BLOOD IN THE BOARD ROOM:

FAMILY RELATIONSHIPS INFLUENCING THE FUNCTIONS OF THE BOARD

Sven-Olof Collin Jenny Ahlberg Jonas Gabrielsson

Smithsonian firm Marxian firm

Family firm

“Nepotism is just fine, as long as it is kept within the family”

Familiness of the firm

Ownership structure

Family governance of the firm

Managerial labor market

Capital structure Strategy Structure

Audit

Board of directors

Family

Blood,i.e.

Nepotism

Board functions

Control

Resource provision

Decision making

Conflict resolution

Do blood relationships at the board influence the functions of the board?

Family and genetics

A firm dominated by a family - A firm for a family

=> family governance and family nepotism

Inclusive fitness

Genetic relatedness, factor r

- 0,5 parent, child, full sibling, dizygotic twin

- 0,25 half-sibling, grandparent, grandchild, avuncular relationships

- 0,125 cousin, great grandparents, great grandchildren, great aunt/uncle

The effect of nepotism

Simplifications

Nepotism suggested to affect individual and group behavior

– genetic relatedness and socialization

Silent assumption in family firm research

Generation

The board

Board functions

- control

- decision making

- resource provision

- conflict resolution

Presence of factor r will influence the orientation towards the four functions as well as the overall activity

Family coefficient

Hypothesis

Control Decision Resource Conflict Activityr=0,5 (sibling, parent) - + - - +r=0,25 (grandparent, uncle) - - - - -r=0,125 (cousin) + - + + +Family coefficient - n n - -

SampleNo files of family firms

‘Shotgun’ approach

Stepwise surveys

First survey:

– 14.421 corporations, selected 1.400 corp + 422 corp from a list of gazelle corporations => 1704 corporations

– 278 responses (16.3% response rate)

Selected family>50% shares AND considered to be family firm by CEO or owner =>148 corporations

Second survey = ‘blood survey’

– 68 usable responses, i.e., final response rate = 4%

=> Explorative study

Operationalization

Four questions each

– Control (alpha=0,61)

– Resource (alpha=0,79

– Decision (alpha=0,76)

– Conflict (alpha=0,88)

– Board activity=Control+Resource+Decision+Conflict

r-0,5 share etc = number of r-0.5 relationships/total number of relationships

Family coefficient= weighted sum of the r-variable, i.e., ‘blood density’ of the board

Numerous control variables: family chair, generation, board size, sales (corp size), industry, solidity, liquidity

Results

Average 2 family (i.e., genetic) members and 2 non-family members

19% of boards with only family and members through marriage (35% US, 45% Italy, 72% Belgian family firms)

Average Control=17,2; Decision=16,7; Resource=15,4 and Conflict=7,6

Chairman of the board from the family=43%

r=0,5 (e.g., parent) dominating family relationship

Regression results

More family, i.e., blood, less control

r=0,125 (e.g., cousin) drives conflict emphasis

r=0,25 (e.g., grandparent) reduces board activity the most

More generations, less conflict

Conclusions

Exploratory results, no generality test of hypotheses

Weak indications of genetic influence on board activity

Weak indications of nepotism in r=0.25 (e.g., grandparents) and r=0.125 (e.g., cousin), but not r=0.5 (e.g., parent) , i.e., strongest blood

r=0.5 (e.g., parent) includes both blood and socialization through living together

=> consider Blood and Socialization (interaction frequency etc)

Limitation: Gender should be considered

Speculation

The Battle Ground Boardr=0,125 (e.g., cousin) relationships

conflict in the extended family with attenuated blood

The Training Camp Board r=0.25 (e.g., grandparent) relationshipsthe fifth board function, training camp

Blood – what’s the point?

- r: a quantitative representation of family relationships- Generation does not represent family relationships- Blood introduces evolutionary psychology

The social construction of reality - The natural construction of reality

Competitive advantage of family firms?

Is it possible to manage nepotism?

Is it desirable to manage nepotism?