Family firm governance change factors

8th workshop on family firms management research, Jönköping, Sweden, May 31-June 2, 2012
Governance instruments as practices in strategizing:
Towards a behavioral perspective of the family firm
Authors:
Judith van Helvert
Windesheim University of Applied Sciences
PO Box 10090
8000GB Zwolle
The Netherlands
T +31 88 469 7189
E jmc.beugels@windesheim.nl
Ilse Matser
PO Box 10090
8000GB Zwolle
The Netherlands
T + 31 88 469 8828
E ia.matser@windesheim.nl
Ron van der Pol
PO Box 10090
8000GB Zwolle
The Netherlands
T + 31 88 4697834
E hwg.vander.pol@windesheim.nl
Work in progress; please do not quote!

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Governance instruments as practices in strategizing:
Towards a behavioral perspective of the family firm
Abstract
Specific events may alter the governance structure of family firms. However, current theories and
models of governance are rather insensitive to the causes of changes or developments in the
governance structure. For example, the model developed by Huse (2007) on the value creating process
of the board takes into consideration the contextual contingencies in which the process takes place, but
the underlying intentions of the actors or the factors that lead to action are undiscussed. In addition, it is
questionable whether value creation is the only process outcome of the governance change process that
should be measured. Family firms might have different goals than just value creation to change their
governance structure, depending on the event that triggers this change process. For example, firms that
face succession in a couple of years might want to change the governance structure to support this
process and manage the family relationships for the future. A successful transition might than be more
important as a process outcome than value creation.
This paper builds on behavioral theory and reports on the intention of family members in family firms
to change their governance structure. It relates recent behavioral thought on governance (Van Ees et
al., 2009) to strategizing in the context of the family firm to set up a research design which aims to
understand governance mechanisms as strategic practices to support the strategic decision making
process. The research design builds on the Strategy-As-Practice (SAP) perspective and focuses on 18
private family firms in the Netherlands that were sufficiently different in terms of overlap between
the family and the firm, the level of formalization and general characteristics like sector and size.
This study contributes by looking at change processes in strategizing while considering the specific
family firm context. Building on behavioral theory, we propose to test the assumptions underlying
I don’t have a working relation with my brother.
We are just brothers who run a business together.

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behavioral theory in the context of the family firm, and aim to generate theory for the family business
research field.
Keywords: strategizing, governance, family firm, strategy as practice, behavioral theory
1. Introduction
Traditionally, strategy researchers viewed strategy as something that organizations have. This view has
led to numerous quantitative studies on the relation between firm- or industry level effects on
performance. There are a number of fundamental concerns to be made with respect to these studies
and their implications on strategy for private family firms. First, most of these studies focus on large
(listed) firms (as opposed to SMEs) and they provide contradictory findings. The second concern relates
to the methodology used; these are mostly quantitative studies that fail to explain what strategy
actually entails; it remains for example unclear which strategic tools are used by which actors and in
which situations. The third concern is that it is questionable whether financial performance is the main
goal of private family firms.
Relatively little attention has been paid to the strategy processes that family firms follow to achieve
their goals. Leading scholars in the strategy research field (e.g. Whittington, 2006; Johnson et al., 2003;
Johnson et al., 2007; Nordqvist & Melin, 2010, Jarzabkowski and Spee, 2009) have proposed to shift
attention to a more micro-level approach when studying strategy. This proposed focus on the micro
level is based on the view that strategy is an activity; something that people do instead of something
that organizations have. There is a need to understand what people actually do when they engage in
strategic activity to explain larger patterns of strategic actions.
This paper is part of a larger research project that aims to contribute to the identification of strategy
processes in private family firms in the Netherlands that are in the middle of a change in governance
structure. Governance mechanisms in SME family firms can be considered to be vehicles to provide
structure and discipline in strategic processes. In addition, the involvement of outside directors in
boards or top management teams can help in realizing strategic change (Brunninge et al., 2007). The
research project seeks to analyze who the actors involved in strategizing are, how, when, where and

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why they are involved, and how the governance mechanisms support this process. The firms that
participate in the project have the intention to adjust their governance structure. They all have their
own reason or ‘sense of urgency’ to invest time and other resources in this change process.
This paper focuses on the first part of the overall research project and seeks to analyze the intention to
change the governance structure in private family firms. Why do these firms intend to change their
governance structure? What are their expectations of a new governance structure? In addition, the
study aims to identify the context in which the potential change process takes place. Thus, the purpose
of this paper is to explore and understand the cause and goals of the intended change process of the
governance structure in family firms. The focus is on the following research question:
RQ: Which factors lead to the intention to change the governance structure of the family firm?
The next section discusses the literature and theory that provided a starting point for this study. We
will shortly introduce behavioral theory to understand strategizing and the supporting role of
governance mechanisms in the strategic decision making process in the family firm. After a section on
the sample, the findings from the interviews and the propositions resulting from the assumptions
underlying behavioral research are discussed in section 4 and 5. The conclusion and limitations will be
discussed in the last section.
2. Theoretical background
Strategizing
The research approach that pays attention to the micro processes and detailed activities of strategy
making is referred to as the Strategy As Practice (SAP) perspective, also referred to as strategizing. This
perspective is defined as “a concern with what people do in relation to strategy and how this is
influenced by and influences their organizational and institutional context” (Johnson et al., 2007). It
relates to “the detailed processes and practices which constitute the day-to-day activities of
organizational life and which relate to strategic outcomes” (Johnson et al., 2003). As noted by Nordqvist
(2011), the SAP perspective is important for two reasons: (1) to develop accurate theoretical concepts
on family firms that are based on a theoretical and methodological approach that takes into account the

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details of the processes through which strategy is formed, and (2) to pay sufficient attention to family
members as social actors and their interaction because of their influential role in strategy formation.
The SAP perspective is still relatively new. Since 2005, a growing number of studies takes a qualitative
approach to study the strategy process as opposed to strategy content. For example, the Center for
Family Enterprise and Ownership of the Jönköping International Business School in Sweden has
published a number of qualitative studies on strategizing in family firms (e.g. Nordqvist & Melin, 2010;
Brundin & Kjellander, 2010; Nordqvist, 2011; Hall et al., 2006). The little empirical research that is
available on strategizing in family firms provides indications of the actors that engage in strategizing
(Nordqvist & Melin, 2008), in which arenas they engage in strategizing (Nordqvist, 2011), and the
practices of strategic planning in family firms (Nordqvist & Melin, 2010). One of the major research
opportunities in strategizing which is still unexplored, relates to change initiatives. As explained before,
this paper focuses on the intention of family members in family firms to change their governance
structure to understand governance mechanisms as strategic tools in the strategic decision making
process.
Jarzabkowski and Spee (2009) have provided a literature review on studies within the SAP field,
using the following broad three research parameters: (1) practitioners, those actors that do the
work of strategy, (2) practices, the tools through which strategy work is done, and (3) praxis, the
flow of activity in which strategy is accomplished. Whereas eventually all three parameters will be
part of the study, the main focus of this research project, namely studying how governance can be
used as a tool to support the strategic decision making process, is covered by the practices
parameter.
Governance in family firms
Research in corporate governance addresses the nature of interaction and relationships among the
internal actors, the external actors and the board members in the process of decision making and
control over firm resources with the aim to create value for the organization (Van Ees et al., 2009; Huse,
2012). Internal actors are those who make decisions and take action (management), and external actors
are those stakeholders who seek to influence and control decisions (for example the owners). According
to this theoretical view on governance (e.g. by Mintzberg, 1983) family members working in family firms
might qualify as internal and external actor at the same time. In addition, family members might have

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objectives other than purely economic objectives that influence the interaction with other actors
involved in the decision making process. It is therefore important to consider the interaction in relation
to its history and specific context.
Because of ownership positions, family owners in family firms enjoy certain control rights over the firm’s
assets and use these rights to exert influence over decision-making processes. Carney (2005) argues that
the competitive advantage of family-controlled firms arises from their system of corporate governance.
His argument is based on the view that the control rights associated with the governance systems create
general propensities with regard to the formation of organizational capabilities and that governance
therefore influences the way managers develop internal routines, processes, and systems and the
manner in which firms contract with external entities such as financiers, capital markets, and other
business partners. According to Carney, the impact of the ownership’s control over the firm’s assets
generates three specific characteristics that provide advantages in scarce environments, that generate
social capital, and stimulate opportunistic investment processes. These three characteristics are (1)
parsimony (strategic decisions are made with personal wealth and in general family firms are therefore
more prudent), (2) personalism (the ultimate authority is incorporated in the person of the family
owner-manager), and (3) particularism (majority ownership permits the family to use particularistic
criteria next to rational calculative criteria in the decision-making process.
Next to formal or contractual governance systems, firms can also build on informal or relational
governance. Relational governance relates to values and agreed-upon processes in social relationships
that promote flexibility, solidarity and information exchange (Poppo and Zenger, 2002). These social
relationships are generally characterized by trust. In 2002, Mustakallio et al. have analyzed the effect of
contractual and relational governance on the strategic decision-making process in family firms. They
found that relational governance, based on social capital, augments contractual governance and leads to
higher decision quality and decision commitment.
The context of the family firm
Research has shown that family firms are different from non-family firms, among others in their social
relationships with stakeholders (Corbetta and Salvato, 2004), in the way they manage their resources
(Sirmon & Hitt, 2003) and next to economic objectives, family firms strive for the continuity of the firm,
family harmony, social status and family business identity (Chrisman et al., 2010). Because of these

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differences, family firms behave different from non-family firms. However, the family firm does not
exist. Family firms differ by the impact of the family on the firm. Chrisman et al. (2010) have shown that
family involvement is positively related to the adoption of Family Centered Non Economic (FCNE) goals
and that this relationship is partially mediated by family essence as measured by the transgenerational
control intention and family commitment. This is one way to look at the impact of the family on the firm.
The integrated system view as used by Hall et al. (2006) is another way to look at the impact of the
family on the firm, and proposes that the functioning of the family firm is not only the result of an
overlap in the family system, the business system and the ownership system, but of a synthesized
system with its own dynamic and logic. This integrated systems view is further illustrated by Litz (2008)
who not only talks about the family business but also the business family. He uses the Möbius strip as a
metaphor to conceptualize the family business and its reciprocal institution—the business family. The
family system and the business system are interrelated by their output which is turned into input for the
other system: “a business becomes a family business and, conversely, a family becomes a business
family, whenever cross-system transfers occur. For example, when a next generational family member
becomes a business employee, he or she helps generate profitable transactions for the business, which
in turn provides a financial return used to sustain the family. In short, the family-firm interface becomes
increasingly Möbius-like whenever each system’s outputs (the family’s child and the firm’s wages) are
transferred across systems to become the other system’s inputs, that is, the firm’s workforce and the
family’s income, respectively”. Litz continues by differentiating the level of interrelatedness by four
factors: scale, scope, sign and singularity. Scope relates to the diversity of dimensions ranging from
values to finances, scale is about the size of the transfer in absolute and relative terms, sign concerns
whether the input is positive or negative, and singularity concerns the complexity of the transfer.
From an integrated systems perspective, an understanding of the governance of the family business as a
practice to support the strategic decision making process must be built on the specific family business
context which is characterized by the level of integration of the family and the business (family
involvement). The perspective leads to expectations that the individual actors have their own specific
goals depending on their position in the firm (e.g. owner, manager or employee), and that actors are
subject to particular conditions of the family firm, such as social norms from the family that provide
guidance and boundaries in this strategy process (Hall, et al. 2006).

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Behavioral theory: why?
Recent developments in governance research to use behavioral theory to understand the conditions for
effective governance depart from the dissatisfaction about conflicting and ambiguous research results of
governance studies that use the agency theory perspective as a basis. This shift in theoretical
perspective is important because assumptions like rational decision making underlying agency theory
have proven not to be valid in reality. The behavioral theory of the firm (March and Simon, 1958) helps
to understand decision making in real business settings. According to behavioral theory, decision making
is an experiential learning process which develops by trial and error. During this process the goals are
adapted, and attention and search rules are developed (Huse, 2007). Van Ees et al. (2009) have applied
the assumptions underlying the behavioral theory of the firm to boards and corporate governance. This
paper proposes to use behavioral theory to study why and how actors choose and use specific
governance mechanisms as a tool to support the strategic decision making process.
After the next section that elaborates on the research method, the variables of interest and the sample,
we will discuss the intentions of the firms to adjust the governance structure. Then, we will introduce
the assumptions underlying the behavioral theory of the firm, put them in the context of the
participating family firms and relate them to the strategic decision making process.
3. Sample and research method
According to Johnson et al. (2007), in-depth and mainly qualitative research are a central requirement
for developing the SAP perspective. In this qualitative study, eighteen family firms participate that have
the intention to change their governance structure. These firms are sufficiently different in terms of the
formal structures and processes that could be expected to have an impact on strategic processes. The
characteristics of these firms are shown in Table 1, in the Appendix. Most of these firms have 50 or more
employees, however the number of family members working in the firm is limited to a maximum of
three. Three firms are managed by the first and second generation, seven firms by the second
generation, two by the second and third generation, two by the third generation, and 4 by the fourth
generation. Fifty per cent of the firms have management teams that partly consist of non-family
members, and only four firms have a board next to the management team.

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These company characteristics were acquired via semi-structured interviews, during which topics like
the intention to adjust the governance structure and the expectations of a new governance structure
were discussed. In addition, we talked about decision making processes in the firm and the involvement
of the family. These findings have been summarized in Table 2, also presented in the Appendix. We will
further elaborate on these findings in the next section.
As explained in the introduction, this paper is part of a larger research project that aims to contribute to
the identification of strategy processes in private family firms in the Netherlands that are in the middle
of a change process of the governance structure. This study aims to combine the behavioral theory of
the firm and the findings from these introductory interviews to set up a research design to analyze
whether and how governance structures can support the strategic decision making process and how this
is linked to the goals of the firm. After this first stage of the larger research project, we will select those
firms that provide diversity in terms of their intention to start the change process to do further case
study research. This approach is referred to as theoretical sampling (Glaser and Strauss, 1967). The goal
of theoretical sampling is to gain deeper understanding instead of a representative capture of all
possible variations. We will select two cases per intention or ‘sense of urgency’ to adjust the
governance structure to be able to make cross comparisons. Cross comparison and triangulation by
using multiple data collection methods leads to higher validity of the study and thereby provides
stronger substantiation of constructs and hypotheses (Eisenhardt, 1989). Therefore, multiple data
collection methods will be combined to gather the empirical material such as a large number of
interviews (with owners, managers, consultants, board members, family members, and accountants),
observations of meetings (board meetings, strategic planning meetings), casual conversations, and site
visits. Company reports, minutes from board and senior management team meetings, strategic plans,
newspaper articles and the web will be used. The goal of these case studies is both to test the
behavioral theory of the firm in the process of strategizing, and generate theory for the family business
research field. This means that a combination of an inductive and deductive approach is used. This
combination of analytical approaches is indicated as ‘abductive’ (Alvesson and Sköldberg, 2000).
Variables of interest
Possible variables of interest include the level of integration between the family system and the
business system, strategizing, goals and governance mechanisms. To differentiate between the different
family firms in the study, Litz’s (2008) idea of various levels of interrelatedness between the family

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system and the business system will be elaborated on. The second variable of interest relates to
strategizing and concerns the goals of the family firm. What are their economic goals, what are the non-
economic goals and to what extent are these goals important for either the family system, the business
system or both. Do family firms operate as ‘extensions’ of their owner-managers or the family? In
addition we want to know about the expectations of a new governance structure. How can the new
governance structure help in realizing the goals of the company? Again, the study will both focus on the
specific governance mechanism that is used, but also its interaction with contextual and scope
conditions. Furthermore, it is becoming recognized that the nature of governance mechanisms needs to
change as firms cross over the different thresholds in the life-cycle of their development (Zahra et al,
2009). So one important contextual or scope condition to take into account is the life-cycle of the firm.
Therefore, we have also asked about the intention of the firms to participate in the research project to
understand the reason why they want to reconsider their governance structures.
4. Initial observations
Because the number of family firms that has a board is rather limited (13.5 per cent of the family firms),
we want to know which strategic issues trigger firms to think about formalizing the governance
structure. Therefore, we have asked the firms for their motivation to participate in our research project,
for the expectations on a new governance structure, and the involvement of the actors. In this section
we will report and illustrate on these findings. 1
Intention to adjust the governance structure
The intention of the participating family firms to think about and reconsider the governance structure
can be categorized in three major factors: ownership structure, family management, and changes in the
market situation. Other factors which are mentioned are the need for an advisory ‘tool’ either for the
CEO or for the management team as a whole, a backup plan if something happens to the CEO, manage
relationships with non-family owners, and the need for more formalized strategic planning.
1
Due to translation from Dutch to English, slight deviations in meaning may occur in quotes.

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Ownership structure
One of the major strategic issues to think about the governance structure is a change in the ownership
structure. Nine of the eighteen family firms indicate that ownership issues are at least one of the
reasons to consider an advisory or supervisory board.
In the situation above, the change in ownership structure is related to a succession. However, also other
situations than succession might be a reason to adjust the governance structure. For example, the
involvement of the owner in the firm.
Family management
Another factor which is mentioned by a number of firms as the main reason to think about the
governance structure and consider to change it, relates to managing family involvement. This relates to
setting requirements for family members who want to work at the family firm, but also to manage
responsibilities of family members at different positions in the firm.
We know about the legal and tax issues involved in ownership succession, but we also want
to learn how to ensure continuity and the quality of employees.(…) And ehm, well, we want
to be informed about the different governance options and broaden our view. So orientate
on a new governance structure.
The sense of urgency to adjust the governance structure of the firm results from the change
in ownership structure. When I think about the former ownership situation, I notice that I
have a bad feeling about it. That I have not acted on it before and I have been paying
someone who did not add something to the firm, but who was quite demanding. And with
that experience, I now say that I want to manage things right.
Father: I am, ehm, I want, the priority is that I am and stay the father of my sons. And after
the succession I don’t want to control them. So the members of the board of supervisors are
all non-family members. The only place where I still talk about the firm with my sons now
they are in the business is at the kitchen table.
Son: And ehm (..) we have to do more to keep my sister a little bit involved. Because now
we say, here is the annual account, read it, and then you know what is going to happen. If
she does not understand it, there is too little communication to explain it and make
agreements. We need to formalize that.

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Another respondent responds in a similar way:
Growth and other changes in the market
The third category of factors that are mentioned as reasons to reconsider the governance structure
relates to developments in the market. Some firms struggle with uncontrolled growth whereas others
have difficulty to survive. They are all in need of expertise to help them to respond to these
developments.
It is clear that the respondent above is in need of advice of how to position the firm in a market which
becomes more tight. However, also companies that grow quickly have difficulty in managing this.
Expectations of a new governance structure
Fourteen out of the eighteen family firms indicate that continuity is the main goal. In general, we could
say that their expectation of the governance structure is to help them to realize this goal. With respect
to the governance structure, we see that the intention to change the governance structure is linked to
the governance mechanism that the company is considering. Those firms that struggle with family
management issues are considering family constitutions, whereas the other firms are considering
advisory or supervisory boards. Those firms that consider a family constitution expect that the
We have had some issues in our family. Last year, one of my brothers has given up his
ownership share and this has led to some tension. My children are still very young, but the
oldest of my oldest brother is 22 years old, so within a couple of years succession might
become a relevant topic. So it is interesting and important to manage things right and
know about the different possibilities, now I am thinking to set up a family constitution. But
are there other options? What are the advantages and disadvantages? I also like to talk
about these things with other entrepreneurs.
Since 2004 we have lost some of our major customers. Next to the financial and economic
crisis, we have experienced some major shifts in our industry. We want to know how we can
survive as a small family firm in a market in which the major customers make agreements
with the big franchising companies?
Should I interfere or should I let the manager ehm (..) do his job? Ehm and ehm not overrule
him, well I would not do that anyway when others would be able to hear or see. That is
what I struggle with. We are not bullies, but management can be more tight every now and
then.

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constitution will help them clarifying authority and ownership issues, and eventually to achieve the goal
of continuity and family harmony.
If we consider the expectations of an advisory or supervisory board in terms of the general distinction
between the service and control function of governing mechanisms, then most of the respondents
indicate that they are in need of this service function. A number of firms mention the focus on strategy
and organizational issues on behalf of a healthy company.
Involvement of actors
Then, as the last variable of interest in this initial stage of the project is the involvement of the actors in
this change process. In order to make inferences about the supporting role of governance mechanisms
in strategizing, we need to acknowledge the context in which the process takes place. Decision making
processes and the actors involved are very different. In one of the firms, the governance structure is
rather formal with a management team with four non-family members and a supervisory board with
three non-family members. Only one of the two owners, brothers, is the CEO and part of the
management team. The other brother has a sales position, however, via informal routes, this person has
an enormous influence on the strategic decision making process.
My father was still working fulltime when he died. We were already working in the
company at the time. My mother, ehm, inherited the ownership of the firm. And ehm (..)
she has never worked, well she knows a lot about the firm, but she never eh managed the
firm and we actually did that together with our father. With the new governance structure
we expect to manage the ownership succession without destroying the family, without
destroying the firm.
A board would be a manner to bring discipline in the strategic decision making process. And
it is about bringing in outside experience and expertise on certain topics. However, we have
always had the idea that if we have an advisory board, that it needs to be flexible. That we
can adjust the composition of the board to the life cycle of the firm.
Most of the time, my brother and I fully agree on the direction we want to go. We both are
very commercial-oriented. That means that we put the interest of the market first, and the
business needs to follow. Sometimes, the business has some difficulties with that. We ehm
sometimes we are ahead of time or we want to speed up the process. My brother
sometimes ignores the official organizational structure, that leads to problems every now
and then.

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Other firms try to keep the family and business situation separate in order to make sure that business
problems do not become family issues.
5. Behavioral theory in strategizing
In section four we have elaborated on the main variables of interest of the respondents for this paper.
Our first observations seem to indicate that we can make three broad categories of intentions to
reconsider the governance structure, namely ownership succession, managing family involvement and
changes in the market. In addition, we have shown that the intention, the goals and the expectations of
a new governance structure, lead to preferences for specific governance structures. The context in
which these processes take place are very diverse. The view of the CEO on who should or should not be
involved in strategizing and in which arena possibly depends on the number of family members
involved, the integration between the family and the business system, and the level of
professionalization. In order to analyze how these variables are going to influence the change process
towards a new governance structure, we suggest to use behavioral theory as a theoretical framework.
Therefore, in this section, we will elaborate on the assumptions underlying the behavioral theory of the
firm, and come up with propositions that can guide future research activities. These assumptions are
successively bounded rationality, satisficing behavior, routinized decision making, and political
bargaining.
Bounded rationality
The complexity of the business environment makes it impossible for decision makers to completely
acknowledge and understand the linkages among variables around them (Van Ees et al., 2009; Huse,
2007). Decision makers in organizations are limited in their ability to process information and solve
complex problems due to constraints on their decision making capabilities. This phenomenon is referred
to as ‘bounded rationality’. From this concept of bounded rationality we can deduct that decisions
cannot be regarded as optimal solutions, that subjective factors like cognitive bias and incompetence
Ehm, well, we have decided that eh, which works really well, that the women do not
interfere in our business decisions. I am sorry, but that is the way it is. When we still worked
in the firm with three brothers, you have to deal with three women of whom none has the
intention to do something in the firm. When we see each other in private, in family
situations, we don’t talk about business.

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have an effect on the outcome of the decision making process, and that the limited abilities of decision
makers might explain organizational inefficiencies and failure. Applied to governance, bounded
rationality implies that actors that either participate in or influence the decision making process cope
with the constraints on their capabilities to process relevant information by applying simple decision-
making heuristics to solve strategy and monitoring problems. It is likely that the more deeply these
heuristics are encoded in the organizational memory, the more they will be recalled and enacted on in
similar problem situations (Van Ees et al, 2009).
The concept of bounded rationality in the context of family firms is used very little. The studies that do
use the concept relate it to agency theory (Chrisman et al, 2003; Van den Berghe & Carchon, 2003).
However, we propose that the concept of bounded rationality can be linked to the inward orientation of
family firms. Especially in the process of strategic decision making, and the role of a governance
mechanism as a supporting tool to realize the goals, which is fully internally orientated, the danger may
exist that macro developments are insufficiently acknowledged by the family members. However, non-
family members that have a position in the board or management team might have the role in the
strategizing process to bring in this broader view. This leads to our first proposition:
P1: Family members who are internal actors in the strategizing process are led by internal developments
and apply inward oriented decision making heuristics in the decision making process.
P2: The more generations have been involved in the firm, the stronger the decision making heuristics
will be and that problems will be solved in a way, like ‘they’ve always been solved’.
P3: The added value of the involvement of non-family members in strategizing arises from bringing in
relevant ‘outside’ information and assist in well informed decision making.
Satisficing behavior and problematic search
The satisficing behavior assumption refers to the tendency of actors in the decision making process to
accept choices that are ‘good enough’. In real business settings, decision makers are mostly concerned
with solving immediate problems and finding short term solutions which is generally referred to as
problematic search. Problems are only recognized to the extent that the actors have failed to satisfy one
or more of their goals or when they expect to do so in the near future (Van Ees et al., 2009). In this
process, the actors risk attention allocation and selection bias (Huse, 2007). Decisions can therefore not
be regarded as optimal solutions to problems. They reflect solutions that satisfy particular aspiration

16
levels and they are determined by history and the social environment (Van Ees et al., 2009). The
advantage of this narrow and focused search could be efficiency. However, the disadvantage is that it
could promote inertia that breeds strategic simplicity (Zahra, 2008).
When the concept of satisficing behavior is applied to governance settings, van Ees et al. (2009) refer to
the goal realization process. As soon as the goals of the actors are satisfied, the problem is solved. This
can be realized by finding an alternative to the existing solutions, or by revising the goals that make the
existing solutions acceptable. Huybrechts (2011) uses the concept of satisficing behavior to study the
gap between board task expectations (by which she means the needs of the firm) and board
performance in family firms. One of those needs could possibly be to realize the goals of the company.
To study the goal realization process, it is important to keep in mind that family firms have a
simultaneous focus on economic and non-economic goals. Although the research on goals of family
firms is still rather limited, we do know that the sustainability of the firm is considered important. In
addition, Chrisman et al. (2010) have identified that family harmony, social status derived from the firm
and a strong identity linkage are general Family Centered Non Economic (FCNE) goals that become more
important when family involvement and family essence become stronger.
The non-economic goals of family firms are not easily satisfied on the short term. Ensuring continuity
and trying to maintain family harmony can both be considered as processes which require continuous
attention. We therefore propose that:
P4: Satisficing behavior and problematic search are concepts that will be observed to a lesser extent in
family firms in which the family and business system are strongly integrated.
Routinization of decision making
The third assumption underlying the behavioral theory of the firm is the routinization of decision
making. Actors mostly rely on routines during the decision making process. These routines, also referred
to as performance programs (March and Simon, 1958) or standard operating procedures (Cyert and
March, 1963), consist of the codified memory of the firm, including past experience, personal
(experiential) knowledge, capabilities and beliefs, and the values and capabilities of the organization
(Huse, 2007). On the one hand, these routines provide a source of control and stability, by which they

17
enable organizational action. In addition, they serve as socially and historically constructed programs of
action. However, on the other hand, routines can also constrain organization action and they mostly
involve tacit knowledge which is hard to codify. Routines can be broken by learning processes, so next to
routines unlearning also plays a central role in behavioral theory (Van Ees et al., 2009).
According to behavioral theory, it is likely that board members (or actors in other governance
mechanisms) will deal with organizational problems by applying memorized routines to reduce the
complexity of decision making. It would be interesting to test this notion in research to find out how,
why, and under what conditions internal and external actors in governance situations reinforce, change
or unlearn routines used to solve problems and make decisions (Van Ees et al., 2009). Another
interesting question is whether routines lead to more formalization in the governance structure or
whether routines lead to more informal (or relational) governance.
Family firms have often developed strong routines. It happens that things are being done in a specific
way, because it has always been like that. The older the firm gets, the stronger the routines develop.
Although not mentioned explicitly, Zahra (2012) uses the concept of routinization of decision making to
examine the effect of family ownership on the breadth, depth, and speed of organizational learning. He
claims that the limited search for opportunities to solve problems could be broken by experimenting and
learning and that this is triggered by family ownership because of their incentives (performance of the
company). He indeed finds that the breadth and speed of learning could be enhanced by family
ownership, but that the depth of learning is negatively associated with family ownership.
P5: Because of accumulated tacit knowledge and specific values and norms that influence strategizing in
family firms, routines in decision making will be strong in family firms in which the family and business
system are integrated.
P6: New generation might have the ambition to add things to the firm, and develop these routines by
engaging in learning processes.
P7: The influence of non-family members in strategizing might challenge existing routines and further
develop them.

18
Political bargaining
Political bargaining explains the negotiation and bargaining process in the context of the firm among
coalitions of stakeholders or actors with conflicting interests and goals. When the coalitions change
because of the fact that one actor leaves the company or the family involvement becomes higher, the
decision making process is influenced because the goals, the goal-setting process, and the problem
solving process might change. Goal conflicts are solved through political bargaining rather than through
objective alignment by economic incentives. In addition, goal formation and goal conflicts are seen as
the outcome rather than the beginning of the bargaining process: they may drive the search for new
knowledge and information (Huse, 2007; Van Ees et al., 2009).
Classen et al. (2012) argue that behavioral factors like values and cognitive backgrounds of dominant
coalitions within a firm influence complex strategic decisions and they posit that the values and
cognitive backgrounds of key decision-makers within the firm influence the search breadth of family
versus nonfamily firms. In addition, they claim that family businesses prefer to minimize the influence of
coalitions that consist of external partnerships within the innovation process, partly because of their
focus on socio-emotional wealth (SEW) preservation and partly because of their limited cognitive
diversity and absorptive capacity. So, they expect that family firms influence the coalitions of actors that
participate in the decision making process to make sure that the goals of the family are preserved.
P8: The presence of non-family owners and non-family managers in family firms could lead to increased
political bargaining about the goals of the firm.
P9: The larger and the older the family firm, the more the involvement of external actors in the political
bargaining process and the higher the focus on family centered non-economic goals.
Behavioral theory applied to the supporting role of governance in strategizing provides a theoretical
framework that challenges the dominant agency perspective to open up the black box of the behavior of
internal and external actors in the decision making process in firms. The focus of behavioral theory on
the interactions and behavioral processes among and between the actors involved requires a qualitative
research approach. The challenge of this research approach lies in using the key concepts of bounded
rationality, satisficing behavior, routinized decision making and political bargaining to explain the
decision making process and by focusing on the effects of the context and history at the same time.

19
Conclusion and Limitations
This paper has aimed to set up a research design on the role of governance mechanisms as a tool to
enhance the strategic decision making process based on a behavioral framework. This research design
builds on the strategy as practice approach and views governance mechanisms as a practice to support
strategizing. Our first observations from our sample of family firms that reconsider their governance
structure in order to work on their own strategic issues are that these issues can be categorized in three
main groups: ownership succession, the management of family involvement, and market developments.
We have also seen that the intention, the goals and the expectations of a new governance structure,
lead to preferences for specific governance structures and that the contexts in which these change in
governance structures take place are very diverse. The actors that are involved in this process, and the
arenas in which the decision making processes take place, seem to depend on the view of the CEO, the
integration between the family and the business system, and the level of professionalization of the firm.
In order to analyze how these variables influence the change process towards a new governance
structure, we have come up with a number of propositions, built on the assumptions underlying
behavioral theory. We argue that this theory offers valuable insights, on the one hand to be tested in
the family firm context, and on the other hand to build and extend family business theorizing.
Most family firms in the Netherlands do not have a board; 13.5 per cent of the family firms have a board
versus 30.9 per cent of non-family firms (Flӧren et al., 2010). The use of family governance practices is
also limited; on average 15.4 per cent of the family firms has a family constitution and this figure is very
much dependent on the size of the firm. In the category 1-9 employees, the percentage is only 8 per
cent and in the category over 200 employees the percentage is 37.5 per cent. We are therefore aware of
the fact that there is a bias in our sample towards the willingness to have a more formal governance
structure. However, we argue that it is worthwhile to study this group of firms because of the potential
added value of a formalized governance structure. We consider the firms in our sample to be
forerunners in comparison with other family firms that face similar challenges.

20
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Appendix 1
Table 1: Firm characteristics
Firm A Firm B Firm C Firm D Firm E Firm F Firm G Firm H Firm I
Nō of employees 20 360 500 550 35 60 3 60 150
Nō of fam. members
working
3 3 2 3 2 3 2 2 3
Industry Automobile
service
Construction Wood
construction
Transpor-
tation
Cheese
produc-
tion
Nuclear
medicine
Automobile
service
Laboratory
supplier
Financial
services/
ICT/Food
Year founded 1954 1953 1978 1955 1973 1948 1895
Current generation
(managing)
3
rd
2
nd
and 3
rd
2
nd
3
rd
2
nd
1
st
and 2
nd
2
nd
4
th
4
th
Nō of owners from nuclear
fam.
1 (2nd
generation)
1 (2nd
generation)
2 (2nd
generation)
2 (3rd
generation)
2 (2nd
generation)
1 (1st
generation)
1 (2nd
generation)
2 (3rd
and 4th
generation)
2 (4th
generation)
Nō of fam. members in
management team
2 2 1 2 2 3 1 2 2
External members in
management team
0 1 4 7 0 2 0 0 0
Nō of fam. board members 0 0 0 0 0 0 0 0 2
External board members No Yes Yes No No No No No No
External chair of the board No Yes Yes No No No No No No
Family CEO Yes Yes Yes Yes Yes Yes Yes Yes Yes

23
Firm J Firm K Firm L Firm M Firm N Firm O Firm P Firm Q Firm R
Nō of employees 100 70 55 80 700 30 88 35 50
Nō of fam. members
working
3 1 3 1 2 2 2 3 3
Industry Facility
manage-
ment
Electrical
equipment
and
installation
Construc-
tion
Wood
production
Laundry Safety Safety
specialist
Construc-
tion
Meat
industry
Year founded 1999 1951 1918 1982 1913 1779 1988 1982 1952
Current generation
(managing)
1
st
and 2
nd
2
nd
4
th
1
st
4
th
2
nd
2
nd
2
nd
2
nd
and 3
rd
Nō of owners from nuclear
fam.
2 (1st
and 2nd
generation)
1 (2nd
generation)
3 (4th
?
generation)
1 (1st
generation)
1 (3rd
generation)
1 (2nd
generation)
2 ( 2nd
generation)
2 (2nd
generation)
1 (2nd
generation)
Nō of fam. members in
management team
2 1 3 1 2 2 2 2 3
External members in
management team
1 2 1 1 1 3 0 0
Nō of fam. board members 0 0 0 0 0 0 0 0
External board members No Yes Yes No Yes No No No No
External chair of the board No No No No Yes No No No No
Family CEO Yes Yes Yes Yes Yes Yes Yes Yes Yes
Table 1 Continued: Firm characteristics

24
Participant Cause for participation
in the project
Goals of the family
firm
Expectations of new
governance structure
Overlap
family and
business
Actors involved Arena
Firm A Ownership succession 1. Continuity
2. Family harmony
1. Clarify communication and
authority issues, linked to the
ownership structure
2. When number 1 is satisfied,
there is more time to focus on
the business.
Large 4 Family
members
(3 siblings and a
mother) and the
accountant
Formal and informal (2
siblings in the
management team)
Firm B 1. Management and
ownership succession
2. Need for advice
Continuity Advisory and controlling
board that can help to focus
on strategy and that keeps
the owning manager keen on
developments in the firm.
Medium 2 family
members, 1 non-
family member
Formal
Firm C 1. New ownership
structure
2. There is no plan in
case the owning
manager withdraws.
3. Bad experience with
former ownership
situation.
1. Being number 1 or
2 in various market
segments.
2. Creation of wealth.
1. Knowing how to structure
to firm.
2. Managing ownership
relationships.
3. Organizing informal
consultation.
Small 2 family
members, 4 non-
family members
Formal and informal (1 of
the family members is CEO
and part of the
management team)
Firm D Formalizing the
organization to deal
1. Controlled growth
of the firm
1. Advisory function of the
board.
Large 2 family
members, 7 non
Formal and informal. The
two family members are

25
with the growth of the
firm
2. Continuity 2. Coaching of the managing
family members.
family members brothers who are also the
CEO’s.
Firm E Managing family issues
to prepare for the
future
1. Controlled growth
of the firm
2. Continuity
1. Making arrangements via a
family constitution to deal
with issues of ownership,
management and authority
2. to have a plan in case of
emergency succession
Large 2 family
members and the
accountant
Formal (business issues are
only discussed in the
business).
Firm F 1. Ownership
succession
2. Manage relationship
with non-family
owners
3. Formulate long term
strategy
Continuity 1. Focus on strategy
2. More formal
communication structure
Large 3 family
members, 3 non
family members
Formal and informal (2
brothers and father in
management team; the
business is owned by the
father and two non-family
members).
Firm G Survival in a bear
market
1. Having a satisfying
return.
2. Make the firm
ready for sale.
Advisory function of the
board.
Large 2 family
members and
advisor
Formal and informal.
Copreneurial couple that
discusses business issues
also with their children.
Firm H Ownership succession Make time available
for strategy.
1. Coach for the managing
owner.
2. Sounding board for the
management team
Medium 2 family
members (father
and son)
Formal and informal
Firm I Need for family
management
Continuity and
“bringing the best
Clarity about the different
roles in the family firm and
Large 2 family
members

26
possible quality and
reliability to our
customers”
the corresponding
responsibilities.
Firm J 1. Need for focus on
less markets
2. Need for strategy
development
3. Formalizing the
organization to deal
with the growth of the
firm
4. Ownership
succession
1. Continuity
2. Human Resource
Development
3. Stronger control
function
1. After having succeeded the
present generation, new
management will try and use
new governance instrument,
preferably an advisory board
Medium 2 family
members and 1
non family
member
Formal
Firm K Need for advice on
strategic issues
1. Continuity
2. Looking for new
markets
3 Human Resource
Development
4. Product innovation
Advisory function of the
board
Large 1 family member
and two non-
family members
Formal
Firm L 1. Involvement of non-
family management
board members
2. Ownership
succession
3. Need for growth in a
Continuity Making arrangements via a
family constitution to deal
with issues of ownership,
management and authority
Large 3 family
members and 1
non-family
member involved

27
competitive market
Firm N Family management
(making rules about
ownership and family
involvement)
Continuity 1. Keeping family-owners and
other family members who do
not work in the firm informed.
2. Hold on to family
philosophy, values and norms.
Medium 2 family
members and 1
non-family
member
Formal and informal
(father still likes to be
involved or at least
informed)
Firm O Managing
responsibilities; the
company is too
dependent on the
managing owner.
1. Being number 1 or
2 in the market.
2. Continuity
3. Managed
growth/profit
4. Financial
independence
5. Motivating
employees
1. Make the company ready
for sale.
2. Optimize the organization
structure on behalf of a
healthy company.
Medium 2 family
members and 1
non-family
member
Formal and informal (the
son-in-law has just entered
the business and is a
potential successor)
Firm P Need for strategic
planning
Continuity 1. Advisory function for the
management team
2. Structure and discipline in
strategizing
Small 2 family
members and 3
non-family
members
Formal
Firm Q 1. Ownership
succession
Continuity 1. Sounding board for the
management team
2. Coach for the managing
owners.
Large 2 family
members
Formal and informal. The
succession has recently
taken place and the father
still likes to be involved.
Firm R 1. Ownership
succession
Continuity Large 3 family
members (2
Formal and informal

28
2. Need for a more
professional structure
brothers and
father) and 1 non
family member
Table 2: Overview of variables of interest

Family firm governance change factors

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