How Family Firms Differ

Family firms are ubiquitous. According to data published by the Institute for Family Business in 2011, 66 per cent of all private sector firms in the United Kingdom in 2010 were family businesses. The concentration of family businesses is high across sectors, ranging from 36.5 per cent in health and social work to 89.1 per cent in agriculture and other primary sector activities (Figure 1.1). Four sectors account for over two-thirds of the family firms in the country: real estate, renting and business activity (22.7), construction (22.4), wholesale and retail trade, repairs (13.0) and transport, storage and communication (10.4). These firms are believed to account for a significant proportion of firms both in Europe, in general, and “[b]eyond Europe and the United States — and with the conspicuous exception of Japan — the family firm has been and continues to be the norm” (Jones and Rose, 2006, p. 1).

Since the publication of the pioneering papers of Alchian and Demsetz (1972) and Jensen and Meckling (1976), it has been customary to view firms as organisations that are characterised by contractual relationships among self-interested “factors of production” (Fama, 1980, p. 289). These papers laid to rest the traditional view of the firm that merged together the roles of the manager and the owner, and fostered discussions about the potential for conflict of interest between managers who (re-)negotiate contracts with all other input owners and the owner-investors who bear the risk associated with the organisation’s operations and have residual claims to its profits. Indeed, despite early arguments about the efficiency of arrangements that separate ownership and control in firms (Fama, 1980), the dominant view in the literature is that agency conflicts between managers and owner-investors that characterise widely held firms (Berle and Means, 1932) explain why managerial decisions may not be in the interests of the shareholders (Shleifer and Vishny, 1988; Bebchuk and Fried, 2003).

In the previous chapter, we concluded that familiness is the key source of distinction between family and non-family firms. Its direct implication — which is implicit in the discussion in Chapter 2 — is that it is erroneous to think about agency problems within family firms and familiness as two distinct prisms through which we can examine family firms and their strategic behaviour. Indeed, agency problem within family firms is — at least in part — an outcome of familiness. Lubatkin et al. (2005) summarised the relationship between familiness and agency problems within these firms elegantly using Figure 3.1. The interpretation of the diagram, which emphasises the agency problems that result from altruism, follows easily from the discussion in Chapter 2 and we shall discuss its implications for strategies of family firms later in this chapter.

Since financial performance is a widely accepted summative measure of the impact of adopted strategies, managerial behaviour and other influences on a firm, it is hardly surprising that one of the most prolific areas of research on family businesses is the impact of family ownership and control on various measures of financial firm performance. For instance, O’Boyle et al. (2012) and Machek et al. (undated) have each identified 78 articles that compare quantitatively the performance of family and non-family firms. The early discussion about the impact of family ownership and control on firm performance was largely an extension of the owner-manager agency problem that was highlighted by Jensen and Meckling (1976). For example, in a much cited article, Daily and Dollinger (1992) examine the impact of family control on performance and conclude that “family-owned and -managed firms exhibit performance advantages as a result of the unification of ownership and control” (p. 117).

In this monograph, we have argued that familiness and its manifestations such as reciprocal altruism distinguish family firms from their non-family counterparts. A perusal of the literature suggests that the role of familiness is recognised in analyses of family firms, albeit much more in the management literature than in the economics and finance literature. However, the literature requires extension in three different directions — with familiness lying at the heart of these extensions — to facilitate a better understanding of family firms. Specifically, there is a need to better understand the nature of implicit and explicit contracts that characterise a family firm and have reliable proxies for these contracts, especially those within the controlling family. Recall that a firm is characterised by a set of contracts among the stakeholders (Jensen and Meckling, 1976).