ThisthirdeditionofFamilyBusiness,onthebasisofthelatestresearch,presents
this latter r perspective. Based on global research h on n family firms, the book is
organizedaroundthreeleadershipimperativesandfivebestpracticestomanagethe
unique risksposed by the overlapof family,ownership,and managementof the
firm.Chapters4 through11discussthe uniquechallengesand then,through an
action orientation,helpthereaderarriveataseriesofmanagerial andgovernance
bestpracticesrelevanttofamilyfirmsingeneralortoanindividualfamilybusiness
situation.
THESTRATEGICPERSPECTIVE:
COMPETITIVECHALLENGES
FACEDBYFAMILYBUSINESSES
Myexperience bothasascholarandasanadvisorto morethan100 family-owned
businessesforthepasttwoandahalfdecadessubstantiateswhatbusinessownersoften
perceiveasposinguniquechallengestotheirbusinesses.Forexample,manyownerssee
shrinking productlife cycles as requiring theircompanies to innovate moreand to
adapt and d renew w their strategies more frequently. . They also o perceive intense e cost
competitionandrapidchangeindistributionandvaluechainsasrequiringtremendous
agilityand,thus,asrepresentingseriouschallengestotheirfirms.
Family businessowners are also o well aware e of the increasing individualism m in
youngergenerations,whosemembersoftenviewextendedfamilyand legacyasif
theywerealienconstructs.Ownersareequallyconcernedbythemedia’sversionof
whothewinnersareingloballycompetitivemarkets.Accordingtothemedia,large
multinational, publicly y traded companies s are e the only possible e winners in n the
increasinglycompetitivelandscape.Thisbiasconcernsmanyfamilybusinessown-
ers,whofearthatthenextgenerationofownersisgrowingupthinkingthatfamily
businessesrepresentthe“laggingedge”andthattheexcitingcareeropportunities
lieelsewhere.
Ontheotherhand,next-generationmembersareoftenconcernedaboutwhatthey
perceiveastheentrenchmentofthecurrent-generationCEO.Inanerainwhichlife
expectancyhasincreasedsignificantly,fearsabouttheCEOneverrelinquishingpower
maybedifficulttodispel.Andboth generationsworrythatthegrowingcomplexity
and severity of corporate,individual,and estate-tax laws s may predisposeowners to
maketaxminimizationapriority,tothedetrimentofotherimportantconsiderations,
suchasagilityandcorporatecontrol.
Itisimportanttonotethattheagencycoststudiesreferredtoheredidnotincludea
comparative nonfamily business sample. . Thus, these e studies highlighted possible
agencycostsofaltruismandCEOentrenchmentinfamilyfirmsbutfailedtoaddress
the relative impact t of a different setof agency costs on n nonfamily firms s (e.g., the
increasedcostsofsophisticatedfinancialandauditingsystemsandstaff;intheUnited
States,thecostsofcompliancewiththeSarbanes–OxleyActaloneareestimatedatover
$800,000peryearforsmallandmidsizedfirms).Indeed,anequallyviablepossibilityis
thattheuniquedifferencesprovidedbyfamilyownershipandcontrolareasourceof
competitiveadvantageandthatthisadvantageoutweighstheuniqueagencycostsof
familyfirms.Inotherwords,theliteratureonagencycostshasnotyethelpedtoresolve
thequestionofwhetheragencycostshinderfamilyfirmsorwhethertheinteraction
betweenbusinessandfamilyrepresentsanetpositiveforthefamilyfirm.
14
FAMILY BUSINESS
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COMPETITIVEADVANTAGE:
THERESOURCE-BASEDVIEW
The competitiveadvantages inherentin family businessesarebestexplained by the
resource-based view of f organizations. From this theoretical perspective, a firm is
examinedforitsunique,specific,complex,dynamic,andintangibleresources.These
resources—oftenreferredtoas“organizationalcompetencies”—embeddedininternal
processes, human resources, , or r other r intangible assets, can n provide the e firm m with
competitive advantages in n certain n circumstances. In a a family firm, , one e of these
resourcesmaybeoverlappingownerandmanagerresponsibilities,whichcanleadto
advantages—such asreduced administrative costsand speedierdecision making,the
resultofstreamlinedandless-costlymonitoringmechanismsthataremadepossibleby
theexistenceoffamilytrust.Thisowner-manageroverlapisalsocreditedwithenabling
longer time horizons for measuring g company y performance, which results in share-
holdersbehavingaspatientfamilycapitalists.
Other resources s unique to o family firms s may be customer-intense relationships,
whicharesupportedbyanorganizationalculturecommittedtohighqualityandgood
customerservice,andthetransferofknowledgeandskillsfromonegenerationtothe
next,whichmakesiteasiertosustainandevenimprovefirmperformance.
23
Owner-
shipcommitment(willingnesstoholdonandfight)overthelongterm,ratherthan
shareholderapathyandcapitalflight(e.g.,readinesstoswitchfromIBMsharestoGE
sharesintheportfolio),isyetanotherpossiblesourceofcompetitiveadvantage.The
Ford, Hewlett, , and d Packard families have all exemplified this potentially unique
resourceintheirownershipstancevis-à-visCEOperformanceinthepastdecade.
The unique resources that t family y businesses can n call l on n to create competitive
advantageare:
l
Overlappingresponsibilitiesofownersandmanagers,alongwithsmallercom-
panysize,whichenablerapidspeedtomarket.
l
Concentratedownershipstructure,whichleadstohigheroverallcorporate
productivity and d longer-term commitment t to o investments s in n people and
innovation.
l
Afocusoncustomersandmarketniches,whichresultsinhigherreturnson
investment.
l
Thedesiretoprotectthefamilynameandreputation,whichoftentranslatesinto
highproduct/servicequalityandthehigherreturnsoninvestmentthatbeinga
high-qualityleaderproduces.
l
Thenatureofthefamily–ownership–managementinteraction,familyunity,and
ownership commitment, which support t patient capital, lower administrative
costs, skills/knowledge e transfer r across generations, , and d agility in n rapidly
changingmarkets.
Familyfirms,forinstance,mayroutinelybeabletomakedecisionsmorequicklyand
maythereforetakeadvantageofopportunitiesthatothersmiss.Quickdecisionmaking
is critical in business, and tight-knit families in business move fast. Clear Channel
Communications grew w from 16 6 radio o stations in 1989 to more than 1200 (and
23
Cabrera-Suarez,K.,DeSaa-Perez,P.,&Garcia-Almeida,D.,TheSuccessionProcessfromaResource-
and-Knowledge–BasedViewoftheFirm.FamilyBusinessReview,14(1),2001,pp.37–47.
CHAPTER THENATURE
,
IMPORTANCE
,
ANDUNIQUENESS OF F FAMILY BUSINESS
15
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36 television stations) in 2006. . MarkP.Mays,thefounder’sson,notesthatwhen
makingacquisitions,theymovelikelightning.
In2002,family-controlledenterprisesontheS&P500reinvested$617.8million,
comparedwithameager$79millionfortheirnonfamilycounterparts.(Eventhough
family-controlledenterprisesrepresentedonlyathirdoftheS&P500,theyreinvested
almost10timesasmuchduringtherecessionaryyearthatfollowedtheburstingofthe
Internetbubbleand9/11.)Family-controlledcompanieswerealsolesslikelytopay
outdividends,with61percentmakingthesepayoutsascomparedwith77percentof
nonfamily firms.
24
This is compelling evidence of the e higher r propensity of family-
controlled and closely held firmsto investwith h along-term m horizon.Research has
foundthatthepracticebyfamily-controlledandcloselyheldfirmstocontinuetoinvest
in peopleand technology through theupsand downsofeconomiccycles s leads to
highercompanyproductivity.Accordingtoanotherstudy,threeadditional competi-
tiveadvantagesthatthefamilyfirmenjoysare:efficiency,withloweroveralladminis-
trativecostsbecauseoftheowner-manageroverlap;socialcapital,withitstransferof
knowledge and d relationship- - and d network-building g benefits; and opportunistic
investment,basedonitsspeedandagilityinthefaceofnewopportunities.
25
Inastudyconductedin2003involvingasampleof700familybusinessesinGer-
manyandFrance,thefirmsinwhichfamilieshadsignificantinfluenceandtherewas
considerableoverlapbetweenownershipand managementrolesenjoyedappreciably
improvedfinancialperformance.However,whenthefamily’srepresentationinman-
agementfarexceeded the cash-flowrightsof theirownershipstake,the firm’sper-
formancesuffered.
26
InSpain,theperformanceof8000large-andmedium-sizedfamilyandnonfamily
firms was compared d based on 2002 data.Spanish familyfirms s performed d better r in
termsofreturnonequitythantheirnonfamilycounterpartsofthesamesizeandinthe
sameindustry.Familyinvolvementinmanagementbyitselfdidnotprove tohave a
positiveimpactonthefirm’sperformance.
27
AstudyofsixEuropeanstockexchanges,fromLondon’sFTSEtoSpain’sIBEX,
donebyThomsonFinancialandreportedinNewsweekconsistentlyfoundthatfamily
firmsinEuropeoutperformedtheircounterparts.
28
InLatinAmerica,astudyof175firmstradedintheBolsadeComerciodeSantiago
(Chile’sprincipalstockexchange)comparedtheperformanceof100familyfirmswith
thatof75nonfamilyfirmsduringthe10yearsbetween1994and2003andfoundthat
familyfirmsoutperformedtheircounterpartsinreturnonassetsandreturnonequity
(both measures s ofprofitability).They also o performed betterin Tobin’sQ,a a proxy
24
Weber,J.,etal.,Family,Inc.,BusinessWeek,November10,2003,pp.100–114.
25
Carney,M.,CorporateGovernanceandCompetitiveAdvantageinFamily-ControlledFirms.Entrepre-
neurshipTheoryandPractice,29,2005,pp.249–266.
26
Jaskiewicz,P.,FamilyInfluenceandPerformance:AnEmpiricalStudyforGermanyandFrance,European
BusinessSchool,InternationalUniversitySchloßReichartshausen,Germany.Unpublishedpaperpresentedat
ameetingoftheInternationalFamilyEnterpriseResearchAssociation,2003.
27
Menéndez-Requejo,S.,OwnershipStructureandFirmPerformance:EvidencefromSpanishFamilyFirms,
UniversityofOviedo,Spain.UnpublishedpaperpresentedatameetingoftheInternationalFamilyEnter-
priseResearchAssociation,2005.
28
BestoftheBest,Newsweek,April12,2005.
16
FAMILY BUSINESS
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measureofthecreationofmarketvalueduringthatperiod.InChile,amajorityofthe
publiclytradedfirms(57percent)werefamily-controlled.
29
In theUnited States,itwasthe pioneering study by Anderson and Reeb
30
that
prompted the e international l research h discussed d previously. Their study y found d that
family-controlledfirmsintheS&P500outperformedmanagement-controlledfirmsby
6.65 percent t in n return on assets and d return n on n equity y and created an additional
10percentinmarketvaluebetween 1992 and1999.Foracomparativeviewofthe
datasupportingtherelativeperformanceanduniquecompetitiveadvantagesoffamily
firms,refertoFigures1.2and1.3.
The abilityofa particularfamily business to o capitalize e on its unique advantages
dependsonthequalityoftheinteractionbetweenbusinessandfamily.Itisprecisely
this interface e that agency y theorists suggestneeds to be addressed d with a series of
managerialandgovernancepracticesthatwillsafeguardthefirmfromanyfamily-based
hazards.Measuring the e perceptionsof different t stakeholders, monitoring g executive
performance,and implementingaparticularsetofprescribedmanagerialand gover-
nancepracticescanallcontributetocontrollingthehypothesizedcostsandturningthe
unique features s of f family firms into resources that actually produce competitive
advantage.
Theimportanceof(1)jointlyoptimizingtheownership,management,andfamily
subsystems, (2) controlling agency costs, and (3) ultimately exploiting the unique
resources available to family y businesses in order r to achieve competitive e advantage
providesboththetheoreticalframeworkandthepracticaltakeawayscontainedinthis
book.
29
Martinez,J.&Stohr,B.,FamilyOwnershipandFirmPerformance:EvidencefromPublicCompaniesin
Chile.UnpublishedpaperpresentedatameetingoftheInternationalFamilyEnterpriseResearchAssociation,
2005.
30
Anderson,R.,&Reeb,D.,op.cit.
figure
1.2
TheRelativePerformanceofFamilyFirms
PerformanceofFamilyFirmsandNonfamilyFirms
Family-Controlled
Firms
Management-
ControlledFirms
ShareholderReturn
15.6%
11.2%
ReturnonAssets
5.4%
4.1%
RevenueGrowth
23.4%
10.8%
IncomeGrowth
21.1%
12.6%
(Between1992and2002,S&P500list)
PerformanceofFamilyFirmsComparedtoNonfamilyFirms
ReturnonAssets(ROA)+6.5%*
Marketvalue*+10%
*InEBITDAterms,between1992and1999,S&P500list;similaroutperformanceinreturnonequity
Tobin'sQmarketvaluetoreplacementvalueofassets,between1992and1999,S&Plist.
SOURCES:Weber,J.,etal.,Family,Inc.BusinessWeek,November10,2003,pp.100–114;andAnderson,R.,&Reeb,D.,Founding
FamilyOwnershipandFirmPerformance:EvidencefromtheS&P500.TheJournalofFinance,58(3),
June2003,pp.1301–1328.
CHAPTER THENATURE
,
IMPORTANCE
,
ANDUNIQUENESS OF F FAMILY BUSINESS
17
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figure
1.3
CompetitiveAdvantagesofManyFamilyBusinessesonSevenDimensions
I. SpeedtoMarket(Databasedonfirmsize,notformofownership.Family
businesses,onaverage,aresmaller.)
Market
CompanySize
(insales)
TimetoBringNewProduct
toMarket
UnitedStates
>$100million
22.6months
<$100million
16.0months
InJapan
>$100million
19.1months
<$100million
14.0months
InEurope
>$100million
23.4months
<$100million
15.9months
SOURCE:BostonConsultingGroup,http://www.bcg.com.
II. StrategicFocusonNiches*
MarketSize
BusinessPerformance
(asmeasuredbyROI)
<$50million
28.1%
$50to$100million
26.8%
$100to$250million
24.2%
<$1billion
10.9%
*Basedonmarketsizeserved,notfamilyownership.Familybusinessesmoreoftenthannotcompeteintherelatively
smallernichemarketsasopposedtolargermarketsegments)
†4-yearaveragereturnoninvestment(ROI).
SOURCE:Clifford,D.,&Cavanagh,R.,TheWinningPerformance:HowAmerica'sHighGrowthMidsizeCompanies
Succeed.NewYork:Bantam,1985.
III. OwnershipConcentrationandCorporateProductivity*
Stockconcentrationispositivelycorrelatedwith
Relateddiversification
R&Dexpenses/employee
Trainingexpenses/employee
Overallcorporateproductivity
*Samplecomposed oflargelybutnotexclusivelyfamily-controlledcompanies.
SOURCE:Hill,C.,&Snell,S.,EffectsofOwnershipStructureandControlonCorporateProductivity.Academyof
ManagementJournal,32(1),1989,pp.25–45.
IV. RelativeQualityandReturnonInvestment*
RelativeProductQuality
ReturnonInvestment
(asmeasuredbyROI)
High
27.1%
Medium
19.8%
Low
16.8%
*Basedonqualitypositioning,notonfamilyownership.Familybusinesseshaveademonstratedcapacitytocompete
onthebasisofbrand,reputation,andhighrelativequality,butthesampleincludesnonfamilyfirms.
†4-yearaverageROI.
SOURCE:Clifford,D.,&Cavanagh,R.,TheWinningPerformance:HowAmerica'sHighGrowthMidsizeCompanies
Succeed.NewYork:Bantam,1985.
18
FAMILY BUSINESS
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figure
1.3(Continued)
V. PatientCapitalandLong-TermPerspective
Averagetenureof18yearsforowner-managersversus8yearsforpublic-company
CEOsiscorrelatedwithcommitmenttothelongtermandmakingefficientlong-term
investmentsinthefamilybusiness.*
Companycontinuallyoptimizesthemixamongfamily,management,employees,
customers,andownershipforhigherlong-termprofitability.
*Daily,C.,&Dollinger,M.,AnEmpiricalExaminationofOwnershipStructureinFamilyandProfessionallyManaged
Firms.FamilyBusinessReview,5(2),1992;andJames,H.,OwnerasManager,ExtendedHorizonsandtheFamilyFirm.
InternationalJournaloftheEconomicsofBusiness,6(1),1999.
AdaptedfromWaterman,RobertH.,Jr.,WhatAmericaDoesRight. NewYork:W.W.Norton,1994.
VI. TotalCosts
FamilyBusinesses
OtherBusinesses
Lowercostof
capital*
Whenthebusinessownercontrols100%of
thestockandthestockisinthehandsof
familyshareholdersenjoyingfamily
harmony,theeffectivecostofcapitalis
nearly0%.Whilethereisanopportunity
cost,cashflowfromthebusinesscanbe
reinvestedforgrowthwithoutpayingout
highdividendsortaxesorincurringhigh
interestondebt.
Financingcostsforother
businessescanrangefrom
25%–30%forventurecapital
to17%–20%formezzanine
financingtotheprimerate
forbankfinancing.
Lower
administrative
costs
Accordingtotheagencycostliterature,
theoverlapbetweenownerandmanager
orprincipalandagentallowsfamily-
ownedbusinessestoenjoylower
administrativecostsbecauseoflower
CEOcompensation,reducedlevels
ofsupervision,andreducedinvestment
infinancialsystemsandcontrols.
*deVisscher,Francois,WhenShareholdersLoseTheirPatience.FamilyBusinessMagazine,11(4),2000.
Gomez-Mejía,L.,Larraza-Kintana,M.,&Makri,M.,TheDeterminantsofExecutiveCompensationinFamily-
Controlled PublicCorporations.AcademyofManagementJournal,46(2),2003,pp.226–237.
VII. AgilityandCustomizationCapabilityinRapidlyChangingMarkets
Inventoryandqualitycostsofcapital-intensive,long-runmanufacturinghaveincreased
inthepastdecade.Thegreaterflexibilityofnewmanufacturinganddistribution-retail-
servicetechnology(includingnumericalcontrolequipmentinthefactoryandlow-cost
PCsindistributioncentersandretailpoints)makessmallerrunseconomically
attractive.Familyfirmsoftenpopulatethisspace.
Increasingdemandforcustomization,rapidchangesinconsumerpreferences,and
shorterproductlifecyclesleadtorewardsforopportunity-seekingowner-managers
whocanmakedecisionsfast.Familyfirmsoftencompeteinthisspace,alegacyoftheir
entrepreneurialpast.
Internet-based,value-addedpartnershipsinthesupplychainmakeagilitypossible
acrossthevaluechain.AnearlyexamplewastheMilliken–LeviStrauss–Dillards(all
familybusinesses)electronicsdatainterchangesupplychainagreementintheearly
1980s.
SOURCE:Poza,E.,LookWho'sOutThereontheCuttingEdge.FamilyBusinessMagazine,4(1),1993.
CHAPTER THENATURE
,
IMPORTANCE
,
ANDUNIQUENESS OF F FAMILY BUSINESS
19
THESTEWARDSHIPPERSPECTIVE
Thisperspectiveclaimsthatfounding-familymembersviewthefirmasanextensionof
themselvesand therefore viewthecontinuinghealth of the enterprise asconnected
withtheirownpersonalwell-being.
Inameetingofthefifth generationoftheBlethenfamily,ownersofTheSeattle
TimesCompany,chairman and publisher r Frank Blethen n spoke of thecommitment
from every Blethen generation n that resulted d in n 100 0 yearsof caring leadership and
stewardship of TheSeattleTimesand othernewspapersin thecorporate group.He
emphasizedtheneedtovaluetheextendedfamilyoverindividualorbranchneedsand
challenged individuals s who o accepted d participation n in the family clan to assume the
stewardshipresponsibilitiesinorderforthemtobesuccessfulasindividuals.
Hewentontoassertthatunderstandingtheindividual’sresponsibilitytowardthe
groupisessential—asishavingrealisticexpectationsofwhatyou doanddonotget
frombeingamemberoftheBlethenfamilyandTheSeattleTimesCompany.More
thanmoney,familymembersinheritaresponsibilitytoothers,tostewardship,sothat
theenterprisetheyreceivedfromtheearliergenerationmaysuccessfullypassontothe
next.
In1980,alongstrikethreatenedtheviabilityofthiscommitment.“FrankBlethen
concedesthestrikewasatremendousfinancialhittoTheTimes,causinghimforthe
firsttime in n his life e to considerthe possibility of selling. Fortunately those darkest
moments ultimately y strengthened the e family’s resolve. The stewardship p they feel
towardthenewspaperanditsplaceinthiscommunityistooimportant.”
31
Asstewardsofthefirm,familyownersoftenplaceindividualsontheboardwhohave
industryknowledge andwhocan provide objectiveadviceand advocateforagoing
concern.Theindependenceoftheboardislessanendinitselfthanareflectionofthe
family’scommitmenttoavailitselfofcomplementaryskillsthatthefamilylacks,suchas
legal,financial,succession-planning,accounting,andinternational-marketingskillsand
knowledge.Thedirectorsarechosentopromotecontinuedcorporatehealth,basedon
theirabilitytoprovideadvicethataddsvalue.Assuchtheboardhasapositiveimpact
on thefinancial performance of thefirm through its s advice more than through h its
monitoringorsupervisoryfunction.
Interestingly, among g S&P P 500 0 firms, independent directors hold more e than
61.2percentoftheboardseatsinnonfamilyfirmsbutonly43.9percentinfamily
firms.Andtheperformanceadvantage,intermsofreturnonassets/returnonequity
(ROA/ROE)andmarketvaluation,demonstratedbyfamilyfirmsbetween1992and
1999 relative to management-controlled firms
32
vanishes in n the absence of an
independentboardprovidingcompanyoversight.Evenmorestrikingly,andconsis-
tentwithagencytheory,themostvaluableS&P500firmsarethoseinwhichinde-
pendent directors balance e board d representation by y family members. Firms s with
continued founding-familyownershipandrelativelyfewindependentdirectorsper-
formsignificantlyworsethandononfamilyfirms.
33
Infamily firmsthen,whetherfromanagencyorastewardshipperspective,inde-
pendentandadvisorydirectorsremain theprimarylineofdefenseagainstthemana-
gerial opportunism, expropriation, , and d entrenchment that large, , controlling
31
TheSeattleTimes,Sunday,January21,2001.
32
Anderson,R.,&Reeb,D.,op.cit.
33
Anderson,R.,&Reeb,D.,op.cit.
20
FAMILY BUSINESS
shareholderscanexercise inrelation to minorityshareholders,employees,and other
stakeholders.Fromtheagencyperspective,theydosothroughtheirmonitoringand
supervisoryrole;fromthestewardshipperspectivetheydosothroughtheiradvisory,
objective,andcommittedstancetotheongoingconcern.Independentandadvisory
directorscanpreventexcessiveCEOcompensation,flaweddecision-makingprocesses,
stalestrategicplanning,and unearned perquisites,whilelimiting the family’sundue
influencethroughenhancedboarddynamicsandsubcommitteesoftheboard.Most
importantlytheseboardscan preventan unqualifiedorincompetentfamilymember
frombecomingthenextCEO.
34
ETHICS,SOCIALRESPONSIBILITY,AND
THEFAMILYBUSINESS
Familybusinessesaregenerallyperceivedasbeinglesssociallyresponsiblebecauseof
theirincentive toprotectfamilywealth.They arealsooften perceivedaslessethical
becauseoftheirincentivetoreducetaxliabilitiesandderivecompetitiveadvantageby
whatevermeanspossible in theoften private,less-transparentworld ofmostfamily
businesses. But there is s an n opposite e and d quite compelling g argument: that family
businesseshaveabuilt-indesiretoupholdthefamilycompany’simageandprotectthe
family’snameandreputation.Infact,thisthirdeditionofFamilyBusinessmakesthe
relatedargumentwithregardtothequalityoftheproduct/servicethefirmcreates(see
Figure1.3,IV)bypresentingthehigherreturnsoninvestedcapitalpossiblewhenthe
firmisahigh-qualityprovider.S.C.Johnson(makerofRaid,Off,Windex,andOust)
remindsusthattheyareafamilycompanyattheendofeverycompanyad.Theydo
thisbecauseoftheperception(supportedbytheirownmarketresearch)thatfamily
businesses care more aboutquality,care more aboutthe environment,and d can be
countedontostandbehindtheirproduct/servicefarintothefuture.
Research using data a drawn n from BusinessWeek and the socialperformance rating
given by Kinder, Ludenberg, Domini & Co., , compared d 261 firms—some family-
controlled,othersmanagement-controlled—fromtheS&P500overa10-yearperiod.
Itfoundthatalthoughfamilybusinessesarenomorelikelytoengageinpositivesocial
initiativesthanarenonfamilycompanies,theyarelesslikelytoengageinactivitiesthat
havenegativesocialconsequences.Theauthorsconcludethattheresultspointtothe
importancethatimageandreputationhaveforfamilybusinesses.
35
FAMILYBUSINESSRESEARCH
Thefieldofstudyoffamilyenterprisesgoesbackonlyto1975,whenentrepreneur,
family businesseducator,and consultantDr.Léon Danco published hispioneering
work, Beyond Survival: : A Guide for the Business s Owner and His Family.
36
Two
34
Shleifer,A.,&Vishny,R.,ASurveyofCorporateGovernance.JournalofFinance,1997,pp.737–783.
35
Dyer,W.G.,&Whetten,D.A.,FamilyFirmsandSocialResponsibility:PreliminaryEvidencefromtheS&P
500.EntrepreneurshipTheoryandPractice,30,2006,pp.777–783.
36
Danco,L.,BeyondSurvival:AGuidefortheBusinessOwnerandHisFamily.Cleveland:TheUniversity
Press,1975.
CHAPTER THENATURE
,
IMPORTANCE
,
ANDUNIQUENESS OF F FAMILY BUSINESS
21
watershedeventsplayedkeyrolesinturningthestudyoffamilybusinessintoafield:
1 ThepublicationofaspecialissueofthejournalOrganizationalDynamicsin
1983
37
2 Thelaunchingofaspecializedjournal,FamilyBusinessReview,in1986
38
Still,between1975andtheearly1990s,mostofthepublishedworkonfamilybusi-
nesseswasanecdotal,rootedinthestoriesofconsultantsandobserversofthesemostly
privatelyheldenterprises.Onlyinthepastdecadehasresearchbeguntostrugglewith
thedefinitionoffamilybusinessandtoaddressitsuniquecharacteristics.
Notwithstandingthedearthofresearchonthisuniqueformoforganization,family
businessesmostlikelyconstitutetheearliestformofenterprise.Wheneverparents—
whetherengaged in makinga a craft,cultivating thesoil,orevenruling acountry—
welcomed members s ofthe nextgeneration n ashelping handsin the pursuit t ofthat
enterprise,afamilybusinesswasborn.
Today,familybusinessesareconsideredbymanyscholarstobeonthecuttingedge
ofcorporateperformance,jobcreation,returnoninvestment,qualityofproductand
service,flexibility,customizationcapability,andspeedtomarket.
39
Theyarealsowell
knownfortheirvulnerabilitytodeclineaftertheretirementordemiseofthefounding
entrepreneurialgeneration.
40
Theagencycostliteraturehastraditionallyarguedthat
when ownershiremanagersoragents,additionaloversightand controlmechanisms
arerequired,resultinginan increaseinenterprise-managementcosts.
41
Morerecent
literaturearguesthatagencycostsaresignificantforfamily companiesasaresultof
CEOentrenchment,conflictavoidance,andaltruism.
42
Themostrecentresearchon
family-firmperformance,discussedearlierinthischapter,putsmostofthesecompeting
arguments in perspective by clearly demonstrating g that the benefits s of the family–
business interaction outweigh its s costs s on the e basis s of f overall performance e over
extendedperiods.
Oneoftheresearch studieswewillbereferring toin thisthirdeditionofFamily
BusinessistheDiscovery Action Research on Family Business.Thisstudy wascon-
ducted in n the formof“action research,” ” with h companiesparticipating in the Part-
nership with Family Business s at the e Weatherhead School of Management, , Case
Western Reserve e University, , and d in n family business s programs s at the e University y of
Pittsburgh and the e University of St. . Thomas. . The action research constituted an
iterative process ofdiagnosis, feedback, and collaboration with membersof partic-
ipatingfirmsandfamilies.Thesampleforthisstudyincluded868executivesandfamily
memberswhohadbeeninvolvedoverthepast11yearsin90businesses.Specifically,
thesamplewasmadeupof303familymembersinthebusiness(68percentoffamily
members), 145 5 family y members s not active in n the management t of the e business
37
Burke,W.W.,ed.,OrganizationalDynamics.NewYork:AmericanManagementAssociation,1983.
38
Lansberg,I.,ed.,FamilyBusinessReview,1(1),1986.
39
SeeAstrachan&Carey,op.cit.;Kleiman,R.,Petty,W.,&Martin,J.,FamilyControlledFirms:An
AssessmentofPerformance.FamilyBusinessAnnual,1,1995,pp.1–13;andPoza,E.,Alasombradelroble.
Cleveland:EditorialUniversitaria,1995.
40
SeeDanco,op.cit.;Poza,E.,SmartGrowth:CriticalChoicesforFamilyBusinessContinuityandProsperity.
SanFrancisco:Jossey-Bass,1989;andWard,op.cit.
41
Daily,C.,&Dollinger,M.,AnEmpiricalExaminationofOwnershipStructureinFamilyandProfessionally
ManagedFirms.FamilyBusinessReview,5(2),1992,pp.117–136.
42
SeeSchulzeetal.,op.cit.;andGomez-Mejíaetal.,op.cit.
22
FAMILY BUSINESS
(32 percent of family y members), , and 420 nonfamily y managers. Of those e family-
member respondents s who o identified d their r position n in the family, , 90 were CEOs
(22percent),48werespousesofCEOs(12percent),111weresons(27percent),73
weredaughters(18percent),and84were“other”(21percent).This“other”category
includedsiblingsoftheCEO,sons-anddaughters-in-law,nephews,andnieces.
This study’sfindingssuggestthata positive family–businessinteraction n is s atthe
heartofcreatinguniqueandidiosyncraticcompetitiveadvantagesinfamilyfirms.This
research suggests safeguards s that t can prevent higher r agency y costs s and d highlights
resourcesandcapabilitiesborneoutofthepositivefamily–businessinteractionthatcan
provideuniquebenefitstofamilyfirms.Boththesafeguardsandthesourcesofcom-
petitiveadvantagewillbediscussedinthechaptersthatfollow.
Howafamily’sinfluencemightaffectthestrategicand economicdecisionsof a
businessandhowthesemightaffectthecompany’sperformance(andviceversa)isthe
frontierofmuchcurrentresearch.Untilrecently,mostbusinessscholarsignoredfamily
businesses.Thisnotwithstanding,mostbusinessesgloballyarefamilybusinesses.
Scholarswhodidresearchfamilyfirmsforthemostpartconcludedthattheywere
anachronismsandthatbecauseofnepotism,agencyproblems,andfamilyconflictthey
werelargelyinefficient.
43,44
Recently,threecharacteristicsofthefamilyformofgovernancehavebeenidentified
asdistinguishingthemfromotherformsoforganization.Thesewerereferred toby
Carney
45
asparsimony,personalism,and particularism.Parsimonyrefersto thepro-
pensityoffamilyfirmstobevigilantabouttheirfinancialresources,duetothefactthat
thefamilyownsthoseresources.Personalismreferstotheuniquepowerresultingfrom
thecombinationofownershipandcontrolheldbythesamefamily.Thisconcentration
ofpowerfreesfamilyfirms,relativetononfamilyfirms,fromtheneedtoaccountfor
theiractionstootherconstituencies,givingthemthediscretiontoactastheyseefit.
Particularismistheproductofthisconcentrationofpoweranditsresultingdiscretion.
Familybusinesses,scholarsargue,havetheparticularabilitytouseidiosyncraticcriteria
andsetgoalsthatdeviatefromthetypicalprofit-maximizationconcernsofnonfamily
firms.Andthesethreecharacteristicsprovidefamilyfirmswithadvantagesinefficiency,
socialcapital,andopportunisticinvestment.
46
Therehasbeenmodestdiffusionoffamilybusinessresearch andeducationinthe
pastdecade.According to the FamilyFirmInstitutein Boston(seehttp://www.ffi.
org),there are nowmore than n 100 0 family business s programsin the United d States
alone.Andwhilemostofthe substantial researchwithlastingimpacthasalso been
produced in thepastdecade,itsinfluence on the largerfieldsofmanagementand
organizationisstillminuscule.Greatincentivesforfurtherresearchonfamilyfirmsand
forgreaterimpacton managerialsciencebyfamilyfirmstudiesnowexist,giventhe
well-documented higher r performance of family firms relative to o their r nonfamily
counterparts.Mainstreamorganizationalresearchhasignoredtheuniqueadvantages
of the family business form, largely y as s a result of stereotyping family firms as the
43
Carney,M.,CorporategovernanceandCompetitiveAdvantageinFamilyControlledFirms.Entrepre-
neurshipTheoryandPractice,29,2005,pp.249–265.
44
Chrisman,J.J.,Chua,J.H.,&Steir,L.P.,SourcesandConsequencesofDistinctiveFamiliness:An
Introduction.EntrepreneurshipTheoryandPractice,29,2005,pp.237–247.
45
Carney,op.cit.
46
Chrisman,J.J.,Steir,L.P.,&Chua,J.H.,Personalism,ParticularismandtheCompetitiveBehaviorsand
advantagesofFamilyFirms:AnIntroduction.EntrepreneurshipTheoryandPractice,30,2006,719–729.
CHAPTER THENATURE
,
IMPORTANCE
,
ANDUNIQUENESS OF F FAMILY BUSINESS
23
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