 2 3 4 2 2 4 1 20 2.50
Tarasa 4 4 3 2 3 2 2 2 22 2.75
Tonsa 5 5 5 5 5 5 5 4 39 4.88
Utiel 5 5 5 1 5 2 2 1 26 3.25
Formulating, implementing and maintaining family protocols 305
ACL 1 3 1 1 3 9 1.80
Fonoll 5 5 4 4 4 22 4.40
Goiria 5 5 5 5 5 25 5.00
Grufor 1 1 2 1 1 6 1.20
Oester 1 2 4 4 2 13 2.60
Opujol 3 2 2 3 2 12 2.40
Rofra 3 3 2 4 5 17 3.40
Rogilsa 5 5 4 3 4 21 4.20
Sadia 4 4 5 5 4 22 4.40
Tarasa 5 5 4 4 4 22 4.40
Tonsa 1 3 1 1 3 9 1.80
Utiel 4 5 3 1 1 14 2.80
Equilibrium
in the
Existence government
Overlap of chief of the family
with Level of emotional and the
Company formulation Education involvement officer business Total Average
ACL 1 1 3 4 3 12 2.40
Fonoll 4 4 5 4 4 21 4.20
Goiria 4 4 5 5 5 23 4.60
Grufor 4 4 5 5 5 23 4.60
Oester 1 1 1 1 1 5 1.00
Opujol 1 3 3 4 3 14 2.80
Rofra 4 5 5 5 5 24 4.80
Rogilsa 2 4 4 3 4 17 3.40
Sadia 4 4 5 1 4 18 3.60
Tarasa 4 5 5 5 4 23 4.60
Tonsa 1 1 2 1 2 7 1.40
Utiel 5 3 5 2 2 17 3.40
We observed such situations in those cases that have not been able to leave position ‘A’
on the matrix (Figure 16.1) for a long period of time, as testified by the statements made
by people interviewed throughout the research:
● ‘The family protocol easily becomes a “book of wishes”, which, if the business goes
well is not needed, and if it does not go well “will fix nothing”.’
● ‘As we failed to reach a consensus on our main differences of opinion, these
differences have got worse and we have lost our unity.’
● ‘The formulation of the family protocol did not increase a healthy “family pride”.’
306 Handbook of research on family business
Ampleness
Minimum Sufficient Satisfactory
Minimum A B F
Grufor
Oester
ACL Utiel
Tonsa
C
Pujol
D
Sufficient
Tarasa
Sadia Proa
Fonoll Rofra
Rofra
In all these cases, performance in terms of unity and commitment was poor, whereas in
most of the other cases unity and commitment show positive patterns as a result of the
implementation of the family protocol.
Discussion
In the previous section we introduced the rhythm–ampleness matrix (Figure 16.1). We
consider it worth giving some more information about the interpretation of the different
areas of the matrix.
protocol with the least contents, have started to widen their content, moving towards
position G.
The choice between one or other alternative frequently depends on structural condi-
tions or on contingent situations of the family and/or the business. Nevertheless, except
in the cases recalled above, the refusal to advance towards position ‘G’ and the choice of
definitive permanence in position ‘E’ show a lack of interest by the family in trying to
further strengthen the family business and to achieve a greater degree of unity and com-
mitment.
the basic concepts of business economics and strategic management and their under-
standing of the objectives and the content of a family protocol. The results of our
research show that when these two dimensions improve, the family business experiences
important positive results that have a positive impact on both the formulation and the
implementation of the family protocol.
Also the dimensions of the family, the quality of the relationships among its members
and the existence of leadership influence the rhythm: small families are able, all other
things being equal, to advance more quickly, while larger families have to face greater
difficulties not only of an organizational nature, but also concerning the construction of
the consent among a greater number of people; good relationships among family
members facilitates mutual trust and allows consent to be reached more easily; a recog-
nized leader’s presence helps in moments of stagnation or when it is necessary to find a
way to get out of difficult situations.
On the business side, the rhythm in the formulation and implementation of the family
protocol seems most influenced by the profitability of the family business and well-
designed organizational structure and control systems.
Analysing the relationship between structure, conduct and performance, we observed
that increased unity in the family seems to be related to the fact that the formulation
process offers an opportunity to have a forum of discussion where family members can
receive information, discuss different perspectives, better know each other, and gain reci-
procal trust. Another variable that has an influence on unity is the compatibility between
personal versus group goals.
Commitment seems to be related to the ‘quality’ of the common project that the family
is able to design and to the degree in which family members’ behaviours are consistent
with such a project. The formulation and implementation of a family protocol seems to
influence the determinants of commitment at both family and business level. At family
level, the education of family members that is usually part of the process generates an
awareness in the family. At the business level an increase in professionalization is usually
the premise for higher commitment. Anyhow, it is worth putting on record that introdu-
cing commitment to the project into active participation of family members is in most
cases a true challenge for those who are in charge of making the protocol work. Even in
most successful cases, it is not easy to obtain dedication from family members, especially
those who are not active in the family business as managers or directors.
Once we analysed our sample in accordance with the first theoretical framework, we
moved on to the dynamics that generate the outcomes we observed. In the next section we
will use one of the observed cases to show how we made such dynamic analysis, and the
results we obtained.
The economic situation of these seven siblings was sufficiently good, excellent if com-
pared with the penuries the family experienced years before, given the very humble origin
of the family. On the other hand, there were important economic differences among them,
owing to the remunerations that perceived for their work. Three of the siblings worked in
the family business, whereas the other four worked in diverse activities outside the family
business. One of the siblings had a salary that allowed him to live modestly and the others,
owing to lack of education and ability, carried out works of low remuneration or of small
dedication.
The members of the second generation had very different attitudes and virtues. Four of
them were industrious, the three others did not have any job and had been living of the
monthly allowances they received from the family company. Some of them fully trusted
the siblings who managed the family business, others did not fail to show their disagree-
ment on any kind of decision. In a special way, two of them maintained a permanent dis-
crepancy with the rest in all economic issues.
The three siblings who managed the family business, through their effort and dedica-
tion, showed their personal intention to develop of the company, although one of them,
Jorge, seemed to worry more about the improvement of his personal status than about the
growth and evolution of the family business. The other four siblings looked at the
company merely as a source of personal income.
The family business comprised two different and independent companies, one managed
by Antonio and Rosa, the other by Jorge. Sales amounted to about 30 million euros for
each of the companies, and both companies ranked among the best competitors in their
respective industries. However, mainly due to the maturity of their products, for long time
the two business had not been growing and developing as necessary and experiencing a
sort of stagnation. As a consequence, profitability, that had been very high in the past,
was beginning to diminish, although without going down to extremes.
The two companies had a very simple structure of responsibilities. In each of them one
family member was the CEO and sales manager, and two non-family managers were in
charge of operations and administration areas, supported by a number of non-family
middle managers. Management and control systems were rudimentary. When the com-
panies experienced their most important growth, local consultants were contracted to
help solve the most pressing problems, but in 1994, when the board of directors was estab-
lished, there was nothing more than an annual balance sheet, and this was not subject to
any kind of auditing.
In 1994, Jorge frequently talked with Antonio and Rosa about the convenience of estab-
lishing a board of directors with external and independent consultants that might help to
overcome the situation the companies found themselves in. Jorge argued that he was
impressed by the recommendations he had frequently heard in conferences and read in
the specialized press on boards of directors.
Jorge asked Antonio and Rosa to meet an independent consultant he had in mind as a
candidate for being a board member in their family business. Antonio and Rosa agreed to
meet the consultant and after doing so they agreed with Jorge’s proposal to have him on
their business’ board. Once Antonio and Rosa agreed the proposal, the three asked the
rest of the second generation to express their opinion about the idea of establishing a
board of directors with independent members and hiring in the board the consultant they
had met. The proposal was almost unanimously accepted, although most of the siblings,
310 Handbook of research on family business
especially those who lived apart from the family business, did not know much about the
mission of the board, neither did they understand what could be expected from some
independent consultants that they found ‘expensive’.
The new board of directors was settled, with the participation of four siblings and two
independent consultants.
During the first two years of operation of the board, the situation of each of the com-
panies constituting the family business evolved in a different way. The company managed
by Antonio, and where Rosa worked, experienced significant improvement. Thanks to the
incorporation of excellent non-family managers and the adoption of appropriate man-
agement and control systems, the company was able to advance firmly in the implemen-
tation of the demanding development strategy designed by the board. However, the
second company, managed by Jorge, continued to stagnate: turnover among non-family
managers hired by Jorge was very high; the efforts to revitalize the product and overcome
its maturity were ineffective; Jorge proved to be unable to react properly to the evolution
in distribution channels. All of this occurred in spite of the constant input from the inde-
pendent directors. In the mean time, one of the independent directors, who had served as
a consultant to several families in business, suggested writing and implementing a family
protocol to regulate the relationship between the family and the business.
In 1995 the formulation of the family protocol began. The four siblings who were on
the board were the only family members who had the ability and minimum preparation
to give a positive contribution to the process. So it was decided that they would work out
a draft with the support of the independent manager, and, once they reached a sufficiently
complete draft, the document would be submitted to the rest of the family for discussion.
Supported by the independent director, the four siblings started discussing different
aspects of the relationship between the family and the business. The independent director
participated in the meetings, took notes and edited a draft that was then discussed,
reformed and approved in board meetings.
It took about a year before the document was sufficiently complete in the basic aspects
of the relationships between the family and the business, covering the following areas:
how to incorporate the family values into the business; what type of business is it going
to be in the future; what should family members, as shareholders, expect from the
company; what possible reasons could cause the family to want to leave/sell (and so on)
the company at a future date; rules for entering the company and promotion therein; how
family members should act as owners; how family members should govern the business;
and how to maintain unity within the family business.
Then, a family meeting was organized, to which the seven siblings, their spouses and
the independent board members were invited. In this meeting the family protocol was pre-
sented to the rest of the family. The attitude of most family members was rather passive;
they simply listened to the explanations of the independent consultant, without asking
any question or raising any issue for discussion.
A few days later, two of the siblings who did not work in the family business, made
known their formal intention to sell their share of the business. In short, with the help of
lawyers and auditors, the buy–sell negotiations started. About one year later an agree-
ment was reached and the two siblings sold their share to the remaining five siblings.
Once these dissidents were removed, the remaining five members of the second gener-
ation, their spouses and the children older than 14 years (a total of 15 people) were invited
Formulating, implementing and maintaining family protocols 311
to participate in an education programme designed for the purpose by the external board
members. The external board members encouraged the other directors to hold, every
three months, regular meetings among the five siblings and their spouses. These meeting
were to be organized similarly to shareholders’ general meetings, and were aimed at
increasing family members’ knowledge of the business and involving non-active siblings
as much as possible.
Given the small base of knowledge of the members of the family, these activities had
to be run with great patience. It was Rosa who put greatest effort into making all this suc-
cessful, so that, little by little, she began to be considered unanimously as the ‘Chief
Emotional Officer of the family’.
The efforts to implement the family protocol began to give good results: the passive atti-
tude of family members was constantly evolving into active participation.
But still the company managed by Jorge did not improve its performance, in spite of
the clear and strong arguments raised by the independent board members about the
causes of this situation and the numerous plans of action approved by the board.
Decisions were not implemented and the company remained as it was.
Everybody doubted Jorge’s ability to manage the company out of its stagnation and the
independent directors started to state openly their intention to resign from the board; on
the other hand, the two non-active siblings did not take a position and did not make
known their position in the meetings. The ‘unstable balance’ could tip in any moment.
Jorge, after failing once again to incorporate a new manager who had been the general
manager of a company of considerably greater size, asked a consultant with a very good
reputation to take charge of the project to turn the company around. The other board
members thought there was little chance that any relevant innovation proposed by the new
consultant would be implemented by Jorge, and they began to comment on the possibil-
ity of selling the business either to third parties or to Jorge.
In this period, Vicente – one of the siblings who did not work in the family company –
asked for ‘liquidity’ to address the financial needs of his own venture. According to the
family protocol, the family company bought some of his shares. The shares were to be
maintained in the company’s portfolio for an established period of time to allow the seller
to buy them back, in case he wanted and had resources to do so. However, against the pro-
tocol’s statement, Vicente did not allow the auditing company who assisted the group to
audit the books of his company to identify the causes of the financial deficit that it peri-
odically experienced.
Taking advantage of this situation, Jorge clearly represented that he wanted to take
over the business he was in charge of, in order to be able to manage it ‘his own way’. At
the same time, he promised Vicente that he would be appointed as sales manager in the
company (although it was evident that Vicente had no qualification to carry out such
role), so obtaining his support. The independent directors decided to resign to allow
family members to resolve their disputes without external interferences in the boardroom
and also to prevent the risk of being involved in such dispute. But they continued to give
their professional support to the family. The decision to separate was taken. The task of
evaluating the companies’ equity and preparing the patrimonial separation of the two
businesses was given to two experts, but they arrived at very different conclusions and
could not reach an express agreement. Consequently, an award by arbitration was
requested.
312 Handbook of research on family business
A few months later the award by arbitration was stated. Antonio commented to the
two former consultants:
The award by arbitration has already arrived and it has been accepted by all the siblings. Now
the three of us must pay about 9 million euros to Jorge and Vicente, who followed him as sales
manager. We have enough time, and with the resources generated by the business we will be able
to make it.
The three of us agree we want to set up a new board, and we will ask the persons you sug-
gested to sit in our board. However, you have known us for a long time and we all are totally con-
fident of you, I ask that you help us on two very critical points.
The first consists in that we never again want fratricidal fights. They are an incredible loss of
time . . . in the last months I have hardly been able to take care of the business. The displeasures
have been so great as to affect even the relationship with my wife and children. Never again!
I don’t know the way. I don’t know if it is better that one of us buys stocks until having 51%
of equity, or we establish ‘golden shares’, or we establish formal agreements, or what else . . . I
do not want to ask for ‘power in itself’, I don’t want to decide everything ‘my own way’. I only
want we establish a structure of power that can help us prevent situations like the one we have
just experienced from happening again in the future. And in case something happens anyhow,
we can manage the situation in a professional way, in the best interest of the business.
The second thing I ask you is that you help us formulate a new family protocol. The one we
had has been very useful, but it is no longer valid and it is necessary to write a new one, consist-
ent with the present and future situation of the family business.
My wife and children who didn’t know anything about the business when we wrote the first
protocol, now are informed and they love the idea of continuity. One of my children who has
completed his studies as an engineer would like to enter the family business and to follow the
tradition of the family in spite of the grievances.
Rosa’s children are still very young, but she and her husband want we go through a similar
process to the one we followed before, and the owners are committed to the future of the
company.
Pedro, our third brother, is 60 years old and still single. It doesn’t seem that he will have a
family. Can you imagine the situation should he decide to leave his shares equally divided among
all his siblings, or should he die without making a will?
Consultant’s
Consultant’s experience
conceptual
model
Figure 16.2 Cause–effect loops and their synergic effect on learning, commitment
and unity
The first loop is founded on the positive effects of the decision to share the information
about the family business with all family members. Supported by the independent di-
rector, the four siblings who sit on the board write a draft of the family protocol. The con-
sultant, who is an expert in family business, has great influence on the process through his
conceptual model and offers significant help in a situation where the business knowledge
of family members is poor. The information provided allows family members to inter-
nalize the spirit of the family protocol, and shows the family the evident need to orient
their personal preferences and expectations towards common objectives. As a result of
this, the family members who do not agree with the idea of the family protocol decide to
sell their shares in the business. For the other members of the family, the implementation
of the family protocol increases their level of mutual confidence, and improves the quality
of their personal relationships. All this, reinforced by the departure of the dissident
members, increases the level of unity, which in turn leads to an increase in the ability
develop a common project on the future of the business, again internalized by the family.
The second virtuous loop is related to the learning generated by the implementation of
the family protocol. The family members’ training process, which started at the same time
as the implementation, causes an increase in their knowledge of the business. This gives
rise to a flow of learning related to the peculiar characteristics of family businesses, which
helps to improve the orientation of personal preferences towards common objectives and,
therefore, creates more compatibility between personal objectives and common needs.
The third virtuous loop is related to the growth in the family’s commitment, and its
efforts to establish a common project for the future of the business, advancing in the imple-
mentation of the family protocol. As a result of the efforts to start the implementation of
314 Handbook of research on family business
the family protocol, one member of the family takes on the responsibilities of the
‘emotional head’ and starts a flow of activities that enables the family to get to know each
other better. This ‘emotional head’ is very important for the young members of the family,
since the level of commitment remains high, preventing the centrifugal forces that are
typical of large families from creating dispersion, and leading the younger generation to
become actively involved in the establishment of a common project related to the future of
the business.
The evolution of the case, as it has been described so far, shows that until the emergence
of the crisis with Jorge the process of formulation and implementation of the family pro-
tocol produced a number of positive loops that reinforced unity and commitment. What
happens later on, shows, on the other hand, one peculiar characteristic of such typology
of loops. When some of the variables change, the loop inverts its movement and what
appeared to be ‘perfect’ quickly evolves into a ‘disaster’.
In the Pujol case, the truly significant variable that produced the degeneration of the
system was the lack of important virtues in some family members: virtues such as indus-
triousness that only half of the family have, sincerity that appears nonexistent in several
of them, and loyalty that is not in Jorge. The case shows that Jorge does not want to rec-
ognize that the business under his responsibility reached its maturity years ago and its
strategic revitalization becomes more and more difficult over time. Furthermore, the
appearance of personal interest and aspirations in Jorge that are contrary to the philoso-
phy of the family protocol, and the desire to pursue his own personal interest produce an
erosion in the reciprocal confidence with the rest of the family. In such circumstances, the
rupture of ‘unity’ appears irreparable, and separation is the best thing that the indepen-
dent board members can recommend to the rest of the family to preserve their whole
patrimony from the risk of major losses and to maintain at least part of the family entre-
preneurial project.
The challenge to the family will be in how to articulate the legal and financial aspect of
the separation, and arrange it in a way that generates the smallest possible damage to the
older generation, and does not cause an intense rupture of the relationships among sib-
lings, as happened with the first separation.
Conclusions
The survey this chapter draws from represents an attempt to deepen our knowledge of
family protocols and the dynamics that occur during the formulation and implementation
process. We are conscious that the survey presents a number of limitations owing to the
reduced number of family businesses in the sample, and the fact that we considered only
one country and only one model of family protocol. On the other hand, through cross-
case study we have been able to make an in-depth analysis of the process of writing and
implementing a family protocol, which probably would not have been possible had we
assumed a greater sample or different models and contexts.
We hope that, despite those limitations, the results of our survey can be of help to both
academics and practitioners, to better understand the dynamics that occur when writing
and implementing a family protocol. It is our opinion that the analysis of the results
determined by the introduction of the family protocols and other tools suggested by the
academics and practitioners, not only enables the real sturdiness of such tools to be
tested, it also facilitates a deeper understanding of the dynamics that characterize family
Formulating, implementing and maintaining family protocols 315
businesses. If the specific of family businesses is represented by the presence of the family,
the study of the dynamics that characterize such presence appears essential, at least in
our view.
Literature on family protocols shows general agreement in attributing great importance
to the formulation process of the protocol. The results of our investigation seem to
confirm this statement and identify the reasons why this occurs. In many cases where we
observed negative results of the protocol, shortcomings are also identified in the formu-
lation process.
Several academics and advisers underline the importance of a participative process.
Our investigation puts in evidence that this is a necessary but not sufficient condition; in
addition it is necessary that the most influential members of the family have certain atti-
tudes. Sincerity, shared and real interest in the future of the company, and maturity in the
members of the family seem to be the variables that describe the conditions that can
favour better (or harm) the successes of the family protocol. These are the attitudes
determining that a long and participative process is useful to digest and metabolize knowl-
edge, ideas, concepts, and so on or, conversely, is a useless waste of time. Other important
aspects in the process are related to the communication habits among the family. Sincerity,
ability to express ones own ideas, ability to resolve conflicts can be affected by good or
bad communication habits in the family.
Building on our findings, academics can find inputs for future research aimed, for
instance, at corroborating our results in different contexts, testing the models we propose,
going one step forward in the line of system dynamics and building a simulation model,
analysing our findings referring to different theoretical frameworks (that is, resource-
based view, agency theory), linking our model to other models proposed to study family
businesses (that is F-PEC Scale; see Klein et al., 2005), deepening the analysis of the rela-
tionship between certain structural characteristics of specific family businesses and
aspects to be emphasized in the family protocol.
Consultants and family-business members can refer to our results to verify the existence
of preliminary conditions to start the project of a family protocol, follow paths that fit
the structural characteristic of the family business, and consider in a proper way the
different variables that influence the success of the project.
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17 Generic models for family business boards
of directors
Joseph H. Astrachan, Andrew Keyt, Suzanne Lane and
Kristi McMillan
Many laws and proposals from around the globe are trying to address board practices that
have allowed massive corporate failure. While valuable for large public companies, they
may be harmful to family-owned businesses because they stem from a market model rather
than a control model of corporate governance, and ignore the issue at the heart of corpor-
ate governance problems today: accountability. It is our proposition that the unique char-
acteristics of control-model companies require a different approach to corporate
governance than market-model companies. Control-model companies must focus on the
unique need of the boards to have the competencies to be held accountable, and hold
others accountable, for their actions. This chapter provides recommendations and prop-
ositions testable by future research that will lead to greater board accountability and, in
turn, positive identifiable results in board and company performance.
Introduction
Governance reform of publicly held corporations is the white-knuckled topic de jour
among denizens of board rooms, federal oversight bodies, the halls of academia and
newsrooms. Indeed, the recent nearly daily onslaught of reports of unethical and crim-
inal conduct, fomented by a greed and lust for power, by certain CEOs, CFOs, board
members and other corporate chieftans – from the Enrons to the Global Crossings of
America’s Blue Chip business landscape – has triggered endless calls for change. Many
corporate leaders, acting of their own volition, already have reconfigured the moral com-
passes by which future executive conduct is to be reckoned (Donaldson, 2003). The US
Congress stepped in with Sarbanes–Oxley, a sweeping federal statute providing business
leaders with a road map by which they are able to align corporate goals with more effective
governance systems.
This is good, fitting and proper. But a critical sub-text has been missing from this often
searing debate. Namely, what is the significance of these governance reforms for the pub-
licly held corporation’s distant but economically robust brethren – namely, the closely
held, family-owned business? Should these family-owned entities be held to the same gov-
ernance guidelines and standards that apply to those firms making up the ranks of the
Fortune 500, for example? Corporate behemoths with a 200 million share stock float who
dwarf the family-held entity, run by husbands, wives, sons and daughters with a stock
float of a few thousand shares? To put it another way, does one size fit all (Corbetta and
Salvato, 2004)?
This is not a trivial question. Recent data, disclosed by Astrachan and Shanker (2003),
concludes that family businesses in the US represent the lion’s share of all annual US tax
return filings: a stunning 89 per cent of the total. These entities generate no less than
317
318 Handbook of research on family business
64 per cent of the gross domestic product. By another compelling measure, the family-
owned business employs a whopping 62 per cent of the nation’s workforce. Because of the
contribution family-owned companies provide to the US economy, it is imperative that
they undertake a concerted effort to maintain and enhance governance standards of their
own to assure their continued success.
It is the assertion of this chapter that there are significant differences between these
publicly and privately held firms that impact the governance processes necessary to
provide accountability. Indeed, many of the most popularized corporate governance
practices may be detrimental to family businesses (Corbetta and Salvato, 2004). Many of
these recommendations may harm family unity or might be too complex for private firms,
and many are only applicable to very large, public companies with dispersed ownership.
Popular corporate governance practices are focused towards a market model of corporate
governance, found prevalently in the United States and the United Kingdom, which
involves companies with a widely dispersed shareholder base and a majority of independ-
ent, outside board members. In contrast, the typical family-owned business exhibits char-
acteristics of the control model of corporate governance, found prevalently in continental
Europe, Latin America, and Asia, which involves companies with a concentrated share-
holder base and family member ‘insiders’ active in management and on the board.
These popular recommendations may also be problematic in that many promote form
over substance, as these so called ‘best practices’ often become generalized laundry lists
that do not lead to identifiable positive results (Atkinson and Salterio, 2002; Robinson,
2002). And although some of the issues most prevalently discussed in family and non-
family business literature, such as the significance of independent boards, are important,
fixating on such issues tends to overshadow the issue that is at the heart of corporate gov-
ernance problems around the globe: so, what do we mean by accountability?
Accountability in the context of corporate governance can be thought of as the group
processes, characteristics and actions of individual board members that hold manage-
ment accountable for the decisions taken and for their implementation. This concept of
accountability might be operationalized by exploring a series of questions such as: do you
have a governance system? Who does it hold accountable? What does it do to hold these
people accountable? How are goals set? How are rewards and sanctions set? Once answers
to these questions are obtained, we can move to measuring their frequency, intensity and
duration, and then correlating them with corporate performance.
Throughout the balance of this chapter, we will offer propositions for accountability in
control-model firms, that will operationalize the concept of accountability and look at their
impact on performance. As we then look at corporate governance guidelines for family
firms, we must focus on the need for the primary governing body – the board – to have these
competencies to hold others accountable, and be held accountable, for their actions.
It is our assertation that the propositions contained herein for control-model com-
panies, will lead to great accountability as well as to board and firm performance. These
recommendations and propositions will provide a foundation for testing processes of
accountability in future research.
To understand the implications of the propositions described here both for family busi-
ness owners and researchers, we first point to a significant source of bias in popular pro-
scriptions for ‘best practices’ for board behavior. In the second section of this chapter we
describe: (1) the board competencies necessary to ensure shareholder accountability;
Generic models for family business boards of directors 319
(2) ways in which shareholders should exert their rights in order to hold the board
accountable; and (3) actions the board must take to hold management accountable for
their actions, all of which incorporate propositions for further consideration.
Market model
The market model of corporate governance is common in countries where capital markets
are highly liquid and shareholders are widely dispersed, such as in the US, UK, and Ireland.
This model involves a large dispersed class of investors with no prior connections to the
companies listed on the public exchanges (Coombes and Watson, 2001). The focus of cor-
porate governance reform in countries employing this model is on board structures and
practices that ensure that the board is a distinct entity, capable of objectivity and able to act
separately from management (Gregory and Simmelkjaer, 2002). It also insists on independ-
ent boards and demands a high level of financial and business disclosure. Examples of com-
panies that follow the market model include most public companies in the United States,
such as General Electric and AT&T. One difficulty of this model is that it seeks the near
impossible mission of eliminating all current and future conflicts of interest.
Market Control
Setting Setting
● Prevalent in UK, US ● Prevalent in continental Europe, Asia,
● Ownership and management are separate company other than financial (i.e.
and at arm’s length managers, board members, family)
● Insider board members
Control model
The control model of corporate governance, commonly found in Asia, Latin America, and
much of continental Europe, is prevalent where control rights are not fully separated from
ownership, and ownership tends to be concentrated. The model sees conflicts of interest as
endemic and seeks to institutionalize them or provide sanctions for them rather than elim-
inate them. An example of this is when a large shareholder, such as a family or institution,
maintains a control stake. The purpose of investment for these types of shareholders is not
to produce short-term gains as with most market-model corporations (Shleifer and Vishny,
1997); rather, in particular for family businesses, the shareholders tend to maintain a long-
term perspective on their investment that benefits current, as well as future, generations.
An example of a control model company is Fiat SA, Italy’s third most valuable
company (LaPorta et al., 1999), where ultimate control (over 25 per cent) belongs to the
Agnelli family, and members of that family are also board members and part of man-
agement teams. United States examples of this are the Ford family, which maintains
approximately 40 per cent voting power, and the Sulzberger family, owners of the New
York Times, where the family owns 18 per cent of the company while maintaining voting
control over board members through a special class of stock not available to outsiders.
For control-model companies, it is natural for the owners to expect to have a board pres-
ence, particularly because they are not anonymous (Coombes and Watson, 2001).
Typically, shareholders of control-model companies are managers, as well. This often
results in shareholders having control rights significantly in excess of their cash flow
rights. This concentration of ownership in the control model is an easily identifiable
concern that has led to corporate governance reform focusing on the fair treatment of
minority shareholders (Gregory and Simmelkjaer, 2002).
identity.
Qualifications
Market-model bias Strategic business competencies and diversity of skills and back-
ground are sufficient board qualifications.
Generic models for family business boards of directors 323
Much of the corporate governance literature for large public firms and family busi-
nesses alike focuses on strategic business competencies and diversity of skills and back-
grounds when discussing board qualifications. Many in the corporate governance field
believe that an ideal board profile includes active or retired CEOs and other profession-
als with expertise in such areas as finance, marketing, operations, technology, law, and
public policy (Moore, 2002). In addition, a common theme apparent in corporate gov-
ernance codes worldwide is that the quality, experience, and independence of the board
affect its ability to perform its duties (Gregory and Simmelkjaer, 2002). Although these
qualifications are important and desirable, they are not sufficient for family firms.
Particularly for the typical family business, family dynamics often impinge on what
should be a culture of communication and open dissent (Sonnenfeld, 2002). Often con-
flicts arise because the roles board members play in the family (parent) can emotionally
clash with the objective role that is to be carried out in the business (the employer).
Therefore, it is the way in which board members interact and communicate with each
other and management that is a primary determinant of board success or failure
(Sonnenfeld, 2002).
The board of the typical family firm must have the competencies to ensure strategic
guidance of the company, effectively monitor management, and be accountable to the
company and its shareholders. This concept of a competency-based board means that as
long as board members conduct a forum of open communication, embody a culture of
open dissent, have a basic understanding of business (that is, have an understanding of
risks and of the measures that lead to financial and non-financial indicators of success),
and collaborate with the management team, board members can be held accountable for
their actions and those of management.
Size
The corporate governance literature is split regarding the appropriate size of a board.
Many corporate governance specialists assert that since individual responsibility tends to
dissolve in larger groups, smaller boards are more desirable for family businesses (Neubauer
and Lank, 1998; Ward, 1991). Many of these authorities recommend that the most effective
boards range between five and nine directors (Nash, 1995; Newell and Wilson, 2002).
324 Handbook of research on family business
Others insist that boards that are ‘too large’ can encounter coordination problems and
difficulty developing effective communication and teamwork (Felton et al., 1995).
However, other experts believe that a range of nine to 15 directors is beneficial (Moore,
2002). For example, in many of the European Union member states, the average size of the
board is closer to 12 or 13 (Gregory and Simmelkjaer, 2002). In addition, many experts
believe that smaller boards may not have enough breadth and can hamper the separation
of director and committee assignments (Moore, 2002). Indeed, a larger board can lead to
greater accountability as long as each individual board member has the necessary compe-
tencies to render good judgment, have their judgment be evaluated by his/her peers, and,
in turn, be held accountable for his/her actions. In addition, more board members may also
imply more eyes capable of noticing problems and ensuring accountability. Therefore, the
most effective board for the typical family firm in the control model consists of seven to
12 people. However, although larger boards lead to greater feedback, and therefore,
greater accountability, larger boards may inhibit full participation; therefore, boards
should not be too large as to create factions that limit participation and communication.
For example, a study conducted by Yermack (1996) found a negative relation between
board size and firm value as boards become too large (that is, 12 directors or more).
Independent outsiders
Market-model bias Boards should minimize the use of insiders and include a significant
proportion of independent outsiders.
Propositions for control-model accountability
Model family firms Independent status is largely irrelevant to achieving accountability.
A board of owners may be beneficial.
Proposition 3 A board of qualified ‘insiders’ can improve company performance.
others state an ideal board should consist of only independent outside directors in add-
ition to the CEO and chairman (Ward, 1991).
Family businesses, however, have been criticized for being slow to adopt the concept of
outsiders. The 2002 Mass Mutual Financial Group/Raymond Institute: American Family
Business Survey indicates that family members still constitute the majority of board
members. Entrepreneurs and family businesses traditionally have resisted bringing in out-
siders because they do not want someone directing their actions or revealing family secrets
(2002 American Family Business Survey; Nash, 1995). We suspect much of the reluctance
to adopt a board is due to a desire to avoid accountability. But despite the fact that busi-
nesses often need fresh creative perspective, objectivity, and openness – all traits generally
considered to be advantages brought about by independent outsiders (Aronoff and Ward,
2002b) – we believe family businesses can achieve these results by adopting a competency-
based view and composing their boards accordingly.
Since outsiders can often be easily swayed by compensation, perks, recognition, and
potential as well as actual business dealings (with the company as well as with other board
members), we would propose that a board occupied by outsiders does not guarantee
objectivity. Even though boards consisting primarily of insiders (current or former
managers/employees of the firm) or dependent outsiders (directors who have business
relationships with the firm and/or family or social ties with the CEO) may be considered
to be less effective at monitoring others (Lynall et al., 2003), insiders, in particular, are
seen to provide rich firm-specific knowledge and strong commitment to the firm
(Sundaramurthy and Lewis, 2003). We believe a board member that has the ability to
render an opinion unfettered by other board members is more important than whether or
not the individual works inside the business. Additionally, even though several academic
studies have provided evidence that suggests that independent outsiders add real value to
a company (Felton et al., 1995; Rosenstein and Wyatt, 1990), outside independent board
configurations have not been associated with firm performance (Dalton et al., 1998).
Independence is a mindset of disinterest that cannot be predicted by the lack of prior rela-
tionships of the parties involved. Therefore, in order to promote objectivity and account-
ability, board members should consist of individuals who base their decision-making on
the merits of the decision rather than extraneous influences or considerations, such as per-
sonal relationships or financial and personal gain.
Market-model bias The focus of board meetings is on how many meetings are sufficient.
Propositions for control-model accountability
Model family firms The focus of board meetings is communication, conflict resolution,
and accountability. To achieve this, we recommend no more than
six, nor less than three meetings per year.
Proposition 4 Three to six board meetings per year will increase board account-
ability and board performance.
members into complacency by stature rather than the merits of a decision. In such
situations, consensus tends to yield a decision which most can live with rather than which
the majority supports. Therefore, having a formal voting process by simple majority (except
in cases where a larger majority is called for) allows for a process where issues are discussed
at length and members’ opinions are polled, thereby creating greater accountability.
Additionally, in order to capture all relevant information on key matters brought
forward by management, as well as decisions made by the board, every board should have
a board manual. The board manual can also include pertinent corporate information
(values, vision, plan, director and officer biographies, organization bylaws, job descrip-
tions, committee assignments, contact numbers, important dates, and so on), as well as
the goals of the board and system of evaluation. Not only will the board manual aid
board members in organizing the content and process of its decision-making, it will help
in the evaluation process as well.
Board commitment
Market-model bias Nominal participation is adequate for most boards.
Proposition for control-model accountability
Model family firms Active participation is necessary for family firms.
Proposition 7 Active board participation will increase management accountability.
Board members should devote sufficient time to their responsibilities and actively con-
tribute to the company’s performance. With regard to family businesses, however, the
328 Handbook of research on family business
2002 Mass Mutual/Raymond Institute: American Family Business Survey indicates that a
substantial percentage of family business respondents reported weak board performance.
The results indicate that 15 per cent of respondents regarded their board’s contribution
as ‘fair,’ 2 per cent rated the board’s contribution as ‘poor,’ and 25 per cent of respondents
cited ‘no contribution’ by the board. An explanation as to why boards do not make a more
positive contribution is likely due in large part to inappropriate board participation.
Boards can be involved in the performance of a business in varying degrees. Table 17.2
delineates Wheelen and Hunger’s (1994) six degrees of board involvement, ranging from
low (phantom) to high (catalyst).
A study conducted by Judge and Zeithaml (1992) indicates that 70 per cent of boards
participate at levels from phantom to nominal participation in the US. Despite many cor-
porate governance experts observing that a board’s role is reactive, thereby indicating that
this level of participation is adequate, the boards of typical family businesses should
actively participate in their respective businesses. Accountability requires more than
nominal participation, but a catalyst role may undermine the authority of management
and appropriate checks and balances.
A related issue is that service on too many boards can interfere with the performance
of board members (OECD, 1999). Because boards have such difficulty evaluating the per-
formance of companies and managers, many directors believe they should spend more
time on a single directorship (Felton and Watson, 2002). Some companies have limited
the number of board positions that can be held to make directors more committed to their
work (Felton and Watson, 2002). This may help ensure that members of the board enjoy
legitimacy and confidence, and in turn create greater accountability (OECD, 1999). We
believe a prudent rule of thumb is that active participation on three boards may be a limit
of effective board service.
Model family firms Directors are reviewed regularly and kept if performing well; direc-
tors are thanked and let go if no longer capable of ensuring
accountability.
Proposition 8 Regular annual reviews of the board increases board effectiveness
and accountability.
Studies conducted by Shen and Cannella (2002) have proven that a board member’s
effectiveness (and therefore accountability) decreases after 14 years, thereby indicating
that in order to keep a director for a long period of time, he or she must be making sig-
nificant contributions to the business. This is why many market model proponents have
advocated predetermined terms for directors. Some experts have recommended that the
term for directors, although reviewed annually, should be for two to three years with a
mandatory retirement age set between 62 and 65 years old (Ward, 1991).
However, the reason why boards of most companies, particularly publicly held com-
panies, have term limits is largely a political one, and at best loosely related to the account-
ability of their members. Therefore, we believe that a board member’s term should be for
a limited, yet not necessarily predetermined, time period. Although many boards of the
typical family firm are filled with individuals who are close friends of members of the
family, or are family members themselves, this close relationship does not preclude
the fact that board members should serve for a limited period of time. Board members
who serve indefinitely become entrenched in the business and generally lose their ability
to render objectivity and promote accountability. As a result, a length of time that pro-
motes accountability would be a minimum term limit of approximately three years (in
order to get the director acclimated to the business) and an extensive review process after
that three-year period. There must also be a process for evaluating the contribution of the
director, as well as criteria for ‘keep/let go’ decision-making.
not want to conduct individual evaluations because they feel they must share in the
responsibility, or they feel that they will be disturbing the collegiality present in board
rooms. However, in order for directors to be held accountable for creating and maintain-
ing a high performance board, they must be able to distinguish good contributions from
poor (Felton et al., 1995), and, above all, ensure that all directors act to hold themselves
and the company accountable.
The chairman, as the conductor of the board, can play a central role in ensuring the
effective governance of the enterprise (OECD, 1999). The chairman acts as the parlia-
mentarian for the meeting and is responsible for agenda-setting and controlling discussion
on agenda items, while allowing appropriate discussion of essential items (Nash, 1995).
Whether the role of the chairman should be separate from the role of the CEO has become
a matter of debate. The results of the McKinsey US Directors Survey (2002) indicate that
currently, 75 per cent of S&P 500 companies have a single person serving as both chair-
man and CEO. Many corporate governance experts believe that the business culture of the
US lends itself to having the CEO be the board chairman in order to focus a company’s
leadership (Moore, 2002). In addition, other advocates for the CEO/chairman role claim
that a company risks added divisiveness by splitting the role of the chairman and CEO and
that it reduces the CEO’s freedom of action (Felton and Watson, 2002). However, many
others, particularly in the UK, believe that the separation of the CEO and chairman roles
ensures an appropriate balance of power. Many commentators have viewed a lack of sep-
aration as impeding the supervisory ability of the board; others claim that if the leader of
the supervisory body is also the leader of the managerial body under supervision, he or
she faces a significant conflict of interest (Gregory and Simmelkjaer, 2002).
We believe that the roles of chairman and CEO should only be combined when the
single person can do the two jobs effectively. Since the role of the chairman is to guide
board processes, moderate meetings, ensure that the board completes all tasks in a timely
and effective manner, and counsel the CEO (not direct the CEO), an increase in the role
of the CEO with the additional responsibilities of the chairman functions presents a
limited number of conflict of interest issues. As long as the CEO is the best person to
handle this additional moderator job effectively and be held accountable, the CEO may
be able to carry on both roles without causing an imbalance of power. The implement-
ation of the single CEO/chairman role begs the question, however, of ‘who evaluates the
CEO?’ We advise that the board institute evaluations where the opinions of individual
directors and managers are sought and then synthesized in a report presented to the board
and discussed privately with the CEO, and that whoever chairs the committee responsi-
ble for this task is not the CEO nor reports directly or indirectly to the CEO.
An additional area of controversy concerning board leadership is whether the
retired CEO should stay on the board in the capacity of the chairman as part of the
Generic models for family business boards of directors 331
succession transition. Many times the prior CEO is not able to surrender all of his or
her authority when staying on as chairman and often, as soon as there is a crisis, the
departed CEO feels compelled to return to ‘rescue’ the organization. However, as
long as the successor is able to initiate change and assert his or her leadership, and as
long as sufficient knowledge transfer occurred from the old leadership to the new,
then we believe the prior CEO can stay on as chairman without undermining the
authority of the new leader. However, we recommend that separate committees
monitor the situation and act to remedy any problems if the former CEO undermines
the new CEO.
Board compensation
Even though the American Family Business Survey (2002) found that fewer than 61 per
cent of family businesses compensate their board members, compensation is one way to
attract and retain the most qualified and accountable board. How board members should
be compensated has increasingly become a controversial topic in corporate governance,
owing to the current collapse of investor confidence in companies’ performance. Generally,
companies operating under the market model compensate board members according to
market norms. Many experts claim that creating investor confidence requires performance-
based compensation rather than retainers or salary (Felton and Watson, 2002). For
instance, they claim that issuing restricted stock rather than offering stock options may help
meet the investors’ demand that directors be accountable for the actions that they imple-
ment. Even for non-family companies we believe this approach is short-sighted in that it
may stimulate rather than eliminate the manipulation of financial statements.
Compensating directors with stock may hold other disadvantages for the family-
controlled company. Linking directors’ judgment to share price presumes that intermedi-
ate term share value is the goal, which is not always the case as family businesses often
provide owning family members with non-financial returns. It also rewards directors for
industry effects rather than objective corporate performance. Furthermore, family
members often have a bias against stock in non-family hands, for which such an approach
cannot account. To send a message that the board is as important as the CEO, we rec-
ommend that directors should be paid for their time commensurate with that of the
company’s CEO. A simple heuristic is to divide the CEO’s annual pay by 250 working days
and then each board member should be paid the resulting amount per day for each day
spent on board matters (Ward, 1991). In addition to financial compensation, opportuni-
ties to learn, grow, and make a contribution are among many of the other benefits of a
position on a strong and vital board.
332 Handbook of research on family business
• The right to influence and affect control the corporation through shareholder
• The right to participate in the profits and positive cash flow of the corporation
shareholders to protect their interests so that they can participate in the accountability
process and perpetuate the family’s goals.
Model family firms Shareholders of family firms should be informed of all strategy
conversations and decisions, and the board should take family goals
and desires into consideration.
Proposition 13 Family shareholder ‘involvement’ will increase board performance.
Shareholders operating under the market model tend to leave strategic decision-making
entirely up to the board and management. Conversely, shareholders of family firms oper-
ating under the control model tend to direct management, make decisions on their own,
or lobby individual board members. This form of decision-making weakens the power of
both the board and management, and may results in factionalizing the shareholding body.
We believe appropriate involvement by shareholders would entail establishing the values,
vision, and goals of the business as well as being a ‘partner’ in strategy (Aronoff and
Ward, 2002a). This means helping management and the board to understand owner goals
as a basis for developing business strategy, and then embracing and supporting the strat-
egy that is proposed by management and endorsed by the board (Aronoff and Ward,
2002a). This form of involvement in strategic decision-making allows shareholders, the
board, and management to become united in their decision-making in order to add rich-
ness and strength to their business culture.
to involve themselves too much in the decision-making process. However, even though
board members maybe experts in their respective fields, they should not be formulating
company strategy; rather they should be critically evaluating the strategy that manage-
ment creates. Therefore, if management’s strategic plan is not appropriate, we believe the
board should make management amend the strategic plan – that being the most effective
form of accountability.
Additionally, another aspect to monitoring management is ensuring that management
continues to be held accountable for fully executing its plans. The board must periodically
check in with executives in the short-term to ensure that plans are executed, as well as
benchmark results against long-term indicators, such as market share, budgets and
margins. By continuing this monitoring function, board members can help identify obsta-
cles and figure ways to overcome them when performance falls short.
Executive compensation
Market-model bias Executive compensation should be transparent. Boards should tie
compensation to stock performance.
Propositions for control-model accountability
Model family firms Compensation should be transparent among family members.
Boards should tie compensation to organization’s mission, annual
business performance (financial and non-financial), and long-term
financial results.
Proposition 15 Correlating management compensation to business performance
will increase management accountability.
Owing to continued reports of excessive executive compensation, particularly across
EU member states, there is an increasing call for disclosure of executive remuneration
among market-model boards, such as those in the UK (Gregory and Simmelkjaer, 2002).
Even though privately held family businesses are not obligated to announce executive
remuneration, family businesses must also create an atmosphere of trust and trans-
parency among family members. Many family business owners are too comfortable
keeping pay undisclosed. However, nondisclosure does not prevent family members from
forming strong emotions, suspicions, and beliefs about one another’s compensation
(Aronoff and Ward, 1993). Therefore, we believe that information concerning compensa-
tion should be easily available to family member shareholders and reviewed annually by
the board in order to preserve an atmosphere of accountability.
Additionally there have been debates over how best to compensate executives. Many
institutions operating under the market model primarily define performance simply as
stock performance. This emphasis on stock performance, however, tends to stimulate
extreme emotions – greed when things are going well, demoralization when the market
falls (Elson et al., 2003). Further, business performance is only one ingredient in stock per-
formance, which also includes economic, industry, acquisition prospects, and other
factors. Therefore, for market-model companies it is now being recommended that busi-
nesses rebalance elements of executive compensation and tie compensation more closely
to the organization’s mission, annual business performance, and long-term financial
results, which, in turn, that will create real shareholder value over time (Elson et al., 2003).
Generic models for family business boards of directors 337
Summary
The thesis of this chapter can be summarized as ‘accountability, accountability, account-
ability’. Because of the unique characteristics of concentrated ownership and power in
338 Handbook of research on family business
SHAREHOLDERS
Should …
• Influence composition of board
• Create communication channels
• Be involved in strategic decision-making
BOARD
Should …
• Be mid to large-sized
• Not focus on independent status
• Enhance communication and conflict resolution
• Actively participate
• Have limited/not predetermined terms
• Conduct individual board member evaluations
• Allow CEO/chairman role
• Compensate equivalently to CEO
• Monitor company and hold it accountable
MANAGEMENT
Should …
• Be monitored by the board
• Tie compensation to mission, vision, long-term indicators
• Clarify expectations for evaluations
control model firms, the mechanisms of accountability through board governance will not
necessarily be the same as those of market-model companies. All the propositions herein
are directed toward better understanding these differences.
The board is the governor of the family business and as such sits squarely between the
owners and their leadership. While the owners are ultimately responsible for strategic direc-
tion and this can clearly be seen in their investment, the board must insure that strategy as
detailed by management is in keeping with the family owners’ desires and that company
leaders execute the strategy in a timely and complete fashion. To achieve accountability as
described here, a competency-based board with a focus on balancing the appropriate
Generic models for family business boards of directors 339
High
Quadrant 1 Quadrant 2
Quadrant 3 Quadrant 4
Low High
Number of shareholders
Figure 17.4 Four quadrants of family firm governance: dimensions of market and control
amounts of monitoring and collaboration is needed for the typical family-owned business
operating under the control model (see Quadrant 1 in Figure 17.4).
The emotionality, overlapping roles, and oft-perceived unbusiness-like behavior have
caused market model corporate governance specialists great skepticism about family-
owned businesses’ ability to be held accountable. However, as long as the family is psy-
chologically mature and at least moderately unified, and the board executes the task of
holding family business members accountable to clear standards and well-understood
expectations that are mutually set, accountability is likely, and the probability of under-
performing lessened (Gimeno et al., 2004).
However, as family businesses move away from the typical control model, which occurs
when the number of active family members decrease and ownership becomes more wide-
spread, family businesses begin to move closer towards the market model (see Quadrant 4
in Figure 17.4), and assuring appropriate accountability may need to shift. Family firms
operating closer to the market model need control mechanisms, such as independence,
discipline and objectivity, to sustain the business. Such controls are needed to insure that
340 Handbook of research on family business
independent management acts in the best interests of the owners. Family firms operating
under the market model may not have some of the strategic advantages of family com-
panies as they lack the ability to efficiently align the interests of management with own-
ership in order to create a shared sense of purpose, since the identities of the family and
the identities of the business can become distanced.
There are two other ways in which family businesses migrate from the control model of
governance. One is when family become less active in the management owing to retire-
ment or lack of interest by subsequent generations (moving from Quadrant 1 to 3 in
Figure 17.4), but family shareholders maintain their stakes in the business. In this sce-
nario, family shareholders become passive investors who see the business as merely an
investment in a portfolio. One danger is when such ‘portfolio model’ shareholders become
disinterested, they feel increased pressure to liquidate their shares and even may be prone
to litigate to do so. Again, as they move away from the control model, the business loses
some of the competitive advantages of a family company, in this case the biggest loss
perhaps being patient capital.
Another way in which a family business may move away from the control model is when
family remains active in management or the board as the business moves through gener-
ations, but the family expands and becomes less unified as a result of expected centrifu-
gal pressures. This situation may be characterized by multiple families or family branches
in the business with different ideas on how the business should be run. This type of ‘dynas-
tic model’ of governance is extremely unstable, where the lack of unity can create a sale
of shares of the company (see Quadrant 2 in Figure 17.4), or the company may be at risk
of failure. Governance in this arena needs to concern itself with family unity and ensure
that unity among family shareholders is of utmost importance.
One can see from this brief exploration that there is no single model for corporate gov-
ernance that can account for the many differing configurations of family, shareholders,
and business conditions (Corbetta and Salvato, 2004; Gubitta and Gianecchini, 2002).
Our intent herein was to provide testable propositions for how control-model family
firms’ boards of directors may need to pursue accountability in ways different than their
market-model counterparts.
It is our belief that, based on the literature, each propositions will contribute to a foun-
dation of accountability for the particular configuration of family, shareholder, and
family involvement in the business. It is our hope that each of these propositions will be
further explored using empirical research models. Such in-depth research will help us
better understand the effects of a concentrated ownership base in relation to corporate
accountability. For example, future research can examine the relationships provided in the
propositions as they relate to company performance (profits, ROE, and other financial
measures) and family variables, such as those in the F-PEC scale (Astrachan et al., 2002).
Using these models we might see that the levels of ‘familiness’ in the F-PEC scale may be
a more important variable than ownership dispersion when comparing market- and
control-model companies. Challenges to investigating these propositions include oper-
ationalizing and measuring the concept of accountability, as well as developing clearer
measures of concepts, such as board performance.
It is clear that the present study is limited by it’s exploratory nature. While the lack
of research studies devoted to understanding the uniqueness of family firms and their
governance necessitated the nature of this study, we feel that through using and measuring
Generic models for family business boards of directors 341
the concept of accountability in relation to the propositions herein, we can deepen our
understanding of how the board governance of control-model family firms should differ
from non-family market-model firms.
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18 Effective knowledge transfer in family firms
Rosa Nelly Trevinyo-Rodríguez and Josep Tàpies
One of the most critical organizational changes family businesses deal with at some stage
in their lives is the succession process. When evaluating it, two main targets are sought:
quality and effectiveness. To meet these quality-effectiveness standards three elements
should be transferred from the predecessor to the next generation member(s): (1) owner-
ship control/power, (2) management responsibility and (3) competence/knowledge. This
chapter focuses on the third element, knowledge, since most of the times, it is ‘the taken-
for-granted’ factor. How effective intergenerational knowledge transfer in family firms
takes place – under which conditions and through which variables – is the heart of this
writing. We have developed the Knowledge Transfer Model in Family Firms (KTFF)
which sets out several internal and external relationships in the family–enterprise–next
generation system. And, although this is a conceptual text, it may drive future empirical
research projects in order to provide support for the proposed interactions (relationships).
Introduction
One of the most common ways organizational changes are brought about in any business
is through the replacement of key personnel. This process is generally called administra-
tive succession. Indeed, organizationally, succession is important for two basic reasons:
(1) it always leads to organizational instability, and (2) it is a phenomenon that all organ-
izations must cope with (Grusky, 1960). One reason why all organizations must cope with
the succession process is more than obvious: we are all mortal beings. However, it is
important to note that not all businesses face the same problems when entering the suc-
cession stage. Family firms are a particular case where succession is extremely delicate,
since some additional, special dimensions have to be taken into account; for instance, the
family and its dynamic relationships.
Without doubt, the succession processes in family firms represent the most critical
period confronting family businesses, since this is precisely when the business is trans-
ferred from one generation to the next. And of course, one of the main dreams a founder
typically has is to hand down his or her legacy to his or her offspring, given that he or she
has accumulated capital, commitment of potential members, entrepreneurial skills, and
legitimacy (Stinchcombe, 1965). In addition, the founder has already generated learning
curves (diminishing costs), as well as built on a reputation that can serve as a springboard
for the family to jump on and promote. In truth, the founder has created a highly reliable
and accountable business. Nevertheless, the very factors that make a system reliable and
accountable (reproducible – it has the same structure today that it had yesterday) make it
also resistant to change. That is precisely why succession is so crucial.
Owing to the importance and inevitability of succession processes, much attention has
been drawn to highlight the needs of family firms to develop formal succession plans, and
to start planning the let-go stage as early as possible. In fact, assuming all else is equal,
the extent of organizational instability following succession tends to be inversely related
343
344 Handbook of research on family business
to the amount of control over the process (Grusky, 1960). Thus, progress in explaining an
organizational change, such as succession, requires understanding both its nature and the
degree to which it can be planned and controlled (Hannan and Freeman, 1984).
Focusing on the organizational change planning and control, Handler (1990) affirms
that when evaluating the succession process two targets are sought: quality and
effectiveness. Quality is a reflection of how the involved family members personally
experience the process, while effectiveness is more related to how others judge the outcome
of the succession. To meet these quality-effectiveness standards, the transfer of three ele-
ments between the generations should take place: (1) ownership/power, (2) management
responsibility, and (3) competence/knowledge (Varamäki et al., 2003). It is worth stress-
ing that besides these three elements, there are various psychological factors that may also
influence the effects of the succession process, such as the successor’s (or potential candi-
date’s) personal skills and administrative experience outside the business, his or her com-
mitment to the goals of the family and the organization, and the legitimacy he or she can
generate for the position in the eye’s of the employees of the company.
In spite of the fact that little attention has been devoted to the study of how knowledge
is transferred in family businesses, usually most of the studies regarding the succession
topic take this transmission for granted. On the other hand, there are signs that perspec-
tives related to transfer of knowledge and learning processes are important because one
sees them appearing constantly across disciplines. Yet, in spite of the considerable
advance on bridging disciplines, there is almost no organizational learning and/or family
business literature focusing on ‘How effective intergenerational knowledge transfer in
family firms takes place’. Consequently, we embark in this study intending to find out
variables and conditions that promote effective knowledge transfer in family businesses,
thus bridging the organizational learning and family business areas.
How is knowledge transferred within the same firm across generations is an issue that
may explain to some extent (in addition to the leadership-keeping process) why most
family businesses do not survive until the third generation, the mortality/death rate being
much higher during the owner–second generation transition. Although we keep our
approach completely theoretical through this conceptual writing, the final idea is to set a
knowledge transfer framework (with variables and conditions) that can be used later in
empirical research to provide support for the proposed relationships.
This chapter is organized as follows. First, we analyse whether or not knowledge trans-
fer in family firms is different from knowledge transfer in other firms, and if so, we will
proceed to examine the concept of individual learning and how is it related to knowledge
acquisition and transmission. Second, we develop a knowledge transfer model applied to
family firms exposing the variables and conditions that interact during knowledge trans-
mission processes.
Is the knowledge transfer in family firms different from the knowledge transfer
in other firms?
The primary roots of knowledge are the philosophy and sociology disciplines. Writers such
as Popper, Lakatos, Feyerabend, Berger, Luckmann, Polanyi, Kuhn, Wieck and Giddens
influenced the thinking on knowledge in organizational and economic life. Yet, despite the
fact that there is a lot written regarding this subject, there’s no single standard definition of
knowledge. In this writing, we will use Tsoukas and Vladimirou’s (2001) interpretation of
Effective knowledge transfer in family firms 345
knowledge, from the organizational learning literature: knowledge is the individual cap-
ability to draw distinctions, within a domain of action, based on an appreciation of context
or theory, or both; it presupposes values and beliefs, and is closely connected with action.
Knowledge is mainly ‘personal’: it is mostly a property of the people who acquired and
use it. Actually, it has been detected that people in organizational environments are much
less likely to share what they know with their colleagues, since they consider them ‘proxi-
mate competitors’ in the labor market. Employees usually regard certain areas of their
knowledge as part of their power base within the company; thus their willingness to share
is limited (Probst et al., 2000). Moreover, the human being is generally reluctant to com-
municate his own knowledge stock because of self-interested, opportunistic reasons
(agency theory). In fact, generally individuals would tend more to share their knowledge
with people outside their organization (and even with those in other organizations)
than with their own colleagues. As the motto attributed to Machiavelli says, ‘People make
wars with neighborhoods and alliances with far located partners’.
However, the main point here is that ‘unless the implications of experience can be trans-
ferred from those who experience it to those who did not, the lessons of history are likely to
be lost’ (Levitt and March, 1988, p. 328). So, what do organizations do in order to preserve
experience and transmit knowledge? Well, most of them encapsulate it in computers via data-
bases and systems. Others implement such norms and procedures that dictate how people
should behave in almost every case. At the other extreme, there are many family-owned orga-
nizations that, instead of writing each single rule in an organizational memory, pass on their
knowledge from generation to generation by means of tradition and value systems.
However, family firms have an advantage on the ‘competitive-non sharing issue’, since
all owning members (usually from the family) make a living out of the same source: their
business. In addition, family owners and next generation members (NGMs) tend to share
the same objective or dream (assuming no family conflicts). Moreover, an element of trust
exists that holds the family and the business together. And, even when some authors may
argue that there is no difference between a family business and a non-family firm, the fact
is that the strength of personal relations within a family is greater than in any business
relation. As Granovetter (1985) pointed out:
Departing from pure economic motives, continuing economic relations often become overlaid with
social content that carries strong expectations of trust and abstention from opportunism . . .
[However] it would never occur to us to doubt this last point in more intimate relations, which
make behavior more predictable . . . In the family, there is no Prisoner’s Dilemma because each is
confident that the other can be counted on. In business relations the degree of confidence must be
more variable. (Granovetter, 1985, pp. 490–91)
It is well known that one important factor that affects transferability of knowledge is
the perceived trustworthiness of the source of knowledge (Szulanski et al., 2004; Wathne
et al., 1996). In fact, experiments in the communication field have demonstrated that a
trustworthy source could substantially influence a recipient’s behavior (Allen and Stiff,
1989; Hovland et al., 1949; Perry, 1996; Szulanski et al., 2004). Likewise, it has to be said
that trust develops over time as a consequence of individual interaction; in the end, trust
is placed in a person, not in that person’s specific actions (Rempel et al., 1985). When
dealing with such ‘trust’ factors, family firms tend to be ahead of non-family businesses,
since owners and NGMs in the former tend to be more closely related, and therefore know
346 Handbook of research on family business
each other. The latter is much more difficult in big non-family firms where the sharehold-
ers’ power is diluted and represented by board members. Even when these board members
(top executives) may be connected by networks of personal relations and may be able to
generate trust among their own employees and shareholders, their ties will surely not be
as strong as those developed among family members.
The kind of strength of the relationships between parents and children (NGMs) that
we are underlining is what Coleman (1988) called social capital. In fact, there is a lack of
social capital in the family if there are no strong relations between NGMs and parents
(owners). The development of social capital within the family depends on two factors: the
physical presence of parents in the family (owners) and the attention given by the parents
to the NGMs. In this text, we are assuming the presence of both.
Similarly, we have to consider not only the trustworthiness of the source, but also its
availability and desire to transfer knowledge. In general, family business owners are
inclined to teach NGMs everything they know about the business, since their main dream is
that their children continue and build on it. The founder wants to teach his or her siblings
(and/or in-laws when the case applies) how to learn faster than their competitors, in order
to improve the chances of survival of the family business. However, in other kinds of orga-
nizations this may not happen, first because of the high personnel turnover and, second,
because of agency problems. Besides, it has to be highlighted that for a family firm, busi-
ness reputation is closely linked to family reputation. Why? Because it is the owner(s) and
his or her family who represent the values and ideas promoted there. More often than not
the brand name of the enterprise is precisely the surname of the family. Thus, a special con-
sideration regarding their own reputation as individuals is attached to the family firm,
making their commitment much higher and their continuation dream more vivid.
Consequently, trustworthiness, time availability and desire of the source (among
others) enhance knowledge transfer, influencing the likelihood of behavioral change by
the recipient. In addition, knowledge transfer is not mechanical, but interactive and
embedded in the existing capabilities on both sides and in the social relationships between
them. Thus, if there is not goodwill and commitment on both sides knowledge transfer is
more complex and complicated. One of the obvious principles of human communication
is that the transfer of ideas occurs most frequently between a source and a receiver who
are alike or homophilous (Rogers and Shoemaker, 1971). If we consider that ‘homophily’
is the degree to which pairs of individuals who interact are similar in certain attributes,
such as beliefs, values, education, from the same family, and so on, we suggest that there
may be better understanding, goodwill, and commitment between family members than
between non-family members, since communication is easier (assuming no conflict). As
the old adage goes: ‘Birds of a feather flock together.’
Having asserted that knowledge transfer in family firms is different from knowledge
transfer in non-family firms, we proceed to analyse the individual learning process, in order
to understand how knowledge is acquired, assimilated and used by NGMs. To do so, we
use sociological and psychological literature, as well as organizational theory writings.
One must learn by doing the thing, for though you think you know it – you have no certainty,
until you try. (Sophocles, 400 BC)
Effective knowledge transfer in family firms 347
To understand how knowledge is transferred, we first have to study how individual learn-
ing takes place, since knowledge is the outcome of learning. As stated by Piaget (1968)
‘learning’ can be defined as a continuous genesis, a process of creation and re-creation
where gestalts and logical structures are added or deleted from memory over time. If this
is so, learning has an implicit assumption of change. Therefore, we may say that individ-
ual learning is dynamic and cyclic; it is a process by which relatively permanent changes
occur in a person’s behavior as a result of some experience or knowledge the person has
acquired (Bass and Vaughn, 1966). However, the success of learning consists in the acqui-
sition of knowledge (Polanyi, 1975) not in the change of behavior, since it may rarely
happen that knowledge be gained without any accompanying change in explicit behavior
(Fiol and Lyles, 1985), but only in the individual private knowledge.
When analysing the individual learning literature, we found there was a tacit agreement
among the reviewed authors on the fact that individual learning usually happens through
experimentation, evaluation and assessment, it being a process rather than an outcome.
Moreover interesting insights, such as that of March and Olsen (1975), pointed out that
roles, duties and obligations were behaviorally important to involvement in the learning
process, affirming that without doubt ‘People attend to decisions not only because they
have an interest at stake, but because they are expected to or obliged to’ (p. 151). Indeed,
numerous research studies (Bower, 1981; Gadanho and Custódio, 2002; LeDoux, 1998;
Picard, 1997; Underwood, 1983; Wickens and Clark, 1968) have proposed that emotional
responses (affect) are a critical component of memory, representing an associative network
connected to certain events, such as family actions, rituals, expectations, decisions, and so
on. In fact, Damasio (1994) suggested that humans associate high-level cognitive decisions
(for instance, the decision to make a conscious effort in order to actively remember/learn
what’s being experienced) with special feelings (emotions) which have good or bad conno-
tations dependent on whether choices have been emotionally associated with positive or
negative long-term outcomes. Furthermore, Bahrick (1984), Salasoo et al. (1985) and
Johnson and Hasher (1987) suggest that as level of learning increases and new connections
of events are made, some portion of this type of knowledge becomes permanent, and will
be indefinitely maintained, even in the absence of further rehearsals, and regardless of
potential interference encountered during the retention interval. Therefore, expectations,
ideals and shared dreams, connected with emotions and values are important, though not
easily detected, intangible factors that influence the nature of learning.
In addition, learning (as well as adaptation) must consider the complexity of the envir-
onment relative to time, energy, uncertainty, relative importance of attainment of success
versus avoidance of failure, experience or non-experience of the individual, preferences,
goals and aspiration levels, incentives, and so on (Cangelosi and Dill, 1965). If the envir-
onment is too complex and dynamic for the individual to handle, overload may occur,
inhibiting learning and knowledge acquisition (Lawrence and Dyer, 1983). So, it is better
to learn step by step, so that assimilation is long lasting and errors (misleading signals pro-
duced by noise) are reduced. This view perfectly matches the findings from some well-
known psychology studies regarding individual learning, which note among other things:
1. Distributed learning activities seem more effective than massed learning (‘step by step’).
2. Learning which is rewarded (positively reinforced) will tend to be repeated, remem-
bered, and used in other situations. Time is a critical factor to foster repetition.
348 Handbook of research on family business
Applying the latter to family firms, we realize that for NGMs previous attitudes and
beliefs also form the structure for future cognition, affecting learning commitment, atti-
tude and behavior. Undeniably, learning is influenced and determined by attitude, values,
trust and commitment. The behavior of the NGMs will depend on the relationship
between the outcomes they observe and the aspirations they have for those outcomes
(Levitt and March, 1988) as well as on the rewards and punishments administered.
Likewise, we can observe that since learning is a dynamic process that takes time (for
assimilation of knowledge purposes, repetition and incentives need to be ‘a given’), pre-
decessors should start transmitting their knowledge to NGMs at early stages in life in
order to achieve a more effective knowledge transfer. On the other hand, in order for
learning to occur, a certain amount of stress is necessary (Cangelosi and Dill, 1965; Fiol
and Lyles, 1985; Hedberg, 1981; Hedberg et al., 1976). Thus, predecessors must create
situations where NGMs can act, reflect and name their findings. ‘In directing their explor-
ations and naming their observations, they begin to understand their environment and
become more able to manipulate and change their situations’ (Freire, 1970b, p. 462).
Although financial gain is sometimes the cause of searches for opportunities (Lewin and
Wolf, 1975), it is usually scarcity, conflict, and substandard performances that lead to
actions, whereas wealth, harmony and goal accomplishment breed complacency and rein-
force current behaviors. Learning is typically triggered by problems (Hedberg, 1981).
Thus, when thinking about transferring knowledge to NGMs, predecessors must take into
account that the learning and assimilation of concepts and ideas NGMs may acquire will
be based on the challenges they face, the constant reward and punishment they receive
(Lieberman, 1972), as well as their own actions and findings, in joint conjunction with the
expectations they perceive and share, the values they have internalized and the commit-
ment they show (related to their own interests and personality).
Finally, the level of stress and the degree of uncertainty about past successes will also
determine the effectiveness of the conditions of learning, as well as how the environment
is perceived and interpreted (Daft and Weick, 1984; Fiol and Lyles, 1985; Starbuck et al.,
1978; Weick, 1979a). And, for learning to be effective, an interaction between NGMs, the
predecessor and the situation must take place. Acting, or learning by doing is the means
to acquire knowledge (Freire, 1973).
‘Acknowledging that all knowledge contains a personal element, or to put it differently,
“[recognizing] personal participation as the universal principle of knowing” (Polanyi,
1975, p. 44), implies that knowing always is, to a greater or lesser extent, a skillful accom-
plishment, an art’ (Tsoukas and Vladimirou, 2001, p. 982). Consequently, the learning
process, or acquisition of knowledge, will be subjected to the individual’s attitude. In
effect, to know something, the individual must act and integrate a set of details or ‘par-
ticulars’ of which he or she is subsidiarily aware (unconscious). Basically, what happens
is that to make sense of his or her experience, the individual relies on some parts of it sub-
sidiarily in order to attend to the main objectivefocally. In the real world, we comprehend
Effective knowledge transfer in family firms 349
something as a whole (focally) by tacitly integrating certain particulars, which are known
by the actor subsidiarily (Tsoukas and Vladimirou, 2001).
The intriguing question of whether unconscious stimuli influence thought and behav-
ior has been constantly studied in psychology (Dixon, 1971; Erdelyi, 1984, 1985; Johnson
and Hasher, 1987; Kihlstrom, 1984), and important demonstrations of meaningful pro-
cessing of unconscious stimuli have been reported by Marcel (1983), Fowler et al. (1981)
and McCauley et al. (1980). Moreover, indirect tests do seem to reveal long-lasting con-
sequences of unconscious processing (Johnson and Hasher, 1987). Consequently, we
suggest that NGMs unconsciously acquire certain ‘tacit knowledge’ (Polanyi, 1975) –
intangibles such as family values and conceptions – just by interacting with the family, the
business and the predecessor (in some cases, the founder). This is in line with what Hasher
and Zacks (1979, 1984) observed concerning automatic encoding.
Thus, learning or knowledge acquisition consists of three elements: subsidiary parti-
culars, a focal target and, crucially, a person who links the two (Tsoukas and Vladimirou,
2001; in accordance with Polanyi, 1975). This idea is pretty much related to and in fact
reinforces, cultural-historical activity theory (CHAT), which provides an orientation
toward learning by stating that human action (in this case, knowledge acquisition) has a
tripartite structure: subject, object and mediating artifact (Figure 18.1).
Cultural-historical activity theory was initially developed during the 1920s and 1930s,
by Lev Vygotsky, based on Feuerbach theses (by Marx, 1886), which presented the agenda
of overcoming the opposition between idealism and mechanistic materialism by means of
the concept of activity. The key concept of CHAT was mediation: artifact-mediated and
object-oriented action. A person never reacts directly to the environment, but through the
use or mediation of tools, cultural means, signs, and so on. Vygotsky characterized the
development of the intellect as an ongoing dialectic of instrumental and abstract
processes, through which the mind took shape by means of the reactive and transforma-
tive relations in which people engage with the world (Keller and Dixon Keller, 1996).
MEDIATING ARTIFACT
SUBJECT OBJECT
The model relates the subject/person, the object/focal target and the mediated artifact/
subsidiary particulars (unconscious) in the following way. First, the subject/person, who
is represented by the NGMs must learn/ acquire knowledge (action) about how to run
the family firm, which is represented as the object/focal target. In order to do so, the
subject/person needs an artifact or tool that helps him or her carry on the human activ-
ity (knowledge acquisition). This mediating artifact is represented by the family. Thus,
knowledge transfer (acquisition) takes place in and through a social context.
One of the central ideas in Polanyi’s concept of knowledge is tradition. Tradition
describes how knowledge is transferred precisely in social contexts. The tradition is a
system of values outside the individual. Indeed, tradition is a social system which takes
up, stores and conveys the knowledge of society – or family (Sveiby, 1997b). This kind of
knowledge-transfer is in fact represented by the master–apprentice relationship (crafts-
manship) which has been in use for centuries. ‘To learn by example is to submit to author-
ity. By watching the master and emulating his efforts in the presence of his example the
apprentice unconsciously picks up the rules of the art, including those which are not
explicitly known to the master himself’ (Polanyi, 1962, p. 53). Thus,
The individual lets the . . . cultural patterns of the tradition form his own idiosyncrasies into an
image of reality, irrespective of whether his tools are patterns of thought, patterns of action or
social institutions. As time passes, some of the values are validated and transformed cognitively
into beliefs about how things are. They are therefore no longer in need of being tested so they
become a taken-for-granted tacit knowledge shared by the members of the group. (Sveiby, 1997b)
As a result, the family acts as a mediating artifact in conjunction with tradition (an inter-
twined tool embedded in the family context). Undeniably, tools are created and trans-
formed during the development of the activity itself and carry with them a particular
culture (historical remains from their development). So, the use of tools is an accumula-
tion and transmission of social knowledge by itself. Consequently, tool use (tradition)
influences the nature of external behavior and the mental functioning of individuals
(Kaplelinin and Nardi, 1997).
Accordingly, the family acts as a reference system which contains a well-defined struc-
ture of values, ideas, behaviors, norms and general knowledge, which is transmitted
unconsciously to the individual by means of traditions (NGM) from the time he or she is
Effective knowledge transfer in family firms 351
born. The next generation capitalizes on those traditions, acquiring the knowledge, inte-
grating it, applying it and increasing it. Of course, we have to take into account that next
generation level of commitment to the family business will definitely affect the knowledge
assimilation process and patterns, it being a determinant factor (variable) in the context
of effective and qualitative knowledge transfer. In fact, this transmission effort only
makes complete sense when the three actors are completely aligned. Based on the work
done by Fiol and Lyles (1985), alignment implies a potential to learn, unlearn or re-learn
based on past behaviors. Essentially, the work of Chakravarthy (1982), Chandler (1962),
Cyert and March (1963), Hambrick (1983), Miles and Snow (1978) and Miller and
Friesen (1980) regarding firms and their strategies recognizes the widespread acceptance
of this premise. Here, we are not applying the term only to firms, but also to the whole
family–firm–next generation system. Consequently, if the three corresponding compo-
nents do not show the same direction – potential to learn, unlearn and re-learn – the final
output may vary.
In Figure 18.2 each square represents ‘a system balance – depending on the faced envir-
onment’, each big dashed circle stands for ‘one different dynamic environment’, while the
small double-lined circle symbolizes the dynamistic-cause effect interrelationship among
actors.
As we can see, learning and adaptation occurs along several simultaneous dimensions
(Herriot et al., 2001). From a population ecology perspective and a strategic management
view, the ultimate criterion of the system performance is its long-term survival and
growth. To achieve this, the system must find different balances depending on the envir-
onment it moves/coexists in. In addition, we have to take into account that those
environments are also dynamic; changing continuously and being affected by the time,
uncertainty, energy imposed, past events, and so on. Furthermore, the system needs to
find an alignment among its elements (actors), in order to adapt to the general ambience.
However, this alignment is also cyclical and dynamic, preserved by a sustained strong
cause–effect relationship among actors. System adaptation, alignment and actors’ assimi-
lation of knowledge (learning) regarding the environments, as well as the force of the
interrelationship system balance–environment–actors will determine the family firm’s
survival/death and fit/misfit in the community.
The successor (or candidates) – NGMs – is embedded in the family system from the
time he or she is born, and as the individual develops his or her personality, habits and
beliefs, the family transmits to him or her certain views and ideologies as well as memo-
ries and values that preserve certain behaviors, mental maps, norms and ideas. The same
happens with the other members embedded in the family system, who experience this iso-
morphic adaptation up to a point where cognitive systems, associations and memories are
developed and shared among them. All these systems, associations and memories are kept
alive and passed from generation to generation as family traditions. However, even when
traditions are transmitted to us from the past, they are our own interpretations, which we
have arrived at within the context of our own immediate problems – environments
(Polanyi, 1983). Our perceptions and received stimuli from the environments we face
affect our reinterpretation of traditions, and as a byproduct, impact our actions (behav-
ior) and learning processes. Therefore, the NGM consequently affects the ‘environments’
back, since what came in as perceptions and stimuli, went out as redefined, re-created and
changing actions that modify the surroundings. This is a never-ending cyclic process
TIME
DYNAMIC
UNCERTAINTY
STIMULI AND ENVIRONMENTS
ENERGY
PERCEPTION
SYSTEM BALANCE
INTERDEPENDENCE INTERDEPENDENCE
Alignment Alignment
Time
Expectations
Desire
Emotions
Traditions
Trustworthiness
352
Commitment Culture
Motivation/passion
NX GEN MB Alignment ENTERPRISE Values
Past events
Preferences Procedures
LEARNING
PROCESSES
through which continuous feedback is acquired and by which traditions are adapted
and redefined, though not completely changed (unless in special and extreme circum-
stances).
Conclusion
When evaluating succession processes one of the most important variables related to the
quality-effective standards of the procedure is knowledge transfer. Nonetheless, as we
pointed out before, knowledge transmission in family firms takes place differently than
knowledge transmission in non-family firms, owing to intangibles related to family value
systems and traditions. Some of the most relevant variables and conditions that, accord-
ing to our conceptual model, affect knowledge transmission in family firms are synthe-
sized below.
Regarding the variables, we identified two classes: (1) those that are common to/affect the
whole system (essential variables of the whole system) and (2) those that are particularly
focused on a specific actor (family and next generation variables). For practical reasons and
easy remembering, we grouped the common variables (class 1) together and constructed the
educate standard (education of NGMs – Figure 18.3), while the punctual/specific variables
(class 2) are listed accordingly to the actor they have an effect upon (Table 18.1).
On the subject of the conditions needed in order for effective knowledge transfer to take
place across generations in the context of family firms, we detected that some desirable
circumstances/settings:
● Next generation members’ learning process must start in early stages (from child-
hood), since ‘learning’ is enhanced through time with such practices as repetition,
rewards and punishments, feedback and practice.
● For effective learning to take place commitment, expectations, values and percep-
tions have to be shared between the predecessor and NGM (explicit and implicit
communication is needed).
● Learning processes must be ‘constructed’ in such a way that they show challenging
and solvable situations highly related to real life and to the future work.
learning does not always lead to intelligent behavior. Experience or wisdom can not be
completely communicated, consequently the next generation has to ‘live’ their own knowl-
edge processes and apply their judgment and reasoning depending on the problem facing
them, making their own mistakes and learning from them. What predecessors do is just
to set a context where NGMs can develop their potentials in an orderly, not so costly, and
guided way. But in the end, ‘Passing the torch involves doing on the part of the next gen-
eration’. Knowledge is personal; it’s an ART.
Further research
Since the overall KTFF model we have proposed here includes many different variables
and/or constructs which are difficult not only to measure, but also to examine jointly, we
propose certain specific ideas in order to test the model ‘by parts’, breaking it down into
more manageable pieces of research.
In order to understand how to shape and/or transform the learning processes accom-
plished by NGMs during their life, we need first to map out those processes/relationships.
To facilitate this task, we propose to base that mapping procedure on the proposed rela-
tionships (interactions) presented in the KTFF model. Thus, a research testing knowledge
acquisition (learning) during different stages of the NGMs life – for instance, childhood,
adolescence, early maturity and maturity – may be insightful, showing whether the inter-
actions among the family, the enterprise and the NGMs are different or not at separate
points in time. Basically, the idea is to dynamically map how the KTFF model changes
over time (along these different stages) in order to detect if there are some points where
learning patterns have changed. If so, a consequent question would be why those patterns
changed from one stage to another?
Another focus of research could be to assess the antecedents of such constructs as next
generation commitment and/or trust (among others) and then to see how these antecedents
are related either to the enterprise, to the family (context), to NGMs’ individual personal-
ity, or to a pair/all of the basic variables, as well as to the learning patterns that the NGMs
exhibit over time (stages). Factor analysis and structural equation modeling could help
considerably in order to group antecedents and to detect causal relationships.
On the other hand, it would be equally attractive to analyse the literature related to
the ‘psychology of child development’ and to observe how the learning processes chil-
dren carry out during childhood can be effectively fostered or inhibited – and if so, to
Effective knowledge transfer in family firms 355
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19 Feuding families: the management of conflict in
family firms
Franz W. Kellermanns and Kimberly A. Eddleston
Introduction
Conflict has often been portrayed as a recurring characteristic that diminishes the per-
formance and survival of family firms (for example, Levinson, 1971). Research on con-
flict, however, notes that not all conflict is inherently bad. Studies have focused on a
beneficial type of conflict, task conflict, which has been found to be positively associ-
ated with performance when it occurs in moderate levels (for example, Jehn, 1995,
1997a). Task conflict involves the open discussion of the merits of ideas, thereby improv-
ing the range of options provided to decision-makers. In contrast, relationship conflict
has been identified as a detrimental type of conflict (Jehn, 1995, 1997a). Relationship
conflict is associated with resentment, animosity, anger, frustration and hostile behav-
iors. This dysfunctional nature of relationship conflict has a devastating effect on a
firm’s performance.
The above-mentioned distinction between task and relationship conflict is critical in
understanding the consequences of conflict, however it falls short in taking into account
the unique psychodynamic effects of the family firm. That is, family involvement must be
considered to fully understand how conflict occurs and can be managed in family firms
(Dyer Jr, 1986, 1994; Ling et al., 2002; Schulze et al., 2001, 2003b; Schwenk, 1990). While
progress has been made in understanding the antecedents of both types of conflict in
family firms (for example, Kellermanns and Eddleston, 2004), our understanding on how
these types of conflict can be successfully managed is still lacking.
Our chapter thus focuses on five popular conflict management strategies, namely,
avoiding, contending, compromising, collaboration, and third-party intervention (for
example, De Dreu, 1997; De Dreu and Van Vianen, 2001; Sorenson, 1999; Wall Jr and
Callister, 1995), as they relate to the occurrence of task and relationship conflict in
family firms. This chapter contributes to the literature in at least two ways. First, we add
to the family firm literature by showing that both task and relationship conflict need to
be properly managed in family firms. Giving particular attention to the complexity
perspective of family firms, we argue that while relationship conflict needs to be mini-
mized, an optimum level of task conflict needs to be achieved in order for family firms
to succeed. Second, taking into account the unique psychodynamic effects of family
firms, we add to the conflict literature by discussing integrated conflict management
strategies that address both task and relationship conflict. To our knowledge, this is the
first theoretical paper that matches conflict management strategies with both task and
relationship conflict while explicitly taking into account the unique influences of the
family firm. Our chapter concludes with a discussion of the implications for theory and
practice, and a presentation of future research opportunities on family firm conflict
management.
358
The management of conflict in family firms 359
and Mannix, 2001). Moderate levels of task conflict appear to be the most beneficial to
performance given that particularly high levels of task conflict can prohibit task
completion and very low levels diminish the development of new ideas and strategic
options and can encourage group-think (Janis, 1972; Kellermanns and Eddleston, 2004).
However, this view of task conflict does not consider the psychodynamic effects of the
family, particularly when family member interactions are dysfunctional and hostile.
In particular, negative conflict, otherwise known as relationship conflict, leads to low
levels of decision quality, resentment, anger and worry (Amason, 1996; Jehn, 1995, 1997b)
and threatens the stability and viability of the business as well as the family unit.
Relationship conflict often interferes with work efforts by redirecting efforts related to
work toward the reduction of threats, politics and coalitions (Jehn, 1997a). Squabbles and
infighting within a family firm can result in insufficient attention being focused upon busi-
ness needs and performance (Kets de Vries, 1993). Relationship conflict is laden with
negative emotions and personal animosity, and is thus considered extremely dysfunctional
(Amason, 1996; Amason and Schweiger, 1994; Brehmer, 1976). Relationship conflict
revolves around disagreements and frustrations that are not related to work or a business
task (De Dreu and Van Vianen, 2001). Since relationship conflict is associated with frus-
tration, irritation and annoyance (Jehn and Mannix, 2001), it has been linked with nega-
tive performance effects such as ineffectiveness and dissatisfaction (Amason, 1996; Jehn
and Mannix, 2001). Such negative conflict within the family firm may contribute to the
high mortality rate of family businesses (Beckhard and Dyer Jr, 1983). Therefore, when
investigating conflict, both task and relationship conflict should be considered simulta-
neously, given that one relates directly to the task at hand and can increase performance,
while the other conflict relates to personality clashes and can diminish performance.
The complexity perspective of family firm conflict, which was proposed by Keller-
manns and Eddleston (2004), emphasizes the importance of understanding the relation-
ship between task and relationship conflict. They argue that the benefits of task conflict
can be lost when relationship conflict is present in family firms. Relationship conflict dis-
tracts family members from their work and deflects attention away from tasks, preoccu-
pying them with feelings of anger, frustration and resentment (Filbeck and Smith, 1997).
Relationship conflict is particularly devastating for family firms since family members
have access to key processes and information in the organization, and thus tend to yield
significantly more power than normal employees in non-family businesses (Dyer Jr, 1986;
Sorenson, 1999). Thus, optimal performance effects in family firms can be expected when
low levels of relationship conflict and moderate levels of task conflict are experienced in
family firms (see also Kellermanns and Eddleston, 2004). Formally stated:
Proposition 1 Low levels of relationship conflict and moderated levels of task con-
flict will lead to superior performance in family firms.
However, this balance between task and relationship conflict is not easy to achieve in
family firms, and conflict management interventions might become necessary. Indeed, con-
flict management has been considered extremely important for family firms (for example,
Dyer Jr, 1986; Sorenson, 1999; Ward, 1987). While the need for future research has been
identified (for example, Kellermanns and Eddleston, 2004) and current research suggests
integrated management approaches for non-family firms (for example, Van de Vliert et al.,
The management of conflict in family firms 361
1999), research has yet to investigate conflict management approaches for family firms in
relation to creating optimal levels of task conflict while minimizing relationship conflict.
Figure 19.1 summarizes the suggested relationships between conflict management, the
occurrence of conflict and family firm performance proposed in this chapter. Next, we
review the five conflict management approaches suggested in Figure 19.1 under the con-
sideration of the complexity perspective of conflict in family firms.
Avoiding
The avoiding conflict management strategy involves a lack of response to conflict, whereby
the problem is ignored. Here, individuals recognize the disruptive potential of certain
issues and thus avoid and forestall dealing with them (Murninghan and Conlon, 1991).
Some research has found that an avoiding conflict management strategy can be quite
effective (De Dreu and Van Vianen, 2001; Jehn, 1997b; Murninghan and Conlon, 1991).
For example, a study by Murninghan and Conlon (1991) found that the avoiding conflict
management strategy was characteristic of highly successful string quartettes. Similarly,
De Dreu and Van Viannen (2001) showed that teams that avoided conflict perceived higher
levels of performance. In contrast, when conflict is not ignored and occurs frequently and
openly, the intensity of relationship conflict increases significantly (Jehn, 1997a). However,
these studies did not take place in family firm settings, but rather in a team context. Because
362 Handbook of research on family business
of the co-mingling of the family and the business, and the consistent interactions of family
members, the avoiding conflict management strategy may not be as effective in family firms.
While avoidance might allow family members to focus on the tasks at hand, the over-
arching problems that created the negative affect will continue to linger and fester. Owing
to the interrelationship between the business and the family (Whiteside and Brown, 1991),
relationship conflict needs to be minimized in both the family and the business, which
makes it even more difficult to suppress. The most pronounced difference between teams
and family firms is the temporal component of the conflict. While team members may be
able to ‘sit out’ conflicts and go their own way after a project is completed, family firm
members are locked into the organization and are unlikely to leave (Gersick et al., 1997;
Schulze et al., 2003a, 2003b). Managing conflict in family firms requires special handling
because family members must continue to work together, they tend to share the same
long-term goals and they hold simultaneous memberships in several intersecting systems,
not just the one in which the dispute has occurred (Kaye, 1991). Thus, it is much more
difficult for family members to escape relationship conflict.
When family firms ignore conflicts, they simply ‘forestall coming to terms with those
undisclosed issues’ (Kaye, 1991, p. 22). A high use of avoidance in family firms has been
associated with low family satisfaction, high sibling rivalry and low mutual trust (Kaye and
McCarthy, 1996). Indeed, effective relationships in family firms thrive on honesty, explicit
communication where feelings are shared, and issues negotiated (Whiteside et al., 1993).
Healthy family firms do not view arguments as bad, but instead focus on how conflicts are
resolved (Whiteside et al., 1993). Accordingly, we suspect that the avoidance of relation-
ship conflict cannot be sustained and will be detrimental in the long-run to family firms.
In addition, an avoiding conflict management strategy is not expected to encourage
optimal levels of task conflict. An avoiding conflict management strategy is likely to leave
a conflict as it stands, without solving or escalating it (Van de Vliert and Euwema, 1994).
By avoiding task conflict, family firms become stagnant and lack the development of new
strategies (Kellermanns and Eddleston, 2004). Without conflict, a family firm does not re-
evaluate its tasks or create new objectives (Kaye, 1991). Opinions are not integrated into
decision-making and thus the quality of decisions may suffer. Family members are likely
to feel discounted when their opinions are ignored, which may even lead to relationship
conflict. For example, avoiding conflict can escalate frustrations and lead to negative
spillover that hurts relationships between family members and, thus, avoidance can
heighten tensions and limit productive action (Sorenson, 1999). Indeed, the use of the
avoiding conflict management strategy in family firms has been found to have a negative
effect on business outcomes and to hurt family relationships (Sorenson, 1999). Therefore:
Contending
The contending conflict management strategy, sometimes referred to as competing,
is when individuals attempt to impose their will, wishes and perspectives upon others
(De Dreu and Van Vianen, 2001). Individuals do not take into account others’ concerns
and, thus, contending is seen as an individualistic strategy that creates competition among
The management of conflict in family firms 363
Compromising
Compromising refers to a conflict management strategy that tries to partially satisfy all
parties in a dispute through compromises. Compromising is often seen as a distributive
conflict management strategy since neither party’s needs are fully met, rather, their needs
and goals are partially achieved (Sorenson, 1999). However, because each party’s con-
cerns are partially addressed in the conflict resolution, this strategy also has an integra-
tive component (Sorenson, 1999). Research has shown that this is not the most effective
conflict management strategy, since the root causes of the conflict tend to persist
(Murninghan and Conlon, 1991). When conflicts are rooted in differences regarding
social attitudes and ideologies, comprising is unlikely to resolve disputes (De Dreu and
Van Vianen, 2001). However, while compromising may not be the most effective strategy,
it has been found to be associated with positive family relationships (Sorenson, 1999). In
fact, a family firm that rarely compromises is likely to have harmful and negative family
interactions; sometimes family members have to give and take simply to keep the peace
364 Handbook of research on family business
Collaborating
The collaborating conflict management style involves individuals trying to work out a
mutually acceptable solution to their problem that fully satisfies the concerns of all parties
(De Dreu and Van Vianen, 2001; Sorenson, 1999). Collaborating has been found to
improve team effectiveness and to lead to mutually beneficial solutions, better goal
achievement and less likelihood of future conflicts (Pruitt and Rubin, 1986; Tjosvold,
1997). Although some research on teams has shown that collaborating is not effective in
dealing with relationship conflict (De Dreu and Van Vianen, 2001; Murninghan and
Conlon, 1991), research on family firms has shown that this is the most effective conflict
management strategy in terms of both family and business outcomes (Sorenson, 1999).
Collaborating facilitates the understanding of others and promotes positive relationships
(Sorenson et al., 1998). Because it requires open communication, trust and mutual
support (Seymour, 1993), collaborating is well suited to the unique needs of family firms
and may be the most important conflict management strategy for family businesses
(Sorenson, 1999). As such, since collaboration is a relationship-enhancing conflict man-
agement strategy that promotes cooperation and commitment, it may be the most effective
strategy for reducing relationship conflict and minimizing its negative effects.
Similarly, collaboration is also a business-enhancing strategy because it promotes par-
ticipation, teamwork and learning (Sorenson, 1999). Collaboration is effective in encour-
aging individuals to focus on the work problem as opposed to positions (Fisher and Ury,
1981). Because it requires mutual sharing and openness, collaboration is associated with
organizational learning and adaptation that should enhance the performance of a family
business (Dyer Jr, 1986). Indeed, task conflict has been argued to require a collaborating
response to be effective (De Dreu and Van Vianen, 2001).
Third-party intervention
While avoiding, contending, compromising and collaborating involve the disputing
parties resolving conflicts themselves, third parties must often become involved when indi-
viduals are unable or unwilling to resolve the conflict themselves (Wall Jr and Callister,
1995). Third-party intervention is sometimes necessary because conflicts in family firms
often ‘require an outsider to discern their unspoken, hidden, barely-hinted at apprehen-
sions’ (Kaye, 1991, p. 22). There are a multitude of third-party mediation and arbitration
strategies. In the case of mediation, the success rates in reaching an agreement or resolu-
tion vary substantially; in the case of arbitration, an agreement is reached by definition
(Wall Jr and Callister, 1995). Mediators are helpful to family firms because they improve
communication between parties and point out to each party how he or she has been con-
tributing to the conflict (Haynes and Usdin, 1997; Kaye, 1991). Arbitrators often employ
the same techniques as mediators, yet they also have the option of dictating a solution to
the conflict (Wall Jr and Callister, 1995). However, the most common form of third-party
intervention is conciliation and consultation. These interventions are voluntary and do
not require the family firm to relinquish control to the third party. Thus, while amiable
solutions are sought, they are not binding to the parties involved.
Simply getting family members to agree to consult a professional for guidance improves
the chances of resolving conflicts (Whiteside et al., 1993). Furthermore, the actual step to
seek help from a counselor plays an important role in conflict resolution among family
members because it signals their willingness to work together and shows that they admit
to the need for change (Whiteside et al., 1993). Regardless of the type of third-party inter-
vention, it is particularly important that the intervention tries to resolve the root of the
conflict and bring family members closer together. Third-party intervention often reduces
or resolves the sustained relationship conflict in family firms leading to a healthy climate
within the firm and family. The third party might also be able to function as an informa-
tion broker between the family members and thus allow the positive effects of task con-
flict to develop. As such, third-party intervention is often one of the most effective conflict
management strategies in terms of changing a family’s system of interactions and refram-
ing family members’ goals and contributions as well as previous conflictual behaviors
(Kaye, 1991). Indeed, third-party intervention has long been a popular tool of conflict
resolution in family firms (Haynes and Usdin, 1997; Hilburt-Davis and Gibb Dyer, 2003).
Accordingly, we propose:
Discussion
In order to succeed, family firms need to learn how to foster task conflict, while avoiding
the negative consequences of relationship conflict (Kellermanns and Eddleston, 2004).
We argued that avoiding and contending conflict management approaches are negatively
related to family firm performance, that compromising has a mixed effect, and that col-
laborating and third-party intervention are positively related to family firm performance.
The unique psychodynamic effects of the family firm are most prevalent in terms of the
negative performance effects associated with the use of an avoidance conflict management
366 Handbook of research on family business
style. Although avoidance is often effective in resolving conflicts in non-family firms or team
settings, we argued that because of the complex and sustained interactions among family
members, the avoidance conflict management style is often counterproductive in family
firms (see also Sorenson, 1999). We further highlighted the effects of compromising, con-
tending and collaborating on the occurrence of task and relationship conflict and subse-
quent family firm performance. Finally, we argued in favor of third-party intervention in
family firms by highlighting their positive effects on performance. This is not to say that we
believe that when family firms are faced with conflicts that they should relinquish control
and hire professional management as soon as possible (Levinson, 1971), nor are we advo-
cating an increase in the use of consultants in family firms (Hilburt-Davis and Gibb Dyer,
2003). We are, however, advocating that when family firms are entangled in destructive con-
flicts that may be spiraling out of control, they can certainly benefit from an outside view.
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PART V
FAMILY BUSINESS
SUCCESSION
20 Lost in time: intergenerational succession, change
and failure in family business
Danny Miller, Lloyd Steier and Isabelle Le Breton-Miller
Executive summary
Much of the time, successions in family owned businesses (FOBs) simply do not work out.
In part, this is because personal and emotional factors determine who the next leader will
be. This is especially true in the case of father to son successions where the desires of a
family for their children dictate that a son take over the business regardless of suitability.
Here, remedial paths consist not in finding the right person for the job but getting the suc-
cessor the help he/she needs. That can only come from knowing the early warning signs
of problematic successions and combating them quickly and directly. This research
sought to identify those warning signs.
It found that at the core of problematic succession lies an inappropriate relationship
between an organization’s past and its present. Either there is too strong an attachment
to the past on the part of the successor, too wholesale a rejection of it, or an incongruous
blending of past and present. We call these very common patterns conservative, rebellious,
and wavering. Each is characterized by distinctive tendencies in strategy, organization,
and governance, and each has its typical symptoms. FOB board members must be alert
to these symptoms and consider them as focal points for change. It is encouraging that
each of the three succession patterns is common and thematic; but each is also distinctive
and requires its own characteristic changes in strategy, organization, and governance.
These changes might be made with the help of a family council or board of directors while
the successor remains in place. But our examples show that action may have to be taken
early so that there are enough resources left to effect a turnaround.
The chapter also draws conjectures about the potential causes and performance impli-
cations of these patterns in different environments. Although tentative, these may help
managers recognize even earlier potential trouble spots in an intergenerational succession.
1 Introduction
Family owned and controlled businesses account for an enormous percentage of employ-
ment, revenues, and GDP in most capitalist countries (Morck et al., 2000; Sharma et al.,
1996; Shepherd and Zacharakis, 2000). Although many are small, FOBs in aggregate rep-
resent one-third of the Fortune 500 and about half of the US gross domestic product
(Aronoff et al., 1996). They also employ over 80 per cent of the work force (Neuberg and
Lank, 1998).
In many of these businesses, founders try to perpetuate their legacy and ensure
continued family control via intergenerational succession, as when they hand over lead-
ership to their children. Unfortunately, recent evidence indicates that ‘a mere 30% of
family businesses survive past the first generation’ and that many intergenerational
successions fail soon after the second generation takes control (Davis and Harveston,
371
372 Handbook of research on family business
1998, p. 32; Handler, 1990, 1992; Sonnenfeld, 1988, p. 238; Ward, 1997, p. xvi). This rep-
resents a serious blow not only to family businesses and their employees, but also to the
health of an economy. Intergenerational succession failure, then, is a challenge that
merits investigation.
Past research suggests that there are many reasons such successions fail. They include
unclear succession plans, incompetent or unprepared successors, and family rivalries
(Dyer, 1986; Handler, 1990, 1992, 1994; Hugron, 1993; Lansberg, 1999; Morris et al.,
1997; Pitts, 2000). Often, however, the choice of a successor is predetermined by blood.
Then it becomes a matter not of finding the right successor, but quickly identifying the
problematic outcomes of a succession and helping the incumbent deal with them. The first
places to look for these outcomes are in the aspects of strategy, organization, and govern-
ance that are universally believed to underlie performance (Fuchs et al., 2000). Discovery
of these concrete and ‘proximate’ manifestations of troubled successions might help
managers address them directly and provide clues about their fundamental causes.
Our approach was to track poorly performing or failed family enterprises for several
years after succession to determine what happened. Of particular interest were charac-
teristic post-succession themes in competitive tactics and capabilities, goals and values,
organizational designs and processes, and top management boards and teams. We sought
inductively to discover common patterns in the data – to identify early warning signs so
that these can be directly addressed. We also speculate on the sources of the patterns and
their performance implications in different contexts. But because we studied only failing
enterprises, we cannot speak to the determinants of successful succession (see Handler,
1994; Morris et al., 1997).
One reason for such extremes is that an intergenerational succession creates an unusu-
ally large age and experience gap between old and new CEOs – often 25–30 years
(Handler, 1994). This gap, the immaturity of the successor, and emotion-fraught parental
relationships make dysfunctional reactions of submission and rebellion all the more likely
(Kets de Vries and Miller, 1984; Kimhi, 1997). Another reason is that many FOBs are cen-
tralized in power and ownership. Whether the tendency is toward conservatism or action,
few can stop it. In fact, founders often see their businesses as extensions of themselves that
they want to control completely (Dyer, 1986; Lansberg, 1999). As these reactions stem
more from personality and emotional relationships than competitive demands, they can
give rise to inappropriate strategies, unsuitable organization cultures, and flawed govern-
ance. We wished to study these post-succession problems as they developed to determine
their concrete manifestations and symptom patterns.
Given our expectation of extremes along the change dimension and to discover
common patterns in the data, raters were asked, again double blind, to classify the firms
based only on the overall level of change (again H, M, or L). Raters agreed on all 16 clas-
sifications. As change was the classificatory variable, it is tautological that groups differed
along this criterion. More striking from our accounts were the extremes that were reached
of obsessive conservatism, dramatic rebelliousness, or a third wavering category that
was an odd combination of these extremes rather than an effective middle ground.
Remarkable too was the tremendous quantitative score similarity of firms within each cat-
egory (see Appendix A). Most important were the widespread differences in virtually all
variables across the three succession categories – differences that were by no means pre-
determined by the classification according to change. Indeed, a few traits of any of our
succession events would be enough to classify patterns, and thereby predict many of their
other strategic, organizational, and governance tendencies.
The modal tendencies we discovered for each group are summarized in Table 20.1 and
Appendices A and B. In the descriptions that follow, we discuss these patterns and present
a sample case study for each one that tries to make more concrete the nature of each type
of succession. It is important to remember that this is an exploratory study. Our patterns
do not constitute a validated taxonomy but are simply very common patterns that
emerged in the research.
3 Conservative successions
In conservative successions, the new CEO remains in many ways dependent on the old –
even after the latter has quit or died. So the shadow of the parent lingers. As a result, a
period of strong leadership may be followed by one of conservatism in which strategies
and organizations are locked in the past.
3.1 Strategy
Time stands still. Relative to their competitors, firms led by conservative successors
undergo little change in their goals, business scope, product lines, or markets. This strat-
egic stability is reflected by a relatively fixed functional and value chain emphasis: firms
keep stressing or differentiating themselves via the same activities and policies. There is
more emphasis on addressing problems than seizing opportunities. In fact, even in the face
Intergenerational succession, change and failure in family business 375
Being the only son of a legendary father can be a mixed blessing. On the minus side, there is an
enormous weight of expectations, along with a sometimes frustrating struggle to acquire one’s
own identity, away from a parent’s shadow. When the son is successful, he is perceived as a chip
off the old block; when he makes a mistake, he is perceived not to measure up to the father’s
standards. (Pitts, 2000, pp. 45–6)
Tom Jr took over as CEO in 1984. Tom had been groomed to assume command for
much of his life. He had been sent to the same English public school as the father and had
apprenticed both at a competing firm and at Bata. But Tom Jr had had little independent
experience as a manager before taking the helm at Bata. While the father was gregarious
and confident, the son was an introvert. In addition, although Jr saw business opportun-
ities, he did not pursue these with enough confidence or resources to update the Bata strat-
egy. According to one manager who had worked at Bata, ‘If [Jr] had been a strong person,
he wouldn’t even have been in the company. If he told me to do something, the next day
the old man was sure to contradict him’ (Pitts, 2000, p. 53).
3.3.1 Strategy and organization By the 1980s and 1990s, competition for Bata was
increasing from firms such as Nike and Adidas, which were building market share with
their global brands. Tom Jr did little to meet these challenges. Product lines remained
staid, utilitarian, and anonymous in a market that would only pay a premium for fashion
376 Handbook of research on family business
and branding. Consequently, Bata’s offerings grew stale while rivals surged ahead and
stole market share.
Given the weak leadership at Bata, different country managers were left to their own
devices. Each had their own designs, manufacturing facilities, and types of outlets. While
this was necessary when there were barriers to trade, it got in the way of rationalizing
manufacturing operations and building and leveraging global brands. Tom Jr did make
a few tentative efforts to consolidate manufacturing and invest in a more integrated
global marketing effort. But he had not amassed the confidence or resources to make
these changes work. To aggravate matters, both his parents still interfered with Tom’s
decisions. Things came to a head when Jr wanted to take advantage of high Asian stock
prices in the early 1990s to raise money to improve North American operations. His
parents blocked the move. In 1994, the board replaced Tom Jr with an outside manager.
It is estimated that Bata employment fell from about 85 000 15 years ago to about 50 000
worldwide.
4 Wavering successions
Wavering successors are characterized by indecision. They want to make their mark on
their firms but are uncertain as to how. On the one hand, they respect the policies and
traditions of the founders. On the other, they wish to exert influence and show their inde-
pendence. In addition, they vacillate between these attitudes, manifesting doubt and
reversing their own initiatives.
4.1 Strategy
Strategies take the form of lesser, often unsuitable initiatives, which are grafted onto older
strategies and traditions. For example, a leader may make corporate acquisitions, intro-
duce products, or enter new markets. But these initiatives are too incongruent with the
established strategy, or market focus to be effective. There is also a tendency to terminate
initiatives in midstream – before they have had a chance to be tested. This start–stop
aspect of strategy wastes resources and creates confusion.
4.3.1 Organization and governance Eaton’s organization was a fractured and confusing
one, with the finance people at odds with the merchandisers and the old guard fighting
the new. Some of George’s key blunders came in recruiting new executives who, like
himself, knew too little about Eaton’s business. George and the rest of the Eaton’s family
began more and more to depend on advice from finance people rather than the merchants
and marketers who had in the past successfully managed the firm, and these factions
battled constantly (McQueen, 1998, p. 231).
George directed Eaton’s from the top down, yet he and his team lacked both creative
and managerial talent. Those recruited, while having just enough power to alienate the
old guard with many of their decisions, usually did not have enough influence to imple-
ment their more important initiatives.
5 Rebellious successions
In rebellious successions, a new CEO rejects the legacy of the prior generation. There is
wholesale eradication of the past and its practices. Rebellious successions are rarer than
those of conservatism or wavering because normally, renegade offspring decide not to go
into the business or are discouraged from doing so by the older generation. But if rebels
do ascend to power, they want to do things very differently from the ‘old man’.
5.1 Strategy
Strategy is characterized by far-reaching changes: in the product–market scope of the firm
and in functional business strategies. There are, for example, significant acquisitions,
divestments, expansions, product or market changes, and shifts in functional emphasis
(for example, from an operations to a marketing focus). Unfortunately, these changes are
often off the mark. They are spawned more by the new CEO’s desire to leave an imprint
and escape the past than by a judicious perception of new opportunities.
guru and prime strategist at Barneys. Ambitious and strong willed, Gene was intent on
transforming Barneys as soon as he entered the business. According to an associate, ‘Fred
was the merchant and he watched over the business, while Gene was the guy throwing shit
on the wall and seeing what stuck’ (Levine, 1999, p. 95). The only way for Fred to keep
Gene in the business was to leave him alone. According to Fred, ‘Gene’s got his own idea
of where he’s going, and I don’t want to upset him’ (Levine, 1999, p. 96).
From the outset, Gene began to push for an expanded women’s department. He
sought out radical new designers and embraced the most costly and provocative fash-
ions. Gene wanted Barneys to become the New York trendsetter in women’s fashion,
and his tastes could be outlandish. To showcase his growing women’s collection, Gene
undertook to build a second, far more grandiose uptown store. He recruited the most
extravagant architects to design magnificent New York premises and spent enormous
amounts of money, doubling, then quintupling the budget, and severely taxing Barneys’
finances.
The women’s store was never a success: volume was always disappointing, and from
1985 to 1992, the business was bleeding money. For this, Gene always blamed ‘the people
in the store,’ never admitting that his daring fashions and exorbitant tastes might be the
culprits (Levine, 1999, p. 145). Resources continued to erode as Gene tapped the busi-
ness to feed his lavish lifestyle and renovate his Larchmont mansion. To fund these and
other extravagances, he entered into a partnership with Isetan, the Japanese retailing
giant. The aim was to take Barneys into cities such as Los Angeles and Chicago. But
these markets had decidedly different tastes than New York, and Gene’s grandiose,
impulsive expansion strategy failed. To disguise the resulting losses and personal with-
drawals from Isetan, Bob and Gene initiated shady accounting practices and kept mul-
tiple sets of books. Ultimately, the changes Gene wrought in business scope, product
lines, and staff, coupled with the huge expenditures required to implement them, put
Barneys on the ropes. By 1996, the Pressmans had lost control of a Barneys that was in
essence bankrupt.
5.3.1 Organization Under Gene’s tenure, Barneys hemorrhaged talent. It lost superb
marketing and sales people, alienated excellent suppliers, and chased away potential
leaders. Some people were fired simply because Gene did not like the way they dressed.
The administrative structure was as chaotic as the strategy. Factions grew up around Bob
and Gene as each blamed the other for the poor results (Levine, 1999, pp. 206–207). This
rendered impossible collaboration and even coordination between marketing and finance.
Controls were almost nonexistent as neither executive ‘took the slightest interest in such
banalities as computer systems or organization charts’ (Levine, 1999, p. 207). Inventories
mushroomed and buyers did not know which items were hot and which were not. But
Gene just kept spending.
opposites (Kets de Vries and Miller, 1984; Stierlin, 1974). In addition, because the family
business represents such an important symbol of the powerful father, a rebellious child’s
succession can lead to the wholesale dismantling and rebuilding of an enterprise. At last,
the child can demonstrate competence and originality in the very sphere that will confirm
his or her independence.
A third dysfunctional pattern emerges from an unresolved combination of idealization
and opposition, and it is largely one of vacillation. The child at once admires the parent
but also wants to achieve some level of independence. In normal circumstances, respect
and independence coexist; but where the parent has been narcissistic, inattentive, or overly
controlling, the child may waver back and forth between extremes of passivity and action
(Minuchin, 1974). When children take over a family business, these patterns of conser-
vatism, rebelliousness, and vacillation may contribute to our succession patterns.3
Family dynamics also come into play in the interactions between brothers and sisters
as they fight to control or manage a business (Lansberg, 1999; Pitts, 2000). The stagna-
tion that characterizes conservative successions may be caused by rivalry between broth-
ers and sisters as they block one another’s actions. Wavering successions in which
opposing camps pursue conflicting initiatives are another possible result.
Hypothesis 2 Our problematic succession patterns are more apt to occur where past
and current leaders exhibit leadership styles characterized by dramatic, suspicious,
obsessive, and depressive behavior, and where these styles are not mitigated by broad
business and educative experiences.
One suspects, in the end, that our three succession patterns will be products of all of
these categories of influences, and that they will be especially extreme where there is
confluence among these influences.
Intergenerational succession, change and failure in family business 383
7.3 Execution
Not all successions within our types are created equal. They vary in their execution and
in how extreme they are. Insular hidebound conservatism across many of our strategy
and organizational variables will be more harmful than moderate conservative prac-
tices, or great conservatism in a few practices. The same logic holds for rebellious
successions where chaos is apt to be far more damaging than coherent opportunity
seeking.
384 Handbook of research on family business
Hypothesis 7 The more consistent and extreme (high or low) the scores on the vari-
ables for our types, the worse the performance of the firm.
Acknowledgements
The authors are grateful to the Social Sciences and Humanities Research Council of
Canada for Grant #410-98-0405 and the Center for Entrepreneurship and Family
Enterprise at the University of Alberta School of Business for funding. They would also
like to thank Bill Bone of Loram, Jim Chrisman of Mississippi State University, Kenneth
Craddock of Columbia University, and Jean-Marie Toulouse of HEC, Montreal, for their
helpful comments.
Notes
1. We avoided successions with unclear passage of power and diluted ownership as these are both different and
well explored (Gersick et al., 1997; Handler, 1994; Hugron, 1993).
2. Firms studied included Bata (Tom Jr), Ford (Edsel), Disney (Roy), Schwinn (Ed Jr), Steinway (fourth gen-
eration), and Leathercraft (disguised) (all conservative successions); Eaton’s (George), Cuddy (Peter and so
on), Birks (Drummond), Yamaha (Kawakami), Bingham (Barry Jr), and Sharksboro (disguised) (all waver-
ing successions); and Barneys (Gene Pressman), Seagrams (Edgar Bronfman Jr), Gucci (Maurizio), and
Wanton Electronics (disguised) (all rebellious successions).
3. Cases compiled using public sources typically contain little information about dysfunctional family dynam-
ics. Firms we have studied up close and confidentially, however, showed similar succession patterns con-
nected with particular family histories.
References
Aronoff, C.E., Astrachan, J.H. and Ward, J.L. (1996), Family Business Sourcebook II, Marietta, GA: Business
Owner Resources.
Boszormenyi-Nagy, J. and Spark, G. (1973), Invisible Loyalties: Reciprocity in Intergenerational Family Therapy,
New York: Harper and Row.
Intergenerational succession, change and failure in family business 385
Sonnenfeld, J. (1988), The Hero’s Farewell, New York: Oxford University Press.
Stierlin, H. (1974), Separating Parents and Adolescents, New York: Quandrangle.
Ward, J.L. (1997), Keeping the Family Business Healthy: How to Plan for Continuing Growth, Profitability and
Family Leadership, Marietta, GA: Business Owner Resources.
Wiersema, M. (1995), ‘Executive succession as an antecedent to corporate restructuring’, Human Resource
Management, 34(1), 185–202.
Winnicott, D.W. (1971), Playing and Reality, New York: Basic Books.
Many articles on family business open with the assertion that fewer than 30 per cent of
family businesses are passed on to the second generation and that only 10 per cent make
it to the third generation (Lansberg, 1999). The average lifespan of a family business is
24 years, which coincides with the number of years that the founder remains at the helm
of the business (Welles, 1995). After this time, the business may continue to exist, but
the ownership and the leadership do not belong anymore to the family. It is often stated
that a family business ‘goes to the dogs’ in three generations, an observation that is
expressed quite baldly in some countries; for example, in Mexico the statement is ‘father–
entrepreneur, son–playboy, and grandson–beggar’ (Davis, 1997). These observations have
spurred many researchers and consultants to study succession in family business.
Succession and interpersonal family dynamics appeared to be the most frequently occur-
ring subjects in 1998, when the Family Business Review drew up a balance sheet of ten
years of scientific study on family business (Dyer and Sánchez, 1998). Even today, the
impression remains that family business and succession are like a pair of Siamese twins.
For example, current seminars about family business and for family business members
deal with succession. Attention is focused on a timely succession plan, in which the finan-
cial, fiscal–legal, and emotional issues are drawn out and resolved. Planning appears to
be the magic formula for succession in family business.
Recently, a new approach to research on family business has emerged. Several
researchers have highlighted the fact that there is no connection between planning
and successful succession (Aronoff, 1998; Astrachan, 2001; Keating and Little, 1997;
Lansberg, 1999; Murray, 2003). According to these researchers, succession rarely involves
only an incumbent and a successor. Instead, the process requires the perspective of a
multigenerational time frame and takes place in a rich stew of social, cultural, financial,
legal, strategic, moral, and other dimensions that resist neat, linear thinking. Our know-
ledge about how family business is successfully transferred to following generations is still
in its infancy (Lansberg, 1999; Sten, 2001).
Family business and succession are often approached from the perspective of owner-
ship (Lansberg, 1999; Ward, 2004). Nevertheless, there are cases where the ownership of
the business is no longer in the hands of the family, but the family conducts the
day-to-day management. The family resembles then more a business family than the
business to a family business. In this chapter, we refer to a family business and a busi-
ness family when the family holds the ownership and/or the day-to-day management of
the business.
The dominant method of research in the family business discipline is to use large-scale
surveys among a representative sample of businesses (Bird et al., 2002; Davidsson et al.,
2001; Dyer and Sánchez, 1998; Fillis, 2001; Grant and Perren, 2002). To gain insight and
388
Towards a business family dynasty 389
be able to offer an explanatory model, a qualitative research approach using (for example)
case studies merits consideration.
In this chapter, we want to explain the transfer of the family business to the following
generations by using case studies. We wish to offer an answer to the central research ques-
tion: how is it that one family succeeds in passing the business down to following generations
while another family does not succeed in doing that? Thus, we are studying the complete
transitional path and not just the last stage where the physical, financial, fiscal, and legal
aspects of the transfer are taken into account. Moreover, we want to arrive at an explan-
atory model for transfer to following generations that is not limited to transfer to the next
generation. Therefore, we quite intentionally use the plural ‘generations’ and not the sin-
gular ‘generation’ in the research question.
The chapter is structured as follows: first, we explain the method and work procedures;
secondly, we present the frame of reference for the interview topics; thirdly, we present
our empirical results; and finally, by way of a conclusion we offer our explanatory model
of business transfer.
Biographies of
business
families
Popular articles
Number of
interviewed Still Still day-to-
Size family family day family Generation
Case class* Sector Generation members ownership management change(s)
Note: * Very small, less than 10 employees; small, 10–49 employees; medium, 50–249 employees; large, at
least 250 employees (in accordance with the European definition).
392 Handbook of research on family business
Frame of reference
The scientific literature review led to a frame of reference (see Figure 21.2). That frame-
work furnished us with the interview topics for the case studies. We present the frame of
reference and end this section with the interview questions.
The three main players in the transition of family businesses – the individual, the family
and the business – are displayed in Figure 21.2. The dotted lines between the columns make
transferee(s),
mother, other
family members)
STRATEGY/VALUES
TIME
GOVERNANCE
MANAGEMENT
FINANCIAL
(OWNERSHIP)
UPBRINGING/
EDUCATION/
ACCOMPANIMENT
clear the fact that the protagonists are connected with one another. The rows indicate pos-
sible levers. Dotted lines are also drawn to indicate that they also influence one another.
The main players and the levers can evolve, and this is represented by the time axis.
There is constant interaction between the individual, the family and the business during
transfer. Individuals are the transferor(s), the transferee(s) and other family members (for
example, the mother, in-laws and family members who are not active in the business). The
family in its entirety also plays a leading role. Research on family business must always be
done through the lens of the family. Thus, the success of the family business appears to
depend partly on family processes and partly on how the family deals with disruptions
(Olson et al., 2003). However, the family has been relatively neglected in research. Dyer
(2003) draws attention to the fact that the family is missing in organizational research. The
business, as the third player, forms the object of the transfer. Some families even regard
the family business as a family member (Valera, 2002).
The three main players can have a strategy or can foster values. Thus, the strategy of
the mother at the individual level can consist of watching over the shared family
dream (Lansberg, 1999). Behind the scenes, she frequently plays a very important role in
the business (Muson, 2002). Poza and Messer (2001) distinguish six types of women in
family businesses: jealous wife, CEO (chief emotional officer), business partner or co-
entrepreneur, employee, guardian of the family values and free agent. At the level of the
family, we can explore whether it has a common vision of the future. Lansberg (1999) talks
about a shared dream, which derives from the fundamental values and wishes of the
family. At the level of the business, we study whether the business strategy is decisive in
the transfer process. Ward (2002) emphasizes that the strategy of the family business must
be linked to the values of the family.
The board of directors governs implementation of the strategy. Owing to the diptych,
family and business, it merits recommendation to govern the family as well, particularly
if the family tree has several branches. In this case, a family charter can be drawn up, a
sort of family constitution, in which the rights and duties of the family members are set
out. Some families hold formal meetings. According to Habbershon and Astrachan
(1997), such family councils ensure greater involvement of the family in the business.
Many questions arise from the issue of day-to-day management. Is the manager a
family member or not? Is the manager also the owner of the family business? What is the
involvement of family members in management? Is management in the hands of one
person or a team? Aronoff (1998) finds that a team increasingly performs the management
of a family business, especially from the second generation. In a study of 400 family busi-
nesses, Lansberg (1999) showed that a majority of owner-managers expressed the wish
that several children lead the family business in the next generation. Another issue is the
extent to which family values seep through into management of the business. Values are
often attributed to the founder of the business (Cappuyns, 2002). These values can then
place a permanent stamp on its continued existence.
We think primarily of ownership in examining the financial aspects of a family busi-
ness. Ownership raises many questions. Who from the family can hold shares? Are own-
ership and management transferred simultaneously? Does the transferor keep a finger in
the ownership pie? Is ownership a team event?
Gallo (2002) says that the upbringing children receive at home is crucial for a future
career in the family business. The children learn about the values, the history and the
394 Handbook of research on family business
culture of the business. They observe how the family deals with problems that develop
over time. Whether the children ultimately embrace or reject the family business depends
on the example given by parents, brothers and sisters.
The frame of reference leads us to the following questions for the interviews: how does
the family succeed in multigenerational transition, why does the family prefer the busi-
ness to be continued by the family, how is multigenerational transition prepared and how
is the transfer of ownership, management and governance regulated?
Results
This section follows the order of the questions for the interviews. The results derive from
our ten case studies and the study of the literature. The study of the literature illustrates
and confirms the results. The number of the case study referred to in the following dis-
cussion corresponds to the number in the first column of Table 21.1.
The fifth way was transferors giving possible successors an indirect soft push from
behind (Case 6); for example, influencing the studies of possible successors. Unlike the
second way, the transferors do not ask possible successors explicitly in the fifth way of
transfer. They influence possible successors indirectly. Transferors do not want to coerce
their children, unlike the practice in earlier years. Transfer cannot be forced, and coercion
only serves to discourage the transfer.
Why does the family prefer the business to be continued by the family?
We identified three reasons why the interlocutors found it important for the family to con-
tinue the business.
The first reason was the fulfillment of values. Three values formed part of the family
heritage: wanting the best for the work team (Cases 1 and 9), love for the product (Case
3) and independence (Case 5). In Case 5, ‘independence’ was one of the arguments of the
father: ‘I made it clear to my son that it is better to be a “little” boss than to be a “big”
employee’.
The second reason was preservation of the family name and a reassuring feeling (Cases
4, 5, 6, 9 and 10): ‘You create something and you want that the own color remains. As the
children are a continuation of yourself, you want that they succeed you’ (father in Case 10).
The family name has great emotional and symbolic significance. It stands for the rich
history of the business and the family, the achievements, heroic deeds and sacrifices of the
previous generations, and the authenticity and excellence of the product. Because the
family name stands on the product, the family feels responsible for it. Hence, the family
name summons up a feeling of pride. This is made clear in the promotional material of
family businesses (for example, websites and brochures) and in the business buildings. They
direct attention to the history of the family business, its founders and the family name.
The third reason was exploitation of the advantages of a family business, such as long-
term vision, versatility, life engagement and the rich family history as a sales argument,
to retain the influence of the family on the business (Cases 4, 5, 8 and 9).
Family business
External experience
Formal internal
education
Studies
Interpreneurship
shake off. In other words, the transferring generation must display enthusiasm.
Management values were transferred via upbringing, where the mother often played the
major role. Honesty and respect were family values honored in dealing with personnel
(Cases 5, 7 and 8). The family values of honesty, partnership and restraint punctuated com-
mercial policy (Cases 7 and 9). Hard work, perseverance and networking were entrepre-
neurial characteristics central in childrearing (Cases 6 and 7). Symbols such as the family
home, portraits and the recurrence of the first name of the founder in every generation were
conduits for the soul of the family business. They forged the relationship between the family
and the business and between the different generations (Cases 4 and 8).
Studies formed the second stepping-stone (Cases 1, 4, 8 and 9). Most successors earned
an advanced degree before full-time entry into the family business. In a number of cases,
the studies were oriented towards the sector of the family business. In other cases, poten-
tial successors were free to choose a discipline. Often, the diploma was a condition for
being able to work in the family business: ‘The successor has to obtain a diploma from
university. In this way, the successor can prove that he/she deserves the family business’
(son-successor in Case 4).
The literature demonstrates that larger family businesses sometimes provide formal
internal education for family members at a young age (Bibko, 2003; Stern, 2003a, 2003b;
Tifft and Jones, 1999). This formed the third stepping-stone. They learn about the figures
of the business, its future and its values during organized training sessions and attendance
at meetings of the board of directors. Along with learning about the conduct of the family
and the business, this formal internal education seeks to identify the brighter ones and to
allow directors to become familiar with potential future managers. The mentor can be
either a family member or a non-family member. A transferor explains the importance of
formal internal education: ‘My grandchildren are still young: the oldest is ten. In twenty
years, they can be ready for the family business. However, I believe strongly in education
for them about the business. Therefore, we shall organize meetings for them with the
family and with external people’ (Bibko, 2003).
Towards a business family dynasty 397
The fourth stepping-stone was the acquisition of outside work experience in other com-
panies, whether or not abroad (Cases 1, 2, 3, 4 and 6). Seven reasons were mentioned for
taking this fourth stepping-stone of external experience: gaining self-confidence, enhanc-
ing management and professional knowledge, gaining worldly wisdom, increasing motiv-
ation, gaining trust and admiration of the transferor, avoiding the thought that the grass
is greener on the other side and contributing to the credibility of the family member as a
successor.
The fifth stepping-stone occurred with the official start in the business. We distinguished
between beginning at the bottom of the ladder and freedom for and by the successor(s).
Before the succeeding generation held a management position, it generally passed through
the various departments in the business (Cases 5, 6, 8 and 9). In this way, the successors
proved themselves, won the confidence of employees and discovered the business, the
sector and the customers. Leadership by the succeeding generation meant the acquisition
of credibility. Both transferors and successors underscored the importance of freedom for
the new generation when they officially started in the family business (Cases 3, 5, 8 and 9).
Successors must receive the necessary breathing and maneuvering room from transferors
to learn from their mistakes, to give innovative impulses and to discover who best assumes
the respective responsibilities. Why is freedom for the successors so crucial? First, it avoids
the disappearance of the family business. Case 3 is no longer a family business, because the
father could not let go: ‘Letting go was not possible for father. He continued to control the
family business, was worried when there was a problem in the business, etc. He wanted that
his sons steered the business, but he could not let go the steering wheel’ (son-successor in
the fifth generation). Secondly, freedom for the successors increases the probability on
good cooperation and paves the way for successful transfer to the following generations.
Successors indicated that by receiving room to move, they in turn learned to give room,
which already smoothes the path to a following successful transfer. In addition, it facili-
tates team management. Thirdly, if the successors were held tightly in the transferors’ grip,
they could act destructively when they suddenly gained their freedom. Some would not
even recoil from dragging the business down with them (as occurred with the Gucci’s
(Forden, 2001)). While the acquisition of credibility is identified with leadership by the suc-
ceeding generation, leadership means the ability to let go for the transferring generation.
Transferors who are masters in the art of letting go significantly increase the chance of a
successful transfer. Successors in Cases 8 and 9 described their masters as ‘Buddy’ or ‘Big
Manitu’. The son in Case 9 gave evidence:
Father was never a boss towards us. He enabled us to take responsibility. He never said ‘I shall
show you how I do it’. If we had questions, we could address these to him. In this way and accord-
ing to our ambitions, we could grow and learn. Father has done a great job.
Freedom for the successor(s) entailed taking responsibility, respecting the previous gen-
erations, asking for advice from the transferor(s), and understanding that the past denotes
the foundations and provides a lead to the future.
Stepping-stone six related to written planning and agreements, with the regulation of
the legal, financial and fiscal issues. There must be an eye for measures in the event of
doomsday scenarios, such as the death or resignation of a family member (Cases 4 and
8). A a successor in Case 4 made clear, it guarantees reassurance and family harmony:
‘Paying attention to these doomsday scenarios was not easy and unpleasant. I still
398 Handbook of research on family business
have the shakes if I think of that exercise. But the clear official regulation is a kind of “life
insurance” for the family business’. Written plans were not an absolute guarantee for a
successful transfer, but poor planning could prove costly for the business and the family.
For the sake of family peace, a taboo might rest upon timely written agreements. This was
the experience in Case 3, that has been sold:
Aspects like ownership, management, function, objectives, etc. should be regulated in a clear and
formal way. This was never the case in our family business. Agreements were only made orally,
never on paper. I thought that everything would be settled after a couple of years, but the agree-
ments that were not made returned like a boomerang (son-successor in the fifth generation).
Delineation of responsibilities
Transferor: Successor:
Family values
• Individual values
Symbols • Mother as • Outside experience
symbolic head
• Bottom of the ladder
• Father as
‘Buddy’ or ‘Big • Early involvement
Manitu’ • No coercion
Family • Enthusiasm • Freedom
name
• Co-shareholder upon
official entry
Only active
shareholders Advantages
Healthy business INDIVIDUAL
Formal internal
education TIME
FAMILY
BUSINESS
condition. Moreover, specialists can be hired to work out financial and fiscal–legal regu-
lations. The other soft elements of the transfer process – interpreneurship, freedom,
values, outside experience, upbringing, education – must be addressed and fostered by the
family as part of the process. Thus, succession is not about a process that can be tied up
in a fixed time frame (for example, three to five years before the transferor lets go). It starts
much earlier and never ends. Succession is not about transfer from one generation to the
next generation repeated in discontinuous time intervals of about 25 years (the duration
of one generation); it is about continuous transfer to further generations (plural). The
stepping-stones – interpreneurship, studies, formal internal education, external experi-
ence, official start in the family business (beginning at the bottom of the ladder, freedom
for and by the successor(s)), and written plans and agreements – pave the way for the
transfer of the business to further generations and to a family dynasty. During the process,
families in business should be guided by the principle of sound governance: the individ-
ual family member belongs to the family, which belongs to the business. Business advis-
ers and business families should be more aware of this principle of sound governance and
of the transfer of the family business as a lifelong, continuing process.
We are aware of a number of limitations in the research. In our case studies, we
conducted interviews with several family members, but not with external managers and
other stakeholders (for example, consultants, outside directors and employees). Our
explanatory model has not been tested on a large scale. However, our method and find-
ings enable formulation of a number of implications for the field and for future research.
First, family businesses should not only be studied and defined from the angle of owner-
ship. There are also family-managed businesses. Consequently, and this is our second
implication, the conventional representation of family business with three overlapping
circles – business, family and ownership – should be questioned. We propose the individ-
ual family member, the family and the business as the three circles. Thirdly, research on
family businesses should adopt a dynamic approach because family business transfer con-
stitutes a continuing process and not a one-time event. This means that researchers should
take into account the time aspect and the different aspects of the family business and the
family in business, such as cultural, social and strategic factors.
Acknowledgements
The authors would like to thank the Acerta Social Insurance Fund for financing the
research on which this chapter is based.
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22 Using the strategic planning process as a
next-generation training tool in family business
Pietro Mazzola, Gaia Marchisio and Joseph H. Astrachan
Introduction
The extant family business literature on the topic of generational succession has enabled
researchers and practitioners to disseminate best practices to the family business com-
munity. There is consensus, for example, that generational transfer is an ongoing process
and not a single event. As a part of this process, power, by way of management, owner-
ship and control, is handed over from one generation to the next. There is also agreement
that this process occurs in stages, and that critical moments can be identified, and that
both can influence the behaviour of a variety of stakeholders.
In this research, we focus our attention on the next-generation family members who
have entered the family company. These future leaders have overcome the decision stage,
completed relevant studies and have ideally gained work experience outside the family
company before taking up their, usually middle-management, positions.
Therefore, the present chapter attempts to assist families in business overcome the
strains of succession. For the most part, literature on succession, concentrates on the
stages that precede entry into the company and, in particular, on the conditions that influ-
ence the decisions of the younger generation regarding the most appropriate choices of
university and work experience. What happens to the young members after they enter the
company remains an area to be studied in greater depth.
To address that gap, we focus on the first phase after entry into the company, a period
that can have differing temporal lengths, and propose a strategic planning tool. We
suggest that, under certain conditions, the strategic planning process itself can be used as
a training tool for the next-generation members.
Even if the real impact of strategic planning on firm performance is still inconclusive
(Brews and Hunt, 1999), the strategic plan is one of the most wide spread managerial tools
used within companies (Grant, 2003). Most organizations periodically engage in a process
of strategic planning; although a new organizational vision might not be generated every
year, contemporary budgeting norms and practices call for an annual assessment of per-
formance goals (Ketokivi and Castañer, 2004, p. 340).
The objective of this chapter is to study whether the strategic plan presents particu-
lar benefits in the case of family business, in the particular phase of the succession
process. Theoretically the role of the strategic planning as communication tool, consen-
sus gathering and learning effects (Mintzberg, 1994b) and as an integrative device
(Ketokivi and Castañer, 2004) has been acknowledged and investigated empirically
(Langley, 1988). What has not yet been investigated in depth is whether and how such
strategic planning process (whose outcome we assume here is the strategic plan) con-
tribute differently to family business, and more specifically during the succession.
Family business literature is generally dominated by the issue of succession planning.
402
Using the strategic planning process as a next-generation training tool 403
Poza (1995) affirmed that strategic planning, by helping to promote both appropriate new
growth of the business and common ground in the family, can be more supportive of busi-
ness continuity than traditional succession planning (Zahra, 2005)
Our findings support the idea that strategic planning process, besides producing known
benefits at (family) firm level (Barringer et al., 1998; Chrisman et al., 2003; McCann et al.,
2001), can also play an important role during the succession process at two levels.
First, the strategic plan can help next generation in terms of:
Secondly the strategic plan, under certain conditions, maybe be helpful in conflict solu-
tion. Next-generation involvement during strategic planning and its use in sharing goals,
risks and needs, facilitates the overcoming of family position bias and creates collabor-
ation and consensus among owning family members. In this respect, strategic planning
works like an important integration device (Grant, 2003; Ketokivi and Castañer, 2004).
This chapter is organized in five sections, including the introductory section. The
second section reviews previous studies on succession in family business and strategic
planning process. The third provides information on the research methodology, the
sample and the variables. The fourth section illustrates the most important findings, while
the fifth offers some concluding remarks and contributions for theory and practice.
Theoretical background
Succession passage
Authors agree in considering the succession passage as the most important topic with
which family businesses have to deal, and it is one of the more deeply analysed topics in
the research literature. In a family business, succession is the passage of the ‘leadership
baton’ from a generation to the following (Beckhard and Burke, 1983). Alcorn (1982)
specified that succession is referred to as the changes at the top of the organization. Since
the topic is so widely analysed, many perspectives have been posited, with the following
being the most pertinent to the topic presented in this chapter.
There is a group of studies on succession passage whose object is the succession as a
process (Farquhar, 1989; Friedman, 1987; Gabarro, 1979; Gilmore and McCann, 1983;
Vancil, 1987), research that deals with the subsequent phases of this process (Gordon and
Rosen, 1981), and research on the specific problems with each (McGivern, 1978).
Barach and Gantisky (1988) introduced the concept of strategy for young family
members within the family company.
Ward (1987) emphasizes the characteristics of successful succession passage, introduc-
ing the concept of planning as a condition for a successful and smooth succession passage.
404 Handbook of research on family business
Many authors then underlined the importance of planning the entire succession process
(Kimhi, 1997; Lansberg, 1988; Morris et al., 1997) and identified the benefits that plan-
ning can bring in terms of making the succession process easier and of facilitating rela-
tionships among those involved in the process.
Looking at this review of the available literature on succession passage, it seems evident
that the focus has been mainly on the process, and in particular on the importance and
the benefit of succession planning process (Davis, 1983; Handler, 1994; Upton and Heck,
1997; Ward, 1987).
Within this process a still underexplored relevant issue concerns the growing path of
next-generation family members once they enter the company.
As far as this phase is concern, in the literature there are some evident open issues, for
example:
● attaining legitimacy from the incumbents, family members and owners, non-family
executives and other external stakeholders. Firms are embedded in a social context
and next-generation entrepreneurs within family firms are inserted into an existing
network structure. They assume positions by virtue of who they are. Within these
networks, legitimacy partly is conferred and partly has to be earned (Steier, 2001).
Again, incumbents are often reluctant to let the next generation join in the decision-
making process of the business (Handler, 1989; Lansberg, 1988);
● the transfer of (tacit) knowledge from one generation to the following (Cabrera-
Suárez et al., 2001; Steier, 2001).
This study aims to fill these two gaps in the literature by exploring the role of strategic
planning process as a training tool itself for next-generation family members, able to
solve, among the others, these issues.
1. Realized strategy is the simultaneous and structural positioning that has taken place
as the result of past decisions and actions and that consolidates over time once a
structure is created and operating mechanisms and a coherent corporate culture are
in place (Mintzberg, 1994b).
2. Strategic intents are the explicit directions and the intents declared by management
with regard to the company’s mission, its management philosophy, the field of activ-
ity it has chosen, the size it wants to achieve and the role it wants to play in the com-
petitive arena and towards its main social stakeholder (Burgelman, 1983; Hamel and
Prahalad, 1989; Mintzberg, 1990; Quinn, 1981). Because strategic intents reflect the
company’s long-term orientation, they generally have a certain stability over time and
a relevant influence on the future results of the company.
3. Action plans: there can be a gap between realized strategy and strategic intent that
can be closed only by carrying out the appropriate action plans. These are actions
that, on the whole, aid the implementation of intentional strategies and thus make
closing of the strategic gap possible (Brews and Hunt, 1999).
406 Handbook of research on family business
4. Emerging strategies are models of equilibrium that arise ‘from the bottom up’ – and
are, in this sense, opposed to the models developed and achieved according to the top
down logic – as the result of the learning acquired, at the individual and collective
level, by people active in different positions in the operations management of a busi-
ness unit or a corporate function. Day-to-day operations can, in fact, allow a person
to see opportunities that are not as evident at the governance level and to suggest
original solutions for unforeseen problems and threats (Mintzberg, 1994b).
Within this process of strategy-making, strategic planning takes place. Indeed, the stra-
tegic planning movement was the first broad effort to instill discipline in the strategy-
making process and concurs in forming strategic intent.
In particular strategic planning provides:
● information on the realized strategy, including its clarification and articulation, and
the company’s past performance (Langley, 1988; Mintzberg, 1994b);
● a view of the external environment. This typically includes guidance relating
to some features of markets in the planning period that are not so much
forecasts as a set of assumptions relating to the environmental framework
(Grant, 2003);
● information on the ‘ends’ which can be hierarchically ranked from the broad, higher
level ends, that is, the ‘grand design’ (Granger, 1964), the mission or ‘strategic intent’
(Hamel and Prahalad, 1989) of an organization, to the lower-level, more limited
and specific operational objectives or goals (Brews and Hunt, 1999);
● information on the ‘means’, conceived as the patterns of action through which
organizational resources are allocated. This type of information typically
includes action plans, programs and resource allocation activities (Brews and Hunt,
1999);
● simulations of the possible effects of the plans and forecast building (Mintzberg,
1994b). In order to foster a better understanding of the corporate performance
drivers, strategic plans may include maps that show the causal relationships and the
links through which specific improvements create the desired outcomes (Epstein
and Westbrook, 2001; Kaplan and Norton, 2000).
However, management scholars have heavily criticized the effectiveness of strategic plan-
ning in the process of defining strategies, and observed how environmental uncertainty
and the cognitive limits of planners tend to hamper the accuracy of forecasts, favoring
logical incrementalism rather than formal planning, especially in unstable environments
(Mintzberg, 1994b).
Besides, strategic planning can perform an important role, acting as catalyst for con-
sensus inside and outside the company (Langley, 1988; Mintzberg, 1994a) and can:
1. facilitate internal and external learning through collecting spread knowledge (Brews
and Hunt, 1999);
2. offer a context for strategic decision-making by applying methodologies and tech-
nique and facilitate communication and dialogue (Grant, 2003);
Using the strategic planning process as a next-generation training tool 407
All these benefits seem to fit properly with the open issues highlighted above regarding the
post-entrance phase for family next-generation members in the succession passage.
Research method
In order to increase our understanding of the specific benefits of the strategic planning
process in family business during succession, we focused on those processes in which next-
generation members took part.
Sampling
Grounded theory uses theoretical sampling. Cases are not randomly chosen from the
population of interest, but are chosen on purpose so to increase the diversity of the sample
in the search for different properties (Eisenhardt, 1989b; Pettigrew, 1990; Yin, 1994).
Grounded theory states that if the information gathered on these groups begins to be
saturated (redundant information), one has to look for cases with different characteristics
until all necessary information to build the theory is collected. Therefore the size of the
sample is basically irrelevant in Grounded theory research.
408 Handbook of research on family business
For all these reasons, we analysed 11 family-owned companies, which are small to
medium sized, and have revenues ranging from 20 million to 200 million euros.
They operate mainly in the shoes, fashion, packaging, distribution and mechanical
industries.
We initially restricted the selection to the cases of strategic plans realized among the
members of the Italian Association of Family Business. Within this restricted popula-
tion, we selected companies where next-generation members had been involved in the
process. We followed Andrew Pettigrew’s principle of ‘planned opportunism’, choosing
firms that represented extreme situations, combining highly visible and much
debated cases to less scrutinized, more ‘ordinary’ cases (Pettigrew, 1990). Following
Pettigrew’s recommendations, we purposefully selected firms that, to our knowledge,
seemed to disconfirm patterns from previous studies. In this theory-building phase, we
considered heterogeneity as a way to as much variation as possible in the data, in order
to grasp the complexity of the phenomenon and, as a consequence, to develop a
richer and more refined conceptual framework. The selection was somewhat sequential
as some cases were included in the study after the collection and analysis of data had
already started. Following common prescriptions for multiple case studies (Eisenhardt,
1989b), we replicated the study until we had evidence that we had reached what Glaser
and Strauss (1967) refer to as ‘theoretical saturation’. In other words we stopped
when the incremental learning coming from each additional case had become
minimal, because what we observed did not seem to improve our emerging framework
further.
Concerning the owning families, our choice has been concentrated on those cases of
family-owners who are the first or second generation Table 22.1 shows the main charac-
teristics of the sample.
Within selected cases, analysis has been directed towards the following critical issues
(see Table 22.2): role of the next generation in the strategic planning process (leading or
just team member); presence of conflict situation among the family members and the
owners (we coded with ‘zero’ the absence of conflict, with ‘one’ the presence of latent
conflict and with ‘two’ the presence of open conflicts); reason why the strategic plan was
Table 22.2 Needs for and benefits from SPP
Presence
Role of next of conflicts
gen in SPP 0 none Benefits from SPP*
L leading 1 latent
Company P participating 2 open Need for SPP 1 2 3 4 5 6
Case A L 0 ● Convincing non-family managers that next- X X X X
generation members were capable through
concrete elements
● Getting the consensus from non-active owners
Case B P 0 ● Inserting III generation members in the top X X X
management team
● Getting a contribution from next-generation
members
Case C P 0 ● Legitimizing next-generation members in X X X X
front of banks and external stakeholder
409
● Acquiring a deep knowledge of the business
● Defining the strategic intent of the business
Case D P 1 ● Defining the strategic intent of the business
● Legitimizing next-generation X X X X X
members in front of owners
● Quantifying business knowledge
Case E P 0 ● Insert and train next-generation members X X X X X
which were very young and had to get
business knowledge
Case F L 1 ● Getting the consensus of non-active X X X X X X
shareholders
● Improve next-generation legitimization
in order to be appointed managing director
Case G P 2 ● Train the young family member
● Getting the consensus of family X X X X
shareholders on a growth project
Table 22.2 (continued)
Presence
Role of next of conflicts
gen in SPP 0 none
Benefits from SPP*
L leading 1 latent
Company P participating 2 open Need for SPP 1 2 3 4 5 6
Case H P 1 ● Involving juniors in future business strategy X X X X X X
● Shareholder had to decide whether to
sell or to continue together and in that case
to invest money to grow
Case I P 1 ● The company was not growing and one of X X X X X X
the juniors decided to invest in a diversified
business which was not performing well
Case J L 1 ● Different family branches had to
decide whether to continue together or not
410
● Family shareholder had to decide the X X X X
amount of money to invest
● Next generation had to enter and learn
about the business
Case L P 0 ● Inserting the new generation
● Going public X X X X X X
● Involving the new generation in the
IPO process
Note:
*Benefits from SPP:
1. facilitate internal and external learning (Brews and Hunt, 1999);
2. offer a context for strategic decision making (Grant, 2003);
3. help legitimization before external stakeholders (Higgins and Diffenbach, 1995; Langley, 1988);
4. reduce position bias and enhance goal convergence (Grant, 2003; Ketokivi and Castañer, 2004);
5. stimulate effort of quantifying phenomena (Grant, 2003; Mintzberg, 1994b);
6. allow executives and directors to evaluate the job done (Grant, 2003; Mintzberg, 1994b).
Using the strategic planning process as a next-generation training tool 411
realized (more family need or business related need); and, finally, the benefits obtained
through the strategic planning process (SPP).
Focusing on the possible different role that the younger generation can play in
drawing up the plan, we noticed that these roles varied between two extremes: complete
responsibility for the process and the final result, or, participation in the work team with
the role of executor. Different factors influence this role. The more responsibilities the
young member has in the management of the process, the more he/she will learn not only
from the contents but also from directly exercising leadership skills (or verifying the exist-
ence of such skills) and the stronger will be the legitimization he/she obtains (if the
process has been completed with success) in the eyes of third parties.
The benefits of the plan in terms of learning will be different when the young member
has no prior experience and therefore needs to learn everything – both content and
process – ‘from scratch’.
The approach chosen implied the combined use of various methods of data collection
(multiple data collection methods): field observations, interviews, analysis of corporate
archives, and so on. We combined qualitative and quantitative evidence collected through
different methods (triangulation) so as to reach a deeper understanding of the investi-
gated phenomena.
Data analysis
Data analysis was based on common techniques for grounded theory building and com-
bined within-case analysis to cross-case comparison (Eisenhardt, 1989b; Glaser and
Strauss, 1967; Lee, 1999). Within-case analysis was initially conducted to identify a
number of core constructs. The identification of core constructs was based on a content
analysis of the interviews. Therefore, we searched interviews for passages that contained
references to needs and benefits obtained from strategic planning. The search was con-
ducted independently by the researchers; later comparison of independent analysis
showed a substantial agreement. This coding procedure helped us to identify, for each
case, a number of key themes. Following indications from Eisenhardt (1989a), we
referred to the existing literature to develop and to enrich these inductively derived
insights. In this phase, we often relied on data collected from our archival research to go
beyond our informant’s accounts, and to extend and refine the emerging framework.
Provisional interpretations and tentative propositions were refined in several iterations
between theory and data until we were able, for each case, to provide a plausible explan-
ation of the observed patterns.
In a second stage, in order to refine emerging constructs and verify how strongly each
of these contributed to explain the observed phenomenon, we conducted a cross-case
comparison. Cross-case comparison helped us to verify the robustness of our provisional
interpretations across cases. In some cases, the comparison required a further homogen-
ization of concepts, as some themes were grouped into a more general concept. In other
cases, propositions were refined, to include the effect of intervening variables. Again, the
process followed an iterative path, until the emerging conceptual framework fit the
observed patterns across cases. At the end of this operation we were able to identify a
number of core issues related to the benefit of strategic planning. As often happens in
inductive research, these findings in part confirm and in part extend past literature, and
are discussed in the next section.
412 Handbook of research on family business
Building on these results, we investigated the possible benefits that the strategic plan-
ning process has in succession passage in family business. In particular, a double set of
benefits emerged, further explain in the next section.
Realized strategy Analysing realized strategy allows the young member who takes part
in it to develop an in-depth knowledge of:
1. Executive summary
1.1 The proposed strategic project
1.2 Action plans
1.3 Expected results
1.4 The management team
2. The realized strategy
2.1 Competitive strategy at the corporate level
2.2 Group performance
2.3 The competitive strategy of individual strategic business areas
2.4 Performance recorded at the strategic business area level
3. The intended strategy (strategic intent)
3.1 Need for and convenience of strategic rethinking
3.2 Internal reasons: the limits of current strategy
3.3 External reasons: processes of change underway: developing threats and opportunities
3.4 The mission
3.5 Portfolio strategy
3.6 Competitive strategy of the strategic business area
3.7 Expected results
3.8 Resource requirements for the achievement of the plan
4. Action plans
4.1 Planned changes in organizational structure
4.2 Plans for increasing corporate productivity
4.3 Plans for size development
4.4 Summary framework: actions, times, organizational responsibilities, economic and financial
impact, criticalities and obligations
5. Financial assumptions, key value driver and financial forecast
5.1 The model linking strategic decisions and economic variables
5.2 The assumptions on which financial forecasts are based
5.3 Plan results
5.4 Assessment of economic convenience and financial feasibility of the plan
5.5 Sensitivity analysis
Source: Strategic Plan Listing Guide – Italian Stock Exchange (Mazzola and Marchisio, 2003).
● tacit knowledge;
● using managerial tools for strategic appraisal of the family business;
● its need for renewal in a more objective way not totally influenced by typical dynam-
ics present in pathological succession patterns which might be either too conservative,
too wavering or too rebellious (Miller et al., 2003).
In case L, new generation, after some outside working experience, entered the company.
In order to help his entrance and involvement, he took part to the strategic planning
process, realized in order to verify the hypothesis to go public. Next generation worked
full time in order to fully understand and describe the business model, to catch the main
differences between them and the competitors, to grasp both competitive advantage
414 Handbook of research on family business
sources, and improvement areas. At the end of process the young member described that
period as a critical one for him in order to have ‘a quick and proper understanding of the
family company, and his fast introduction in the organization’.
Intended strategy Making the strategic intent explicit represents an important stimulus
for the next generation in order to enable the process of generation, evaluation and
selection of alternatives, which require two conditions: on one hand, the imagination to
develop a great number of different alternatives so to avoid many variations on the same
theme and, on the other, the discipline necessary to consistently evaluate the options.
Szulanski and Amin (2001) synthesized these two concepts into one they called ‘discip-
lined imagination’, a fundamental skill in creating continually innovative business strat-
egy, which in turn is a prerequisite for creating value and, very often, for the very survival
of companies. It is a skill learnt by doing. Involving the younger members in this process
helps them develop, right from the beginning, a way of thinking that values creativity but
also the discipline thanks to which the best alternative possible can be chosen. The
younger members must not necessarily possess both characteristics, although they should
learn that both components are important and that they need to create conditions that
will guarantee both (also in the future).
Taking part in this phase allows next-generation members have the opportunity to learn
and experience tools and methodologies for scenario building, visioning and scouting
possible sources of innovation.
The main benefit of this phase is the reduced risk of undergoing either a conservative
or rebellious succession (Miller et al., 2003) and to provide the family business with the
proper change in goals, business scope, product lines, or markets and willingness to seize
opportunities.
In case A, next generation member took part to the formulation of the strategic plan
to present to the family council in order to tackle with the deep industry crisis. The biggest
challenge of the strategic planning process was the definition of credible and valuable
vision. ‘We spent a lot of time in exploring new business opportunities able to counter-
balance the problems in the traditional scope.’ At the end of the process the young family
member was used to say ‘I had a unique opportunity to discuss really relevant strategic
issues: and I clearly understood how important is strategic renewal for assuring family
business continuity’.
Action plan Action plans imply an in-depth knowledge of numerous elements among
which are the corporate framework, its resources and obligations, the persons to involve,
the responsibilities to be assigned and the time necessary to accomplish the proposed
objectives. In terms of tools acquired, the definition of an action plan help young members
to learn both project management and resource management. In particular, regarding the
former in this phase, the new generation is educated, right from the beginning, to work in
a team, by objectives and to check the effectiveness of their activity by confronting them-
selves with the results; while regarding the latter, in this phase young family members learn
how to add, shed and allocate resources, to bundle and to leverage them, which represent
a basis for reaching the desired competitive advantage (Sirmon and Hitt, 2003).
Family business I was facing a delicate problem. The company has not been growing
for more than five years. One family member launched a diversified business which was
Using the strategic planning process as a next-generation training tool 415
both losing money and absorbing cash. This situation created a tension among owners.
This situation had been solved by defining a clear action plan for that division: a clearly
defined amount of resources was allocated to the initiative, a break even goal was settled
and a time frame was fixed. The young family member involved remembered this phase
as the most critical of the whole process. ‘While there was a shared agreement among
owners about the necessity of exploring growing opportunities, the main problems
emerged when we had to decide the amount of resources we had to allocate for the growth
project and not distribute as dividends.’
Financial assumptions, key value driver and financial forecast Together with the afore-
mentioned qualitative analyses, financial forecast offers an additional benefit for a
deeper understanding of strategic intentions, for choosing among alternative action
plans and for controlling the progress of the chosen projects. Next-generation members
have the opportunity to fully comprehend the quantitative implications of the strategic
intent.
In this phase they learn also how organizations create value, developing strategy maps
such as a balanced scorecard, which show how an organization will convert its initiative
and resources into tangible outcomes (Kaplan and Norton, 2000). Thank to this activity
the young member is able to understand the most important company value drivers
and the key indicators through which monitoring them. This fills quickly the gap of
knowledge usually acquired through long-term experience in the business.
Another benefit consists in the development of awareness of the constraints deriving
from aspiration levels of owning family for growth and payout and its willingness to
assume debt. The interdependence of growth and payout-aspiration levels drives any busi-
ness, but its ability to facilitate goal-setting in a private business is highly significant. Profit
growth and profit payout drive family wealth creation and must be disciplined by levels of
profitability grounded in reality (Adams et al., 2004).
Family business E was growing very fast and had to decide whether to continue inves-
ting in the growth process also through the acquisition of a couple of minor competitors.
The son strongly believed in the attractiveness of the strategic intent and supported this
project in front of the other owners. ‘I finally understood not only where and how to grow,
but more importantly, I realized that given our profitability, the expected growth rate
could be reached only if all the owners were prepared to significantly reduce their divi-
dend expectations in the short period, and to accept to double our traditional debt/equity
ratio. This latter issue was considered not acceptable in my family. So we had to change
our strategic project in order to meet owners’ will.’
Ph. 2 Ph. 3
Draft strategic Discussion with
plan incumbent Ph. 4
Revised
strategic plan
Ph. 1
Planning Ph. 5A Ph. 5B
guidelines Internal approval by BoD External approval by
or family council or other stakeholders
shareholder assembly (banks, PE, partners)
Ph. 6
Performance
appraisal
represent more clearly the benefits deriving from the strategic planning process, we repre-
sent the main phases of the process itself. In Figure 22.1 we have adapted the model pre-
sented by Grant (2003). As Figure 22.1 shows, the strategic planning process includes
several phases and improves the interaction with both internal and external stakeholders.
Considering the whole process, we identify two main benefits. First, young members
who took part in the process had the opportunity to exercise leadership skills (Mumford
et al., 2000, p. 26). The authors maintain that:
It is evident that the possibility of taking part in the realization of the plan is a crucial
opportunity for the younger members to exercise leadership skills. This benefit is particu-
lar important if we consider that founding generations are reluctant to let the next gen-
eration join in the decision-making for the business (Handler, 1989; Lansberg, 1988).
Of course this is not the only opportunity the next generation has to exercise leader-
ship skills. Other possibilities exist both on the business or family side. Among the former
we can imagine situations where juniors have the responsibility for a specific project
or team or business unit, or taking part in board of directors meetings; regarding the
latter, the next generation member’s leadership skills can benefit from taking part in
and/or having the responsibility of organizing or managing family council or other family
meetings.
Second, according to Brews and Hunt (1999), how to plan, making incremental adjust-
ments, and the quality of planning improve with time, so the early years are particularly
Using the strategic planning process as a next-generation training tool 417
important for learning. Next-generation members who participate in the process have the
opportunity to learn from the beginning a structured methodology and several tools.
Finally, taking part in the whole process helps young members to take a more know-
ledgeable decision about their staying in the company and in what role.
Considering phases 1–4, the young member has the opportunity to:
1. be exposed and collaborate both with the incumbent and with other internal and
external relevant stakeholders. This exposure and collaboration helped the young to:
(a) develop teamwork capabilities;
(b) be introduced within the organization;
(c) communicate and share ideas with and get feedback from acknowledged and
experienced internal and external stakeholder (the entrepreneur, family and non-
family executives and, eventually, customers, suppliers, bankers and consultants,
encouraging mutual learning, which, according to Handler (1992), is typical in
successful family firms.
2. increase their sense of belonging and ‘feel to be part of the realization of a great
project’ (Case B), which favour:
(a) increasing his/her commitment thanks to the fact that being involved is a recog-
nition in itself of the ability or worthiness to contribute to the organization,
instilling a sense of appreciation and a stronger identification with resulting orga-
nizational goals (Ketokivi and Castañer, 2004; Kogut and Zander, 1996);
(b) consequently increasing commitment should reduce both position bias
(Tannenbaum and Massarik, 1950), and the risk of wavering or rebellious suc-
cession (Miller et al., 2003, p. 521);
Considering phase 5a and 5b, the young member has the opportunity to:
1. earn legitimization before family owners and family and non-family executives. This
helps the young member in:
(a) exercising negotiation skills – resources have to be obtained;
(b) honing communication skills – consensus and trust have to be gained.
2. become known by non-family external stakeholders, earning legitimization on the
basis of a concrete result produced and earn their respect through the presentation of
well-structured information.
Finally, phase 6 makes the performance measurement an objective one, reducing the situ-
ation where family members are measured ‘by blood’.
process itself, and that the benefits occur simultaneously for the family company, for the
next-generation members and for the owners.
Evidence from the cases suggests that the well-documented roles that strategic plans
usually have in big organizations, can be used also in family businesses, offering an idio-
syncratic contribution above all during the first years after a young member enters the
company. In particular these benefits have to do with helping a systematic acquisition of
crucial business (tacit) knowledge and skill, facilitating interpersonal working relation-
ships between incumbent and the new generation, reinforcing the next generation’s image
and reputation in front of third parties, non-family members or non-family external
stakeholders, and allowing family members and non-family executives and directors to
evaluate the job done by the next generation.
Furthermore, evidence from our study suggests that a broader range of benefits can be
obtained by drafting and presenting a strategic plan in family business. In some of the
cases analysed, we saw a positive effect on latent conflict among family members, owing
to the fact that the plan helped in quantifying phenomena, making them more objective
and facilitating the decision process.
In order to obtain these benefits at least one condition has to be respected. This concerns
the methodology and skills used in order to realize the strategic planning process and to write
the plan. Considering the learning experience it represents, it is very important to do it prop-
erly. For this reason it is strongly recommended to have capable people leading the process,
be they executives working in the company or external consultants, if needed. The presence
of consultants is not only a condition, but also an added benefit. Collaborating with exter-
nal consultants can be a further opportunity to learn not only techniques and analysis
methodologies directly applied to corporate reality under the supervision of authoritative
professional figures, but also to learn different approaches and ways of thinking, which are
in certain cases comparable to the benefits obtained through work experiences outside the
family business. Besides being potential mentors, consultants can also be precious allies
when the young members are ready to introduce and sell new ideas to the company.
If the company does not use the services of consultants in the preparation of the plan,
the process is an opportunity to cooperate with (family or non-family) managers from
which useful reciprocal knowledge can be gained, as mentioned above.
We believe that the implications of our findings touch both theory and practice. On the
theoretical side, our objective was to offer a contribution to the studies regarding the
phase after the younger members enter the company, offering a concrete tool to develop
the leadership and managerial skills of the new generations – a hot topic among family
business researchers – and to facilitate family relations.
From a practical point of view, our findings can provide both practitioners and the
families with some suggestions. As far as practitioners are concerned, and on the basis of
the conclusions we have reached, we would like to remind those consultants who do not
carry out a specific activity for family businesses but who find themselves in the position
of drawing up a strategic plan, that they have a great responsibility towards the younger
generation, since they have the potential opportunity to be important mentors for the
younger members. Slightly different is the recommendation for practitioners who are
instead dedicated to family businesses: here, the preparation of a strategic plan is a further
learning tool for the younger members and can provide a solution for possible conflicts
among the members of the family.
Using the strategic planning process as a next-generation training tool 419
As far as families are concerned, we are able to offer them a concrete training tool which
can help the next-generation members with the above mentioned learning, and which
simultaneously offer a benefit for the development of the company and for the owners’
decision process.
Of course this tool is not free from risks. The high visibility to which the next gener-
ation is exposed during the process can become a threat in case of (big) mistakes, above
all in terms of wrong attitudes held by juniors. All the attention in fact is devoted to the
young members and if they behave in an inappropriate way everybody will have the
chance to notice it. A second possible risk is where for any reason the process does not
work and the next generation does not feel involved. If this is the case, all the benefits
related to the sense of belonging would be lost. Finally there is the risk that by introdu-
cing a structured activity of planning, the room left for emergent strategy reduces too
much and the strategy process becomes too rigid. These dangers identify the need for
further research necessary on the topic. This work is a first effort that stems from an anec-
dotal approach that will have to be further examined by studying further cases, establish-
ing a control sample and then by identifying some hypothesis which has to be tested.
In terms of content we suggest further areas of investigation related to this, such as indi-
viduating conditions for success so that all potential benefits can be achieved. Among
them, we think it is particularly important to focus on the characteristics and attitude of
the incumbent in terms of giving freedom to act to the juniors. Very autocratic incum-
bents are unlikely to leave the next-generation member free to present new ideas and are
even more unlikely accept them. A second possible condition to further investigate is the
role of trust in the whole process.
Other areas for investigation concern better understanding the threats to the success of
the process, the possible roles that the juniors, the incumbents, non-family managers and
consultants can and should play in the strategic planning process, and eventually check
whether there is any relationship between the role the next generation plays and the bene-
fits they, the owning family and the company can get; verifying the possible influence of
a particular choice of timing for the preparation of the plan in generational succession.
Finally, a further area to be analysed is that of the plan’s influence on the performance of
the younger members (a measure also to be defined) and of the company in terms of
growth and the identification and exploitation of new opportunities.
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23 An integrated framework for testing the success
of the family business succession process
according to gender specificity
Vassilios D. Pyromalis, George S. Vozikis, Theodoros
A. Kalkanteras, Michaela E. Rogdaki and George P. Sigalas
Introduction
The family firm has always been and continues to be an increasingly vital player in the
economy (Duman, 1992). One of the events that may disrupt the smooth evolution of a
family business is a generation transition and succession. Moreover, the enlarging role
that women play in family businesses and their increasing presence during the succession
process renders an investigation into the relationship between succession issues and
gender specificity quite promising. This is because there have been very few studies dealing
with gender issues in family firm ownership and management, even though family firms
account for an estimated 80 per cent of all American businesses, and about one-third of
these family firms are owned by women (Sonfield and Lussier, 2003). In addition, the
global rise in female entrepreneurship and self-employment has also been noted by
OECD studies (OECD, 2000) and the National Federation of Women Business Owners
(National Federation of Women Business Owners, 1997). More particularly, in the USA
alone, it is anticipated that women will soon own 50 per cent of all US businesses and that
there will be an upsurge in female inheritance, ownership and management of companies
founded immediately post-war, over the period 2000–2020 (Achua, 1997; Daniels, 1997).
Finally, succession issues receive extensive attention (Dyer and Sanchez, 1998), as related
articles have grown twofold in the 1990s (Wortman, 1994). It is therefore quite obvious
that owing to the enlarging role that women play in family businesses, and the significance
of the succession process in family firm, it seems quite worthwhile to attempt to correlate
succession issues with gender specificity.
This chapter draws on existing literature and seeks to integrate gender specificity and suc-
cession in a conceptual framework that will highlight this fundamental relationship. More
specifically, as the trend for women to take over leadership positions in firms is evolving,
our framework is used to investigate whether the success of the succession and satisfaction
from the process per se depends on the successor’s gender. For this purpose, we make use
of the Analytic Hierarchy Process and base our findings on evidence from the literature.
However, it is important before proceeding with the core body of our research propos-
itions, to provide some basic definitions and clarify the basic context within which family
businesses operate, as well as the most important dimensions of the issues to be examined.
Theoretical background
Family businesses are defined as ‘businesses in which ownership and/or policymaking are
dominated by members of an emotional kinship group’ (Carsrud, 1994). They differ from
422
Framework for testing the success of the family business succession process 423
other businesses in that ownership and/or control overlap with family membership (Lank,
1997), as all major operating decisions and plans for leadership succession are influenced
by family members in management positions or on the board of directors (Handler,
1989a). Hoover and Hoover (1999) claim that above all else, family business is the busi-
ness of relationships, and thus, one should think and talk about ‘business families’ rather
than ‘family businesses’ (Le Van, 1999).
On the other hand, the succession process is ‘the transfer of leadership, ownership, or
managerial control from one family member to (preferably) another’ (American Family
Business Survey, 1997). The basic stakeholders in the transition process are similarly iden-
tified as the incumbent, the successor, and the other family members (Handler, 1989b). In
the United States, 92 per cent of all firms are family firms and 18 million among them are
family dominated according to Duman (1992). It is also estimated that in the next few years
47 per cent will change their top leadership. Among those, 45 per cent have not chosen a
successor and lack a succession plan, while 65 per cent do not have a strategic plan. As far
as ownership transition is concerned, it is interesting to note that 35 per cent of the family
business owners are considering a co-CEO perspective, 34 per cent are proclaiming that a
woman will be the next CEO, and 20 per cent do not have an estate plan (DiMatteo, 2004).
The difficulty of the succession process is obvious, as 30 per cent of family businesses
survive past the first and 15 per cent past the second generation (Davis and Harveston,
1998). These percentages can be confirmed by the Family Business Network, a non-profit
organization based in Lausanne, Switzerland, which estimates that around 70 per cent of
family firms fail to survive to the second generation. One of the most important reasons for
that of course, is the lack of a suitable successor. This shows the importance of succession
and cooperation pools within the family itself. Two-thirds of the family business owners
want their businesses to be transferred, either through sale or as a gift to the next generation
of the family (American Family Business Survey, 1997), because it is believed that this way
the firm would maintain its existing competitive advantage through the preservation of the
‘idiosyncratic knowledge of family character’ (Bjuggren and Sudd, 2001, p. 11).
Research findings on the interactive factors that affect the outcome of the leadership/
ownership transition are significant and revolve around the satisfaction with the succes-
sion process as well as the effectiveness of the process per se, as Handler (1989b) asserts.
These findings are summarized on Table 23.1, and are of extreme value for the develop-
ment of our research propositions. Regarding the ‘satisfaction’ dimension, an empirical
study identifies as critical success factors the ‘incumbent’s propensity to step aside’, the
‘successor’s willingness to take over’, the ‘agreement among family members to maintain
family involvement’, the ‘acceptance of individual roles’, and ‘succession planning’
(Sharma et al., 2003, p. 671).
Most of the literature, however, concentrates instead on factors that affect the ‘effect-
iveness’ dimension of the succession process. Research findings here suggest that the char-
acteristics of successful successions are the ‘well prepared successors’, the ‘positive
relationships’ and the ‘succession planning attempts’ (Morris et al., 1997, p. 392).
Additionally, Miller et al. (2003, p. 514) advocate that the ‘successor’s relation with the past’
also affects the effectiveness and outcomes of the succession, since things to be avoided are
a ‘too strong attachment to the past’, a ‘wholesale rejection of it’, and/or an ‘incongruous
blending of present and past’. Other factors that have a negative impact on the succession
process are ‘family rivalries’ (Dyer, 1986) and ‘incompetent or unprepared successors’
424 Handbook of research on family business
Table 23.1 Literature review of factors that affect the succession process
Dimension
Satisfaction with the Effectiveness of the succession
Researcher succession process process
Sharma et al., 2003 The incumbent’s
propensity to step aside,
the successor’s willingness
to take over, agreement
among family members
to maintain family
involvement, the
acceptance of individual
roles and succession
planning (positive influence)
Morris et al., 1997 Well-prepared successors, the positive
relationships (trust, shared values) and
the succession planning and
controlling attempts (positive influence)
Miller et al., 2003 Owner’s relationship with the past
Dyer, 1986 Family rivalries (negative impact)
Kets De Vries and The incompetent or unprepared
Miller, 1987 successors (negative impact)
Handler, 1990 Previous positive succession experience,
fulfilled career, psychosocial, and life
stage opportunities in the context of
the family firm, the capability to
exercise personal influence in the family
business, mutual respect and
understanding with the incumbent and
high commitment to the continuation of
the family business (positive influence)
Dyck et al., 2002 Sequence (appropriate skills and
experience of successor), timing
(effective passing), baton passing
techniques (succession details) and the
communication (positive impact)
Dascher and Jens, The desire to pass on a business, the
1999 ability to carry out the desire, and the
willingness of heirs to accept
responsibility (positive impact)
Wong et al., 1992 Size of the family business (positive
influence)
Framework for testing the success of the family business succession process 425
Regarding the role of gender in the succession process, it is obvious from the literature
that male offspring are favoured (Allen and Langowitz, 2003; Family Business Network
research, 1995) regardless of suitability (Miller et al., 2003). Unfortunately, there still exist
perceptual barriers to women’s advancement to senior management positions in family
firms, literally known as ‘glass ceilings’ (Crampton and Mishra, 1999). Men and women
also seem to differ in many attributes and characteristics. For instance, as far as self-
employment motives are concerned, men’s main drive is wealth creation and economic
advancement, while women’s drive is to achieve a family-related lifestyle, some flexibility
to balance work and family, as well as ‘constructivism’, and economic parity (DeMartino
and Barbato, 2003). However, as the number of women in top positions is constantly
increasing (American Family Business Survey, 1997; Taylor, 2002), it is important to
examine whether this obvious succession bias against women is founded on real traits, on
performance outcomes, or on a perception as a consequence of socio-cultural values.
Finally, there is no information in the research literature about gender-specific outcome
measures of succession in family firms (Astrachan et al., 2002). Men and women have also
been compared by specific traits, but there is no integrated approach and thus, no evidence
as to who can handle more effectively and efficiently a succession process. The findings of
the literature review on gender individualities as they relate to succession in family firms
are summarized in Table 23.2.
Table 23.2 Review of gender individualities literature
426
Powell, 1990 No significant differences
in management values and
styles between the two
genders
Crouter, 1984 Women experience more
family-business related
conflicts
Loscocco, 1997 Women are less able to
manage the work–family
interface
Buttner, 2001 Women are more
collaborative, relations
oriented and participative
Cole, 1997 Women are more dependent Men are
they undertake more considered to be
frequently the nurturer, med- more independent
iator, or peace-maker role than women
Moore and Women are more Women rely more
Buttner, 1997 collaborative, interactive, on social networks
team workers, participative than systematic
and democratic decision-making
Brenner et al., Women have more
1998 interpersonal skills
Astrachan et al., Women are more
2002 interactive,
collaborative and
can lead a smoother
transition
Miller et al., 2001 Women are less
confident, use
advisors, and form
networks
Johnson and Women are more
Powell, 1994 cautious, less
confident,
427
aggressive, easier
to persuade, provide
inferior leadership
and problem-
solving, and are
risk averse
Sonfield et al., Men are more
2001 strategic and
entrepreneurial
Eagly et al., 1995 There is no gender
difference in
leadership
effectiveness
Kaplan, 1988 Women emphasize
more non-
financial personal
goals
Table 23.2 (continued)
428
1993 entrepreneurial
due to social/
liberal feminism
Bailyn, 1993 Women are less
entrepreneurial
and run the
business around
their personal life
Framework for testing the success of the family business succession process 429
It appears from the literature review that there is a lack of an integrated conceptual
framework, which deals with both dimensions and critical success factors of the succes-
sion process, namely satisfaction and effectiveness as well as gender issues. What is missing
is a synthesis of the various perspectives in order to come up with a coherent and concise
two-dimensional succession framework. The model developed by Morris et al. (1997)
deals with satisfaction with the succession process but concentrates mostly on the
effectiveness of succession. Even the ambitious conceptual framework by Sharma et al.
(2001), which attempts to create such a two-dimensional integrated approach, focuses
only on factors that affect the initial satisfaction with the succession process, and does not
provide weights for ranking the importance of the success factors.
Conceptual framework
The conceptual framework described in this section is a result of a synthesis of the exist-
ing literature on succession, and will provide the basis for the test of our hypotheses
through three stages, namely: the identification of the basic dimensions of a succession’s
success; the identification of the critical success factors that influence a succession’s
success, and finally the development of an integrated conceptual framework.
The incumbent’s propensity to leave This factor has been cited as one of the most import-
ant in the business literature (Brady and Helmich, 1984; Christensen, 1953; Lansberg,
1988; Malone, 1989; Pitcher et al., 2000; Sharma et al., 2001; Vancil, 1987). This factor is
affected by multiple criteria, such as the owner’s fear of losing power both within the
430 Handbook of research on family business
Low High
Effectiveness of the process
business and within the family, since withdrawal from the leadership position in the busi-
ness could also mean an automatic withdrawal as head of the family. This may explain
why over one-third of former family firm owners are still involved in the business even
after retirement (American Family Business Survey, 1997). Moreover, owners usually link
their personality and way of life with the family business and fear that by leaving the busi-
ness they will lose their identity and status. Allen and Langowitz (2003) showed that 13.4
per cent of family business members claim that the CEO will ‘never’ retire. A safe con-
clusion from this discussion is that a low propensity of the incumbent to leave will affect
satisfaction with the succession process in a negative way.
Successor’s willingness to take over This factor has also been cited by the literature as
very important (Barry, 1975; Bowen, 1978; Goldberg and Woolridge, 1993; Morris et al.,
1997). It seems that the successor’s willingness to take over depends on three main vari-
ables: commitment to the family; the maturity of the successor; and the degree of respon-
sibility of the successor. The higher these three variables are, the higher the successor’s
willingness to take over, and consequently the higher the overall satisfaction with the suc-
cession process.
Incumbent’s propensity to
leave
Satisfaction
Successor’s will to take
over
Positive relations –
communication
Succession planning
Effectiveness
Successor’s
appropriateness/preparation
Positive relations and communication It is obvious that if family members share the same
values and show mutual respect satisfaction will be higher, and the transition will be
handled more effectively (Dyer, 1986; Morris et al., 1997). Trust must be built among
family members and everyone should clearly identify, acknowledge and accept their roles
in the business as well as in the succession process through positive communication, and
unmistakably know ‘what’s in there for them’ in terms of personal gains in exchange for
their support, so conflicts and rivalries that may affect the succession effort negatively are
avoided. It is apparent that a positive relationship exists between good relations and com-
munication and satisfaction with and overall effectiveness of the succession process.
Succession planning There is a great deal of evidence in the literature about the positive
effects of good succession planning on the success of the succession transition (American
Family Business Survey, 1997; Hayes and Adams, 1990; Lansberg, 1988; Morris et al.,
1997). Business advisors strongly suggest incorporating a succession planning process
and an exit strategy into the business plan very early, because the longer the family busi-
ness succession planning, the smoother the transition process is likely to be (Ward, 1999),
especially when the whole family is involved in the business succession planning discus-
sions. Making a succession plan and then announcing it, however, is the surest way to
sow family discord. Therefore, outside help with succession planning such as profes-
sional family-firm advisors, lawyers, or accountants injects credibility and objectivity
into the process.
These contradictory and somewhat unrelated findings throughout the literature regard-
ing the role of gender in the successful outcome of a succession process (Astrachan et al.,
2002) and the integration of the discussion above produces the conceptual framework
presented in Figure 23.2, which encompasses the critical success factors that affect a suc-
cessful succession.
432 Handbook of research on family business
Hypothesis I Female offspring are more likely to achieve better results in the satis-
faction dimension of the succession process than male offspring.
Hypothesis II Male offspring are more likely to achieve better results in the
effectiveness dimension of the succession process than female offspring.
Hypothesis III Male offspring are more likely to achieve a more successful succession
process overall than female offspring.
Methodology
It is obvious that the issue we are dealing with is marked by:
embodies the overall goal, while the lowest level is composed of all possible alternatives.
One or more intermediate levels represent the decision criteria and/or sub-criteria. The
relative importance of the decision elements (weights of the criteria and scores of the
alternatives) is assessed indirectly from pair-wise comparison judgments (Saaty, 1977).
The decision-maker provides a prioritized ranking order indicating the overall preference
for each of the decision alternatives, by comparing criteria, sub-criteria and alternatives,
with respect to the overall goal or objective. The process for determining both weights and
scores is the same, so they are often called ‘priorities’. The derived local priorities are
further aggregated into ‘global priorities’, which are in turn used for final ranking of the
alternatives and selection of the best. To accomplish this process, the existing literature
was reviewed in order to weigh as accurately as possible the dimensions and the critical
success factors of the succession process, as well as to make pair-wise comparisons
between male and female successors.
In summary, the AHP is based on three principles (Saaty, 1990): the principle of con-
structing hierarchies, the principle of establishing priorities, and the principle of logical
consistency. The empirical effectiveness and theoretical validity of the AHP, as well as its
flaws have been discussed by many authors (Barzilai, 1998; Belton and Gear, 1983; Dyer,
1990; Harker and Vargas, 1987; Lai, 1995), but according to Zografos and Giannouli
(2001), the AHP:
Thereby, the selection of the Analytical Hierarchy Process is justified on the grounds
that it is a decision-making tool that is quite suitable for selection problems (El-Wahed
and Al-Hindi, 1998; Lai et al., 1999; Schniederjans and Garvin, 1997; Tam and Tummala,
2001; Tummala et al., 1997), and is capable of overcoming the difficulties of imprecise
measurements while at the same time providing an alternative-specific answer to our
propositions.
Research design
As mentioned above, in order to carry out the procedural steps of the AHP, a synthesis
of the existing literature was undertaken to establish as accurately as possible weights for
the satisfaction and effectiveness dimensions, as well as the critical success factors of the
succession process so pair-wise comparisons between male and female successors can be
completed. The exact weighting entailed the subjective judgment of the authors, some-
what limiting the scope of the research potential. As no significant prior research exists
that correlates the outcome of the succession process with the successor’s gender
(Astrachan et al., 2002), the literature review that was undertaken by the authors exam-
ined over 250 studies and critically evaluated them in order to construct the conceptual
434 Handbook of research on family business
framework first, and then develop comparative inter-gender weights for the critical
success factors of the successful family firm succession process. To accomplish this, the
screening criteria that were used were mainly the publication journal’s focus and promi-
nence and the number of references retrieved. Secondary parameters were the type of
research and the date of the corresponding survey, placing more emphasis on empirical
research and more recent articles. Similar criteria were used for the comparative assess-
ment of the two genders on the derived attributes, but more importance was placed on the
study’s date as more recent research studies tend to equate the attributes of the two
genders (Sonfield and Lussier, 2002). In addition and because of these circumstances, this
part of the analysis was extended beyond family business and general management papers
to more distinct areas, such as psychology, human relations, and organizational dynam-
ics. Finally, owing to the absence of direct comparisons in the desired attributes, indirect
implications were established between contiguous factors, and final classifications were
drawn accordingly.
The theoretical establishment of the first setup step of the AHP thus, was developed
from the conceptual framework section, where the objective (goal), the criteria (factors),
and the alternatives were determined from the literature review. The transformation of the
integrated conceptual framework into an AHP evaluation model is realized through a
hierarchical decomposition of the evaluation of the critical success factors that influence
the succession process and its successful or unsuccessful outcome (Figure 23.3).
For the purpose of our analysis, the hierarchical decomposition consists of three levels.
The first level, which is the goal of the hierarchy, reflects the outcome of the succession
process, that is, whether the realization of the succession process can be identified as suc-
cessful or not. The second level in the hierarchy consists of the two dimensions that deter-
mine the success of the succession, that is, satisfaction with the succession process and
effectiveness of the succession process. The third level consists of the factors that influence
causally the dimensions of the second level. An extra level differentiates between male and
female successors, which, contrary to previous studies, integrates the gender issue into the
model in order to build a coherent and concise two-dimensional succession framework
stressing both satisfaction with the process and the effectiveness of the overall succession
process, but also the role of the successor’s gender in the outcome of the succession process.
Next, the very significant second weighting step in our analysis consists of determining
the relative significance of the two dimensions of the success of the succession process in
order of importance. However, except for the distinction between satisfaction with and
overall effectiveness of the succession process (Handler, 1989b), there is no actual research
study or related findings about the relative importance of the two dimensions. Because of
the interdependence between the two dimensions (Sharma et al., 2001), equal weights
were assigned to the satisfaction and the effectiveness dimensions of the succession
process, and with the use of the numerical scale of the pair-wise comparisons of the
Expert Choice software (Expert Choice Inc., 1995), the weights for these two interdepen-
dent dimensions were both set to equal 1.00. As for as the critical success factors that are
crucial to the successful outcome of an intergenerational transition process in a family
firm, a lot has been written (Dyck et al., 2002; Sharma et al., 2003). However, little is
known about the relative importance of each individual factor. Morris et al. (1997)
suggest that the first priority of the succession process is the effort to build trust, encour-
age communication, and foster shared values, and that relationship issues account for
Succesfulness of succession
435
Incumbent’s will Successor’s will Positive relations – Succession Positive relations – Succession Successor’s
to leave to take over communication planning communication planning appropriateness
Male Female Male Female Male Female Male Female Male Female Male Female Male Female
Figure 23.3 Hierarchical decomposition of the assessment of the critical success factors affecting the success of family
business succession
436 Handbook of research on family business
approximately 60 per cent of the succession’s success, the preparation of the heirs
accounts for 25 per cent, and finally, planning and controlling activities for 10 per cent.
In another study Birley and Godfrey (1999) state that the three most important factors in
family business governance, in order of importance, are the heirs’ freedom to choose
whether they wish to take over, the training they receive, and the ability to distinguish
between family and business affairs. An Australian survey by Barach and Ganistsky
(1995), on the other hand, suggest that the most important issues in the succession
process, in order of significance, are balancing short-term and long-term business deci-
sions, preparing and training a successor, maintaining loyalty to non-family managers,
balancing family concerns and business interests, and developing relationships between
successor(s) and non-family employees.
These few literature citations do not provide enough information to make quantitative
pair-wise comparisons. However, for the satisfaction dimension a common element in all
of them is that positive relations/communication issues and succession planning are pro-
bably the most important factors, followed by the incumbent’s propensity to leave, and
the successor’s willingness to take over. As for the effectiveness dimension, succession
planning and the successor’s appropriateness seem to be considered stronger factors than
communication in terms of contribution to the overall succession effectiveness. Since
these final weights entail a sense of personal and subjective judgment it was decided not
to use a quantitative scale. Therefore, the pair-wise comparisons of the Expert Choice
software (Expert Choice Inc., 1995) were conducted using a subjective scale in order to
increase the coherence and reliability of the results.
The third ranking step of the AHP analysis, deals with the assessment of the alterna-
tives’ potential and the development of pair-wise comparisons. The comparison between
the two genders in the existing literature about men and women’s managerial and entre-
preneurial capabilities is small and inconclusive (Chaganti and Parasuraman, 1996).
Studies after the 1980s seem to find no actual differences in a gender comparison. For
instance, Sonfield and Lussier (2003) found that there were no statistically significant
differences between men and women in all examined areas (group decision-making, family
member conflict, succession planning, use of outside advisors, long-term planning, finan-
cial management tools, founder’s influence, the issue of going public, formal versus
informal management style), except on the issue of debt versus equity funding, which
shows that women prefer equity funding. A firm’s size and profitability were also cited as
significant factors that affect the process of transition. In this area men outperform women
(Allen and Langowitz, 2003), as male-owned businesses have a greater profitability versus
women at a ratio of 6 to 5, with average means of $30.4 versus $26.9 respectively. Women
on the other hand own twice as many productive companies. As far as number of employ-
ees as a size indicator is concerned, a women entrepreneurs study shows that men have four
times as many employees as women in family businesses (Santa Clara University, 2000).
Another exploratory study in Spain (Shim and Eastlick, 1998) agrees and found that
women-owned businesses are younger, have fewer employees, and lower revenues. Finally,
with regards to counselling, some studies have found that women are less confident in their
potential, and tend to form outside social networks on which to base their decision-
making. This suggests that they make greater use of outside advisors than do men (Miller
et al., 2001). Owing to the limited research literature, and to the ambiguity and inconclu-
siveness of the available studies as presented earlier in Table 23.2, in order to be able to
Framework for testing the success of the family business succession process 437
perform as reliable comparisons between men and women on each of the aforementioned
critical success factors as possible, the final weights again did not include the use of a quan-
titative scale but rather a reasonable application of personal judgment. Therefore, the pair-
wise comparisons were also conducted using a subjective scale in order to increase the
rationality and reliability of the results. The conclusion was that in terms of successor
managerial and entrepreneurial skills men are less conservative. Men also seem to be twice
as likely to seek venture capital indicating a stronger growth orientation. From the discus-
sion above it seems that the ‘successor’s appropriateness’ factor favours male over female
successors, and thus the male gender was given a ‘moderate’ superiority.
Finally, as mentioned earlier, the numerical calculations for the final fourth evaluating
step were performed by the Expert Choice software package (Expert Choice Inc., 1995).
The multi-criteria analysis conducted by the Expert Choice came up with a weighing
of the two alternatives (male and female successors) as to their capability to produce
a smooth generation transition. The sum of the two weights equals 1 and can be per-
ceived of as a percentage, or a comparative indicator. After the evaluation was realized,
sensitivity analysis was performed using the corresponding option of the Expert Choice
software, with the objective of understanding the underlying basis of the overall
conclusion.
Research findings
Men scored an overall rating of 0.501 while women were rated with 0.499 in their poten-
tial to undertake a successful succession process. The results suggest that in an ‘ideal’ lit-
erature synthesis, men and women are almost equal as far as their potential to realize a
successful succession in a family business. With an overall inconsistency of the model
equal to 0.00, it is quite surprising that we see the capacity of the two genders on the suc-
cession issue to be as close as it is. If we consider instead a ‘distributive’ model of the lit-
erature synthesis rather than the ideal one, we find very similar results with men at 0.495
and women at 0.505. The sum of the two weights equals 1 and can be perceived as a per-
centage, or a comparative indicator. No matter what aspect we examine, the results are
very close to the absolute equation of one. The results suggest that men and women are
almost equal as far as their potential to realize a successful succession in a family busi-
ness. It is evident that our research leads to a solid conclusion that the success of the suc-
cession process does not depend on the gender of the successor. Therefore, Hypothesis III
which asserted that male offspring are more likely to realize a more successful succession
process overall than female offspring, is rejected.
Finally, another interesting aspect of the issue is to examine the outcomes of the sen-
sitivity analysis tables, with the objective of understanding the underlying basis of the
overall conclusions. The results show that women seem to outperform men on the ‘satis-
faction with the succession’ dimension, while men seem to outperform women on the
‘effectiveness of the succession’ dimension. Therefore, both Hypotheses I and II which
stated respectively that: female offspring are more likely to achieve better results in the sat-
isfaction dimension of the succession process than male offspring, and male offspring are
more likely to achieve better results in the effectiveness dimension of the succession
process than female offspring, are both accepted.
If validated through further research, these findings can justify those who claim
that men and women have complementary skills. Despite contradicting research studies
438 Handbook of research on family business
(Songfield and Lussier, 2003), men and women do not seem to perform comparatively and
with equal degrees of effectiveness and efficiency on every managerially specific challenge
or capability. On the contrary, women seem to possess different competencies, abilities,
and modi operandi which are not only useful to the management of family businesses but
also beneficial because they bring different perspectives to the various managerial, finan-
cial and emotional challenges of a family firm and, to a greater degree, any business
organization trying to overcome internal and external challenges in general.
Conclusions
This chapter essentially attempts to make an important theoretical contribution to the
family business literature. The conceptual framework presented here tries to fill the gap
that exists in the understanding of the succession process by integrating efforts as far as
critical success factors leading to a successful succession process, satisfaction with the
process and effectiveness of the succession process specifically as they all relate to gender.
On the other hand, the managerial implications of this framework could be of value to
family business owners in their attempt to identify the factors that are critical for a smooth
generation transition for their firm.
The hypotheses that were tested through the conceptual framework provided a pio-
neering insight into the gender-specific succession literature. If the results are validated
through empirical field research, they will determine that as far as the issue of successful
succession is concerned, the bias against women and the fact that in most cases they are
being passed over for the ownership/control of the business is not reasonably founded.
More importantly, our research suggests that men and women possess different skills that
lead to different strategic competencies, all of which are very valuable to any business
organization. Specifically, it seems that women outperform men on the relational issues,
while men outperform women on performance issues.
One limitation of the research effort is the imprecise and contradictory state of affairs
of the family business literature, especially the lack of a field research and the lack of non-
English research studies and settings in general. More information and more non-US
studies and papers could have influenced the results by bringing more data and an alter-
native or complementary view to the issue. Finally, as in every survey that depends on lit-
erature to provide new insights, the issue of accessibility of all important research studies
is crucial and is thereby referred to in the limitations of the research.
The most fundamental limitation of the study, however, is that owing to the fact that
the body of related existing research studies is small and somewhat inconclusive
(Chaganti and Parasuraman, 1996; Sharma et al., 2001; Sonfield et al., 2001), this posed
an exogenous constraint on the literature review and, consequently, the classification of
the dimensions and factors of succession, as well as the pair-wise comparisons between
men and women were approximated using a subjective pair-wise comparison through per-
sonal judgment by the authors. In addition, methodologically speaking, the Analytic
Hierarchy Process did not include the interaction between the two dimensions of the suc-
cession process. Therefore, until the findings of this study are tested in practice the valid-
ity and reliability of the conceptual framework constructed here should be considered
exploratory in nature, because of the assumptions and the subjectivity involved.
Finally, and as a result of the limitations cited above, the direction that future research
could and should take is toward empirical field research studies focusing on the critical
Framework for testing the success of the family business succession process 439
success factors in order to obtain a more accurate evaluation of their ‘weight’ toward a
successful succession, and demonstrate and measure their importance as they relate to
gender. The essence of this pioneering research study has been to provide an overall
research direction, and not delve into the matter in a generalizable depth of analysis.
Hopefully, the basis of sound future research effort direction has been set, and one can
expect more accurate and in-depth findings about this so important but so thinly investi-
gated issue in the future.
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4(2), 153–90.
PART VI
FAMILY BUSINESS
PERFORMANCE: GLOBAL
AND TRANS-CULTURAL
ISSUES
24 Internationalization of family businesses through
strategic alliances: an exploratory study
Kristin Cappuyns
Introduction
There are a number of phenomena, aside from competitive pressures, such as globaliza-
tion and rapid product life cycles, that encourage companies to embark on international-
ization strategies by exporting their products, establishing wholly owned foreign
subsidiaries or entering into strategic alliances. Strategic alliances offer numerous poten-
tial benefits to small firms, including the ability to tap into new markets, access economies
of scale, obtain complementary resources in under-developed value chain activities,
respond to environmental uncertainties, and receive endorsements from reputable incum-
bents (Ariño and Reuer, 2003; D’Souza and McDougall, 1989; Deeds and Hill, 1996;
Dickson and Weaver, 1997; Eisenhardt and Schoonhoven, 1996; Gomes-Casseres, 1997;
Hara and Kanai, 1994; Larson, 1991; Shan, 1990; Stuart et al., 1999).
Hence, at some stage of their business life cycles, both family businesses (FBs) and non-
family businesses (NFBs) need to trust outside business partners, despite the fact that
these businesses may have conflicting interests or may even be competitors. In other
words, entrepreneurial risk-taking is important for the survival and successful perform-
ance of family firms (Rogoff and Heck, 2003), even though these activities are time con-
suming and their payoffs are uncertain (Zahra, 2005, p. 35). Researchers have expressed
their concerns on several occasions about the fact that family businesses become more risk
averse as they grow older, and prefer conservative strategies that limit their growth and
profitability (Sheperd and Zahra, 2003).
In fact, a number of recent publications have demonstrated how this risk aversion is
manifested, in comparisons of the international activities of family businesses with those
of non-family businesses. Family businesses are seen to produce a lower level of exports
and direct foreign investments, and when a family business enters the international mar-
ketplace, the pace of the process tends to be slower than in non-family businesses
(Fernández and Nieto, 2005; Flören, 2001; Gallo and García Pont, 1993; Gallo and
Sveen, 1991).
These publications, moreover, agree that there are certain internal characteristics of
family businesses, such as concern about loss of control, risk aversion, the overlap of the
family, the business and the ownership system, the delayed succession process, and the
prolonged presence of the same people at the head of the organization, which can be
identified as the causes of the slowness of family businesses compared to non-family busi-
nesses (Flören, 2001; Gallo et al., 2004; Ward, 1987).
At the same time, we must bear in mind that growing advances in the development of
strategic alliances among companies in different countries, along with an increase in the
knowledge of how to make these alliances successful, may provide opportunities for
driving the internationalization of FBs at greater speed.
445
446 Handbook of research on family business
Nevertheless, the literature on strategic alliances does not consider the influence which
the characteristics of the individual partners (for example, whether or not they are FBs)
can have on a decision to form strategic alliances, as well as on the alliance’s development
process. In other words, even if being a family business does not appear, a priori, to
influence the strategic goals pursued, entering into a strategic alliance does affect these
characteristics of the company: its values, management process, and use of control mech-
anisms. Therefore, it is appropriate to expect that some of unique characteristics of family
businesses will have a bearing on the formation and development of the strategic alliance.
In fact, results have indicated that when both partners are family businesses, this helps
them to bridge cultures in international contexts better than other organizations, as they
share the universality of family (Swinth and Vinton, 1993).
At the same time, in order to determine the impact of these characteristics, this study
analyses strategic alliances with partners in emerging markets, as this will add another
dimension, resulting from the significant cultural distance between partners, which con-
siderably challenges the family businesses’ risk aversion as well as their dislike of sharing
control with partners with substantial cultural differences.
This chapter proceeds as follows: in the next section we give an extended review of lit-
erature in both the family business and strategic alliance fields. This is followed by a
section about the sample and research methodology. After that, the main findings are pre-
sented in two different sections: the first part of the findings illustrates that when the
family business embarks on internationalization projects, the firm’s product, financial
resources and organizational capacity are key. The second part of the results goes a bit
further; we have found taxonomies which confirm that family businesses, in order to
succeed in forming and developing strategic alliances, must in the first place improve their
ability to manage in contexts where objectives are not shared; they must build personal
preferences for the use of alliances; and they must develop trust towards their partners.
Another very recent study (Graves and Thomas, 2004), which is based on the results of
a longitudinal database of Australian family and non-family businesses, highlights that,
compared with non-family businesses, family businesses lag behind in building their man-
agerial capabilities as they progress towards advanced stages of internationalization.
Besides, the results suggest that family businesses are less likely to appoint outside man-
agers to take the lead in their internationalization processes, counting instead on suitable
family members to become the leading figures.
Nevertheless this is not a priori harmful to the family businesses’ continuity; on the con-
trary, recent findings clearly underline the way the firm can benefit from the incorporation
of qualified family members.
Members of the owner family have a special incentive to encourage a firm’s focus on
innovation, because the success of their company increases their wealth. The results echo
the call for greater participation by the family in the life of the firm as a way of achieving
strategic renewal (Fernández and Nieto, 2005, p. 86; Gallo and García Pont, 1993;
Gersick et al., 1997; Miller et al., 2003; Ward, 1987; Zahra, 2005, p. 38).
A third important characteristic is the impact of a strong business culture. There are
many contradictions in the abundant literature on this subject, but we will limit ourselves
to a few works that have related culture to the internationalization process.
Family businesses in general are often characterized as having a culture that is inward-
looking and resistant to change, and where decision-makers are constrained by the firm’s
history and tradition (Dyer and Handler, 1994; Gersick et al., 1997; Kets de Vries, 1993).
On the contrary, many of these businesses have learned that it is possible to gain strategic
advantages by building management systems based on trust and loyalty, a possibility not,
however, inherent in all families (Swinth and Vinton, 1993). At the same time, many of
the cultural characteristics of family businesses are the same all over the world, making it
easier to form strategic alliances, as noted by Gallo and Sveen (1991, p. 187).
Similar results are provided by a study about strategic alliances among family busi-
nesses, in which Swinth and Vinton state that there are always some very powerful cul-
tural differences between countries, especially between partners in emerging markets, and
the fact that businesses are family owned does not eradicate these differences. But as they
share the unique characteristics of being family-owned businesses, this might at some level
ease the partnership (Swinth and Vinton, 1993).
Furthermore, the literature on strategic alliances could maybe help us to learn more
about the role of family business partners. Unfortunately, so far this field (Gulati, 1995;
Parkhe, 1993; Ring and Van de Ven, 1994) has not paid sufficient attention to the influ-
ence that certain of the partners’ characteristics, such as the fact of being a family busi-
ness, can have on the decision to form a strategic alliance, as well as on the evolution of
the alliance. Research carried out in this area shows that the decision to enter into a strat-
egic alliance is influenced by the partners’ perceptions of compatibility between their
strategic goals and corporate cultures, in the widest sense of the word. Although the fact
of being a family business may not, a priori, influence a company’s strategic goals, it will
influence its cultural characteristics; its values, management processes and use of control
mechanisms (Kogut and Singh, 1988, p. 4).
It is reasonable, therefore, to expect that the intrinsic characteristics of family busi-
nesses definitely have a bearing on the formation of strategic alliances. In spite of the
unique capabilities and challenges associated with family businesses, there has been very
Internationalization of family businesses through strategic alliances 449
little research on the ability of these businesses to create, reconfigure and exploit their
resources and capabilities to undertake strategic alliances in the global marketplace.
Consequently, the precise objective of this study is to detect which characteristics do have
an influence and to what extent they can positively or negatively influence the formation
and development of the alliances.
Research methodology
The prompt to carrying out this research in an exploratory way was the scarcity of
research into the internationalization of family businesses in general, and particularly
their involvement in strategic alliances. The methodology used was the analysis of quali-
tative data collected in semi-structured interviews.
The sample includes Spanish family businesses that had formed strategic alliances in
order to enter emerging markets, or had unsuccessfully tried to engage in strategic
alliances, or that were seriously thinking about forming them. Latin American alliances
were left out of the study because the cultural distance between these countries and Spain
is smaller than the cultural distance between Spain and other countries with emerging
economies. Hence, the formation and development of strategic alliances with countries
outside Latin America more clearly reflects the challenges posed by such initiatives.
The decision to initiate strategic international alliances is usually rooted in a firm’s
desire to enter emerging markets and expand geographically. The family businesses exam-
ined belonged to different stages in the formation of strategic alliances in order to iden-
tify the characteristics of family businesses that influence the different phases of the
process.
A total of 13 family businesses participated in the study, representing three industrial
sectors: the food and beverage sector (4), textiles (4) and mechanical equipment (5). We
considered a business to be an FB when the following three conditions are met: (1) the
proportion of equity owned by one family is large enough for the family to control
the company; (2) family members are involved in the management and/or governance
of the company; and (3) at least the second generation of the family is involved in the
company.
Interviews were conducted between December 1999 and March 2000 with managers of
Spanish family businesses that had formed strategic alliances in order to penetrate emerg-
ing markets. By strategic alliance (SA) we understand an explicit agreement among firms
to collaborate in a limited aspect of their activity for a relatively long term, and this may
or may not result in a separate organizational entity. In fact, some, but not all, have
managed to achieve their objectives via these alliances.
One person was interviewed per company. This person belonged to the top manage-
ment team that had been involved in the strategic alliances. All the family businesses had
at least some members of the second generation working in the business, but three of them
were in the fourth generation already. Tables 24.1 to 24.5 provide more numeric data about
the 13 family businesses of the sample, such as; generation involved at the moment the
strategic alliance was formed, current generation incorporated (at the moment of the
interviews), ownership, alliance and the nationality of the partners.
Data were collected from semi-structured interviews with a person from the top-level
management position in the company. The information from the interviews was comple-
mented by archive data obtained during visits to the company, and from press cuttings. The
450 Handbook of research on family business
Generation Number %
1 1 8
1–2 2 17
2 5 42
3 3 25
4 or more 1 8
Total 12* 100
Generation Number %
1 and 2 3 23
2 4 31
2 and 3 2 15
3 2 15
4 or more 2 15
Total 13 100
Note: * In one of the cases the alliance was never formally constituted.
Internationalization of family businesses through strategic alliances 451
data were analysed using the data analysis tools and techniques suggested by Miles and
Huberman (1984). The procedures suggested by these authors include using descriptive and
analytic matrices designed ad hoc by researchers to facilitate data reduction, deduction of
conclusions and verification. The research team that worked on this project held various
meetings at this stage to compare partial conclusions and draw further conclusions.
Results: positive synergies and behavioural patterns in the formation and development
process
The results of this study were twofold: on the one hand, all family businesses in the sample
had a very similar set of variables that seemed to be fundamental when a family business
was seriously considering the possibility of initiating and developing strategic alliances;
on the other hand, the sample presented different forms of behaviour with respect to the
formation and development of these strategic alliances. In the following paragraphs we
illustrate these two set of results.
Variables of synthesis
The global economy has obliged both family-owned and non-family-owned firms to enter
international markets to compete. It is important for family businesses to realize that they
possess distinctive resources related to the influence of the family and ownership devel-
opmental cycles that may assist them in their international expansion. It is a question of
being aware of, and taking maximum advantage from, the right allocation (Gersick et al.,
1997; Habbershon and Williams, 1999).
The presence of family businesses in the global marketplace illustrates that not all
family businesses are averse to growth and risk-taking. On the contrary, some of them
undertake domestic and international strategic alliances to upgrade their existing cap-
abilities or to acquire and develop new skills that expand their growth options. These risky
moves require a significant resource allocation and demand major changes in these com-
panies’ internal decision-making process, without guarantees of financial success (Zahra,
2005, p. 24).
In the following paragraphs we illustrate how the family businesses in our sample
proceed when initiating alliances, as well as during their development process. The find-
ings allowed us to think in terms of three ‘variables of synthesis’. By the expression ‘vari-
ables of synthesis’ we mean that each variable gives rise to a ‘virtuous spiral’, resulting,
on the one hand, from positive synergies between different dimensions and, on the other,
from the learning ability of the many players (owners, managing family members from
different generations, and so on) who have so much influence on the strategic management
of the FB.
452 Handbook of research on family business
Product
Economic
resources
Organization
These variables turn out to be critical to the success of the internationalization process
(Figure 24.1), both because of what each means individually, and because of the rela-
tionships between the variables, which tend to strengthen them.
Product The first step in the learning process comes when the product or service
becomes a leader in the niche market of the business activity. This position encourages an
examination of opportunities in other competitive markets where this leadership position
will be put to the test.
Organization All the family businesses interviewed have very strong organizational struc-
tures, most of them headed by the founder or a successor, who gives an example of the
ELISA values in his way of living and directing the business. The ELISA values are
‘Excellence, Labor ethic, Initiative, Simplicity of life style, Austerity’. This set of values,
which has been found to be present in very successful Spanish family businesses (Gallo and
Cappuyns, 1999, p. 11), is implemented in the business culture, and because the family
businesses share the universality of family, this may enable them to better bridge cultures
in international contexts than other organizations (Swinth and Vinton, 1993, p. 19).
The ‘virtuous spiral’ resulting from positive synergies between the three dimensions
of product, economic resources and organization, and the fact that it happens to be a
Internationalization of family businesses through strategic alliances 453
Initiation
Early Late
1st–2nd Gen. 3rd, … Gen.
Quick
<1 year
‘Maximum ‘Slowly but
Pace speed’ surely’
‘A desire
‘Disorientated’ without
Slow commitment’
>1 year
learning process, confirms findings from previous studies in the field of entrepreneurship,
where Eriksson found that when the firm decides to go abroad, it must develop routines
compatible with its internal resources and competence, and that can guide the search
for experiential knowledge about foreign markets and institutions (Eriksson et al.,
1997, p. 353).
As the company advances along this virtual spiral, it acquires three strengths that are
key to success in strategic alliances: a very solid organizational structure which makes
these businesses attractive for capable managers by fostering trust, especially for share-
holders, and focussing the personal preferences of owner-managers towards a viable inter-
national strategy.
In the following paragraphs we illustrate how the family businesses in our sample
benefit from these positive synergies during the start-up and formation process of the
strategic alliance.
The start-up process An analysis of the companies in our sample shows how there are
broad differences between them in two frequently quoted aspects of internationalization
processes. Figure 24.2 illustrates the aspects of ‘when this process will really get started in
the FB life cycle’, and ‘the pace of the initiation of the strategic alliance’. The combina-
tion of these two aspects can be termed the ‘level of commitment to internationalization’.
The four different patterns of behaviour illustrate a decreasing level of commitment to
the internationalization process:
454 Handbook of research on family business
Moreover, in the interviews it has been commented that the businesses in the first two
categories mentioned above, ‘Maximum speed’ and ‘Slowly but surely’, started the inter-
nationalization process at a very early stage. Their attitude confirms the results of a study
about effects of the age at entry into the global marketplace, in which the authors pro-
posed that as firms get older, they develop learning impediments that hamper their ability
to successfully grow in new environments and that the relative flexibility of newer firms
allows them to rapidly learn the competencies necessary to pursue continued growth in
foreign markets (Autio et al., 2000, p. 921). For family businesses that do not start the
internationalization process in the first or second generation it is very unlikely that they
will do so in the future (Okoroafo, 1999, p. 154).
Furthermore, the same study states that early venturing across borders establishes a
self-reinforcing pattern (Amburgey et al., 1993; Cohen and Levinthal, 1990) that implants
a proactive culture in the firm, enhancing not only the ability to see and realize foreign
opportunities, but also the willingness to do so (Penrose, 1959). This interpretation is con-
sistent with the work of Brush (1992), who found that early internationalizers held more
positive attitudes towards non-domestic markets than did late internationalizers; and this
has been confirmed with the family businesses from this Spanish sample, where the age of
the business (in function of generation) and the pace of time for the start-up reflect the
level of commitment to internationalization.
Nevertheless, for those family businesses in our sample that took the decision to go
abroad in the first generation, this was not a coincidence, but a well considered decision,
taken by leaders who have tremendous personal energy and passion for growth and have
been defined as ‘masters of growth’ (Ward, 1987).
The development process Our analysis also indicates a second important difference
between the family businesses in the sample when dealing with the execution of these
Internationalization of family businesses through strategic alliances 455
alliances. There are two determining factors at the execution level: the first is the level of
family ownership, that is to say, whether the family is the 100 per cent owner of the
company’s share capital, or if there are other partners from outside the family. The second
factor relates to the level of organizational development of the FB, that is, whether at the
governing level there is an active and useful board of directors (who are not there merely
to cover legal requirements) and whether at the management level there is a professional
and well-prepared organizational structure.
Figure 24.3 illustrates the far-reaching impact that these two factors – ownership and
organizational development – can have on the content and performance of strategic
alliances in which family businesses are engaged. The results presented in Figure 24.3
suggest that the use of strategic alliances as a vehicle for internationalization, apart from
a strong personal commitment, requires other factors such as trust in the partner and
managerial capabilities.
At a higher level, there is a need to trust that allies will maintain a relationship with the
ownership structure and the developments of the family business. An ownership structure
shared with third parties outside the family facilitates the development of the ability to
manage in the context of unshared aims as a strategic alliance, as well as the capacity to trust
the partners. ‘Commitment to trust, reliability and mutual benefit is exactly the kind of old-
fashioned thinking that ideally positions family firms for the future’ (Ward and Aronoff,
1991, p. 44). Family firms that retain these fundamental values as guides to decision-making
and operations find themselves at a strategic advantage (Lansberg and Perrow, 1991).
The very successful family businesses in our sample, as can be appreciated in Figure
24.3, had a strong commitment as well as trust in their partners, and that was especially
reflected in the fact that they did not strive for a majority percentage of the partnership.
As the level of trust decreases, the strategic alliances are bound by a set of contractual
rules evolving to absolute control by keeping a comfortable majority of property.
Another aspect of our findings is related to managerial capacity. This finding is com-
pletely in line with the results from another Spanish study that concluded that the man-
agers’ backgrounds are one of the determining factors to be taken into account, apart
from the firm’s size and age, for understanding the large set of causal relationships with
regard to the company’s level of internationalization (Casillas and Acedo, 2004).
456 Handbook of research on family business
Finally, Figure 24.3 illustrates how different combinations of these influential charac-
teristics such as commitment, trust, property and organizational development, result in
the use of different types of alliances, or in some cases their non-use.
Conclusion
In contrast with the majority of research findings, the data analysed in this study have
clearly initiated a breakthrough in the understanding of the failure of the international-
ization processes in family businesses; above all, it calls into question the tendency to
blame the intrinsic characteristics of these businesses for the delayed or the reduced activ-
ity in the international arena.
The main results of this study are threefold: in the first place, it indicates that
family businesses as well as non-family businesses are able to grow through inter-
nationalization processes, and more especially through strategic alliances. At the
same time, it highlights the fact that there are three critical variables that together drive the
internationalization process: possession of a product whose potential exceeds that of the
local market; desire to grow the company, even if this entails greater indebtedness or
accepting new equity partners; adoption of an organizational structure that enables
growth, without stagnating in traditional forms. When all three conditions are met, the
company will develop strengths to enable it to successfully engage in strategic alliances,
simultaneously allowing the development of the necessary managerial capabilities for
internationalization, which in turn favours the formation of personal preferences and a
strong conviction of the desirability of internationalization. An Australian survey, based
on a longitudinal database of Australian family and non-family businesses could not find
significant differences with respect to financial performance in the internationalization
process in both groups (Graves and Thomas, 2004, p. 210). So, even if family businesses
follow a specific pattern, they can reach equal outcomes as non-family businesses.
Secondly, this study shows that although internationalization is often discussed, not
Internationalization of family businesses through strategic alliances 457
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25 Family and cultural forces: shaping
entrepreneurship and SME development in China
David Pistrui, Wilfred V. Huang, Harold P. Welsch
and Zhao Jing
This study profiles the characteristics, attributes and growth orientations of Mainland
Chinese entrepreneurs including the relationships, roles, and contributions family and
culture play in the development of private small and medium-size enterprises (SMEs).
Drawing on a sample of 222 entrepreneurs’ psychographic motives, demographic attrib-
utes and business activities are revealed. Family and enterprise relationships related to
employment, investment, and active family participation and growth orientations are
empirically tested. The findings suggest that entrepreneurs are motivated by the need for
independent-based achievement and continuous learning around a family focus.
Entrepreneurs were found to rely heavily on family member participation to establish,
develop and grow their enterprises. The majority of the entrepreneurs surveyed employed
at least one family member on a full-time basis. Entrepreneurs were also found to use
family finances as the primary source of start-up capital. Family participation in the form
of employment and investment was found to have a positive impact on entrepreneurial
growth intentions and expansion plans.
460
Family and cultural forces 461
countries moving from a state-planned to a mixed market-based system), the family unit
is often the only intact socio-economic institution capable of supporting entrepreneurial
activities. The family also plays a leading role in new venture formation, often serving as
the primary source of start-up capital, not to mention in expensive labor and know-how.
Entrepreneur-led SMEs provide social stability and serve as the engine of economic
growth. One such example can be found in the post-communist transition of Eastern
Europe where entrepreneur-led family businesses have been found to be the engine driving
economic growth while fostering social stability (Hisrich and Fulop, 1997; Pistrui et al.,
1997b; Poutziouris et al., 1997).
As far back as 1978 China began to realize some of the advantages of mixing state and
private enterprise. China has adopted a different approach toward entrepreneurship and
private-enterprise development, opting for the development of a mixed ‘socialist market
economy.’
In an effort to stimulate economic growth and development Chinese leaders encour-
aged the formation of rural enterprises and private businesses, liberalized foreign trade
and investment, relaxed state control over some prices, and invested in industrial produc-
tion and the education of its work force (Hu and Khan, 1997).
By the end of 1990s it was estimated that more than 12 million private enterprises were
operating in China (Quanyu et al., 1997). Many of the newly emerging entrepreneur-led
private sector businesses are micro-enterprises. Starr (1998) pointed out that most Chinese
SMEs employ, on average, fewer than 15 workers and hold less than $40 000 in registered
capital. Both Dana (1999) and Davis (2000) cited examples of a series of emerging areas
such as financial services, real estate, subcontracting, restaurants and the entertainment
sectors where entrepreneurial activities have begun to flourish.
Culture has also been found to impact growth orientation. For example, Koiranen
(2002) reported that established Finnish family businesses scored lower than expected on
values related to economic return such as growth and social recognition, and higher on
values and ethical behavior.
464 Handbook of research on family business
Martin and Lumpkin (2003) discovered that as US family businesses mature, their
entrepreneurial orientation is replaced with a family orientation where stability and
inheritance concerns become the businesses’ primary drivers. In a study of 305 Spanish
firms Gallo et al. (2004) concluded that family businesses have less growth in domestic
and international sales and equity. Virtually all the cited researchers identify the need for
additional research to advance the understanding of growth orientation in relationship to
entrepreneurship and family business.
This research intends to build on the work of Pistrui et al. (1997a and b), Gundry and
Welsch (2001), and Pistrui (2002) by advancing the understanding of how family partici-
pation and involvement affects growth orientations and expansion plans of Chinese
entrepreneurially led enterprises.
Chinese entrepreneurs view work as more important than leisure and as contributing
to family welfare rather than competing with it (Zapalska and Edwards, 2001). Tsang
(2001) pointed out that Chinese businesses are perceived as essentially a family possession
where the head of the family has the final say in decision-making.
The nature of Chinese familism and the strong inclination to trust only people related
to them has been found to create difficulty in Chinese businesses’ abilities to move from
small owner-managed firms to larger professionally managed enterprises (Fukuyama,
1995). Nonetheless entrepreneur-led small and medium-size family businesses will con-
tinue to be at the forefront of the emerging PRC socialist market economy.
Although small entrepreneur-led family-run enterprises can proliferate in China, their
growth into more complex organizations may be held back by the disastrous legal inheri-
tance of socialism (A Survey of China, 2000). Accordingly, the aspects associated with
family business development represents an area for more in-depth analysis.
in those cities are more entrepreneurial and family business orientated than those in inner
cities such as Wuhan.
On the other hand, compared with those in the western areas of China such as GanSu,
and Chongqing, people in Wuhan are more entrepreneurial and have some tradition of
family participation in business development. Therefore, by sampling Wuhan entrepre-
neurs, we expect to have a nominal view of Chinese entrepreneurs and family business
development in terms of their demographics, family and enterprise relationships, entre-
preneurial spirit, type of business activities, financing, personal attributes, growth aspir-
ations and motivations, among other characteristics.
of professors and graduate students. The decision was made to develop a set of proce-
dures to guide the EPQ interview process. This included training sessions for interviewers
where a series of policies and procedures were established and reinforced. Furthermore,
a system of random checking back both interviewees and interviewers was established
and implemented to ensure quality data points. All written correspondence including the
EPQ and accompanying covering letter would carry the logo and endorsement of the
Chinese institution along with the US partner who was a co-sponsor of the research
project.
With the assistance of the local chamber of commerce, we randomly selected 500 oper-
ating businesses from a firm registration database. In China, the Chamber of Commerce
(COC) is a government agency with tremendous political influence. The introduction by
the COC provided us access to local entrepreneur-led SMEs in a way that we would not
otherwise have had. This ensured a reasonable response rate. All interviewees were assured
anonymity. Many questionnaires were disqualified owing to incomplete data and missing
information. Out of 500, we received usable EPQ data from 222 (a 44 per cent response
rate) operating entrepreneur-led SMEs.
We use the results in three ways: to explore the types of entrepreneurial activity taking
place in central China; to uncover the roles and the relationships of how cultural and
family forces are related to entrepreneur-led SME development in a socialist market
economy; and to provide direction for further study and analysis related to entrepreneur-
ship and family business development in transforming economies.
Notes:
Range 1–5; N222.
*** 0.001, ** 0.01, * 0.05.
468 Handbook of research on family business
The data suggest that Chinese entrepreneurs are motivated by the need for personal
achievement and the desire to make a direct contribution to the success of an enterprise.
The desire for higher earnings was the primary motive. Family security also appeared as
a central motivating force.
Chinese entrepreneurs indicated an eagerness to make better use of their training and
skills and to keep on learning. There is a strong drive to achieve a personal sense of
accomplishment, foster family well-being, and develop new skills. These findings appear
to be consistent with important components of the Chinese value system, such as
Confucianism, which encourages continuous self-improvement, hard work, and diligence.
The data further validate the work of Wu (1983), Dana (1999), Pye (2000), and (Zapalska
and Edwards, 2001) who set forth the theory that Chinese cultural orientations rooted in
Confucianism were fundamental in shaping entrepreneurial orientation and family busi-
ness development.
Although this analysis is descriptive in nature, these basic findings provide an empirical
foundation from which to develop further analyses. These findings (see Table 25.1) suggest
that Chinese entrepreneurs from the Wuhan region appear to be motivated by the need
for independent-based achievement and continuous personal development around a
family focus.
Chinese entrepreneurial motives were found to be quite different from their counter-
parts in post-communist Romania and East Germany. For example, Pistrui (2002), and
Pistrui et al. (1997b) documented the fact that Romanian entrepreneurs were driven by
the motivations of increasing security, social status, and prestige of the family unit,
whereas Chinese entrepreneurs are driven by lifestyle, financial motives and personal chal-
lenges associated with business start up and development.
Wintermantel (1999), and Pistrui et al. (2000, 2003) found that new entrepreneurs in
the former communist East Germany were motivated by a blend of individual and
social aspects including lifestyle, the desire for independence and family well-being.
Furthermore, significant differences were found in the motivations between East and West
German entrepreneurs, verifying that culture and the political economy can shape entre-
preneurial motivations. Chinese entrepreneurs clearly have a unique set of motivational
attributes when compared with their post-communist Central and Eastern European
counterparts. Attention will now be given to some general demographics and entrepre-
neurial spirit.
Male Female
Category Total Mean (SD) Mean (SD)
Years of education 13.09 13.19 (2.77) 12.75 (2.71)
Years of business experience 7.83 8.21 (6.23) 6.62 (5.95)
Years of work experience 10.08 10.37 (8.58) 9.12 (7.67)
Age 36.66 37.15 (8.12) 35.08 (8.69)
Total 222 170 52
Question 1: When did you first know you wanted to go into your own business?
Question 2: What year was your business started?
Question Before 1987 1988–90 1991–93 1994–96 1997–99
Question 1 23.68% 23.00% 18.42% 30.00% 4.74%
Question 2 11.98% 11.06% 15.21% 29.49% 32.26%
Mean (SD)
Question 1Question 2 2.90 (3.86)***
Notes:
N222.
*** 0.001, ** 0.01, * 0.05.
(1997) point out that state-owned enterprises actually maintain special Women’s
Commissions, which share offices and activities with enterprise unions.
These findings suggest that entrepreneurial development is taking place across gender
lines. As Table 25.2 illustrates, no statistically significant differences were found based on
gender. This may reflect the impact of socialism, which encourages the active participa-
tion of woman in the economy. Women entrepreneurs may benefit from the support of
their extended families that provide assistance with children and household chores. The
fact that female entrepreneurs tended to be plentiful and a bit younger may indicate the
emergence of a new enterprising class of young Chinese women.
With an average of 13.09 years of education, it does not appear that Wuhanian entre-
preneurs have much formal training beyond high school. This is in contrast to what Pistrui
(2002) found in Romania where entrepreneurs had just over 15 years of education, and
by Wintermantel (1999) who documented that East German entrepreneurs had a similar
level of slightly over 15 years.
The average number of years of business experience, 7.83 years, suggests that these
entrepreneurs have been successfully self-employed over an extended period of time. This
is significantly more experience than Romanian entrepreneurs (3.4 years of business expe-
rience, Pistrui, 2002; Pistrui et al., 1997a). While Wintermantel (1999) and Pistrui et al.
(1997a, 2003) reported that East German entrepreneurs had 5.8 years of business experi-
ence. Men were found to have slightly (1.59 years) more business experience than women
(see Table 25.2). By the same token, men were found to have only slightly more work
experience – a difference of only 1.25 years. Both Romanian and East German entrepre-
neurs were found to have approximately 14 years of work experience, almost four years
more on average than their Chinese counterparts.
470 Handbook of research on family business
Note: N222.
Family employees are also active in enterprise creation, development and operation. At
least half (50.9 per cent) of all businesses in the sample had at least one family member
employed full time in the enterprise (see Table 25.3). Approximately 40 per cent were found
to have two or more family members employed on a full-time basis. Given the government
restrictions on family size, this finding suggests that multiple generations including
cousins might be working together to establish and grow entrepreneur-led family-
managed SMEs.
Family members were not found to be engaged as much in part-time employment. More
then 78 per cent indicated that they had no family members employed part-time in their
firm. With just over 20 per cent (21.62 per cent) reporting a family member employed part
time, 16 per cent had only one family member serving as a part-time employee.
Most likely, entrepreneurs perceive employment as part of the family’s obligation,
reflecting the traditional Chinese cultural terms associated with Confucianism and
Guanxi relationships. Pistrui et al. (2001) reported that there was not a strong relationship
between family investment and family employment as Chinese entrepreneurs had a
difficult time distinguishing between investment and active participation in the business,
and see the two as one in the same. These findings point to the need for further study of
the relationships between entrepreneurs and family members in different cultural settings.
Notes:
*** 0.001, ** 0.01, * 0.05.
Range 1–5; N222.
expected, new Chinese entrepreneurs were found to rely much less on formal institutions,
such as banks and government assistance, to get started. This is similar to the research of
Pistrui et al. (1997b) who found that Romanian entrepreneurs relied primarily on family
and personal networks for start-up financing during the transition from communism to a
mixed socialist economy. Hisrich and Fulop (1997) found a similar phenomenon in
Hungary where over 70 per cent of women entrepreneurs relied on personal saving and
the support of family and friends. Attention will now turn to the types of businesses being
started.
Method of establishment
The vast majority (86.48 per cent) of the entrepreneurs surveyed originated their enter-
prises. As Table 25.5 illustrates, another 8.1 per cent of the entrepreneurs purchased their
businesses from someone else. Only 5.4 per cent inherited the business, which further
Family and cultural forces 473
Percentage
Type of business organization
Sole proprietorship 53.85
Limited liability company (LLC) 32.13
Partnership 10.41
Corporation 4.07
Total 100.00
Method of establishment
Originate 86.48
Purchase 8.11
Inherit 5.41
Total 100.00
Business activities
1. Retail 27.94
2. Service organization 20.27
3. Distribution 16.67
4. Manufacturer 12.61
5. Computer/technology 10.81
6. Construction 4.95
7. Financial/insurance 3.15
8. Transportation 2.25
9. Professional services 1.35
Total 100.00
Note: N222.
suggests that this sample of Wuhanian entrepreneurs represents a new urban entrepre-
neurial class. These finding are similar to those reported by Wintermantel (1999) who
found new East German led family businesses were originated by new entrepreneurs in
the post-communist period following the fall of the Berlin Wall. However, Wintermantel
(1999), and Pistrui et al. (2002) also reported that over 90 per cent of entrepreneurs
surveyed originated their enterprise.
The findings of this study suggest that Chinese entrepreneurs search for localized
market opportunities and create closely held inward-looking sole proprietorships to serve
them. Given the youth of these enterprises, it appears highly likely that these newly emerg-
ing SMEs will face increased competition as the private sector of the Chinese economy
grows. There will also be an emerging need for succession and continuity assistance as
these businesses mature and integrate additional family members into their operations.
found to dominate the sample. These three indexes represented well over half (64.88 per
cent) of new start-ups in the Wuhan area.
The domination of retail activity is further evidence of the emerging entrepreneur-led,
private-enterprise sector focused on consumer markets. The findings in this study support
the work of Davis (2000), who set out examples of private restaurateurs or subcontrac-
tors (chengbao) that have replaced state canteens as well as the development of leisure and
entertainment businesses. Similar patterns of retail and service start-ups have been docu-
mented in Romania (Pistrui et al., 1997b), and East Germany (Wintermantel, 1999)
during the transition from communism, suggesting that entrepreneur-led family firms
have seized a moment of opportunity to fill a void in the emerging marketplace.
Manufacturing and computer/technology activities represented over 20 per cent of the
sample. Most likely, these sectors are examples of the tertiary markets developing to serve
the retail and technology sectors. Given the abundance of cheap labor it should not be
surprising that manufacturing represents almost 13 per cent of the enterprises. Most likely
entrepreneurs with state connections are leveraging Guanxi relationships in combination
with family resources to launch and develop new private enterprises.
The data also suggest that the advent of the Internet, mobile telephones, and personal
computers seems to be creating a flurry of entrepreneurial activity around computer hard-
ware and software markets. Chinese officials opened the Internet to the public in 1996 (a
time period which shows a significant increase in the number of new business start-ups;
see Table 25.2). The China Network Information Center (CNNIC) estimated 16.9 million
Internet users as of June 2000, up from a mere 600 000 in 1997 (Hartford, 2000). Another
example of entrepreneur-based activity related to the Internet is found in Internet con-
nections. Hartford (2000) also points out that by late 1999, 500 private companies held
licenses as Internet service providers. Consequently, part of the sample data may encap-
sulate this type of activity.
Whereas some markets, such as banking, telecommunications, and general distribu-
tion, are off limits to entrepreneurs, other consumer service sectors are being developed
(‘A survey of China’, 2000). Examples from this study include a small, yet important, level
of professional services, transportation, insurance and real estate.
Q402 Q412
Growth
Adding Offsite
operating
intentions and training of
space expansion employees
plans
Q405 Q415
Acquiring Seeking
new professional
equipment advice
Perhaps more importantly, transition is creating vast new markets and fostering the intro-
duction of new goods and services. Methods of production are also radically changing.
In general Chinese entrepreneurs are redesigning how enterprise is conducted.
Mainland China provides an excellent field site in which to investigate entrepreneurial
growth intentions and expansion plans. The transition from communism toward a social-
ist market based economic system offers a rich environment to investigate entrepreneur-
ship and small business growth.
Notes:
*** 0.001, ** 0.01, * 0.05.
N222; Range 1–5.
Family and cultural forces 477
theme was the intention to expand internal resources and capabilities. This includes adding
specialized employees, developing information technology, and seeking special advice.
Chinese entrepreneurs seem to have definite, well-defined plans for the future. Although
vestiges of communism remain, entrepreneurs and their families are becoming masters of
their own destiny by focusing on the emergent private sector business opportunities in
China’s socialist market economy.
In a study that employed the EPQ to sample 1427 entrepreneurs across five countries
(China, US, Romania, Germany, and Venezuela), Pistrui (2005) discovered that Chinese
entrepreneurs were found to have modest levels of growth intentions and expansion plans
as compared to the other nations. They led only three of the 18 categories including:
● Selling to a new market 4.20 (mean 3.80)
● Adding a new product or service 3.99 (mean 3.95)
● Seeking professional advice 3.72 (mean 3.51)
From this point attention will turn to exploring the proposition and testing the
hypothesis with multivariate statistical tools.
Component
1 2 3 4 5 6
Q405 0.696997 0.229397 0.090072 0.075331 0.055791 0.164158
Q408 0.677611 0.289496 0.129154 0.00874 0.01052 0.233306
Q410 0.662826 0.13584 0.179559 0.326973 0.218882 0.033297
Q409 0.658423 0.014342 0.135884 0.09164 0.340662 0.12031
Q407 0.262109 0.790139 0.041563 0.110632 0.190906 0.03194
Q406 0.286511 0.748468 0.011189 0.086158 0.196459 0.055385
Q413 0.139998 0.171646 0.80743 0.00108 0.064003 0.110485
Q414 0.027254 0.14912 0.639916 0.351181 0.12406 0.02033
Q411 0.289439 0.13936 0.577899 0.07161 0.00741 0.42918
Q412 0.210592 0.359911 0.549978 0.09934 0.250277 0.21704
Q416 0.063031 0.204153 0.059255 0.795849 0.200018 0.21935
Q417 0.165275 0.13706 0.029659 0.635582 0.390886 0.229306
Q415 0.247958 0.376833 0.330661 0.629607 0.20545 0.00307
Q401 0.135413 0.222546 0.128909 0.144989 0.668172 0.122955
Q400 0.228402 0.30601 0.079432 0.086151 0.648681 0.04097
Q402 0.18084 0.119731 0.00555 0.244248 0.02105 0.690047
Q403 0.039917 0.11647 0.112877 0.164493 0.500906 0.583126
Q404 0.03609 0.544743 0.061192 0.057353 0.083684 0.557024
Notes:
Extraction method: Principal Component Analysis.
Rotation method: Varimax with Kaiser Normalization.
Rotation converged in 10 iterations.
Chinese entrepreneurs are keen to expand operations and develop new markets for their
products and services. There is also the desire to improve infrastructure to support enter-
prise growth and development. Chinese entrepreneurs were found to have a clearly defined
subset of growth intentions and expansion plans. In a similar study of Romanian entre-
preneurs Pistrui et al. (1997b) and Pistrui (2002) documented growth intentions and expan-
sion plans around market expansion, technological upgrades, and operations/production
constructs. The finding of this research suggests that Chinese entrepreneurs have an even
more defined pattern of growth intentions and expansion plans.
Family and cultural forces 479
with similar magnitude. Discriminant validity was assessed by examining the rotated com-
ponent matrix to ensure that items did not cross load on multiple factors.
Results of the analysis indicated that a priori assumptions were substantiated with a six-
factor solution: EquipUpg, ITUpg, OpExp, BusDev, MktExp and InfraDev. Table 25.9
presents the test of convergent validity including standardized Cronbach ’s, eigenvalues,
composite reliabilities and variances explained by each construct. All variables have high
factor loadings on their respective construct (> 0.55), the Cronbach ’s for each construct
are above generally accepted guidelines (Nunnally, 1978), and the composite reliabilities of
the measures exceed the minimum value of 0.60 (Bagozzi and Yi, 1988). This supports the
reliability of the measures integrated in the hypothesized model. Also, the convergent
validity is supported because all loadings are highly statistically significant (p 0.001).
Convergent validity can be assessed by the degree of association among the items mea-
suring the constructs (Table 25.7). To evaluate discriminant validity, Fornell and Larcker
(1981) suggest a comparison between the average extracted variance (AEV) of each factor
and the variance shared between the constructs (the squared correlations between the con-
structs). In Table 25.10, squared correlations are reported on the off-diagonal and AEV
square-roots are on the diagonal. An AEV value should be higher than 50 per cent (Rivard
and Huff, 1988) and should be greater than its squared correlations.
EquipUpg
ItUpg
H1 + H2 +
OpExp
H3 +
FP
H4 +
H5 +
BusDev
H6 +
MktExp
InfraExp
Kelloway (1998). By these criteria, we have verified that our model has a good fit with the
empirical data.
Carmines and McIver (1981) state that the ratio of chi-square to degrees of freedom
should be in the 2:1 or 3:1 range for an acceptable model. Kline (1998) says 3 or less is
acceptable. Even though some indices in our model fall short of the recommendation, the
existing goodness-of-fit measures are related to the ability of the model to account for the
sample covariances and therefore assume that all measures are reflective.
The SEM procedures that have different objective functions and/or allow for formative
measures would, by definition, not be able to provide such fit measures. In actuality,
models with good-fit indices may still be considered poor based on other measures such
as the R-square and factor loadings. The fit measures only relate to how well the para-
meter estimates are able to match the sample covariances. They do not relate to how well
the latent variables or item measures are predicted.
The SEM algorithm takes the specified model as true and attempts to find the best-
fitting parameter estimates. If, for example, error terms for measures need to be increased
in order to match the data variances and covariances, this will occur. Thus, models with
low R-square and/or low factor loadings can still yield excellent goodness of fit (Chin,
1998a and b). Therefore, our model fit is adequate because of the strong loadings, signi-
ficant weights, high R-squares and significant structural paths.
The impact of family participation and growth intentions and expansion plans
The hypothesis that that family participation in the business has a positive impact and
encourages entrepreneurial growth intentions and expansion plans was confirmed.
Family participation in the form of employment and investment was found to have a
positive impact on entrepreneurial growth intentions and expansion plans. These findings
482 Handbook of research on family business
Q405
Q406 Q407 1
Q408
1
Equip
Upg
0 Q410
ITUpg Q409
FT 1
Q415
1 1
Bus Q416
Dev
PT FP
Q417
Q411
1
Famlnv
Op Q412
0 Exp
Q413
Infra
Dev
Q414
1
0
Q401
1
Market
Exp
Q402 Q403 Q404 Q400
Squared Standardized
multiple regression
Hypothesis Testing the relationship between correlation coefficient
H1 FP has a positive impact on EquipUpg 0.572 0.756***
H2 FP has a positive impact on ItUpg 0.441 0.664***
H3 FP has a positive impact on OpExpa 0.382 0.618***
H4 FP has a positive impact on BusDev 0.532 0.729***
H5 FP has a positive impact on MktExp 0.739 0.859***
H6 FP has a positive impact on InfraExp 0.529 0.728***
Chi-square (
2) 405.912 df 184
2/df2.206
NFI 0.695 RFI 0.652 IFI 0.806
CFI 0.802 NCP 221.912 FMIN 1.853
RMSEA 0.074 Hoelter .05 117 Hoelter .01125
suggest that newly emerging Chinese family businesses intend to expand and grow. These
enterprising families are at the forefront of the transition from communism to a socialist
market economy.
Six specific growth constructs have been identified and validated in these entrepreneur-
led family enterprises. Family participation was found to shape these growth and expan-
sion subsets. As outlined in the previous sections the model has been statistically validated
suggesting that family participation creates growth personalities that reflect a clustering
of implementable attributes of planned growth around specific categorical orientations
such as market expansion, equipment upgrades, and business development.
These findings are also empirical validation that Chinese cultures including
Confucianism and Guanxi networks connect the family and entrepreneur to their enter-
prise. Family participation reflects the Confucian values and Guanxi ties associated with
family, collective values, centralized authority, conformity and the importance of reputa-
tion achieved through hard work and successful enterprise as described by Zapalska and
Edwards (2001). The family is the social unit that often helps blend the myriad business
tasks together and helps smooth out the rough edges when conflicts arise with respect to
growth and policy questions. The obligation to share wealth with family members and to
provide support and security may deter the entrepreneur from investing in the growth
aspects of the business. Thus the research question arise as to whether the family was a
deterrent to or facilitator of entrepreneurial growth.
The results indicate that the family may not only be instrumental in helping to estab-
lish the business but also is a significant factor in the growth of the firm. Various forms
of family support could include growth capital, room and board, building space, tools,
encouragement and moral support to growth initiatives. Kuratko and Welsch (2004)
484 Handbook of research on family business
suggest that the family influence helps obtain access to suppliers, merchants, creditors,
market authorities, local officials and persons with economic power and influence. Many
of these factors provide the medium and vehicles for the growth of the firm. Thus fami-
lies have proven to be a valuable mechanism for entrepreneurial growth and governments
should encourage families in this direction.
Families have been found to play a central role in the growth and development of entre-
preneurial led SMEs in Mainland China. Although the findings of this study are signifi-
cant there is a clear need for further research.
Conclusion
The findings of this study suggest that Mainland Chinese entrepreneurs located in the
Wuhan area are motivated by the need for personal achievement, the desire to make a
direct contribution to the success of an enterprise, and the desire for family security.
New-venture creation grew during the mid to late 1990s, when approximately 77 per
cent of the entrepreneurs surveyed actually started new enterprises. The results of this
study found that the overwhelming majority (85.98 per cent) of new private firms were
closely held sole proprietorships or LLCs. Over 86 per cent of the entrepreneurs surveyed
indicated that they had originated their enterprises.
The family and Chinese culture played a central role in supporting entrepreneur-led
SME growth and development. The household and extended family tended to provide
primary sources of start-up capital. Over 67 per cent of the businesses had at least one
family investor; while 31.5 per cent had two. Fifty per cent of these new enterprises had a
family member employed full time, while 23.4 per cent had more than one family member
working full time.
Family participation was found to have a positive impact on entrepreneurial growth
intentions and expansion plans. This represents one of the first empirical validations of
the impact of Confucian values and Guanix ties on entrepreneurial led business develop-
ment in a post-communist transition socio-economic system.
One thing that seems certain is that entrepreneur-led, family-centered private SMEs will
continue to play an increasing role in the development of China’s socialist market
economy. Although small, entrepreneur-led, family-run private enterprises can prolifer-
ate in China, their growth into more complex organizations may be held back by the legal
inheritance of socialism (‘A survey of China’, 2000).
From a policy standpoint, this study indicates a low degree of support from the Chinese
government. It therefore highlights the urgency for the Chinese government to channel
financial resources and services, and to create innovative programs to support entrepre-
Family and cultural forces 485
neurial family centered business development. Historically, the Chinese government has
devoted much of its attention to state-owned enterprise and scant attention has been paid to
the development of private-owned enterprise. Not until after 1992, did the Chinese govern-
ment start to accept and realize that entrepreneurs are the engine of economic development.
One notable caveat in this study is related to our sample, which is based on entrepre-
neurs in Wuhan. We note that Chinese entrepreneurs in more entrepreneurial areas such
as Shanghai and Guangzhou may exhibit different socio-economic characteristics and
demographics. We expect there may be some differences across various regions both in
terms of family dynamics and the socio-economic environment. Nevertheless, no attempt
is made here to generalize findings from this study to other areas of China.
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26 Board of directors in Italian public
family-controlled companies
Guido Corbetta and Alessandro Minichilli
This chapter aims to explore the features of the boards of directors in the publicly listed
companies of the Italian stock exchange. It analyses the board along its classical three
dimensions, that is, the composition, the structure, and the processes. The purpose is to
understand if the family companies present specific characteristics with respect to the
functioning of corporate boards. The analysis has been conducted over the 114 family-
controlled Italian listed companies, and focused mostly on the independence of the board
of directors from the controlling family. Results indicated that in public family-controlled
companies the compliance with the code prevails over their family nature in order to
explain their board characteristics. Results showed some correlations between the board
characteristics and the company stock performance. Nonetheless, no evidence was found
that public family-controlled companies have strong specific characteristics descending
from the family representation within the board of directors.
Research background
Few topics like corporate governance and boards of directors found such considerable
attention in the past decade (Daily et al., 2003). Some would say that we are experiencing
the ‘golden age’ of boards and governance (Huse et al., 2005). A superficial glance sug-
gests that the corporate scandals and bankruptcies worldwide compelled academics and
managers to became aware of the relevance of corporate governance. We maintain that
this interest comes from other reasons.
First, several theoretical developments and fresh ideas widened the meaning of cor-
porate governance. Corporate governance traditionally has been defined as the ways sup-
pliers of finance to corporations assure themselves of getting a return on their investment
(Shleifer and Vishny, 1997). Therefore, the governance research has so far been dom-
inated by the agency theory paradigm in explaining the moderating role the board of
directors plays between managers and shareholders (Eisenhardt, 1989; Fama and Jensen,
1983; Jensen and Meckling, 1976; Shleifer and Vishny, 1997). This theoretical perspec-
tive has its roots in Berle and Mean’s seminal work (1932) on the separation between
ownership and control, which emphasized the contribution of the board of directors in
lowering the risk of managerial opportunistic behaviours. Hence, it reduced the role of
the board to a mere monitor against funds’ expropriations inspired by a managerial self-
serving attitude. The ongoing research on governance mechanisms shows that people
could have different behaviours. It also shows how the board has to interface with a
broader bundle of actors than the sole shareholders. The stakeholder theory arguments
(Blair, 1995; Freeman and Reed, 1983; Huse, 1998, 2001), for instance, proposed a more
comprehensive definition of corporate governance as a set of interactions that occur
among the internal stakeholders (including the management), the external stakeholders
488
Board of directors in Italian public family-controlled companies 489
(including the shareholders), and the board in directing the corporation to create value
(Huse, 2002). This new theoretical perspective created room for alternative interpret-
ations of the governance matter. Stewardship theory, for instance, emphasized a diverse
view of human behaviour. In this view, managers are motivated to act in the best inter-
est of their principals, founded on the conviction that pro-organizational behaviours
have higher utility than individualistic and self-serving behaviours (Davis et al., 1997;
Stiles and Taylor, 2001).
The family business literature followed the same path, and benefited from these devel-
opments. Scholars in this field traditionally faced the governance problem in terms of
agency relationships between the board and the management (Schulze et al., 2000). They
also focused on the comparison of agency costs in family and non-family companies
(Chrisman et al., 2004). Theoretical advancements showed how the incidence of agency
costs in family companies is likely to depend on the type of person prevailing within the
firm (Corbetta and Salvato, 2004). In other words, the family contexts characterized by
an individualistic person would have experienced higher agency relationships than the
family contexts featured by a self-actualizing person. In those contexts, the prevalence of
stewardship behaviours would have determined a stronger emphasis on the maximization
of potential performance (Corbetta and Salvato, 2004).
Another reason that determined the emphasis on boards and governance is the chang-
ing role of the board of directors. We maintain that boards of directors are substantially
changing from ineffectual pawns to actual leaders (Lorsch, 1989). Their behaviour is
different now than only few years ago. Directors on boards are starting to hire, fire
and compensate top executives. They are also starting to perceive themselves as value-
creating corporate actors. These behaviours are taken for granted in the literature on cor-
porate governance and boards of directors. According to various scholars, the two basic
roles each board should perform are the control role and the service role (for example,
Huse and Rindova, 2001; Johnson et al., 1996; Monks and Minow, 2004; Stiles and
Taylor, 2001; Zahra and Pearce, 1989). What has happened in the recent past is a rather
different story. Boards have long been considered ‘ornaments on the Christmas three’
whose relevance was confined within a pure legalistic perspective. This belief was even
stronger in the context of family companies, although there was a complete lack of evi-
dence with respect to board characteristics in those situations.
This study aims to combine the traditional corporate governance research on large
public corporations with the specific characteristics of family-controlled companies. We
focused on the board of directors as the most relevant governance mechanism, whose
primary purpose is to protect stakeholders against managerial misconduct, and to provide
management with counselling and advice. We tried to understand which are the typical
board characteristics in a public family-controlled company, and how much does the
family matter in the design of the board structure. We therefore described the board char-
acteristics and the functioning of the Italian family-controlled companies under the per-
spectives highlighted. Our purpose has been to understand the board design in large
public family companies. The qualitative description used specific indicators to appreci-
ate both the board characteristics and the family representation. The results have been
used to make comments on the board functioning in the companies we examined, and
explore the potential link between board characteristic, family representation, and
company stock performance.
490 Handbook of research on family business
Board characteristics
the audit, compensation and nomination committees (Vance, 1983); (3) while the overall
board composition is substantially unrelated to firm performance, the structure and com-
position of its committees does impact on it (Klein, 1988). The results we obtained from
our analyses confirmed the last hypothesis.
The emphasis on board processes finally stemmed from the need to go beyond the
demographic approach to board of directors. This tendency followed the need to open the
board black box (Pettigrew, 1992). Notwithstanding, the complexity of exploring mech-
anisms and interactions inside the board, limited the research on this topic. This study
used the number of meetings as a proxy of the board processes and activities. Even though
it only partially addresses the topic, it represents a first step towards this emerging
research trend.
Family representation
The other element we considered in our study is family representation. We considered
three possible indicators of family representation, that is, the presence of a family CEO,
the presence of a family chairman, and the number of family members among the total
board members. In the context of family companies, the appointment of a family versus
non-family CEO (that is, external) is an important indicator of the wish to separate own-
ership and management. Along this line, the appointment of an external CEO is a clear
signal of the will to select the key actors based on their competences, rather than on family
ties. This position is yet not prescriptive. Several Italian companies with a family CEO
showed positive performances and were managed with competence and technical ability.
The second indicator is the family versus non-family chairman. As we anticipated earlier,
the chairman has different characteristics than the CEO, since the chairman should have
an internal leadership and an external ability to represent the company. We thus hypothes-
ized that for a family member the chairman position could be more suitable, at least in
principle. The third indicator refers to the number of family members among the total
number of directors. Coupled with the family or non-family nature of the CEO and the
chairman, it completed the picture on the family overlap with the company. Even though
we did not have hypotheses on the family directors, we argue that an overrepresentation
of family members on the board should be avoided for at least two reasons. First, a high
number of family members on the board limits the potential contribution in terms of
advice and counsel that outside directors can give. This is not a criticism of family
members’ ability to effectively counsel management. Nonetheless, their excessive repre-
sentation in the boardroom clearly narrows the variety of perspectives external directors
can express. Secondly, the presence of too many family members could limit the will of
independent directors to control management, especially if the management itself is
strongly family based.
families have the control over the board of directors, both directly and through financial
holdings. We identified 114 family companies out of 168 non-financial listed companies,
ordered by turnover. We later identified three subsamples: (1) the majority controlled
family companies, where the family/families held the absolute majority of shares; (2) the
minority controlled family companies, where the family/families controlled the board of
directors without a strict majority of the shares; (3) the first 30 companies for turnover.
The information about the turnover were collected through the AIDA – Italian Digital
Database of Companies. The majority-controlled public family companies were 96 out
of the 114, with an average turnover of 1.820 million euros. The minority-controlled
public family companies were 18, with an average turnover of 4.842 million euros. The
highest mean was clearly that of the first 30 companies for turnover, with an average of
8.126 million euros.
To analyse the board characteristics we codified and collected the information con-
tained in the various companies’ corporate governance reports for the year 2003. We col-
lected information about: (1) the size of the board; (2) the separation between the CEO
and the chairman; (3) the percentage of independent directors over the total number of
directors; (4) the presence of the three main committees (audit, remuneration and nom-
ination); (5) the number of meetings held in the past year by the board of directors; and
(6) the number of meetings for each of the board committees. The analysis of family rep-
resentation was realized through the three indicators earlier defined, that is: (1) the family
CEO; (2) the family chairman; (3) the number of family members within the board. To
define the family connection of each board member across the 114 companies selected we
considered different sources. Among them, we used the companies’ websites, direct phone
interviews with stakeholder relations departments, and a database of newspaper articles
from a major Italian financial newspaper.
Descriptive results
The descriptive analyses of the indicators we considered gave a whole picture of the board
characteristics in Italian family-controlled companies, with a focus on the major differences
across the subsamples we defined. This picture is presented in the appendix to this chapter.
Our purpose is to sketch out and to comment some of the most interesting results.
The size of the board, although correlated to the size of the companies (the average is
9.1 directors in the majority-controlled companies against 12.5 in the first 30 companies),
still showed a remarkable variance across the samples. A considerable number of com-
panies (30.7 per cent) had up to 7 directors in the board, and the 9.6 per cent had more
than 15 directors. We would have wished a more homogeneous distribution around the
mean of the whole sample, which is 9.6.
The results also clearly demonstrated how larger companies presented the highest com-
pliance with the code provisions. The first 30 companies showed a split between the CEO
and the chairman in 90 per cent of the cases, against the 62.5 per cent for the majority-
controlled companies. The same occurred for the presence of committees of the board.
Of the first 30 companies 86.7 per cent had an audit committee, against the 73.9 per cent
of the majority-controlled companies and 77.7 per cent of the minority-controlled
companies. The difference increased with respect to the remuneration committee. This
committee was established in the 76.7 per cent of the first 30 companies, against the
60.4 per cent of the majority-controlled companies. Finally, there were fewer nomination
Board of directors in Italian public family-controlled companies 493
31 companies 22 companies
No (27.2%) (19.3%)
Family CEO
51 companies 10 companies
Yes (44.7%) (8.8%)
Yes No
Family chairman
Figure 26.1 The overlap between the family and the company
No. of
Family Chairman Family No. of family No. of Audit Nominat. Remuner. Board
Turnover chairman CEO CEO directors members independents C. C. C. meetings capitaliz.
Turnover 1 – – – – – – – – – – –
Family chairman 0.24* 1 – – – – – – – – – –
ChairmanCEO 0.14 0.31* 1 – – – – – – – – –
Family CEO 0.19* 0.28* 0.63** 1 – – – – – – – –
No. of directors 0.18 0.03 0.19* 0.16 1 – – – – – – –
No. of family 0.12 0.31** 0.21* 0.32** 0.21* 1 – – – – – –
495
members
No. of independents 0.09 0.06 0.12 0.05 0.58** 0.05 1 – – – – –
Audit Committee 0.04 0.08 0.11 0.04 0.27* 0.08 0.42** 1 – – – –
Nomination 0.24* 0.02 0.15 0.11 0.03 0.08 0.17 0.19* 1 – – –
Committee
Remuneration 0.01 0.07 0.10 0.02 0.36* 0.14 0.42** 0.61** 0.26** 1 – –
Committee
Board meetings 0.18 0.13 0.15 0.24* 0.02 0.06 0.11 0.02 0.01 0.03 1 –
capitalization 0.22* 0.04 0.07 0.04 0.38* 0.09 0.29** 0.18 0.09 0.18 0.00 1
chairman (0.31**). The companies with a high number of family directors showed a ten-
dency to identify the family with the company itself. As a consequence, they preferred to
grant the guidance of the company to professionals selected within the family. Finally, the
presence of a family CEO was negatively related to the number of meetings the board
annually had (0.24*). When the CEO is a family member, the board of directors acted
as a ‘rubber stamp’ for its proposals. Thus, the number of meetings is likely to be fewer
than in companies where the board effectively acts as a decision-maker. Nonetheless, none
of the three measures of family representation we built showed any significant correlation
with the company stock performance.
Conclusions
The evidence from the previous analyses suggested three main conclusions for the study.
First, the public family-controlled firms presented a tendency to select the CEO, the chair-
man, and the other board members from among the family group. This is not necessarily
a negative stance. On the contrary, there is a plethora of examples of successful CEOs
selected from within the family. Secondly, we found correlations between the company
stock performance and some board characteristics, such as the board size and the pres-
ence of independent directors. As we argued before, independents on the board have
basically a signalling power, which increases the company reputation and its stock value.
Third, the company stock performance had no significant relationship with the measures
of family representation we adopted. This is the most unexpected result, since we
hypothesized the stock market would have appreciated the introduction external directors
and top executives in the context of a family-run businesses. This conclusion suggested
that the board composition in family companies is basically different between non-listed
and listed ones. Among the listed companies the prevailing guidance for the composition
the board of directors is the code of best practice, and the impact of the family is less
important than in privately held family businesses.
The study suffered some limitations. The first is the context of where it took place.
Italian companies are traditionally dominated by large controlling families, whose inter-
ference in governance choices is often relevant. In other words, the Italian managerial
culture is used to a strong family presence in governance bodies, and that could have
biased the results of our analyses. Even though the conclusion showed no significant rela-
tionships between family representation on the board and the stock performance, the
study would benefit from proper comparisons with those of other countries. Secondly,
the study represented only a first and mostly descriptive attempt to explore the effects of
board characteristics on firm performance in the setting of family-run businesses. A
further theoretical development towards a model of causal relationships which link
board characteristics, family representation in the board, and firm performance is thus
required.
Nonetheless, the study provided some preliminary insights on the board design that
need to be highlighted. It opened interesting perspectives in understanding which com-
panies’ features favour a greater presence of professional managers on the board, and
which managerial profile they present. Regardless of the immediate impact on stock
performance, the family versus non-family members on the board are thought to give
different contributions to the firm success. Family executives should have greater motiv-
ation to create value for the company, often owing to a significant shareholding.
Board of directors in Italian public family-controlled companies 497
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Family/non-family CEO
Number and type of companies Non-family CEO (no.) Non-family CEO (%)
Majority controlled 96 44 45.8
Minority controlled 18 9 50.0
First 30 for turnover 30 21 70.0
All the sample 114 53 46.5
Family/non-family chairman
Number and type of companies Non-family chairman (no.) Non-family chairman (%)
Majority controlled 96 26 27.1
Minority controlled 18 6 33.3
First 30 for turnover 30 11 36.6
All the sample 114 32 28.1
Independent directors
Average number of meetings for the whole board, the audit committee and the
remuneration committee*
Note: * The average number of meetings has been calculated on the number of companies that indicated it
(among parenteses).
27 Family-firm relationships in Italian SMEs:
ownership and governance issues in a double-fold
theoretical perspective
Luca Gnan and Daniela Montemerlo
This chapter offers a comparative study of family versus non-family small and medium-
sized enterprises (SMEs) in terms of ownership and governance issues, and is based on a
survey on 620 incorporated companies of small and medium size.
The survey was started in 2000 and was aimed at making an in-depth exploration of
Italian small and medium-sized enterprises, with a special focus on family firms. Previous
surveys had already analysed family small and medium-sized enterprises in Italy
(Corbetta and Montemerlo, 1999); this survey intended to update some information and
to go deeper into some issues, particularly into ownership and governance in terms of
both structure and evolution. Another goal of the survey was to make some preliminary
tests of different theoretical perspectives. On one side, we wanted to verify whether agency
theory assumptions may apply to small and medium-sized enterprises and not only to
large corporations; on the other side, we maintain that agency is a relevant perspective by
which to interpret family small and medium-sized enterprises, but that it is not sufficient
and should be integrated with a relational perspective.
The main findings we obtained confirmed, even at an exploratory level, that both per-
spectives are relevant. Family small and medium-sized enterprises are becoming more
complex, especially in terms of ownership, which is increasingly fragmented. Fragmentation
typically brings about differentiation between managing and non-managing owners, which
raises a number of critical topics to be coped with to prevent agency problems, such as
shares’ transfers, dividends, appointment criteria for future leaders, company control
through governance bodies. Family small and medium-sized enterprises do appear to cope
with such topics by sharing rules for ownership and leadership, and by articulating govern-
ance systems. But this is not enough to retain ownership unity, which explains why, in a rela-
tional perspective, unofficial governance bodies such as family councils are used to nurture
trust and shared vision.
First, we present the main theoretical references and the propositions that have been
derived from both the agency and the relational perspectives. Then, we illustrate the methods,
sample and data collection. The next section reports main findings. Finally, we discuss such
findings, offering some concluding remarks to researchers and owning families.
Theoretical references
We maintain that, in order to read the structure and evolution of small and medium-sized
family firms from a theoretical point of view, a double perspective is necessary.
Specifically, we think we need two approaches that are traditionally used alternatively,
but that should be complementary to enable a more in-depth understanding of family
businesses.
501
502 Handbook of research on family business
The first perspective is the contractual one of agency theory that is not often applied
to small and medium-sized enterprises, on the assumption that these firms do not have
to cope with substantial agency problems; our point of view is that, on the contrary,
small and medium-sized enterprises can be complex enough to feature such problems.
The second perspective is the relational one centred on the special links that exist
between family owners and that may make the contractual devices that are typical of own-
ership insufficient. According to this perspective, a ‘social capital’ of trust, shared vision
and networks exists, which has to be nurtured by means of relational devices that inte-
grate with the contractual devices.
delegate tasks to agents at various levels and, consequently, to monitor them. To this
purpose, a number of tools can be used, such as:
● policies to handle ownership issues like shares’ transfers and dividend distribution.
These are typical tools that are put in place to cope with agency problems, especially
between managing and non-managing owners. In fact, both transfers and dividends
may be regulated to guarantee that the former will not cheat the latter by putting up
obstacles to exit and by ‘hiding’ company performances. Differentiation between
managing and non-managing owners generally occurs when ownership becomes
fragmented, that is when the number of owners increases (Corbetta and
Montemerlo, 2003);
● policies to handle another key ownership issue such as the criteria for appointing
future company leaders. Again, fragmented ownership may tend to agree on ‘teams
at the top’ as leadership models for generations to come, as this model better guar-
antees full ownership representation in company governance. Later on, we will see
that the agency perspective is not sufficient to understand teams at the top, and
another interpretation will be offered;
● articulation of governance systems, typically by appointing bodies that appoint and
monitor other bodies, and so on. By governance systems, we mean the combination
of bodies that can be involved in governance at ownership, board and top manage-
ment level (Montemerlo et al., 2004; Rediker and Seth, 1995).
Method
employees; (3) respondents perceive the company to be a family business, whatever the
family share (which actually happened in 14 cases, see Greenwald and Associates, 1995).
Focusing on the sub-sample of family businesses, the redemption rate is indicated in
Table 27.1 and is in line with the rates which are normally obtained in Italy. We compared
the industries represented in our sample with those of the database used and found no
differences in the industries represented (see Table 27.1). We also compared early respond-
ents (first half) with late respondents (second half), following the Armstrong and Overton
procedure (1977); differences here were also not significant. The same happened with
other variables, for example, company age, size (employees and turnover), market and
industry characteristics. All this suggested that non-response bias might not be a problem
and that control variables were not necessary.
The incidence of family businesses on the whole sample confirms the worldwide
acknowledged relevance of family firms, as these firms represent the predominant model.
What is more, Italian family firms perform the same in terms of continuity and the
same, or even better, in terms of profitability; besides, they feature similar strategies.
However, family companies are structurally smaller than non-family ones.
The ages of both types of firms resulted to be analogous, that is, the mean of year of
foundation for family businesses is 1966 (median: 1974) and 1968 (median: 1976) for non-
family firms.
Profitability indicators show that, from 1994 to 1999, family and non-family firms
feature similar ratios in terms of ROS (return on sales), ROI (return on investment) and
ROE (return on equity), as shown in Table 27.2. It has to be noted that the difference
between family and non-family firms is significant only for return on investment in 1995
and 1996 and for return on equity in 1995 (sig. 0.05).
Strategic behaviours are also similar in family and non-family firms, comprising a
common trend towards increasing complexity. In fact, main strategic changes in the past
decades and those envisioned for the next appear similar. For example, for the 10 years
preceding the year of this survey, owners highlighted growth in sales (79 per cent) and
employees (48 per cent), entry into new segments of the same industry (38 per cent), inter-
nationalization (34.6 per cent), diversification into new industries (25 per cent), and strat-
egic alliances with other companies (21 per cent), as key changes.
For the following decade, entrepreneurs figure out they will establish many more
alliances (47 per cent), they will increase the degree of internationalization (41.4 per cent),
they will diversify more into new industries (37.3 per cent) than new segments (35 per
cent). As to growth, 65 per cent of companies expect to increase their size in term of sales;
506 Handbook of research on family business
in general, the expected growth is more in terms of sales than of employees (24 per cent,
t17.614, sig. 0.001).
As to size, family firms are smaller, on average, than non-family firms; 84.5 per cent of
family firms are small whilst the corresponding percentage of non-family is 69.1 per cent
(t3.246, sig. 0.001).
Moreover, most family firms are concentrated in the lower-size ranges: for example,
73.4 per cent of family firms and 58.3 per cent of non-family ones have less than 50
employees (t 2.932, sig. 0.001). Presence of family firms, and particularly of small
ones, is higher in more consolidated, manufacturing industries: 43.1 per cent of family
firms are manufacturing, while the incidence of manufacturing non-family firms is 30.8
per cent (t 2.475, sig. 0.001, the difference seems to be especially due to the stronger
presence of non-family firms in service industries: 25 per cent versus 15.5 per cent, t
2.120, sig. 0.001); small family firms account for 87.4 per cent of manufacturing and
81.6 per cent of non-manufacturing companies.
Results
● family owns 100 per cent of equity in 72 per cent of cases, and more than 51 per
cent in another 18.5 per cent;
Family-firm relationships in Italian SMEs 507
● average share owned by the family as a whole is 89 per cent today (std. dev. 22.5)
and has not changed over the past 10 years;
● present average share held by single-family owners is 37.9 per cent (std. dev. 19.4),
while the average share of the most important family shareholder is 51.3 per cent
(std. dev. 23.4). Again, no change occurred with respect to 10 years before;
● the average number of family shareholders is 3 (std. dev. 2.2); with respect to 10
years ago, the increase (0.35 per cent) is not significant; neither is this number
expected to change in the future. Besides, it turned out to be positively correlated
(sig. 0.001) with size, both for turnover (r 0.215) and number of employees
(r 0.191) (Gnan and Montemerlo, 2001);
● most family business shareholders (on average, 69 per cent of total shareholders)
work in the company;
● non-family partners exist in about 28 of cases and in almost two-thirds of these
cases they are friends of the controlling family, with no changes with respect to 10
years before. This actually represents an increase with respect to previous surveys
(Corbetta and Montemerlo, 1999);
● 53 per cent of total family assets, on average, are invested in the company.
This does not mean that ownership structure is not going to change. On one hand, in
the past 10 years, some family owners exited from 20 per cent of companies (and in 81 per
cent of these cases this occurred during the succession process). As a whole, 42 per cent
of shares was transferred (28 per cent per shareholder on average). Exits were correlated
(sig. 0.001) with generation (r0.210), age (r0.141) and fragmentation, that is,
number of family owners (r0.205), confirming that family business’ evolution naturally
brings about transfers of shares, either within the same generation or from one genera-
tion to the next. Some companies are going to significantly change the structure owing to
family exit; in 6.6 per cent of cases, respondents declared there will not be any family
shareholders in 10 years’ time.
Fragmentation was already being experienced in the past decade, and it is increasing;
family ownership groups comprising four to six shareholders increased from 20.4 per cent
to 25.7 per cent in the past 10 years (t2.019, sig. 0.001), and are expected to increase
to 31 per cent in the next 10 years (t 1.887, sig. 0.001).
Archetype 1 2 3 4 5
Number of firms 123 79 143 76 29
Percentage 27.3 17.6 31.8 16.9 6.4
Family council 26.8% 50.6% 0.7% 100.0% 24.1%
23.6% 45.6% 0.0% 100.0% 17.2%
Shareholders’ meeting 100.0% 100.0% 100.0% 100.0% 100.0%
41.5% 21.5% 69.9% 81.6% 65.5%
Holding board of directors 0.0% 2.5% 7.0% 6.6% 31.0%
0.0% 1.3% 4.9% 6.6% 31.0%
Operating board of 0.0% 100.0% 100.0% 100.0% 100.0%
directors 0.0% 13.9% 43.4% 40.8% 62.1%
Chairman 0.0% 49.4% 97.9% 93.4% 82.8%
0.0% 3.8% 91.6% 80.3% 65.5%
CEO 0.0% 83.5% 90.2% 96.1% 72.4%
0.0% 22.8% 64.3% 76.3% 65.5%
Sole CEO 100.0% 0.0% 0.0% 0.0% 0.0%
77.2% 0.0% 0.0% 0.0% 0.0%
Executive committee 2.4% 3.8% 4.2% 13.2% 13.8%
1.6% 3.8% 4.2% 13.2% 13.8%
General manager 14.6% 11.4% 22.4% 19.7% 96.6%
5.7% 5.1% 15.4% 15.8% 93.1%
Managing committee 4.9% 1.3% 5.6% 10.5% 51.7%
4.1% 1.3% 4.2% 9.2% 51.7%
Third parties 17.1% 2.5% 23.1% 44.7% 93.1%
14.6% 2.5% 23.1% 42.1% 93.1%
Note: * For each governance body, the two percentages indicate existence and functioning (italic).
Percentages of 50% and more are indicated in bold.
bodies that make up the archetype is higher, or when the number is the same but at least
most of the bodies that make up the archetype feature a higher frequency in terms of exis-
tence and/or functioning. Two dichotomized indicators were used to measure these two
phenomena, based on the answers given to a question that, for each of the 11 official and
unofficial bodies listed above, asked respondents to indicate: (1) if the body did exist in
the company or not; and (2) whether it was functioning, that is, actually utilized or not.
A synthesis of archetypes’ characteristics is sketched out in Table 27.3. Details are
offered in the remaining part of this section.
Archetype I: Single leader This is family firms’ simplest archetype, present in 27.3 per
cent of companies, where the shareholders’ meeting is always there but is actually used in
less than half the cases (41.5 per cent). In fact, the family council is existing in 26.8 per
cent and utilized in 23.6 per cent of companies. The stronger body in this archetype is the
‘sole’ CEO, always present, and almost always functioning (77.2 per cent). Presence of
other bodies is very small.
510 Handbook of research on family business
Archetype 2: Family council over official collective bodies This archetype accounts for
17.6 per cent of cases. The stronger body appears to be the family council, present in half
the companies (50.6 per cent) and almost always utilized (45.6 per cent). The family
council might partially act as a substitute for the shareholders’ meeting (actually used in
21.5 per cent of cases) but also of other bodies such as the board of directors (which is
also there in all cases, but is functioning only in 13.9 per cent). The chairman and CEO
are quite frequent (49.4 per cent and 83.5 per cent respectively) but not much used (3.8
per cent and 22.8 per cent, respectively). All other bodies feature a very low presence.
Archetype 3: Active ownership and board in a single company Archetype 3 is the most
common within its sub-set of companies as well, as it accounts for 31.8 per cent of cases.
With respect to archetypes 1 and 2 of family firms, archetype 3 features greater prevalence
and a higher utilization of official bodies. The family council is almost absent; the share-
holders’ meeting is used in 69.9 per cent of cases; the board of the operating company
plays an actual role in less than half the companies (43.4 per cent); the chairman and CEO
are the most prevalent (97.9 per cent and 90.2 per cent respectively) and functioning (91.6
per cent and 64.3 per cent); again, overlaps are possible. Other bodies feature a very small
presence, with the partial exception of the general manager and third parties.
Archetype 4: Active ownership, board and unofficial bodies in a single company This arche-
type accounts for 16.9 per cent of cases. It is quite similar to archetype 3 but for a greater
articulation owing to a higher utilization of the family council and third parties. In par-
ticular, the family council is always present and used, and might partially substitute for the
board of directors, which is always there, but is functioning in only 40.8 per cent of cases.
Archetype 5: All active, both official and unofficial bodies, in single companies and groups
This is the most articulated archetype, including governance bodies at all levels; in par-
ticular, holding boards, top management bodies and third parties are much more utilized
than in previous archetypes. This archetype accounts for 6.4 per cent of cases.
Test of other propositions – Proposition 3: In family firms, size of the company and extent
of ownership fragmentation are related positively to the articulation of their governance
systems; Proposition 4 In family firms, ‘official’ governance bodies coexist with ‘unofficial’
bodies; Proposition 5: In family firms, ‘official’ governance bodies are utilized less than
‘unofficial’ bodies Results of this part of the study show (see Tables 27.4 and 27.5), first,
that governance archetypes may be quite complex even in small and medium-sized enter-
prises, while they are generally supposed to feature very simple structures in governance
literature. It also emerged that there is always a gap between existence of and actual uti-
lization of, which confirms that governance bodies may be present, but not functioning.
Secondly, matching archetypes with company size showed that family small and
medium-sized enterprises increase the existence and actual use of governance bodies as
long as they grow larger and the number of family owners increases, which supports
proposition 3. Thus, a further complexity might be expected in the future as companies
expect to grow more and to experience more fragmentation (see above).
Thirdly, our study offers insights on the presence and importance of the family council.
In particular it shows that family councils do exist in a number of small and medium-sized
Family-firm relationships in Italian SMEs 511
Archetype 1 2 3 4 5
Number of firms 123 79 143 76 29
Percentage 27.3 17.6 31.8 16.9 6.4
Sales (’000 euros) Mean 5879.2 8544.2 15 029.8 17 760.8 35 482.6
Std. dev. 14 352.7 9917.3 17 578.4 22 853.8 43 702.0
Employees Mean 45.9 39.7 79.9 77.0 143.2
Std. dev. 68.3 69.1 87.4 79.4 132.2
No. of shareholders Mean 2.9 3.0 5.4 4.4 4.3
Std. dev. 0.9 1.3 5.3 2.3 4.6
Family shareholders Mean 2.4 2.8 3.1 4.0 4.2
Std. dev. 0.9 1.2 1.9 1.9 4.3
enterprises, thus partially supporting proposition 4, and it highlights that they may some-
times substitute the shareholders’ meeting and the board of directors, thereby partially
supporting proposition 5. This raises some issues for the future that will be discussed in
the next section.
Table 27.5 Test of propositions 4 and 5
Holding Operating
Functioning % in Number Family Shareholders’ Board of Board of Sole Executive General Managing Third
each archetype of firms Council Meeting Directors Directors Chairman CEO CEO committee Manager committee parties
Family firms 450 32.4% 55.3% 4.9% 27.1% 47.6% 41.6% 21.1% 5.6% 16.0% 7.6% 24.9%
Archetype 1 123 23.6% 41.5% 0.0% 0.0% 0.0% 0.0% 77.2% 1.6% 5.7% 4.1% 14.6%
Archetype 2 79 45.6% 21.5% 1.3% 13.9% 3.8% 22.8% 0.0% 3.8% 5.1% 1.3% 2.5%
Archetype 3 143 0.0% 69.9% 4.9% 43.4% 91.6% 64.3% 0.0% 4.2% 15.4% 4.2% 23.1%
Archetype 4 76 100.0% 81.6% 6.6% 40.8% 80.3% 76.3% 0.0% 13.2% 15.8% 9.2% 42.1%
Archetype 5 29 17.2% 65.5% 31.0% 62.1% 65.5% 65.5% 0.0% 13.8% 93.1% 51.7% 93.1%
t values associated with % difference between presence of a family council and presence of other bodies*
Family firms 450 0.000 7.110 11.341 1.752 4.683 2.843 3.871 10.944 5.867 9.821 2.515
Archetype 1 123 0.000 3.050 6.160 6.160 6.160 6.160 9.974 5.496 4.102 4.622 1.796
512
Archetype 2 79 0.000 3.311 7.715 4.637 6.960 3.110 8.133 6.960 6.616 7.715 7.325
Archetype 3 143 0.000 18.236 2.713 10.462 39.511 16.061 0.000 2.503 5.099 2.503 6.550
Archetype 4 76 0.000 4.143 32.851 10.503 4.323 4.857 0.000 22.396 20.133 27.370 10.223
Archetype 5 29 0.000 4.282 1.244 3.926 4.282 4.282 2.458 0.363 8.981 2.964 8.981
t value of the difference of % between the presence of third parties and the presence of other bodies*
Family firms 450 2.515 9.802 8.781 0.760 7.279 5.393 1.348 8.382 3.326 7.256 0.000
Archetype 1 123 1.796 4.907 4.592 4.592 4.592 4.592 12.660 3.843 2.347 2.895 0.000
Archetype 2 79 7.325 3.836 0.584 2.664 0.455 4.019 1.432 0.455 0.834 0.584 0.000
Archetype 3 143 6.550 8.997 4.593 3.728 16.248 7.734 6.550 4.839 1.658 4.839 0.000
Archetype 4 76 10.223 5.482 5.606 0.165 5.245 4.577 7.435 4.217 3.738 5.012 0.000
Archetype 5 29 8.981 2.758 6.337 3.053 2.758 2.758 19.786 9.981 0.000 3.977 0.000
Concluding remarks
competition (Ward, 1997). In sum, teams at the top may result from a mix of agency needs
(such as full ownership representation) and relational needs (such as retaining cohesion
between family executives); this might also be further explored to better understand and
support leadership and governance structures.
So, a big challenge for owning families and their leaders could be to use unofficial
bodies such as the family council to complement rather than replace official corporate
ones (Corbetta and Montemerlo, 2003). Given their influence, this is a big challenge for
third parties as well.
Last, but not least, many family small and medium-sized enterprises are envisioning
team leadership for the next generation. As mentioned above, teams at the top should be
looked at in a ‘mixed’ perspective, that is, with the lenses of both agency and relational
approaches. So, it is necessary to guarantee teams at the top’s sense of responsibility and
accountability to family owners and to preserve organizational clarity and transparency
in order to attract the most qualified resources from both family and outside. But it is also
necessary to share values that preserve team members’ unity and commitment, and to
translate values into rules that enable teams at the top successfully to complement other
governance bodies, making the most of all stakeholders’ contributions.
Acknowledgement
This work benefited from the financial support of the Italian Ministry of University and
Scientific Research, Bocconi University and Catholic University to a co-financed project:
‘Generational transitions in medium-size Italian family firms: successful experiences and
best practices’, which is hereby gratefully acknowledged.
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28 Longevity of Japanese family firms
Toshio Goto
Introduction
This chapter presents an overview of Japanese family firms, highlighting their longevity
based on empirical data to provide a broad view of their uniqueness as well as their com-
monality when compared with their counterparts in other countries. The study aims to fill
some gaps in the research on family firms from a Japanese point of view by proposing
that, although there are important differences in the factors contributing to the longevity
of Japanese family firms compared with their counterparts in other parts of the world,
there are also some factors which are held in common with family firms in the rest of the
world. These factors will be examined to test the validity of this proposition.
The first part of the chapter focuses on aspects of the longevity of Japanese family
firms. As a part of this research, a total of 1157 family firms that have been in operation
for more than 200 years were identified. The major attributes, including age, industry
segment and geographical distribution of these long-lived firms are given, along with a
brief description of the background of selected industries. In order to better understand
the magnitude of Japanese family firms’ longevity, a preliminary survey was also con-
ducted on the longevity of family firms worldwide.
The second part is devoted to the analysis of three major factors contributing to the
longevity of Japanese firms, with a special focus on the Tokugawa period of 1603 to 1867
(also known as the Edo period). These factors are economic development, which provided
the capacity for family firms to sustain growth, the existence of relatively advanced man-
agement systems, which contributed significantly to the longevity and prosperity of
family firms, and the philosophical background, namely Confucianism, which required
the giving of precedence to the family business over the family itself.
While Confucianism itself as an ethical philosophy and a prescription for family and
business relationships is recognized as having made a unique contribution to the longevity
of Japanese family firms, it can also be said that the specifics of its teachings and the busi-
ness ethics it incorporated are factors that have similarly contributed to the longevity of
family firms worldwide. These are family unity, a commitment to continuing the family
legacy as the bedrock of survival, a product catering to basic human needs, allowing the
business, rather than the family, to come first, an obligation to community and customer
service, conflict arrangement and a system of governance. The nature of these factors,
their roots in Confucian philosophy and the way they manifested themselves in the prac-
tices of long-lived family firms will be examined to emphasize the uniqueness and com-
monality of Japanese firm’s longevity.
Literature review
Until relatively recently, the subject of Japanese family businesses has been given insuffi-
cient attention both in academic circles as well as in the world of business. Little research
had been done on the relevance of family firms in Japan until a study by Goto (2005)
517
518 Handbook of research on family business
indicated that family firms account for 96.5 per cent of total firms and 77.4 per cent of
total employment in Japan. These research findings are based on a random sampling of
all types of business entities headquartered in Shizuoka Prefecture, which, located as it is
in the centre of the main island of Japan, is often viewed as representing Japan overall
both quantitatively as well as qualitatively.
Family firms are defined in Goto (2005) as those where members of the founder’s family
are involved in both management and ownership to the extent of having two or more
family members either as top executives and/or shareholders.1 This definition, following
Neubauer and Lank (1998) and other preceding works, is kept rigorous enough to
describe the voting power of the family, while giving a practical consideration to the data
availability.
The magnitude of Japanese family businesses in Japan’s domestic economy, as sug-
gested by this study, is comparable to or even greater than that in other developed coun-
tries, as shown in previous research such as that on Australia by Owens (1994), Germany
by Reidel (1994) and Klein (2000), Italy by Corbetta (1995), Spain by Gallo (1995),
Sweden by Morck and Yeung (2003), the United States by Shanker and Astrachan (1996),
as well as in Astrachan and Shanker (2003), and in an overall comparison made by
Reynolds et al. (2002).
While the above studies serve as important background for this research, there are
various limitations to it. Most of these limitations were caused by the lack of accessible
public records, together with the secretive attitude of family firms (Neubauer and Lank,
1998), and these same problems have hitherto also constituted difficulties for researchers
in Japan.
In one of a limited number of studies carried out in Japan, Kurashina (2003) indicated
there are 1074 family firms out of 2515 firms listed on the stock exchange, (excluding
JASDAQ and OTCs) or 42.7 per cent, but did not give further details nor disclose the
source of his data. For example, the resulting data resembles counterparts in the United
States as reported by Anderson and Reeb (2003). This therefore makes this research a sig-
nificant contribution to the field because it is based on a more comprehensive and better
sourced database of the writer’s own compiling.
In his research into the longevity of Japanese firms, Shimizu (2002) analysed the public
companies listed in the first section of the Tokyo Stock Exchange, and indicated that the
mean duration of listings is 228.28 years and the median is 145.22 years, using the listed
duration as the surrogate for firm longevity. The rate of delisting was nearly constant; this
finding is inconsistent with the ‘liability of newness’ theory in organizational ecology
(Hannan and Freeman, 1989).
Shimizu’s (2002) analysis used event history analysis and the Cox regression model.
Since the average listed duration is more than a century, Japanese big businesses would
seem to have considerably longer life spans than small firms in Japan as well as in the
United States. Reporting on the ability of Japanese small firms to survive, the Small and
Medium Enterprise Agency (1999) showed that the median survival time of business
establishments (place of business) is approximately five to ten years. Since the majority of
Japanese small firms are family firms, the survival time of family firms is also considered
to be short.
Goto (2005), on the other hand, suggests that the average age of family firms is 52 years,
which is significantly higher than in the United States, where the average life span of a
Longevity of Japanese family firms 519
family firm is 24 years (Lansberg, 1983). It has been said that only 30 per cent of family
firms reach the second generation (Beckhard and Dyer, 1983), while less than 16 per cent
survive to a third generation (Applegate, 1994). These observations lead to the hypothe-
sis that non-family firms will be older than family firms principally because the vast
majority of family firms fail to survive the first generation (Ward, 1987).
Family Business (2003) released a preliminary list of the world’s hundred oldest firms
and included six Japanese firms that have been in business since 1800 or earlier. Yokozawa
et al. (2000), however, had already shown that there are at least 746 long-lived firms in
Japan that have been in operation for more than two centuries, including 25 firms founded
in the ancient era (in or before 1191), 65 in the middle era (1192 to 1573), while Goto
(2005) identified 1157 firms2 that have been in business for two centuries or more.
Expanding on Yokozawa et al. (2000), Yokozawa and Goto (2004) claimed that the vast
majority of the long-lived firms are family firms.
These discrepancies in findings naturally give rise to questions about the validity of
comparisons of the longevity of family firms beyond national boundaries. In the case of
long-lived family firms in operation for centuries, O’Hara (2004), in one of the pioneering
works on this subject, explored 12 family firms from around the world, each of which pro-
vided lessons on the key factors for a family firms’ ongoing success. Pointing to family
unity and a commitment to continue the legacy as the bedrock of survival, O’Hara (2004)
also identified as recurring principles and practices the following: a product catering to
basic human needs; primogeniture; which brings about a role for women; the use of adop-
tion as a means to perpetuate family ownership; allowing the business, rather than the
family, to come first; an obligation to community and customer service; conflict arrange-
ment; plans in writing; and a system of governance. In an interview with Karofsky (2003),
O’Hara also remarked on the importance of an ability to change without forsaking basic
family values.
Prior to this work, O’Hara and Mandel (2002) had already published ‘The World’s
Oldest Family Companies’, which gives useful data, even though – as the authors admit –
it is quite limited in its coverage. This list is composed of 88 family firms that have sus-
tained their longevity for at least 200 years and is based upon various public sources
including lists of members of Les Hénokiens and Tercentenarians.3
A number of studies have been done outside Japan which take up the subject of the
longevity of Japanese firms, including those by Bellah (1957) on the value system that
came into being during Tokugawa period, Fruin (1983) on Kikkoman Company,
Hirschmeiner and Yui (1975) on the development of the merchant philosophy and
Roberts (1973) on the Mitsui family business. The existence of these studies, which mainly
examine historical aspects, indicates the importance placed by researchers into family
businesses worldwide on various factors considered to be in some way peculiar to Japan.
To gain an understanding of reasons for the longevity of Japanese family firms, an issue
of definite importance is the contribution philosophical and religious factors have made, and
whether these differ significantly from similar factors affecting family firms in other parts of
the world. It is interesting to note that Neubauer and Lank (1998), when citing the Mogi
family’s constitution, remarked that values here were influenced by religious manifestos and
strivings derived from moral psychology. The Mogi family’s constitution4 was written in line
with the so-called ‘Seventeen Articles Constitution’ documented by Prince Shotoku
(574–622) in ancient times, and was thus strongly subject to the influence of Buddhism.
520 Handbook of research on family business
These factors will be taken up in the second part of this chapter in which the key issues
are the way in which religious philosophy, education, management skills, separation of
ownership and control were influential factors in the longevity of long-lived family firms
in Japan.
Research methodology
For the purposes of this research, a database, the Long Lived Family Firms in Japan (LFFJ)
database,5 which had already been accumulated by Yokozawa and Goto (2004), was further
expanded by adding in additional data from relevant trade publications and homepages,
focusing on those industry segments which were thought by Yokozawa et al. (2000) to include
a high proportion of long-lived firms. Because of these additions, LFFJ2, or the expanded
version of LLFJ, is skewed towards the sake brewing, hotel and confectionery industry seg-
ments. In this chapter, family firms are defined, to follow Goto (2005), as those where
members of the founder’s family are involved in both management and ownership to the
extent of having two or more family members either as top executives and/or shareholders.
Verification of data, and of the year of foundation in particular, was one of the most
challenging aspects of this research. Points which needed to be verified were threefold:
existence of the firm, self-statement by the subject firm and, finally, verification based
upon some other form of evidence. For this research, the first verification was made by
checking the existence of either the subject firms’ homepage6 or telephone number. The
second verification was made by accessing the firm’s homepage to find some statement
about its history and foundation. For those firms without a homepage, this process is
omitted. The third verification could not be made available for the purposes of writing
this chapter, primarily because of time and resource limitations.7
As part of this research a preliminary comparative survey was conducted on the
longevity of family firms worldwide in order to better understand the magnitude of
Japanese family firms’ longevity. Kompass Online and Amadeus (Online) were chosen as
the primary sources of data8 to compile an extensive and reliable database for this purpose.
700
600 579
500
432
400
300
200
114
100
1 0 2 1 1 0 4 2 11 9
0
6th 7 8 9 10 11 12 13 14 15 16 17 18
Notes: The horizontal axis shows the firms’ ages as according to century of foundation.
during the late eighth to twelfth centuries. These firms are manufacturers and suppliers of
ritual accessories, religious items and confectioneries.
By way of comparison, Table 28.1 shows the total number of long-lived firm in other
countries. As is clearly apparent, Japan has by far the largest proportion at 32.7 per cent,
followed by Germany (856 firms), Netherlands (240), France (177), Austria (167) and
Russia (155). Table 28.2 shows the oldest firm in each country. Japan is listed at the top
as having the oldest, followed by Germany (founded in 768), Austria (1074), Italy (1074),
the United Kingdom (1189), Latvia (1211), France (1239) and so forth. This is only a pre-
liminary comparison, but further research may well prove that Japan is exceptional both
for the proportion and longevity of long-lived family firms.
Japanese longest-lived family firms, that is, those founded during or before the fifteenth
century are shown in Table 28.3 in descending order of foundation. As shown in Table
28.3, industry segments are concentrated in hotel management and confectionary-
making partially due to the way the LFFJ2 database was compiled, as already explained.
Table 28.4 shows the distribution of all long-lived firms in operation for at least two cen-
turies. Such a concentration is considered to reflect the extent of the development of these
industries in pre-modern Japan.
Distribution by geographical area shows a relatively high concentration of firms in
Kyoto. This is to be expected because of Kyoto’s long history as Japan’s ancient capital.
When viewed historically, industries can generally be seen to have started either in a mar-
ketplace where there was a relatively high density of population, especially one with a high
consumption rate, or in an area with competitive superiority such as access to innovation
or raw materials.
Geographical distribution of all firms contained in LFFJ2, however, shows changes
over time. Kyoto Prefecture alone had 37.5 per cent of all the long-lived family firms
nationwide during the twelfth century or earlier, but the proportion decreased to the level
of 23.0 per cent in the eighteenth century. While the proportion in the area of the ancient
capital decreased, the proportion in the Kanto area (Tokyo and its adjacent six prefec-
tures) steadily increased. This trend reflects the diffusion of industry from Kyoto, the
522 Handbook of research on family business
ancient national political and commercial center, to its adjacent areas first and then to
remoter areas.
A quick glimpse of three industry segments, religion-related businesses, inns, confec-
tioners and sake breweries, will provide a good understanding of the development of
industry from the ancient to the pre-modern era and underline the point that one of the
factors that long-lived businesses have in common is that they deal in a product catering
to basic human needs.
The religion-related industries listed in Table 28.1 are Kongo-gumi (currently Kongo
Gumi Co. Ltd9) and Tanaka Iga Butsuguten. Members of the Kongo family were brought
from Korea to Japan by Prince Shotoku more than 1400 years ago to build the Buddhist
Shitennoji Temple, which still stands. Buddhism, first introduced from China in 538,
became the state religion by the end of the century, that is, soon after, the patronage of
the Prince. Tanaka Iga Butsuguten grew along with temples in Kyoto, providing religious
items and accessories to the faithful. Buddhism was a strong part of the establishment
during the ancient and medieval era.
The inn system was created as a part of the station system set up during the Taika
Reform between 645 to 649. Stations established every 30 li (nearly 20 kilometers), pro-
vided both horses and accommodation for officials delivering urgent correspondence.
This station system was subsequently reorganized and expanded to become the Tokaido
(literally, the ‘Eastern Sea Road’) and other official main roads of feudal Japan. Besides
the official inns, there were also privately built inns for the use of commoners. Saint Gyoki
(668–749), one of the pioneers in this business, built nine fuseya, charitable institutions,
to house and care for sick travelers. His endeavors were mostly centered in the Kinki area.
Major temples such as Todaiji built hostels to ease the travel of the faithful, and these
resemble the hospitals and hostels connected to churches in medieval Europe.
The establishment of the confectionery industry can also be traced back to the ancient
capital, Kyoto. Shosoin or the Imperial Repository, located in Nara, the capital of Japan
from 710 to 784, preserves a document that includes a sugarless candy in a list of foods of
the eighth century. Sugar was first imported from China in 754 as a precious flavoring at that
time, it was mostly consumed for medicinal purposes, while leftovers were used to make
candies and sweets. Only nobles and high ranked officers had access to these confectioneries.
Toraya10 was already supplying confectionery to the Imperial Family in the sixteenth
century as it still does today. Legend tells that Toraya was already in this trade as long ago
as the Nara period (710–794) and by the 1600s Toraya’s proprietor, Enchu Kurokawa,
considered to be the founding father of the present-day Toraya, had established a
prosperous confectionery business in Kyoto.
524 Handbook of research on family business
Table 28.2 List of the oldest long-lived family firms listed by the year of foundation
Table 28.3 List of the oldest long-lived Japanese family firms by the year of foundation
Location (city/town,
Name of firm Year prefecture) Industry *
Kongogumi 578 Shitenoji-shi, Osaka Contractor 39
Hoshi 718 Komatsu-shi, Ishikawa Hotel 46
Mizuhiki Motsuyui Genda 771 Kyoto-shi, Kyoto Ritual accessories
Tanaka Iga Butsuguten 889 Kyoto-shi, Kyoto Religious items
Ichiwa 1000 Kyoto-shi, Kyoto Confectionery 24
Sudo Honke 1141 Tomobe-cho, Ibaragi Sake brewery 55
Tsuen 1160 Kyoto-shi, Kyoto Tea manufacturing 23
Gorobei Ame Sohonpo 1181 Aizu Wakamatsu-shi, Confectionery
Fukushima
Goshobo 1190 Kobe-shi, Hyogo Hotel
Masamoto Gama 1207 Imada-cho, Hyogo Ceramic pottery 15
Sankomaru Honten 1319 Gosho-shi, Nara Pharmacy
Gurenya 1327 Matsushima-cho, Miyagi Confectionery
Kanbukuro 1329 Sakai-shi, Osaka Confectionery
Keiunkaku 1332 Hayakawa-cho, Yamanashi Hotel
Kuroda Sennedo 1333 Yasuki-shi, Shimane Confectionery
Maruya Haccho Miso 1337 Okazaki-shi, Aichi Fermented bean
paste
Shiose Sohonke 1341 Chuo-ku, Tokyo Confectionery 34
Takada Shozoku 1346 Tokyo Apparel
Matsumaeya 1392 Kyoto-shi, Kyoto Seaweed products
Naruoka Construction (2) Shizuoka-shi, Shizuoka Contractor
Uiro (3) Odawara-shi, Kanagawa Confectionery 24
Kameya Mutsu 1421 Kyoto-shi, Kyoto Confectionery
Sohonke Surugawy 1461 Wakayama-shi, Wakayama Confectionery
Sohonke Surugawy 1461 Kyoto-shi, Kyoto Confectionery
Honke Owariya 1465 Kyoto-shi, Kyoto Confectionery 14
Hishigo Nakabayashi 1467 Kyoto-shi, Kyoto Bamboo products
Chikuzaiten
Mizuta Gyokuundo 1477 Kyoto-shi, Kyoto Confectionery
Yamamura Juhodo 1487 Kyoto-shi, Kyoto Pharmacy
Hiraizumi Honpo 1487 Nigaho-cho, Akita Hotel
Sasaya Hotel (4) Numata-shi, Gunma Hotel
Notes:
* shows the generation currently in charge of management.
Entries (2) and (3) have been in operation for 600 years.
Entry (4) started business in the 1500s.
Sake was often associated with ritual ceremonies in the ancient era (the first written
record of sake dates from the third century), therefore it is not surprising that it was
primarily made by the imperial court or by large temples and shrines for ceremonial pur-
poses. At first only the surplus was preserved for private consumption, but then sake
526 Handbook of research on family business
brewing was gradually expanded into a commercial business. This resembles the origins
of wine and liquors associated with religious institutions in Europe. In Japan the govern-
ment controlled the brewing industry by granting special permission to the makers in
order to secure important tax revenue.
contributing to the longevity of family firms in Japan. Factors examined here include eco-
nomic development, management systems and philosophical background.
When reading the analysis it is important to take note of the particular period of
Japanese economic development to which the points taken up apply in particular and keep
in mind the question of whether these dimensions might nowadays harm the ability of
Japanese businesses to further sustain growth.
The analysis essentially focuses on the Tokugawa period (1603 to 1868), the pre-modern
era, which formed a strong foundation for Japan’s rapid growth in the modern era. The
Tokugawa period, although providing the strength of one of the most rigid feudalistic
societies in the world, was not without its weaknesses and limitations. Deeply rooted
philosophical beliefs held back the healthy growth of the Japanese economy instead of
allowing it to free itself from a feudalistic legacy. In this sense, it would be appropriate to
say that Tokugawa period served both as strong basis for and a threat to the longevity of
Japanese businesses.
Economic development
Economic development is indispensable to provide the capacity for new businesses to
start up and maintain growth. Although limited in both land area and natural resources,
Japan showed steady economic growth during the Tokugawa period. Between 1600
and 1872, the population grew from 12 million to 31.3 million at an annual growth rate
of 0.4 per cent. Edo, with a population of well over 1 million, was the largest city in the
world.
The area of land under cultivation increased from 2065 thousand chobu (approximately
one hectare or 2.45 acres) to 3234 chobu, an annual growth rate of 0.2 per cent, while agri-
cultural production grew 0.3 per cent annually during the same period. The first half of
the Tokugawa shogunate (1603–1868) experienced a somewhat higher population growth
rate of around 1 per cent, while the latter half experienced stagnation.
This is not to say, however, that Japan was more developed than Western countries. In
fact, Japan lagged far behind. The country’s gross national product (GNP) per capita was
only 25 per cent of that of England and 36 per cent of that of the United States in 1870.
When the level of industrialization is judged by the percentage of the total labor force
employed in agriculture, Japan is seen to have had 72 per cent of its total labor force in
agriculture, compared with England (19 per cent) and the United States (51 per cent) and
was thus still in an under-industrialized state.
This not withstanding, it is important for our discussion to note that Japan, despite its
relative backwardness with regard to economic development, had ample capacity for busi-
ness to start up and develop.
Management skills
Here, it is important to be aware that economic development aside, seventeenth-century
Japan was advanced in many other ways, comparing favorably with Elizabethan England
economically and with the Celestial Empire culturally (Roberts, 1973). Family firms in
Japan had developed fairly advanced management systems by the eighteenth century,
including those related to business organization, separation of ownership and manage-
ment, personnel management, accounting systems and risk management. These systems
were necessitated by the aggressive economic and commercial activity of the seventeenth
528 Handbook of research on family business
century and strong efforts on the part of firms to protect themselves from possible future
calamities of one kind or another.
Organization A unique feature of the House of Mitsui, founded in 1673 and the wealthi-
est merchant house of the Edo period, was the creation of a kind of joint-stock corpora-
tion. Hachirobei, the founder of Mitsui, which is also one of the biggest family firms,
combined the six houses of his sons into a more comprehensive economic unit named
Mitsui-gumi. By forming this super-house composed not only of individuals but of
houses whose unifying element was a common ancestry, he made possible the formation
of a corporate body capable of engaging in a capitalistic enterprise within a feudal
economy. Mitsui-gumi was, to some extent, a joint-stock corporation of limited liability,
and this house of houses was structurally a partnership built upon mutual trust and cor-
poration.
In 1710, Mitsui-gumi established a main headquarters, the Omotokata in Kyoto to
coordinate central administrative functions. A meeting was held twice a month, formally
attended by three family members and two deputy heads from among the employees.
Instead of accumulating capital separately, the six brothers pooled it in the Omotokata,
which they owned jointly and from which they could borrow operating funds. They also
turned in fixed dividends in accordance with the annual net income of all the businesses
comprising Mitsui-gumi. Financial progress was examined not only semi-annually but
also every three years.
One of the most important mechanisms contributing to the longevity of Mitsui-gumi
was its system of reserves, which actually saved it several times when other companies
went bankrupt. There were four forms of reserves to be resorted to in descending order
of the level of the emergency being faced, starting with ‘the shop’s foundation’ reserve for
working capital and ending with ‘the cellar silver’ reserve, a hoard of coins and bullion to
be dug up only when every other resource had been exhausted.
This level of organization was to be seen not only in Mitusi but also in many other firms.
Ohmi merchants, well known for their long tradition of making ‘business trips’, created
a long-term partnership to avert risk, an arrangement which is comparable to the com-
menda11 in medieval Italy. This arrangement, and other similar ones that were also in
place at this time, was created to assure the durability of houses and their business.
Separation of ownership and management As early as the late seventeenth century, family
firms in Japan were characterized by the nearly complete separation of ownership and
management, together with a high level of specialization of functions, which is usually
considered to be a unique feature of modern managerial capitalism (Fruin, 1983).
In Noda soy sauce breweries, including the forerunner of Kikkoman, Japan’s largest
soy sauce producer, owners did not directly manage or even oversee their production facil-
ities. They did little more than finance and ‘supervise’ the front office. Overall manage-
ment was delegated to managers and was divided into separate spheres: general
management, production management, and labor management.
Decision-making by consensus was stressed as a means to protect family firms from risk
as well as any evil-doing by the family heads. House rules encouraged subordinates to
voice their opinion, good or bad, about their heads. In cases where the heads ignored these
opinions, another meeting was required to be called to officially request the head to
Longevity of Japanese family firms 529
improve. If no improvement was made, the head was asked to retire as a last resort. Such
retirements actually occurred in many houses.
Bookkeeping Larger houses such as Mitsui and Konoike developed rather elaborate
systems of bookkeeping, which had some similarities to the double-entry bookkeeping
developed by Italians. The most advanced system was established by the Nakai family of
mid-eighteenth century, where the capital account and the income-expenditure account
both gave the same final profit and loss figures.
The merchant houses had rules for bookkeeping; transfers from the journal to the main
ledger had to be done under supervision and had to be verified by official seals. A variety
of books were kept: for sales, for purchases, for cash in- and out-flow, for capital account,
for shipments, and so on, all written with a brush and ink and verified with seals.
However, no single prevailing method evolved during the Tokugawa period; each house
had its own way of bookkeeping and thus the practice of double-entry bookkeeping, even
when it existed in some rudimentary form, did not spread (Hirschmeier, 1975). In Italy,
Luca Pacioli (1445–1517), the ‘father of double-entry bookkeeping’, published a study of
the books of the treasury of the Republic of Genoa of 1340, which presumably acceler-
ated the introduction of double-entry bookkeeping and resulted in a creation of a highly
sophisticated standard accounting system.
In contrast to this, in Japan, each house kept its bookkeeping confidential and this pre-
vented the fast and unanimous introduction of the method. The existence of sophisticated
double-entry bookkeeping in some form or other, however, indicates a high level of com-
mercial activity, demanding elaborate methods.
Risk management It is not an exaggeration to say that family firms in the Tokugawa
period were fully equipped with risk management policies. One such policy was that
houses avoided dividing their business, but rather gave shares to their sons who would
own, but not manage, the growing family concern.
Also, family constitutions were drafted codifying the principles that had maintained the
house safely for generations. After the clampdown on extravagance, a feature of the
530 Handbook of research on family business
Genroku era (1688–1704), which took place under the rule of shogun Yoshimune, the
typical merchant became rather conservative, and showed a willingness to comply with
the rulings of the Tokugawa government and the clans. It was during this period of
retrenchment on the part of the merchants that more successful merchants compiled sets
of rules for civic and business behavior, which are a good reflection of their overall men-
tality and approach to business.
To sell rice is nothing more or less than a commercial transaction. It may therefore be said that
all the people, from the feudal lords of the great provinces down, are in a sense engaged in com-
merce . . . Commerce is absolutely indispensable in daily life, hence it is wrong to despise money
or hold commerce in contempt . . . There is nothing shameful about selling things. What is
shameful is the conduct of men who fail to pay their debts to merchants.
Obtaining profit from sale is the way of the merchant . . . The merchant’s profit from sale is like
the samurai’s stipend. No profit from sale would be like the samurai serving without a stipend.
The family is handed down by ancestors and passed to descendants. Money does not belong to
just one individual. If money belongs to society as a whole it is not to be spent by one person for
his own sake. If small it must be spent for the whole family.
In looking over conditions in the world in general, there is nothing, which decays so easily as a
merchant family. If you seek the cause of this, it is an illness called foolishness. This foolishness
quickly becomes extravagance. Though foolishness and extravagance are two, we must say that
they are hard to distinguish.
Whilst being cautious not to criticize the fundamentals of the feudalistic class system,
Baigan strongly emphasized the equality of the merchant’s work with that of any social
class, even including the feudal lord and samurai. Contrary to the common perception of
commercial activities as being shameful, Baigan claimed that they were in fact as noble as
any other social function since they were of value to society. In this manner, honest profit
was justified as the proper reward given by the empire for such value added services. By
remaining true to his vocation of unselfishly selling at a just profit, a merchant could fulfill
his social duty as expected; this was the only way for a merchant to carry out his reli-
gious duties.
After Baigan’s death, the philosophy of Shingaku built upon his theories and became
influential nationwide partly because the Tokugawa government made use of it to discip-
line the behavior of the merchants. And the merchants, since they were positioned as the
very bottom of the feudalistic hierarchy, not unexpectedly supported Baigan’s idea of
equality fervently.
Shingaku had an important influence on the merchants’ ideology in various ways.
Many Shingaku schools were established throughout Japan and merchants solicited the
teachers to draft their family percepts and constitutions as a part of their determined
efforts to preserve the family and family business for future generations. Therefore, it is
natural that family percepts and constitutions in Japan have strong philosophical as well
as religious overtones, reflecting the background of Shingaku.
Shingaku, built up and strengthened under the Tokugawa feudal regime, remained sig-
nificant into the modern era even after the Meiji Restoration in 1868, and although its
overt influence gradually decreased it still exerts a covert influence in present-day Japan.
It is necessary to recognize both the positive as well as negative aspects of the influence
of this traditional philosophical background.
In Japan the teachings of Shingaku strongly recommended merchants to remain frugal,
honest and diligent and were thus instrumental in preserving family businesses for gener-
ations. The hardworking and ascetic spirit imbued in the teachings of Confucius is
comparable to the Protestant ethic, which is viewed as important in the modern
transformation of the West as analysed by Tsuchiya (1989). It is in this comparison that
532 Handbook of research on family business
we begin to see the way in which differing philosophical backgrounds from different parts
of the world contributed a system of governance and a belief in the firm’s obligation to
community and customer as well as educational and organizational systems of various
kinds which contributed each in their specific ways to achieve similar ends: the longevity
of long-lived family firms around the world.
Conclusion
The databases used in this research, even in their preliminary forms, served to provide
valuable clues as to the characteristics of Japan’s long-lived family firms and identified
factors contributing to the longevity of family firms. The analyses of the data in the
databases gave a clear indication that there are more family firms in Japan than in other
countries in the world. It has already been noted, however, and must be emphasized again
here, that the confirmation of this conclusion awaits the compilation and analysis of
similar databases for other countries. Such research in other countries is also necessary to
validate the second provisional conclusion of this research, which is that Japanese family
firms are longer lived than other countries.
On the assumption that it is valid to argue that long-lived family firms are a notable
feature of Japan’s economic environment, it is also shown that it is possible to identify
three important reasons for this: the steady economic growth of Japan since the
Tokugawa (Edo) period which provided the capacity for the setting up of new businesses
which prospered and eventually established themselves as the long-lived family firms
discussed here; the management skills of these family firms which had already attained a
marked level of sophistication by the eighteenth century; and the philosophical back-
ground based on the teaching of Shingaku which was such an integral part of the spirit
Longevity of Japanese family firms 533
of the merchant houses in the Edo period and contributed significantly to the longevity
of family firms.
This philosophical background, while characterizing the uniqueness of Japanese long-
lived family firms, substantiate the common key factors for long-lived family firms’
success which include: family unity, sense of commitment and willingness to sacrifice self
for business and out of a sense of obligation to society which supported systems of gov-
ernance and contingency arrangements which kept firms alive for centuries.
Longevity is without doubt a subject of keen interest for existing family firms world-
wide and this research implies the possibility of identifying a large body of long-lived
family firms if similar data were compiled so that comparisons and in-depth analyses
of long-lived family firms can be made on a global scale. A global comparative study of
longevity of family firms, the possible findings of which can be previewed in this chapter,
would enhance understanding of the key factors for success of family firms. It is hoped
that this research will contribute to future comparative studies on a wider scale.
Notes
1. Firms are recognized as family firms, if more than two individuals with the same family name appear either
as owner or management. In Japan, it is obligatory for women to change their family names on marriage
and the maiden names are never kept or added as is the practice in some other countries, which makes it
difficult to identify founding family members under different family names. Daughters, after marriage, may
play an important role either as an owner or in some cases in management in a family firm. Parents and
siblings of the married daughter also need to be surveyed as potential participants in a family firm. Since
these possibilities are of necessity disregarded with the databases used in this research, data presented in
this chapter should be interpreted as being skewed downward.
2. These firms are among the 748 firms in Yokozawa et al. (2000).
3. Les Hénokiens is an international association of family-owned businesses with a history of 200 or more
years, which was established in 1981 with the purpose of preserving and sharing the traditions learned
through years of experience. The Tercentenarians Club is an international association of business that have
been trading continuously for 300 years or more and retain links with the founding family.
4. The first article starts with ‘All family members desire peace. Never fight, and always respect each other.
Ensure progress in business and the perpetuality of family prosperity.’
5. LLFJ was prepared based on 103 Chambers of Commerce directories listing the year of foundation. It
should be noted that the coverage of LLFJ is significantly limited since: (1) more than half of the total
number of Chambers of Commerce are not covered, including the Tokyo Chamber of Commerce and (2)
rural areas where there are no Chambers of Commerce are not covered.
6. In Japan, the majority of long-lived firms have homepages accessible to the public.
7. This work involves complicated procedures as well as various issues related to the definition of foundation
and longevity, such as how to deal with intermission of operation, transfer of location and so on.
8. Kompass Online covers 76 countries, and includes 1 886 792 firms, of which the European region comprises
43 countries and 1 376 753 firms, while Amadeus covers 38 countries and 7 376 186 firms in Europe.
9. The current president is Toshitaka Kongo, the thirty-ninth generation.
10. www.toraya-group.co.jp.
11. A very early form of partnership, in which one merchant provided capital for another who actually under-
took the voyage.
12. As translated by Bellah (1957).
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PART VII
This chapter investigates the relationship of family ownership and debt financing behavior
in privately held and public companies. Several studies (Agrawal and Mandelker, 1987;
Demsetz, 1983; McConaughy et al., 1996; McConnell and Servaes, 1990; Shleifer and
Vishny, 1986; and, for empirical research in France, Charreaux, 1991) have been carried out
to determine how a firm’s ownership structure, especially the shareholding stake, can affect
financial performance by mitigating agency conflicts between management and sharehold-
ers. Empirical results suggest that the organization of ownership structure can have an
impact on corporate performance. However, few studies have looked at the relationship
between ownership structure and capital structure outside the USA and UK. In particular,
there are few academic works on the influence of family shareholders on financing decisions
(Gallo and Vilaseca, 1996; Poutziouris and Sihar, 2001; Romano et al., 2000). The present
research belongs to this analytical framework. It focuses on the financing choices of French
family businesses. The objective of the chapter is to investigate if and how family control of
shareholding induces a firm’s specific financial behavior. In particular, our aim is to iden-
tify how these shareholders’ preferences can help to explain the differences observed
between family firms and other firms in their choice of capital structure and debt maturity.
We consider a company to be a family business when a family or an individual is the
leading shareholder and is involved in the ownership and control of the company, what-
ever the manager’s identity. The chapter uses a theoretical framework based on agency
theory (Fama and Jensen, 1983; Jensen and Meckling, 1976) and the financial contract-
ing theory (Hart, 1995) to develop several hypotheses. These theories offer a multifaceted
analytical framework which make it possible to study the relations among several actors
who have an influence on the allocation of the firm’s resources and its investment deci-
sions. Moreover, this framework takes into account certain psychological factors, such as
the risk of a transfer of control from the shareholder to creditors and the preference for
autonomy, that are important for the family shareholder. The nature of these relation-
ships influences the strategic and financial decisions taken in the firm, decisions that will
have an impact on debt and stock issuance, and therefore on the firm’s value.
An empirical study is conducted for the period 1995–2000 on a sample of French firms
composed of 477 private firms and 236 public companies. The main results show that
family firms exhibit specific financial behavior influenced by the objectives and charac-
teristics of their leading shareholder. Moreover, it emerges that going public reduces the
problems of information asymmetry that characterize investment family business.
Furthermore, the professionalization of management via delegation to outsiders induces
a higher level of free cash flow risk. As a result, managerial family firms run by a hired
CEO are more indebted than owner-managed family firms. Finally, significant differences
are not found between the debt maturity structure of family and non-family firms. No
537
538 Handbook of research on family business
evidence is found for a non-monotonic relationship between debt level and family own-
ership structure when managerial family firms are studied.
The chapter continues with a review of the literature and investigations into the factors
governing family shareholder influence on financing decisions, leading to the hypothesis-
building. Next is a detailed discussion of sample data and research methodology, followed
by empirical results and conclusions.
Family shareholders’ behavior and firms’ financing choices: a risk attitude insight
Agency theory (Jensen and Meckling, 1976) offers a theoretical framework for analysing
the relations between the various interested parties in a company, namely, the sharehold-
ers, the creditors and the managers. It makes it possible to analyse more precisely the
underlying factors governing such conflict, which arise when one of the interested parties
(the principal) delegates the management of his or her interests – generally financial – to
one of the other actors (the agent) in the firm (Jensen and Meckling, 1976). However,
agency theory takes into account only the conflicts that arise among the firm’s actors
owing to the way financial resources are allocated; whereas conflicts in family firms can
also arise from the manner of allocating control and specific private benefits (Hart, 1995).
Therefore, the study of the financial behavior of family firms requires an analysis of the
financing relationship through both agency theory and the financial contracting theory.
Three types of agency relationship can be defined (Jensen and Meckling, 1976). In the
first, the shareholders can delegate the ongoing business decisions to a manager whose
mission is to maximize their wealth. The performance of the business is therefore heavily
influenced by the strategic, financial and commercial choices made by the manager. The
effectiveness of these decisions depends not only on the professional skills of managers,
but also on their specific incentive to make the optimal choices to maximize shareholders’
wealth.
In the second type, the company’s financial creditors delegate to the shareholder the
management of the funds that are made available to the business. The creditors’ interests
are satisfied since the company’s aggregate risk is not modified between the date the funds
are made available and the date they are reimbursed. Some choices made by shareholders
(risky strategic projects, changes in the dividend policy, or an increase in the level of
indebtedness) may modify the company’s level of aggregate risk without the creditors
being in a position to intervene (Jensen and Meckling, 1976; Myers, 1977).
Finally, the third relationship exists where there is opposition between shareholders.
The origin of shareholder related conflict is twofold. The first is common to all public
firms and is the result of differences between the interests of family shareholders and those
of external shareholders. This conflict is over and above those which may emerge between
family owners. This second type of conflict is specific to family firms and can be danger-
ous for the perpetuation of the business in the family.
In this context, the intensity of agency conflicts between the agent and the principal
depends on their preference set, in which the degree of risk aversion is an important deter-
minant (Jensen and Meckling, 1976).
process. The degree of risk tolerance of each interested party depends on the extent to
which the risk attached to their investment can be diversified. Financial literature makes
it possible to establish a ‘typology’ of the firm’s interested parties as a function of their
degree of risk aversion.
Shareholders limit their financial commitment to the value of the shares they own.
According to financial theory, most investors prefer to invest in a fully diversified port-
folio to minimize their risk. Thus, as long as shareholders are able ideally to diversify their
risks, they would be risk-neutral. Shareholders therefore have the possibility of increas-
ing the risk they take in each company through this diversification mechanism. Their pref-
erence would then tend towards strategies that result in maximizing their monetary
wealth; namely, towards risky strategies and especially those using firms’ leverage.
On the other hand, managers cannot take the same level of risk, since a large part of
their wealth derives from their significant investment in human capital specific to the
firm. Managers’ employment, employability and reputation depend on this human
capital investment (Diamond, 1989, 1991). Unlike with financial capital, the risks asso-
ciated with human capital are hard to diversify (Amihud and Lev, 1981). The risk in this
case is strongly linked to the viability of the company that employs the manager. For this
reason, when decisions are taken about the firm, managers will choose solutions that
ensure the survival of the business, even if those choices do not coincide with the inter-
ests of their principal, the shareholder. Managers can protect their investment by reduc-
ing the firm’s default risk, and especially by lowering the company’s level of debt (Friend
and Lang, 1988).
Finally, from the loan that they grant, creditors hope to gain future revenues deter-
mined by the loan contract. The more risky the project undertaken by the business the
greater is the risk borne by creditors of not being reimbursed. They are therefore in oppos-
ition to the interests of the shareholder, whose wealth (in terms of dividends and capital
gain) increases in proportion to profit growth. Any risky investment taken after the
lending operation is unacceptable to the creditors because, if it succeeds, they will earn
the same revenue whatever type of project the company undertakes, but they will bear a
higher risk. The financing terms they offer will reflect their perception of the risk incurred
and the uncertainty of their future reward, particularly the high costs of the supervision
that they exercise. These elements of risk and cost increase with the burden of debt, and
are generally included ex ante in the interest they charge.
Differences highlighted in how a firm’s actors assume risk affect the firm’s recourse to
debt, because the latter represents a significant element in the company’s aggregate risk
(Harris and Raviv, 1991). The shareholder is thus the actor ready to assume the highest
level of risk, the manager and the creditor having a greater aversion to risk. Still, we cannot
generalize the behavior described above to all types of shareholder. Actually the principal
hypothesis in this behavior is shareholders’ ability to diversify their portfolio of invest-
ments and thus to minimize their risk. Accordingly, we should question whether family
shareholders can easily diversify the risk associated with their financial and personal
investment, and, if not, the impact this might have on the financing choice of family firms.
The family shareholder is characterized by a close relationship between his personal
wealth and the value of the company. Therefore, his or her risk tolerance is one of the key
determinants of the firm’s risk-taking strategy and financing. According to Xiao et al.
(2001) the decision process depends on two factors: the attitude towards risk and the
540 Handbook of research on family business
risk-taking behavior. If family owners seem to have a more open attitude towards risk
than other individual shareholders, their risk-taking behavior in the firm is more cautious,
owing to their low wealth diversification. Indeed, unlike the shareholders described in the
financial literature, family shareholders invest an important part of their financial net
worth and wealth in the business. The cost of their risk diversification is greater if they
have little cash left at their disposal to invest in other assets. This cost is greater for family
owners than for other kind of blockholders.
Moreover, the association of family shareholders to the firm is not only monetary driven.
Various studies carried out in Europe and in the United States show that family owners
favor their decision-making autonomy and their firm’s continued viability rather than
achieving a growth target or realizing liquidity for the shareholders. The determinants of
their risk behavior depend, first, on their preference for maintaining the firm’s viability, sec-
ondly on their desire for managerial and strategic autonomy and, finally, on the protection
of their control and their reputation. These factors represent a set of private benefits (Hart,
2001; Hart and Moore, 1989) that are dependent on the control power of the family owner.
As a result, family owners do not have the same attitude to the company’s aggregate risk as
that of classical diversified shareholders. To the extent that the risk of their investment is
closely linked to their firm’s aggregate risk, any increase in the risk of bankruptcy tied to an
increase in debt augments their potential loss of wealth. Because their attitude is influenced
by this closeness to their patrimony, family owners’ risk aversion is closer to that of man-
agers, and differs from the risk neutrality of the diversified shareholder (Nagar et al., 2000).
Financing decisions therefore depend on the desire and the ability of family owners to
protect their monetary and private benefits (Dietsch and Godbillon, 1998; Zingales, 2000).
Hypothesis 1 Family firms are less indebted, than their mainstream peers, whatever
the manager’s identity (that is, insider or outsider)
threat for the manager. The separation of control and management decisions in family
businesses generates, despite the similarity of their risk aversion, a free cash flow risk
(Jensen and Meckling, 1976) owing to the manager’s opportunistic behavior; it also
induces agency costs for family owners (Ang et al., 2000). However, this free cash flow risk
is assumed to be lower than in mainstream professionally run counterparts, owing to the
similarity of risk aversion in family companies. Debt represents an indirect control mech-
anism to reduce the opportunistic behavior of the external manager.
Hypothesis 2 Family firms managed by a member of the owner family are less
indebted than others family firms.
In contrast, debt is costly for family owners because it increases the risk of default and
the risk of transfer of shareholders’ control to creditors in case of default. That is why the
use of debt as a control mechanism depends on a compromise for family owners between
debt costs and direct control costs.
Nagar et al. (2000) show that there is a negative relation between the family sharehold-
ing stake and its control costs. Therefore, at low shareholding levels, family shareholders’
direct control costs could be higher than debt costs. Consequently, family owners would
prefer the use of debt to reduce the free cash flow risk: at low shareholding levels, debt
would be a positive function of family shareholdings. In contrast, at high shareholding
levels, the cost of contracting debt is higher for family owners than the cost of direct
control. As a result, they would prefer to effect direct control of managers rather than
increasing the level of debt: at high shareholding levels, debt leverage would be a negative
function of family shareholding when an external manager runs the firm. Therefore,
family firms’ debt leverage, when an external manager is in charge, is a non-monotonic
function of the family shareholding stake.
Hypothesis 3 The relation between debt level and family shareholding stake is non-
monotonic for family firms run by external non-family managers.
Recent developments in financial theory suggest that the choice of debt maturity can mit-
igate the agency conflict between the family owner and lenders, and alleviate the problem of
information asymmetries. Bolton and Scharfstein (1990) suggest that lenders have enough
power to exclude the firm from the capital market, and hence to stop future financing alto-
gether, if family owners default. This is called the explicit lender threat. Under the assump-
tion that family owners value highly their firms’ continued viability, the authors show that
repeated debt refunding reduces information asymmetry and related agency conflicts. In
that context, borrowers have to come back at regular, short intervals for more funds. Myers
(1977) and Jensen (1986) propose to reduce debt maturity so that frequent renewals require
the family owner to justify the firm’s results to creditors. These regular contractual renego-
tiation requirements make it possible to reduce information asymmetry and to mitigate
agency costs. Overall, significant short-term indebtedness forces the family owner to repay
the creditors and to choose the most profitable investment project. As a result of having a
whole range of controls, creditors combine cash flow rights with the ability to regularly
interfere in the major decisions of firms using short-term debt. Therefore, when creditors
anticipate a high information asymmetry risk, they will prefer short-term lending. Although
542 Handbook of research on family business
the main costs of short-term debt are such that family owners may be prevented from under-
taking good projects because debt covenants keep them from raising additional funds, they
may also be forced by creditors to liquidate when it is not efficient to do so (Diamond, 1991;
Hart, 1995; Stulz, 1990). In these conditions short-term debt can accelerate the transfer of
control from the family owner to creditors. These debt agency costs, together with the pos-
sibility that lenders might investigate the company books, reduce the family’s decision-
making autonomy, and deprive it of the benefits of control.
The family owner would hence be reluctant to rely on short-term debt. In order to take
advantage of future growth opportunities and to preserve their decision-making auton-
omy, family owners would rather rely on long-term debt contracts. The future payment
flows of the latter are the slowest and the time horizon the furthest. However, it is clear
that this is not in the creditors’ interests (Hart and Moore, 1989). For this reason, the
family firm’s debt maturity would depend on the creditor’s perception of information
asymmetry and the negotiating power of both family owner and creditor. This last factor
would determine whose interest would predominate.
In summary, since family firms appear to bear a higher information asymmetry (Catry
and Buff, 1996; Dietsch and Godbillon, 1998), associated with a strong preference for
decision-making autonomy, short-term debt would be too restricting for family owners.
If they were free to choose the debt maturity, they would rely on long-term financing.
However, this debt maturity arbitrage is influenced by the related information asymmetry
costs. Thus when the cost of contracting long-term debt cannot be assumed, the family
would rather rely on short-term debt.
Hypothesis 4 Family firms would rather contract more long-term debt, ceteris paribus.
per cent and 79 per cent. Family firms have a significant preference for majority control
mainly for public family firms for which the difference with non-family firms is significant
at 1 per cent. This suggests that family shareholders impose strong control over the firm.
The analysis free float – the proportion of shares offered to the public – reveals insignificant
differences between family-controlled (27 per cent of shares) and non-family firms (28 per
cent of shares). Thus , there is a tendency for public family firms to assimilate and adhere
to market mechanisms. However, they prefer widespread distribution of the shares put on
the market compared with concentration in the hands of financial investors. Table 29.3
shows that on average only 13 per cent of family firms’ shares belong to financial
investors compared to 43 per cent on average for non-family businesses. These results
highlight the importance given by family owners to seeking a close relationship with their
financial stakeholders and to the preservation of family control. Dilution of the floating
Firm samples
Listed Private
Leading shareholder’s identity Number Proportion (%) Number Proportion (%)
Family owner (EP) 171 72.5 285 59.7
Financial owner 22 9.3 9 1.9
Holding entity 14 6 23 4.8
Industrial firm 29 12.3 152 31.9
Miscellaneous 8 1.7
Total 236 100 477 100
shares enables the power of the other investors to be diluted to the advantage of family
shareholders.
Moreover, family firms are not closed managerial entities. As demonstrated in
Table 29.3: some family firms have a non-family CEO who is not hired from the owner’s
family group. Nevertheless, these observations highlight the importance given by family
546 Handbook of research on family business
Samples
Listed Private
Firms characteristics Family Non-family Family Non-family
(on average) (n171) (n 65) (n285) (n 192)
Ownership stake 54.94%a 53.76% 73.04% 79.6%
Free float 27.97% 27.07%
Institutional shareholding 13.35%a 42.78%
Number of identified owners1 2.99 3.51 1.42
Managerial identity2 1.43 1.6
Notes:
(a) p 1%.
1. Family shareholders taken as a unique group.
2. If the manager is a family member the number is 1, 0 elsewhere.
shareholders to the control of their firm and their management. This especially enables
them to preserve their decision-making autonomy.
Charreaux (1991). We conduct two separate regressions for, on the one hand, listed family
firms and, on the other, private firms. The results do not alter the significance and the sign
of the relationship between gearing and family shareholder ownership. We find that the
ownership stake has a significant (at 5 per cent significance level) and negative effect on
gearing. Nevertheless, this result is only validated for public family firms, not for private
ones. Therefore, this finding confirms that the cost of the family owner’s direct control is
higher as capital is diluted: debt is used as an additional control mechanism for the family
owner (Table 29.4).
Being listed does not induce a specific financial behavior. The public firms variable is
positive but insignificant. This result suggests that being listed does not enable family
firms to diversify their financial resources. Therefore, the financial behavior between listed
and private family firms are not hugely different.
Management delegation induces specific financial behavior on the part of family firms.
Our results underline that, when management is delegated to an external CEO, family
firms are more indebted than those run by a family member. In Table 29.3 the coefficient
of the active family management variable is significant and negative. Thus delegation of
decisions induces a free cash flow risk and managerial opportunistic behavior. Our
Hypothesis 2 is confirmed.
In order to study the possibility of a non-monotonic relationship between gearing and
family ownership when the CEO is an external manager, we add the square of family own-
ership as a continuous variable to our OLS regression specification model.3 The results
show that the relationship between family ownership and gearing is linear, invalidating
our third hypothesis. It seems that for public firms, the family owner has the same inter-
est as other shareholders and the main agency conflict is that between managers and all
shareholders, mainly because going public induces an increased risk of managerial oppor-
tunism. Therefore, the relation between debt and family shareholding is negative: at low
stakes, debt is an additional control mechanism; at high stakes, the family owner exercises
direct control over managers.
Regarding control variables, we find that agency cost variables are significant determin-
ants of the firm’s gearing. The debt level is negatively related to debt cost and cash flow
cover and positively linked to capital employed growth and interest cover. Moreover, tan-
gible assets are a means of enhancing the level of debt. Finally, we find that the gearing is
negatively related to the operating profit in accordance with the Pecking Order theory
(Myers and Majluf, 1984). The results of our analysis of the control variable are gener-
ally consistent with the findings of previous research.
Notes:
(a) p1%, (b) p 10%.
This table reports the results of regressing on the one hand firm gearing on family ownership and on the other
hand firm debt maturity on family ownership. All ratios were calculated for each year from 1995 to 2000. The
average ratio of each variable was integrated in the regression. t-values are in parentheses.
benefits from the availability of other kinds of long-term financing. Bankers are therefore
in competition with other financial investors, and lose their monopolistic position as
resource providers for family firms. Debt costs would therefore decrease. Furthermore,
debt maturity is negatively linked to tangible assets. This result highlights the guarantee
role played by fixed assets when family firms want to borrow in the long term. However,
despite the use of variables defined by several previous studies of firms’ debt maturity
structure (Barclay and Smith, 1995), our model do not reveal any significant relationship.
This calls for further research.
Conclusion
The aim of this research is to determine whether the identity of the leading shareholder
influences the company’s financing decisions. More specifically, we intend to contrast the
debt-financing behavior of public and private family companies with that of non-family
businesses (that is, managerial firms). Comparing the financing decisions of French
family firms with those of French managerial firms enables us to do this. Attention is also
given to investigating the determinants of the debt-financing decisions of family and man-
agerial firms. Using the agency theory and the financial contracting theory frameworks,
we suggest that the family shareholder is more risk averse than the shareholder described
by the classical theory.
Our results provide evidence that the type of the leading shareholder is not neutral to
the decision to contract debt. The empirical results suggest that family companies are less
indebted. This emphasizes several factors. First, family owners’ preference for decision-
making autonomy and their fear of the risk of control being transferred to creditors reduce
their willingness to contract debt. Secondly, their direct control over managers is less costly
than for other blockholders. Finally, the family owner exercises control over managers
more efficiently; this reduces the latter’s opportunistic behavior. We do not find evidence
of a non-monotonic relation between debt level and family owner shareholding for man-
agerial family firms. This indicates that when a family firm’s equity is diluted, the cost of
direct control is high for family owners: they therefore behave like other shareholders and
550 Handbook of research on family business
rely on debt control over management. On the contrary, the debt costs such as the risk of
transfer of control to the creditor – the default risk – are higher than the costs of the direct
exercise of control of management. The debt level would decrease with family owners’
shareholding. Furthermore, we point out that there is a similarity of debt maturity struc-
ture in family and non-family firms. Therefore, creditors do not differentiate significantly
between the two categories when we consider short-term debt. Finally, the study of public
family firms suggests that they have fully integrated financial market rules. Nevertheless,
the identity of their leading shareholder still constitutes a differentiating factor.
The observations borne out in the course of this study have enabled us to define several
axes of development. More precisely, it would be interesting to focus on an aspect of
agency conflict that we have ignored, namely, the conflict among shareholders. These con-
flicts arise when one shareholder has enough control of the firm to be able to take actions
that benefit him at the expense of the non-controlling shareholders (Shleifer and Vishny,
1996). The conflicts which arise between a blockholder and minority shareholders are
added in family firms to those generated by family members’ opposing points of view.
Family firm shareholders’ agency conflicts might be more complex than those of non-
family businesses.
Notes
1. After selecting firms, we recheck the data for each firm and each year. We exclude several firms for which
financial data are still missing.
2. This ownership stake is consistent with the definition given by several works of research relating to large
shareholders’ influence and patrimonial firms. In this regard see Short (1994), Shleifer and Vishny (1996)
and Shanker and Astrachan (1996).
3. The results of this OLS regression are not presented in the chapter owing to the insignificance of the square
family ownership variable and the non-modification of the previous regression main results.
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30 The structure and performance of the UK family
business PLC economy*
Panikkos Zata Poutziouris
This chapter reports on the profile of UK family-controlled quoted companies and, via
the Family Business Index, reports on their performance vis-à-vis that of their main-
stream counterparts. It comes in response to recent empirical investigations on the role
and performance of family-controlled firms in stock markets across leading economies,
notably those of the US, France, Germany and Spain.
The investigation focuses on UK quoted family-controlled companies that are con-
stituents of the Financial Times Stock Exchange (FTSE) All-Share Index and draws com-
parative evidence on their structure, growth, profitability and share price performance
over a five-year period, 2000–04.
Interestingly, the research reveals that the index of family business public limited com-
panies (FB-PLCs) capitalization performs better than that of mainstream FTSE indices,
despite the continued diminishing role of family shareholding (Franks et al., 2003). The
outperformance of UK FB-PLCs mirrors US findings where quoted family firms
(with founding families playing a active role in ownership and management control)
financially outperform their Standard and Poors (S&P) counterparts (Anderson and
Reeb, 2003).
In the light of recent concerns about the effectiveness of corporate governance mechan-
isms to master agency costs, it emerges that the quoted family-controlled PLC model is
not a ‘deficient’ organization structure. Quoted family firms have their own approach in
mastering their long-term growth and development, and, moreover, in managing princi-
pal versus agency conflicts, in building relations with financial agents, in mitigating risks
and in charting effective strategic decision-making – all in all resulting in valued added
familiness.
Introduction
Worldwide, the family firm, is the most prevalent form of business organization. For most
developed market economies, the family business sector is estimated to represent from 60
per cent to 75 per cent of all enterprises – including, in certain cases, up to a third of
quoted public limited companies, accounting for about half of GDP economic activity
and private employment (Astrachan and Shanker, 2003).
As industrial statistics indicate, the influential role of the family in the business activ-
ity is more central at the early stages of the corporate life cycle, where the founders and
owners managers – and their family ties – are the main source of entrepreneurial drive
and capital. Notwithstanding this, with the emergence of managerial capitalism, which is
fuelled by the separation of ownership and control owing to the growth and financial
development of large private companies via flotations, the role of families in terms of
ownership and control remains important.
552
Structure and performance of the UK family business PLC economy 553
A series of investigations indicate that the proportion of family controlled quoted com-
panies in main equity capital markets across OECD economies is very substantial ranging
from 10 per cent to over 50 per cent (Faccio and Lang, 2002; La Porta et al., 1999). It is
argued that family shareholding in quoted family companies is variant depending on the
development of the capital market and its legal-regulative model, and, of course, the busi-
ness cultural paradigm conditioning the appetite for business families to sustain control
via voting ordinary shareholding, often reinforced by pyramidal cross-shareholding, and
multi-classification of shares with enhanced blockholding voting power.
In contrast to the persistence of family capitalism in other continental capital markets
(Becht et al., 2001; Faccio and Lang, 2002; La Porta et al., 1999) the UK family share-
holding according to Franks et al. (2003) has been in decline during the past century.
Despite the diminishing role of insiders and families in the UK PLC economy, the
Investors Chronicle (2003), has cited evidence revealing that family-controlled quoted
companies were outperforming their counterparts. This was in line with the findings of
the Stoy Hayward and BBC 1992 business survey and more recent investigations which
focused on the financial performance of family quoted firms in the US (Business Week,
2003), and in Europe (Miller, 2004).
More specifically, from striking new analysis by Thomson Financial (Miller, 12 April
2004), it emerges that family-controlled quoted companies are outperforming their rivals
on all six major stock indexes in Europe, from London’s FTSE to Madrid’s IBEX, and
often dramatically so. The Thomson research team created an index for both family and
non-family PLCs and tracked their performance over a 10-year period to December 2003.
In addition, they also produced a list of the top 10 fastest growing family-company shares.
Hereby, in summary, are the results:
● In Germany the family index soared 206 per cent, led by BMW, while the non-
family stocks climbed just 47 per cent.
● In France, the family index surged an equally breathtaking 203 per cent, led by the
likes of Sanofi-Synthelabo, L’Oreal and LVMH, while its counterpart rose only 76
per cent.
● Family controlled PLCs also outperformed their peers in Switzerland, Spain, Britain
and, even, Italy.
Indeed, this business analysis comes in contrast to recent scandals in North America and
Europe (for example, US based Adelphia, Swiss Erb Group and Italian Parmalat, to name
a few) that portray family-controlled businesses as scandalous, in search of mechanisms
to ‘shine the family silver’ and of course to sustain family control . However, the evidence
about the outperformance of family companies could offer comfort to investors who are
worrying about the practice of expropriation of special benefits for the controlling family
owners and, of course, for the despotism and altruistic nepotism characterizing business
family dynasty entrepreneurs.
In the light of renewed interest in the financial affairs of quoted family firms, the aim
of this investigation is to direct the microscope to the UK family business PLC in order
to monitor its structure and performance over time. This research report continues with
a brief literature review relating to the topic of quoted family firms and their financial
affairs. This is followed by an outline of the research methodology and data. Then there
554 Handbook of research on family business
is a comparative analysis of the UK Family Business Index vis-à-vis London main stock
market indices. Finally, in conclusion, a set of implications are briefly discussed emanat-
ing from the explorative Phase A of the empirical study.
of shares in the hands of the family (and its units), ranged from 5 per cent (for the UK)
to 70 per cent (for Hong Kong). The percentages for other countries varied as follows: 20
per cent in the US, 30 per cent in Canada, 10 per cent in Germany, 20 per cent in Italy, 55
per cent in Sweden and 20 per cent in France (data referring to the end of 1995). The same
study also analysed, for each of the 27 countries, the ownership of 10 medium-sized listed
companies (that is, 10 smaller companies with capitalisation of at least $500 million, in
order to have comparable sizes). Families were present in from 10 per cent (Japan) to 100
per cent (Greece) of the cases. In the UK, 60 per cent of those companies had family
owners, 30 per cent in the US, 40 per cent in Germany, 80 per cent in Italy, 60 per cent in
Sweden and 50 per cent in France.
Faccio and Lang (2002) conducted a comprehensive study of ultimate ownership and
control in 13 Western European economies and established that families (again based on
the ownership cut off of 20 per cent) were the most pronounced type of controlling share-
holders. They found that 44.3 per cent of Western European corporations were family
controlled. However, family control was the lowest in the UK (23.68 per cent) and Ireland
(24.63 per cent); in continental Europe, the lowest percentages were recorded in Norway
(38.55 per cent), Sweden (46.9 per cent), Switzerland (48.1 per cent) and Finland (48.8 per
cent). In the remaining countries, such as Austria, Belgium, France, Germany, Italy,
Portugal and Spain, family-controlled firms were in the majority.
Blondel et al. (2002) investigated the 250 largest publicly traded companies in France,
the so-called SBF 250 and reported on the prevalence, evolution, and degree of control of
patrimonial firms. Patrimonial firms were defined as companies where individuals or fam-
ilies were identified as major ultimate shareholders with at least 10 per cent of equity at
each level of the ownership chain. The study established that, even in this group of quoted
companies, where spread ownership would be expected to be the norm, patrimonial firms
are the majority – representing 57 per cent of all companies in the SBF 250. Patrimonial
firms were present in most sectors of the economy, and their presence increased from
1993 to 1998. Their share of capitalization was lower than their importance in terms of
business numbers, reflecting their concentration within the ‘smaller range’. Stakes owned
by families and individuals were quite high, the use of cross-holdings and voting
rights further increased corporate control by patrimonial family businesses and business
families.
Klein and Blondel (2002) in a comparative study of the role of family controlled com-
panies in the Paris and Frankfurt stock markets established that over 50 per cent of the
250 largest quoted companies were patrimonial – family-controlled companies – concen-
trated in the lower range of capitalizations. They found that family shareholding was rela-
tively lower and on the decrease (during 1993–98) for the German case.
Navarro and Ansón (2004), building on previous investigations into the degree of
concentrated ownership in Spanish quoted companies (Crespí-Cladera and García-
Cestona, 2001; Faccio and Lang, 2002; La Porta et al., 1999), reinforce the importance of
individuals and families as owners of large Spanish quoted companies. They found, using
20 per cent of ownership as the threshold, that for 56 per cent of the sample firms the
largest shareholder is an individual or family. Families in control of business groups tend
to use pyramids and indirect ownership and other complicated chains and cascades of
intermediate firms in order to defend their investments and ensure control rights exceed
cash flow rights; moreover, in the majority of cases, members of the controlling family
Structure and performance of the UK family business PLC economy 557
take the CEO role. Finally, the study offers conclusive evidence that Spanish quoted
family firms are facing a serious survival crisis, with more and more families having to
relinquish control and ownership power.
This chapter will only offer the preliminary findings of the MBS-IFB-UBS investigation
into the structure and performance of UK family business PLCs. It is planned that the
next phase of the research will attempt to examine the generic hypothesis about the posi-
tive effect that family ownership has on business performance, and the key parameters
governing such family business superiority.
Structure and performance of the UK family business PLC economy 559
Family firms These are quoted companies with at least 10 per cent family ownership,
that have experienced generational transition and where there is at least one family
member on the board. In a couple of cases a partnership involving siblings (founders) has
been considered a family business, for example, Antofagasta, CLS Holdings and
Goldshield. Also, a more subjective judgement is made that family owner-managers are
compelled to sustain the level of family control.
One classic example of a family firm, according to our definition, is Associated British
Foods (ABF), where the Weston family has held a major interest since its foundation, and
generation after generation is geared to preserve the control of the company. A succes-
sion process was recently completed at ABF when George Weston was announced as the
replacement for the CEO, Peter Jackson, who was expected to retire in April 2005. Peter
Jackson was appointed CEO in 1999 after the ill health of George’s father, the late Garry
Weston, forced him to step down as CEO.
Patrimonial firms These are defined as companies where the family controls at least 10
per cent of the voting shares, but do not conform fully to the other aforementioned crit-
eria (that is, generational succession and family board involvement). However, there is the
intention to keep the business in the hands of the owner family.
One example of patrimonial firm is J Sainsbury plc, whose executive control is no
longer with the Sainsbury family. However, the Sainsbury family is still the key share-
owner, either directly or as major beneficiaries of family trusts, and there is no evidence
that the family might exit the business.
Entrepreneurial firms These are defined as firms where the founders or other individuals
(for example, directors after a management buyout – MBO) hold a substantial propor-
tion of shares but there is no clear evidence that the company will be passed on to the next
generation of family owner-managers. One example of an entrepreneurial firm is Matalan
where the founder and group chairman, John Hargreaves, and his family are the major
shareholders but there is uncertainty as to future plans of family perpetuation.
For the purpose of this report the sample of family business PLCs is restricted to
family-controlled and patrimonial firms, which can provide the solid base for further
560 Handbook of research on family business
Sampling criteria
The first guideline employed is to restrict the sample to companies that were constituents
of the FTSE All-Share Index and have been listed on the London Stock Exchange for at
least five years, representing the period 1999–2004. This includes FTSE 100, FTSE 250
and FTSE SmallCap companies but FTSE Fledgling companies were excluded.
The decision to exclude FTSE Fledgling constituents, despite the fact that smaller
quoted family firms relatively proliferate in this category, was based on two reasons. First,
Fledgling constituents have less than 0.2 per cent of market capitalization compared with
the full market capitalization of the FTSE SmallCap and, more importantly, they do
not meet the liquidity criteria – turnover of at least 0.5 per cent of shares in issue per
month – for their participation in the FTSE All-Share index (see FTSE, 2004, and visit
www.ftse.com). The second guideline was to select FTSE-quoted companies where more
than 10 per cent of the issued ordinary shares were ultimately owned by a family or by an
individual (directly or by means of a family trust or another investment vehicle).
Sources of information
All information regarding share prices and market capitalization for the FTSE indices
positions was retrieved from Thomson’s Datastream database. The financial information
for the construction of the sample of family firms and for the FTSE All-Share con-
stituents was retrieved from the Bureau van Dijk’s FAME database. FAME was also used
for retrieving the financial data. The FTSE webpage was the main source for information
about the UK series of the FTSE Actuaries Share indices. The London Stock Exchange
webpage was used to retrieve communications to the market that could help towards the
verification of family shareholding. More historical information regarding the role of
families in quoted companies was also sourced from Hemscot, the Sunday Times Rich
List, the Investors Chronicle studies and the Stoy Centre for Family Enterprise. Finally,
the Institute for Family Business (UK), with its growing network of family business stake-
holders, corroborated our classification process.
Table 30.2 Distribution of family business PLCs across FTSE indices (percentages)
Table 30.6 Market capitalization by category and in relation to the FTSE All-Share
(percentages)
capitalizations, it is quite natural that family business PLCs have relatively, on average, a
lower free float multiplier compared with non-family FTSE constituents, thus contribut-
ing lower to adjusted market capitalizations.
The trend, for quoted family/patrimonial firms, to account disproportionately for a
lower proportion of market capitalization in relation to the number of quoted family
firms in the stock market was also observed in France (Blondel et al., 2001) and Germany
(Klein and Blondel, 2002).
FTSE Sample of
All-Share FB-PLCs
Agriculture, hunting and forestry; fishing – 0.00
Mining and quarrying 3.41 2.08
Manufacturing 24.78 39.58
Electricity, gas and water supply 2.23 0.00
Construction 4.60 4.17
Wholesale and retail trade; repairs 10.39 18.75
Hotels and restaurants 2.23 4.17
Transport, storage and communication 6.08 6.25
Financial intermediation 26.56 8.33
Real estate, renting and business activities 15.88 14.58
Education 0.15 0.00
Health and social work 0.45 0.00
Other community, social and personal services 3.26 2.08
in general former state-owned monopolies characterized with high capital intensity and
regulation, which constitute barriers of entry for family business PLCs. It is evident that
the family-controlled and patrimonial companies are relatively more active in cyclical
consumer goods services (Table 30.7).
Further analysis of the distribution of family business PLCs by SICs demonstrates the
high concentration of family and patrimonial companies in manufacturing (about 40 per
cent of the sample). The sector is hospitable to more traditional and mature companies.
Table 30.10 Dividend yields of family controlled (FC) and patrimonial companies (PC)
Table 30.11 P/E ratios of Family Controlled (FC) and Patrimonial Companies (PC)
The only exception relates to lower dividend yield and P/E ratios for family-controlled
companies categorized in the FTSE SmallCap, which are statistically different at 10 per
cent and 5 per cent level of significance, respectively.
Although not statistically confirmed, seemingly there is a tendency for the P/E ratios of
family/patrimonial companies to be lower than the P/E ratios for FTSE All-Share con-
stituents. This is again symptomatic of the poor market confidence in the long-term per-
formance for family-controlled and patrimonial companies, perhaps owing to their
renowned family control concerns and culture of restrained growth.
Table 30.12 Balance sheets of family business PLCs versus FTSE companies
Notes:
* Excluding financial institutions.
Rounding of figures explains discrepancies.
566 Handbook of research on family business
and are expressed as a percentage of total assets. In summary, the comparative analysis
of the financial structures of family-controlled companies (familial and patrimonial)
versus that of their FTSE All-Share Index PLCs demonstrate the following key statisti-
cally significant differences:
● Family business PLCs have the tendency to invest more in tangible assets – they are
often regarded as symbol of financial autonomy – as they can be used as collateral
for external debt.
● Family business PLCs tend to use more long-term loans – perhaps because they can
secure better deals and, more importantly, they can refrain from issuing more exter-
nal equity at the cost of family control.
● Evidently, and in line with the pecking order hypothesis, family business PLCs issue
relatively lower share capital, including additional rounds, and of course are more
prudent with profits – as they enthusiastically reinvest it.
● The higher ‘Revaluation reserves’ could be due to keeping tangibles up to market
values in order to comfortably command external debt.
● Family business PLCs exhibit a lower growth rate, in terms of sales and assets, com-
pared with their mainstream FTSE All-Share companies (although not statistically
confirmed).
The selection of quoted family companies follows the methodology outlined before in
the discussion of criteria for the categorization of family-controlled and patrimonial com-
panies. For the selection of the 30 securities that are constituents of the FB 30 index, the
securities were ranked at each period (on a weekly period) according to their absolute
market capitalization in relation to the sum of absolute market capitalizations of all
securities in the sample. This ranking was calculated for each week in the five-year period
from 1 October 1999 to 1 October 2004.
The composition of the FB 30 index was reassessed at the end of each interval of
six months (reassessment dates: 31 March 2000, 29 September 2000, 30 March
2001, 28 September 2001, 29 March 2002, 27 September 2002, 28 March 2003, 26
September 2003, 26 March 2004, 21 September 2004). The securities chosen for each
of the periods were those that featured in the top 30 positions during the previous six-
month period (understandably the selection for the first period, was based on that
period itself).
Market capitalization adjusted for free float For the calculation of adjusted market cap-
italization, the free float factor was taken into account. The free float factor represents the
proportion of shares for a specific security that is readily available for trading, that is, is
not held by a major shareholder (for example, a family).
The case of Associated British Foods is used by the FTSE (2004) to exemplify the use
of free float adjustments:
Free float is not purely restricted to which listed companies own what proportion of other listed
companies but also take into consideration interests held by other parties. An example of this
case could be Gary Wesland,1 who owns 53% of Associated British Foods. This would lead to a
possible free-float of 50%
To be consistent in the benchmarking with the FTSE UK indices, the time series of free
float factor for each of the securities was derived from information available in the FTSE
website. For the latest free float factors, the ‘FTSE UK Index Constituent Rankings’
document was used. For each company under consideration, the information regarding
number of ordinary shares issued and fully paid was extracted from the notes to the latest
accounts available. The number of shares of each company was then multiplied by the
share price available in the FTSE document, resulting in the absolute market capitaliza-
tion of the company. The free float factor was then determined dividing the market cap-
italization informed in the FTSE document (adjusted for free float) by the market
capitalization resulting from the calculation.
The changes in the free float factor throughout the period under analysis were
determined from the annual notes released by the FTSE with the modifications made
to the UK Actuarial Series during each year. The dates (in the weekly series) in which
there were changes to the free float factor for the securities under consideration
were: 15 June 2001, 17 May 2002, 21 June 2002, 21 March 2003, 19 September 2003,
19 December 2003, and 17 September 2004. With the time series of free float factor in
hand and the matching time series of absolute market capitalization for each of
the securities obtained from Datastream, the adjusted market capitalizations were
determined.
Structure and performance of the UK family business PLC economy 569
Computation of the FB 30 and FB All-Shares The value of each of the indices was deter-
mined weekly by the division of the sum of market capitalizations (adjusted for the free
float factor) by a divisor. The first divisors were calculated so that indices could start at
100. Thereafter, every date with changes in a free float factor or with changes to the basket
of companies in the index (in the case of FB 30) called for a new divisor to be calculated
for the next week. The new divisor was calculated by simply dividing the week’s total
market capitalization by the value of the index in the previous week.
170.00%
150.00%
FB 30
130.00%
FB All-Shares
110.00%
FTSE 100
90.00% FTSE 250
30.00%
01 1/2 9
01 4/2 0
01 7/20 0
01 0/2 0
01 1/2 0
01 4/2 1
01 7/2 1
01 0/2 1
01 1/2 1
01 4/2 2
01 7/2 2
01 0/2 2
01 1/2 2
01 4/2 3
01 7/2 3
01 0/20 3
01 1/2 3
01 4/2 4
01 7/2 4
0/ 4
04
/0 99
/0 00
/0 00
/1 0
/0 00
/0 00
/0 00
/1 00
/0 00
/0 00
/0 00
/1 00
/0 00
/0 00
/0 00
/1 00
/0 0
/0 00
/0 00
/1 00
20
01 0/1
/1
01
Conclusion
This investigation provided evidence about the demographic profile, financial structure
and performance of UK family-controlled quoted companies (familial and patrimonial
PLCs). The share price/capitalization performance of constituents of the UK family
business PLC economy, was established via the computation of the FB 30 and the FB All-
Shares, which were benchmarked against the FTSE UK indices. Evidence suggests that
family business PLCs, overall outperform their FTSE counterparts.
In a previous explorative investigation, the research team, established that controlling
for sectoral effect the share performance of family-controlled companies can be a mixed
blessing: generally a third of family-controlled companies outperforms, another third
underperforms and the remaining companies registering similar performance. The
message is that, although evidence about the outperformance of family business PLCs can
offer ammunition to the defenders of family capitalism, more research is needed to cor-
roborate some of the findings.
What are the factors driving family-controlled quoted firms to outperform their
counterparts?
Scholars have been arguing the family firms possess dynamic capabilities, value-
adding familiness and access to idiosyncratic social capital advantages which fuel their
competitive advantage. The competitiveness of family firms, has been accounted for in
the context of social capital (Steier, 2001) and resource based view frameworks
(Habbershon et al., 2003) and the dynamic capabilities perspectives (Salvato and Melin,
2003).
This edge is more evident when the economy and capital markets underperform and
relatively suppressed when market conditions are buoyant. Stein (1989) demonstrated
that quoted companies with shareholders characterized with longer investment horizons
suffer less from managerial myopia and opportunism, as they are less likely to forgo good
investments for the sake of boosting short-term profits. James (1999) argued that family
firms, because of family commitment to perpetuating ownership onto succeeding gener-
ations, provides inherent incentives to invest more efficiently and prudently according to
the market rules. Anderson et al. (2003) found that one implication of families maintain-
ing a long-term presence in family firms is that the firm will enjoy certain economies, such
as a lower cost of debt financing.
Tentatively, a number of key factors can be attributed for the better performance of
family business PLCs, as follows:
● They are into niche-orientated market penetration and reap the economies of spe-
cialization (the Clinton Cards phenomenon).
● They can tap into family wealth and easily use family assets to secure competitively
priced financial solutions.
● They can manage to limit the negative implications of agency problems.
While this five-year retrospective benchmark provides valuable insight into the outper-
formance of the FTSE indices by quoted family business PLCs, there is scope to broaden
the study on many parameters:
This investigation, in order to overcome some inherent dilemmas (for example, defini-
tion of what constitute a family controlled firm), had to experiment with certain para-
meters; therefore certain dimensions and methodological caveats need revisiting:
● The survivors bias – the performance of the family business index does include the
fate of de-listings and companies that were taken private.
● There is a need to further explore the ownership regime of sample companies. How
do family owners gain ownership control rights in addition to cash rights?
● Do they operate pyramidal structures and cross-shareholdings via multiple control
chains? Family owners as a large shareholder may exercise control over a firm
through a chain of intermediate firms.
● Do they use classes of shares which can allow the multiplying of voting power?
● Will the adoption of the more sophisticated F-PEC measurements for the selection
and classification of family firms prove more effective?
● What evidence can we get to justify family business outperformance? Other areas
which deserve further investigation include transaction costs, agency costs, corpo-
rate governance issues and aspects of familiness.
● The documentation of representative studies for the paradigmatic and problematic
family business PLCs, will contribute towards the demystification of certain trends,
such as the chronic fall in the number of family business PLCs.
572 Handbook of research on family business
Notes
* The MBS research team benefited from the financial support of the Institute for Family Business (UK),
and UBS-Wealth Management which are hereby gratefully acknowledged.
1. Gary Wesland is a reference to Garfield Howard Garry Weston who died in 2002. The share ownership of
ABF is kept under the family investment company called Wittington Investments.
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31 Ownership structure and firm performance:
evidence from Spanish family firms*
Susana Menéndez-Requejo
This chapter explores the relationship between founding-family ownership and firm
performance. Starting from the agency theory approach, the potential benefits and costs
of family ownership, and their influence on firm performance, are considered. The data-
base under investigation constitutes a 8000 large and medium size Spanish firms. Several
univariate analyses are conducted, as well as a cross-sectional analysis and a data envel-
opment analysis (DEA) in order to compare family and non-family firms performance.
The empirical analysis shows that Spanish family firms perform better, in terms of
return on equity, than non-family firms of the same size and in the same industry. Family
involvement in management of the firm does not prove to have a positive impact on firm
performance.
Introduction
Founding-families are a special class of shareholder, because often they hold poorly diver-
sified portfolios but, at the same time, they are long-term investors, as their aim is to
bequeath the firm to the next generations (Anderson and Reeb, 2003). In this context, the
aim of this chapter is to evaluate the effects of family governance and ownership on firm
performance, starting from the agency theory approach:
1. On the one hand, having large shareholders such as founding families, could nega-
tively influence firm performance. Founding families have concerns and interests of
their own, such as stability and capital preservation, compensation, related-party
transactions, nepotism in manager selection or special dividends, that may not align
with the interests of other investors in the firm. Large shareholders have the incen-
tives and the power to pursue objectives like firm growth, firm survival or in general
taking decisions that benefit themselves at the expense of firm value. According to
these arguments, family-controlled firms should have poorer performances than firms
with a dispersed ownership.
2. On the other hand, concentrated shareholders can mitigate managerial expropria-
tion. For instance, large non-diversified equity positions and control of management
favours monitoring managers in family firms and diminishes agency conflicts between
owners and managers while facilitating firm value maximization. Founding families
that hold management positions can better align the manager’s interest with those of
the owners. Moreover, the family owners interest in maintaining family reputation
and firm control also reduces agency conflicts with suppliers and creditors, given that
the same governance supports longer relationships. Taking into account these argu-
ments, large investors and especially family firms have incentives to maximize firm
performance.
575
576 Handbook of research on family business
As there is potential benefits and costs of family ownership, the family’s influence on
firm performance is an empirical issue, which is explored in this study. Starting from these
approaches, several univariate analyses are conducted, as well as a cross-sectional analy-
sis and a DEA, in order to compare family and non-family firms performance. The impact
of large equity blockholders on firm performance is examined, in particular, whether
founding-family presence hinders or facilitates it.
The database includes all the large and medium size Spanish firms in 2002 (the last year
available) (SABI database), which is around 8000 firms. First, the ownership and man-
agerial structure of each firm are examined, in order to classify firms according to their
ownership. The use of this database is a differential point in this chapter, since, the empir-
ical analysis in relation to Spanish family firms usually takes as its database the firms
quoted on the Spanish stock market or in the Spanish Business Strategy Survey. In the
first case, we should take into account that Spanish public firms represent a very small
group of firms, since there were just 151 non-financial firms quoted on the Spanish stock
market in 2002, versus 8018 large and medium size non-financial firms that there were in
Spain in 2002, which is the database that we analyse. The Spanish Business Strategy
Survey database, which considers a sample of 1600 firms instead of the whole population,
classifies firms according to the answer to the question in relation to if the firm has family
owners as managers, directors or in other positions. However, in this study, the firms are
classified into family and non-family, beginning with the ownership and management
structures analysis, one firm after another.
Starting with the firm’s financial statements, different methodologies are followed in
order to test the influence on firm performance of the ownership structure and control
characteristics of the firms, distinguishing between family and non-family firms. This is
another point that differentiates this chapter, that is, the comparison of the results of uni-
variate analyses, matched-pairs analysis, regression analysis and DEA. Active and passive
family control of the firm are pointed out (in relation to the presence of family members
as CEOs) and the family generations involved in the firm.
The remainder of this chapter is organized as follows. First, the arguments on the impact
of family ownership on firm performance are presented. Next, the methodology is shown,
in relation to the data sample and the statistical procedures, presenting the results of uni-
variate analysis, regression analysis and DEA, and finally, the conclusions are presented.
Family business performance
Potential negative influence of family ownership on firm performance
Founding families have concerns and interests of their own, such as stability and capital
preservation, excessive compensation, related-party transactions or special dividends, that
may not align with the interests of other investors of the firm (Anderson and Reeb, 2003;
DeAngelo and DeAngelo, 2000). Large owners in firms may extract private benefits from
the firm, owing to their superior control rights, pursuing their own interests but not the
firm value maximization for all the shareholders (Demsetz, 1983; Fama and Jensen, 1983;
Shleifer and Vishny, 1997). In this case, the investment decisions can be influenced by their
personal utility instead of by market value maximization (Fama and Jensen, 1985).
Large shareholders, such as founding families, have the incentives and the power to
pursue objectives such as firm growth, firm survival or in general to take decisions that
benefit themselves at the expense of firm value.
Ownership structure and firm performance 577
in more efficient operations and superior results (McConaughy et al., 1998). Nevertheless,
Yermack (1996) shows that the presence of a founding family CEO is negatively related
to company value.
According to the previous arguments, large concentrated investors, and especially
family firms, can have incentives that positively influence firm performance, motivating
them to perform better than non-family firms.
The empirical research also provides favourable evidence of a better performance for
family firms. McConaughy et al. (1998) and Anderson and Reeb (2003) conclude that
family firms perform better than non-family firms, controlling for industry and firm char-
acteristics, since firms with continued founding-family presence exhibit significantly
better accounting and market performance than non-family firms. These results are rela-
tively unaffected by the consideration of other blockholders or by the discrepancy
between the family’s ownership and control rights (Anderson and Reeb, 2003).
Starting from the previous theoretical proposals, family’s influence on firm perform-
ance is analysed empirically in this study of Spanish firms, in order to examine the preva-
lence of the opposing arguments.
Methodology
Database
The database taken to analyse the performance of family firms includes all the large and
medium Spanish non-financial firms for the year 2002. For this sample, corporate-level
accounting and performance information has been collected from the SABI tapes, an elec-
tronic database that provides the information that firms are required to deposit in the
Spanish Mercantile Registry for their accounts. Information on the ownership and man-
agement structures have been also collected from this database.
Following the European Union Commission Recommendation, firms are classified as
a large firm when they generate annual sales up 40 million euros and have more than 250
employees. Medium firms are considered those with annual sales between 7 million and
40 million euros and between 50 and 250 employees. In 2002 there were 7775 large and
medium size anonymous and limited companies in Spain. It is preferable to take this large
sample of firms, instead of only those listed firms on the stock market, since just 5 per cent
of the Spanish large firms are public firms and none of the medium firms are listed. In this
way, a more representative sample of Spanish family firms is going to be considered.
The fractional equity ownership of the founding family and the presence of family
members on the board of directors1 are examined to identify family firms. In Spain people
have two surnames (the first one of the father and of the mother), so it is easier than in
other countries to identify family members after the founder, even to include distant
relatives such as second or third cousins. In the case of shareholders being firms, it has
been necessary to search into their ownership data to find the last owner. The firms are
classified into family ones when a family group has the control of the firm, that is, they
are the major blockholder and/or they have family members on the board of directors.
One thousand six hundred and thirty-four firms could not be classified with the avail-
able information, being cases of firms with just one shareholder, or with two sharehold-
ers who may or may not be married. It is preferable to develop the analysis taking the 6141
firms that can be clearly classified into family and non-family firms.
Ownership structure and firm performance 579
Table 31.1 Distribution of family and non-family firms in Spain by sales (2002)
Note: The firms are classified into family ones when a family group has control of the firm, in other words,
they are the major blockholder and/or they have family members on the Board of Directors. All the large and
medium sized firms in Spain in 2002 were analysed.
Table 31.1 shows the data sample distribution. Family firms constitute 34 per cent of
Spanish large firms, but 63 per cent of the medium-sized companies, in the year 2002.
In order to compare the characteristics of family firms with non-family firms on the
basis of size, it has been tested if family firms are significantly smaller than non-family
firms in terms of sales, total assets and number of employees, between both groups,
differentiating between large and medium companies. Table 31.2 shows the descriptive
statistics and the results of the mean differences tests for two independent samples (t-test).
Family firms are significantly smaller than non-family firms in each size group (large firms
and medium-sized firms), according to sales, total assets, and number of employees. In
relation to the firm’s age, significant differences were found in favour of family firms,
which are older than their homologous non-family firms.
Table 31.3 summarizes the distribution of firms in each group according to their main
activity sector. The firms have been grouped according to two-digit industry codes (the
group named ‘other sectors’ is the total of the numerous remaining).
With the database being described, the differences in performance between family and non-
family firms are now analysed, for large and medium-sized companies in Spain. Theoretical
proposals have established positive and negative factors that can determine the performance
of a family firm. The prevalence of these opposing arguments is an empirical question.
Statistical procedures
Univariate analysis
As a first step, a univariate analysis of the differences between performance of family and
non-family firms is developed. Accounting measures of firm performance are considered,
given that our sample includes all the large and medium size Spanish non-financial firms,
instead of just firms quoted on the Spanish Capital Market. After the classification of the
firms into family and non-family ones, 6141 firms constitute the sample of this study (only
150 non-financial firms are listed on the Spanish stock market; they are also included in the
sample, as they are large firms). The typical lower investor protection that characterizes a
‘continental’ stock market, like the Spanish one, with a civil law tradition, makes a broader
database more representative than only listed firms.
Table 31.2 Differences by size between family and non-family firms in Spain (2002)
580
Panel B: Medium firms (sales between 7 million and 40 million €)
Sales (million €) 17 15 8 18 15 9 3.417***
Total assets (million €) 16 11 15 24 12 66 4.927***
No. employees 104 89 49 113 98 52 5.536***
Age 23 21 14 19 15 15 8.092***
Notes:
Significant at 1%, 5% and 10% (***, **, *) level.
Summary statistics for the size of the firms in the analysis, comprised of 532 large family firms, 1046 large non-family firms, 2870 medium family firms and 1693
medium non-family firms, in Spain for the year 2002. Family firms are those firms with family groups being the major blockholders or/and family presence on the
board of directors (non-family firms in other case).
Ownership structure and firm performance 581
Table 31.3 Percentage of family and non-family firms in each industry, by two-digit
CNAE code
Notes:
The group ‘other sectors’ is the total of the numerous remaining.
The total number of firms in each group are: 532 large family firms, 1046 large non-family firms, 2870
medium family firms and 1693 medium non-family firms, in Spain for the year 2002.
The measures analysed, in order to evaluate the performance of family firms versus
non-family firms, are the following one (calculated for the year 2002 in all cases):
● Return on assets (ROA) is computed using earnings before interest, tax and amor-
tization divided by the book value of total assets.
● Return on equity (ROE) is measured as net earnings divided by the book value of
shareholder equity. It measures shareholders return. This is the main variable for
evaluating firm performance of non-listed firms.
● Sales growth rate (gSales) is calculated as the increase in sales in 2002 divided by
sales at the beginning of the period. This variable approximates operating efficiency.
● Sales per employee (SalEmp) is the ratio of sales to the number of employees, at the
end of the year 2002.
● Cash flow per employee (CashEm) is the ratio of cash-flow to the number of employ-
ees at the end of the period.
● Leverage (Lev) is measured as the ratio of total debt to total liabilities, giving infor-
mation about financial risk and leverage taken, and as a critical factor of the
differences between economic and financial returns (ROA vs ROE).
582
Panel B: Medium firms (sales between 7 million and 40 million €)
ROE 12.1% 10.0% 48.4% 10.8% 11.3% 69.2% 0.688
ROA 7.1% 5.7% 8.8% 5.8% 5.5% 13.7% 3.534***
Sales growth 16.4% 7.5% 54.9% 19.1% 7.5% 62.1% 1.493
Sales per employee 187 157 112 185 156 115 0.676
Cash flow per employee 11 9 50 13 9 30 1.244
Leverage 61.3% 64.2% 21.6% 65.0% 67.7% 23.2% 5.102***
Notes:
Significant at 1% (***) and 5% (**) levels.
Summary statistics for the size of the firms in the analysis, comprised of 532 large family firms, 1046 large non-family firms, 2870 medium family firms and 1693
medium non-family firms, in Spain for the year 2002. Family firms are those firms with family groups being the major blockholders or/and family presence on the
board of directors (non-family firms in other case).
Ownership structure and firm performance 583
Table 31.5 2-way ANOVA: family versus non-family firms, large versus medium firms
(Spain 2002)
Notes:
Significant at 1 per cent (***), 5 per cent (**) and 10 per cent (*) levels.
F values are included. Data sample is comprised of 532 large family firms, 1046 large non-family firms, 2870
medium family firms and 1693 medium non-family firms, in Spain for the year 2002.
accounting performance measures for the firms in the study, comparing family to non-
family firms, and separately for large and medium-sized firms. Statistics for differences in
means test (t-test) is also included.
There are no differences in the univariate analysis between family and non-family firms
in relation to their return on equity. Large family firms have a 12.3 per cent median ROE
versus 14.5 per cent for large non-family firms, and medium size family firms have a 12.1
per cent median ROE versus 10.8 per cent for medium non-family firms, but these
differences are not statistically significant.
On the other hand, statistically significant differences were found, between family and
non-family firms, in relation to higher return on assets for family firms, both for large and
medium size companies. Nevertheless, as Table 31.4 shows, this higher economic perform-
ance for family firms, coincides with significantly smaller leverage for family firms. That
is to say, although family firms show a better economic performance, in the end they do
not obtain better financial performances for their owners, because of their financial struc-
ture and/or financial conditions.
In relation to efficiency in terms of sales growth, sales per employee level and cash flow
per employee, Table 31.4 illustrates significantly worse levels for large family firms in com-
parison to large non-family firms, while no significant differences were observed for
medium size companies.
The information of t-test is completed with a 2-way ANOVA, comparing family versus
non-family and large versus medium firms, as well as their interaction effects. Table 31.5
shows, again, that there are no statistically significant differences between family and non-
family firms, in relation to their return on equity, neither between large and medium com-
panies, nor is the interaction effect of family ownership and size significant. Nevertheless,
a deeper multivariate analysis is needed, as we show in Tables 31.8 and 31.9.
Table 31.6 shows the univariate analysis for different age groups of firms, distinguish-
ing young firms (first generation in the case of family firms), medium-age firms (second
generation) and old firms (third and more generations in the case of family firms). There
are no statistical differences between family and non-family firms in relation to their
return on equity.
Table 31.6 Differences in performance between family and non-family firms in Spain by age groups (2002)
584
Sales per employee 195.0 160.7 139.1 245.1 181.9 282.5 3.883***
Cash flow per employee 13.3 9.7 16.5 18.8 11.5 32.9 3.590***
Leverage 57.4% 58.3% 20.5% 60% 61.1% 23.1% 2.182**
Panel C: Old firms (more than 60 years)
ROA 5.6% 5.3% 8.3% 5.8% 5.4% 12% 0.173
ROE 10.0% 7.8% 93.8% 20.5% 9.4% 79.9% 0.923
Sales growth 9.7% 6.7% 20.0% 12.0% 5.3% 27.9% 0.742
Sales per employee 199.2 171.1 117.3 277.5 189.3 343.9 2.488**
Cash flow per employee 12.6 10.4 21.2 26.5 14.3 65.5 2.398**
Leverage 53.1% 50.2% 21.5% 59.8% 60.4% 23.5% 2.184**
Notes:
Significant at 1% (***), 5% (**) and 10% (*) levels.
Summary statistics for the age of the firms in the analysis, comprised of 2458 young family firms, 2053 young non-family firms, 824 medium-age family firms, 515
medium-age non-family firms, 107 old family firms and 135 old non-family firms, in Spain for the year 2002. Family firms are those firms with family groups
being the major blockholders or/and family presence on the board of directors (non-family firms in other case).
Ownership structure and firm performance 585
Matched-pairs methodology
In order to consider the sensitiveness of the results in the methodology employed, a
matched-pair methodology is now developed. Each family firm is compared with the
closest non-family firm, in terms of industry and size, in order to control for these effects
(McConaughy et al., 1998). First, the firms are organized according to their three-digit
CNAE code (sector code, equivalent to SIC numbers), and then, in each sub-sector, the
firms are ranked by sales. Inside each three-digit sector, the closest non-family firm to each
family firm is looked for, taking into consideration that sales were, as a maximum, 25 per
cent above or below the sales level of each family firm, and that the total assets and the
number of employees were also similar. Nevertheless, the average of the absolute value of
the differences between the sales of each family firm considered and their non-family firm
pair found is 7 per cent for large firms and 4 per cent for medium firms. However, there is
not always another firm in the same sector with a similar size. This is why, starting from
the 532 large and 2870 medium size family firms identified in Spain in 2002, 1535 matched
pairs of family and non-family firms can be defined, distributed as 285 pairs of large firms
and 1250 of medium size companies.
Table 31.7 shows the results of the differences means t-test, for two related samples, as
in this case we have matched pairs. The matching process appears to work well; in no case
is there a statistically significant difference between family firms sample and control
sample sales level nor in the number of employees, according to the t-test. In relation to
the total assets level, the t-test still shows a significantly smaller total asset size for family
firms, although they have a similar size in terms of sales and employees.
In relation to the performance comparisons, no significant differences are observed in
terms of return on equity, again, for this sample that exhaustively controls industry and
size. That is to say, family firms perform like non-family firms. The differences again
appear in a higher return on assets and a lower leverage for family firms, in comparison
with their homologous non-family firms, in terms of activity sector and size.
where,
586
Panel B: Medium firms (sales between 7 million and 40 million €)
Sales (million €) 17 359 14 829 8497 17 374 14 702 8677 0.387
Total assets (million €) 16 078 11 893 14 677 20 695 11 723 55 040 3.086***
No. employees 106 92 49 109 95 54 2.204**
Age 23 21 14 20 16 15 5.894***
ROE 13.2% 10% 57.7% 11.4% 11.5% 66% 0.748
ROA 7.1% 5.7% 9.4% 6.3% 5.6% 11.3% 1.905*
Sales growth 41% 7.7% 6.3% 33% 8% 2.1% 0.420
Sales per employee 185.98 155.5 107.3 185.91 155.4 115.9 0.031
Cash flow per employee 9.56 8.9 73.6 12.02 8.6 23.8 1.138
Leverage 62% 63.9% 21.7% 65.4% 68.1% 24.7% 3.821***
Notes:
Significant at 1% (***) and 5% (**) levels.
The control group is matched on activity sector three-digit code classification and by size (considering sales first and also number of employees and total assets).
285 pairs of large firms and 1250 pairs of medium size companies were analysed for the database of Spanish firms in 2002.
Ownership structure and firm performance 587
● Firm Age is measured as the Neperian logarithm of the number of years since the
firm was founded until 2002. McConaughy et al. (1998) observe that the value of
founder-controlled firms is negatively related to the firm’s age. Alternative defini-
tions of this variable are considered as dummy variables that classify the firms by
whether the firm was founded less than 30 years ago, between 30 and 60 years ago,
or more than 60 years ago (other cut-off points taken are, 20 and 40 years ago, and
25 and 50 years ago).
● Fam*Age is a multiplicative variable, that multiples the family firm binary variable
by the firm age variable. This interaction term considers the possible differential
impact of age on family and non-family firms.
● FamMan (family management), approximates active family control of the firm,
and is defined as a dummy variable that takes the value of 1 if founding family
members are present on the board of directors, that is, family members acting as
CEOs (active family involvement in firm management). Eighty-six per cent of the
CEOs are family members and 14 per cent are outsiders, among the family firm
sample. Anderson and Reeb (2003) find that accounting profitability is better with
outside CEOs when family members (founders or founder descendants) serve as
CEOs (market performance appears to be better only in the presence of founder
CEOs and outside CEOs, while founder descendants serving as CEOs have no
effect on market performance).
Controlling for industry and firm characteristics, Control Variables include the following:
● Firm Size is the Neperian logarithm of the book value of total assets. This variable
is included, as the univariate analysis shows that on average family firms are smaller
than non-family firms.
● Leverage is measured as the relation between total debt and total liabilities.
● Listed is a dummy variable that equals one if the firm is listed on the Spanish stock
market.
● Activity sector is identified by dummy variables to denote each two-digit SIC code
(excluding one of them).
Table 31.8 shows the results of the regression analysis (the second column includes only
the statistically significant variables). This multivariate analysis is developed in order to
examine if being a family firm influences firm performance, but not a global model for
firm performance, so the F-score is a better indicator than R square.
The coefficient estimate on family firms is positive and statistically significant, in
accordance with a positive impact of family ownership on firm performance. Firm age
has also influence on performance, but positive for non-family firms and negative for
family firms. That is, younger family firms show better performance than older firms. This
results is in accordance with the previous ones obtained in the univariate analysis (Table
31.6). Nevertheless, family involvement in the management of the firm does not impact
on firm performance.
The control variables size and leverage, which the univariate analysis showed signifi-
cantly different for family firms, are statistically significant also. Smaller size and more
588 Handbook of research on family business
Table 31.8 Performance and family firms: regression analysis (Spain, 2002)
Notes:
Significant at 1% (***) and 5% (**) levels.
Family is binary variable that equals one when founding family is present in the firm. Age is the Neperian
logarithm of firm’s age. Fam*Age is a multiplicative variable of Fam and Age. FamMan is a dummy variable
that takes the value of one when any family member act as CEOs. Size is the Neperian logarithm of total
asset book value. Leverage is the ratio of total debt divided by total liabilities. Listed is a dummy variable that
equals 1 if the firm is listed on the Spanish stock market. Sector is defined as eight dummy variables of the
nine two-digit codes sector activity.
Number of observations is 6094.
The independent variable is Return on equity.
debt are variables that positively influence performance. Activity sector is unrelated to
firm performance.
Being a family firm proved to be a differential factor determining firm performance.
Theoretical arguments in relation to the positive influence of family ownership on firm
performance are shown to be the more relevant ones. Nevertheless, family involvement in
management does not influences firm performance.
In any case, we should take into account that different goals to firm value
maximization can coexist with financial objectives in family firms (Gersick et al.,
1997). Firm growth, reputation, good name, financial security for the family in the
future, firm survival, social and business esteem are some of these possible additional
aims for family firms (Chaganti et al., 1995; Mathews et al., 1994; Romano et al.,
2000).
optimum efficiency level, that is to say, it is in the efficient frontier (Seiford and Thrall,
1990). The statistical program gives a value between 0 and 100 to each firm, being 100 the
value of the firms in the efficient frontier.
Another advantage of DEA is that several performance indicators can be con-
sidered simultaneously. The firm outputs included are the following, relating to the year
2002:
● Return on assets (ROA). Computed as the earnings before interest, tax and amor-
tization divided by the book value of total assets.
● Return on equity (ROE). Measured as net earnings divided by the book value of
shareholder equity.
● Sales growth rate (gSales). Variation of total sales for the year 2002 in relation to
the sales level at the end of the year 2001.
● Employees growth rate (gEmpl). Variation of total number of employees for the year
2002 in relation to the sales level at the end of the year 2001.
In order to group the firms, according to a similar level of inputs used, and then
compare outputs that they obtain (their performance), the following inputs are consid-
ered for the year 2002:
● total assets;
● number of employees;
● firm age;
● operating costs;
● ownership structure, as the number or people who own at least 51 per cent of the
firm shares;
● book-equity to total assets ratio;
● interest coverage, as the operating profit divided by the interest expenditures.
Table 31.9 shows the average efficiency of family firms versus non-family firms,
separately for large and medium size companies. The Kruskal-Wallis test is the non-
parametric test for the differences in efficiency between the family and non-family firms.
The efficiency of family firms is better than for non-family firms, for large and medium
size companies and for all the measurements employed. Taking into account that the
maximum value given to efficiency in the DEA is 100, while the average ROA and ROE
for large family firms is 75.26 and 61.65, these values are 69.44 and 51.43 respectively for
large non-family firms, with the difference being statistically significant. The same con-
clusions can be established in relation to sales and employees growth and for the medium
size firms. That is to say, the DEA show that family firms are more efficient than non-
family firms.
The better performance of Spanish family firms in comparison with non-family firms,
is in agreement with the results of other empirical studies such as Leach and Leahy (1991)
for the United Kingdom and Anderson and Reeb (2003) for listed firms on the New York
Stock Exchange (S&P 500).
590 Handbook of research on family business
Table 31.9 Efficiency of family firms versus non-family firms (data envelopment
analysis), Spain 2002
Family Average efficiency* 75.26 61.65 13.07 2.72 78.17 71.75 23.95 16.74
firms Standard Deviation 4.83 7.21 12.24 7.70 8.24 12.91 26.05 24.03
Minimum efficiency 63.69 45.59 0.05 0.84 55.02 11.44 0.08 1.37
Number of firms 332 332 332 332 1752 1752 1752 1752
No. firms in the frontier 2 2 2 2 103 109 104 81
Non- Average efficiency* 69.44 51.43 1.88 2.21 75.06 63.49 9.42 11.12
family Standard deviation 6.8 9.19 10.95 10.84 10.18 15.15 22.41 22.85
firms Minimum efficiency 41.14 2.67 0.17 0.09 0.46 0.11 0.27 1.07
Number of firms 830 830 830 830 1213 1213 1213 1213
No. firms in the frontier 5 4 10 9 80 49 63 67
Test Kruskal-Wallis 291.126 432.675 44.277 495.241 138.740 306.775 124.236 239.223
Significance 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000
Notes:
* Maximum efficiency 100.
ROAreturn on assets, ROEreturn on equity, gSales sales growth rate, gEmplemployees growth rate.
Variable returns are considered.
ship have a higher impact on firm performance, in comparison with the theoretical poten-
tial costs. Nevertheless, further theoretical analyses is needed in relation to the differences
between family and non-family firms in their capital structure and the impact of this deci-
sion on firm performance. Future research could also explore the relationship between
firm performance, family ownership and firm growth decisions, given the smaller size that
characterizes family firms.
From a practical point of view, the main implication for practitioners is the worse per-
formance observed as family firms get older, in such a way that it is crucial to solve the
typical succession problems.
Some limitations of this study are geographical, since the sample is drawn exclusively
from Spain, and the unavailability of more detailed ownership and management data. In
this sense, future research could consider a broader data sample of family firms from
different countries. Another possible extension is to consider additional theoretical
approaches to the analysis of family-firm performance.
Notes
* The author acknowledges financial support from the Spanish Institute of Family Businesses, the Asturian
Association of Family Businesses (AAEF) and the Asturian Federation of Entrepreneurs (FADE) in
Spain.
1. Astrachan et al. (2002) propose the F-PEC power subscale for the definition of family-owned businesses, as
a continuous scale with its three subscales: power, experience and culture. Nevertheless, there is not enough
information to calculate F-PEC with this database.
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Anderson, R.C. and D.M. Reeb (2003), ‘Family founding ownership and firm performance: evidence from S&P
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solving the family business definition problem’, Family Business Review, 15(1), 45–58.
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592 Handbook of research on family business
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32 Family ownership, corporate governance and firm
value: evidence from the Spanish market
María Sacristán Navarro and Silvia Gómez Ansón
Introduction
This chapter analyses how ultimate family ownership, pyramids, and corporate govern-
ance affect a company’s value. We measure how the presence of families within company
management structures, that is, a family’s participation in company management and
control, influence company value and how the management and control by founders
affects company performance. Using a sample of 86 Spanish non-financial companies,
our results show that family ownership does not affect company value per se, whereas a
company’s corporate management structure does influence company value. When the
managers or the chairpersons of the board belong to a family, the firms’ performance
appears to be affected. The presence of descendants in the firm’s management and/or in
the firm’s control seems to affect negatively firm value.
Family-run businesses are a very common ownership structure in continental markets
(Faccio and Lang, 2002; La Porta et al., 1999). In this respect, Spain is no exception.
Family-run businesses represent 86 per cent of the business panorama in Spain and
feature serious management problems. Only 5 per cent of Spanish family companies use
family boards (Gaceta de los Negocios, 29 April 2005) and only some have effective boards
of directors (Gallo, 1998). Recent studies (IEF, 2005) highlight the importance of the pro-
fessionalization of decision-making mechanisms within family companies (with the cre-
ation of family boards and board of directors).
In this respect, the question of how family ownership and a company’s corporate man-
agement structure affect its value is currently a topic of interest and, although having
received increased attention from scholars, stills remains a very open issue. The aim of this
chapter is to relate family ownership and the effect of pyramids (measured by the excess
of voting rights over cash flow rights) to company value, and to assess the implication of
the ultimate family owner group on its management, corporate management structure
and value. In addition, we explore how the presence of founders or descendants within
the company’s management and control mechanisms affect its performance.
This study contributes to the existing literature on family companies and corporate man-
agement in a number of important ways. First, as family business research is still overshad-
owed by definition issues, we use the term family-controlled company, whose ultimate
owning group is a family (which is the largest shareholder in the company) that owns more
than 10 per cent of the voting rights at the end of the company control chain (Sacristán
Navarro and Gómez Ansón, 2004). Although the influence of family ownership control on
company value has been the subject of numerous research investigation, scholars sporadi-
cally address the ultimate owner perspective (Claessens et al., 2000; Du and Dai, 2005; Faccio
et Lang, 2002; La Porta et al., 1999). This chapter aims to contribute in this direction.
Secondly, regarding corporate management structure, we look at whether companies are
593
594 Handbook of research on family business
managed or controlled by the ultimate owner group and how this may affect company value.
Family involvement in company management or control (Anderson and Reeb, 2003, 2004;
McConaughy et al., 2001; Villalonga and Amit, 2005) has not previously been measured in
such a way (as far as we know). Thirdly, our analysis of the founder/descendant’s influence
on company value has not been studied for the Spanish market.
The results suggest that the observed differences in the companies’ performance are
more due to the origin of management and its relation to the founding family than to its
ownership structure, that is, whether it is a family or a non-family company.
The chapter is structured as follows. In the next section we describe the theoretical
framework regarding the possible influence of family ownership, the role of the family in
active management and/or control on company value. In the third Section we present the
methodology (data, sample and variables) employed in the study. In the fourth section we
analyse the main results and, finally, we present the main conclusions and implications of
the chapter.
Theoretical framework
requires knowledge of the company’s technology, families may provide greater oversight
when their lengthy tenure enables them to move further along the company’s learning
curve (Anderson and Reeb, 2003, p. 1305). The long-term horizon that characterizes
family companies may also affect their efficiency. Family ownership may provide incen-
tives for a company to invest according to market rules (Anderson and Reeb, 2003) and
would lead to lower debt financing costs, as compared with non-family companies
(Anderson et al., 2003).
Nevertheless, there are also arguments that suggest that family-owned companies may
be less efficient than non-family companies (expropriation hypothesis). Concentration of
ownership reduces the possible diversification of financial risk, increases the risk premium
and consequently the cost of capital (Demsetz and Lehn, 1985). In addition, agency prob-
lems may also occur between family members (Schulze et al., 2001), and the presence of
family groups, when a company obtains outside equity financing, may also trigger agency
issues owing to the use of pyramidal groups to separate ownership from control, the
entrenchment of controlling families and non-arm’s length transactions, as well as ‘chan-
nelling’ between related companies (Morck and Yeung, 2003). Moreover, founding fami-
lies may have the incentives and power to take action and adopt investment decisions that
benefit themselves, to the detriment of other shareholders (Demsetz and Lehn, 1985).
An important question when analysing the influence of families on company value is
their use of pyramids to channel ownership. In this sense, family ownership can also be
considered by measuring voting and cash flow rights instead of property rights (Claessens
et al., 2002; La Porta et al., 1999). Empirical evidence shows that the separation between
voting and cash flow rights is more pronounced in family-controlled companies and small
companies, and may have an influence on company performance (Claessens et al., 2002).
Empirical evidence
The empirical relationship between family ownership and company value is not conclu-
sive and therefore requires further attention. Certain papers report a positive relationship,
for example, for the Spanish market (Camisón, 2001; Santana Martín and Cabrera
Suárez, 2001). For the US market, Anderson and Reeb (2003a) find that family compan-
ies outperform non-family companies; McConaughy et al. (1998) report that founding
family-controlled companies are more efficient and valuable than others and that
descendant-controlled family companies are more efficient than founder-controlled com-
panies, while Villalonga and Amit (2005) report that family ownership creates value when
founders work as chief executive officers (CEO). Other papers report no differences in per-
formance between family and non-family companies (Alcalde et al., 2001; Galve Górriz
and Salas Fumás, 1993, 1994) or find that family companies perform worse than non-
family companies. For example, Morck et al. (1988) find that Tobin’s q is lower for older
companies managed by a member of the founding family and Morck et al. (1998) report
that companies controlled by heirs of the founder are less profitable than others in the
same industry. Amongst large US corporations, Holderness and Sheehan (1988) docu-
ment that family companies have a lower Tobin’s q than non-family companies. Wall
(1998) and Barth et al. (2005) find that family companies are less productive than non-
family companies.
Most of these papers use the return on assets (ROA), return on equity (ROE) ratios
and Tobin’s q as a measure of company performance and one has to consider that the way
596 Handbook of research on family business
they measure performance may affect the results of these studies. For instance, Galve
Górriz and Salas Fumás (1996), document higher productivity for family-owned
companies in Spain, although no difference in profitability is found. While the ROA and
ROE ratios are based on accounting data, Tobin’s q is based on market values (see
Demsetz and Villalonga, 2002, p. 213, for a critical review), and therefore different results
may be obtained. Differences in the results may also be the result of sample selection
biases. Probably owing to the difficulty in obtaining data on family companies, most of
the papers employ samples of large quoted companies, and only a minority use samples
of small and medium-sized companies or even non-listed family companies.
Another problem refers to the endogenous nature of the relationship between family
ownership and company value. In this sense, the studies by Demsetz (1983), Demsetz and
Lehn (1985) and Demsetz and Villalonga (2001) suggest that ownership concentration does
not affect company value. They claim that the company ownership structure is the endoge-
nous outcome of decisions that reflect both the influence of shareholders and of market
trends. Thus, as a company’s ownership structure reflects decisions made by those who own
the shares, the ownership that emerges should be influenced by the profit-maximizing inter-
est of shareholders, and consequently there should be no systematic relationship between
variations in the family ownership structure and variations in company performance.
Empirical evidence
The results of the studies that try to link a family company’s professionalization to
company value are non-conclusive. Family involvement in the company’s management
tends to be measured by whether the chief executive officer belongs to the family group
or not, and family involvement in company control tends to be analysed by determining
whether or not the chairperson of the board belongs to the family group. While some
studies report a positive impact of family chief executive officers on company perform-
ance, others do not. In this sense, examples of studies that show a positive influence on
company value by family involvement in its management (family chief executive officers)
are those of Anderson and Reeb (2003), Camisón (2001), Sraer and Thersmar (2004) as
well as Villalonga and Amit (2005). Other authors (Anderson and Reeb, 2004; Villalonga
and Amit, 2005) report a positive influence on company value by family management and
family control – family chief executive officer plus family chairman – or by founding man-
agers (Adams et al., 2005; McConaughy et al., 1998; Sraer and Thersmar, 2004), or young
founding managers (McConaughy et al., 1998).
On the contrary, other authors report a negative influence on company value by active
family management (Barth et al., 2005), old founding managers (Morck et al., 1988),
second or third generation managers (Pérez-González, 2001) and family control
(Cabrera-Suárez et al., 2001; Schulze et al., 2001), whereas, for example, Jayaraman et al.
(2000) finds no significant influence of the involvement of founders as managers on
company share returns. Finally, other authors report that family companies managed by
professional management hired from outside the owner family are equally productive as
non-family owned companies (Barth et al., 2005).
Methodology
Data
The initial database used for the analysis comprised all companies quoted on the electronic
markets of Spain’s four stock exchanges: Madrid, Barcelona, Bilbao and Valencia, at the end
598 Handbook of research on family business
of 2002 (31 December). The information was provided by the Spanish Supervisory Agency
(CNMV) and the four stock exchanges provided the platform upon which the sample was
constructed. The following data were employed in the study: company accounting data sup-
plied by the Spanish stock exchanges, stock quotes published by the daily stock bulletins of
the Spanish stock exchanges, data on major shareholders and board composition published
by the Spanish Supervisory Agency, the Official Company Register and the SABI database.
The following filters were applied to this initial database:
These filters reduced the final sample down to 86 companies, all of which are listed on the
electronic markets, with a mean market capitalization of 2026 million euros. The number
of companies included in the sample is similar to other empirical studies that also employ
samples of non-financial Spanish companies (Galve Górriz and Salas Fumás, 1996).
Among the sample, 37 companies (43 per cent) are family companies from an ultimate
owner perspective (mean market capitalization of 990 million euros), and 49 (57 per cent)
are non-family companies (mean capitalization of 2825 million euros) see Table 32.1.
Procedure
In order to define a family company, we employ part of the F-PEC scale (Astrachan et al.,
2002) by exclusively considering the ownership variable. We therefore consider a broad
definition of family companies, defining a family company as one whose main ultimate
owner group is a family or an individual who holds voting rights above the 10 per cent
threshold. A cut-off point of 10 per cent is conventionally used in literature (Du and Dai,
Note: The sample is comprised of 86 non-financial companies quoted on the electronic market of Spain’s
four stock exchanges: Madrid, Barcelona, Bilbao and Valencia, at the end of 2002.
Family ownership, corporate governance and firm value 599
2005) because: (1) it provides a significant threshold of votes; and (2) most countries
mandate disclosure of 10 per cent ownership stakes, and usually even lower (in Spain the
percentage goes down to 5 per cent). Whenever possible, each company’s chain of control
was analysed in order to identify the ultimate owners.
Regarding the methodology, we conducted mean difference analyses and cross-
sectional analyses in order to test whether company performance was affected by family
ownership, the existence of pyramidal groups, the level of professionalism of manage-
ment and control of the family companies, and the founder effect. In this sense we con-
ducted multiple regressions where the dependant variable was the firm performance and
the independent variables were those related to family ownership, pyramids, corporate
governance variables and founder-descendants variables, as well as several control vari-
ables (size, leverage, financial risk and age).
Variables definition
With respect to the definition of variables (see Table 32.2), company performance – the
dependant variable – is measured as its market performance, the market to book value of
common equity ratio (MB) and as a its accounting performance, the ratio of operating
income to total assets (ROA). Given that previous studies have shown that industry
factors affect company performance (King, 1966; Livingston, 1977), and in order to avoid
multiple co-alignment problems that could arise when running the regressions with
dummy variables representing the companies’ industry, we use the industry-adjusted
market to book value of common equity (AMB) and the industry adjusted ratio of oper-
ating income to total assets (AROA) as dependant variables. Both measures are computed
by subtracting the industry median ratio from each company’s ratio.
We have included different variables in regressions as explanatory variables. The owner-
ship variable that measures if the firm is a family or a non-family one under the ultimate
owner perspective is a dummy variable (UOFAM) that adopts a value of 1 when the ulti-
mate owner group, using the 10 per cent threshold, is a family or individual, and otherwise
a value of zero. A continuous variable (DIVVRCF) measures the excess of voting rights
over cash flow rights of the ultimate owner group, meaning the existence of pyramids.
Family’s presence in the control of the firm is measured through the variable CON-
TROLUO which adopts a value of 1 when any member of the ultimate owner family group
is the chairperson of the board of directors, and zero otherwise. The variable that measures
family management is MANUO, a variable that takes value 1 when the ultimate owner
manages the company, that is, when the company’s chief executive officer belongs to the ulti-
mate owner’s group, and otherwise zero. The total presence of ultimate family owners is
measured through the variable, FAMANCON, a dummy variable that takes value of 1 when
the company is managed and controlled by the ultimate family owners, and zero otherwise.
Founders/descendants presence on corporate governance is measured through variable
FOUNDESC, a dummy variable that identifies whether or not the company is managed
or controlled by its founders or by their descendants. This variable takes value 1 when the
company is managed or controlled by the family’s descendants, and zero when it is
managed or controlled by the founders. In order to define this variable correctly, we first
considered founders as individuals that (solely) own significant shares in a company, and
descendant-managed companies as those in which several individuals from the same
family are present. Nevertheless, as we are aware that companies can also be founded by
600 Handbook of research on family business
Variable Description
1 Tobins q (MB) MB denotes the market to book value of common equity ratio
2 Return on assets (ROA) ROA denotes the ratio of EBITDA to total assets
3 Industry adjusted q The MB ratio adjusted by the industry median (SIC codes at
(AMB) a two-digit level)
4 Adjusted ROA (AROA) AROA the industry median adjusted ROA ratio adjusted by
the industry median
5 Family company Companies whose ultimate owners are families or individuals
(UOFAM) who own more than the 10% threshold
6 DIVVRCF Excess of control rights over cash flow rights for all
companies
7 Family controlled A variable that adopts a value of 1 when any member of the
(CONTROLUO) ultimate owner family holds the position of chairperson of
the board and zero in all other cases
8 Family managed A variable that takes on a value of 1 when any member of the
(MANUO) ultimate owner family holds the position of chief executive
officer and zero in all other cases
9 FAMANCON Dummy variable that adopts a value of 1 when the chief
executive officer and the president of the board belong to
the ultimate owner’s family, and zero in all other cases
10 FOUNDESC Dummy variable that adopts a value of 1 when the company
is managed or controlled by descendants, and zero when it
is managed or controlled by its founders
11 FOUNDMAN A variable that adopts a value of 1 when the manager is the
founder and zero in all other cases
12 DESCDMAN A variable that adopts a value of 1 when the manager is the
descendant and zero in all other cases
13 FOUNDCON A variable that adopts a value of 1 when the president of the
board of directors is the founder, and zero in all other cases
14 DESCDCONTROL A variable that adopts a value of 1 when the president of the
board of directors is a descendant, and zero in all other cases
15 SIZE (Ln TA) TA represents total company assets (in millions of euros)
16 AGE (Ln company age) The number of years since the foundation of the company
17 Leverage (LEV) LEV the ratio of leverage defined as the ratio of total debt to
equity
18 RISK Standard deviation of the daily stock return, multiplied by
the square root of the number days of the year
brothers, or by members of the same family, we have crossed this data with the age of the
company. For all companies classified as managed by a descendant, but less than 25 years
old, the company’s website was checked and its founder identified, in order to correctly
define the variable. The variables that captures the presence of founders/descendants
within the firm’s management are FOUNDMAN and DESCDMAN. Both variables are
dummy variables that adopt a value of 1 when the company is managed by its founder
(FOUNDMAN), or a descendant (DESCDMAN), and zero otherwise. The variables
that capture the presence of founders/descendants within the firm’s control are FOUND-
Family ownership, corporate governance and firm value 601
CON and DESCDCONTROL. They are dummy variables that adopt a value of 1 when
a company is controlled by its founders (FOUNDCON) or by a descendant (DESCD-
CONTROL), and zero otherwise.
Finally, as control variables we included several variables in the regression models:
company size measured by the logarithm of its assets (SIZE), company age measured as
the logarithm of the number of years since its foundation (AGE) and company leverage
measured as the ratio of total debt to equity (LEV). We also included the company’s finan-
cial risk (RISK) measured as the standard deviation of its daily stock return. This data
was obtained from the SABI database and the daily stock bulletins published by the
Spanish stock exchanges. Management-related variables were taken from the companies’
corporate management reports submitted to the Spanish Supervisory Agency.
The definitions of all variables are summarized in Table 32.2.
Results
Descriptive analysis
The results of the descriptive analysis (Table 32.3) show that family companies under-
perform non-family companies when the industry adjusted ratio of return on assets is
used to represent company performance (statistically significant at a 5 per cent level), this
Table 32.3 Summary statistics
Note: P-values in brackets. *** Statistically significant at a 1% level. ** Statistically significant at a 5% level.
* Statistically significant at a 10% level. The number of companies is 86 except for the risk variable, where it is
76. MB denotes the market to book value of common equity ratio. AMB denotes the MB ratio adjusted by the
industry median. ROA denotes the ratio of EBITDA to total assets. AROA denotes the ROA ratio adjusted by
the industry median. TA represents total company assets. LEV is defined as the ratio of total debt to equity.
AGE represents the number of years since foundation. RISK represents the Standard Deviation of the daily
stock return, multiplied by the square root of the number days of the year. DIVRCF represents the excess of
control rights over cash flow rights for all companies. UOFAM is a dummy variable which reflects those
companies whose largest ultimate owners are families or individuals who own more than the 10% threshold.
MANUO is a dummy variable that takes on a value of 1 when any member of the ultimate owner family holds
the position of chief executive officer and zero in all other cases. CONTROLUO is a dummy variable that
adopts a value of 1 when any member of the ultimate owner family holds the position of chairperson of the
board and zero in all other cases. FOUNDESC is a dummy variable that adopts a value of 1 when the
company is either managed or controlled by descendants, and zero when it is managed or controlled by its
founders. FAMANCON is a dummy variable that adopts a value of 1 when the chief executive officer and the
president of the board belong to the ultimate owner’s family, and zero in all other cases. FOUNDMAN is a
dummy variable that adopts a value of 1 when the manager is the founder and zero in all other cases.
DESCMAN is a dummy variable that adopts a value of 1 when the manager is the descendant and zero in all
other cases. FOUNDCON is a dummy variable that adopts a value of 1 when the president of the board of
directors is the founder, and zero in all other cases. DESCONTROL is a dummy variable that adopts a value of
1 when the president of the board of directors is a descendant, and zero in all other cases.
not being the case when the industry adjusted market to book value of the common equity
ratio or the market to book ratio or return on assets is used to represent company per-
formance. Although there are differences in the other measures of company performance,
they are not statistically significant. These results suggest, as we previously mentioned,
that the way of measuring company performance may affect results. Caution is therefore
necessary when comparing and discussing the results of empirical studies that employ
different measures of company performance.
Family companies are also smaller than non-family companies (but this difference is
not statistically significant). Previous empirical Spanish studies report a smaller size for
family firms (Galve Górriz and Salas Fumás, 1996). Family companies also have a greater
excess of voting rights over cash flow rights (the difference being statistically significant
at a 1 per cent level). This evidence is consistent with the results reported by Claessens
Family ownership, corporate governance and firm value 603
et al. (2002) for Asian markets. In addition, family companies have similar ages, a similar
leverage and similar risk, as opposed to non-family companies.
Interestingly 43 per cent of sample companies are family companies, according to our
definition. In summary, the profile of the database can be characterized as follows:
● 13 per cent of companies are managed by the main family ultimate owner
(MANUO) and in 33 per cent, the chairman of the board is a member of the main
family ultimate owner group (CONTROLUO);
● 63.2 per cent of family companies are managed or controlled by descendants, whereas
36.8 per cent are managed or controlled by founders or descendants (FOUNDESC);
● in 11.6 per cent of the total sample, the family held the position of chief executive
officer or chairman of the board, that is, families took part in the firms’ corporate
governance structures;
● 3.5 per cent of all sample companies are managed by their founders, while 8.1 per
cent of the sample’s companies are managed by descendants (DESCMAN);
● 12.8 per cent of the total sample’s firms are controlled by the founder (FOUND-
CON) and 18.6 per cent are controlled by descendants (DESCONTROL).
The analysis suggests that ultimate family presence is larger within the firm’s control (as
chairpersons of the board) than within the firm’s management (as chief ececutive officers).
For sample’s firms, firm’s management and control is based mostly on descendants rather
than on founders.
The bivariate correlations amongst variables included in the study are shown in
Table 32.4. As it is expected significant correlations (at a 1 per cent level) are observed
between the performance indicators. Adjusted market value is also positively correlated
with firm’s leverage. At a 5% level, there are negative correlations between the adjusted
return on assets and corporate governance variables (MANUO, CONTROLUO) and the
founder/descendants effect (FOUNDESCD, DESCDMAN, DESCDCONTROL). As
observed, the presence of a family as ultimate owner (UOFAM) is highly correlated (at a
1 per cent level) with the variables MANUO, CONTROLUO or FAMANCON.
Therefore, due to possible multiple co-alignment problems, we opted not to include the
variable UOFAM jointly with these other variables in the analyses. We also ran step-wise
regressions in order to avoid such problems.
Analyses
Note: *** Statistically significant at a 1% level. ** Statistically significant at a 5% level. AMB denotes the
MB ratio adjusted by the industry median. AROA denotes the return on assets ratio adjusted by the industry
median. TA represents total company assets. LEV is defined as the ratio of total debt to equity. AGE
represents the number of years since foundation. DIVRCF represents the excess of control rights over cash
flow rights for all companies. RISK represents the Standard deviation of the daily stock return, multiplied by
the square root of the number days of the year. UOFAM is a dummy variable which reflects those companies
whose largest ultimate owners are families or individuals who own more than the 10% threshold.
FOUNDESC is a dummy variable that adopts a value of 1 when the company is either managed or controlled
by descendants, and zero when it is managed or controlled by its founders. MANUO is a dummy variable that
takes on a value of 1 when any member of the ultimate owner family holds the position of chief executive
officer and zero in all other cases. CONTROLUO is a dummy variable that adopts a value of 1 when any
member of the ultimate owner family holds the position of chairperson of the board and zero in all other
cases. FAMANCON is a dummy variable that adopts a value of 1 when the chief executive officer and the
president of the board belong to the ultimate owner’s family, and zero in all other cases. FOUNDMAN is a
dummy variable that adopts a value of 1 when the manager is the founder and zero in all other cases.
DESCMAN is a dummy variable that adopts a value of 1 when the manager is the descendant and zero in all
other cases. FOUNDCON is a dummy variable that adopts a value of 1 when the president of the board of
directors is the founder, and zero in all other cases. DESCONTROL is a dummy variable that adopts a value
of 1 when the president of the board of directors is a descendant, and zero in all other cases.
and between ultimate owner controlled and managed companies and the rest of the sample.
Consistent with the results shown in Table 32.4, when the industry adjusted ratio of return
on assets is used to measure company performance, we do find significant differences between
family and non-family companies (UOFAM) (statistically significant at a 5 per cent level),
between companies that are controlled and managed by their ultimate owners (FAMAN-
CON) and the rest of the sample (the difference being almost statistically significant at a 5 per
cent level), between the companies managed by families (MANUO) and the rest of sampled
companies (the difference being statistically significant at a 5 per cent level), or between com-
panies that are controlled by families (CONTROLUO) and the rest of the sample (nearly sta-
tistically significant difference at a 5 per cent level). These results tend to suggest that family
companies, family-controlled companies and family-managed companies perform worse
than non-family, professionally controlled and professionally managed companies.
Family ownership, corporate governance and firm value 605
1
0.215 1
0.439*** 0.006 1
0.798*** 0.085 0.085 1
0.417*** 0.39 0.947** 0.443** 1
0.219** 0.383** 0.496*** 0.273** 0.524** 1
0.343*** 0.363** 0.777** 0.245** 0.688** 0.057 1
0.441*** 0.836*** 0.269** 0.55*** 0.296*** 0.496*** 0.114 1
0.55*** 0.651*** 0.263** 0.687*** 0.293*** 0.091 0.404*** 0.183 1
We also find significant statistical differences in the divergence between cash flow rights
and voting rights between the sub-samples of companies. The excess of voting rights over
cash flow rights is larger for family versus the non-family companies (UOFAM and the
rest) (statistically significant at a 1 per cent level), in companies controlled or managed by
the ultimate owner group as opposed to the rest of the sample (statistically significant at
a 5 per cent level) and in companies which are controlled (CONTROLUO) and managed
(MANUO) by the ultimate owner group (FAMANCON) (statistically significant at a
1 per cent level). These results suggest the need to explore the possible influence of pyra-
mids on company value and the need to study the reasons behind the reported statistical
differences. We therefore ran multiple regression models.
Regression analysis
We next test whether the presence of families and individuals as ultimate owners
(UOFAM), the excess of voting rights over cash flow rights, that is pyramids (DIVVRCF)
held by ultimate owners, corporate management variables (FAMANCON), the presence
of founders or descendants in management and control (FOUNDESCD) and several
control variables (SIZE, AGE, RISK, LEV) may influence company value (estimated
using the measure of company market value as a dependant variable: the industry
adjusted market to book value of common equity ratio – in Reg.1 to Reg. 3, Table 32.6
and the industry adjusted ratio of operating income to total assets as a measure of the
company accounting value – in Reg. 4 to Reg. 6, Table 32.6.
Regressions were estimated step-wise. For both dependant variables, the first block of
regression models (Reg. 1 and Reg. 4) are estimated without including the corporate gov-
ernance variable-FAMANCON and the founder/descendant variables, FOUNDESC, but
considering the ownership variable (UOFAM); the second block of regression models
(Reg. 2 and Reg. 5) include the variable FAMANCON, which is the effect of corporate
governance variables without considering the ownership variable (UOFAM) and the third
block of regression models (Reg. 3 and Reg. 6) consider the possible influence on
company value of founders or descendants (FOUNDESC) that manage or control such
companies, also without considering the ownership variable (UOFAM). These regres-
sions are estimated for the total sample of companies (86 companies). All regression
models turn out to be statistically significant.
When the adjusted market value is used as dependant variable, leverage turns out to
affect positively a firm value (at a 1 per cent level). This means that the market values posi-
tively firm’s leverage, possibly owing to the less free cash flow left for owner-managers.
When the industry adjusted return on assets ratio is used as dependant variable, the
results suggest a negative influence on company performance resulting from family
involvement in the company’s management and control (FAMANCON) (statistically sig-
nificant at a 5 per cent level) – in Reg. 5. These results suggest the need for further research
into the interactions between variables for a more detailed analysis of the underlying
reasons for the observed negative relation. We endeavour to explore these interactions in
the regression models shown in Table 32.7.
The results of these regressions suggest for both dependant variables no significant
influence of family ownership and of pyramids on company performance. This finding is
in line with the results of Galve Górriz and Salas Fumás (1996), which obtain the same
profitability for Spanish family and non-family companies.
Family ownership, corporate governance and firm value 607
Note: P-values in brackets *** Statistically significant at a 1% level. ** Statistically significant at a 5% level.
* Statistically significant at a 10% level. As we have run step-wise regressions we report the first step in which
the model is statistucally significant at a 5% level or below. Adjusted market value denotes the market to book
ratio adjusted by the industry median. Adjusted return on assets denotes the return on assets ratio adjusted by
the industry median. DIVRCF represents the excess of control rights over cash flow rights for all companies.
UOFAM is a dummy variable which reflects those companies whose largest ultimate owners are families or
individuals who own more than the 10 % threshold. SIZE represents total company assets. AGE represents
the number of years since foundation. RISK represents the Standard Deviation of the daily stock return,
multiplied by the square root of the number days of the year. LEV is defined as the ratio of total debt to
equity. FAMANCON is a dummy variable that adopts a value of 1 when the chief executive officer and the
president of the board belong to the ultimate owner’s family, and zero in all other cases. FOUNDESC is a
dummy variable that adopts a value of 1 when the company is either managed or controlled by descendants,
and zero when it is managed or controlled by its founders.
Table 32.7 shows the results of the regression models when we consider alternatively the
influence on company performance of pyramids, corporate management variables,
founder effect variables and the control variables. Reg. 1 to 5 use the market represent-
ative measure for company performance as dependant variable, adjusted market value,
while Reg. 6 to 9 use the accounting measure adjusted return on assets. All the regressions
models are statistically significant at a 5 per cent level or below (1 per cent).
First, we considered the possible influence of corporate governance variables (the effect
of the ultimate family owner as manager – MANUO – or as chairman of the board of
directors – CONTROLUO) on company value (Reg.1 and Reg. 6). Secondly, we separated
Table 32.7 Company management and control and company performance
Dependant variable: adjusted market value Dependant variable: adjusted return on assets
Reg. 1 Reg. 2 Reg. 3 Reg. 4 Reg. 5 Reg. 6 Reg. 7 Reg.8 Reg. 9
(Constant) 1.060 0.882 0.777 1.357 0.751 0.099 0.015 0.090 0.094
(0.442) (0.516) (0.450) (0.232) (0.571) (0.078) (0.029) (0.111) (0.076)
DIVVRCF 0.021 0.029 0.032 0.025 0.028 0.001
(0.331) (0.167) (0.129) (0.240) (0.199) (0.363)
SIZE 0.085 0.085 0.117 0.112 0.080 0.013 0.014 0.018**
(0.634) (0.627) (0.494) (0.528) (0.643) (0.125) (0.126) (0.047)
AGE 0.167 0.109 0.170 0.1
(0.413) (0.592) (0.399) (0.626)
RISK 0.004 0.001 0.002 0.002 0.001 0.001
(0.736) (0.901) (0.853) (0.824) (0.110) (0.202)
LEV 0.156*** 0.172*** 0.165*** 0.165*** 0.168 0.002
608
(0.001) (0.000) (0.000) (0.001) (0.000)*** (0.512)
CONTROLUO 0.250
(0.211)
MANUO 0.545 0.040**
(0.211) (0.046)
FOUNDMAN 0.398
(0.628)
DESCMAN 0.623 0.672 0.056**
(0.187) (0.204) (0.022)
FOUNDCON 0.635 0.662 0.763
(0.118) (0.087) (0.095)
DESCONTROL 0.148 0.026 0.043**
(0.678) (0.946) (0.020)
N 86 86 86 86 86 86 86
F 2.355 2.605 4.049 2.458 2.617 3.506 5.464 2.569 4.082
Sig. 0.031** 0.018** 0.003*** 0.025** 0.018** 0.019** 0.022** 0.033** 0.047**
Note: P-values in brackets *** Statistically significant at a 1% level. ** Statistically significant at a 5% level. As we have run step-wise regressions we report the
first step in which the model is statistically significant at a 5% level or below or once the model is significant, the best iteration – after excluding correlated
variables – to obtain statistically significant variables. Adjusted market value denotes the market to book ratio adjusted by the industry median. Adjusted return
on assets denotes the return on assets ratio adjusted by the industry median. DIVVRCF represents the excess of control rights over cash flow rights for all
companies. SIZE represents total company assets. AGE represents the number of years since foundation. RISK represents the Standard Deviation of the daily
stock return, multiplied by the square root of the number days of the year. LEV is defined as the ratio of total debt to equity. MANUO is a dummy variable that
609
takes on a value of 1 when any member of the ultimate owner family holds the position of chief executive officer and zero in all other cases. CONTROLUO is a
dummy variable that adopts a value of 1 when any member of the ultimate owner family holds the position of chairperson of the board and zero in all other
cases. FOUNDMAN is a dummy variable that adopts a value of 1 when the manager is the founder and zero in all other cases. DESCMAN is a dummy variable
that adopts a value of 1 when the manager is the descendant and zero in all other cases. FOUNDCON is a dummy variable that adopts a value of 1 when the
president of the board of directors is the founder, and zero in all other cases. DESCONTROL is a dummy variable that adopts a value of 1 when the president of
the board of directors is a descendant, and zero in all other cases.
610 Handbook of research on family business
Conclusions
This chapter explores how the fact of being a family company and the use of pyramids
by families affect company value. It also explores how the presence of ultimate family
owners in the management of companies (as chief executive officers) and in the control
of such companies (as chairpersons), either as a founder or descendant, also affect
company value.
The results of the analyses carried out suggest that being a family company or not, from
an ultimate owner perspective, does not seem to affect company value. Neither does the
use of pyramids. What really influences company value is the identity of its top manage-
ment – board executives and the chairperson. The presence of descendants seems to
reduce firm value. Companies that are chaired and/or managed by heirs show lower levels
of accounting performance than others. Thus, our results suggest that the descendants of
family groups, when in charge of both the management and control of a company, may
use their power to extract income from minority shareholders. Thus, what seems to be
crucial for a family company is how its management and control is organized.
These findings contradict the hypotheses that propose a positive or negative influence
of family ownership on company value. In this sense our results differ from those reported
by Anderson and Reeb (2003) or McConaughy et al. (1998), but are similar to the find-
ings reported by Alcalde et al. (2001) or Galve Górriz and Salas Fumás (1993, 1996).
We must say that our study suffers from several limitations, resulting from the meas-
urement of certain variables, that must be taken into account when interpreting the
results. Just to name a few, we are aware that we may be missing something by measuring
the effect of founder management or founder control by only considering the positions of
chief executive officer and chairman of the board. In addition, we are also aware that the
results vary when we use different performance measures. The study would also benefit
from the consideration of other corporate management related variables, that is, type of
boards of directors or the existence of anti-takeover devices.
Further research needs to be undertaken to understand the underlying reasons for the
observed negative effect of descendants on firm value. For example, one open question is,
what factors determine that descendants turn out, on average, to be bad managers? Case
studies may help us to understand such issues.
We believe that our study offers interesting implications for managers and family com-
panies. In order to prevent future problems, families should stay as qualified sharehold-
ers delegating to professional managers the day-to-day running of the company. The
positions held by family members as well as the identity of such family members must be
subject to special consideration. Family companies should try to overcome potential per-
sonal gains of descendant managers by hiring external managers or establishing adequate
monitoring devices that impede heirs from extracting income, to the detriment of other
shareholders. This will allow the company to survive over time. According to a Spanish
proverb: ‘From hardworking grandfathers, rich fathers and poor grandchildren’. Family
companies should try to turn the proverb around.
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Epilogue: theory building and the survival of
family firms – three promising research directions
Shaker A. Zahra, Sabine B. Klein and Joseph H. Astrachan
These are times of profound change around the globe. Family businesses, the most endur-
ing and venerable organizational form, are under immense pressure to adapt in order to
exploit emerging opportunities in their domestic and international markets. Without suc-
cessful adaptation, these firms can lose their competitive standing and sources of com-
petitive advantage, which could lead to their demise. Regrettably, family business owners
looking at the voluminous literature for guidance are apt to be disappointed. Research on
family firms is fragmented and non-cumulative, and lacks good theoretical grounding
(Zahra and Sharma, 2004), suggesting a need for more creative theory building by cap-
italizing upon the unique qualities of family firms, especially their cultures and histories
that determine family dynamics and decision-making. A ‘systems approach’ is clearly
needed to build and test such a theory. Furthermore, the field has to develop a common
language to ensure that communication is taking place between the disciplines involved
such as organizational behavior, strategy and finance.
In this chapter, we sketch out some ways that could expedite our progress in develop-
ing theory that guides futures research into family firms and helps their owners (man-
agers) achieve superior performance. We believe that one theory, or meta-theory, cannot
fully capture the richness and diversity of family firms, their cultures, systems and man-
agerial styles. Instead, in-depth research of the different variables is needed before a
theory of the family firm can emerge and gain wide acceptance. Understanding these vari-
ables can be the foundation to determine the emergence, evolution and survival of family
firms. Chrisman et al., propose that ‘the ultimate aim of research about family business is
to develop a theory of the family firm’ (2005, p. 566). Such theory would be valuable if it
helps families and their businesses do better, create wealth and add value to society.
How can we develop effective theories that will guide future research on family firms
and their decision-making processes? We believe that the answer lies in encouraging both
descriptive and prescriptive research, selectively importing theories from sister disciplines,
and developing and testing our original theories. As family firms are more complex than
their non-family counterparts, we also have to be careful to observe where imported the-
ories fall short and how we can further develop them or whether a new approach is needed
in order to grasp the whole complexity. Our success in achieving these objectives lies in
our ability to better contextualize our research in the life and nature of the family firms,
with their complexities and ambitions. Contextualizing our research means thoroughly
understanding the phenomena and issues at hand, factoring these issues into our theory
building and testing, and considering the particulars of the family firm situation in our
interpretations of our findings (Zahra, 2006). These processes will make theory building
and testing in family firms more challenging. Family firms are more complicated in many
respects compared with their non-family counterparts, which might explain why they have
614
Epilogue: theory building and the survival of family firms 615
firms behave differently from other types of firms. This might be true, but many family
firms share important similarities with other firms. This highlights the importance of what
is really distinctive about family firms. Schulze et al.’s (2001) analyses of the various mani-
festations of agency problems in family firms is a notable example of the theoretical rich-
ness that could be gained from probing and questioning our beliefs about family firms.
Turning our assumptions upside-down can open the door for greater depth and rigor in
future family firm research.
The good news is that the three groups of researchers we have just identified already
exist in the field, but there is a clear shortage of ‘great idea’ people and theorists. This
shortage is understandable. Theory-building skills are difficult to master and take years
to develop. ‘Systems’ thinking complicates the accumulation of these rare and compli-
cated skills. Our focus on borrowing from other disciplines also stands in the way of
having to face the fact that we need to innovate while theorizing about family firms and
their operations. The survival of these firms is important not only for their owners but for
society at large.
Conclusion
Research on the factors that determine the success and failure of family firms is in tran-
sition. It is becoming more theoretically grounded while making use of rigorous research
methods and analytical tools. Building theories that could enhance the success and sur-
vival of family firms can be demanding, as we have stated throughout this chapter. Our
challenge then is to better develop a more intimate understanding of the dynamic inter-
relationships that connect individuals, institutions and the context as we explore new
issues of importance to family firms or tackle persistent debates using fresh insights and
newly developed theories. We need, therefore, to move from borrowing and imitation to
effective theory construction and innovation in our research. In this way, we can more
competently address relevant issues with rigor and thus enrich our findings. By building
our theories, we can give back to the disciplines from which we have borrowed heavily.
Knowing more about what makes family firms unique and special can provide an import-
ant platform from which we can theorize more accurately and richly about the differences
that might exist between these companies and non-family firms. Such a platform could
give us an opportunity to enrich our dialog with sister disciplines while speaking to the
owners of family firms about issues of great importance to them, especially the survival
of their companies.
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Index
619
620 Index
balance sheet structures 565–6 family institutions and the business family 129;
and capital markets 571–2 see also family councils
compared to FTSE companies 566–70 family investment, China 470, 471–2
definition 559 family involvement in management
dividend yield 564–5 and economic performance 282, 283
family share ownership 564 and firm performance 31, 186, 283, 596–7
market capitalization 561–2 and internationalization 447–8
performance 557–8, 566–70 family management 152–5
sectoral distribution 562–3 and firm value 596–7
UK 560–72 impact of ideology 156–8
Family Business Research Group 94 impact on performance 154–5
Family Business Review 15, 19 family orientation of business 130
Family Business Stock Index 557 effect on business operation 135–41
family business studies 11–23 family-owned boards
family business succession, see succession accountability to shareholders 332–5
family business systems 216–17 management accountability 335–7
family businesses family ownership
and change 89–93 and firm performance 558, 575–91
characteristics 81–2 and firm value 593–611
community context, SFB model 89, 93–4 in public equity markets 555–7
and conflict 358–67 family paradigm concept 156
and corporate governance 317–41 family protocols 298–315
and debt financing 537–50 family representation on board of directors
definitions 26–7, 56–7, 96, 126, 167–8, 196, 491, 493
269–70, 422–3, 559 family shareholders
France 543–9 family business PLCs 564
internationalization 445–57 and firm financing 538–40
and market strategy 136–7 family succession, see succession
ownership 82 family system variables, SFB model 98–9
performance 148–9 family systems
professionalization 269–93 application of SFB model 100
role in economy 62–3, 460–61 and family business dynamics 217–18
social system 69–72 theories 84, 216
as strategic entities 68–9 far-sighted founders 33
types 180–94 FB (Family Business) Index 557, 567–9
in US 56–64, 81, 317–18 Fernández, Z. 447
see also family business PLCs FFI, see Family Firm Institute
family cohesiveness, see cohesiveness of family finance, family–business intermingling 92–3
family–company differentiation 153–4 finance theories and family firms 554–5
family complexity 147 financial behaviour and family ownership
effect on business performance 148–9 537–50
family councils 153, 504, 510, 514–15 financial capital
family culture 42 adjustments to change 92–3
and CLRs 113 family investment, China 470, 471–2
and entrepreneurship 462 sources 42–3
family dynamics and succession problems financial orientation of business 157, 158
380–81 financial perspective, Balanced Scorecard 198
family factor 74–6 O’Reilly’s Rainforest Guesthouse 203
Family Firm Institute (FFI) 2, 15, 19, 20–21 Fiol, C.M. 351
Body of Knowledge (BOK) task force firm context and succession problems 382
20–21 firm performance, see performance of family
family firms, see family businesses firms
Family Firo Model of human dynamics of firm value, see value of firm
change 90–92 FIRO (Fundamental Interpersonal
family governance 129 Relationship Orientation) Model 90–92
624 Index
hotel industry and firm longevity, Japan 523 Italy, family firms
Hoy, F. 68 boards of directors 491–8
human capital, family businesses 88 ownership and governance 504–15
adjustments to change 92
Hunt, M.R. 416 Jaffe, D.T. 220, 221
Huszczo, G.E. 141 James, H.S. 570
Japanese family firms, longevity 517–33
ideology and family businesses 156–8 Jehn, K.A. 39
IFERA (International Family Enterprise Jensen, M. 127, 540, 541, 594, 596
Research Academy) 2 Jetha, H. 59
imagination in strategy-making 405, 414 Johannisson, B. 239
implementable attributes of planned growth Johnson, G. 253, 256, 266
(IAPG) 475 Johnson, M.K. 347
inclusion dimension, Family Firo Model 90–91 Jorissen, A. 136, 139
independent outsiders on board Judge, W.Q. 328
and accountability 324–5
Italian family firms 493 Kadis, L.B. 219
individual proprietorship 58 Kahn, R.L. 131
Industrial Dynamics 301 Kaplan, R.S. 197–9
informal strategic arena 259 Karofsky, P. 519
innovation and learning perspective, Balanced Kaslow, F.W. 217, 218, 219
Scorecard 199 Katz, D. 131
O’Reilly’s Rainforest Guesthouse 206 Katz, J.A. 11
institutional theory and family business Kaye, K. 220, 362, 365
governance 153 Kellermanns, F.W. 39, 360, 366
institutions and family business research 18–19 Kelly, L.M. 32
instruments, see test instruments Kepner, E. 197
integrated systems view of family–business Kets de Vries, M.F.R. 220, 238, 381
interaction 254 Kirby, D. 461
integration dimension, Family Firo Model 91 Kirchoff, B.A. 59
intended strategy and next-generation learning Kirchoff, J.J. 59
414 Kirschner, S. 219
intergenerational CLRs 110, 113, 115 Klakovich, M. 222
intergenerational knowledge transfer 34–5, Klein, S.B. 27, 168, 170, 172, 556, 562
344–55 Kline, R. 481
intergenerational succession, see succession knowledge dissemination 47
internal factors of family business knowledge transfer
performance 145–60 intergenerational 34–5, 344–55
internal process perspective, Balanced knowledge transmission in family firms
Scorecard 199 (KTFF) model 350–53
O’Reilly’s Rainforest Guesthouse 204 Koiranen, M. 463
International Family Enterprise Research Kolenco, T.H. 148
Academy (IFERA) 2 Kongo-gumi (Japanese firm) 520, 523
internationalization through strategic alliances Krasner, B.R. 218, 221
445–57 KTFF (knowledge transmission in family
interpersonal level, family business research firms) model 350–53
37–42 Kurashina, T. 518
interpersonal transactions, SFB Model 87–8 Kuratko, D. 483–4
interpreneurship and multigenerational
transition 395–6 La Porta, R. 555
intrafamilial informal CLRs 110, 118 Lambrecht, J. 463
intrafirm family/non-family CLRs 110, 117 Lang, L. 556
intragenerational CLRs 110, 115–16 Lang, L.H.P. 170
investment by family, China 470, 471–2 Lank, A. 518, 519
Irving, G. 35 Lansberg, I. 196, 393
626 Index