How Family Firms Differ

Structure, Strategy, Governance and Performance

S. Bhaumik, R. Dimova

• Publisher: Palgrave Macmillan
• Year: 2014
• Print ISBN:
  9780230347441
• eBook ISBN:
  9781137473585
• Topic: Business
• Subtopic: Business Strategy
• Index: Business

Family firms account for a large proportion of firms in most countries. In industrialised countries of North America and Western Europe, they generally account for a large share of small and medium sized enterprises. In emerging market economies such as India, they also account for the majority of the large firms. Their importance for factors such as employment creation notwithstanding, relative to the widely held Anglo-Saxon firms, which are ubiquitous in the economics, finance and management literatures, family firms have historically received much less attention from scholars of these disciplines. However, in part owing to increased focus on emerging markets, there is a growing literature on family firms. In How Family Firms Differ, the authors explore important aspects of family firms, drawing on the existing literature and their own research on these firms.

1

Family Firms

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).

Despite the significant presence of family-controlled firms among the Fortune 500 companies – a third of those companies are family-controlled – most family firms are small. As highlighted in Table 1.1, nearly three-quarters of all family firms in the UK have zero employees and about 95 per cent of family firms have fewer than ten employees. Not surprisingly, these smaller firms account for a far smaller share of turnover. Family firms with zero employees account for about 15 per cent of turnover while all family firms with fewer than ten employees account for about 40 per cent of turnover. The importance of family firms, however, stems from their impact on employment. Small family firms with fewer than ten employees account for over 50 per cent of employment, which makes them very important from a policy perspective.

Figure 1.1 Percentage share of family firms

Source: Author generated using Table 4.3 of The UK Family Business Sector, Institute for Family Business, November 2011, p. 14.

Notes: The overall share of (2,959,346) family businesses in (4,484,540) private sector firms is 66 per cent.

Table 1.1 Importance of family firms

Their economic importance is further enhanced by the finding that in the aftermath of the financial crisis, nearly two-thirds of family firms are experiencing growth while about 80 per cent of them anticipate steady or aggressive growth in the foreseeable future (PricewaterhouseCoopers, 2012).

From a conceptual point of view, the importance of family firms is quite different. Most firms are small at their inception and nominally most start-up firms are family firms in the sense that they are controlled and managed by a sole proprietor who is, by definition, also the sole owner of the firm’s equity. Data from a German survey of start-up firms, which we shall discuss in more detail later in the monograph, indicates that about 70 per cent of the firms that started operation between 2005 and 2008 were founded by single individuals (Figure 1.2) and about 79 per cent of these firms had zero employees at birth. However, while high ownership concentration and a significant overlap between the investor(s) and the management may be manifested in family firms, and while these might even be necessary characteristics of family firms, these are by no means sufficient to characterise family firms. Indeed, entrepreneurial firms with high ownership concentrations may not evolve into family firms at all. Dyer and Handler (1994) note that

because of the financial and time pressures related to starting a new enterprise, entrepreneurs may have difficulty developing [attributes such as high commitment] in their families. Spouses and children may see the business and financial gain as more important than the family, and that the demands of the business leave the entrepreneur with little time to communicate with ­family members or work through family problems (p. 74).

To reemphasise, therefore, high ownership concentration per se does not capture the ways in which the role of the owner-managers of these firms as business people and entrepreneurs interact with their role as members of the extended families that characterise the lives of the owner-managers at least as much as the businesses do. Yet, balancing the business and family aspects of their lives is a non-trivial pursuit of the owner-managers and, in particular, the family part of their identity can significantly affect the ways in which they conduct their business. The conceptually interesting question is how families become intertwined with the business aspects of family firms and how the aforementioned balancing act affects strategic decisions and the behaviour of family firms in ways that makes them different from the stylised value-maximising non-family firm that is discussed in the literature.

Figure 1.2 Size of founding team

Notes: The bar chart is based on a sample of 6,501 start-up firms in Germany that started operations between 2005 and 2008. The data source is the KfW-ZEW Start-up Panel. The size of the founding team is truncated if the number of founding members exceeds 5.

Dyers and Handler (1994) highlight the differences between the family systems and the business systems that collide (or interact) within family firms (Table 1.2). The implication of this collision (or interaction) for family firms can be found in some of the responses quoted in the PricewaterhouseCoopers (2012) survey (pp. 8–14):

• “Some families may be ready to withstand the storms of the economic crisis but more likely to collapse at the first dispute among family members.”

• “A family business can be hampered by an insistence on continuing with a low performing line of business. Emotions can dominate, and founders can become obsessive about control.”

• “Potential employees think that within a family business they will not have a future. In order to attract and retain talent we must create an enabling environment for the future.”

• “In the event that someone is not pulling their weight, it is much more difficult to make a business decision that you should make – there can be a conflict between the head and the heart.”

• “We need more international thinking – it’s a challenge not to limit the company to the local market.”

The role of the family and the impact family relationships and the dynamics nested therein have on the businesses of family firms is easy to see and we also get a glimpse of how family firms might be different from non-family firms. However, despite a growing literature on ­family firms and a much more detailed characterisation of the observed differences between family and non-family firms (Stewart and Hitt, 2012, Table 1, p. 60), we lack an integrated framework that tells us how exactly family firms are different and how therefore we should adapt stylised theories about firms and firm behaviour for analysis of family firms.

Table 1.2 A comparison of family and business systems

	Family systems	Business systems
Goals	Development and support of family members	Profits, revenues, efficiency, growth
Relationships	Deeply personal, of primary importance	Semipersonal or impersonal, of secondary importance
Rules	Informal expectations (“That’s how we’ve always done it”)	Written and formal rules, often with rewards and punishment spelled out
Evaluation	Members rewarded for who they are; efforts count; unconditional love and support	Support conditional on performance and results; employees can be promoted or fired
Succession	Caused by death or divorce	Caused by retirement, promotion, or leaving
Source: Dyer and Handler (1994), Table 2, p. 75.

In the rest of this monograph, we shall endeavour to understand the impact of the family on the stylised (and much discussed) nature of agency problems within firms (Jensen and Meckling, 1976), the impact of the interaction between the family and the business sides of the firms’ behaviour and strategic aspects of family firms, as well as the summative impact of families on firm performance. In doing so, we hope to provide an integrated framework that can underpin future research on family firms.

1.1 Conceptualisation and identification of family firms

In order to analyse the conceptual basis of an organisation, it is necessary to identify exemplars of that organisational form. However, despite the existence of data on family firms, an example of which is presented earlier in this chapter, it is quite difficult to settle on a generally accepted definition of a family firm (Colli, 2003). Chua et al. (1999) enumerate a wide range of definitions of family firms in the literature, ranging from simple measures of ownership of shares to identification of people who form an “emotional kinship group” (Table 1, p. 21). They argue that a family firm should be characterised by more than ownership of shares or management control and by the behaviour of the dominant coalitions within the firm that shapes its visions and strategies. Formally, they define a family firm as follows:

The family business is a business governed and/or managed with the intention to shape and pursue the vision of the business held by a d...

Table of contents

• Cover Page
• Half Title Page
• Title Page
• Copyright
• Dedication
• Contents
• List of Figures and Tables
• Acknowledgements
• 1 Family Firms
• 2 Agency Problems and Familiness
• 3 Strategic Implications of Familiness
• 4 Family Involvement and Firm Performance
• 5 Familiness in Future Research
• References
• Index