examining the "family effect" on firm performance

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Family Business Review

DOI: 10.1111/j.1741-6248.2006.00074.x2006; 19; 253Family Business Review

W. Gibb Dyer, JrExamining the "Family Effect" on Firm Performance

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Examining the Family Effect onFirm PerformanceW. Gibb Dyer, Jr.

The purpose of this article is to provide an explanation for the contradictory evidence inthe literature regarding the performance of family-owned firms. The article suggests thatmost of the research fails to clearly describe the family effect on organizational perfor-mance. The family effect, based on agency theory and the resource-based view of the

firm, is described and propositions are generated that examine the relationship betweenfamilies and organizational performance. Implications for theory and research are alsodiscussed.

How might a family that owns and manages anenterprise affect its performance? To answer thisquestion, a number of scholars have attempted tocompare the performance of family firms withfirms having no family ties, but the results of suchstudies have led to mixed results and conflictingopinions regarding the impact of family control(Gomez-Mejia, Nuez-Nickel, & Gutierrez, 2001;

Schulze,Lubatkin,Dino,&Buchholtz,2001;Schulze,Lubatkin, & Dino, 2003). For example, Daily andDollinger, in their study comparing the perfor-mance of family versus nonfamily firms, write:

family-run firms do appear to achieve performanceadvantages . . . whether performance is measured interms of financially oriented growth rates or per-ceived measures of performance. (1992, p. 132)

More recently, Anderson and Reeb also found thatfamily firms outperformed nonfamily firms in theS&P 500,noting that family firms are significantly

better performers than nonfamily firms (2003,p. 1324).

In contrast to these findings, Perrow concludesthat the family firm is inherently inefficient:

Particularism means that irrelevant criteria (e.g.,only relatives of the boss have a chance at top posi-

tions), in contrast to universalistic criteria (compe-tence is all that counts), are employed in choosingemployees . . . efficiency is foregone if recruitmentor access is decided on grounds that are not relatedto the members performance . . . More serious, theparticularistic criteria are likely to be negativelyrelated to performancethe more these particular-istic criteria are used, the poorer the performance.(1972, pp. 810)

Work by Faccio, Lang, and Young (2001) has alsonoted that family firms are relatively poor per-formers due to conflicts that arise as a familyattempts to manage an enterprise. Those who seethe family firm as an inefficient organizationalform typically argue that the best course for anyfamily firm is to move as quickly as possibleto replace family members in the firms leader-ship positions with professional managers whocan function with more objectivity and skill(Levinson, 1971).

The purpose of this article is to address thesepuzzling findings in the literature by analyzing thefamily effect on firm performance. First, I willdiscuss how the current theorizing and researchon this subject fails to clearly differentiate thefamily effect from other variables that may influ-ence firm performance. Some of the important

FAMILY BUSINESS REVIEW, vol. XIX, no. 4, December 2006 Family Firm Institute, Inc. 253

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studies that focus on family firm performance willbe reviewed and the possible explanations for theconflicting results discussed. Second, the familyeffecton firm performance will be explored usingagency theory and the resource-based view of thefirm to describe the impact that a family mighthave on a firm. Several propositions will be pre-sented regarding family firm performance, sug-gesting that the family effect can be either positiveor negative depending on the circumstances.Finally, implications of the family effect for theorydevelopment will be discussed.

Determinants of FirmPerformance

As mentioned previously, most studies that haveattempted to ascertain the impact of the family onfirm performance have compared the perfor-mance of family and nonfamily firms. Table 1 listsnine studies comparing the performance of familyfirms with nonfamily firms.1

Table 1 contains the definitions used in thestudies, the performance measures, the samples,the criteria used to select the samples, and thefindings. Of the nine studies, four reported thatfamily firms perform better than nonfamily firmsbased on the performance criteria used by the

researchers; three studies found that nonfamilyfirms had superior performance; two studieshad mixed results. Upon closer inspection ofthese studies, there appear to be several possiblereasons for the divergent conclusions. First, thedifferent methodological approaches employedacross the studies might account for the contra-dictory findings. For example, the definitions ofwhat constitutes a family firm varied widelyacross studies. Some scholars defined a firm asbeing a family firm rather subjectively, basing

firm classification on whether the respondentbelieved the firm was a family firm, while otherresearchers based their definition on more objec-tive criteria such the percentage of family owner-ship or the number of family members occupyingmanagement or board positions. Thus, somestudies likely included firms in their family firmsample that would not have been included in otherstudies samples and this mixing of apples andoranges might account for the ambiguous find-ings. Moreover, sample size, type of firm, and per-formance measures also varied widely betweenstudies. Some studies primarily comparedfounder-led family firms with nonfamily firmswhile other samples were composed of familyfirms that had moved into succeeding generationsof family leadership.

These methodological problems suggest thatresearchers need to unravel the impact of thevarious factorsincluding the familythat affectfirm performance (Scott, 1992). Figure 1 outlinesthe typical factors that scholars have arguedare the determinants of firm performance:(1) industry, (2) governance, (3) firm character-istics (e.g., social capital, strategy), and (4)managementparticularly, in the case of newerfirms, the impact of the entrepreneur or founder.What most scholars leave out or fail to clearlyarticulate, however, is the possible family effecton firm performance as described in Figure 2.Figure 2 suggests that a family might influencefirm governance, its basic characteristics, thequality of its management, and possibly even anindustry (Dyer, 2003; Morck & Yeung, 2003, 2004).It is also possible that a family may have a directeffect on a firms performance that is not medi-ated through the other four variables.

The studies cited in Table 1 leave open the ques-tion as to whether these studies have sufficientlycontrolled for the effects of the various variablesto truly isolate the family effect on firm perfor-mance. For example, Gallo, Tapies, and Cappuyns(2000) note that in their study, family businessestend to be found in industries that are moreseasonal in their sales and are less capital inten-sive, and the Anderson and Reeb (2003) studydescribes similar differences. Although some of

1 These studies were gleaned from a review of journals knownto publish studies comparing the performance of family andnonfamily firms, for example,Journal of Finance,Academy ofManagement Journal, Family Business Review,Journal of SmallBusiness Management, and recent working papers on thesubject. The list of studies in Table 1 is not exhaustive butclearly illustrates the fact that there are divergent findingsregarding the performance of family firms.

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Table1FamilyVersusNonfamilyFirmPerformanceComp

arisons

Citation

Definitionof

FamilyFirm

Performa

nce

Measures

Samples

Sample

Criteria

Find

ings

Andersonand

Reeb(2003)

Familyfirmcriteria:(1)the

familycontinuestohave

anequityownershipstake

infirm;(2)family

possessesboardseats;(3)

foundingCEOisstillthe

actingCEOordescendent

ofCEOisactingCEO.

1.Tobinsq.

2.Return

onassets.

3.Return

onequity.

403firmstakenfrom

S&P500.Firms

from19921999.

S&P500firms,excluding

banksandpublicutilities.

Familyfirmshave

higherTobinsq

an

dreturnon

assets.

Beehr,Drexler,

andFaulkner

(1997

)

Afamilybusinessisonein

whichtheownerandat

leastoneotherfamily

memberwork.

1.Conflict:work-family

conflic

t/interpersonal

conflic

t.

2.Expect

ationsand

advantages:family

expect

ations/personal

advantage.

3.Individ

ualoutcomes:job

satisfa

ction/career

satisfa

ction/psychological

strain.

4.Organ

izationaloutcomes:

organizational

commitment/turnover

intention.

5.Family

outcome:family

harmo

ny.

45businesses.(37

pairedfamilyand

nonfamilyin

Maine;4family

and7nonfamilyin

Michigan).

Individualsample:

235.

Smallfamily-owned

establishmentsinMaine

werematchedwith

nonfamily-owned

establishments

(predominantlyfromthe

retailindustry).Michigan

businesseswereselected

frommachiningandlight

metalmanufacturing

industry.

Familyfirms

ge

nerallyperform

be

tteronthe5

pe

rformance

dimensions.

Dailyand

Dollinger(1992

)

Iftherewerekeymanagers

relatedtotheowner

workinginthebusiness

thefirmisconsidereda

familyfirm.

1.Size.

2.Growt

h.

3.Margins.

4.Perceivedperformance.

186manufacturing

firms.

Manufacturingfirms

maintainingnomorethan

500employeeswith

standardindustrial

classification(SIC)codes

2039.

Familyfirmsperform

be

tteralongthe

severaldimensions.

McConaughy,

Matthews,and

Fialko(2001

)

Publiccorporationswhose

CEOsareeitherthe

founderoramemberof

thefoundersfamily.

1.Efficiency.

2.Capita

lstructure.

3.Value.

219firmsidentified

fromThe

BusinessWeekCEO

1000.

FirmswithCEOsincludedin

thearticle,The

BusinessWeekCEO1000,

whofitthecriteriaof

beingeitherthefounder

oramemberofthe

foundersfamily.

Familyfirmsperform

be

tteralongthe3

dimensions.

Gallo,Tapies,and

Cappuyns

(2000)

Designationoffamilyfirm

lefttothejudgmentof

thepersonansweringthe

questionnaire.

Growth,debt,andother

financialmeasures.

204nonfamily

businessesand10

1

familybusinesses.

Spanishbusinessesthathad

salesofover3billion

pesetasin1995andmore

than150employees.

Nonfamilyfirmshad

superiorgrowth.

Examining the Family Effect on Firm Performance

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Table1(continued

)

Citation

Definitionof

FamilyFirm

Perform

ance

Measures

Samples

Sample

Criteria

Findings

Gomez-Mejia,

Nunez-Nickel,

andGutierrez

(2001)

Determinedbythe

relationshipbetweenthe

owners,theCEO,and

editor.TheCEOhadthe

lastnameoftheowner(s)

orinthecaseofthe

editor,familystatuswas

confirmediftheCEOand

theeditorhadthesame

lastname.

Newspa

percirculation.

276Spanish

newspapers.

Spanishnewspapersthat

existedbetween

19661993.

Nonf

amilyfirms

mo

nitorCEOs

better.

Villalongaand

Amit(2004)

Thefounderoramemberof

hisorherfamilybyeither

bloodormarriageisan

officer,adirector,ora

stockholder.

Tobinsq.

Fortune500firms

from19942000.

Fortune500firmsfrom

19942000.

Second-generation

fam

ilyleaders

destroyfirmvalue.

Chrisman,Chua,

andLitz(2004)

Percentageofownership,

numberoffamily

membersinmanagement,

andfamilysuccessor

chosen.

Salesgrowth.

1,141firms.

Thesefirmswereselected

fromtheSmallBusiness

DevelopmentCenter

programintheUnited

States.Eachfirmhadat

least5ormorehoursof

counselingassistancefrom

theSBDCin1998.They

werealsorequiredto

haveatleast5

full-timeemployees.

Mixe

d:little

dif

ferencebetween

fam

ilyand

no

nfamilyfirms.

Tanewski,

Prajogo,and

Sohal(2003)

Ownersdecidewhetheror

nottheyareafamilyfirm

andthesecriteriamust

exist:50%

ormoreof

ownershipheldbyasingle

family;asinglefamily

groupiseffectively

controllingandmanaging

thebusiness.

1.Productinnovation.

2.Proce

ssinnovation.

3.Struc

ture.

4.Prosp

ectorstrategy.

5.Leaderstrategy.

2,000smalland

medium-sized

familyand

nonfamilyowned

businessesin

manufacturingand

serviceindustry

sectorsinAustralia.

1,000family-ownedfirms

thathadlessthan100

employees

(manufacturers)orless

than20employees(service

industries).

Mixe

d:familyfirms

les

sinnovativebut

havegreater

prospecting

orientation.

Dyer

256



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these studies do attempt to control for industry,the fact that families find certain industries moreattractive for launching an enterprise calls intoquestion whether performance differences aresolely a function of family ownership and man-agement or are, in fact, related to the industrywhere these firms are embedded.

Family governance is highlighted as makingthe difference in firm performance by Chrisman,

Chua, and Litz (2004), Anderson and Reeb (2003),and McConaughy, Matthews, and Fialko (2001),and more recently has been discussed in a treatiseby Carney (2005). However, these authors all arguethat the agency benefits accrued by family firmsare a function of unified governancethe ownersare also the firms managers (Jensen & Meckling,1976). But unified governance and its agency ben-efits are not unique to family businesses. Owners

Figure 1 Common Variables Affecting Firm Performance.

Firm

Performance

Industry

Firm Governance

Firm

Characteristics

Management

(Founder)

Family Effect

Figure 2 The Family Effect on Firm Performance.


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who are not related to one another may alsomanage their businesses, and hence obtain thebenefits of owner management. What thesestudies fail to demonstrate is the unique impact of

family governanceon firm performance.The Anderson and Reeb (2003) study also pre-

sents another possible confounding variable, thefirm effect. Most studies that use comparativesamples assume, ceteris paribus, that all the firmcharacteristics are held constant except for thevariables under investigation. The Anderson andReeb study compared founder-led family firms inthe S&P 500 with firms that were not led byfounders, and noted that the newer firms (lessthan 50 years old) performed better than the olderfirms. The organization life-cycle literature sug-gests that most firms go through four generalstages: founding, growth, maturity, and decline(Greiner, 1972; Kimberly, 1980). Founder-led firmsthat are in the S&P 500 would have had to havebeen growing very rapidly to achieve such a sizeduring the founders tenure. If we were to comparefounder-led firms that are likely to be in thegrowth stage of their life cycle with firms withoutfounders that would likely be older, more mature,and growing slower or even declining (as in thecase of nonfounder-led S&P 500 firms), thenthe differences in performance may be a functionof the firm and its stage of development andnot of the firms relationship to a family. Further-more, the studies by Beehr, Drexler, and Faulkner(1997) and Daily and Dollinger (1992) noted thatcertain firm characteristics such its strategy, struc-ture, and human-resource systems differed some-what between family and nonfamily firms, andtherefore the inference was made that such differ-ences were the result of family involvement. Whatis not clear from these studies, however, is therelationship between these firm characteristicsand the owning families. Did, indeed, the familyfoster such differences in firm characteristics, ordid they arise from some other driving force? Thisquestion is not fully answered by these studies.

A final potential confounding factor in thesestudies is the management or founder effect.Schumpeter (1934) argued that one of the mostvaluable commodities for any firm is the entrepre-

neur whose vision, innovation, and ability to seeopportunities causes creative destruction in themarketplace and enables the firm to captureextraordinary profits (Morck, Shleifer, & Vishny,1988). Although research does suggest that not allentrepreneurs bring with them a skill set thatleads to high firm performance (e.g., Dyer, 1992;Kets de Vries, 1985), the success of new ventures isoften attributed to the founders unique skills andcharacteristics (Bird, 1989). In the case of thefounder-led family firm, it is difficult to deter-mine whether the founder is primarily responsiblefor superior firm performance or whether thefamily is responsible. The studies found in Table 1indicate that founder-led family firms generallyperform better than those firms without founders.This was particularly evident in the Villalonga andAmit (2004) study that noted that founder-ledfamily firms performed significantly better thansecond-generation-led family firms. Thus thestudies comparing the performance of founder-led family firms with nonfamily firms may actu-ally be demonstrating the founder effectand notthe family effect on the firm. For example, thestudy by Anderson and Reeb (2003) includes firmssuch as Microsoft in their sample of founder-ledfamily firms.Although the impact of Bill Gates onthe firm is undeniable, it is unclear what effect,if any, the Gates family has had on Microsoftsperformance.

In summary, the research comparing the per-formance of family firms to nonfamily firmsleaves us with many unanswered questions,the chief one being: How might a familyaffect theperformance of a firm?

The Family Effect on FirmPerformance

The previous discussion has suggested thatresearch noting differences in performancebetween family and nonfamily firms has notbeen particularly enlightening regarding theimpact of a family on firm performance. We willnow explore the family effect on performance,in other words, those attributes that a familybrings to a firm that might affect its perfor-

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mance. Performance, broadly defined, refers toefficiencies in terms of utilization of resources aswell as the accomplishment of organizationalgoals (Steers, 1982). Families are thought to influ-ence firm performance primarily throughfamily

goals and relationships and family resources orassets(Dyer, 2003; Habbershon & Williams, 1999;Steier, 2001). To develop theory regarding howfamily goals, relationships, and resources affectfirm performance, agency theory and theresource-based view of the firm seem to bethe most promising (Chrisman, Chua, & Litz,2004; Chrisman, Chua, & Sharma, 2005; Schulze,Lubatkin, Dino, & Buchholtz, 2001; Sirmon &Hitt, 2003). Agency theory and the resource-based view suggest that certain family factorscan lead to various agency benefits and impor-tant assets, while other family factors imposecosts and are liabilities to firm performance.These factors are listed in Table 2.

The following discussion provides moredetailed arguments regarding the impact of familygoals, relationships, and resources on firm gover-nance, firm characteristics, and a firms manage-ment. (The potential impact of families on

industries and even entire economies has beendiscussed previously by Morck and Yeung (2003,2004) so it will not be discussed in detail here.)Several propositions are posited that are designedto more clearly articulate the family effect onorganizational performance.

Governance and the Performanceof Family Firms

Agency theory has often been used to argue thatfamily firm governance is more efficient thanthat of nonfamily enterprises (Morck et al., 1988).Jensen and Meckling (1976) indicate that familyfirms are likely to incur fewer agency costsbecause the goals of a firms principals (owners)are aligned with its agents (managers) since theyare typically one and the same. Because of thisalignment of goals, agency costs will not be borneby the owners since they will not have to spendtime and resources to monitor the behavior oftheir agents. Schulze, Lubatkin, Dino, and Buch-holtz, in their review of agency theory and itsapplication to family firms (2001, p. 99), discuss

Table 2 Family Factors Affecting Firm Performance

Family Factors Contributing to High Performance Family Factors Contributing to Low Performance

Agency Benefits Agency Costs

Lower agency costs due to the alignment of

principal-agent goalsLower agency costs due to high trust and shared

values among family members

Higher agency costs due to conflicting goals in the

familyHigher agency costs from opportunism, shirking, and

adverse selection because of altruism (i.e., family

members fail to monitor each other)

Family Assets Family Liabilities

Human capital: the family has unique training, skills,

flexibility, and motivation

Family lacks necessary skills and abilities due to small

labor pool, lack of talent, or inadequate training

Social capital: the family develops relationships

outside the family with employees, customers,

suppliers, and other stakeholders that generate

goodwill

Family branding of the firm or of the firms goods

and services may generate goodwill and a positive

image with stakeholders

Family fails to develop social capital with key

stakeholders due to distrust of outsiders (i.e.,

amoral familism)

Family relationships lead to complex conflicts among

family that may undermine image and goodwill

with stakeholders

Physical/financial capital: the family may have

physical or financial assets that can be used to

support the firm

Family uses firm assets for personal use, thus draining

the firm of financial and other resources


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the advantages of the alignment of principal-agent goals and, in particular, the advantages ofowner management:

owner management should reduce agency costs

because it naturally aligns the owner-managersinterests about growth opportunities and risk. Thisalignment reduces their incentive to be opportunis-tic, sparing firms the need to maintain costlymechanisms for separating the management andcontrol of decisions. (Fama & Jensen, 1983a p. 332,quoted in Schulz et al.)

As noted previously, however,owner managementis not unique to the family firm.Nonfamily ownerscan also manage their enterprises and thereforereceive the same agency benefits as family ownermanagers. Thus owner management is not afamily effect on firm performance.

It may be true, however, that familial relation-ships between ownersand those managerswho aretheir agents provide an additional benefit to reduceagency costs. Owners, who may have their sons,daughters, brothers, or other family members astheir agents, need not incur the expense of moni-toring agents they distrust. Fama and Jensen(1983b) suggest this idea when they note thatfamily members . . . therefore have advantagesin monitoring and disciplining related decisionagents (Fama & Jensen, 1983b, p. 306). Morerecently,EnsleyandPearson(2005)haveshownthattop-management teams in family firms are morecohesivethanthoseinnonfamilyenterprises.Totheextent that a family brings to the firm commongoals, high trust, and shared values in addition tounified governance,cumbersome and costly moni-toring mechanisms can be avoided.

Some research findings appear to support thisview that family firms experience reduced agencycosts. For example, McConaughy, Walker, Hender-son, and Mishra (1998) present evidence thatfamily monitoring of family managers encourageshigh performance and reduces conflicts betweenshareholders and managers. In another study,McConaughy (2000) compared family firms thathad family CEOs with family firms that hadnonfamily CEOsspecifically, compensation offamily versus nonfamily CEOs. McConaughy con-cludes that:

family CEOs possess superior incentives and haveless need to receive additional incentives throughtheir compensation from the firm. It shows thatfounding-family CEOs are paid less [on average$534,900 less] and that their pay is less sensitive to

performance. Alternatively, the results can be takento suggest that family controlled firms have to paynonfamily CEOs more to get what a family CEOwould do. (2000, p. 130)

A more recent study on CEO compensation com-paring family and nonfamily firms by Gomez-Mejia, Larraza-Kintana, and Makri (2003) alsonoted that professional CEOs are paid signifi-cantly more than family CEOs. Families whocontrol related managers through what Etzioni(1961) calls normative control (shared values)will likely incur fewer costs than those owners/

principals who must provide financial incentivesto their agents to get comparable performance.Thus, these studies indicate that having familyinvolvement in firm ownership and managementmay significantly reduce certain costs, potentiallyenhancing firm performance.

Why Reduced Agency Costs May Not BeRealized in Family Firms

In contrast to the view that family firms are moreefficient due to reduced agency costs through rela-tionships that align the goals and incentives offamily owners and managers, is the alternativeperspective that family firms are breedinggrounds for relationships fraught with conflict(Dyer, 1986; Kaye, 1991; Lansberg, 1999; Ward,1987). Indeed, family members may have compet-ing goals and values, which may spring fromcomplex conflicts and family dynamics that arisefrom a familys psychosocial history (Hilburt-Davis & Dyer, 2003). From biblical times, storiesabout families, whether they be about Cain andAbel, Jacob and Esau, or Joseph and his brothers,are filled with conflict, treachery, and deceit,rather than family harmony. In the context of afamily business, differing views within a familyabout the distribution of ownership, compensa-tion, risk, roles, and responsibilities may make thefamily firm a battleground where family members

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compete with one another. Schulze, Lubatkin, andDino argue that the dispersion of ownership infamily-held firms drives a wedge between theinterests of those who lead a firmand often owna controlling interestand other family owners(2003, p. 181). Since there is typically no equitymarket for minority family owners to cash outand go their own way, Schulze,Lubatkin, and Dinosuggest that the minority owners have incentivesto free ride on the controlling owners equity(2003, p. 184) by shirking, exorbitant compensa-tion,or accumulating perquisites.Under such con-ditions, family members are not equally yoked inpulling the firm and family forward, but are fight-ing for their own interests. From this perspective,the family firm may, in fact, incur significantagency costs due to the conflicts that accompanyfamily involvement.

Another reason that is often posited for familyfirms not realizing reduced agency costs is theidea thataltruism(orparticularism) makes it dif-ficult, if not impossible, for families to effectivelymonitor family members who work in the firm.Altruism, treating people for who they are ratherthan what they do,is often seen as the cornerstonevalue in family firms (Schulze, Lubatkin, Dino, &Buchholtz, 2001). Rosenblatt, de Mik, Anderson,and Johnson, in their extensive study of familyfirm dynamics, quote a senior family managerwho articulates why family members may bemonitored differently than nonfamily employees.

If my sons or my wife make mistakes, I let it go,because its not worth fighting over.You have to livewith your family. A nonfamily member, you can firehim. (1985, p. 112)

Almost a century ago, Max Weber presented hisrational-legal model of bureaucracy as an alter-native to nepotism, the outcome of altruism(Weber, 1946). Weber noted that nepotism leads toadverse selection and ineffective (or nonexistent)monitoring and evaluation of employees, whichcan lead to shirking and opportunism on the partof family members. Perrow excoriates nepotismwhen he writes: Much inefficiency in organiza-tions and much annoyance shown by members. . . stem[s] from nepotism (1972, p. 13). He even

suggests that nepotism is self-serving to those incontrol: To some extent, nepotism undoubtedlydoes stem from the belief that ones own incom-petence can be better protected if one offers posi-tions to nephews, sons, uncles, and other relativesof the owners (1972, p. 14). Perrow believes thatnepotism makes it difficult, if not impossible, forfamily members to monitor each other effectivelyand that nepotism protects family members fromsuch monitoring.

Schulze, Lubatkin, Dino, and Buchholtz(2001)andGomez-Mejia,Nuez-Nickeletal.(2001)present empirical evidence that such altruism mayindeed lead to poor performance. Schulze, Lubat-kin, Dino, and Buchholtz (2001), in their study of1,376 family firms, reported that those familyfirms that had developed some formal governancemechanisms (which presumably mitigate againstaltruism) performed more effectively than thosefirms without such formal arrangements. Gomez-Mejia, Nuez-Nickel et al. (2001) found that theSpanish family firms they studied were muchmore reluctant to fire a family CEO than were non-family firms, but when the family CEO wasreplaced, the firm performed significantly betterafter the transition than those nonfamily firmsthat also replaced their CEOs. The implication isthat family owners, as a result of altruism, areunwilling to monitor and discipline their CEOs;hence the family CEOs became entrenched. As aresult, the family waits too long (until perfor-mance falls precipitously) to make a leadershipchange. Nonfamily firms, on the other hand,monitor their CEOs more carefully and are nothamstrung by altruism; hence they are morewilling and able to replace a CEO when the CEOsperformance is deemed unacceptable.

In summary, if familial ties encourage princi-pals and their agents to have common goals andvalues, such a family effect should lead toreduced agency costs. However, others have sug-gested that the family firm is not an inherentlyefficient organizational form,incurring significantagency costs due to the fact that family membersmay have different goals for the firm and family,creating incentives for minority family sharehold-ers to free ride. Moreover, because the value of


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altruism pervades most families, family membersare reluctant to monitor, evaluate, or disciplineeach other. Such a value system can lead to adverseselection, shirking, and opportunism, thus under-mining firm performance. Two propositionsrelated to firm governance stemming from thesearguments are:

Proposition 1. Firms with principals and agents thathave familial ties will have lower agency costs (due tomore congruent goals and values) than those firms with

principals and agents who are not related.

Proposition 2. Firms that have family relationships basedon altruism will have higher agency costs than those

firms whose relationships are based on universalisticcriteria.

Family Assets and FirmPerformance

The resource-based view of the firm has beenanother popular approach for critiquing theperformance of family firms (Habbershon & Wil-liams, 1999; Sirmon & Hitt, 2003). The resource-based view suggests that firms with assets that arevaluable, rare, inimitable, and nonsubstitutablemay be able to create a sustainable competitiveadvantage (Barney, 1991; Penrose, 1959). From theresource-based view,the question arises: Do fami-

lies bring with them unique assets to a firm thatwill give it a competitive advantage? Three typesof capital (or assets) have been associated with theperformance of family firms: (1) human capital,(2) social capital, and (3) physical/financialcapital. There are argumentsboth pro andconregarding whether or not families canindeed develop and take advantage of these assets.

Human Capital

One resource that can give a firm a competitiveadvantage is human capitalthe skills, abilities,attitudes,and work ethic of those employed by thefirm. There have been several ideas posited con-cerning why family firms may have unique humancapital. First, because the family name is on thebuilding, family members will naturally be more

motivated and committed to the business (Rosen-blatt et al.,1985; Ward, 1988). Such family connec-tions inspire loyalty and family members aretherefore willing to work long hoursoftenwithout compensationand be highly flexible intheir work roles and assignments in order to helpthe firm succeed (Rosenblatt et al., 1985). Second,family members have often been socialized at avery early age to understand the nature of thebusiness, its customers, and its competitors, andhave received hands-on training from familyleaders who are knowledgeable and highly skilled(Dyer, 1986, 1992). Such a process of socializationcan prove to be a significant source of competitiveadvantage by creating a highly knowledgeable andskilled cadre of family employees who are highlymotivated and willing to sacrifice much to see thefirm succeed. Few nonfamily firms can boast of aworkforce with such assets.

On the other hand, family firms have a limitedpool of potential recruits. Thus, the family maynot be able to supply the firm with enough tal-ented employees to manage the key operations.This is particularly true in firms that requirehighly specialized knowledge of technology andmarkets (e.g., bioengineering firms) or firms thatare sufficiently large and complex enough torequire sophisticated knowledge of managementsystems and processes. The restricted nature ofthe human resource pool supplied by the familymeans the family may not have enough qualifiedpersonnel to operate a business successfullyunless they recruit nonfamily employees to fill keypositions. Moreover, Dyer (1989) has documentedthe difficulty in integrating nonfamily managersinto the family firm; thus merely going outsidethe family for management talent may not be apanacea for family firms needing outside assis-tance. If nepotism is the accepted norm (seeProposition 2), family members who are incompe-tent may be placed in key positions, thus jeopar-dizing firm performance. Thus family connectionsmay inhibit a firm from developing and utilizingthe best management talent, putting it at a com-petitive disadvantage in terms of human capital.In summary, propositions related to humancapital are:

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Proposition 3. Firms with family employees will havegreater human capital than firms with employeeswithout family ties, given that family employees arebetter trained, more flexible, and more motivated thannonfamily employees.

Proposition 4. Firms relying solely on family employeesto fill key positions in the firm will have poorer humancapital than those firms that may also select nonfamilyemployees for key positions.

Social Capital

Social capital is a complex phenomenon, butsimply stated, it is the goodwill that is engen-dered by the fabric of social relations and that canbe mobilized to facilitate action (Adler & Kwon,2002, p. 17). Social capital is an important assetinasmuch as it allows the firm to gain access toother forms of capital (e.g., intellectual, human,financial capital) that are needed for a firm tosurvive (Sirmon & Hitt, 2003; Steier, 2001). Fami-lies may have some unique advantages in develop-ing social capital between the family and firmstakeholders (e.g., customers, suppliers, employ-ees), given that they typically have the ability tocultivate and nurture long-standing relationshipsacross generations, and firm stakeholders may bemore likely to develop personal attachments to afamily that owns and operates a business, ratherthan to an amorphous, impersonal firm. Commit-ments made by a family, which are often based onaltruism,are likely to be more enduring (and moretrusted) than commitments by individuals, sincefamilial obligations are generally shared withinthe immediate family, and may even extend toextended family members. Therefore, the endur-ing nature of family connections and commit-ments may give families certain advantages indeveloping and maintaining social capital.

A unique status is also often ascribed to familymembers who are connected with the ownershipof an enterprise, and such status facilitates thecultivation of important relationships that maybenefit the family and the business (Steier, 2001).Indeed, employees, customers, suppliers, bankers,and other company stakeholders often prefer totalk to members of the owning family about their

issues and concerns rather than communicatingwith some lower-status nonfamily manager oremployee (Meek, Woodworth, & Dyer, 1988). Thisis due, in large part, to the perception that familymembers have the power and ability to recipro-cate financially and otherwise in any exchange.Moreover, there is an incentive for building rela-tionships with members of an enterprise-owningfamily, since ones own status in the communitymay be enhanced by such relationships. Thus, anindividuals or familys status in a communitybrings with it certain social benefits that are notavailable to others (Seidel, Polzer, & Stewart, 2000;Stuart, Ha, & Hybels, 1999). Wong, McReynolds,and Wong further note how Chinese families havebeen adept at using social capital to develop theirbusinesses.

In capital formation and investment, the supply oflabor, and the motivation to work hard and coopera-tively, ethnicity and the support of family membersare the key to the survival of many immigrant busi-nesses. Among Chinese, kinship often serves as botha catalyst and a facilitator of business enterprise.(1992, p. 355)

Other writers suggest that family businessesmay have certain advantages in attracting custom-ers and providing quality service because ofthe goodwill and trustworthiness generated by thefamily name and the commitment over time tocustomer service (Dollinger, 1995; Lyman, 1991).One family business capitalizing on its family con-nection, the Longaberger Company of Dresden,Ohio, markets its handicrafts by proclaiming thatthe company is selling products From our familyto your family (Dollinger, 1995, p. 391). Themessage is that you can trust their productsafter all, theyre family. Indeed, the social capitalattached to ones family nameto the extent itpositively influences customers, suppliers, andother stakeholdersmay prove to be a unique,inimitable resource that can be used by a firm togain a competitive advantage. Creating and pro-tecting the family brand name may prove to beparticularly important in service industries or incultures where reputation is critical for success.

Another form of social capital that may proveadvantageous to a family firm is the extension of


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goodwill beyond the family to nonfamily employ-ees. For example, Meek et al., in their study ofstrikes in Jamestown, New York, reported thatlocally owned companies, most with family con-nections, had significantly fewer strikes andstrikes of shorter duration than firms owned byabsentee owners (Meek et al., 1988). Meek et al.conclude that one of the primary reasons for thegreater unrest in the absentee-owned firms wasbecause the managers of the absentee companieswere less influenced by local norms governinglabor relations (Meek et al., 1988, p. 74). Familieswho both own and manage an enterprise may beable to generate greater social capital and trustwith their employees as compared to those firmsoperated by disinterested owners and managerswho are not in tune with employee values andconcerns. In summary, to the extent that familialsocial capital provides access to resources, gener-atesgoodwill on the part of customers and otherkey stakeholders, and fosters strong ties betweenthe family and its workforce, family firms mayhave some unique resources to create a competi-tive advantage.

Despite the advantages derived from socialcapital, the presence of strong familial bonds alsohas disadvantages. Edward Banfield, in his classicwork The Moral Basis of a Backward Society,describes families from southern Italy exhibitingwhat he calls amoral familism. According toBanfield, amoral familists maximize the mate-rial, short-run advantage of the nuclear family;[and] assume that all others will do likewise(1958, p. 83). Thus, those outside ones family arenot to be trusted and may be seen as potentialcompetitors, even enemies. Families who create atight social network that bars outsiders fromentry may be unable to secure needed resourcesto develop their businesses. Amoral familists areunable to generate spontaneous sociability,which Fukuyama indicates is essential to organi-zation building.

The most useful kind of social capital is often not theability to work under the authority of a traditionalcommunity or group, but the capacity to form newassociations and to cooperate within the terms ofreference they establish. (1995, p. 27)

Case studies have illustrated the fact that certainfamilies employ amoral familism in their relation-ships with their employees (Christensen, 2002).Nonfamily employees are treated as second-classcitizens and are exploited by the family. Suchan adversarial relationship between an owningfamily and nonfamily employees often results inlow employee morale and low productivity. Propo-sitions related to a familys influence on a firmssocial capital are as follows:

Proposition 5. Firms with family owners/managers havegreater social capital between themselves and otherstakeholders than firms without family ties.

Proposition 6. Firms with family owners/managers aremore insular and self-interested (i.e., amoral familism)than firms without family ties.

Physical and Financial Capital

The last forms of capital to be considered arephysical and financial capital. Families may bringwith them significant physical and financial assetsthat can be used by the firm. Sirmon and Hittbelieve that family firms with survivabilitycapital, which represents the pooled financialresources of the family, can provide the firm witha competitive advantage compared to those firmswithout access to such resources. As they note,survivability capital can help sustain the businessduring poor economic times or, for example, afteran unsuccessful extension or new market venture.This safety net is less likely to occur in nonfamilyfirms due to the lack of loyalty, strong ties, orlong-term commitments on the part of employ-ees (2003, p. 343). Not only do families use theirfinancial resources to protect their firms againstbusiness downturns, but they may also turn toextended family to generate capital to launch newventures. This pooling of capital by families hasbeen particularly successful in fostering the pro-liferation and growth of Chinese family busi-nesses (Fukuyama, 1995).

Family members can use their personal assetsto strengthen the firm; however, families are alsoknown for taking assets out of the businesses theyown, thereby undermining the firms stability.

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Haynes, Walker, Rowe, and Hong (1999) sur-veyed 673 family businesses, asking the ownersto describe whether family funds were used tosupport the business or if business assets wereused to finance family needs, such as securing per-sonal loans or covering shortfalls in the familysmonthly budget. They concluded that families aremuch more likely to draw on firm resources tomeet family needs than they are to use familyresources for the benefit of the firm. Therefore,family demands on firm resources may put thefirm at risk. Intermingling of business and familyfunds also makes accountability difficult, makingopportunism on the part of the family membersmore likely. Thus, families can have a direct effecton a firm by either providing or expropriatingresources.

Proposition 7. Family owners/managers are more likelyto use personal resources to benefit the firm than areowners/managers without family ties.

Proposition 8. Family owners/managers are more likelyto expropriate firm resources for personal benefit thanare owners/managers without family ties.

The Family Effect Within thePopulation of Family Firms

The previous discussion suggests that not allfamily firms are alike because of the assortment ofdynamics found in the families that own andmanage them. Due to a particular set of familygoals, relationships, and assets, some family firmsare likely to have high agency costs and significantfamily liabilities (e.g., poor human, social, andfinancial capital), while other family firms mayhave characteristics that provide them with loweragency costs and abundant resources. Figure 3presents three dimensionsagency costs,family assets, and family liabilitiesrangingfrom high to low, which we might use to beginto distinguish between various types of familyfirms.

There have been a few attempts to createtypologies of family firms. For example, Dyer(1986) developed a typology of business,board, and family cultures that predicts suc-

cessful leadership succession. Gersick, Davis,Hampton, and Lansberg (1997) and Lansberg(1999) categorize family firms in terms of owner-ship structure, noting that they often evolve fromcontrolling owners to sibling partnerships andeventually to cousin consortiums, with each typefacing different issues and dynamics. Birley (2001)types family firms on the basis of family involve-ment in the firm as measured by owner-managersresponses to a 20-item questionnaire. For FamilyIn firms, the owning familys needs and concernsinfluence firm behavior. Family Out firms havelittle family involvement, and thus family issuesare generally not considered when making deci-sions. Juggler firms are those organizationswhere the owner-managers attempt to balance theneeds of their families with the needs of the firm;neither family nor firm is deemed preeminent forJugglers.

Typologies can prove useful in articulating thedifferences in organizational forms and the out-comes derived from those forms, despite the factthat they frequently gloss over the fine-graineddifferences (or commonalities) one might findthrough a close examination of each type. Withthis in mind,a typology will be presented that willprovide the foundation for theorizing regardingfamily firm performance. The dimensions pre-sented in Figure 3 create four quadrants suggest-ing four types of family firms: (I) theclanfamilyfirm, (II) the professional family firm, (III) themom & pop family firm, and (IV) the self-interested family firm. There are certain agencycosts and familial assets or familial liabilitiesassociated with each type. Each type will now bebriefly described.

Quadrant ILow Agency Costs,High Family Assets: The ClanFamily Firm

In the clan family firm, the goals of family ownersand family managers are one and the same,leading to low agency costs. In this type of firm,the long-term family and firm goals are isomor-phic, with the family attempting to meet both firmand family needs (similar to Birleys Juggler


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firms). This type of family firm gets its namefrom the fact that it receives the benefits of lowagencyandtransactionscostsduetoclancontrol:behavior is regulated and made predictable by thegroups shared goals, norms, and values (Ouchi,1980; Wilkins & Ouchi, 1983; Williamson, 1981).Such clans have a high degree of trust that reducestransactions costs while enhancing communi-cation and coordination within the family andcreating goodwill with firm stakeholders(Habbershon & Williams, 1999). Significanthuman capital is found in these firms since familymembers bring with them the skills and commit-ment needed for firm survival and success andsocial capital is developed by such families toacquire needed resources. Family resources arealso used to support the firm during difficult times

(Wong et al., 1992). In summary, in this type offirm, family relationships not only reduce agencycosts, but enhance the firms ability to leveragethe owning familys human, social, and financialcapital. Small, first-generation family firms thatare owned and managed by family membershighly committed to both the success of firm andfamily may be the stereotypical clan family firm.

Quadrant IIHigh Agency Costs,

High Family Assets: TheProfessional Family Firm

Relationships and governance in the professionalfamily firm are based on professional codes ofconduct. These firms have what Dyer (1986)describes as a professional cultureand appear to

Quadrant IIQuadrant I

Quadrant IVQuadrant III

HIGH

LOW HIGH

HIGH

Professional

Family

Firm

Clan

Family

Firm

Self-Interested

Family

Firm

Mom & Pop Family

Firm

LOW

LOW

FAMILY

LIABILITIES

FAMILY ASSETS

AGENCY COSTS

Figure 3 Typology of Family Firms.

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have some of the characteristics of Birleys (2001)Family Out firms that strive to implement pro-fessional values. Agency costs are higher in thistype of firm as compared with the clan familyfirm, inasmuch as costs are borne in the attempt toformalize control systems and monitor manage-ment. However, to the extent that a family imple-ments formal monitoring mechanisms, it alsoavoids the problems of opportunism and nepo-tism that afflict many family businesses. Thus, theprofessional control system helps ensure thatthe firms resources are not squandered by thefamily. Family assets are therefore protected andcan be developed in the professional family firm,much like the clan family firm. Large family firmssuch as the Marriott Corporation or WalMart,where the family maintains significant ownershipbut relies on professional managers to run theenterprise, are examples of professional familyfirms (Dyer, 1986, 1989).

Quadrant IIILow Agency Costs,High Family LiabilitiesThe Mom& Pop Family Firm

In Quadrant III we find family firms that have lowagency costs, but also certain liabilities stemm-ing from family ownership. Such firms have theagency advantages of the clan family firm, inas-much as the family does not have conflicting goalsand behavior is monitored largely through closefamilial ties. However, families operating this typeof firm fail to develop familial assets. Familyvalues may encourage nepotism, so family manag-ers may not be trained or have the expertiseneeded to grow the business. Family social capitalmay not be leveraged with customers and suppli-ers. Moreover, the familys physical or financialassets may not be utilized effectively to benefit thebusiness. Thus, while this type of firm derives effi-ciencies from its low agency costs, its growth andperformance may be stymied by family liabilities.This type of family firm is likely to be representedby small mom & pop enterprises such as family-owned restaurants or family farms, which mayhave been operated by a family for generations,

but the owning family has not made an effort tocultivate family assets to help the firm grow.

Quadrant IVHigh Agency Costs,

High Family LiabilitiesTheSelf-Interested Family Firm

Self-interested family firms are based on utilitar-ian and altruistic relationships (Etzioni, 1961).Family members advance their self-interest atthe expense of the firm and, often, other familymembers. These firms are similar to BirleysFamily In firms, where nepotism is the norm.Particularistic criteria are used in employee selec-tion, evaluation, and promotion to benefit thefamily and individual family members. Moreover,the family may display characteristics of amoralfamilism as family members look after their ownand the familys self-interest as opposed to thewell-being of the firm, and promote altruisticfamily relationships to avoid the monitoring oftheir activities by others. Thus family assets maybe squandered through opportunism, shirking,and adverse selection, all of which are made pos-sible by the lack of formal monitoring systems andthe self-interested nature of the family. Familyownership in the self-interested firm may becomewidely dispersed among family members, withsome family members interested in the growth ofthe business while others are more interested inreaping the rewards of ownership (Gersick et al.,1997; Lansberg, 1999). Such differences in goalsfor the firm stimulate conflicts and self-interestedbehaviors to the detriment of firm performance(Kaye, 1991). Gersick et al.s (1997) cousin con-sortium family firms comprised of multiple gen-erations of family members that are often highlyconflicted or Banfields insular family firms ofsouthern Italy seem to be examples of self-interested family firms.

Firm Type and Performance

Our typology presents us with four general typesof family firms that we can now critique andcompare as to their performance. The followingpropositions are based on the ceteris paribus


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assumption, that the family effect on performancecan be clearly delineated only by assuming that allother firm factors are held constant (e.g., industry,firm characteristics). Based on our discussion ofthe resource-based view and agency theory,we can postulate that clan family firms, ceterisparibus, will have the highest performance. Suchfirms have significant family assets and lowagency costs. Professional family firms also havecertain family assets,but bear the costs associatedwith the imposition of professional rules andmonitoring, with such monitoring helping thefirm avoid adverse selection, shirking, and oppor-tunism. However, it may be that the relation-ship between monitoring and performance iscurvilineartoo little monitoring fails to controlopportunism, which leads to poor performance.However, too many bureaucratic controls mayeliminate family assets, stifle innovation, andincur significant agency costs (Schulze, Lubatkin,Dino, & Buchholtz, 2001). The mom & pop familyfirm has the advantage of low agency costs butalso has some family liabilities, while the self-interested family firm may incur liabilities dueto incompetent management, amoral familism,complex conflicts, the siphoning of resources fromthe firm for use by the owning family, and soforth. The lack of effective monitoring may con-tribute to the creation of these liabilities. Thus,self-interested family firms may have difficultysurviving since they have significant familialliabilities coupled with high agency costs. Giventhese conditions, the self-interested family firmswould be at a competitive disadvantage vis--visclan family firms and professional family firms. Insummary, the typology in Figure 3 suggests thefollowing propositions.

Proposition 10. Ceteris paribus, clan family firms willperform better than the other three types of family firms.

Proposition 11. Ceteris paribus, professional family firmswill have higher performance than self-interested family

firms.

Predicting which firmthe mom & pop familyfirm or the professional family firmhas the per-formance advantage is more difficult. Although

the mom & pop firm has an advantage due tolower agency costs, it also has liabilities. The pro-fessional family firm may have significant agencycosts, but it also has a pool of family resources.Ceteris paribus, if the agency costs and familialassets of the professional family firm outweighthe agency costs and liabilities of the mom & popfirm, then the professional family firm would havethe advantage (and vice versa).

Given the three dimensions of the typology justpresented, one might feel that the propositionsstemming from the typology are self-evident:firms with low agency costs and high resourceswill perform better than those with high agencycosts and family liabilities. However, to the extentthat the typology helps us to explicitly identifythose factors that lead to lower or higher agencycosts, as well as those factors that generate familyresources or liabilities, we can more clearly iden-tify sources of competitive advantage (or disad-vantage) for family firms and therefore be betterable predict their performance. Moreover, thetypology encourages us to investigate the possibleinteraction effects of the dimensions.(e.g., How dovarious forms of governance affect family assetsand liabilities?) Such an approach to theory build-ing will help us better understand the determi-nants of family firm performance rather thanmerely assert that family firms are better or worseoff than those firms without family connections.

Comparing the Performance of Familyand Nonfamily Firms

Nonfamily firms, ceteris paribus, would beexpected to perform more poorly than clan familyfirms since they lack family resources and havehigher monitoring costs (given that nonfamilyfirms typically use professional controls). Nonfa-mily firms would also be at a disadvantage com-pared to professional family firms since they haveno familial resources and incur similar agencycosts. However, nonfamily firms may fare muchbetter compared to self-interested family firms,which have significant agency costs and familyliabilities. This leads us to the following twopropositions.

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Proposition 12. Ceteris paribus, clan family firms andprofessional family firms will have higher performancethan nonfamily firms.

Proposition 13. Ceteris paribus, nonfamily firms willhave higher performance than self-interested family

firms.

In the case of the mom & pop family firm, itsadvantage (or disadvantage) compared with thenonfamily firm would be a function of the com-parative agency costs between the two, in additionto the family liabilities incurred by the mom &pop firm.

Testing these propositions may provide us withsome additional insight concerning the reasonsbehind the contradictory findings in those studiesthat compared the performance of family andnonfamily firms. When studying family firmperformance, researchers typically classify familyfirms using a 0 or a 1either the firm is afamily firm or it is notand then compare theperformance of the sample of family firms withthose firms that are designated as nonfamily. Sucha classification scheme turns the family firm into ablack box, since it fails to recognize and articu-late which family factors lead to high perfor-mance and which may lead to poor performance.

Furthermore, when researchers compare asample of family firms versus a sample of nonfa-mily firms, they are likely to obtain a cross-sectionof the various family firm types in the sample andgloss over the important differences we see in thepopulation of family firms. To the extent thatthe family firm sample contains a disproportion-ate number of any particular type, the results maybe misleading. For example, if a sample containeda disproportionate number of self-interestedfamily firms, then the performance of the firms inthat sample may fair poorly when compared to thenonfamily sample. Conversely, a sample contain-ing a disproportionate number of clan familyfirms would likely perform better than a randomsample of nonfamily firms.

Sampling bias provides us with a possibleexplanation for the contradictory findings in theliterature; however, the major contribution of thisframework lies in its ability to help us develop

better theory regarding the impact of a family onfirm performance. The theory used in creating thetypology provides a framework to develop test-able hypotheses to generate more precise explana-tions regarding why we may see differences inperformance when comparing family and nonfa-mily firms as well as differences in performancewithin the population of family firms. The 13propositions presented here help us get inside theblack box of the family firm and suggest variousmeans by which a family may affect a firms per-formance. Thus, while researchers are typicallyasking the question: Do family firms performbetter than nonfamily firms?, the appropriatequestion should be:What type of family firm leadsto high performance?

Family Types and FirmPerformance

The typology just presented suggests that certainfamily firms have higher performance becausethey have familial assets and lower agency coststhan firms without those advantages. This thenleads us to consider the question: What types offamilies or family patterns are conducive to highfirm performance? Indeed, family dynamics arewhat give rise to the benefits or costs we see asso-ciated with family firm performance. Thus weneed to develop better theories about why certainfamilies embrace nepotism while others do not;why do some families co-mingle family and firmassets while others eschew such practices; andwhy do certain families share common goals,while others do not. To answer such questions, weneed to focus on the underlying family dynamics.

Previous work by scholars in the family sciencesprovides us with various models of family dynam-ics. For example, Constantine (1993) and Kantorand Lehr (1975) suggest four types of families: theclosed paradigmfamily, in which the family relieson a hierarchy of authority to regulate family pro-cesses and make decisions, and therandom para-digm, where the family values change and novelty.Such a family system is largely egalitarian andencourages independent thought and action onthe part of family members. Collective needs are


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seen as being met through individual initiative. Athird family pattern is theopen paradigm. In thispattern, family members create a democraticmodel for action and decision making as thefamily attempts to integrate individual needs intothe familys collective goals and values. Such fami-lies attempt to synthesize the opposing values ofhierarchy and independence found in the closedand random paradigms. A final pattern is thesyn-chronous paradigm. Synchronous families rely onpreexisting tacit agreements concerning sharedvalues, goals, and ideas that regulate family pro-cesses. In such families, no one needs to be toldwhat to do, for the family rules are internalized byall. Such families may be found more frequently inAsian societies rather than in Western cultures(Constantine, 1993).

Such a typology of families (in addition to manyothers that have been developed) may help usunderstand whycertain firms owned andmanagedby families are at a comparative advantage or dis-advantage. The reader may note some of the pos-sible connections between the family paradigmsjust described and the family firm typology pre-sented earlier. For example, synchronous familiesthat ownand managean enterprise may havefeweragency costs than families operating with therandom paradigm,and suchfamilies may alsohavethe ability to develop socialcapitalmoreeffectivelythan other family types. It may also be true thatfamilies operating under an open or random para-digm may be able to help a firm adapt, grow, andchange, as compared with a family using a closedparadigm.My purpose in suggesting such linkagesbetween family type and firm performance is toencourage more theory building and collaborationacross the disciplines of family science and man-agement to betterunderstand therole of thefamilyin firm performance. To truly understand thefamilyeffectonfirmperformance,weneedbettertheorizing regarding the link between family pat-ternsandthebehaviorandperformanceofthefirm.Wemayalsodiscoverthatcertainfamilypatternsorparadigms morph into new family patternsonce thefamilybeginsworkingtogether.What oncewere harmonious (or acrimonious) relationshipsin a family may dramatically change as family

members interact day after day in the context of abusiness.

Directions for Future Research

The purpose of this article has been to explore thefamily effect on organizational performance.The theoretical framework and typology pre-sented suggest that there are several differenttypes of family firms, some of which have uniqueassets that allow them to compete successfullywhile others have governance practices that incursignificant agency costs, which, in turn, may causethem to falter in the marketplace. The dimensionsthat spawn the typology will, hopefully, encourageorganization scholars to see family firms througha more complex lens, recognizing that there aredifferential family effects and that classifying allfamily firms in one category may lead to mislead-ing conclusions. Definitions of family firms basedstrictly on percentages of ownership and manage-ment controlthose most often used in currentstudieswill likely not differentiate the variousfamily effects, and thus will not accurately predictnor explain differences in firm performance(Chua, Chrisman, & Sharma, 1999; Westhead &Cowling, 1998). Behavioral definitions, based onthe dimensions suggested by the typology, willlikely be more useful.

The typology presents a framework to betterunderstand the family effect on firm performance,but it leaves us with a number of unansweredquestions, such as the following.1. How do we empirically determine thefamily firm types? How should we measure familyresources and agency costs?2. How do families acquire and develop theirresources? Are certain forms of familial capital(e.g., human, social, financial) more valuable thanothers? How do families lose their resources?3. Do certain governance mechanisms lead togreater or lesser agency costs in family firms?4. What is the relationship between family own-ership and management control and the fourtypes of family firms?5. Do families have a differential impact ondifferent measures of firm performance? For

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example,families might have a negative impact onhuman-resource outcomes (e.g., turnover), but apositive effective on financial outcomes (e.g.,profits, revenues).6. Are there other types of family firms, or arethere other dimensions that will create newtypologies to examine? What are the fine-graineddifferences between the various types?7. Do these types evolve in family firms in anyparticular pattern? For example, do we typicallyfind clan family firms in the first generation andthen find such firms evolving into either profes-sional family firms or self-interested family firmsas the firm grows and the family transitions intothe next generation?As we answer these questions, we can begin todevelop additional propositions to be tested thatmay unravel the complexities relating to thefamily effect and help us understand more fullythe advantages and disadvantages of having fami-lies own and manage an enterprise.

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W. Gibb Dyer, Jr., O. Leslie Stone Professor, MarriottSchool of Management, Brigham Young University,Provo, UT 84602; [email protected] would like to thank Dave Whetten, JustinDyer, William Schulze, John Ward, Jeffrey Dyer,

Sabine Klein, Ludo Van der Heyden, ChristineBlondel, Andrew Pettigrew, and members of theMarriott School OLS department for theirhelpful comments regarding the ideas in thisarticle.


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