A Review of Theory in Family Business Research- The Implications for Corporate Governance

A Review of Theory in Family BusinessResearch: The Implications for

Corporate Governance

Jan-Folke Siebels and Dodo zu Knyphausen-AufseßTechnische Universität Berlin, Strasse des 17. Juni 135/H 92, 10623 Berlin, Germany

Corresponding author email: [email protected]

In recent years, increasing scholarly attention has been directed toward the field offamily business research. Based on an exhaustive sample of 235 publications, thisarticle provides a comprehensive review and a critical assessment of the theoreticalunderpinnings and corporate governance issues in family business research. Threepredominant theoretical perspectives, namely principal–agent theory, stewardshiptheory and the resource-based view of the firm, have emerged and provide empiricalevidence that family businesses significantly differ from non-family firms in importantdimensions such as agency costs, competitive advantages or corporate governancestructure. On their own, none of the aforementioned perspectives succeeds in address-ing all complexities associated with family businesses and their corporate governance.Accordingly, joint approaches combining different theoretical frameworks can help toimprove understanding of the family business. The article concludes by discussingpossible directions for future research that might further contribute to building acomprehensive theory of the family business and its corporate governance.

Introduction

The field of family business research as a scholarlydiscipline is quite young in comparison with estab-lished fields such as strategic management, financeor organization. Prior to the 1980s, few scholars paidattention to the specificities of family-owned and-controlled companies (Heck et al. 2008). This issurprising given the fact that different studies (e.g.Burkart et al. 2003; Claessens et al. 2002; IFERA2003; Villalonga and Amit 2006) emphasize theoften dominant role these organizational forms playin many countries. For example, based on theirbroadest definition, Astrachan and Shanker (2003)estimate that family firms generate 89% of total taxreturns, 64% of GDP and employ 62% of the totalworkforce in the US. Other scholars support thesefindings (Morck and Yeung 2004; Neubauer et al.1998) and come to similar results for other econo-

mies such as the UK (Institute for Family Business2008; Westhead et al. 1997) or Spain (Jaskiewiczet al. 2005). Particularly in Germany, family firmshave been found to show an unusually strong domi-nance (Faccio and Lang 2002). Klein (2000) esti-mates that approximately 58% of all businesses inGermany with more than €1m turnover/year arefamily businesses.1 One research institute (Haun-schild 2010; Institut für Mittelstandsforschung 2007)estimates that, depending on the definition,2 up to

1The percentage decreases with the size of the company (i.e.among the companies with more than 250 m EUR turnoverper year, only 30% are classified as family businesses).2The IfM defines family businesses as businesses in which(1) a maximum of two families hold at least 50% of allshares and at least one shareholder serves as an executive(narrow definition) or (2) a maximum or three families holdat least 50% of all shares and no family member serves as anexecutive (broad definition).

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International Journal of Management Reviews, Vol. 14, 280–304 (2012)DOI: 10.1111/j.1468-2370.2011.00317.x

© 2011 The AuthorsInternational Journal of Management Reviews © 2011 British Academy of Management and Blackwell Publishing Ltd.Published by Blackwell Publishing Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA02148, USA

95% of all German companies could be consideredfamily businesses, generating 41.5% of all sales andemploying 57.3% of all employees in the Germaneconomy.

Recognizing the importance of the field and theapparent lack of scholarly attention in the past,academia has begun to investigate this phenomenonmore closely during recent decades (Craig et al.2009; Heck et al. 2008; Moores 2009; Sharma2004). The respective results have been compiled andsummarized by a number of scholars (i.e. Bammenset al. 2010; Bird et al. 2002; Chrisman et al. 2005,2010; Dyer and Sanchez 1998; Handler 1989;Sharma et al. 1997; Zahra and Sharma 2004) in achronological but rather fragmented and descriptivemanner, focusing on specific topics such as the rolesand behaviors of the boards of directors (Bammenset al. 2010), the range and frequency of family busi-ness publications (Craig et al. 2009), research net-works between scholars (Debicki et al. 2009) orcovering shorter time periods (e.g. Bird et al. 2002)and smaller samples (Chrisman et al. 2010).

The purpose of this article is, while including alltypes of family firms (privately held companies,unquoted public limited companies, etc.), to compre-hensively and critically assess the current state oftheory-directed research on family businesses andtheir governance. More specifically, the principalquestions addressed in this paper are: (1) What are thecentral theories that have been used to explain whyfamily businesses differ from non-family businesses?and (2) Why do family businesses have demandsdifferent from non-family businesses concerningtheir governance structure? By answering thesequestions, we contribute to the literature in severalways. First, by offering such a review of the severaltheoretical frameworks, we identify current trends ofthe prevailing and emerging schools of thought.Second, in contrast to earlier literature reviews, thispaper includes German-speaking literature, therebyincorporating academic findings from an economy inwhich family firms play the predominant role andwhich is considered to be the home country of the‘hidden champions’ that are world-market leaders intheir respective business areas (Simon 1996, 2009).Third, by focusing attention on the specific questionof corporate governance structures in family firms,we offer an assessment of how the different frame-works have been considered within the emergingcorporate governance debate. Fourth, by discussingthe limitations of current models, research gaps willbe identified, helping to guide future initiatives.

The literature review is structured as follows. Itstarts by discussing the methodology and the sampleused for the review in the next section. The review ispresented in the third section, highlighting anddescribing the prevailing theories and perspectives.Afterwards, the results are summarized and criticallydiscussed in the fourth section. Finally, the limita-tions of the paper are disclosed, and directions forfuture research are suggested.

Methodology

This research review covers empirical paperspublished in different academic journals from 1964to 2010, as well as books/dissertations publishedbetween 1957 and 2010. As a starting point, wefocused on academic articles published in FamilyBusiness Review (FBR), Entrepreneurship, Theory& Practice (ET&P), Journal of Business Venturing(JBV) and Journal of Small Business Management(JSBM) (‘journal research’), as these outlets areregarded to be ‘the most appropriate outlets forfamily business studies’ (Chrisman et al. 2010,p. 10), and are recognized to account for a majorportion of family business research (Bird et al.2002; Chrisman et al. 2008, 2010; Debicki et al.2009). Since the aim was to cover the completebibliography of these journals, we used the EBSCOhost search engine for ET&P, and the searchengines on the respective publisher’s websites forthe remaining three journals. The initial keyword3

search resulted in a total of 250 hits, of which 143(57%) were found in FBR, 52 (21%) in ET&P,34 (14%) in JSBM and the remaining 21 (8%) inJBV. In order to ensure that the review would beexhaustive, we also included articles from otheracademic journals and ‘non-journal publications’(e.g. books, dissertations) in the paper. By this, weintended to avoid one of the major limitations inseveral other literature reviews which exclude ‘non-journal publications’ (e.g. Chrisman et al. 2010;Debicki et al. 2009). Thus, we referred to theEconis4 online catalogue of the German NationalLibrary of Economics (ZBW), the world’s largestspecialist library for economics. The initial search

3For a detailed overview of keywords used in the respectivesearch engines refer to Table 1.4Econis (Economic Information System) is the onlinecatalogue of the ZBW – Leibniz Information Centre forEconomics.

Family Business Governance 281

© 2011 The AuthorsInternational Journal of Management Reviews © 2011 British Academy of Management and Blackwell Publishing Ltd.

of the Econis online catalogue (‘library research’)resulted in a total of 1322 hits for different keywordcombinations.5 Since the search parameters werechosen broadly, we anticipated that only a relativelysmall fraction of the total 1572 publications6 wouldprove to be of substantive relevance and signifi-cance, thus justifying their inclusion in the review.In order to identify these relevant and significantstudies, a structured seven-step selection processwas applied (see Table 1):

1. Search of electronic libraries/databases (i.e.EBSCO Host, publisher’s websites and Econiscatalogue) using different keyword combinations(e.g. family business/firm combined with theory,framework, governance, review, etc., in title,abstract or full text).

2. Elimination of substantive irrelevant articles byreading the individual title and selective scanningof the abstract.

3. Consolidation of results from ‘journal research’and ‘library research’ (Econis) and elimination ofduplicates.

4. Ensuring substantive relevance by readingall abstracts of the remaining papers/publicationsand evaluating their respective content (i.e. onlypapers and publications referring to the theoreti-cal assessment of the distinctive family businessand family business governance were selected).

5. Further safeguarding of relevance and substanceby reading the remaining articles/publications intheir entirety and discarding publications that failto address the research questions.

6. Inclusion of additional papers that were identifiedvia cross-referencing during the analysis of thebibliographies of papers/publications retrieved instep 5.

7. Inclusion of further literature recommendationfrom three independent reviewers during thedouble-blind review process

In total, this procedure resulted in a sample of 235publications that passed all seven selection steps. Ofthese, 193 (82%) are articles published in a total of50 academic journals (see Appendix); 21 (9%) aretextbooks, 7 (3%) are dissertations, and 14 (6%) are

other publications. While Randolph (2009) predictsthat within an exhaustive review only 10% of therelevant publications will be identified through elec-tronic searches, the remaining 90% being identifiedby searching the references of the retrieved articles,41% of the sample was identified through searchengines and 59% based on searching the referencesof relevant publications (i.e. step 6 of the selectionprocess).

Regarding the timeframe, the majority of thestudies were published between 2005 and 2010(40%) indicating the increasing interest in the fieldof family business research. Prior to that period,publication activity was weaker, with 17 publica-tions between 1990 and 1995, 34 between 1995 and2000, and 64 between 2000 and 2005. The com-position of the sample is summarized in Figure 1.Furthermore, all major articles and dissertations(books and textbooks are excluded) featured in thisreview have been classified and briefly summarized.The respective tables can be obtained from theauthors upon request.

Results

The review starts with a brief discussion of somedefinitional issues and proceeds with the descriptionand assessment of the prevailing theories in familybusiness research. Afterwards, we summarize thediscussion of corporate governance in family firmsand investigate the application of the differenttheories to this topic.

Definitional issues

As formulated by Chrisman et al. (2005, p. 556),‘ideally all researchers should start with a commondefinition and distinguish particular types of familybusinesses through a hierarchical system of classi-fication consistent with that definition’. Unfortu-nately, researchers have not always heeded thiscall, and the literature still provides many possibledefinitions without consensus (Miller et al. 2007).However, two theoretical approaches on the defini-tion of family businesses seem to emerge as domi-nant (Chrisman et al. 2005; Hack 2009): (1) thecomponents-of-involvement approach (Chua et al.1999; Martos 2007); and (2) the essence approach(Chua et al. 1999; Habbershon et al. 2003; Litz1995).

5For a detailed overview of keywords used refer to Table 2-1,Note: Econis-results also include books/dissertations andarticles published in academic journals.6In total, 250 hits form ‘journal research’ plus 1322 from‘library-research’ = 1572 publication (before consolidationand elimination of duplicates).

282 J.-F. Siebels and D. zu Knyphausen-Aufseß


Tabl

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425

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17n.

a.20

Sum

1.32

210

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4-4

443

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a.10

519

64–2

010

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428

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The components-of-involvement approach sees itas sufficient condition that some kind of familyinvolvement (i.e. ownership, management, govern-ance or succession) exists in order to qualify as afamily business. The fundamental problem associ-ated with this approach is that there are no distinctthresholds, leaving room for interpretation. Address-ing these limitations, the essence approach goes onestep further and views the involvement of the familymerely as a necessary condition. The underlyingfamily involvement must be ‘directed toward behav-iors that produce certain distinctiveness before it canbe considered a family firm’ (Chrisman et al. 2005,p. 557). Consequently, though being exposed to thesame amount of family involvement, two firms mightbe classified differently in using the respectiveapproaches, as family involvement per se need notconvey the intention, vision, behavior or impact thatconstitutes the essence in the latter approach.However, the primary advantage of the essenceapproach is its theoretical nature, which invitesscholars to develop frameworks and models foroperationalizing and capturing the said essence of

family involvement (Chrisman et al. 2005). Never-theless, a discrete threshold of the determinants7 ne-cessary to constitute a family business is still lacking.

To tackle this issue, scholars departed from strictlydichotomous definitional approaches and began tocombine the different determinants in a multidimen-sional scale (Astrachan et al. 2002). As a result,Astrachan et al. (2002) introduced the Family PowerExperience Culture Scale (F-PEC), which measuresthe degree of family influence as a metric variablerather than a dichotomous specificity. The underlyingtheoretical model has undergone some testing andvalidation (Cliff and Jennings 2005; Holt et al. 2010;S. Klein et al. 2005), but it has also been challenged.Rutherford et al. (2008) propose that the F-PECdoes not measure the ‘actual’ but rather the

7The literature quotes the influence on the strategic decision-making (Davis and Tagiuri 1989), the willingness of theowning family to keep control over the business and pass iton to the next generation (Litz 1995) or unique resourceswhich arise from the interaction of the family and the busi-ness system (Habbershon et al. 2003) as main determinantsfor the essence of a family firm.

PE

RS

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ST

RE

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VE

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RA

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ICH 6%

9%

OtherDissertation

3%Books

Articles 82%

Type of Study

Relative distribution of studies

Time of Study

95

64

34

1725

0

20

40

60

80

100

Total publications per period #

Total publications per type and period

14

7

21

193

Others

Dissertations

Books

Articles

Absolute distribution of studies

Source: Own depiction

235

10400 0

26

1

1990-1995

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Before 1990

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20

95

36

76

2000-2005 2005-2010

64

1995-2000

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34

3 5

Others

Dissertations

Books

Articles

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Figure 1. Overview composition literature sample



‘potential’ family involvement in the firm.8 However,having been successfully applied in some studies(Jaskiewicz et al. 2005; Mertens 2009), the maincontribution of the F-PEC is not to arrive ‘at aprecise or all-encompassing definition of familybusiness’ (Astrachan et al. 2002, p. 51), but rather tooffer a scale that supports the convergence of theabove-mentioned definitional approaches.

Prevailing family business theories

Taking these definitional issues as a background, wenow direct attention to theories and frameworks thathave emerged to address the complexities, specificsand behaviors of family businesses. Given the factthat a comprehensive theory of the family firm is stilllacking, researchers followed the call of Sharma(2004) and applied commonly accepted theoreticalframeworks to the domain of the family firm. Themost important theoretical frameworks, namely theprincipal–agent theory, the stewardship theory andthe resource-based view of the firm, are discussed indetail.

Principal–agent theory. Principal–agent theory(PAT) describes possible problems arising fromconflicts of interest and asymmetric informationbetween two parties of a contract (Jensen andMeckling 1976; Ross 1973). Principal–agent theoryassumes opportunistic behavior of individuals in thesense that one contract party, the agent, tends tobehave in his or her own interest rather than theinterest of the other contract party, the principal,creating problems such as moral hazard (cf. Holm-ström 1979) and adverse selection (Eisenhardt1989a; Jensen and Meckling 1976). The transactioncosts incurred during the process of detecting, miti-gating or preventing agency problems (e.g. controlor incentive systems, governance structures, etc.)and the economic damage caused by opportunisticmanagerial behavior (e.g. free-riding, shirking) arereferred to as ‘agency costs’ (Jensen and Meckling1976).

One of the fundamental assumptions of this theoryis that agency costs arise through the separation ofownership and control (Fama and Jensen 1983b).This implies that, whenever managers hold an equitystake in the company, agency costs will be mini-

mized (Ang et al. 2000; Fama and Jensen 1983b;Jensen and Meckling 1976; Schulze et al. 2002).Their personal ownership involvement disincentiv-izes managers from expropriating shareholder wealththrough the consumption of perquisites and misallo-cation of resources (Fama and Jensen 1983a; Schulzeet al. 2002). Consequently, Daily and Dollinger(1992) argue that family businesses require compara-tively lower investments for control mechanisms.However, Schulze et al. (2001) propose that familybusinesses are exposed to different types of agencycosts, stemming primarily from shortcomings withregard to (1) altruistic behavior and (2) managemententrenchment and shareholder expropriation.

Implications of altruism. The concept of altruism isrooted in the theory of the household and has beendescribed by Batson (1990) as a moral value thatmotivates individuals to undertake actions whichbenefit others without any expectation of externalrewards. Taking an economic perspective, the modelof altruism suggests that the utility function ofan individual positively links one’s own welfare tothe welfare of others (Bergstrom 1989). Because ofthis linkage, altruism offers a powerful and self-reinforcing incentive, simultaneously enhancingboth self-regarding (egoistic) and other-regarding(altruistic) preferences (Schulze et al. 2003b).Consequently, parents act generously toward theirchildren not only out of love, but also because thisbehavior maximizes their own utility function andwelfare (Becker 1981). This relationship gives rise toagency complications, because parents might still beincentivized to act generously, though this enablesfree-riding or shirking by the children (Kets de Vries1993; Schulze et al. 2003b).

Applying these findings to family businesses,altruism is considered to be beneficial, e.g. bystrengthening of the family bond, creating de factocollective ownership (Berghe and Carchon 2003;Lubatkin et al. 2005; Stark and Falk 1998; Zahra2003) or reducing information asymmetry throughincreased communication (Berghe and Carchon2003). Some scholars even suggest that altruism isa source of competitive advantage (Carney 2005;Chami 2001).

Recently, Lubatkin et al. (2007a) have argued thatthe prevailing assessment so far overlooks the directeffects of psychosocial altruism. While family-oriented altruism refers to generous transfers of(economic) goods according to the agent’s wants,psychosocial altruism refers to these transfers ‘in

8Rutherford et al. (2008) argue that F-PEC adequately cap-tures the involvement, but not whether this involvement isactually transferred into essence.



terms of how parents contribute to their children’spsychological and social development’ (Lubatkinet al. 2007a, p. 1026). Apart from love and security,those transfers include ethical clarity, socializationand self-esteem and help to create a socially accept-able familial context in the household and firm. Theimplicit incentives (e.g. information access, adapta-tion, economic rent) in those transfers might ulti-mately help to engender governance efficiencies byoffsetting countervailing incentives to free-ride andshirk (Lubatkin et al. 2007a). As such, the authorspresume that the social context of a family firm playsan important role in explaining the attitudes, behav-iors and interests of the protagonists. Still, whenanalyzing the different aspects of the principal’saltruism, Lubatkin et al. (2007a) make the assump-tion that the family-agents (i.e. children) act out ofself-interest and behave opportunistically, disregard-ing the existence of reciprocal altruism. In fact,Eaton et al. (2002) deduce from their economicmodeling that in cases of reciprocal and symmetricalaltruism, agency costs can be mitigated and theresulting lower reservation prices can be a compe-titive advantage. Although there is no empiricalevidence, Kellermanns and Eddleston (2004, 2007)point in the same direction and propose that a highdegree of altruism inhibits dysfunctional relationshipconflicts and facilitates participative strategy formu-lation processes, improving overall performance.Also, Karra et al. (2006) show in their case study thatreciprocal altruism can lead to a convergence ofinterests and thus to reduced agency costs.

Nevertheless, there is also a dark side of altruism(Schulze et al. 2003b). Literature deduces that, insituations in which owner-managers have discretecontrol over the resources of a firm, altruistic trans-fers (e.g. excessive perquisites) result in a variety ofagency problems (Schulze et al. 2003b). In this vein,the problem of self-control (Thaler and Shefrin1981) describes the intra-personal moral hazard ofthe owner-manager. The concept is based on a multi-self model of man, which describes internal conflictsbetween a ‘farsighted planner’, being concernedwith long-term welfare maximization, and a ‘myopicdoer’, favoring short-term satisfaction. Conse-quently, instead of consistently following strategiesto maximize long-term welfare, an owner-managermay lose self-control and favor short-term satisfac-tion. Within family firms, the non-economic motiveof parental altruism may cause owner-managers tomake decisions that favor their employed children,but potentially harm the business (Schulze et al.

2001, 2003b). Examples include hiring family agentsbecause of their ascribed, rather than their achieved,status or their qualifications, or setting up individualdepartments for each child (Schulze et al. 2001).The former effect has been further conceptualizedby Hendry (2002), introducing the term of ‘honestincompetence’.

Furthermore, the personal relationship toward thefamily agents may compromise the principal’sability to realistically assess and monitor their per-formance. Even in cases of detected inappropriatebehavior, it is likely that the principals will avoiddisciplinary actions, fearing the social repercussionsthat such actions might have on their family relations(Klein 2004; Schulze et al. 2003b). This lack ofmonitoring and control can, in turn, encouragefamily agents to engage in hazardous activities suchas shirking and free-riding (Chua et al. 2009). Themore altruistic the principal, the more likely theopportunistic behavior of agents and the probabilitythat family businesses incur agency costs to curbunproductive behavior (Ling et al. 2002).9 In thiscontext Lubatkin et al. (2007b), drawing on justice-based theory, suggest that the adverse effects ofaltruism can be mitigated by stronger self-controlof the principal, thereby reducing perceived injusticeby the agents. However, they do not provide a frame-work for motivating principals to show such behav-ior. Moreover, empirical evidence in support of thisgenuine parental altruism model has been scarce.

In summary, literature empirically shows that,under the assumption of (asymmetric) altruism andopportunistic behavior, family firms are exposed toagency costs (Chrisman et al. 2004; Schulze et al.2001, 2003b). Chrisman et al. (2004, 2005) supportthis assessment by showing that family firms benefiteven more from agency cost control mechanismsthan their counterparts. Still, findings concerning thedegree of exposure are conflicting. While the pureagency protagonists clearly understate the impact ofaltruism, the view of Schulze et al. (2001, 2003a,b)seems to be too pessimistic, especially given the factthat family firms manage to maintain a dominatingrole in our economies. In this light, the recent workof Lubatkin et al. (2005, 2007a) contributes a morenuanced perspective by showing that the impact

9Ling et al. (2002) argue that this holds true only if theprincipal prefers short-term utilities. In contrast, if he preferslong-term utilities, he would show stronger commitmenttoward control mechanisms and thereby restrain opportunis-tic behavior of family agents.



of altruism is contingent on the level of self-controlof the principal and is additionally affected by thecultural and societal background of the firm. Accord-ingly, agency costs will vary among family firms.

Management entrenchment and shareholder expro-priation. Agency problems might occur verticallybetween owners and managers (‘agency problem I’),as well as horizontally among owners/shareholders(‘agency problem II’) of family firms (cf. Villalongaand Amit 2006). Scholars refer to managemententrenchment as situations in which executives try toensure self-preservation by neutralizing internalcontrol mechanisms for example by hiding negativeattributes or embarking on strategies tailored tofit their idiosyncratic skill set rather than marketor competitive requirements (Goméz-Mejía et al.2001). In more general terms, agency problem IIcorresponds to management entrenchment, thisbeing the ability of (owning) managers to extractprivate benefits from (other) owners (Chrisman et al.2005). Villalonga and Amit (2006) suggest that,in situations in which the major shareholder is anindividual or a family, there will be a greater incen-tive for both the monitoring of the manager and theexpropriation of minority shareholders, which canresult in agency problem II superimposing agencyproblem I. Thus, entrenchment problems are causedby the shareholder/ownership structure and canoccur between owning managers and (minority)shareholders, while the (minority) shareholders canbe either members of the family or external.

Entrenchment within the family: Empirical studiesshow that, with increasing size and ensuing gener-ations, the circle of family shareholders becomesmore and more dispersed, thereby lowering theorganizational commitment of the individual share-holder (Hack 2009; Schulze et al. 2003a; Vilaseca2002). With regard to Germany, Jaskiewicz et al.(2006) report that 55% of their sample of familybusinesses had more than 10 shareholders. Theseshareholders take on different roles and responsibili-ties within the firm. While some actively participatein the governance of the firm, others may takea passive role. Since families are heterogeneous,with members having different interests and goals(Sharma et al. 1997), such configurations might leadto conflicting interests and result in entrenchment ofowner-managers, who use their ownership stake toassert their interests, compromising the interestsof the remaining shareholders. First, owners mightdisagree about the strategic direction of the firm or

squabble about roles and ranks within the firm(Degadt 2003). Second, moral hazards might occurdue to diverging risk- and time-preferences of activeor passive shareholders (Morck et al. 1988; Walshand Stewart 1990; Witt 2008). Furthermore, whilepassive shareholders could prefer high dividendpayouts, active shareholders might rather retainprofits and use them for investments (May 2004).Empirical studies on this topic are rare. Nevertheless,if not addressed, entrenchment and associated con-flicts will have detrimental effects on the firm’sperformance (Eddleston and Kellermanns 2007;Kellermanns and Eddleston 2007). Consequently, toachieve mitigation, adequate incentive systems andalignment of governance structures are necessary.Some scholars suggest using long-term relationalcontracts (Goméz-Mejía et al. 2001), while othersadduce participation of passive family members incontrolling boards (Ang et al. 2000), or implementa-tion of family (shareholder) councils (Witt 2008).

Entrenchment with external minority share-holders: Conflict of interest and ownership entrench-ment might also occur between owners and externalminority shareholders. In fact, Morck et al. (1988)show empirically that management entrenchmentdecreases firm value. Their findings suggest that withincreasing ownership, firm value also increases atfirst, but then starts to decrease beyond a certainthreshold. Based on this result, they reason thatmanagement entrenchment and associated agencycosts arise once a certain ownership threshold ispassed. Claessens et al. (2002) find similar coher-ences, and other scholars confirm their findings(Kowalewski et al. 2010; Oswald et al. 2009;Villalonga and Amit 2006). While some scholars(Goméz-Mejía et al. 2001; Shleifer and Vishny1997) reason that increased managerial ownershipdecreases the efficiency of corporate governancemechanisms, Gallo and Vilaseca (1998) propose thathaving a family chief financial officer influencing thefirm’s strategy leads to inferior performance. More-over, since external minority shareholders are notmembers of the family, the problem of altruism sur-faces once more. Examples include the adherenceto inefficient managers (Hillier and McColgan 2009;Le Breton-Miller and Miller 2009; Morck et al.1988), problems during the enforcement of relationalcontracts (Schulze et al. 2003b) or economic takingof advantage (Faccio et al. 2001; Hack 2009).

If entrenchment occurs in conjunction withpyramidal ownership structures or if ownershiprights exceed cash-flow rights, this problem can



become more severe (Chrisman et al. 2005; Morckand Yeung 2003; Villalonga and Amit 2009) andowner-managers might engage in an adverse activitytermed ‘tunneling’ (Claessens et al. 2000; Johnsonet al. 2000). In tunneling, transfer prices above orbelow market value are used to relocate revenues orcosts between different subsidiaries and finally toenhance the result of the entities in which the familyhas the highest cash-flow rights.

Still, the assessment of entrenchment is notentirely one-sided. While Kowalewski et al. (2010)find a significant positive impact of family CEOs onperformance. Randoy and Goel (2003) show thatfounding family firms generally benefit from a highlevel of family ownership. However, they assumefamily firms to be low-agency cost environments.Furthermore, literature on entrenchment focusesprimarily on performance expressed in economicterms, neglecting possible non-economic goals offamily firms. An integration of this aspect wouldhelp to improve understanding of this phenomenon.

Stewardship theory. Embracing the concept ofaltruism and developing it further, Davis et al. (1997)relax the assumption that agents behave opportunis-tically and propose the application of stewardshiptheory (ST). Stewardship theory is rooted in thefields of sociology and psychology and was origi-nally developed to investigate situations in whichexecutives (i.e. agents) are motivated to act in thebest interest of their principals (Donaldson and Davis1991). The theory states that the agents (‘stewards’)behave socially, in a self-actualizing manner andwith an attitude postulating psychological ownership(Pierce et al. 2001). This socio-emotional involve-ment of family and firm serves the collective good oftheir firm (Gomez-Mejia et al. 2007).

The stewards’ opportunity set is constrained bythe perception that the utility they can gain frompro-organizational behavior is larger than the utilityfrom self-oriented behavior (Davis et al. 1997),aligning their interests with the interest of the prin-cipal. According to Miller et al. (2008), stewardshipcould take three common forms in the context offamily businesses, these being continuity, commu-nity and connection. Continuity refers to the inten-tion to ensure the longevity of the firms, which in thelong run benefits various family members (Gomez-Mejia et al. 2007). The aspiration of continuityinduces community, or the creation of a collectivecorporate culture populated by competent and moti-vated staff (Arregle et al. 2007; Guzzo and Abbott

1990; Miller and Le Breton-Miller 2006), and con-nection, being the result of strong relationships withexternal stakeholders that might assist in sustainingthe business in times of economic struggle (Goméz-Mejía et al. 2001; Miller and Le Breton-Miller2006).

Nevertheless, the literature is discordant as towhether family agents behave as agents or stewards(Chrisman et al. 2007b; Nicholsen and Kiel 2007).Some studies suggest that the firm culture and goal-set of the owning family are the primary sources ofinfluence, determining the behavior of owners andmanagers (Corbetta and Salvato 2004a; Eddlestonand Kellermanns 2007; Lubatkin 2007). In fact,Corbetta and Salvato (2004a) suggest that extrinsicfinancial motivation promotes agency, and intrinsicnon-financial motivation promotes stewardshipbehavior, and find that a stewardship philosophy iscommon among family firms. Contrasting thisfinding, Chrisman et al. (2007a) show empiricallythat family businesses behave as ‘agent-principals’,using monitoring mechanisms and incentive com-pensation to control the behavior of their familyagents. Furthermore, even under the assumptionof reciprocal altruism, Karra et al. (2006) see limi-tations of the stewardship concept, warning that, withincreasing size, age, lifecycle and shareholder com-position of the organization (Habbershon 2006; Hack2009) or during succession (Blanco-Mazagatoset al. 2007), altruism itself might create new agencyproblems. Furthermore, building on their prior work(Le Breton-Miller and Miller 2009; Miller andLe Breton-Miller 2006), Le Breton-Miller et al.(forthcoming) recently investigated the contingencyfactors that make owners and managers behave inmore agent-like or steward-like ways. They suggestthat both views have application, but are moderatedby the degree of embeddedness of the firm and itstop executives in the family. The stronger the directfamily influence as a function of the number offamily directors, officers, generations or votes, themore likely is an agency setting and vice versa.

Resource-based view. While PAT and ST focusprimarily on transaction costs associated with thegovernance and performance of a firm, the resource-based view (RBV) assumes that returns achieved byfirms are largely attributable to their resources(Penrose 1959). The RBV holds that the source ofsustainable competitive advantages is grounded inthe availability of idiosyncratic, strategic resourcesthat fulfill the cumulative attributes of being



valuable, rare, imperfectly imitable and non-substitutable (Barney 1991; Teece et al. 1997).

The literature suggests that family businessesdispose of a unique bundle of resources that arerelated to the interaction of family and business(Eddleston et al. 2008a; Habbershon and Williams1999; Habbershon et al. 2003). These uniqueresources are referred to as the ‘familiness’ of afirm (Cabrera-Suarez et al. 2001; Habbershon andWilliams 1999; Pearson et al. 2008). Yet, theseresources will result in competitive advantages andsuperior firm performance only if managed purpose-fully and efficiently (Hitt et al. 2001; Sirmon andHitt 2003). Sirmon and Hitt (2003) arguably offerone of the most comprehensive applications of theRBV to the family business domain. They distin-guish between four discrete resources of familyfirm capital and one unique attribute: human cap-ital, patient capital, social capital and survivabilitycapital, combined with the governance structureattribute.

Human capital, being one of the most importantresources, is the acquired knowledge, skills andcapabilities of a person to perform unique and novelactions (Coleman 1988). Researchers suggest thatfamily members have a positive impact on the humancapital base (Sirmon and Hitt 2003). Their concur-rent association with the business and family dimen-sion results in in-depth knowledge of the business,loyal behavior, strong motivation and a strategiclong-term perspective (Lansberg 1999; Miller and LeBreton-Miller 2005). Furthermore, some researcherssuggest that work relationships between familymembers and external managers are characterizedby a high level of trust (Davis 1983), flexible workenvironments (Arregle et al. 2007), higher levels ofresponsibility and extensive training for employees(Reid and Harris 2002), thereby compensating forpotential pecuniary disadvantages and resulting inlower levels of fluctuation (Miller et al. 2008). Still,while it seems convincing that family agents haveadvantages concerning firm-specific knowledge(e.g. internal processes), they may at the same timelack outside work experience and general businessknowledge (e.g. university training) (cf. Bammenset al. 2010). Consequently, Dunn (1995) points outthat employee selection based on family affiliationrather than skill set could adversely affect the humancapital base. In addition, Covin (1994) argues thatlimited promotion possibilities, limitations in wealthtransfers (e.g. no stock options) or perceived lack ofprofessionalism make it hard for family firms to

attract and retain highly qualified external manage-ment. In this context, Sirmon and Hitt (2003) alsonote that altruism might make it difficult for familyfirms to shed resources, especially human capital,causing negative performance implications, e.g. ifnon-performers are not replaced. However, recentstudies suggest that this inertia in shedding resourcesis affected by family psychodynamics, family struc-ture, culture and the communities in which theyreside, and can show positive as well as negativevalues (Kellermanns 2005; Sharma and Manikutty2005).

Moreover, many family firms follow long-terminvestment strategies, as they feel the desire to per-petuate their business and to pass it on to futuregenerations (Gallo and Vilaseca 1996; McConaughyand Philipps 1999). Consequently, the stability of thebusiness is often chosen as a goal superior to rapidgrowth and risky investment strategies (Harris et al.1994; Tagiuri and Davis 1992). Sirmon and Hitt(2003) refer to this long-term orientation as ‘patientcapital’ and argue that patient capital enables firms topursue more innovative and creative strategies. Whilesome researchers confirm this idea and propose thatlong-term orientation indeed translates into a highercapacity for innovation (Le Breton-Miller and Miller2006; Zahra et al. 2004), a comparison of researchand development (R&D) spending, used as a proxyfor innovation, between family and non-family busi-nesses revealed no significant differences (Milleret al. 2008). In this context, Hack (2009) arguesthat the ability to innovate is not only dependent onR&D spending, but also on the ability to recognizeand absorb new technologies. This ability, in turn,correlates with the knowledge exchange within thecompany, which again is fostered by family involve-ment in the governance of a firm (Zahra et al. 2007).Inferring from these findings, family firms might beable to develop advantages regarding this resource.

Long-term orientation also facilitates access tosocial capital. In particular, connections and (long-term) relationships of family businesses with suppli-ers, external financiers and other stakeholders help tobuild unique resource configurations10 (Aldrich andCliff 2003; Carney 2005; Das and Teng 1998;Haynes et al. 1999). According to Carney (2005),the long-term perspective of family firms makes iteasier to establish and maintain fruitful stakeholderrelationships. Indeed, Miller et al. (2008) show

10Hoffman et al. (2006) also mention family capital, derivedfrom family relationships.



empirically that family firms favor more personalsales approaches and invest comparatively more instakeholder relationships than do non-family firms.Consequently, researchers assume that family firmscan achieve a competitive advantage over non-familyfirms with regard to the accumulation of socialcapital and customer orientation (Aldrich and Cliff2003; Miller and Le Breton-Miller 2006). Nonethe-less, the study of network relationships of familybusinesses comes to inconsistent results. While somescholars proclaim that family firms show less activityin the build-up and maintenance of network relation-ships (Donckels 1991; Graves and Thomas 2004),others find no significant differences (Jorissen et al.2005). Still, the quality of the network and the fre-quency of contacts seem to be higher in family firms.

Finally, the integration of the described resourcesis termed ‘survivability’ capital and refers to thepooled personal resources that family members arewilling to contribute, share or loan for the benefit ofthe firm (Haynes et al. 1999; Horton 1986; Sirmonand Hitt 2003). These resources can take the formof free labor, loaned labor, equity investments ormonetary loans. The authors argue that survivabilitycapital is available as a result of the family manager’sduality in family and business relationships andthe corresponding commitment to the business. Forexample, in times of economic crisis the cost oflosing equity value of the firm might be higher to thefamily manager than providing his or her ownresources (e.g. labor) free of charge. Correspond-ingly, family businesses might be able to derive com-petitive advantages from this setup. However, Dyer(2006) challenges this view and notes that familyfirms are also known for withdrawing assets from thebusiness, thereby undermining the firm’s stability.

The RBV provides valuable insights into howresource configurations of family firms differ fromthose of non-family firms and how the deploymentof family-firm-specific resources can lead to com-petitive advantages. Furthermore, it offers someexplanations of how these resources can be acquired,managed and preserved. But empirical evidence isstill scarce and the RBV has addressed only someof the areas that might impact the value creation ofthe family firm. In addition, contingency factorsmotivating individuals to share their resources havenot been investigated, leaving questions for furtherresearch to answer.

Other theories. Apart from the three prevalenttheories, a few other theoretical frameworks have

been used in the context of family business. WhilePAT, ST and the RBV deal with the group or organ-izational level of analysis, most other frameworksfocus on the individual level (Sharma 2004). Oneexample is Kelly et al. (2000), who, using socialnetwork theory, developed a concept of foundercentrality and proposed that high levels of foundercentrality lead to alignment of perceptions, betterfirm performance along founder-relevant successdimensions and a stronger founder influence after hisor her tenure. Furthermore, Sharma et al. (2003) usesocial psychology literature and apply the theory ofplanned behavior, showing that the presence of awilling successor is the beginning of a structuredsuccession planning process. Finally, Sharma andIrving (2005) apply organizational commitmenttheory to show that differing reasons of next-generation family members for choosing a careerin the family firm translate into different behavioraland performance outcomes. Overall, these examplesshow that a significant amount of research on familybusiness deals with individual-level topics and is stillin a theory development stage. This is arguably thereason why none of these approaches has gained thewidespread attention and acceptance of the othertheories reviewed above.

Zellweger and Nason (2008) recently made firstefforts to apply stakeholder theory (Freeman 1984)to the realm of the family firm. They argue that, incomparison with public companies, family firmshave an important additional stakeholder group, thefamily. This group has a unique goal-set includingnon-economic goals such as family control, harmonyor employment of family members. Given the tightoverlap between the individual, the firm and thefamily, as well as the role duality of individuals infamily firms, they propose that these organizationshave a special incentive to satisfy the needs of mul-tiple stakeholder groups. Based on this reasoning, theauthors developed a typology of four performanceoutcome relationships between stakeholder groups,concluding that active management of these outcomerelationships can ultimately increase the organ-izational effectiveness of family firms.

Corporate governance in family businesses

One main feature distinguishing the family firm frompublic companies is the multiple roles that familymembers play within the family and the firm(Neubauer et al. 1998; Tagiuri and Davis 1996). Thisrole-diversity combined with the entanglement of



ownership and control affects the corporate govern-ance structures and leads to distinct and specificrequirements compared with their non-family coun-terparts (Bartholomeusz and Tanewski 2006; Carney2005; Mustakallio et al. 2002; Witt 2008;). Besidethe supervision and control of management, familybusinesses need to establish governance structuresthat enhance cohesion and shared visions withinthe family, while at the same time reducing harmfulconflicts (Mustakallio et al. 2002). Correspondingly,the consideration of the family dimension (i.e. familygovernance) is an integral part of the governancestructure of family firms (Klein 2009).

Following a systems approach (Donnelley 1964),the internal governance of a family firm is definedas two interacting subsystems (Gallo and Kenyon-Rouvinez 2005): the business and the family govern-ance system (Aronoff and Ward 1996). The businessgovernance subsystem is defined as the organizationof administration and control of the business andconsists of the top-management team (TMT), boardof directors11 and shareholders’ meeting (cf. Galloand Kenyon-Rouvinez 2005; Neubauer et al. 1998).While the primary task of the TMT is the strategicmanagement of the company, the board of directorssupervises the company and TMT.

The family governance subsystem is defined tosecure and organize the cohesion within the family(Gallo and Kenyon-Rouvinez 2005; Gersick et al.1997; Mustakallio et al. 2002; Suaré and Santana-Martin 2004) and consists of a family council andthe shareholders’ meeting12 (Gallo and Kenyon-Rouvinez 2005; Neubauer et al. 1998). The board ofdirectors and the family council, as core elements ofthe governance structure, will be discussed in detailbelow. The overlap of the family and businesssystems indicates the interaction and reciprocalinfluence between them (McCollom 1988), imply-ing that, in contrast to public companies, in whichboth systems are decoupled (Simon 2005), internalgovernance in family firms demands both systems tobe treated pari passu (cf. Koeberle-Schmid 2008a).

Board of directors. The board of directors is one ofthe most important governance elements (Blair2007), aiming to align the interests of managers andshareholders (Voordeckers et al. 2007). The primarytasks of the board are (1) control and (2) advice/service for the TMT (Forbes and Milliken 1999;Heuvel et al. 2006; Zahra and Pearce 1989). Addi-tional tasks might include maintenance of the familyrelationship, strategic participation or networking(Koeberle-Schmid et al. 2009; Lange 2009).

The literature focuses primarily on the impact ofsize (Dalton et al. 1999; Eisenberg et al. 1998;Yermack 1996) and composition (Anderson andReeb 2004; Hermalin and Weisbach 2003) of theboard on corporate performance. However, moststudies concentrate on public companies insteadof family firms and describe the Anglo-Americanone-tier system13 of governance (Dalton et al. 2003,1998). These studies come to diverging results andleave the relationship between board demographicsand performance unclear14 (e.g. Anderson and Reeb2004; Dalton et al. 1998; Oxelheim and Randoy2003). Few empirical studies sample (public andprivate) family firms and mostly deal with thethreat of expropriation by owning-families or non-economic family objectives accentuating the PAT-based control task of the board (cf. Bammens et al.2010). In this context, outside director representa-tion is often used as a proxy for the independenceof the board (Johnson et al. 1996; Pearce and Zahra1992). In particular, the fact that outsiders are notsubject to intercompany or interfamily coercionsand are not bound to the social networks of thefamily enables them to remain independent, anattribute necessary to fulfill the control function(Klein 2005). Although these findings and theresults of other scholars (Navarro and Ansón 2009)suggest that insider-controlled boards are associatedwith entrenchment, in fact family members (i.e.insiders) have a strong incentive to control the TMT(Long et al. 2005; Sundaramurthy and Lewis

11Literature offers a variety of terms, including advisoryboard, supervisory board, board of directors administrativecouncil, etc. However, tasks, competences and compositionsare in most cases quite similar (cf. Koeberle-Schmid 2008a),therefore board of directors or board is used as umbrellaterm in this paper.12Additional aspects of the family governance dimensioninclude family charter, family assembly, family council,family office, etc. (cf. Koeberle-Schmid and Nützel 2003;Neubauer et al. 1998).

13Example for studies describing the two-tier system ofgovernance are Jaskiewicz and Klein (2007) orKoeberle-Schmid et al. (2009).14While, for example, Dalton et al. (1999) suggest a posi-tive relationship between board size and business perform-ance, Yermack (1996) finds a negative relationship betweenboard size and Tobin’s Q. Furthermore, Jensen (1993) sug-gests an inverted U-shaped relationship and argues that,when growing beyond seven or eight people, boards mightbe less effective and can be more easily controlled by theCEO.



2003),15 because often a major part of their wealthis vested in the success of the firm. Indeed, a recentstudy of Nicholsen and Kiel (2007) shows thatfamily shareholders exert stronger control withinthe board when compared with external members.Still, empirical findings suggest that family firmsonly reluctantly install independent board struc-tures, fearing the loss of decision-making discretion(Voordeckers et al. 2007). This reluctance seems toincrease with the relative importance of socio-emotional family goals (Fiegener et al. 2000;Voordeckers et al. 2007). Accordingly, family firmsshow a tendency to assign affiliate directors (e.g.lawyers, consultants, bankers), since their lackof independence facilitates influence from themanagement side (Anderson and Reeb 2004).Results even indicate that outside directors areassigned primarily as a response to pressure fromexternal stakeholders who seek to safeguard theirinvestments (Fiegener et al. 2000). While someresearchers argue that larger board sizes increasethe level of control (Corbetta and Salvato 2004b)and lead to higher accountability, others point outthat larger board sizes also constrict the communi-cation and decision capability of its members anddissolve individual responsibility (Lane et al. 2006;Neubauer et al. 1998). Based on this assessment,Lane et al. (2006) estimate the optimal size to liebetween 7 and 12 members.

The advisory task is another important functionof the board (Heuvel et al. 2006), which is rooted inST and supported by PAT, the RBV and resourcedependence theory. While researchers (Corbettaand Salvato 2004a; Davis et al. 1997) suggest thatcontrol lowers the steward’s motivation to behavepro-organizationally, they underline the board’sopportunity to nurture and support the pro-organizational behavior of stewards by offeringadvice and counsel instead of control. Drawing onPAT and ST, Jaskiewicz and Klein (2007) supportthis view and suggest that the level of goal alignmentbetween owner and managers affects board structureand board size. They infer that high levels of goalalignment (i.e. stewardship settings) lead to a highboard–membership ratio of affiliate members. Thesemembers are considered to be advantageous inproviding advice, owing to their close relation withboth the firm and the family. Furthermore, boardstend to be rather small in such an environment. In

addition, the RBV suggests that affiliate or outsideboard members provide valuable resources in theform of complementary business know-how derivedfrom their personal and professional qualifications(Huse 2005). Following this line, Hillman andDalziel (2003) integrate PAT and the resourcedependence perspective (Pfeffer and Salancik 1978)and argue that, beside their internal, personal exper-tise, affiliate or outside board members also provideaccess to external resources derived from theirnetworks and contacts, enabling them to providemore nuanced advice and thereby positively affectingfirm performance (Arosa et al. 2010; Hoy and Verser1994).

A third board task unique to the family firm is themaintenance of family relationships or, more pre-cisely, the mitigation and resolution of conflicts (cf.Voordeckers et al. 2007). Literature proposes thatoutside board members can contribute by keepingdiscussions focused on objective facts and therebyhelp to achieve consensus (cf. Bammens et al. 2010;Johannisson and Huse 2000; Whisler 1988). Stake-holder theory provides a promising theoreticalframework for this topic (Donaldson and Preston1995). Bammens et al. (2010) suggest that stake-holder theory could complement PAT by replacingthe implicit assumption of goals defined a priori(often economic wealth) with ‘the notion of goalnegotiations in which competing owner preferencesare balanced’ (p. 12). Empirical evidence for this isyet to be collected, indicating a promising directionfor future research.

As for public firms, the empirical results on therelationship between board demographics and per-formance for family firms are mixed. While somescholars find evidence that board independenceincreases performance (Anderson and Reeb 2004),P. Klein et al. (2005) propose the opposite. Theseinconsistent findings might be attributed to incom-plete research designs, which fail to account forprocesses and contextual family factors (Bammenset al. 2010). Moreover, there are several additionalaspects, such as knowledge and heterogeneity,number of meetings, member commitment, collabo-ration, company culture, experience or the type offirm or industry context, that affect the board’sability to fulfill its tasks (Corbetta and Salvato2004b; Minichilli et al. 2009). While a recent studyby Koeberle-Schmid et al. (2009) offers an insightfulassessment of some of these aspects, further researchthat considers these contingencies could prove to bepromising in the future.

15Sundaramurthy and Lewis (2003) refer to external block-holders not explicitly family shareholders.



Family council. The family council is a governanceelement unique to family firms. The representationcan have different forms, but always follows the goalof organizing and structuring the interest of thefamily (i.e. family governance) and managing itsrelationship with the business (Gallo and Kenyon-Rouvinez 2005; Witt 2008).

The family council differs from a family assemblywith regard to its smaller size and its position asan institutional body of the company (Gallo andKenyon-Rouvinez 2005). It provides a forum inwhich all different values, opinions and attitudesvis-à-vis the firm are articulated, consolidatedand afterwards presented to the TMT andthe board (Gersick et al. 1997; Koeberle-Schmid2008a). In this regard, the family council serves as astructured nexus between the family and the businessdimension, aiming to align diverging interests andto counteract decreasing emotional attachment ofshareholders to the firm. Researchers describe themain tasks of the family council as: (1) influencingthe business toward the interests of the family; (2)ensuring cohesion within the family; and (3) perpetu-ating the family ownership across generations(Koeberle-Schmid 2008a; Uhlaner 2006; Zahra andPearce 1989). Still, in order to purposefully exerciseinfluence on the business, a family strategy or familyconstitution needs to be defined (Angus 2005). Thefamily strategy or family constitution defines therules of interaction among family members andbetween family and business (Lange 2010; May2007; Witt 2008). It addresses critical issues suchas the treatment of spouses, the definition of whichmember is entitled to work in the firm, or how divi-dend payments are determined (Baus 2010). Oncethis has been done, literature quotes three ways inwhich influence might be asserted (Koeberle-Schmid2008b). First, the family council could discuss strat-egy and vision, develop goals for the company andpresent them to the TMT and the board. Second, thefamily council could be involved in the selectionof the board of directors (Ward 2004). And third,the family council could influence the decisionover management succession (Gallo and Kenyon-Rouvinez 2005; Lansberg 1999).

Furthermore, in its role as communication andinformation body, the council might help to integrateinactive family members and to reduce informationasymmetry, thereby promoting cohesion amongshareholders (Davis and Herrera 1998). Indeed,Mustakallio et al. (2002) show that the existenceof a family council increases social interaction and

enhances the development of shared visions and theemergence of trust. Following this line of argu-mentation, the council could even be perceived asa source of intellectual and social capital (Sirmonand Hitt 2003). In addition, family councils offer aplatform on which present and emerging conflictscan be discussed and resolved before they affect thebusiness (Gersick et al. 1997; Stöhlker and MüllerTiberini 2005). The organization of informal events,such as family days, celebrations and the like, is agood means to sustain and maintain networksbetween family groups or clans and to recognizepossible conflicts before they escalate (Koeberle-Schmid 2008b).

Moreover, for the perpetuation of family owner-ship, family councils should agree on clear andbinding ownership transfer rules, supervise the trans-fer of ownership and define who should be acceptedas shareholders (Gallo and Kenyon-Rouvinez 2005;Lansberg 1999; Ward 2004). These agreementsshould also define the terms for possible shareholderexits, methodologies for the valuation of shares, andrights and duties of shareholders (Redlefsen 2006).Indeed, Redlefsen (2004) shows that family councilshelp to mitigate the frequency and negative repercus-sions of shareholder exits. Whether a family councilis also capable of reducing other conflicts remainsunclear, and also the demographics of family coun-cils have been paid hardly any attention in the litera-ture. Neubauer et al. (1998) investigated the optimalsize of a council and suggest a size of 30–40 people,depending on the size of family and business. Stillother attributes such as members, voting modes, fre-quency of meetings or position of the family councilrelative to the shareholders’ meeting have not beencovered in the literature to date (cf. Witt 2008).

Overall, not much research has been done onfamily councils to date (cf. Klein 2008), and fewempirical studies exist (e.g. Koeberle-Schmid2008b). Moreover, despite the apparent advantages,family councils are not widespread (e.g. for thecase of Germany: Eisenmann-Mittenzwei 2006;PricewaterhouseCoopers 2006; Redlefsen 2004).Apparently, it is not only the research communitythat has left questions unanswered regarding conflictsolving instruments and demographics of familycouncils, but family firms themselves should startpaying more attention to family councils and familygovernance in general.

In summary, the category of family businessesis characterized by a high degree of heterogeneity.The literature identifies four generic types, termed



controlling owner, sibling partnership, cousin con-sortium and public family firm (Gersick et al. 1997).Accordingly, there seem to be several adequate con-figurations of corporate governance, depending onthe individual situational context, ownership con-figuration (Chen 2010), generational life-cycle (Bet-termann 2009), complexity of the firm (Klein 2009)and the corresponding governance tasks that shouldbe fulfilled (Jaskiewicz and Klein 2007; Klein 2008).

Summary and discussion

The review has shown that three major theoreticalframeworks, namely PAT, ST and the RBV, dominatethe theory-directed discussion about the specificitiesof family firms and family firm governance.

Principal–agent theory has found broad applica-tion in the domain of family business and corporategovernance. The introduction of altruism as a mod-erating variable and the concept of entrenchmentprovide valuable insights, helping to understandfamily-firm-specific agency problems (Chrismanet al. 2005). Nonetheless, the literature is discordanton the question of whether family firms are exposedto higher or lower levels of agency costs than arenon-family firms. These contradicting results can beattributed to neglect of the heterogeneity amongfamily firms themselves (Westhead and Howorth2007) or insufficient theoretical grounding, morethan to methodological shortcomings. Indeed, somescholars apply very sophisticated econometricresearch models, using multivariate regressions (e.g.Anderson and Reeb 2003; Daily and Thompson1994; Miller et al. 2007; Villalonga and Amit 2006)combined with hierarchical linear modeling (Eddle-ston et al. 2008b), agglomerative hierarchical quickcluster analysis (Westhead and Howorth 2007),structural equation modeling (Mustakallio et al.2002) or meta-analyses (Dalton et al. 1999). Whilethese studies build on existing theory and focus pri-marily on testing available propositions concerningthe performance implications of different variables,other studies concentrate on the development of newtheory and the derivation of propositions using casestudy research (e.g. Karra et al. 2006; Mertens 2009)or theoretic modeling (e.g. Corbetta and Salvato2004b; Sirmon and Hitt 2003).

Furthermore, there are few implications derivedfrom the distribution of ownership within the familyin the literature. For example, agency problems stem-ming from antidromic effects of altruism and moral

hazard in family firms with active and non-activefamily shareholders have not been fully understood(Hack 2009). Also, performance implications ofnon-active shareholders (Jaskiewicz et al. 2006) orempirical studies on the goals and potential conflictsbetween these two groups are scarce. Notable excep-tions are the studies of Oetker (1999), who addressesstakeholder conflicts in family firms, and of Eddles-ton et al. (2008b), who investigate how generationalownership dispersion moderates the relationshipbetween participative decision-making and conflict.Also, Terberger (1998), using case studies, providesa process-oriented model toward general conflictmanagement.

Nevertheless, some scholars have started to chal-lenge the explanatory power of entirely PAT-basedassessments (Corbetta and Salvato 2004a; Jaskie-wicz and Klein 2007; Klein 2008, 2009). They arguethat the PAT-implicit assumption of an (economic)goal set defined a priori is problematic, since familyfirms might be characterized by more complex goalsystems that include value and utility derived fromnon-economic objectives and socio-emotionalreturns besides economic incentives (Astrachan andJaskiewicz 2008; Zellweger and Astrachan 2008).Furthermore, PAT assumes a low degree of goalalignment between principal and agent (Jaskiewiczand Klein 2007) a priori and, in addition, falls shortof accounting for the behavioral learning effectderived from repeated social interaction. Conse-quently, the emergence of trust between the protago-nists, which affects individual behavior, is excludedfrom the analysis. Accordingly, PAT accentuates thecontrol task of the board of directors (e.g. Heuvelet al. 2006) and predicts large boards consisting to ahigh degree of external directors.

In this context, the introduction of ST removesthe homo economicus assumption implicit in PAT(Corbetta and Salvato 2004a) and proposes the ideaof a self-actualizing man (Agyris 1964). In contrastto PAT, ST assumes a high degree of goal alignment(Jaskiewicz and Klein 2007) between principal andagent, and accounts for the learning effect derivedfrom repeated social interaction. As a result, trust isone of the most important factors promoting a stew-ardship environment and is in fact vital to enableopen advice interactions, which is the prescribed taskof the board within the stewardship framework. Sinceaffiliate relationships are often cited as a basis for thedevelopment of interpersonal trust (Jaskiewicz andKlein 2007), ST predicts affiliate board membersrather than external directors and smaller board



sizes. Still, it is unclear whether stewards behavealtruistically only within the classical principal–agent relationship or also towards other non-activeshareholders or even toward external stakeholders(Hack 2009). Overall, Lee and O’Neill (2003) and,earlier, Donaldson and Davis (1991) point out thatPAT and ST should be seen as complementing ratherthan competing perspectives, each of them pertain-ing to certain situations and circumstances.

The RBV takes a different perspective, sharingmost implicit assumptions such as high levels of goalalignment and trust, consideration of repeated socialinteraction and the advisory task of the board withST. However, the RBV complements both PAT andST by considering the heterogeneity of firms andtheir resources (Barney 1991). For example, PAT/STmake the simplifying assumption that the board’sability to perform assigned control or advisory tasksis constant (Hillman and Dalziel 2003). However, asshown by the RBV, this ability varies and depends onthe skills and capabilities of the board members. Incontrast, the RBV does not consider incentiveschemes motivating individuals to share their skillsand resources (cf. Bammens et al. 2010). Hillmanand Dalziel (2003) contributed first insights onhow the impact of advice is moderated by boardincentives. An expansion of their approach to otherstakeholder groups would help to integrate thesetheoretical perspectives further.

Lastly, research efforts focusing on the individuallevel of analysis ultimately help to complementappreciation of family-firm dynamics. The applica-tion of social network theory (Kelly et al. 2000),theory of planned behavior (Sharma et al. 2003) andorganizational commitment theory (Sharma andIrving 2005) has already yielded valuable results,and we encourage scholars to continue following thispath. Furthermore, stakeholder theory (Freeman1984) and the idea of considering the family as anadditional stakeholder group (Zellweger and Nason2008) is a fresh theoretical perspective. A combina-tion of stakeholder theory with PAT or the RBVoffers promising insights, e.g. regarding conflictresolution possibilities in family firms.

While the discussion of the business dimensionof corporate governance has been centered on boarddemographics (Voordeckers et al. 2007) and theassociated impact on performance, family (share-holder) councils (i.e. family governance) have beenidentified as a useful means of reconciling conflict-ing goals within families (Fabis 2009; Redlefsen2004; Witt 2008). As shown by the present review,

scholarly attention toward family councils has beenscarce to date, and empirical studies as well asdeveloped theory are rare, leaving an obvious gapin research (Klein 2008; Witt 2008). The combina-tion of family system/household theories withprominent management theories offers a promisingtrack for future research. Moreover, the reorganiza-tion of ownership rights or simplification of share-holder structures (e.g. via buy-outs) (Lambrechtand Lievens 2008) or organizational structures(Watermann 1999) could be another potential wayof reducing the impact of family conflicts onperformance.

In summary, research on corporate governancemostly draws on PAT as a theoretical framework(Klein 2008; Lubatkin 2007; Zahra 2007). Still, asdiscussed above, PAT is not without limitations,resulting in the call of scholars to also apply combi-nations of theories (Daily et al. 2003; Huse 2005) tothe realm of corporate governance. Although a chal-lenging task (Okhuysen and Bonardi 2011), usingcombined approaches promises much fruitful futureresearch.

Limitations and future research

The present review is not without limitations. First,we retrieved the initial sample (step 5) by reviewingpapers published in only four academic journalsand the results of the Econis search engine of theZBW (including books and dissertations). The use ofadditional search engines might have yielded addi-tional or different results. Second, in order to achieveexhaustive results, we applied broad, but few,keyword combinations. Again, additional iterationsusing different keyword combinations might haveprovided additional or different results. Conse-quently, as in every review, we cannot rule out thatsome publications might have been omitted.However, we are confident that, by including publi-cations identified during the analysis of the bibliog-raphies of the initially retrieved publications, wewere able to obtain a comprehensive sample reflect-ing the current state of research.

Overall, the field of family business research iswell developed in its current state. Still, the reviewhas shown that a number of issues are yet to beresolved. The relationship between the board andperformance is one example for which hypothesesare readily available, and deductive research strate-gies and further statistical testing are likely to



improve understanding. In contrast, other theoreticalissues such as the relationship between active andnon-active shareholders have long been overlookedand excluded from the corporate governance discus-sion (Jaskiewicz et al. 2006). Consequently, little isknown about roles and potential goal conflictsbetween family shareholders. Yet, a better under-standing of the theoretical foundation of the natureand reasons for these conflicts is of utmost impor-tance, as such conflicts are serious threats to theperformance and continuity of the affected firm(Eddleston and Kellermanns 2007; Harvey andEvans 1994; Hennerkes 2004; Levinson 1971;Schlippe 2009). Only if the goals and intentions ofshareholder or stakeholder groups are understood,does alignment of corporate governance becomepossible. Consequently, potential research questionscould be: (1) Why and how do tasks and roles ofactive and non-active shareholders in family firmsdiffer? (2) Why and under which circumstances (i.e.dispersion of ownership) do conflicts between activeand non-active shareholders arise? (3) How can theseconflicts be moderated and mitigated through theconfiguration of governance structures (e.g. familycouncils, organizational restructuring)? In thiscontext, theory lacks testable hypotheses and callsfor research strategies that exhaust the completepotential of empirical data in order to develop newpropositions (Creswell 2003; Creswell and Clark2007). In such situations, Miles and Huberman(1994) and Lee (1999), among others, suggest apply-ing explorative empirical research strategies, andEisenhardt (1989b) or Yin (2001), for example, pro-poses case studies as a suitable methodology tooperationalize such a strategy. Consequently, futureresearch should follow both deductive and inductiveresearch strategies and continue to feed the cycleof proposition development and testing, ultimatelyhelping to develop a comprehensive theory of thefamily firm.

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AppendixRank Journal No. of articles % of sample Cumulative %

1 Family Business Review 50 25.9 25.92 Entrepreneurship Theory & Practice 24 12.4 38.33 Academy of Management Review 11 5.7 44.04 Journal of Financial Economics 7 3.6 47.75 Journal of Finance 6 3.1 50.86 Journal of Business Venturing 6 3.1 53.97 Journal of Business Research 6 3.1 57.08 Journal of Small Business Management 5 2.6 59.69 Journal of Management Studies 5 2.6 62.2

10 Academy of Management Journal 5 2.6 64.811 Zeitschrift für Betriebswirtschaft 5 2.6 67.412 Corporate Governance: An international Review 5 2.6 69.913 Journal of Management 4 2.1 72.014 American Economic Review 4 2.1 74.115 Entrepreneurship & Regional Development 4 2.1 76.216 ZfKE 3 1.6 77.717 Journal of Organizational Behavior 3 1.6 79.318 Administrative Science Quarterly 2 1.0 80.319 Strategic Management Journal 2 1.0 81.320 Organizational Dynamics 2 1.0 82.421 Harvard Business Review 2 1.0 83.422 Journal of Law and Economics 2 1.0 84.523 Journal of Management & Organization 2 1.0 85.524 Journal of Political Economy 2 1.0 86.525 Quarterly Journal of Economics 1 0.5 87.026 Journal of Corporate Finance 1 0.5 87.627 Journal of Wealth Management 1 0.5 88.128 American Psychologist 1 0.5 88.629 Corporate Governance 1 0.5 89.130 IMF-Working Paper 1 0.5 89.631 American Journal of Sociology 1 0.5 90.232 Journal of Enterprising Culture 1 0.5 90.733 Australian Journal of Management 1 0.5 91.234 International Journal of Globalization and Small Business 1 0.5 91.735 Economic Policy Review 1 0.5 92.236 Journal of Family Business Strategy 1 0.5 92.737 Bell Journal of Economics 1 0.5 93.338 Management Review 1 0.5 93.839 British Journal of Management 1 0.5 94.340 Zeitschrift für KMU und Entrepreneurship 1 0.5 94.841 Zeitschrift für Corporate Governance 1 0.5 95.342 International Journal of Entrepreneurship and Small Business 1 0.5 95.943 International Journal of Management Reviews 1 0.5 96.444 Journal of Banking and Finance 1 0.5 94.945 Education and Training 1 0.5 97.446 Managerial and Decision Economics 1 0.5 97.947 Organizational Science 1 0.5 98.448 I0 New Management 1 0.5 99.049 International Journal of Entrepreneurial Behavior & Research 1 0.5 99.550 Review of Financial Studies 1 0.5 100.0

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A Review of Theory in Family Business Research- The Implications for Corporate Governance

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