Understanding the performance consequences of family involvement in the top management team: The role of long-term orientation

Abstract

This article examines the relationship between long-term orientation, family involvement in the top management team (TMT), and family firm performance. On the basis of agency and stewardship theory, we propose that the inclusion of family members in the TMT only enhances firm performance if it induces a long-term orientation among management. An empirical analysis involving 201 privately owned family firms from Germany supports our theory that a long-term orientation helps align family and organizational goals. As such, it represents an important mediator that links family involvement in the TMT to performance.

Keywords

agency theory family management firm performance long-term orientation privately held family firms stewardship theory

Introduction

Research pertaining to the performance of family firms has recognized the important role of family involvement in the top management team (TMT) (e.g. Cromie et al., 1995; De Massis et al., 2013b; Minichilli et al., 2010). In attempts to understand the relationship between family involvement in the TMT and firm performance, scholars have drawn on agency theory and stewardship theory (e.g. Chirico and Bau, 2014; Howorth et al., 2010; Miller et al., 2013). However, these theories are double-edged with respect to their predictions about the performance impact of family involvement in management, as each theory can be used to explain positive and negative impacts of family involvement in the TMT on firm performance (Miller et al., 2013). Given these contradictory theoretical predictions, it comes as no surprise that empirical findings about the performance consequences of such family involvement are also inconsistent (e.g. Le Breton-Miller and Miller, 2009; Mazzi, 2011).

Thus far, research has primarily relied on family membership to explain performance differences among family firms with varying levels of family involvement in the TMT. However, both agency theory and stewardship theory suggest that the goals and interests of family members determine how family involvement in the TMT influences firm performance (e.g. Chrisman et al., 2007). In particular, the temporal orientations of family members in the TMT as they pursue family and organizational goals seem to be critical. Therefore, family membership alone might be insufficient for predicting the performance impact of family involvement in the TMT. In fact, family involvement in the TMT might only lead to improved firm performance if that involvement is associated with a stronger managerial long-term orientation that helps align family goals with organizational goals.

We define long-term orientation as ‘the tendency to prioritize the long-range implications and impact of decisions and actions that come to fruition after an extended time period’ (e.g. Le Breton-Miller and Miller, 2006; Lumpkin et al., 2010: 241). We argue that a long-term orientation mediates the relationship between family involvement in the TMT and firm performance in two ways. First, a long-term orientation strengthens the positive agency and stewardship effects by enhancing the goal alignment between owners and managers. Second, and more importantly, a long-term orientation reduces the negative effects described in agency and stewardship theories by balancing various stakeholder interests. Regression analyses involving 201 privately held German family firms provide empirical support for our theory.

This article makes three contributions to extant theory and research. First, it contributes to the stream of family firm literature that addresses how family involvement in the TMT affects the financial performance of family firms (e.g. De Massis et al., 2013b; Mazzola et al., 2013; Minichilli et al., 2010; Westhead and Howorth, 2006). Our empirical findings support the presence of a ‘bright side’ of family involvement in the TMT that originates from the mediating role of long-term orientation. While most studies limit their analyses to the direct effect of family membership in the TMT on firm performance, we include long-term orientation as a bridging construct to explain when and why family involvement in the TMT is beneficial for firm performance (Chrisman et al., 2012; George and Jones, 2000).

Second, this article extends the predictions of agency theory and stewardship theory about the performance consequences of family involvement in the TMT. In particular, we show that the contradictory predictions of agency and stewardship theory regarding the effect of family involvement in the TMT on firm performance can be resolved by considering long-term orientation. We find that family membership itself is insufficient for predicting a positive or negative impact of family involvement in the TMT on firm performance (Chrisman et al., 2004; Pieper et al., 2008). Moreover, we show that the influence of family members on long-term orientation determines the performance impact of family involvement in the TMT. This helps to explain differences evident in prior research with respect to the relationship between family involvement in the TMT and firm performance.

Third, we answer the call for additional research on the relationship between long-term orientation and performance outcomes in family firms (e.g. Brigham et al., 2014; Lumpkin and Brigham, 2011). We develop a theoretical explanation of how a long-term orientation contributes to firm performance, and we empirically demonstrate that long-term orientation is a primary driver of that performance.

The remainder of the article is organized as follows. In the next section, we review the role of long-term orientation in light of agency and stewardship predictions regarding the performance consequences of family involvement in the TMT. In addition, we develop our theory and hypotheses. In the third section, we present the data and empirical method used for our regression analyses. The empirical results are the focus of the fourth section. We conclude by discussing the contributions, limitations, and implications of our research.

Theory and hypotheses

Despite the fact that family involvement in the TMT is a common characteristic of many family firms (Astrachan and Shanker, 2003; La Porta et al., 1999), theories on and empirical tests of the performance consequences of such family involvement are often inconsistent (Gedajlovic et al., 2012). Past research has generally relied on two theories – agency theory (Fama and Jensen, 1983; Jensen and Meckling, 1976) and stewardship theory (Davis et al., 1997) – when analyzing the distinct impact of family involvement in the TMT on firm performance (e.g. Chirico and Bau, 2014; Sciascia and Mazzola, 2008). However, both agency theory and stewardship theory offer contradictory predictions about the impact of family involvement in the TMT on firm performance (Miller et al., 2013).

Theoretical controversy: the performance consequences of family involvement in the TMT

Theory on the positive aspects of family involvement in the TMT

Agency theory states that family firms that include family members in the TMT might benefit from lower agency costs, which in turn may enhance firm performance (Fama and Jensen, 1983; Jensen and Meckling, 1976). This theory suggests that family involvement in the TMT can improve the alignment of managerial behavior with the owner’s goals and interests. In particular, the presence of family members in a family firm’s TMT might foster a managerial long-term orientation, given the dominant goal of handing over the firm to the next generation (Brigham et al., 2014; Le Breton-Miller and Miller, 2006). As family firm owners are concerned with the long-term survival of their companies (Miller and Le Breton-Miller, 2005), a long-term orientation among management should lead to goal alignment between owners and managers. This alignment can reduce the need for costly monitoring and incentive systems and thereby enhance firm performance (e.g. Chrisman et al., 2004).

Stewardship theory also suggests that family involvement in the TMT can lead to improved family firm performance (e.g. Davis et al., 2010; Eddleston and Kellermanns, 2007). This theory states that family managers are not motivated by individual goals; rather, they act as stewards whose motives are aligned with those of the organization (e.g. long-term survival, sales growth, profitability, and maintenance of the company’s reputation). This pro-organizational behavior is often associated with extraordinary commitment and a long-term vision for the development of the firm (Davis et al., 1997; Miller et al., 2013). Therefore, stewardship behavior has also been associated with a managerial long-term orientation that drives firm performance (Corbetta and Salvato, 2004; Miller et al., 2008).

Theory on the negative aspects of family involvement in the TMT

However, agency theory also predicts that family involvement in the TMT negatively affects firm performance (Lubatkin et al., 2005). Although family firms may experience lower principal–agent agency costs (e.g. Anderson and Reeb, 2003; Le Breton-Miller and Miller, 2009), they are likely to be exposed to other agency costs. More specifically, family members active in the TMT might be able to use their superior positions and knowledge about the firm to exploit less-influential owners for their own benefit at the expense of the firm (Schulze et al., 2001, 2002). For instance, they may be willing to hire incompetent family executives for personal reasons (Bloom and Van Reenen, 2007) or to underinvest in the firm and use firm resources for personal use (Le Breton-Miller and Miller, 2009). Such problems, which have been referred to as principal–principal agency problem (Morck et al., 2005), might lead to short-term oriented management decisions that target the preservation of family assets and constant flows of dividends rather than the development of the business (Miller et al., 2011). In other words, according to agency theory, family involvement in the TMT might induce a short-term orientation that can negatively affect performance in family firms (Sciascia and Mazzola, 2008).

Stewardship theory has also been used to show that family involvement in the TMT might harm firm performance. Family managers who engage in stewardship behavior that is directed toward their immediate family, that is, when family managers put the interests of their family before the interests of the family firm, might harm the business, thereby leading to reduced firm performance (Howorth et al., 2010; Miller et al., 2013). For instance, family managers may behave with unrequited altruism toward family members by offering them secure employment, salaries above the market average, and privileges that they would otherwise not receive (Gersick et al., 1997). While this stewardship behavior might benefit the immediate family on a short-term basis, it will most likely reduce firm performance in the long run (Schulze et al., 2001).

Empirical controversy: the performance consequences of family involvement in the TMT

Researchers have argued that agency theory and stewardship theory are particularly accurate for describing family firms and family involvement in the TMT (e.g. Miller et al., 2013). However, empirical studies offer support for both positive and negative impacts of family involvement in the TMT on firm performance. For example, Kellermanns et al. (2012), Lee (2006), and Maury (2006) find empirical evidence suggesting that family involvement in the TMT is associated with superior firm performance. In contrast, researchers such as Bennedsen et al. (2007), Bloom and Van Reenen (2007), and Claessens et al. (2002) find that family involvement in management often hinders firm performance and erodes the firm’s valuation. Still others such as Minichilli et al. (2010) or Sciascia and Mazzola (2008) promote a curvilinear relationship between family involvement in the TMT and firm performance. Thus, the empirical and theoretical landscapes are equally conflicted (Chrisman et al., 2005; Le Breton-Miller and Miller, 2009). Table 1 provides an overview of empirical findings on the relationship between family involvement in the TMT and family firm performance.

Table 1.

Selected studies on the performance consequences of family involvement in the TMT.

Study	Type	Key findings	Sample description	Comparative study	Measurement of family involvement in the TMT
Basco (2013)	Empirical (quantitative analysis)	Family involvement in management has a negative impact on family economic-centered performance. However, family involvement in management is not associated with firm economic-centered performance.	567 Spanish privately owned family enterprises and family managed enterprises (non-listed)	Only family firms	Percentage of family members in the TMT
Block et al. (2011)	Empirical (quantitative analysis)	Family management has a neutral effect on firm performance (market-to-book value), whereas family ownership has a positive effect on performance.	419 S&P 500 firms (listed)	Family firms versus non-family firms	Dummy variable (family member as chairman/CEO) used as proxy for family management
Bloom and Van Reenen (2007)	Empirical (qualitative and quantitative analysis)	When family-owned firms pass management control to the eldest sons, it leads to poor management practices and worse performance. When family ownership is combined with professional management, it leads to midly positive management practices.	717 medium-sized firms in the United States, France, Germany, and the United Kingdom (listed and non-listed)	Only family firms	Family involvement is defined as second-generation family or beyond
Castillo and Wakefield (2007)	Empirical (qualitative and quantitative analysis)	Family involvement in management is positvely linked to perceived return on investment.	526 US firms (non-listed)	Only family firms	Number of non-family members in the board of directors
Chirico and Bau (2014)	Empirical (quantitative analysis)	Family involvement in the TMT has an inverted U-shaped relationship with performance (e.g. sales growth). Therefore, although a moderate proportion of family members on the TMT supports positive performance, an increase in this proportion drives negative effects.	199 Swiss family firms (non-listed)	Only family firms	Percentage of family members in the TMT
Daily and Dollinger (1992)	Empirical (quantitative analysis)	There are apparent performance advantages (e.g. sales growth, net-margin growth, and operating-margin growth) for family-owned and managed firms, although the results are statistically not significant.	186 US manufacturing, small, privately owned firms (non-listed)	Family versus non-family firms	Dichotomous categorization of family firms as either family managed or professionally managed
De Massis et al. (2013b)	Empirical (quantitative analysis)	The proportion of TMT members that are family members (the TMT ratio) has an inverted U-shaped relationship with performance (return on assets). The TMT family ratio is important for firms with a high degree of family ownership and less important for firms with a low degree of family ownership.	787 Italian small and medium-sized firms (listed and non-listed)	Family versus non-family firms	Family ratio measured as the proportion of family members serving as top managers divided by the total number of members in the TMT
De Massis et al. (2013a)	Empirical (quantitative analysis)	The U-shaped relationship between family ownership and firm performance (industry-adjusted return on assets) is moderated by family involvement in the TMT, such that that the relationship is weaker for higher family involvement in the TMT.	494 Italian small and medium-sized firms private family firms (non-listed)	Only family firms	Family ratio measured as the proportion of family members serving as top managers divided by the total number of members in the TMT
Filatotchev et al. (2005)	Empirical (quantitative analysis)	Family control of the executive board is detrimental for performance (e.g. return on assets), but a family-related chairman and supervisors do not seem to have an effect on performance.	228 family-controlled public trading companies listed on the Taiwan Stock Exchange	Only family firms	Percentage of family members in the board of directors, measured separately for supervisors and executive boards
Kellermanns et al. (2012)	Empirical (quantitative analysis)	Family involvement in management has a positive effect on performance.	126 US firms (non-listed)	Only family firms	Family involvement in management is measured on a continuous scale from one family member up to several family members in the TMT
Kowalewski et al. (2010)	Empirical (quantitative analysis)	There is a positive link between family voting rights, a family CEO, and firm performance (return on equity and return on assets). There is no evidence of a relationship between a family chairman and firm performance.	217 public Polish companies (listed and non-listed)	Family versus non-family firms	Three dummy variables used as proxies for family management: (a) share of family voting rights, (b) the CEO of the company is from the family, and (c) the chairman of the board is from the family
Lauterbach and Vaninsky (1999)	Empirical (quantitative analysis)	Owner–manager firms are less efficient in generating net income than firms managed by a professional (non-owner) manager. Family firms run by their owners run (relatively) the worst.	280 public Israeli firms (listed)	Family versus non-family firms	Dummy variable (non-family member as CEO) used as proxy for professional management
Lee (2006)	Empirical (quantitative analysis)	Family management leads to faster growth (employment, revenue, and income growth) and to higher profitability.	403 S&P 500 companies (listed)	Family versus non-family firms	Percentage of family members in the board of directors
Luo and Chung (2005)	Empirical (quantitative analysis)	Family members have a positive effect on business-group performance (return on assets) after institutional transitions. However, this effect occurs only up to a threshold, after which additional family members tend to hurt business-group performance.	Top 100 business groups in Taiwan	Family versus non-family firms	Percentage of family members in the TMT
Maury (2006)	Empirical (quantitative analysis)	Active family ownership in which the family holds at least one of the two top officer positions improves profitability (return on assets, Tobin’s Q), which suggests that family management may significantly increase the efficiency of firms. Passive family ownership and non-family ownership have no effect on profitability.	1672 non-financial and 393 financial firms in Western Europe (listed and non-listed)	Family versus non-family firms	Two dummy variables measure (a) if the controlling shareholder is a family without managerial or board representation and (2) if a member of the controlling family is the CEO, honorary chairman, chairman, or vice chairman
McConaughy et al. (2001)	Empirical (quantitative analysis)	Firms managed by the founding family have greater value (e.g. market/equity to book/equity ratio), are operated more efficiently (e.g. sales growth), and carry less debt than other firms (e.g. total debt/total assets).	219 US firms (listed)	Family versus non-family firms	Founding family control is measured based on whether the CEO is either the founder or a member of the founder’s family
Minichilli et al. (2010)	Empirical (quantitative analysis)	CEO type and the family ratio in the TMT are correlated with family firm performance (return on assets). Family firm performance is also related to interactions between firm listing and the CEO type. The construct ‘familiness’ is a determinant of family firms’ resource building and value creation.	500 industrial Italian family-controlled firms	Only family firms	TMT family ratio: percentage of family members in the TMT + dummy variable, which measures whether the CEO is a family member
Sciascia and Mazzola (2008)	Empirical (quantitative analysis)	Family involvement in management has a negative quadratic effect on performance.	620 medium-sized Italian firms (non-listed)	Only family firms	Percentage of family members in the TMT
Sciascia et al. (2014)	Empirical (quantitative analysis)	Family management has a positive effect on performance (return on equity) in later generational stages.	233 incorporated Italian firms	Family versus non-family firms	Percentage of family members in the TMT
Sraer and Thesmar (2007)	Empirical (quantitative analysis)	Family firms that are founder controlled and family firms run by descendants largely outperform widely held corporations in terms of return on equity and return on assets.	700 family firms listed on the French stock market from 1994 to 2000 (listed)	Family versus non-family firms	Four categories were examined: widely held firms (non-family firms), heir-managed firms (CEO is a descendant of the founder), founder-managed firms (founder is still CEO), and professionally managed firms (external CEO)
Villalonga and Amit (2006)	Empirical (quantitative analysis)	Family ownership creates value only when the founder serves as the CEO of the firm or as chairman with a hired CEO. Second-generation leaders destroy firm value. The proportion of outside directors does not significantly affect firm value.	Fortune 500 firms from 1994 to 2000 (listed)	Family versus non-family firms	Percentage of external directors on the board
Westhead and Howorth (2006)	Empirical (quantitative analysis)	Family ownership and family management are not associated with weaker firm performance. However, firms with larger teams of directors and managers report higher levels of absolute growth in sales revenue.	240 privately owned UK family firms (non-listed)	Only family firms	Percentage of family members in the TMT

TMT: top management team.

The role of long-term orientation in the relationship between family involvement in the TMT and firm performance

As the above discussion shows, the positive effects of family involvement in the TMT that are predicted by agency theory and stewardship theory are closely associated with the managerial long-term orientation that results from family involvement in the TMT. For example, Miller et al. (2008) point out that small family firms are characterized by a stewardship perspective that involves a concern for the long-term preservation and nurturing of the business and that this stewardship perspective helps to explain the performance advantages of family firms. In a sample of 153 S&P 500 companies, Block and Thams (2008) find evidence that family involvement in management is positively related to a long-term orientation. Le Breton-Miller and Miller (2006) link this long-term orientation to the family firm’s stronger financial performance and greater effectiveness.

Likewise, the performance disadvantages arising from family involvement in the TMT identified through agency and stewardship theory are often linked to a short-term orientation associated with family involvement in the TMT. For example, Miller and Le Breton-Miller (2006) argue that, due to their shorter tenures, professional managers are goaded into risky short-term expedients (e.g. downsizing) designed to improve the quarterly figures. While such expedients may reduce costs, they also destroy morale and erode the firm’s human capital and its knowledge base (Laverty, 1996).

Thus, we argue that the double-edged predictions of agency theory and stewardship theory can be resolved by not only considering family membership in the TMT but also the temporal orientations in the organization, particularly its long-term orientation (Laverty, 1996). A long-term orientation values extended time horizons and assigns greater importance to the future. Managers with a long-term orientation are mindful that the consequences of many of their choices will be only realized after an appreciable delay (Le Breton-Miller and Miller, 2006). In contrast, a short-term orientation reflects a concern with the more immediate consequences of decisions and actions.

Research shows that the TMTs in family firms are usually characterized by a stronger long-term orientation than the TMTs in non-family firms and that this orientation can primarily be attributed to family involvement in the TMT (Brigham et al., 2014; James, 1999). We argue that a long-term orientation might be an important mediator of the relationship between family involvement in the TMT and firm performance and that these two effects might help resolve the conflicting predictions of agency and stewardship theories. On one hand, a long-term orientation enhances the agency and stewardship advantages of family involvement in the TMT as it strengthens the goal alignment between owners and managers. On the other hand, a long-term orientation reduces agency and stewardship disadvantages because it helps to balance different stakeholder interests. In the following, we describe these two effects.

First, a long-term orientation facilitates agency advantages by aligning the goals of owners and managers in the TMT. Given the long-term commitment of most family owners to the business (Corbetta and Salvato, 2004; Pieper et al., 2008), the organizations’ long-term orientation aligns the goals of family owners with those of the organization, thereby preventing ‘the departure of agents from the interests of the principal’ (Shapiro, 2005: 278). The resulting goal alignment reduces the need for costly monitoring and sanctioning mechanisms (e.g. by a board of directors) and the need for costly incentive systems (e.g. share-option schemes) that are meant to motivate members of the TMT to adopt a long-term orientation. These savings should therefore, make more resources available for investing in the family firm, leading to competitive advantage and improved firm performance (Le Breton-Miller and Miller, 2006; Lumpkin et al., 2010).

A long-term orientation also enhances the stewardship advantages of family involvement in the TMT. A managerial long-term orientation has been found to foster pro-organizational, stewardship-like behavior among TMT members, which strengthens their commitment and mutual trust, thus, improving firm performance (Davis et al., 2010). Davis et al. (1997) show that a long-term perspective serves as an important antecedent of good stewardship, that is, an orientation toward firm-level rather than individual-level goals. In a similar vein, Mowday et al. (1982) find that a strong identification with and belief in an organization’s goals, such as its long-term orientation, enhance the willingness to exert considerable effort on behalf of the organization. As such, a long-term orientation fosters stewardship advantages in family firms, thereby providing a source of competitive advantage and enhancing firm performance (Davis et al., 2010; Miller and Le Breton-Miller, 2006).

Second, a long-term orientation helps balance stakeholder interests, thereby reducing potential agency and stewardship disadvantages. Agency disadvantages in family firms arise due to the principal–principal agency problem, that is, the exploitation of less-influential owners by family members in the TMT who use their superior positions and knowledge of the firm for their own benefit at the expense of the business and other stakeholders (Miller et al., 2013; Morck et al., 2005). While such behavior might yield personal short-term benefits for family members, it will most likely carry substantial economic costs, some of which could considerably diminish long-term performance (Chrisman et al., 2004). Reynolds et al. (2006) argue that a managerial long-term orientation has the potential to reduce these negative effects as it fosters the application of an across-decision approach by TMT members. As part of the across-decision approach, TMT members might completely sacrifice the interests of a particular stakeholder group in certain decision situations. However, it will compensate that stakeholder group in later decisions. Thus, the across-decision approach ensures that each stakeholder group is given the attention, resources, and compensation that it requires and that the TMT works toward developing and reconciling relationships among all stakeholder groups, particularly relationships between more and less-influential owners. Reynolds et al. (2006) show that the across-decision approach provides value for the organization, that is, results in higher firm performance. Consequently, a long-term orientation among management might enable family members in the TMT to balance the interests of different stakeholder groups, especially those of the owning family, over time, thereby avoiding principal–principal agency conflicts that would harm firm performance.

A long-term orientation also has the potential to reduce stewardship disadvantages. These disadvantages can result from stewardship directed toward the immediate family, perhaps in the form of unrequited altruism toward family members (Schulze et al., 2003). While such behavior might lead to short-term benefits for the family, it can endanger firm performance in the long run (Lumpkin and Brigham, 2011). Chrisman et al. (2005) suggest that a managerial long-term orientation might reduce the tendency to engage in altruism toward family members as far-sighted TMTs are able to withhold the immediate satisfaction of each and every need of family members in favor of actions that support long-term value for the family and the firm (Carney, 2005). In addition, as discussed above, a managerial long-term orientation is likely to foster the application of an across-decision approach, which enhances family member willingness to balance the interests of different stakeholders over time and to accept the short-term deprivation of family members for their benefit in the long term (Ogden and Watson, 1999; Reynolds et al., 2006). Therefore, a long-term orientation enables family firms to avoid negative performance effects resulting from undeserved altruism toward family members.

Analytical summary

While agency theory and stewardship theory can both be used to predict positive and negative performance consequences due to family involvement in the TMT, two effects, attributable to a managerial long-term orientation, might help resolve these conflicting predictions. In effect, a long-term orientation can strengthen the goal alignment between owners and managers leading to reduced agency costs as well as increased commitment from TMT members. Additionally, a long-term orientation can facilitate an across-decision approach that helps to balance the interests of different stakeholder interests over time. Together, these effects are likely to facilitate agency and stewardship advantages and reduce agency and stewardship disadvantages linked to family involvement in the TMT. We, therefore, argue that the long-term orientation associated with family membership in the TMT determines whether and how family involvement in the TMT ultimately affects firm performance. This reasoning is reflected in Hypotheses 1 and 2.

H1. Managerial long-term orientation is associated with improved family firm performance.

H2. The long-term orientation associated with family involvement in the TMT mediates the relationship between family involvement in management and family firm performance.

Methods

Research design and sample

We used a sample of 201 private family firms to test our hypotheses. The sample was the result of a questionnaire sent to 4000 firms in Germany. The mailing list was randomly drawn from the Hoppenstedt database, the most comprehensive small and medium-sized enterprise (SME) database in Germany. As family firms are dominant among German SMEs (e.g. Klein, 2000), we used an SME database as the source for our mailing list. In 2010, a structured questionnaire and a cover letter were sent to one member of each firm’s TMT. In accordance with previous research on the relationship between family involvement in the TMT and firm performance (e.g. Sciascia and Mazzola, 2008; Westhead and Howorth, 2006) as well as family firm research in general (e.g. Eddleston et al., 2013), we employed a key-informant approach for our sample based on the assumption that a member of the TMT of a family firm is well informed about the firm’s temporal orientation and performance. To minimize bias in the responses, questions representing the independent, mediating, and dependent variables were mixed (e.g. Chrisman et al., 2012). Furthermore, the questionnaire was reviewed by several family firm executives to ensure that the questions were understandable. Finally, respondents were assured that their responses would be kept confidential.

We received 426 responses, which gives a response rate of 10.7%. To ensure that the firms in our sample were family firms, we verified that the firms identified themselves as family firms (e.g. Zellweger et al., 2012a) and that the family had a controlling interest (e.g. Miller et al., 2013). We defined those private firms in which the family owned an absolute majority (e.g. at least 50%) of shares as family controlled.¹ We identified 375 firms in our sample as family firms. This proportion is consistent with previous research on the entire population of firms in Germany (Klein, 2000).² Furthermore, we only considered family firms with more than 10 full-time employees that had been in business for at least five years in order to ensure that the inclusion of non-family managers in the TMT was feasible. This reduced our sample size to 356 firms. Of those, only 201 provided all of the information necessary for our analysis, resulting in a final response rate of 5.03%. This response rate and the problem of missing data are comparable to previous family firm research relying on the collection of primary data (e.g. Chrisman et al., 2004; Schulze et al., 2001).

The firms in our sample were active in the manufacturing industry (62.68%), the services industry (18.41%), the retail industry (11.44%), and other industries (7.47%). Of the firms in our sample, 31.34% had a TMT that exclusively involved family members, while 10.94% had a TMT that only involved non-family members. In 57.72% of the firms, both family members and non-family members were active in the TMT. Additional information on the characteristics of the firms in our sample is provided in Table 2.

Table 2.

Sample characteristics (N = 201).

Variables	Minimum	Maximum	Mean	Standard deviation	Median
Size (employees)	10	1200	429.29	640.83	197.00
Age (years)	4	246	72.61	52.89	63.00
Family members in the TMT (number)	0	4	1.43	0.83	1.00
TMT size (number)	1	12	3.05	2.30	3.00

TMT: top management team.

Table 3.

Regression model results.

Variables	Model 1	Model 2	Model 3	Model 4	Model 5
	Performance	Performance	Long-term orientation	Performance	Performance
Control variables
Firm size (log)	.141**	.171***	.093**	.119*	.145**
Firm age (log)	−.084	−.088	−.017	−.079	−.083
Family ownership	−.331	−.432	.678**	−.569	−.626t
Ownership concentration	.497	.342	−.034	.469	.352
Performance satisfaction (log)	3.069***	3.075***	.481***	2.920***	2.938***
Industry (manufacturing)	.201	.183	−.047	.211	.196
Industry (services)	.559*	.545*	.172	.501*	.496*
Industry (retail)	.117	.057	−.342*	.209	.154
Independent variable
Family involvement in the TMT		.480*	.385*		.370
Mediator
Long-term orientation				.313**	.285**
N	201	201	201	201	201
R ²	.576	.585	.228	.595	.601
Adjusted R²	.558	.565	.192	.576	.580
F	32.55***	29.91***	6.26***	31.24***	28.60***

TMT: top management team.

***

p < .001; **p < .01; *p < .05; tp < .10.

Measures

We adapted scales of measurement found in the extant literature to fit the objectives of our article.

Firm performance

We measured firm performance by asking respondents to use a 9-point Likert-type scale to indicate the extent to which the average return on assets (ROA), the increase in the ROA, and the firm’s after-tax profits had been lower (scored as 1) or higher (scored as 9) than those of their major competitors over the previous 5 years (Hart and Banbury, 1994; Venkatraman and Ramanujam, 1987).³ Although performance was self-reported, research shows that subjective and objective performance data are highly correlated (Dess and Robinson, 1984; Ling and Kellermanns, 2010). We used the mean value of the three items for our final assessment of firm performance. To examine the reliability of our performance construct, we conducted a confirmatory factor analysis (CFA). Factor loadings well above .50 and a coefficient alpha of .94 suggest that the construct reliability is sufficient for our statistical tests.

Family involvement in the TMT

We measured family involvement in the TMT by asking respondents to disclose the number of family members in the TMT as well as the total number of members in the TMT. We then calculated the percentage of family members in the TMT relative to the total number of TMT members (e.g. Sciascia and Mazzola, 2008; Westhead and Howorth, 2006).⁴

Long-term orientation

We measured long-term orientation by asking respondents to use a 7-point Likert-type scale to indicate the degree to which they agreed with four statements focused on their firms’ long-term orientation.⁵ The statements were based on a scale originally developed by Covin and Slevin (1989). We condensed the responses to the four items into one long-term orientation factor by using the mean value of the four items. To examine the reliability of our long-term orientation construct, we conducted a CFA. Factor loadings were well above .50, and the coefficient alpha was .85. This suggests that the construct reliability is sufficient for our statistical tests (Allen and Yen, 1979).

Control variables

In accordance with prior research examining the impact of family involvement on firm performance, our control variables included firm size, firm age, family ownership, ownership concentration, performance satisfaction, and industry (e.g. Chrisman et al., 2004; Miller et al., 2013). We used firm size to assess whether the size of a firm had an effect on the relationship between family involvement in the TMT and firm performance. The extant research suggests that family involvement in the TMT is associated with superior firm performance in smaller firms but not necessarily in larger firms (e.g. Miller et al., 2013). We used the natural logarithm of the total number of full-time employees as a proxy for firm size (Gomez-Mejia et al., 2013).

We included firm age as a control variable in order to determine whether the age of the firm had an influence on the impact of family involvement in the TMT on firm performance (Anderson and Reeb, 2003). As suggested by Zellweger and Astrachan (2008), family members in the TMT might become more attached to the family firm over time, resulting in a positive effect on the firm’s long-term orientation. We measured age as the number of years since the foundation of the firm. We used the natural logarithm to reduce heteroscedasticity concerns.

We also included family ownership and ownership concentration as control variables to assess whether the ownership structure had an effect on the relationship between family involvement in the TMT and firm performance. Research has proposed that family involvement in the TMT is most beneficial for firm performance when ownership is more concentrated (e.g. Miller et al., 2013). We measured ownership concentration by asking respondents to indicate the total stake held by the three largest blockholders.

Furthermore, we considered performance satisfaction as a control variable in order to assess whether the extent to which performance met aspiration levels had an effect on the firm’s long-term orientation. This control variable is important as higher levels of performance satisfaction might affect the importance attached to a long-term orientation (e.g. Chrisman et al., 2012). We measured performance satisfaction by asking respondents to use a 7-point Likert-type scale to indicate their satisfaction with the firm’s past performance relative to their performance expectations (Chrisman et al., 2012). We used the natural logarithm to reduce heteroscedasticity concerns. To ensure that performance satisfaction did not also measure firm performance, we conducted an exploratory factor analysis. The results highlighted the existence of two factors, which supports the inclusion of performance satisfaction as a control variable.

Finally, we controlled for whether the impact of family involvement in the TMT on firm performance varied by industry. To do so, we included three industry dummy variables, classifying the firms into manufacturing, service, retail, and other (e.g. Chrisman et al., 2012).

Results

We performed several tests to check for potential biases in our analysis. To control for potential non-response bias within our sample, we tested for differences between early and late respondents (Churchill, 1991; Kanuk and Berenson, 1975). Chi-square tests showed no significant differences between early and late respondents for any variable used in our analysis. Thus, non-response bias seems to be only a minor concern.

In addition, we addressed the potential for multicollinearity, heteroscedasticity, and common-method bias in our sample. To control for multicollinearity, we calculated the variance inflation factors. None of the variance inflation factors exceeded 3.26, which suggests that multicollinearity is not a concern (Hair et al., 1995; Kennedy, 2008). To test for heteroscedasticity, we tested whether the regression residuals were dependent on the values of the independent variables by using the Breusch–Pagan/Cook–Weisberg test for heteroscedasticity (Breusch and Pagan, 1979; Cook and Weisberg, 1983). The results were not significant, which implies that heteroscedasticity is not a problem. To control for common-method bias, we ran a Harman one-factor test and a method-factor test using a CFA (Podsakoff et al., 2003; Podsakoff and Organ, 1986). The tests showed no evidence of common-method bias.

To test our hypotheses, we used five multiple regression models.⁶ In Model 1, we only included the control variables. In Models 2–5, we tested both of our hypotheses. In Hypothesis 1, we propose that a long-term orientation will be associated with superior firm performance. The results of Model 4 support this hypothesis as the relationship between long-term orientation and firm performance is positive and highly significant (β = .313, p < .01). In Hypothesis 2, we propose that a long-term orientation will positively mediate the relationship between family involvement in the TMT and firm performance. In order to test this hypothesis, we applied the mediation approach developed by Baron and Kenny (1986), which is widely used in management research (MacKinnon et al., 2007; Wood et al., 2008). In Model 2, we analyzed the effect of family involvement in the TMT on firm performance. This is also referred to as the X–Y test, which highlights the effect that may be mediated (Collins et al., 1998; Judd and Kenny, 1981). Our results suggest an initial positive, significant relationship between family involvement in the TMT and firm performance (β = .480, p < .05).

In Models 3–5, we controlled for the three mediation conditions found in Baron and Kenny (1986). In Model 3, we tested for the first condition, which states that variations in the level of the independent variable (family involvement in the TMT) significantly account for variations in the presumed mediator (long-term orientation). The results show that long-term orientation is positively and significantly linked to family involvement in the TMT (β = .385, p < .05). In Model 4, we investigated whether variations in the presumed mediator (long-term orientation) significantly account for variations in the dependent variable (firm performance). This condition is equivalent to our first hypothesis, for which we already have support. Thus, we can confirm the second mediation condition. In Model 5, we controlled for whether the relationship between the independent and dependent variables remains significant when we introduce the presumed mediator (long-term orientation) into the initial relationship. The results show that firm performance continues to be positively and significantly related to long-term orientation (β = .285, p < .01), while the initial relationship between firm performance and family involvement in the TMT ceases to exist (β = .370, not significant). Together, the results of Models 2–5 provide consistent support for a partial mediation and for our second hypothesis. More specifically, long-term orientation positively mediates the relationship between family involvement in the TMT and firm performance. Bootstrapping results using case resampling and 2000 replications provide support for the robustness of our results. Furthermore, an analysis using objective financial performance data in the form of a 12 month lagged ROA for a subsample of 105 family firms provides additional support.

Discussion

The extant literature acknowledges that family involvement in the TMT is a common characteristic of many family firms (Astrachan and Shanker, 2003; La Porta et al., 1999). Although researchers have shown that a focus on family involvement in the TMT is important for understanding family firm decision making and behavior (e.g. James, 1999), theories and empirical findings on the performance consequences of family involvement in the TMT have been inconsistent (Gedajlovic et al., 2012; Mazzi, 2011). In particular, researchers have drawn on agency theory and stewardship theory to predict the performance consequences of family involvement in the TMT (Chirico and Bau, 2014; Miller et al., 2013). However, according to these theories, family involvement in the TMT can have both positive and negative performance consequences (Miller et al., 2013). As such, the conditions under which family involvement in the TMT leads to agency or stewardship advantages and disadvantages remain uncertain. This is an important gap in the current research as it is contended that agency and stewardship advantages contribute to the long-term survival and sustainable competitive advantage of family firms (Chrisman et al., 2004; Dyer, 2006).

In order to address this research gap, we have used long-term orientation as a bridging construct to explain when and why family involvement in the TMT is beneficial for firm performance. As expected, our empirical results show that a managerial long-term orientation is associated with improved family firm performance and that it acts as a partial mediator of the relationship between family involvement in the TMT and firm performance. Our empirical results complement findings by Castillo and Wakefield (2007) and Westhead and Howorth (2006) who also find empirical evidence suggesting that family involvement in the TMT is associated with improved firm performance. Furthermore, we extend these findings by showing that this performance advantage is attributable to a stronger managerial long-term orientation.

Our article makes three contributions to theory and research. First, it contributes to the stream of family firm literature that addresses questions of how family involvement in the TMT affects the financial performance of family firms (De Massis et al., 2013b; Mazzola et al., 2013; Miller et al., 2013; Minichilli et al., 2010). Our empirical results support previous studies showing a positive performance impact of family involvement in the TMT (Kellermanns et al., 2012). More importantly, our findings extend those studies by including long-term orientation as a bridging construct that explains when and why family involvement is beneficial for firm performance (Chrisman et al., 2012; George and Jones, 2000). Thus, family involvement in the TMT leads to performance advantages if – and because – such involvement is associated with a stronger managerial long-term orientation, which guides the firm’s decision making and behavior. This contributes to a deeper understanding of the indirect effects of family involvement in the TMT on firm performance (O’Boyle et al., 2012).

Second, our article extends the predictions of agency theory and stewardship theory regarding the performance consequences of family involvement in the TMT. In particular, our results suggest that agency theory and stewardship theory can only make consistent predictions regarding the performance impact of family involvement in the TMT if the managerial long-term orientation that is associated with such involvement in the TMT is taken into account. In other words, the influence of family members on a firm’s long-term orientation helps align family and organizational goals and thereby determines the performance impact of family involvement in the TMT (Chrisman et al., 2007; Chua et al., 1999). Relatedly, Chrisman and Patel (2012) state that a long-term vision for the firm can serve as a possible source of alignment between family and organizational goals; De Massis et al. (2013b) conclude that this goal alignment seems to be the primary driver of performance benefits from family management. Our results complement these findings by showing that long-term orientation represents an important mediator of the relationship between family involvement in the TMT and firm performance. By highlighting the role of a long-term orientation, our results help explain the inconsistent findings that have appeared in prior research with respect to the performance consequences of family involvement in the TMT.

Third, our article contributes to research on the relationship between long-term orientation and performance outcomes in family firms (e.g. Brigham et al., 2014; Le Breton-Miller and Miller, 2006; Lumpkin and Brigham, 2011; Zellweger, 2007). Our results suggest that, on one hand, a long-term orientation strengthens agency and stewardship advantages by enhancing goal alignment between owners and managers. On the other hand, they imply that a long-term orientation reduces agency and stewardship disadvantages by balancing stakeholder interests over time. Accordingly, we provide theory and evidence that a long-term orientation is a driver of firm performance. Although this relationship seems to be implicit in the family business literature, theoretical arguments and empirical support for the positive performance consequences of a long-term orientation remain scarce (Brigham et al., 2014).

Our article also has practical implications. Our results suggest that the presence of family members in the TMT does not necessarily improve firm performance under all conditions (Miller et al., 2013). As such, we call attention to variations in the temporal orientation that guides firm behavior attributed to family involvement in the TMT. We suggest that it is not a question of whether family members are active in the TMT, but how those family members shape the long-term orientation of the overall organization. Therefore, when selecting members of the TMT, family firms should pay particular attention to their temporal orientations.

Limitations and future research

Our article is not free from limitations and it highlights several opportunities for future research. First, our analysis is limited to a sample of family firms from Germany. Although family firm research has commonly relied on German samples (e.g. Jaskiewicz and Klein, 2007), future studies should attempt to replicate our results in other countries. Furthermore, our analysis is based on the implicit assumption that family firms consist of a single business entity. However, Zellweger et al. (2012b) show that family members often manage a portfolio of business activities involving multiple firms. Future research should therefore, consider the role of portfolio activities beyond the core company.

Second, our article is based on a cross-sectional research design, which does not allow us to infer causality from our results. Recent studies suggest that the goals of family firms do not stay constant over time (e.g. Chrisman et al., 2013). Future research is needed to investigate how the temporal orientation of family firms might change over time and how such changes affect firm performance.

Third, our long-term orientation construct builds on the work of Covin and Slevin (1989). Although our exploratory and confirmatory factor analyses provide strong support for our construct and show high construct validity, long-term orientation seems to be a higher order heuristic. Lumpkin and Brigham (2011) recently introduced a multidimensional long-term orientation construct that is composed of continuity, futurity, and perseverance. Accordingly, we suggest that additional research aimed at conceptualizing and measuring long-term orientation is needed (Brigham et al., 2014).

The purpose of this article was to assess how long-term orientation can be used to improve our understanding of the relationship between family involvement in the TMT and firm performance. However, the family firm literature suggests that other goals – such as socioemotional wealth preservation (Gomez-Mejia et al., 2007), concern for organizational reputation (Deephouse and Jaskiewicz, 2013), and corporate social responsibility (Dyer and Whetten, 2006) – might also be directly linked to family involvement in the TMT as well as firm performance. In addition, other corporate governance characteristics – such as the presence of a family CEO (Jaskiewicz and Luchak, 2013; McConaughy, 2000) or the existence and composition of a board of directors (De Massis et al., 2013b; Pieper et al., 2008) – might be useful for explaining when and how family involvement in the TMT contributes to firm performance. Research along these lines would prove fruitful.

Finally, additional research is needed to analyze how family involvement in the TMT is related to the buildup and deployment of distinct human, social, and financial resources (Chrisman et al., 2013). In combination with a managerial long-term orientation, family involvement in the TMT might lead to enduring, path-dependent relationships with stakeholders that are not easily replicable by competitors and that generate a competitive advantage in family firms.

Conclusion

The body of the literature on the performance consequences of family involvement in the TMT is growing. While some scholars find support for performance advantages arising from family involvement in the TMT, others provide evidence of performance disadvantages. Thus, it remains unclear under which conditions family involvement in the TMT is positive or negative for firm performance. We suggest that at least one condition – managerial long-term orientation attributable to family involvement in the TMT – determines when and why the presence of family members in the TMT is positive or negative for firm performance. As such, our article has valuable implications for research and practice. It highlights that research on family involvement in the TMT might benefit from extending the scope of analysis from the direct effects of family membership to other, potentially more relevant indirect effects of family involvement in the TMT on firm performance.

Footnotes

Appendix

Appendix 2.

Means, SDs, correlations, and VIFs.

	Variable	Mean	SD	Min	Max	1	2	3	4	5	6	7	8	9	10	VIF^a
1.	Firm performance	6.195	1.403	2.33	9.00
2.	Long-term orientation	6.027	0.707	4.00	7.00	.316***										1.30
3.	Family involvement in the TMT	0.559	0.357	0.00	1.00	.046	.235**									1.64
4.	Firm size (log)	5.483	1.570	1.00	9.10	.146*	.107	−.344***								3.26
5.	Firm age (log)	4.086	0.886	1.39	5.51	−.071	.093	.014	.388***							3.16
6.	Family ownership	0.838	0.252	0.50	1.00	−.016	.331***	.475***	−.054	.280***						1.10
7.	Ownership concentration	0.736	0.349	0.20	1.00	.055	.270**	.540***	−.210**	.132t	.794***					1.51
8.	Performance satisfaction (log)	1.692	0.323	0.00	2.20	.736***	.231**	−.001	.061	−.065	.010	.063				1.38
9.	Industry (manufacturing)	0.627	0.485	0.00	1.00	−.003	.048	.006	.125t	.175*	.158*	.048	.034			2.18
10.	Industry (services)	0.184	0.389	0.00	1.00	.133t	.032	−.059	−.142*	−.271**	−.231**	−.127t	.039	−.589***		1.94
11.	Industry (retail)	0.114	0.319	0.00	1.00	.028	−.080	.130t	.045	.043	.096	.110	.042	−.369***	−.090	1.48

VIF: variance inflation factor; SD, standard deviation; TMT: top management team.

VIF (calculated for Model 5).

***

p < .001; **p < .01; *p < .05; tp < .10.

Funding

The author(s) received no financial support for the research, authorship, and/or publication of this article.

Notes

Author biographies

Christian Hoffmann is a Research Associate at the Chair of Strategic and International Management at Philipps-University Marburg. He is also affiliated with HHL Leipzig Graduate School of Management. His research interests are strategy, governance and goals, specifically in family firms.

Torsten Wulf is Professor of Strategic and International Management at Philipps-University Marburg and Adjunct Professor at HHL Leipzig Graduate School of Management where he is the co-director of the Center for Strategy and Scenario Planning. His research interests include family firms, strategic decision-making and scenario planning.

Stephan Stubner holds the Dr. Ing. h.c. F. Porsche AG Chair for Strategic Management and Family Business at HHL Leipzig Graduate School of Management. His research interests are strategy, governance and entrepreneurship, specifically in family firms and startups.

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