Stewart and Hitt 59opposed seeing “the residue of family capitalism as an Distinctions Betweenunfortunate anachronism, a social indulgence that acted Family and Nonfamily Firmsas a brake on the progress to corporate capitalism.” Manyother such arguments can be found, and Landes came to Scholarly writings on family business offer a rangedisavow Chandler’s (2006, pp. xii-xv) views (see also, of dichotomies between “family firms” and nonfamilyCarr & Bateman, 2010; Colli, Fernández Pérez, & Rose, firms.” Table 1 classifies some of the often-cited dichot-2003; Gilding, 2005; Schulze & Gedajlovic, 2010). omies, with representative citations. Insofar as we Some scholars who recognize the continuing vitality accept these broad stereotypes of family and nonfamilyof family businesses nonetheless believe that these firms businesses, it is hard not to conclude that family busi-would be more effective if they would behave more like nesses compare poorly by the standards taught in busi-nonfamily businesses. Their argument is typically ness schools (Johannisson, 2002; Khurana, 2007;couched in the language of “professionalization.” As an Sarasvathy, 2001). Many scholars would endorse theexample, Martínez, Stöhr, and Quiroga (2007, p. 93) argument for a thoroughgoing transformation of familyproposed that “when family-controlled firms profes- firms if these dichotomies accurately reflect reality.sionalize their management and governance bodies, andhave to be accountable to minority shareholders, theycan overcome most of their traditional weaknesses Meanings of “Professionalization”and take advantage of their strengths and succeed.”Contentions along these lines are common (e.g., Rondøy, We lack a singular term in our literature for such a trans-Dibrell, & Craig, 2009; Schulze, Lubatkin, Dino, & formation. “Familiness,” for example, is a term with aBuchholtz, 2001; Sciascia & Mazzola, 2008; Westhead more specific meaning (Habbershon, 2006; Habbershon,& Howorth, 2006). Similar arguments also appear in the Williams, & MacMillan, 2003). The term that comespractitioner press (from Canada, Robinson, 2007; from closest is professionalization. However, it is only aIndia, Sukumar, 2011; from the Middle East, Anonymous, shorthand for all the distinctions in Table 1. It does not2008; from South America, Anonymous, 2007; from the typically refer to ownership. It also lacks a singularUnited States, Perry, 2008). In contrast, we argue that meaning in popular or scholarly discourse (Hwang &we need a greater understanding of the modes of family Powell, 2009; von Nordenflycht, 2010). In its simplestfirms and of their contexts to know how they can oper- form, it refers to full-time salaried employees (Galambos,ate more effectively. Our essay is designed to provide 2010). By a simple extension to family firms it meansmore contingent answers to this important question. hiring full-time, nonfamily employees, particularly with We proceed as follows. First, we survey the literature the delegation of managerial authority. In studies of fam-and assemble a number of dichotomies associated with ily firms, this is often the core meaning (Chandler, 1990;family versus nonfamily business. These dichotomies Chittoor & Das, 2007; Gedajlovic, Lubatkin, & Schulze,suggest the range of possible ways in which family 2004). A closely related theme in Chandler’s (1990, p. 127)firms might become more like nonfamily firms. We next account is “defining [the] organizational structure pre-survey direct arguments in favor of transitioning to a cisely” so as to coordinate the work of the salariedless familial form of organization. We also summarize managers (see also, Chua, Chrisman, & Bergiel, 2009;the indirect arguments based on studies of performance Songini & Gnan, 2009). Thus, the term implicitly oreffects. A reasonable inference from these studies is that explicitly entails other dimensions, such as formal train-professionalizing the family firm improves performance. ing, meritocratic values, formalized structures, or inde-We are led to a conundrum: Despite direct and indirect pendent directors (e.g., Chua et al., 2009; Chua,arguments in favor of professionalization, a great many Chrisman, & Sharma, 1999; Parada, Nordqvist, &family firms fail to follow this prescription. As a result, Gimeno, 2010; Tsui-Auch, 2004). As a result, it is some-we propose reasons why family firms might or might times used to refer to a holistic transformation (Hung ¬ make the transition, leading to different modes of Whittington, 2011).professionalization. We conclude with suggestions for Relationships among the dimensions. Professionalizationfurther research. is certainly not one-dimensional. For example, hiring
60 Family Business Review 25(1)Table 1. Stereotypical Dichotomies Regarding Nonfamily and Family Business Nonfamily business Family business Representative citationOwnership Dispersed, nonkinship based Concentrated, kinship based Achmad et al. (2009) No wedge between cash flow and Wedge between cash flow and Morck et al. (2005) ownership rights ownership rights Well diversified Nondiversified Andres (2008)Governance Ownership and control split Ownership and control united Sirmon et al. (2008) External influences on board Internal dominance of board Parada et al. (2010) Transparency, disclosure Opaqueness, secrecy Gedajlovic et al. (2004)Returns Largely economically defined Noneconomic outcomes Chrisman et al. (2010) important No private benefits Private benefits for family Anderson and Reeb (2003a) Minority shareholders protected Minority shareholders exploited Martínez et al. (2007)Rewards Achievement, merit based Ascription, nepotism based Beehr et al. (1997) Employees: Based on performance Family members: Indulged Ram (1994) Universalistic criteria Particularistic criteria Chua et al. (2009)Networks External ties based on business Embedded in kinship networks Ingram and Lifschitz (2006) Distinct business, family spheres Role diffuseness Lomnitz and Pérez-Lizaur, (1987) Impersonal social responsibility Personalized social responsibility Muntean (2009)Leadership High turnover with market discipline Entrenched, long tenured Oswald et al. (2009) Formally educated Trained on the job Jorissen et al. (2005) Succession draws on large pool Succession draws on kinship pool Pérez-González (2006)Careers Salaried managers Family members Galambos (2010) Shorter term career horizons Longer term career horizons Benedict (1968)Management Delegation to professionals Autocratic Greenhalgh (1994) Rational, analytical Emotional, intuitive Zellweger and Astrachan, (2008) Innovative Rent-seeking, stifling innovation Morck and Yeung (2003) Formalized, command and control Organic, mutual accommodation Zhang and Ma (2009)salaried managers absent other changes is a failing strat- Professionalization is multidimensional, but we can-egy (Sukumar, 2011; Ward, 2004). Professionalizing not assume that the applicability of any one of thesetherefore can involve a holistic change, albeit one that dichotomies, in a given firm, entails the applicability ofvaries somewhat from firm to firm (Hung & Whitting- others. For example, informality need not coexist withton, 2011; Parada et al., 2010). Based on our review, if indulgence. To assume that it does so is to assume thatthere is a core element to such a shift in the context of the construct is “reflective” of covarying indicators (thefamily firms, it is the Parsonian distinction between dimensions). Many important constructs in business lit-achievement and ascription (Parsons, 1951). In Ward’s eratures are “formative” or caused by indicators that(2004) terms, this is “the principle of merit” (pp. 51-52). may have negative or zero correlations (Diamantopoulos,In other words, people are placed in positions and Riefler, & Roth, 2008). To assume the former in therewarded based on merit. Implementing the principle of absence of evidence is a common error of “protoscien-merit in firms where it had been lacking often requires a tific” thinking (Graham, 1989, p. 338).shift across several managerial dimensions. Depending Moreover, the stereotypical dichotomies of Table 1on the availability of talent it could entail the hiring of do not identify family and nonfamily businesses as dis-salaried managers or even a nonfamily CEO. It could tinct configurations or “gestalts” (Miller, 1981). Noneentail new systems and organizational designs to moni- of these dichotomies, with the possible exception of kin-tor and reward managerial performance. or non-kin-based ownership, uniquely defines a family
Stewart and Hitt 61versus a nonfamily firm, and even this distinction is not firm delegates responsibility to professionals the lessdefinitive. The qualities that are attributed to family bureaucracy is needed (R. H. Hall, 1968). We return tofirms and to nonfamily firms are not universally appli- this point in addressing why family firms may resist thecable. Some family firms have highly educated manag- move to professionalize.ers using analytical decision making and some nonfamilyfirms have casually trained managers using intuitivedecision making. Furthermore, family firms are associ- Benefits of Professionalizingated with nepotism, but the principle of merit isnot the exclusive property of nonfamily business. Professionalizing the family firm by developing non-Professionalizing the family firms often includes edu- personalized “evaluation and incentive compensation”cating the succeeding generation in high-quality busi- (Chua et al., 2009, p. 355) can be appropriate in familyness schools (Benedict, 1968; Douglass, 1992; Gilding, firms. Tsao, Chen, Lin, and Hyde (2009, p. 320) found2005; Pérez-González, 2006; Tsui-Auch, 2004; Tsui- that family firms benefit from the use of “extensiveAuch & Lee, 2003). Moreover, merit does not presup- selection, performance-based pay, in-house training andpose that the goals to be “achieved” must be purely development, job enrichment, and employee empower-economic. ment.” Family firms adopting these practices (termed high-performance work systems) outperformed nonfam- ily firms, whereas those that did not do so underper-An Alternative Meaning formed nonfamily firms. Similar practices may alsoof Professionalization crack the glass ceiling for females in family firmsTable 1 includes (under “management”) a distinctive (Parada et al., 2010), because they provide means tomeaning of professionalization. This usage, found in certify that female managers gained their positionsboth popular and scholarly language, has roots in occu- based on achievement (Songini & Gnan, 2009). Otherpational groups with jurisdictional rights to the use of benefits of professionalizing human resource practicesspecialized knowledge, such as attorneys and physi- are methods for disciplining nonperforming kin (Ram,cians (Abbott, 1988; Galambos, 2010). Managers do not 1994), and higher commitment from nonfamily employ-enjoy these jurisdictional rights (Hodgson, 2005; Hwang ees (Barnett & Kellermanns, 2006; Dyer, 1989; Gilding,& Powell, 2009). Nonetheless, the notion of “profes- 2005; Janjuha-Jivraj & Woods, 2002).sional management” carries connotations from these Many other benefits have been proposed for profes-older occupations (Khurana, 2007, pp 69-70). A true sionalization. These include comporting with institu-professional is expected to develop not only generally tional forces, whether ideological or coercive. Anapplicable knowledge but also to adopt a moral code example of institutional compatibility is that the valueand to view the career as a “calling” (Benveniste, 1987, placed on individual careers may be satisfied by the usepp. 42-43). Professionals are expected to continue to of trust funds and their attendant “corporate, bureau-“improve [their] capabilities” (R. H. Hall, 1968; Hwang cratic affairs” that free the next generations for alterna-& Powell, 2009, p. 268; see also, Chittoor & Das, 2007) tive professions (Marcus & Hall, 1992, p. 8; see alsoand also to display integrity to “protect the interests of Farrell, 1993). Similarly, the value placed on merit inclients and/or society in general” (von Nordenflycht, the wider culture may be satisfied by elite education for2010, p. 163). the successor generation (de Lima, 2000; A. Hall & Ironically, this older meaning of “professionalization” Nordqvist, 2008). Cultural norms such as these are rein-is at odds with other connotations of professionaliza- forced by governmental and quasi-governmental agen-tion. According to the stereotypes, management in fam- cies and by family business associations (Hung &ily firms is less formalized, rational, and standardized Whittington, 2011; Parada et al., 2010; Selekler-Goksenthan in nonfamily firms. Insofar as professionalism & Öktem, 2009).means moving toward a nonfamily business in these The “functionalist” argument for professionalizationsenses it entails bureaucratizing. Yet professionalism (Yildirim-Öktem & Üsdiken, 2010, p. 117) holds that itwith this older meaning was offered as an alternative to is needed to cope with complex and competitive businessbureaucracy (Benveniste, 1987) because the more the environments (Casson, 2000; Chandler, 1990; Walsh, 2010)
62 Family Business Review 25(1)and to pursue opportunities for business alliances size of the catch by fishing boats. Eight of the 15 privatewith professionally managed companies (Benedict, sample studies found an insignificant or mixed effect1968; Ravasi & Marchisio, 2003; Rondøy et al., 2009). (Arosa, Iturralde, & Maseda, 2010; Chrisman, Chua, &One reason for this benefit is the increased diversity of Litz, 2004, who did find evidence of agency advan-perspectives and experiences available when outsiders tages; Chrisman, Chua, & Kellermanns, 2009; Miller,join the board or executive suites (Filatotchev, Lien, & Lee, Chang, & Le Breton-Miller, 2009; Molly, Laveren,Piesse, 2005; Hatum, Pettigrew, & Michelini, 2010). & Deloof, 2010; Rutherford, Kuratko, & Holt, 2008; The other main business argument for professional- M. S. Smith, 2008; Westhead & Cowling, 1997). Fiveization is financial: better terms with banks, greater like- of the studies found a negative effect (Cucculelli &lihood of raising private equity, and opportunities to Micucci, 2008; Jorissen, Laveren, Martens, & Reheul,obtain capital in public equity markets (Barden, 2005; Oswald, Muse, & Rutherford, 2009; Sciasci &Copeland, Hermanson, & Wat, 1984; Dawson, 2011; Mazzola, 2008; and Westhead & Howorth, 2006).Ravasi & Marchisio, 2003). Owners gain from cheaper Furthermore, the sophisticated mixed sample study bycapital, enhanced opportunities for growth and acquisi- Bennedsen, Nielsen, Pérez-González, and Wolfenzontions, and diversification of their assets, particularly if (2007), using the random sex of the firstborn as anthey take their firms public (Bancel & Mittoo, 2009; instrument for succession, found significant negativePástor, Taylor, & Veronesi, 2009). The process of prep- effects of family involvement in management.aration for going public also reduces the taxes and con- Presumably most firms in their large sample were pri-flicts as one generation retires and another succeeds in vate.3 Overall, the performance of privately held familyits place (Chrisman, Chua, Sharma, & Yoder, 2009; firms does not compare favorably with privately heldJanjuha-Jivraj & Woods, 2002). nonfamily firms.Performance Effects Performance Effects for Public Firmsof Family Involvement Empirical results are more complex for the 35 studiesThese financial advantages should be reflected in stud- of performance of public family firms. Several studiesies comparing the performance of family and nonfam- report nonlinear effects and other studies report differ-ily firms. Therefore, we analyzed 59 empirical studies ent results depending on the level of family involve-regarding the effect of family involvement on perfor- ment. Despite this complexity, the public sample studiesmance.2 These are summarized in Table 2. Naturally, are less likely to show mixed or nonsignificant effects.only accounting or operational measures and not market More than half of the private sample studies found such(financial) measures can be used with privately held results but only 4 of 35 did so in the public samplesfirms, and only 15 of the 59 studies contain such perfor- (Jiang & Peng, 2011; Le Breton-Miller, Miller, &mance data. Because the great majority of family firms Lester, 2011; Silva, Majluf, & Paredes, 2006; Viviani,are private, we distinguish studies with samples of pub- Giorgini, & Steri, 2008). Only four public sample stud-lic firms from those with private firms, and those with ies found overall negative effects for family involve-mixed samples. ment (Achmad, Rusmin, Neilson, & Tower, 2009; Miller, Le Breton-Miller, & Lester, 2011; Sacristán Navarro & Gómez Ansón, 2006; Sacristán Navarro,Performance Effects for Private Firms Gómez Ansón, & Cabeza-Garcia, 2011), and four oth-Distinguishing between public and private samples ers did so under certain circumstances (Bennedsen &reveals that family involvement generally has a positive Nielsen, 2010; Chahine, 2007; Le Breton-Miller et al.,effect for public firms and an insignificant or negative 2011; Chang et al., 2010). Nine of the public sampleeffect for private firms. Only 2 of the 15 private sam- studies found overall positive effects, and 14 otherple studies found a positive effect. Kotey (2005) found studies found positive effects under certain conditions.4no significant growth effects but positive accounting Almost two thirds of these studies found positive effectseffects, at certain size ranges only. Herrero (2011) compared with less than one fifth of the private firmfound a positive effect for family involvement on the samples. Similarly, the meta-analysis of studies of
Stewart and Hitt 63Table 2. Summary of Empirical Studies of the Effect of Family Involvement on Firm PerformanceStudy Country Significant effects of family involvementSample of private firms Arosa et al. (2010) Spain Ownership concentration NS overall but generations differ; private but with public-like requirements Chrisman et al. (2004) United States NS direct effect; family firms may have agency cost advantages Chrisman et al. (2009) United States NS direct effect; family influence has a mixed moderating effect on resource stocks Cucculelli and Micucci (2008) Italy Higher ROA in non-heir than heir-managed firms Herrero (2011) Portugal Fishing boats with family members have significantly larger catches Jorissen et al. (2005) Belgium Negative for ROA; CEOs older, less educated, longer tenured, more female Kotey (2005) Australia By some accounting measures, positive at modest firm sizes; growth NS Miller et al. (2009) South Korea NS: apparently offsetting effects; sample: 170 of population of 271 Molly et al. (2010) Belgium (Flemish) NS: growth; first-generation succession less leverage with decline in growth; later successions: more leverage Oswald et al. (2009) United States Negative for FIM; presumably mainly private firms Rutherford et al. (2008) United States “Overall, it hinders a bit but it depends” on the IVs and DVs Sciascia and Mazzola (2008) Italy FIO NS, FIM negative quadratic relationship M. S. Smith (2008) Australia NS overall; any significant difference is sector specific Westhead and Cowling (1997) United Kingdom NS on various measures; FFs perhaps pulled up by outliers Westhead and Howorth (2006) United Kingdom NS generally, negative for FIM and exportingMixed samples Audretsch et al. (2010) Germany FIM, FIO NS. Decision control (supervisory board) significant positive Sample firms all have two boards, required E. Barth et al. (2005) Norway Negative for FIM; nonmonotonic Bennedsen et al. (2007) Denmark Negative for FIM; (random) sex of firstborn an instrument for succession; sample largely private Bertrand et al. (2008) Thailand FIO negative accounting; FIM negative for governance Carr and Bateman (2009) Largest in world Positive overall but varies by region; NS North America and Europe, positive for Lower trust countries Ehrhardt et al. (2005) Germany Financial: NS, operating mixed: positive IF private; declines with heirs Fogel (2006) 41 countries Negative: oligarchic control of large firms correlates with significant worse socioeconomic and political conditions Menéndez-Requejo (2006) Spain FIM NS; FIO positive in some measures; performance lessens with age; largely private sample Minichilli et al. (2010) Italy Positive U-shaped effect, attributed to schisms in familySample of public firms Achmad et al. (2009) Indonesia Negative Allouche et al. (2008) Japan Several positive, FFs with both FIO and FIM outperform those with just one Anderson, Mansi, and Reeb United States Positive for FIO at modest levels; negative for descendent CEOs (2003) Anderson and Reeb (2003a) United States Positive marketing and accounting, but nonmonotonic; founder CEOs may drive positive results Andres (2008) Germany Positive for accounting; only when founding family active, founding CEO especially Barontini and Caprio (2006) 11 European Positive marketing and accounting, but NS with descendent CEOs countries Bennedsen and Nielsen (2010) 14 European Valuation discount for concentrated ownership for family-controlled countries firms (continued)
64 Family Business Review 25(1)Table 2. (continued)Study Country Significant effects of family involvement Bocatto et al. (2010) Spain Performance prior to succession NS for choice of family or nonfamily successor Bonilla et al. (2010) Chile Positive for ROA, yet with lower variance Boubakri et al. (2010) 8 Asian countries Positive prior to 1997-1998 crisis, negative thereafter Chahine (2007) France Positive for mod FIO, negative for high FIO; cubic relationship Chu (2009) Taiwan FIO positive for both accounting and market measures Chu (2011) Taiwan Positive accounting for smaller family firms and those with active family involvement de Miguel et al. (2004) Spain nonlinear; positive at low, negative at middle, positive at high levels Filatotchev et al. (2011) Hong Kong Direct positive effect but negative effect overall because of private information abuse Jiang and Peng (2011) 8 Asian countries NS overall; some countries positive, some NS, some negative; depends on shareholder protection Le Breton-Miller et al. (2011) United States Aspects of family involvement lower stewardship, which lowers shareholder returns J. Lee (2006) United States FIO, positive; FIM, positive for more measures Martínez et al. (2007) Chile Positive accounting; positive financial (if controlling for liquidity) Maury (2006) 13 in Western Positive except at high control levels, accounting positive given active Europe family involvement, financial positive at lower levels McConaughy et al. (2001) United States Positive for FIO for both accounting and financial results Miller et al. (2011) United States FFs grew less; first-generation FFs performed better; lone founder firms performed best Morck et al. (2000) Canada; 41 Negative for heir-controlled large firms, and for countries with lower countries “self-made” billionaire wealth Pérez-González (2006) United States Accounting and financial negative for nepotism in CEO succession Poutziouris (2006) United Kingdom Positive for share price; NS for growth Rondøy et al. (2009) Sweden Positive in high margin (less competitive) industries; NS in low margin industries Sacristán Navarro and Gómez Spain Negative for successions, attributed to entrenchment; market and Ansón (2006) governance NS; accounting negative Sacristán Navarro, Gómez Spain Family as executives significant negative; second significant shareholder Ansón, and Cabeza-Garcia significant positive. (2011) Saito (2008) Japan Positive founder-managed firms; negative FIM and FIO with successors; positive for FIO or FIM by successors Silva et al. (2006) Chile Effect of family ties in groups contingent on balance between ownership and control rights Trebucq (2002) France Positive effect on market value added; no effect of employee stock ownership Tsao et al. (2009) Taiwan Negative given lower high-performance work systems (HPWS); positive given higher HPWS Villalonga and Amit (2006) United States Positive for founder-managed; negative for successor-managed Viviani et al. (2008) Italy Results NS Wang et al. (2010) Taiwan Divergence cash flow and control rights significant negative; institutional owners mitigated this effectNote. NS = not significant; FF = family firm; IV = independent variable; DV = dependent variable; FIO = family involvement in ownership; FIM =family involvement in management; ROA, return on assets.
Stewart and Hitt 65public, U.S. family firms by van Essen, Carney, unsurprising given the sensitivity of the question. As aGedajlovic, Heugens, and van Oosterhout (2010) found result, researchers have had to resort to proxy measures“modest but statistically significant” positive perfor- with “inconsistent” methodologies (Astrachan &mance effects for family involvement. In contrast, the Jaskiewicz, 2008; Zellweger & Astrachan, 2008).meta-analysis of studies of private firms by Carney, van Similarly, we find few observations of how executivesEssen, Gedajlovic, and Heugens (2010) found no sig- manage the interface between the familial and businessnificant performance effects of family involvement. domains, and in particular how they may find entrepre- From these public sample studies we draw two provi- neurial opportunities by crossing these domains.sional conclusions and hence an inference about impli-cations for practitioners. First, the performance of publicfamily firms is better relative to comparable nonfamily Inadequate Data on Kinshipfirms than is the performance of private family firms. A weakness of many studies of family business is lim-Second, the public family firms that use more profes- ited attention to the familial domain. The performancesional practices experience higher performance. Several studies above do not treat kinship as a major indepen-of these practices relate to ownership concentration and dent variable except as a means to dichotomize thegovernance. For example, negative effects are found samples into family and nonfamily firms. Kinship datafor abuse of private information (Filatotchev, Zhang, & are limited to a few questions, such as the leaders’ gen-Piesse, 2011) and for wedges (i.e., discrepancies) eration and the representation of kin in ownership,between cash flow and control rights (Barontini & management, or board positions. For example, theCaprio, 2006; Claessens, Djankov, Fan, & Lang, 2002; recent study by Miller et al. (2011) measured kinshipChang et al., 2010). In contrast, positive effects are ties among board members, managers, and officers. Forfound for professional practices by independent boards a large sample study, this is exemplary and represents a(Brenes, Madrigal, & Requena, 2011) and for sizable major effort. Yet even this study overlooks other busi-ownership blocks outside the controlling family ness-relevant variables such as kinship networks beyond(Bennedsen & Nielsen, 2010; Chahine, 2007; Sacristán the firm (A. R. Anderson, Jack, & Dodd, 2005), whichNavarro et al., 2011; Wang et al., 2010). One study historical studies have shown to be essential instru-(Tsao et al., 2009) found direct effects of professional- ments of coordination throughout kin groups and acrossizing management practices, in this case by means of corporations (Arrègle, Hitt, Sirmon, & Very, 2007;high-performance work systems. Moreover, the con- Farrell, 1993; Ingram & Lifschitz, 2006).texts within which public family firms performed best We need more research on “family-related differ-were the less competitive or turbulent environments ences [such as] variations in inheritance structures orthat could call for sophisticated management (Boubakri, marriage norms” (Bertrand & Schoar, 2006, p. 94; also,Guidhami, & Mishra, 2010; Rondøy et al., 2009). Bocatto, Gispert, & Rialp, 2010; Khanna & Yafeh,Because a firm must professionalize to some extent in 2007). Little attention in performance research has beenorder to go public, these two conclusions lead to the given to influences on family structures such as countryinference that professionalizing improves performance. histories (Church, 1993, Colli & Rose, 2003) or societal factors that affect the family (Jones, 2005). Examples of such factors are the socialization of reproductionLimitations of the (Robertson, 1991) and the legal regimes affecting fam-Performance Studies ily firms. For instance, the “distinction [that] is oftenMany of the performance studies are carefully crafted made between ancestral and self-acquired property”and cleverly designed. However, they have limitations, (Goody, 1997, p. 455) has implications for power rela-many of them inevitable in large sample research. We tions and conflicts in Chinese family firms (Greenhalgh,have noted that private and noneconomic benefits are 1994; Oxfeld, 1993). Culture and other institutional fac-important in family firms, yet these remain largely unob- tors, formal and informal, affect the composition ofserved. As Filatotchev et al. (2011) noted, “our under- family business and the social networks used by familystanding of specific mechanisms of rent extraction by members who are managers (Arrègle et al., 2007;controlling shareholders is limited” (p. 88). This is Arrègle et al., 2010).
66 Family Business Review 25(1) With some exceptions (e.g., Jorissen et al., 2005), Dichotomizing the sample into “family” and “non-this research pays little attention to individual variables family” firms ignores contingencies that may need to be(e.g., human capital) or demographic variables (e.g., age, controlled and focuses attention on a potentially spuri-gender), which are important for understanding family ous category. The “family firm,” as opposed to familyfirms (Bertrand & Schoar, 2006; Danes, Stafford, & firms of various types, has not been shown to exist as aLoy, 2007). Only 3 of the 59 performance studies taxonomic entity (McKelvey, 1982; Stewart & Miner,(Bennedsen et al., 2007; Bertrand, Johnson, Samphantharak, 2011; Westhead & Howorth, 2007). Less strongly put,& Schoar, 2008; Miller et al., 2011) have data on the family firm may be a formative rather than a reflec-kinship. The family is treated as a “‘black box’” (Creed, tive construct (Diamantopoulos et al., 2008) because the2000, p. 346). For example, the data are silent on ties by dimensions found in some cases (e.g., the dynasticmarriage or blood, or senior and junior lines in a kin motive) are not found in others (Casson, 2000; Croutschegroup. They are silent on properties of the kinship sys- & Ganidis, 2008; Gilding, 2005).tem in question, such as norms of inheritance or succes- The consequence of dichotomizing is that whateversion, or the ways that choices are possible in the usage factor(s) is chosen for the distinction, the split is likelyor neglect of kinship ties (Stewart, 2010; Wallman, 1975). to be arbitrary (Klein, Astrachan, & Smyrnios, 2005; Rutherford et al., 2008). As Allouche, Amann, Jaussaud, and Kurashina (2008, p. 325) observed about perfor-Dichotomized Samples mance research, “findings are highly sensitive to the way we define family businesses” (see also, SacristánWith the exception of the study by Le Breton-Miller et al. Navarro et al., 2011). For example, the percentage of(2011), the studies also dichotomize their samples into family firms in one sample ranged from 15% to 81%family and nonfamily firms in various ways, whereas the depending on the definition used (Westhead, Cowling,“degree . . . and mode” of kinship involvement is not “an & Storey, 2002). Thus, the definition selected by theeither-or scenario” (Sharma, 2004, p. 4; also, Arrègle et al., researchers can skew the results.2007; Jaskiewicz, González, Menéndez, & Schiereck,2005). Dichotomization is coarse grained, yet it is virtu-ally universally practiced. However, as noted, firms are Failure to Professionalizeaffected by kinship to various extents and in variousways. Thus, the family business category is far from Strong conceptual and empirical arguments favor thehomogeneous (Croutsche & Ganidis, 2008), with varia- professionalization of family firms. Nonetheless, astion across many attributes of the business and the family, Schulze et al. (2001) observed, not all family firms pro-with a “highly skewed distribution” across certain mea- fessionalize. For example, some CEOs of successfulsures (Westhead & Cowling, 1997, p. 43). Family firms family firms have a low opinion of “professionalvary with respect to familial character and values, such as management” (Gilding, 2005; also, Anonymous, 2008;the “dynastic motive” (Casson, 2000; also, Arrègle et al., Selekler-Goksen & Öktem, 2009). In another example,2007; Bégin, Chabaud, & Richomme-Huet, 2010; Yildirim-Öktem and Üsdiken (2010) found that TurkishJaskiewicz et al., 2005; Westhead & Howorth, 2007). family business groups responded only to coercive pres-They vary with respect to their size and firm resources sures to professionalize; functionalist and institutional(Herrero, 2011; Kotey, 2005; Sirmon & Hitt, 2003). They pressures had little effect. Why might some familyvary with respect to their financial and competitive strate- firms be so recalcitrant?gies (Sirmon, Arrègle, Hitt, & Webb, 2008; Tsao et al.,2009; van Essen et al., 2010). They vary with respect totheir approach to involvement (Audretsch, Hülsbeck, & Modes of ProfessionalizationLehmann, 2010; Maury, 2006). They vary across indus-tries and sectors (Carr & Bateman, 2010; Casson, 2000). Part of the answer likely lies in family leaders’ mentalThey also vary across a wide range of environmental model of the business. Without a consideration of thecontingencies, such as the type of capitalism and the legal family’s “vision”, Chua et al. (1999) found that thecontext (Carney et al., 2010; Steier, 2009). behaviors of family and nonfamily firms could not
Stewart and Hitt 67be distinguished. Similarly, in order to understand the organizational systems and external sources of exper-mode of professionalization adopted by a family firm, tise. Presumably even small, closely held family firmswe need to consider its leaders’ intentions for their firm, will use practices that help their business. For example,and their abilities to envision and to manage a particular they may prioritize family members for leadership posi-mode. With this in mind, we have identified six modes tions but they cannot indefinitely disregard the principleof professionalization by family firms. These modes are of merit as they assign management roles (for an exam-ideal types in a typology derived from the literature; ple, see Ram, 1994) Therefore, some elements of profes-they are not an empirical taxonomy (McKelvey, 1982). sional management can likely be found for all familyOrdered from the least to the most professionalized firms.(at least in their appearance), the modes are Moreover, extensive professionalizing might not be needed or appropriate. Introducing nonfamily managers • firms that lack the capacity for extensive pro- creates the potential for conflicts of interest between the fessionalization, limited in professionalization owners and their agents, the managers, that is, it creates on multiple dimensions (minimally professional the potential for agency costs (Chua et al., 2009; K. S. Lee, family firms) Lim, & Lim, 2003). For example, the exploratory study • firms that seek the private benefits of control by Chrisman et al. (2004) found evidence of agency with their own capital, desiring independence advantages for private family firms relative to nonfam- from external governance (wealth-dispensing ily private firms. Specifically, strategic planning—a private family firms) staple of professional management—was significantly • firms that pursue the opportunities found in less beneficial for sales growth with family firms. informal operations, limited in the use of for- Furthermore, the firm’s situation might not require a malization and standardization (entrepreneur- transition. The competitive environment may not require ially operated family firms) changes if the market niches served are small, markets • firms that pursue the opportunities found in net- are fragmented, and environments dynamic (Casson, works of affiliated firms, remaining embedded 2000; Dyer, 1989; Gedajlovic et al., 2004). In such cases, in kinship and other normative orders (entrepre- the firm is also less likely to experience internal pres- neurial family business groups) sures for professionalizing to deal with increasing scale, • firms that seek the private benefits of control R&D intensity, or marketing sophistication (Lin & Hu, with other people’s money, seeking the appear- 2007). Furthermore, “cultural and institutional factors” ance while violating the spirit of public gover- such as the need to professionalize to appear legitimate nance (pseudoprofessional public family firms) for outsiders might not be salient (Tsui-Auch, 2004, • professionally managed, family-controlled p. 713). The managerial culture in the broader environ- firms that seek the benefits of professionaliza- ment might actually be unsympathetic to the transition tion while retaining family influence (hybrid (Whyte, 1996; Zhang & Ma, 2009). professional family firms)5 Minimally Professional Family FirmsAvoiding Overly Broad Stereotypes Many family firms fail to professionalize because theyFamily firms tend to make less use than nonfamily firms cannot do so. They lack the “skills or the will to success-of “professional HRM practices,” according to de Kok, fully make the transition to professional management”Uhlaner, and Thurik (2006, p. 442). These authors sug- (Sharma, Chrisman, & Chua, 1997, p. 16). Incapacitygested two possible reasons: less capability, or less need may result from cognitive, cultural, emotional, or mana-because of lower agency costs. This second possibility gerial barriers. One cognitive impediment is that familycautions us against stereotyping family firms as inca- business managers may not recognize a need forpable of professional management. Cromie, Stephenson, change. Poza, Hanlon, and Kishida (2004) found thatand Monteith (1995) found that most of the small family family firm CEOs and parents had a significantly higherfirms that they surveyed in Britain used elements of evaluation of their own management than did otherprofessionalization, including formalized, rational family members and nonfamily managers. Moreover,
68 Family Business Review 25(1)family member CEOs tend to be longer tenured and less indulgence of passive love; in Japanese, amayakasu forwell educated than nonfamily CEOs (Bennedsen et al., the giving of indulgence (amae is the noun; Kondo,2007; Jorissen et al., 2005; Pérez-González, 2006). The 1990, p. 150; the classic account is given in Doi, 1973).former may believe that they are doing all they can to This problem of indulging family members can extendkeep up with change and could not learn any faster to nonfamily employees as well as family members thanks(Zahra & Filatotchev, 2004). Therefore, the champions to ideologies of the workplace as a “family” (Ram &of professionalization may be the more educated family Holliday, 1993; J. M. Smith, 2009).leaders. Curiously, Tsui-Auch (2004) in his study of Emotional and cultural entanglements such as theseprofessionalization among Chinese family firms in make it impossible to professionalize a family firm sim-Singapore found no correlation with educational levels. ply by recruiting nonfamily managers (Dyer, 1989; forOf course, these findings may be culturally specific. an example, see Helin, 2011). The family firm cannot Cultural impediments to professionalization include operate just as if it were a nonfamily firm. Being anorms of kinship systems at odds with economic ratio- “professional” manager in the family firm requires thenality. A classic problem for entrepreneurs wishing to capacity to navigate through idiosyncratic family cul-grow their ventures is the challenge of “disembedding” tures (A. Hall & Nordqvist, 2008; K. S. Lee et al., 2003;(Stewart, 1989, p. 148). Their need to channel resources Sacristán Navarro & Gómez Ansón, 2009). For familyinto their venture conflicts with obligations from the members to be accepted as professionals, they for theirwebs of kinship within which they are embedded. In part may need the “social skills to be accepted amongmany cultures, they are expected to display their wealth other employees” (Helin, 2011, p. 159; see also, p. 108).and to redistribute it generously among their kin. Failure For many reasons, family firms can find it difficult toto do so leads to intrapersonal and interpersonal con- attract, reward, and retain high-quality “professional”flicts (Davidoff & Hall, 1987; Fletcher, Helienek, & managers (Barnett & Kellermanns, 2006; Beehr, Drexler,Zafirova, 2009; Hart, 1975; Watson, 1985). Entrepreneurs & Faulkner, 1997; Stewart, 2003). Professionalizingmight also seek to exclude family members from respon- human resource management practices in the family firmsible positions because of their limited capabilities. In requires consideration of factors that militate againstmost kinship systems they enjoy some latitude, but if shorter term or stock-based incentives: the firm’s non-they prioritize family membership less than is normative economic goals, longer time horizons, and the desire toin their culture, emotionally painful conflict is liable to maintain control for the generations (Chua et al., 2009;occur (Bertrand & Schoar, 2006; Hamabata, 1990). Gedajlovic et al., 2004). Meritocracy mixed with prefer- Cultural impediments, therefore, are linked with ential access for kin leads to ambiguities for all con-emotional impediments. Culture includes expectations cerned (Helin, 2011). Efforts to import human resourceabout emotions, and as an element of culture, so too management practices without consideration of the fam-does a kinship system. Individuals often experience ily context generate conflict (Bertrand & Schoar, 2006;ambivalence about feelings that are normative about A. Hall & Nordqvist, 2008). Similarly, pay dispersion inkin, an ambivalence that demonstrates that they have the top management team correlates with significantlyinternalized the expectations (Peletz, 2001). A common higher growth in nonfamily firms but significantly lowersource of ambivalence for family business owners is growth in family firms (Ensley, Pearson, & Sardeshmukh,parental recognition that children should develop inde- 2007; see also, Schulze et al., 2001). Of course, minimalpendence, which conflicts with a desire to indulge them. professionalization may simply be because of an inability toSimilarly, siblings or cousins might recognize the need pay market wages (Carrasco-Hernandez & Sánchez-Marin,to promote the most capable offspring but find it hard not 2007; Cater & Schwab, 2008; McConaughy, 2000).to view their own children as more capable than theirnieces and nephews (Ward, 2004; Tsui-Auch, 2004). The psychological concept for this conundrum is Wealth-Dispensing Private Family Firms“parental altruism” (Lubatkin, Schulze, & Ling, 2005). Some family firms are able to recruit and reward nonfa-In Japanese culture, a similar concept that is widely dis- mily executives, to go public and gain external equity,cussed, and seen as endemic in family firms, is the or both of these options, and consequently seize growth
Stewart and Hitt 69opportunities. However, their leaders might have little could be a threat to their unique access to familialenthusiasm for independent boards and other gover- resources (Athanassiou, Crittenden, Kelly, & Márquez,nance features of professional public firms. They might 2002; Colli et al., 2003). In Greenhalgh’s (1994, p. 751)view these external responsibilities as a threat to their depiction of a Taiwanese “family head,” manipulationbenefits: privacy, valuation placed on noneconomic of kinship traditions enabled him to “build his firm outbenefits, and privileged access to resources found of the loyalties and talents of his family.” Therefore,uniquely in the kinship domain (Lomnitz & Pérez- entrenched leaders of family firms may choose to retainLizaur, 1987). For example, they enjoy greater influ- their “traditional” methods, particularly in functionsence than CEOs of widely held firms in the use of related to privileged control over resources such as cashdiscretionary cash flows (Muntean, 2009). flows and executive positions. We could expect that the Most of these perquisites also apply to other closely most likely areas of conflict in efforts to professionalizeheld, private firms and do not explain the lower accounting are financial and human resources strategy, and gover-and operating performances of family firms (Zellweger nance. However, for obvious reasons these conflict-& Nason, 2008). The same desire to reduce taxes and laden topics are difficult to study.hence reported income applies equally to their compari- Principal–principal conflicts in private family firms. Lead-son firms. The private benefits available to owners ers of privately held family firms, certainly those thatmay, however, be especially pervasive in family firms. are closely held, enjoy legitimate discretion over the dis-Among all types of owners, family owners have more pensation of the wealth of their firms. However, minor-“ways to divert benefits to themselves compared with ity shareholders, if they exist, may be disadvantaged bymanagers at” “widely held corporations” (Claessens the lack of liquidity of the shares and hence a weaket al., 2002, p. 2744). Furthermore, private perquisites, negotiating position at times of ownership consolida-such as non-arm’s-length transactions and asset acquisi- tion. Therefore, “principal-principal” conflicts can arisetions, serve the interests not only of the owner but also with the majority owners, a type of conflict that is morethose of his or her kinship group and their “lifestyle” widely recognized in public family firms (e.g., Luo, Wan,(Westhead & Cowling, 1997, p. 46). Such transfer of & Cai, 2010; Morck & Yeung, 2003; Yoshikawa &wealth from the firm to the owners’ coffers may be more Rasheed, 2010).prevalent in family-controlled firms than in other closely Less recognized is the potential for another form ofheld firms (Bennedsen & Nielsen, 2010; Bertrand & principal–principal conflict that arises in closely held,Schoar, 2006). Therefore, the apparently lower perfor- private family firms.6 Provided that private family firmsmance of family firms might not be perceived as such by generate wealth, decisions must be made about whichthese CEOs (Pérez-González, 2006; Poza et al., 2004). private benefits will be dispensed and to whom. Within Family firm CEOs might also have more noneco- the family there can be cleavages between active andnomic preferences than nonfamily firm CEOs (Astrachan passive owners, generating differing interests in rein-& Jaskiewicz, 2008; Chrisman, Kellermanns, Chan, & vestments versus dividends. There can be differingLiano, 2010). They might prefer, as Gómez-Mejía, treatments of males and females, in-laws compared withHaynes, Núñez-Nickel, Jacobson, and Moyano-Fuentes agnates (“blood” relatives), or of different branches of(2007) suggest, to preserve their “socioeconomic wealth” the family (Bertrand et al., 2008). The consequencesrather than to maximize their financial wealth. In the extend beyond negative affect to include the expropria-CEO’s eyes, this nonfinancial wealth might include tion of resources for one family member at the expensetheir capacity for providing employment for relatives or of other relatives and of the performance of the firmfor maintaining a long-standing company name that pro- (Bertrand et al.). From the perspective of insiders to thevides prestige to the family (Berghoff, 2006; Ehrhardt, family group, any such cleavages and differentiations inNowak, & Weber, 2005; Lomnitz & Pérez-Lizaur, 1987; benefits will be highly visible. For example, the familyThomas, 2009; Zellweger & Astrachan, 2008). cannot hide who gets to live in the ancestral villa (see, From the viewpoint of entrenched family CEOs, pro- Helin, 2011).fessionalizing management may be a threat to their Intrafamilial conflicts are notoriously common. Forpower, especially if these CEOs are, as often, less well example, conflicts among siblings are noted in trade bookseducated than their peers (Zahra & Filatotchev, 2004). It (e.g., Paisner, 1999), in textbooks (e.g., Poza, 2004), in
70 Family Business Review 25(1)biographies (e.g., Smit, 2008), and in scholarly mono- et al., 2007) and in private samples (Barontini & Caprio,graphs (e.g., Watson, 1985). Although they are typically 2006; Ehrhardt et al., 2005; Saito, 2008) as well. Thehidden from outsiders, intrafamilial principal–principal meta-analysis by van Essen et al. (2010) attributed thisconflicts in private family firms may be more wide- generational effect to the fact that successive genera-spread than ownership-based principal–principal con- tions are more risk averse. Perhaps they are trying toflicts in public family firms. They can prove a threat to preserve wealth rather than to create new wealth as thefirm survival if, as Bertrand et al. (2008, p. 467) founders tried to do.observed, they precipitate “a ‘race to the bottom’ where Several authors have therefore suggested that theone brother [successor] tries to tunnel resources out of superior performance for public family firms is becausethe firm before another brother does.” of entrepreneurial effects and not because of family From the viewpoint of nonfamily employees and of effects (Arrègle & Mari, 2010; Casson, 2000). For exam-family members who are younger, female, from lesser ple, Fogel (2006) and Saito (2008) argued that the posi-branches of the family, or skeptical about the family ide- tive effects found may be driven by founders who are,ology, professionalization could seem an opportunity, after all, unusually successful having taken their busi-not a threat. These actors could approve of professional nesses public. In a complementary study of Fortunemanagement as a means to value openness and disclo- 1,000 firms, Miller et al. (2011) distinguished amongsure in contrast with reticence and secrecy (Gedajlovic family firms, family founders, and lone founders, con-et al., 2004; Greenhalgh, 1994; Stewart, 2003). Their cluding that “lone founder firms” were most inclined toenthusiasm could itself be threatening to entrenched growth strategies and were best at providing returns to theleaders. As these examples suggest, noneconomic ben- owners. Another indication of an entrepreneurial, ratherefits may coexist with nonfinancial costs such as than family, effect is Chu’s (2011) finding of superior“role conflicts and social constraints” (Zellweger & performance only for smaller public family firms.Astrachan, 2008, p. 348). Hence, performance studies Professional versus entrepreneurial management. Somethat rely on “externally derived” dependent variables types of “professionalizing” may not be appropriate formay fail to measure the costs and benefits to family entrepreneurial family firms. We refer to professional-involvement that are important in the family’s decisions izing in the sense of “formalized, standardized, and . . .to maintain or to give up control (Astrachan, 2010, p. 10; scientific” means of functioning (Zhang & Ma, 2009,Astrachan & Jaskiewicz, 2008). p. 133; also, Hwang & Powell, 2009). Entrepreneurial management can be superior, given certain contingen- cies, and this superiority can be augmented by theEntrepreneurially Operated Family Firms familial context. There are four reasons supporting thisSome family firms are better served by entrepreneurial argument. The first is that entrepreneurial managementrather than professional management. Performance may be superior because informal social ties enhancestudies provide support for this rationale. Market results the coordination and knowledge sharing internal to afor founder-CEO led firms are significantly superior to company. When the members of a firm understand onethose for successor-CEO led firms, whether or not the another as members of a kin group commonly do, theysuccessors are scions of the family (Fahlenbrach, 2009; become adept at the “mutual accommodation” (Burns &Nelson, 2003). Several studies find this effect with fam- Stalker, 1966) that facilitates adaptation to change. Inily successors. Among the studies in Table 2, several contrast, salaried managers are inclined to replace thesedistinguish between the founding generation and suc- informal understandings with formal systems of com-ceeding heirs, with the former outperforming the latter. mand and control, referred to as “Generally AcceptedLower performance for heirs than for nondescendents Management Principles (GAMP)” by the field researcheror founders was found in several public sample studies Leonard Sayles (1993, pp. 25-26). Observational studies(R. C. Anderson, Mansi, & Reeb, 2003; Andres, 2008; over several decades have shown that this abstractMorck, Strangeland, & Yeung, 2000; Pérez-González, approach frequently fails the coordination challenges2006; Saito, 2008; Villalonga & Amit, 2006). This gen- whereas, “work flow entrepreneurship” by lower-levelerational effect has been found in mixed samples as well employees often succeeds (Sayles & Stewart, 1995;(E. Barth, Gulbrandsen, & Schønea, 2005; Bennedsen J. M. Smith, 2009, pp. 81-86).
Stewart and Hitt 71 Second, informal and idiosyncratic methods may be Haynes, Onochie, and Muske (2007) found a demon-superior to formalization, standardization, and cosmo- stration of this distinction between domains. Theypolitan education, not only because of the need for observed that among members of U.S. family firms,ongoing coordination but also because of the emergence “positive changes in the business financial indicatorsof these methods from practice, not universal principles. create a positive perception of the business, howeverAs Sarasvathy (2001) argued, skilled entrepreneurs con- they have no influence on the family’s perception[s] of astruct opportunities out of available resources, rather better quality of life” or “of the family’s success”than plan for predetermined goals. Bricolage of this sort (pp. 408, 395). Another demonstration, from the ethno-is best achieved with firm-specific knowledge and expe- graphic record, illustrates a common conundrum for fam-rience and “training [that] is idiosyncratic to the particu- ilies with businesses (Ram & Holliday, 1993). Hamabatalar work” (Dyer, 1989, p. 224). This knowledge is often (1990, p. 43) described a young man who was, in thetacit and team-based, rather than explicit or individual domestic domain, a “pet” child, but who was recognized(Lave & Wenger, 1991), and may be better developed to be an incompetent successor in the commercialwith the long-term relationships found both in kinship domain. This is an example in which the mixing ofand in family business (Bloch, 1973; Ellis, 2011; domains represents a cost born by the business. ManagingHabbershon, 2006). As a result, the informal methods of a family firm includes at its heart an effort to reconcileentrepreneurial employees can outperform the more for- differences among the domains (Arrègle et al., 2007;mal methods of approved professional practice (Ram, Colli, 2003; Jones, 2005; Sharma, 2004; Stewart, 2003).1994; Stewart, 1989). The boundaries of family and business as entrepreneurial The cognitive processes developed informally on the opportunity. Johannisson (2002) studied 24 family firmsjob can also be better suited than formal processes for for more than 15 years and found that the most success-coping with unexpected changes (Starbuck, 2009). As ful among them did not adopt “managerialism”; nor didGedajlovic, Carney, Chrisman, and Kellermanns (2011, they acquire external equity investments. Rather, theyp. 10) argued, family firm executives can operate with used the “friction energy” and the “interplay” amongthe discretion derived from “greater scope for the use of “entrepreneurship as a passion for change, the family asentrepreneurial cognitions, which rely on heuristics and a social institution, and management as a profession [to]simplified decision rules that enable timely strategic energize the medium-sized family business” (Johannisson,decisions.” This is a third reason that family firms may 2002, pp. 46, 48, 50). Scholes, Noke, Wright, and O’Neil.benefit from using entrepreneurial rather than a profes- (2011) offered a complementary argument about thesional approach to management. entrepreneurial potential of combining family and busi- The domains of kinship and business. A fourth reason ness. Whereas Johannisson emphasized the creativethat entrepreneurial management can be superior is that potential raised by differences in ideologies, they empha-family firms offer unique opportunities for entrepreneur- sized complementarity as a key to innovativeness: “Thisial behavior. Johannisson (2002) has proposed that entre- complementarity emerges through a process of negotiat-preneurial potential is found at the interfaces of family ing shared values achieved, for example, by enabling aand business. Following the terminology of the kinship nonfamily manager to act as a mentor/adviser to exist-theorist Meyer Fortes (1969), kinship and commerce are ing family managers” (Scholes et al., 2011).among the major social “domains” in society (for quali- Stewart and Hitt (2010) explained the entrepreneurialfications of this language, see Jones, 2005, and Stewart potential of family and business in terms of the logic& Hitt, 2010). These domains intersect in complex ways, of F. Barth’s (1967) thesis on the bridging of differentbut one of Fortes’s arguments was that they are not spheres of exchange. Insofar as the domains of familyreducible one to the other (Stewart & Miner, 2011). and business are in practice distinct, a classic entrepre-Rather, the domains of business and kinship are com- neurial opportunity arises because the same resources,monly regarded as “very different in their essence” (de such as personal networks or potential employees, areLima, 2000). In many cultures, kinship is at the least a discrepantly valued based on different uses or functionswidely adopted idiom that reflects the deepest moral val- in one domain versus in the other. As F. Barth argued inues of the culture (Bloch, 1973; Peletz, 2001; Song, his seminal article, “entrepreneurs will direct their activ-1999; Steadman, Palmer, & Tilley, 1996; Stewart, 1989). ity pre-eminently toward those points of an economic
72 Family Business Review 25(1)system where the discrepancies of evaluation are the creating or input completing function (Gilson, 2007;greatest, and will attempt to create bridging transac- Silva et al., 2006; Young, Peng, Ahlstrom, Bruton, &tions” (F. Barth, 1967, p. 171; Stewart, 1989, 2003). Jiang, 2008). This function has been construed as a formDiscrepancies in evaluation can arise because of con- of entrepreneurship (Leff, 1978; Leibenstein, 1968). Westraints on exchange—in an obvious example, familial can also construe it as a form of Barthian entrepreneur-love is not widely regarded as saleable. They can also ship (F. Barth, 1967). As Leff (1978, p. 668) noted,arise simply from differing perspectives. For example, “honesty and trustworthy competence” may be a rareimpecunious noble families may enter into marital input in less developed marketplaces, such that informa-exchanges with the newly wealthy, trading prestige for tion about sources is more freely available in the kinshipcommercial opportunities or capital, and vice versa arena than the commercial arena. As an example of the(McDonogh, 1986). effectiveness of this mode, Hsieh, Yeh, and Chen In family businesses, an entrepreneurial opportunity (2010) found that among Taiwanese electronics firms,arises when something, such as a custom or set of rela- those that are affiliated with business groups outinno-tionships, from the business domain has a use that ren- vate those that are not.7ders it more valuable in the family domain. The reverse Family business groups are the dominant form ofalso applies. An example of higher valuation in the kin- medium- to large-scale businesses worldwide (Bertrandship domain than in the business domain is a managerial et al., 2008; Morck, Wolfenzon, & Yeung, 2005; Youngposition for an unemployed relative. Another example is et al., 2008). However, familial ties are not the only pos-a modestly profitable venture that, although unappeal- sible basis for interfirm trust. Other types of informaling in financial terms, serves as a means of reuniting social ties can enhance the coordination, “knowledgescattered kin by attracting them to its employment sharing and collusion” among firms in the same industry(Bruun, 1993; Greenhalgh, 1994). (Ingram & Lifschitz, 2006, p. 335). Besides kinship ties, Examples of higher valuations in the business domain other possibilities include ethnicity, religion, and caste. Itthan in the kinship domain are secrecy and trust (Landes, seems possible that firms relatively highly embedded in2006; Lomnitz & Pérez-Lizaur, 1987). In business, the kinship (Aldrich & Cliff, 2003) are also predisposed toability to maintain a confidence for many years can be these other forms of embeddedness (Colli & Rose, 2003;invaluable (Benedict, 1968; Marcus & Hall, 1992). Such Janjuha-Jivraj & Woods, 2002; Peredo, 2003). All thesediscretion is useful with clandestine familial arrange- can be the basis for what Cohen (1969) called “informalments but materially more useful with clandestine interest groups.” Examples of these where benefits toboardroom agreements. It will therefore be particularly business have been substantial include the Westvaluable in contexts in which trust is at a premium, such Highlands Asian clothing industry (Ram, 1994), fashionas less developed countries. For example, Ram (1994) shoes (Blim, 1990), long-distance trade (Cohen, 1969),noted the positive value in the business domain of their ship building (Ingram & Lifschitz, 2006), and textilesowners’ familial reputation, spousal monitoring of (Farrell, 1993); for an example of early positive and laterlabor, and frugality in disposition of corporate assets. negative effects, see Karra, Tracey, and Phillips (2006).However, he emphasized the indulgence of incompetent Why kinship?. Other bases of embeddedness can sub-kin who had an undue sense of entitlement. This exam- stitute for kinship, but kinship is ubiquitous whereas theple demonstrates that negative transfers can also occur. other bases are historically contingent. Why might this be so? Marcus and Hall (1992) offered one possible answer. They argued that kinship networks have aEntrepreneurial Family Business Groups unique capacity to provide linkages, “to make secretIn contexts of poor securities law (such that owners risk deals, . . . to pull together resources from across variousexpropriation by other owners) and poor commercial social and institutional spheres to pursue a single aim . . .law (such that transactions between businesses are [because] they integrate functions and activities thatrisky), many market arrangements are substituted by specialized institutional orders differentiate and frag-networks of jointly owned and kinship-connected firms. ment” (Marcus & Hall, 1992, p. 131). For example, forThese family business groups gain “access to nonmar- families that own small businesses, kinship is the sourceketed inputs” (Leff, 1978, p. 668) and perform a market of the “synthesis” needed to patch together “multiple
Stewart and Hitt 73incomes, from multiple sources, with multiple fallback family members can occur within privately held familypositions” (Creed, 2000, p. 343). firms (Bertrand et al., 2008). When this behavior occurs Gilson (2007) proposed another possible answer. in public family firms it compounds these intrafamilialThe basis of his argument is that outsiders need to evalu- principal–principal conflicts with majority–minorityate not only the trustworthiness of a (theoretically) owner principal–principal conflicts (Jiang & Peng,immortal firm but also the interests of (mortal) execu- 2011; Young et al., 2008). It thereby violates severaltives who could choose actions harmful to the long-run principles of professional governance, not to mentionreputation of the firm but lucrative for themselves in the the responsibility of professionals to act with integrity.shorter run. He argued that “when the corporation is Scholars in economics and finance have studied theseowned by a family, the internal incentives become much governance failings, expropriation from minority own-more transparent” (Gilson, 2007, p. 643). This argument ers, and the ensuing inefficiencies in resource allocationis limited by the problem (which he notes) that the cross- (e.g., Faccio et al., 2001; Morck & Steier, 2007). Forgenerational unity of interests cannot be taken for example, Morck et al. (2005) noted that a divergencegranted and is difficult to evaluate from outside. Perhaps between cash flow and control rights, which is typicallya solution to this problem may be found in Leff’s foun- caused by pyramidal structures or dual-class shares,dational article. Leff (1978) noted that family businessgroups tend to be multifamily groups, with extensive ties can lead to inefficient investment. . . . This isof intermarriage, ritual kinship, and apprenticeship because the controlling family earns only a smallexchanges among successors (Chung & Luo, 2008; part, corresponding to its small cash flow rights inGrassby, 2001; Ingram & Lifschitz, 2006; Kuper, 2009). such a firm, of any investment’s monetary payoffThe tendency for family groups to link multiple families but can retain all of any private benefits theis variable cross-culturally (for its absence in Pakistan, investment generates. (p. 676)see Papanek, 1973), and might be a factor in relativeeconomic development. Similarly, the relative perfor- These sorts of inefficiencies have consequences formance of family groups varies across countries (Morck pseudoprofessional firms themselves, for other modeset al., 2005). of family firms, and for entrepreneurial activity. Poor governance as a response to poor legal protec- tions becomes self-reinforcing. Given strong legal pro-Pseudoprofessional Public Family Firms tections, as in Japan and the United States, minorityFamily groups offer “particularly rich possibilities for owners appear not to be expropriated (R. C. Andersonexpropriation” of minority owners (Faccio, Lang, & & Reeb, 2003b; Chen, Chen, Cheng, & Shevlin, 2010;Young, 2001, p. 55). As with other family firms, they Yoshikawa & Rasheed, 2010). Absent these protec-can use mechanisms such as excess compensation of tions, the main defense of an owner against expropria-family members (Barontini & Bozzi, 2011; Chourou, tion by another is holding a major ownership block.2010). Their structure makes them amenable to “trans- This defense carries attendant costs in lower diversifi-fer pricing [manipulation and] related-party transac- cation and liquidity and higher monitoring require-tions” (Luo et al., 2010; see also, Jiang & Peng, 2011; ments, which in turn are compensated by expropriation,Morck et al., 2005). This “tunneling” of value is espe- which further reinforces the systemic need to protectcially a problem when there are wedges between cash against expropriation by means of holding a controllingflow and control rights. For example, Silva et al. (2006) stake (Luo et al., 2010).found that in family groups with balanced ownership Monitoring costs to protect against such behaviorand control, familial ties among affiliates increase stock are high, because those firms that seek the private ben-market value (with value creation the dominant effect), efits of control with other people’s money—that is,whereas with an excess of control over ownership, mar- with public equity (Morck et al., 2005; Yeung & Soh,ket value is harmed (with value expropriation the domi- 2000)—take pains to appear to be professionally man-nant effect). aged and governed: “In essence, these firms attempt to We have observed that such expropriation of appear as having ‘crossed the threshold’ from founderresources by controlling owners at the expense of other control to professional management . . . [their]
74 Family Business Review 25(1)corporate governance structures . . . often resemble very important animal” that scholars have not yetthose of [professional firms] in form but not in sub- trapped and depicted (Kilby, 1971, p. 1). Two questionsstance” (Young et al., 2008, pp. 198-199). Such a pre- are particularly vexing: (a) What is it, exactly, or other-tense intensifies the vicious cycle of mistrust found in wise phrased, how can it be achieved? and, (b) Howlow investor protection environments. Because of the well does it perform? Does it attain the twin advantagesdifficulties investors face in seeing beyond pseudopro- of professionalism and family involvement, thereby out-fessional facades, public family firms provide signals performing nonfamily professional firms? The lastof their good faith regarding minority owners. These question is the easier entry point to the Heffalump hunt-signals have costs, both for the firms that make them er’s conundrum.and for the economy as a whole. Referring to the performance studies (Table 2), the Signaling good faith. Publicly traded family firms can answer would seem to be no: professional family firmssignal their good faith and gain legitimacy by hiring the perform the same as other professional firms. This infer-major international accounting firms (Yeung & Soh, ence follows if we compare family and nonfamily pub-2000). Another way, which has also been found in the lic firms that are no longer managed by founders. Forhigh investor protection environment of the United these firms there are no significant performance differ-States, is restraining from tax aggressiveness (i.e., “the ences. All performance advantages for public familydownward management of taxable income . . . [and] tax firms can be attributed to first-generational, entrepre-avoidance;” Chen et al., 2010, pp. 41-42). Chen et al. neurial effects (Arrègle & Mari, 2010; Chu, 2011; Fogel,(2010) found that family-controlled firms are less tax 2006; Saito, 2008). This answer of average performanceaggressive than non–family-controlled firms. They has face validity. If a family firm thoroughly profession-argued that this behavior signals good faith to minority alizes, it conforms to the normative modes of organiza-shareholders because “tax aggressiveness activities are tion and management. Its performance can be expectedoften bundled with rent extraction” (p. 60). to be average. Two other signals have the effect of reducing the cash However, we also know that family firms are betterflows at the discretion of the owners: increased levels of than nonfamily firms at expropriating value and enjoy-debt (Setia-Atmaja, Tanewski, & Skully, 2009) and ing the private benefits of control (Bennedsen &higher dividend payments (Faccio et al., 2001; Setia- Nielsen, 2010; Bertrand & Schoar, 2006; Claessens et al.,Atmaja et al., 2009; Young et al., 2008). In the low 2002; Westhead & Cowling, 1997). Therefore, if atinvestor protection environment of China, families with least some public family firms share this tendency, theexcess control over ownership are less inclined to pay apparently equal performance, net of value expropria-dividends, but high-growth family firms, which should tion, may not reflect equal performance in value cre-be reinvesting cash flows, pay even higher dividends to ation. Furthermore, there are large sample and caseattract capital (Feng, 2011). In contrast, Japanese family research reasons to think that this may be so. Thesefirms pay higher dividends than nonfamily firms but do arguments will also lead us back to the first question,not do so if they are quickly growing (Yoshikawa & what is a professional family firm?Rasheed, 2010). In high-investor protection environ- Family control: Enough but not too much. There mayments, low dividend payments can be interpreted as a be an optimal level of family involvement in ownershipsignal of stewardship (Le Breton-Miller et al., 2011). In and involvement in management: not too little and notenvironments where, instead, fast growing firms pay too much. For example, Sirmon et al. (2008) argued thatdividends as signals to investors who could invest simply family-influenced but not family-controlled firms, opti-on the basis of growth expectations, damage is done to mally holding about 15% of the equity, tended to achieveresource allocation and economic growth, and not just to more positive outcomes. For these firms, the positivethe firms compelled to dispense with scarce resources.8 attributes of a family are enabled while the potential negative effects of family involvement are limited. They further argued that maintaining the family influence wasHybrid Professional Family Firms important but giving some voice to other stakeholders The hunt for the Heffalump. The hybrid professional disallows the negative attributes of family control onfamily firm is like the Heffalump: “a rather large and the business. They also found that firms having family
Stewart and Hitt 75influence are more likely to respond with higher invest- still a great deal to learn (Schulze & Gedajlovic, 2010;ments in R&D and with internationalization than nonfa- Steier, 2003).mily firms or family-controlled firms. In contrast, Le Breton-Miller et al. (2011) found thatmost of their indicators of family involvement are sig- Conclusion: Looking Back andnificantly associated with lower stewardship and, hence Looking Forwardlower stock market performance, whereas high levels offamily ownership lead to higher levels of stewardship:“Family control bears a curvilinear U-shaped relation- Research on Professionalizationship with stewardship” with the relationship turning Although “professionalization” is often treated as a sin-positive around “a 28% [ownership] inflection point” gular construct, it entails multiple dimensions (Table 1)(Le Breton-Miller et al., 2011, p. 715). They attributed that combine in different ways in various modes amongthis finding to an increasing identification between the family firms. A comprehensive understanding of thesefamily’s interests and those of the firm. These two stud- combinations would require attention to six distincties differed in the outcomes they examined (strategic categories of variables. These categories are (a) theactions versus stewardship) and are not fully compara- environment, such as national legal development andble. Therefore, we cannot say exactly where to find this intensity of competition (Tsui-Auch, 2004; Zhang &golden mean of family influence, but both studies are Ma, 2009); (b) family characteristics, such as genera-suggestive of a hybrid possibility. tion and family orientation (Bennedsen et al., 2007; Hatum et al. (2010) reported a more detailed but Lumpkin, Martin, & Vaughan, 2008); (c) business char-small-n study. They compared two Argentine family- acteristics, such as firm size and governance (Chrismanowned food processors. One firm proved much more et al., 2009; Kotey, 2005); (d) managerial approach,adaptive to environmental shifts. This firm was less such as the use of internally or externally developedbureaucratic, centralized, and formalized than the other, knowledge and the principle of merit (Oxfeld, 1993;especially in operations, although it incorporated ele- Ram, 1994); (e) performance outcomes, such as financialments of formalization and strategic analysis. Unlike the market measures and noneconomic benefits (Chrismanless adaptive firm, it recruited senior managers with et al., 2010; Miller et al., 2011); and (f) effects for vari-diverse experiences and perspectives as well as promot- ous stakeholders, such as minority shareholders anding from within. It celebrated its tradition of innovation nonfamily managers (Barnett & Kellermanns, 2006;and appears to have succeeded in finding salaried man- Martínez et al., 2007).agers who had a cultural fit with the family (A. Hall & Given such complexity, it is unsurprising that thereNordqvist, 2008). This adaptive family firm exemplifies are gaps in our knowledge about the modes of profes-some of the possible means by which such firms can sional management in family firms. This is borne out bysuccessfully professionalize. a review of the 12 studies we found that directly bear on As Dyer (1989) observed, firms can professionalize this topic. None use fine-grained data on kinship (Paradatheir managerial staff either by hiring established man- et al., 2010, and Tsui-Auch, 2004 are partial exceptions).agers or by developing their current or potential manag- None depict managerial processes as they relate to theers. Further research is warranted to identify the contexts use of kinship. Most construe professionalization inand approaches in which family and business interests terms of the employment of nonfamily managers, whichcan jointly be served. However, we can find in the litera- is typically held to stand for broader changes. At most,ture some suggestions. Large family-owned firms four dimensions are considered (Hung & Whittington,that succeed over the generations appear to use both 2011; Songini & Gnan, 2009). The processes of profes-approaches (Benedict, 1968; de Lima, 2000; Tsui-Auch, sionalization receive welcome attention in some of the2004). Their founding families retain a sense of their articles, all of them qualitative, (Chittoor & Das, 2007;tradition and purpose, but they may also display a “market Dyer, 1989; A. Hall & Nordqvist, 2008; Hung &mentality” (Steier, 2003) that enables them to take an Whittington, 2011; Parada et al., 2010; Tsui-Auch, 2004).“active” ownership role (Helin, 2011). Here, we must Salaried managers in a family firm must attend to therecognize that our suggestions are speculative as there is needs of the families owning the firm (Colli et al., 2003;