understanding the family firm – a new framework for...

Understanding the family firm: A new framework for theory and research – AMR submission, August 2003.

Understanding the Family Firm – A New Framework for Theory and Research

Nigel Nicholson

London Business School

Regent’s Park

London NW1 4SA

Tel: +44-207-262-5050

Email: [email protected]

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mailto:[email protected]


Understanding the Family Firm – A New Framework for Theory and Research

ABSTRACT

A new theoretical synthesis is presented drawing upon biosocial, psychological and

organizational concepts. It argues that family firms can avoid the agency problems and

moral hazards attributed to them and outperform non-family businesses. They can do

this by securing strong and adaptable cultures through mastery over the special

challenges that confront them. The key to this, that the paper elaborates, is the family

system and how it shapes leadership choices in ownership, governance and succession.

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Family business is a forgotten world in the field of management. It scarcely

receives a mention in the leading journals of our discipline or in the pedagogy of most

leading business schools, where the corporate model remains the predominant

paradigm (Gersick, Davis, Hampton, & Lansberg, 1997; Litz, 1997). Perhaps it is

because family firms are seen as “different” (Donckels & Frohlich, 1991) that that they

hardly feature even in the field of entrepreneurship – itself a partially segregated

enclave from the management mainstream (Busenitz et al., 2003). The consequence is

that theory and empirical research are seriously underdeveloped.

Four reasons can be offered for the need to reverse this neglect:

1. Family owned and run firms account for a majority of businesses and a large

proportion of GDP in just about every market economy (Colli, 2003), and in some parts

of the world they hold the commanding heights of the economy (Dutta, 1997; Redding,

1990).

2. They offer examples of some of the most outstanding examples of business

performance and longevity (Collins & Porras, 1994), yet at the same time firms in the

sector are often fraught with viability-threatening perils and rife with conflict (Kets de

Vries, 1993).

3. Many of the most successful businesses grew from family origins (Porter,

1973), an ontogeny that persists; yet there is no consensus over the factors that

distinguish family firms that achieve excellence and growth from those that experience

failure and early death.

4. There is a rich array of theoretical challenges in the field, some of which have

wider business resonance, to the extent that family relationships and cultures are

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archetypes of all business interactions and communities. Some of their major flaws and

critical success factors may be general to other kinds of business.

OVERVIEW OF THE FRAMEWORK

The framework draws upon ideas from multiple sources and disciplines

including evolutionary biology and genetics, economics, family psychology and

organizational behavior. It places agency, in the form of the family system and

leadership choices, in a central explanatory role (Davis & Stern, 1980), conceiving the

unique challenges and opportunities of family firms as arising from alignments and

misalignments between kinship and ownership, executive responsibility and

accountability (Kepner, 1986; Reiss, 1981).

- - - - - - - - - - - - - - - - - - - - - Insert Figure 1 about here

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The framework, portrayed in Figure 1, seeks to identify and explain how family

firms can achieve outstanding performance and avoid agency problems by integrating

the unique web of interests and capabilities that characterizes each of them. The

framework takes as its point of origin culture and economy, since the historical and

geographical context has a determining role over the structure and functioning of

family systems. The family system – consisting of structural, dispositional and

cultural elements – determines not only the identity of the leader or leading group, but

also the constraints and legitimacy under which leaders operate. With or without the

support of advisors, leadership choices in three critical areas are necessary to avoid

agency problems and moral hazards, and to achieve the alignments of organizational

structure, strategy and culture that deliver performance. Feedback loops are implied

throughout the model, but omitted in the diagram and most of the discussion, in the

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interests of brevity and clarity. Some of the most important are the time-lagged

consequences of leadership decisions impacting the family system, and indeed, future

leadership.

The best way to explore the implications of the main propositions of the model

is by reverse engineering its causal flow – looking first at family business performance

and concluding with the family system in context. In sequence, therefore the paper

discusses:

1. What are the main elements underlying variation in family firm performance?

2. What is the role of leadership choice in determining performance?

3. What is the role of the family system as an input to leadership?

Before undertaking this a prior question should be addressed: what is a family

firm?

FAMILY FIRMS: DEFINITION & PREVALENCE

This question can risk being a stalling point for research, since there is no

obvious and straightforward answer (Colli, 2003; Rothausen, 1999). There is scope for

debate about what threshold of family involvement would qualify a firm for the

appellation (Handler, 1989), and the question can only be answered by declarative

rather than analytical means.

For the purposes of the present paper, which is to root the framework in a

recognition of the biosocial status and functioning of the family (Booth, Carver, &

Granger, 2000) one may start this task by asking, what is a family? The answer given

by evolutionary biologists is: “An assembly of relatives who interact regularly, but do

not necessarily share residence” (Davis & Daly, 1999; Emlen, 1995). To this can be

added a clause that captures the usage of most authorities in family business (Neubauer

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& Lank, 1998; Ward, 1987) “firms where one or more families has an effective

controlling ownership interest.” This definition allows non-owning kin, such as

children, former owners, and non-active spouses to be included, and excludes family

members who have negligible material interest or involvement. However, the

definition does embrace those businesses, many of the largest family firms, where

members with quite modest stakes are still able to exert control (Neubauer & Lank,

1998).

A key consideration is kinship, to which we will return later. Childless couples

are relatives only by virtue of pair bonding, and adopted children likewise count as

unrelated family members (recognized in anthropology, as “affinal” and “putative” kin

respectively, Schusky, 1965). Moreover, in human families it is quite common for

members to be uncertain or mistaken about paternity and relatedness (Symons, 1979),

because humans, unlike many other species are unable reliably to detect kinship by

smell or other visible and reliable markers (Fletcher & Michener, 1987). Relatedness,

in other words, is an assumption people make, usually symmetrically. This means that

family is necessarily a social construction around a biological prototype. In some

cultures, such as Japan (Hambata, 1991), it is quite common for family businesses to

incorporate nonkin as if they were family members, usually via marriage. Married

copreneurs (Fitzgerald & Muske, 2002), and even same or opposite sex friends

founding a business, such as Hewlett & Packard, can be considered as “incipient”

family firms under this definition.

This broad definition, which includes first generation owner-managers and their

kin since they could be considered incipient family businesses, puts the proportion of

family firms at over the 75% mark in most economies (GEM, 2002; Shanker &

Astrachan, 1996). It also embraces some 37% of the Fortune 500 (Shanker and

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Astrachan, 1996). It has been reckoned that some 21% of the Business Week 1000 list

employing executives who are direct descendants of the founding family

(McConaughy, 1994).

FAMILY BUSINESS PERFORMANCE

Starting in the lower section of the model in Figure 1, the issue of the strengths

and weaknesses of family firms has recently become a focus of attention in relation to

debates within agency theory (Schulze, Lubatkin, Dino, & Buchholtz, 2001; Schulze,

Lubatkin, & Dino 2003). Family firms solve one of the major agency confronting

business by unifying ownership and control (Fama & Jensen, 1983), but Schulze and

colleagues argue that this benefit is outweighed by the costs they incur through unique

and daunting range of fresh agency problems. These include “self control”, family

members making decisions that are harmful to the interests of the business; “adverse

selection”, failing to make appointments on merit, and “altruism”, altering the incentive

structure to favor people on grounds of sentiment. They are also seen as especially

vulnerable to the moral hazards of free riding and shirking, the risk of “hold up” by

influential individuals, and additionally, in the absence of share price indicators, having

to bear the additional costs of monitoring firm performance (Lubatkin et al., 2002). It

is certainly true that family firms are notorious for their dislike of administration,

planning, and formal control mechanisms (Geeraerts, 1984; Daily & Dollinger, 1991;

Ward, 1987), and they often have difficulty divesting non-performing relatives

(Levinson, 1989), but are these the principal causes of their failure? It is true that

family firms are vulnerable to untimely demise, but the research record shows that

moral and agency hazards are less often the cause than other failings that stem from

family dynamics, such as interpersonal conflicts, mismanaged succession, family/non-

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family schisms, and poor decisions over divisions of equity (Aronoff, Ward, &

Visscher, 1995; Gersick et al., 1997; Lansberg, 1999; Morris, Williams, & Nel, 1996;

Neubauer & Lank, 1998).

Moreover, if there are so many ways for a family business to fail – arguably,

more than in other types of business – how does one account for their sustained

popularity and economic importance (Aronoff & Ward, 1995), or their capacity to

achieve outstanding performance and longevity (Family Business Magazine, 2003;

O’Hara & Mandel, 2002)? A recent study comparing the business performance of

public family and non-family businesses in a controlled comparison of S&P 500 firms

has confirmed that family firms outperform their non-family comparators on ROA, and

are also more profitable in firms where a family member rather than a non-family

executive serves as CEO (Anderson & Reeb, 2003). Among private firms it is also

claimed that family firms are more unstinting in their effort, making them more

productive than their non-family counterparts (Rosenblatt, 1985). Moreover, public

corporations are not immune from agency problems and moral hazards, as business

history of the first years of this century has shown. Flawed governance structures and

over cushioned incentive systems seem to offer scant protection against moral hazard

and self-interested decision-making among its executives (Bebchuk, Fried, & Walker,

2002).

At the base of Figure 1 are four dimensions which are claimed to be areas of

performance advantage for family firms: adaptation, innovation, productivity and

longevity (Beckhard & Dyer, 1983; Rosenblatt, 1985; Aronoff et al., 1995; Tagiuri &

Davis, 1996).

The explanation I am proposing here for the ability of family firms to generate

exceptional performance is that they are a survivor population. Like vines that produce

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the finest wine by having had to struggle to survive in unsympathetic conditions, the

family firms that prosper have qualities enabling them to overcome the special

challenges presented by the overlapping of family and business interests, a point

acknowledged 40 years ago by Alfred Chandler (1962). This advantage is claimed by

those that have been able to build uniquely strong cultures, unifying effort, talent and

willpower around a shared spirit and vision (Daily & Dollinger, 1991; Tagiuri & Davis,

1996; Beehr, Drexler, & Faulkner, 1997). However, no one to date has explained the

casual elements that enable some firms and not others to do this.

I wish to argue that the root dynamic of this path can be taken from a

perspective that combines concepts of agency with biogenetic forces. Family

businesses are reproducing elements that are consistent with our evolved design as

working social animals (Nicholson, 2000; Lawrence & Nohria, 2002) – specifically,

kinship identification with the products of labor and a dissolving of the work/non-work

schism through the family functioning as a unit of production, consumption and

reproduction (Sahlins, 1972). This dynamic confers four unique potential benefits on

firm culture:

1. Identity. Ownership means, as Anderson and Reeb (2003) put it, that the firm is

seen as an asset held on behalf of future generations rather than wealth to be

consumed in the owners’ lifetimes. In the best performing firms this identity is

shared with non-family members and other stakeholders in a spirit of unrivalled

loyalty and community (Beehr et al., 1997). In relation to suppliers, customers

and other stakeholders the same spirit persists (Lyman, 1991), along with the

accountability of having the “family name being above the door” (Brokaw, 1992).

2. Continuity. Leaders last longer and, where they do not outstay their welcome nor

mismanage succession, they help the firm to retain identity across multiple

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generations (Beckhard & Dyer, 1983). This supports cultural continuity and

communitarianism, as well strategic integrity (Dreux, 1990; Fiegener, Brown,

Prince, & File, 1996). Family firms are more willing and able to play a long

game financially (Donckels & Frohlich, 1991; James, 1999), with what has been

called “patient capital” (Aronoff et al. 1995)

3. Confidence. Longevity means executives are able to build stable networks of

relationships, and ownership means they are able to govern with free from the

pressures and accountabilities that can make employed leaders defensive (Collins,

2001). This may also enable family executives successfully to enact styles that

combine tight leadership with loose delegation (Goffee & Scase, 1985).

4. Pragmatism. The vicissitudes of birth that give rise to family structure, and the

“gene lottery” as we may term it, that determines the unique character of

individual family members (Lykken, McGue, Tellegen, & Bouchard, 1992;

Plomin, 1994), mean that successful family businesses are typically those that

have had the flexibility to find pragmatic solutions to human capital shortages and

resolve the conflicts that may occur. It is the will to do so for the sake of the

business as a family domain that makes family firms so unusually adaptive (Daily

& Dollinger, 1991).

These qualities are allied with sympathetic financial strategies. Family firms

typically structure their finances in ways that retain control and minimize external

obligation, so that, compared to public firms they have lower debt to equity ratios,

better managed capital structures, and more efficient resource allocation (Dreux, 1990;

Monsen, 1969), plus reporting regimes that give competitors less access to their

operational and financial condition (Johnson, 1990). These conditions mean that they

can enact strategies with minimum influence from outsiders (Pettit & Singer, 1985).

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To discover these strategies and benefits, I am proposing that leadership

choices, underpinned by a strong family culture, can circumvent family and agency

hazards to outperform other types of firm.

The first proposition that can be offered is therefore as follows:

H1. Family businesses will outperform and outlast non-family comparators

firms, if they enact decisions and practices that align family with business

interests.

THE ROLE OF LEADERSHIP CHOICES

Let now look at the critical decision areas that can achieve this alignment. In

keeping with an agentic perspective, the pivotal factor is leadership, and more

specifically the choices leaders make to deal with external market challenges and the

firm’s stakeholders, to reconcile its internal potentially conflicting forces, and avoid the

moral hazards and agency problems previously discussed. They are, as shown in Figure

1, ownership, governance, and succession.

Ownership And Asset Management Decisions.

Many family businesses fail because of errors in financial strategy. Leaders

face a succession of decisions that are germane to business success and family

adjustment. Early in a firm’s history whether to raise capital through debt or equity

financing is typical. Family firms exhibit a pronounced preference for the former,

typically building a strong equity base through retained profits (Pettit & Singer, 1985;

Poutziouris, 2000). This creates subsequent dilemmas about when to extract wealth vs.

increase investment, when to widen share ownership beyond the family, how to

distribute ownership among the next generation of family members, and when to

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consider launching an IPO or sell out the business (Carlock & Ward, 2001; Ward,

1987).

Family system factors impinge on all of these decisions, and are a source of

agency hazards. Divisions of wealth and ownership may easily succumb to emotional

rather than rational considerations, such as unequal investments on grounds of

favoritism, or even shares on grounds of equity – a strategy seems to be driven by the

biogenetic pull for shares to be commensurate with relatedness (Hertwig, Davis, &

Sulloway, 2002). But family businesses often fail when ownership share is not

congruent with the degree of offspring involvement and contribution to the business

(Ward, 1987; Crosbie, 2000).

In addition to incentives in the form of ownership or wealth extraction for the

family, a further key factor is the reward structure for non-family executives (Gomez-

Mejia, Larraza-Kintana, & Makri, 2003). Little has been written on this topic, but

plainly these relationships are delicate and need handling with care if one wishes to

retain executive talent and at the same time maintain good family relations (Danco &

Jonovic, 1981). The family system will influence these decisions by its biases towards

inclusiveness or exclusivity.

The concept of leadership choice here, therefore, is to do with how far-sighted

are leaders in the way they manage resources – for investment, incentives, security, and

integrity of the business. Therefore:

H2. Family businesses will achieve superior performance and longevity by

ownership and asset sharing that reflect involvement in the business rather than

equity, and which is revised as family circumstances alter.

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Governance Structures & Processes

The general tenor of writings in this area is that family firms tend to be under-

governed compared to other kinds of business, because they become reliant on the

informal dynamics of family interaction to make business decisions and resolve

conflicts (Bork, Jaffe, Lane, Dashew, & Heisler, 1996). Much of the literature consists

of practical guidance for family business owners about how to introduce management

structures and board representation (Dyer, 1986; Neubauer & Lank, 1998).

The abiding concern here, which impacts directly on performance, is to have

governance mechanisms that successfully integrate the family with the business. The

strategic question to be answered, and to avoid the hazards and pitfalls identified by

Schulze and colleagues, is what precedence to give to the demands of the business or

the family – business first or family first (Ward, 1987)? As family businesses mature

ownership and control become decoupled. The introduction of professional managers,

the retirement of equity owning family members, and the disinterest of others, means

that tricky, far-sighted and ethical decisions have to be made to avoid damaging and

energy absorbing conflicts.

Many of these decisions feed back to the family system – decisions such as how

to ensure that there is sufficient flow of cash to keep “peace in the house” and sufficient

ploughed back in investment to satisfy the needs of the business and its professional

managers. Keeping the family aligned becomes a major task as its scale increases, and

conflicting “pulls” between family branches becomes an increasing threat (Gersick et

al., 1997). To manage these pressures it has become commonplace for firms to create

new institutions – family councils and written family constitutions – to sit alongside the

board and other conventional governance structures (Neubauer & Lank, 1998).

Councils operate as forums for family members to align their goals and resolve their

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difficulties, and charters or constitutions to provide decision-rules and cultural edicts

(Leon-Guerroro, McCann, & Haley, 1998).

H3. Family businesses will achieve superior performance and longevity that

institute and maintain governance arrangements – such as family councils and

constitutions – that allow family views to be voiced and reconciled with

business objectives.

Succession and Role Allocation

Succession planning is notoriously problematic – especially the decision

whether to groom the next generation or exclude them from direct involvement in the

business (Lansberg, 1999; Morris et al. 1996). The challenge for leadership is to judge

whether any member of the next generation has the requisite qualities to receive the

baton, whether they can be trained to do so, and alternatively what external recruitment

can be envisaged for executive positions. This is very much a matter of person-role fit,

but the presence of family ties can yield a premium (Gomez-Mejia, Nunez-Nickel, &

Gutierrez, 2001). Leaders need to appraise what positions are available or can be

created to match the attributes and interests of active family members, and what are the

key tasks that will need to be filled by nonkin. Some of the trickiest decisions come in

this domain: especially how to “prune” the family tree (Lank, 2001). This is necessary

when members have become ineffective or makeweight, or when it is desirable to

rebalance participation – paying off some members in order to give others more

leadership responsibility.

Succession and preparation of the next generation is a critical concern in every

business, but in the family firm it has a compounded complexity, involving such

matters as the socialization of individuals from childhood to shape their expectations,

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the elimination from consideration of family members with hopes that might be

legitimate but misguided, the introduction of non-family executives, and processes that

engender team working among all the leading group (Lansberg, 1999).

The qualities required for these challenges include the psychological astuteness

needed to balance the mix of personalities and talents, for example ensuring that there

are people who can help regulate the complex swirl of emotions and interests by acting

as “toxic handler” (Frost & Robinson, 1999; Toegel, Kilduff, & Anand, 2002) or

“Chief Emotional Officer” (Dandridge, 2000). Intra-role conflict is also major

challenge reported by family owner-managers, expressed as the difficulty of wearing

“two or more hats” and having to make tough decisions in areas where uncontrolled

spillovers occur between domains of kinship and business (Foley & Powell, 1997).

H4. Family businesses will achieve superior performance and longevity by

allocating leading roles according to the match between the abilities and drives

of family members and the demands of roles, selecting non-family executives to

fill identified competence gaps, and by pruning family involvement to enhance

perceived person-role match.

The three areas of choice we have been considering are interrelated, in some

clear operational ways. Governance processes often prefigure ownership decisions and

determine executive role allocation. Ownership structures frame governance

arrangements and shape the parameters of succession. Succession and role allocation

potentially have a time-lagged impact on ownership and governance. These

interrelations have more practical than theoretical importance – pointing to the need for

leaders to be aware of these as critical intersecting domains.

As shown in Figure 1 these choices enable the proximal determinants of

performance to be delivered:

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a) Strategic choice. The challenge here is for diversification to match the achievable

and differentiated aspirations of leading family and other interests. Family firms can

grow by cell division, as satellite businesses spun-off to satisfy family member

interests, or by monolithic accretion as interests unify around a shared purpose and

perspective (Poza, 1997).

b) Structure & Systems. Family businesses are notoriously averse to systems, and tend,

as a consequence to run the risk of being under-governed and under-managed

(Neubauer & Lank, 1998). The goal of leadership choices here is to implant what

mechanisms will most effectively regulate the exceptional as well as the day-to-day

processes of the firm.

c) Culture. If a strong family culture is the most irreproducible competitive advantage

of family firms, then the successful integration of family and non-family members is

the means, since not even the largest clan can staff even a small sized business

without the aid of outsiders (Gersick et al., 1997).

These elements themselves have to be aligned, in the sense that strategy, structure and

culture need to be congruent for any business to achieve excellence (Scott, 1981; Ward

& Aronoff, 1994). In the family firm though, each of these has to capture, contain and

direct the spirit of the family business towards its objectives.

Use of Advisors

It can be asking a great deal of the family and leadership to make good far-

sighted decisions in all these areas. This accords external advisors an especially

important role in family firms. They form a varied population, including experts in

law, finance, tax and other technical areas, as well as more general trusted counsels in

strategic arenas and in relation to intimate family concerns, from a position of long-

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standing friendship (Ward & Handy, 1988). Additionally, firms make increasing use of

the growing army of professional advisory organizations and consultancies, offering a

full range of technical to emotional supports for owners and their families.

Effective use of advisors can be a critical determinant of success, by mediating

and shaping choices in these areas. This is likely to be quite constrained by the family

owners in terms of how targeted and temporary vs. how extensive and general is their

involvement. Generally, it can be asserted that families in business always have need

of advice, both to address their areas of deficient expertise, and to give wise counsel on

strategic and psychological dimensions. However, they can be overused and become a

source of dependency. Sometimes the steadfast and longstanding “family friend”

figure can become a source of risk if they are assumed to be a reliable source of general

business intelligence. It is best for family business leaders to make targeted

assessments of their advisory needs and then search for them on relevant parameters.

H5. Family leaders will make more effective choices if they make use of

advisors, selected and briefed to help problem solve on the basis of domain-

specific assessments of need.

THE FAMILY SYSTEM AND FAMILY FIRM LEADERSHIP

So far we have analyzed the core components of successful business

performance and the avoidance of hazards and failure in family firms, using an agentic

perspective that puts the motives and choices of leaders in a pivotal role. Now we

come to the key explanatory dynamic of the model – the primacy of the family as a

source of biases and inputs to leadership and decision-making. The family business

literature has, surprisingly, devoted little attention, other than in anecdotal case

histories, to family systems or leadership. These cannot be reduced to simple

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comparisons of leadership style, for the choices that leaders make can be enacted in

various ways. What matters more is that leadership style is consistent with the ambient

milieu of relationship and values. When one looks at case histories, it is striking how

diverse are the leadership models one finds operating successfully.

Notably, it seems that there are more options for genuinely shared leadership

(e.g. between siblings and cousins) than is found in non-family businesses (Raymond

Institute, 2003). Other models include older siblings acting as pseudo-parents for

younger siblings or other relatives in the business, especially where there is wide age

dispersion in the family age structure (Cicirelli, 1995). The role of women in

leadership also departs from conventional experience, for in some family business

cultures women find their way to leadership roles much earlier and more readily than in

non-family business (Cadieux, Lorrain, & Hugron, 2002; Wicker & Burley, 1991).

Indeed, it may be one of the great strengths of family firms in the future that the gene

lottery makes females are theoretically as available as males for management

responsibility (Curimbaba, 2002).

Leadership potentially encompasses more than one person, for some of the

choices we have discussed implicate a top management group, which of course may

include non-family members. The essential requirement is that leaders, whether kin or

non-kin, have the skills, legitimacy and insight to be able to mediate between the

family system and the business system (Davis & Stern, 1980). The relationship of

leadership to the family system is key – since the family often determines the identity

of the leader(s), their powers and legitimacy, as well as being a constant source of

demands, supports and constraints on the actions of leaders, with failure often

stemming from excessive family interference (Fleming, 2000)

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H6. Effective leadership choices will be made when the family gives optimal

discretion, legitimacy and support for leaders to act, free from close control or

constraint by the family but informed and legitimized by them.

Figure 2 provides an expanded view of the family system. It has been observed

that a “chasm” lies between the analytical approaches of family psychology and family

therapy (L’Abate, 1992). Certainly the notion of “family system” is treated quite

differently by these disciplines. In family psychology highly abstract cybernetic-type

theories attempt to model relations between family goals, communications and

outcomes (Whitchurch & Constantine, 1993), while the therapeutic literature makes

more simple use of systems thinking to reinforce the point that the entire family is

implicated in the presenting problems of any individual member (Hoffman, 1981). A

consequence of this gap in approach is that no unified theory exists in the family

psychology literature to inform the study of family business.

- - - - - - - - - - - - - - - - - - - - - Insert Figure 2 about here - - - - - - - - - - - - - - - - - - - - -

I shall used the concept of family system here to denote the relationships among

three sets of interconnected variables, as elaborated in Figure 2: 1. Family structure:

The kinship network form of the family, 2. Personality configuration: The dispositions

and motives of owning and controlling members; and 3. Family culture: the prevailing

climate of parenting style, norms, values and related parameters. Family outcomes

will be discussed as one way of characterizing the adaptive consequences for the family

of the family system.

Continuing the reverse engineering approach to the framework, we shall first

examine the role of family culture and outcomes, before going on to discuss the two

sets of inputs to them: family structure and member dispositions.

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Family Culture

The concept of culture has been deployed anecdotally rather than systematically

in the family business literature. Within the family therapy and family psychology

literatures there are no generally accepted taxonomies of family functioning, but rather

a multiplicity of occasionally deployed constructs such as: degrees of openness to the

outside world, sensitivities, individualism-collectivism, governance by implicit or

explicit rules, and the presence of coalitions and alliances (Broderick, 1993).

Additionally, one finds discussion of strengths of bonds of affection, communication

structures, degrees of hierarchy, and power distance (Aldous, 1996).

Where writers have suggested classifications of family firms, they tend to be

structural or functional, as in Gersick et al.’s (1997) schema: owner-managed, sibling

partnership, cousin consortium; Gallo’s (1995) distinction between family-labor, family

managed, investment, and provisional family businesses, and Habbershon & Williams

(1999) scale of “familiness”, which combines aspects of ownership, management,

employment, heritage and family involvement.

One recent attempt to capture more cultural variations has been Ling’s (2002)

adaptation of Todd’s (1995) 2x2 grouping of families by their degree of

equality/inequality and authority/liberty. This classification was in turn derived from

the writings of Le Play, a 19th Century sociologist, who modeled the dimensions on

parental and sibling relationships as archetypes. This focus certainly goes some way to

capturing how the values and norms of the family as a culture might constrain or direct

leadership choices, but arguably what is missing from this and other writings is an

account of the internal dynamic of family functioning. One source in the family

psychology literature that has attempted to model and measure this is the work of

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Bengston and colleagues (Bengston, Olander, & Haddad, 1976; Bengston & Schrader

1982) who conceived of family solidarity via six constructs: intergenerational family

structure (size, type and geographical distribution), and five psychological/behavioral

constructs: associational, affectional, consensual, functional, and normative solidarity.

These summarize patterns of interaction, mutual support, positive emotions, shared

values, and perceived obligation, but there has been little or no follow up on these in

the literature.

The other corpus that has an explicit bearing on family climate is parenting

style, which tends to be, by extension, a characterization of culture. The classic

distinction in the literature contrasts authoritative, authoritarian and permissive styles

(Baumrind, 1972; Reitman, Rhode, Hupp, & Altobello, 2002; Wolfradt, Hempel, &

Miles, 2003), and many scholars in the field also focus on spillovers from the quality of

parental relationships to children’s adjustment (Herz Brown, 1991).

To summarize, the key dimensions of culture that would seem to capture the

dynamics of family functioning are: -

a) Parenting style, i.e. the character of family leadership;

b) Power distance between family members, i.e. norms of hierarchy vs. equality;

c) Shared norms and values, i.e. other dimensions of solidarity and conformity

d) Open expression, i.e. the degree of communicative openness about family issues

and emotions.

Family Outcomes

The foregoing analysis highlights the bonds and sentiments that unite or divide

the family. Another way of characterizing family culture is in the effects these

processes have on the integrity of the family, what in Figure 2 are called family

21


outcomes. This amounts to an analysis of the liability of families to different kinds of

change: adaptive vs. centripetal, centrifugal or schismatic tendencies.

1. Adaptive families – where affectional bonds underpin stability and harmony,

and adaptive problem solving is sustained by receptivity and open expression. The

family grows and stays healthy by virtue of an absence of the normative restraints that

can obstruct the individuation of growing family members (Boss, 2002).

2. Enmeshed (centripetal) families – where through heavy authority and enforced

solidarity members become co-dependent to the extent that any member seeking

individuation is met with resistance as a traitor and revolutionary (Minuchin; 1974;

Cooney, 2000). This kind of break-out is a frequent crisis point in family firms,

especially where the owning generation insufficiently relinquishes authority to the next

(Lansberg, 1999).

3. Divided (schismatic) families – where families are factionally split, forming

hostile coalitions and alliances, sometimes all against one perceived “black sheep”

(Kerig, 1995). In family firms schisms often occur where family branches, tied by

marriage rather than blood, seek to take the firm in different directions (Foley &

Powell, 1997). Sibling conflicts also can become amplified through divided ownership.

4. Fragmented (centrifugal) families – where members are highly individuated and

outward facing, to the degree that they are unable and unwilling to give each other

cooperation and support (Dawson, 1991). In family firms this often manifests itself as

the succession crisis where no one is willing to follow in the founder’s footsteps

(Lansberg, 1999), and subsequent dispersal of family and firm as an entity.

22


H7. Families’ liability to adaptive vs. dysfunctional outcomes will be predicted

by measurable dimensions of family culture: parenting style, power distance,

shared norms and values, and open expression.

One can expect families to vary in the strength of their susceptibility to these outcomes,

and for this to vary over time. A close and nurturing family may become an

oppressively enmeshed one, as parents increasingly resist the growing attempts of

children to assert their independence. The family system is clearly not a static entity,

but subject to continual variation and change (Kreppner & Lerner, 1989). Alterations

to family composition and structure, the maturation of individuals, and variations in

and character of intra-family relations make this a moving landscape. Researchers

characterize this as the family life cycle (Carter & McGoldrick, 1995) or the family

career (Aldous, 1996).

These outcomes impact on firm performance and longevity. The adaptive

family is in a state of readiness to consider and support leadership choices. The other

three types represent common threats to family firms: enmeshed families’ failure to

allow the next generation sufficient autonomy to run the business; divided families

where internecine conflicts tear the business apart; and fragmented families where there

is insufficient coherence or shared commitment to maintain the enterprise as a family

business.

The strength of the impact of family outcomes on the leadership of the firm will

be mediated by the degree of identity between the family system and the leadership of

the firm, i.e. if families only have an ownership interest in the business and the

managing executives are non-family, these adaptive risks continue to apply, but with

less immediacy and impact.

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H8. Families’ liability to adaptive vs. dysfunctional outcomes will be predictive

of their performance and longevity, mediated by the degree of family

participation in leadership.

Now let us consider the two main hypothesized inputs to family culture: family

structure and member dispositions.

Family Structure

Family structure can be decomposed into four key sets of biogenetic variables:

kinship or degrees of genetic relatedness, gender, birth order/family size and age

spacing. Combining them potentially offers an objective method for coding family

types, and perhaps their propensity for different kinds of dynamic, something that has

not been attempted or even discussed in the family literature. Taking kinship first, this

can be precisely indexed on a coefficient of relatedness from 0-1. Identity (1.0) is only

found in clones, i.e. monozygotic twins, 0.5 occurs in parent-child and sibling relations,

0.25 quantifies niece/nephew and grandparent relationships, and 0.125 is the coefficient

for cousins. With knowledge of kinship it is possible to construct indices of aggregate

and average relatedness. Evolutionary research has confirmed predictions that the

higher is relatedness the more likely are social support, cooperative and altruistic

behavior, and perceptions of subjective closeness (Barrett et al., 2002; Kruger, 2003;

Neyer & Lang, 2003).

However, it is also the case that the genetic interests of family members

diverge, especially siblings and parent-child relations (Dunn & Plomin, 1990; Trivers,

1974). Parents generally desire equality and cooperation among their offspring (they

have equal genetic shared interests with all their children) but between siblings interests

are divided zero-sum (Hertwig et al., 2002). Yet sibling rivalry is apt to disappear in the

24


face of external competition from less related or unrelated others (Bank & Kahn, 1982).

It seems that the tighter the bindings of common genetic interest the greater the

propensity for conflicts and mismatched demands to be realized. Family business

research has generally confirmed both the propensity for these conflicts to occur in

family firms (Levinson, 1971), and for collaborative biases to be correlated with

kinship (Handler, 1994).

Gender, age spacing, birth order enter the picture as possible moderators of

intra-family conflict or cooperation. Family structures can be contrasted in terms of

their “density”: resulting from their size and aggregate interrelatedness, the

compression of age differences, and their gender mix. These will a) predispose family

cultures to be more or less normative, b) leadership/parenting styles to be more or less

hierarchical, and c) family outcomes to be more or less likely vulnerable to the

dysfunctions identified. In age spacing, closeness has been found to predict conflict

among siblings (Burhmester & Furman, 1990). The same can be expected between

parents and children, as indeed has been found in the only study in the family business

literature to look at intra-familial relationships. Davis and Tagiuri (1981) found father-

son age-gaps associated with conflict at critical life stages – typically when the father

was too young to let go and son too old to wait for power.

H9. The aggregate relatedness of a family will predict cooperative values and

family culture, mediated by age spacing among siblings and between parents

and children – wider gaps biasing towards cooperation, closeness towards

competition.

The effects of gender are also mixed. One recent study has suggested that role

conflicts occur when wives and husbands work together in the business (Danes &

Olsen, 2003). This is consistent with the concept of “gene politics” (Nicholson, 2000)

25


– the idea that cooperation is most likely when relatedness, ownership and executive

influence are congruent and least when they are not (husbands and wives being affinal

or unrelated kin). More positive effects can be expected when women play leading

roles as family members by blood rather than marriage, and in general the presence of

women can be expected to reinforce cooperative values in family business culture

(Broderick, 1993; Brush, 1992; Geary, 1998). There is also much informal evidence

from popular media accounts of the critical role wives and mothers play behind-the-

scenes in family businesses (Hollander & Bukowitz, 1996) & Olson, 2003), much as

they do mediating political relationships and strategic decision-making in tribal

societies (Coon, 1971).

H10. The presence and active involvement of women in the family system will

attenuate the propensity for intra-family conflict, so long as their influence is

congruent with their relatedness and ownership.

The effects of birth order have not figured in the study of family firms. These

are potentially complex, compounded by variations in family size. Previous research

has produced mixed results – firstborns demonstrate more achievement motivation and

parental identification than laterborns (Salmon & Daly, 1998; Sulloway, 1996), but

differences are not detected when standardized personality inventories and survey

methods are used with adult populations (Freese, Powell, & Steelman, 1999; Jefferson,

Herbst, & McCrae, 1998;; Michalski & Shackelford, 2002). The most plausible

resolution of these apparent inconsistencies is that birth order affects the orientations of

siblings in terms of how they differentiate themselves behaviorally within the family

system – for example, parental identification vs. rebellion – without this impacting on

the heritable aspects of personality dispositions. One important implication of this for

26


family business is that strategic change may be more or less likely to follow the

succession of laterborn first firstborn offspring. Following this reasoning:

H11. Sibling competition will arise from laterborns seeking to challenge the

values of parents and firstborns, especially for males.

Family size has mainly been associated with the dilution of resources available

to offspring and putative negative impacts on educational attainment, but this is highly

controversial (Downey, 2001; Steelman, Powell, Werum, & Carter, 2002). In the

context of the family firm one can see increased family size as potentially as source of

greater adaptive flexibility, whilst weakening the average involvement of family

members with the business through proportional dilution of individual ownership

shares. Research suggests that with increased family size comes a greater need for

directive parenting and organization to regulate family conduct (Fallon & Bowles,

1993), yet at the same time size offers a wider range of options to attenuate sibling

conflicts.

H12. Sibling competition will attenuate with family size.

Hypotheses also derive from the forgoing analysis of the linkage between family

structure and family outcomes, mediated by culture, as follows:

H13. Density of structure (high relatedness and age compression) will predict

family enmeshment, mediated by family culture (high openness, low power

distance, and non-authoritarian parenting style).

H14. Density of structure will be inversely predictive of family fragmentation,

mediated by family culture (low shared norms, open expression, and permissive

parenting style).

27


H15. Family size and mixed density (e.g. dense family branches linked by

marriage) will predict family division, mediated by family culture (low shared

norms).

A number of other specific hypotheses in this area can be generated, and await field

testing.

Personality Configuration.

There has been no systematic research into the personality attributes of family

business leaders, though there is a long and controversial history of whether an

“entrepreneurial personality” type exists (Nicholson, 1998; Rauch & Frese, 2000).

However, it is widely accepted that the stable dispositions of leaders predict their

preferences and choices, and consequent upon these, the fate of firms (Chan &

Drasgow, 2001; Hogan, Curphy, & Hogan, 1994; Miller & Toulouse, 1986). Behavior

genetics research informs us that personality and other individual differences have the

seemingly paradoxical status of substantial heritability but without running in families

(Bouchard, 1997; Loehlin, McCrae, Costa, & John, 1998; Lykken et al., 1992). The

reason for this is that many phenotypic psychological individual differences are

explained by gene combinations, plus epigenetic processes (the neonatal switching on

of genes) (Ridley, 1999). This consequence has one important and familiar implication

for family business – there is no guarantee that offspring or other relatives will share a

parent’s interests and motives or be willing to adopt a leading role in the firm. Other

heritable individual differences in the cognitive domain are likely to compound the

problem (Zajonc, 2001). In sum the family gene pool offers an unpredictable and

limited range of options.

28


This analysis also suggests, however, that the range of decision options will be

limited or biased by the configured individual differences of the leading group

(Moynihan & Peterson, 2002; Pitcher & Smith, 2001). Following the analysis of

Moynihan and Peterson, predictions about the effects of specific configurations can be

formulated in terms of:

a) The unidirectional influence of the presence or absence of specific traits among

the leading group, especially those with extreme values

b) Gaps and overlaps in dispositional biases,

c) Congruence and incompatibility of key family members’ profiles,

d) Contingent configuration: the contextual dependence of specific combinations.

The family psychology literature contains evidence for linkage between member

temperament and family culture and functioning (Stoneman, Brody, & Burke, 1989),

and in terms of contingent configuration, the family structure is probably the most

important context for contingency, e.g. dominance is likely to be more acceptable in the

large wide age-spaced family than the close aged nuclear family. Other contingencies

will be the nature of challenges and demands facing the firm. Although complex, this

seems a promising approach to the study of the conduct of family firms, especially

since configural hypotheses have only rarely been applied in field research (Moynihan

& Peterson, 2002).

H16. Family culture will be partially determined by the predominant

dispositions of central family members.

H17. Family culture will be partially determined by the congruence or

incompatibility of the dispositions of central family members.

29


H18. Family culture will be partially determined by the congruence or

incompatibility of configural patterns with family structure, and the challenges

facing the firm.

These hypotheses are broadly framed. Drawing upon the Big Five model of

personality, many more could be generated within the framework that are more specific

and directional about predicted effects. For example, under H16 the presence of

members with high Openness and Agreeableness will be related to a family culture

where open expression is high. Under H17 one can hypothesize that benefits derive

from members differing in Extraversion. Under H18, for families operating under high

pressure high Conscientiousness can be predicted to be especially advantageous and

Neuroticism deleterious. Extraversion and Agreeableness can also be seen to be help

large size families achieve adaptable outcomes, while parents with high Neuroticism

and dominance (a facet of Extraversion) will create enmeshment, especially in small

families. Many additional hypotheses along these lines can be generated and tested.

There is also the question of the relationship between family structure and

personality configuration. This is not elaborated in the model, but it is likely to be a

one-way (in the short-term) causal link: personality being weakly affected by family

structure.

CULTURE AND CONTEXT

The framework has wider social policy implications. The framework set out

here has at its core the family system impacting on the decisions leaders make that

enable the business to prosper, avoid the familiar hazards, and survive. It has some

major business policy implications for the leadership and governance of family firms.

It also has wider social policy implications, emanating from the feature at the top of

30


Figure 1: the family system is also embedded in a wider context of cultural biases that

filter all the variables we have examined. Family businesses may share many features

worldwide, but they also differ as a function of culture and economic-specific sets of

social norms and values, finance and taxation regimes, and kinship patterns and

practices (Busch, 1990; Fiske, 1991; Sampath, 2001; Todd, 1985). In terms of

structure, family size is highly subject to international and cross-cultural variation, and

historically apt to decline as economies develop. It is said that in the West we are

currently witnessing the development of the “beanpole” culture – multiple generations

(through longevity) but no breadth (through declining birthrate) (Markson, 2003). The

business that depends on this structure will have a different culture and be exposed to

different hazards than the firm that has extended breadth and shorter life expectancy, as

firms do in many parts of the developing world (Colli, 2003; Hagestad, 1984;

Bengston, Rosenthal, & Rosen, 1990).

Major social change is underway in many economies where family businesses

occupy a key role. The framework I have presented may help to anticipate some of the

consequences of demographic, cultural and macroeconomic trends. A major

undeveloped theme of the literature in the field is, indeed, the need for a better

understanding of whether the distinctive strengths or hazards of family firms are more

exposed in some cultures than in others.

CONCLUSION – ARE ALL BUSINESSES FAMILY BUSINESSES?

This paper has argued the need for a better understanding of family firms, and

their greater recognition in the mainstream management literature, on the grounds of

their economic prevalence, theoretical challenge, and empirical interest. This could

still mean they are dismissed as irrelevant to the remainder of the corporate business

31


world, even though family influence continues to pervade the big public firms of the

US and other economies (Colli, 2003).

There is one other argument for greater attention in organizational science to

family firms. This is that all firms carry the residue to family feeling and relationships

within them. This is due to what I have elsewhere called the “as if” principle

(Nicholson, 2000). The uncertainty of paternity generated by our lack of any kinship

detector organs and visible fertility markers means that much of our kinship is taken on

trust, on the basis of report and inference. This is counterbalanced by our powerful

bonding capabilities. Together these design features enable us to build large communal

clans of loose genetic relatedness, including an unusual (relative to other species)

acceptance of adoptive childrearing (Silk, 1990). For all our evolution before the

modern age this was the adaptive environment of humans: clans made up of strong and

weak genetic ties (Keesing, 1975; Megarry, 1995). It is only recently that we have

come to commune with strangers and nonkin, and it is not surprising that within our

clans, we operate with the inferential paradigms of kinship relations. Friends act “as if”

they were siblings or cousins, bosses act like parents, mentors like grandparents or

uncles and aunts, and subordinates like offspring (Kram, 1988; James, 1991; Nykodym,

Longenecker, , & Ruud, 1991). The psychological investments we make in close

associations draw from the same well as kinship. However, it is this logic that makes

people so sensitive to perceived betrayal and contract violations in organizations

(Rousseau, 1995). It is also what leads departing bosses to treat the succession to their

position as if it were dynastic and familial (Sonnenfeld, 1988).

If this is the case – that elements of family process and culture are present in all

firms – then it follows that the processes highlighted here will also be widely relevant.

One can infer how leader choices could be highlighted in parallel domains to those

32


have been examining, such as the likely effects of stock holding, informal councils, and

succession processes – as bearing on the culture and effectiveness of firms. Likewise,

it would follow that inputs identical to or analogous to those we have considered here –

personality configuration, relational structures among the leading group, and the group

culture they create – would shape choices in a similar fashion in non-family firms.

At a time when shareholder capitalism has been under fire from many quarters

it is as well to remind ourselves that strong and vigilant high-trust cultures are our best

protection against agency problems and moral hazards, as well as a key to sustainable

competitive advantage (Barney & Hansen, 1994; Etzioni, 1993). It is perhaps easy to

be cynical about firms that claim to recreate the values of the community and the spirit

of the family, but as has been argued in this paper, family and community are biosocial

institutions of fundamental resonance, and the businesses that repeatedly achieve the

accolades of highest regard by the business community and by their employees and

other stakeholders are firms that successfully are able to create and sustain the spirit

and values of the adaptive extended family.

33


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496. FIGURE 1

A Framework for Analyzing the Performance of Family Firms

The Family System

Family structure

Family culture & outcomes

Personality configuration

Choices & Hazards

Ownership & asset management

Governance structures & processes

Succession & role allocation

Culture & Economy

Performance

Strategic DirectionAppropriate diversification to

balance interests

ProductivityInnovation LongevityAdaptation

Leadership Use of Advisors

Structures & SystemsSufficient & consistent for

goals & values

CultureIntegrating family &

non family

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Family structureGenetic relatednessBirth order patterns

Age spacingGender balance

Family culture

Personality configurationTrait polarities

Contrasts & complementaritiesShared traits& overlaps

Gaps& underlaps

FIGURE 2The Family System

Family Outcomes Adaptive – Divided – Enmeshed – Fragmented

Parenting stylesPower distance

Shared norms & valuesOpen expression

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understanding the family firm – a new framework for...

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