All in the Family? An Exploratory Study of Family Member Advisors and Firm Performance

Stewardship and Agency Perspectives in Family Firms

A family firm is an organization in which a group of persons related through common ancestry or marriage owns a substantial part of the business and exercises management control (Miller, Le Breton-Miller, Lester, & Cannella, 2007; Miller, Le Breton-Miller, & Scholnick, 2008). Family firms are emotionally charged organizations characterized by intense interactions (both personal and professional) among family members. Emotional attachment and rational judgment are inseparably intertwined, thus significantly affecting strategic decision-making processes (Olson et al., 2003; Reay, 2009; Sirmon & Hitt, 2003; Zahra, Neubaum, & Larraneta, 2007; Zellweger, Kellermanns, Chrisman, & Chua, 2012). The essential qualities of family firms result in equally distinctive organizational behaviors and outcomes that allow family members to participate simultaneously in both family and business relationships in their personal and professional lives.

Miller and colleagues (e.g., Le Breton-Miller et al., 2011; Le Breton-Miller & Miller, 2009) highlight the positive and negative aspects of family firms within the stewardship and agency perspectives. Based on stewardship theory (for seminal contributions, see Davis, Schoorman, & Donaldson, 1997; Donaldson 1990, Donaldson & Davis, 1991), the family is viewed as a source of competitive advantage, whose uniqueness derives from the integration of family and business life (Habbershon & Williams, 1999). Miller et al. (2008) find that stewardship results in family firms striving for long-term continuity of the business, developing a community culture based on good relationships with staff and nurturing strong relationships with external stakeholders. Family member owners and managers who view themselves as stewards align their motives with the objectives of the organization, which must be nurtured for the support of future generations (Corbetta & Salvato, 2004). Family members who are dedicated to the business tend to place the firm’s objectives ahead of their own. Such steward behavior helps strengthen family relations by reducing relationship conflicts and fostering trust, interdependence, and commitment to the family’s long-term success (Corbetta & Salvato, 2004; Eddleston & Kellermanns, 2007). Family firms may perform better because family managers are more visionary than managers of nonfamily companies, stimulating long-term investment policies, innovation, and commitment to customers (e.g., Eddleston, Kellermanns, & Sarathy, 2008; Miller et al., 2008; Uhlaner, Kellermanns, Eddleston, & Hoy, 2012).

On the other hand, according to agency theory (Fama & Jensen, 1985; Jensen & Meckling, 1976), the literature suggests that family members are driven by self-interest and use the business for parochial purposes (e.g., Le Breton-Miller et al., 2011; Le Breton-Miller & Miller, 2009). Based on this view, although family firms may experience lower principal-agent costs (Anderson & Reeb, 2003; Le Breton-Miller & Miller, 2009), they are likely to be exposed to other agency costs. Family members may use the business to serve only the family and its needs at the expense of other shareholders (Schulze, Lubatkin, Dino, & Buchholtz, 2001). For instance, they may hire incompetent family executives (Lubatkin, Ling, & Schulze, 2007) or underinvest in the firm and extract resources for personal purposes (e.g., Le Breton-Miller et al., 2011; Le Breton-Miller & Miller, 2009). As a result, family members may avoid risk to preserve family assets and allow a constant flow of dividends.

As Le Breton-Miller et al. (2011) explain, if family decision makers “are risk averse and deploy significant resources for parochial purposes, they cannot invest adequately in the firm or in renewing its products and processes, physical plant, or capabilities” (p. 706). Consequently, family firms will experience

inferior investment in the infrastructure and future of the business [ . . . ] scarce liquid resources due to abundant dividends or other expenses [ . . . ] and an insistence on lock-step earnings stability to cater to family risk aversion and financial needs. (Le Breton-Miller et al., 2011, p. 706)

We argue that the stewardship and agency perspectives are complementary and can help explain the performance effects of family member advisors in family firms.

Advising in Family Firms and Family Member Advisors

While advisors are important for any type of company, family firms’ distinctive character calls for specific advising needs and specific advising skills. Many family business scholars (e.g., Astrachan & McMillan, 2006; Bammens, Voordeckers, & Van Gils, 2008; Dyer, 1986; Dyer & Sánchez, 1998; Kaye, 1991, 1996; Kaye & McCarthy, 1996; Kellermanns & Eddleston, 2006; Lansberg, 1988; Mathieu, Strassler, & Pearl, 2010) emphasize the ability of family firm advisors to recognize problems and encourage exploring new options. Advisors serving family firms face challenges that are different from those addressed by other advisors (Davis, Dibrell, Craig, & Green, 2013), since they have to work at the interface of family, business, and ownership. They must be aware of both, process and content, deal with complex emotions, manage family and business conflicts, and balance conflicting stakeholder interests (Gersick, Davis, Hampton, & Lansberg, 1997; Hilburt-Davis & Dyer, 2003; Jaffe & Lane, 2004; Strike, 2013). Recent studies suggest that family firms need not only a high range of expertise, but also a great number of advisors: accountants, attorneys, family office consultants, financial services advisors, management consultants, family philanthropy managers, psychologists, and family therapists (Reay et al., 2013). Strike (2012) concludes that, while research on the topic has increased in recent years, many issues still remain unresolved, such as advisor attributes, choice of advisors, advisory processes, and outcomes. She claims that most research relies on anecdotal accounts provided by advisors and that more emphasis needs to be placed on theoretical conceptualizations and rigorous research methods.

The role of family members as a distinct type of advisor has received scant attention. While Strike (2012) mentions them in her review, she does not elaborate on their specific role. Boyd et al. (1999), among the few who discuss family member advisors, assert that family members’ inside knowledge, their trustful relationship to managers, and their understanding of family culture are important resources in advisory processes. On the other hand, family members’ lack of an outside perspective and their personal involvement in family relationships may result in inertia and contribute to the firm’s regression. Consequently, from a performance perspective, there are both positive and negative effects of involving family members as advisors. Our hypotheses more closely examine these effects.

Family Member Advisors and Performance in Family Firms

Because of the overlap of family, business, and ownership (Tagiuri & Davis, 1996), family firms’ need for advisory assistance is unique (Strike, 2012). A major challenge that advisors face in family firms is to understand the needs of family members within the overlapping family and business systems (Mathieu et al., 2010). A common strategy, and the focus of our study, is relying on family member advisors who are well-acquainted with family and business needs (Strike, 2012).

As members of the owner family, family firm advisors are concerned about the firm “because it is part of their collective patrimony and is often the main asset of the family” (Arregle, Hitt, Sirmon, & Very, 2007, p. 84) and therefore act as stewards toward the firm. According to Davis et al. (1997), stewardship arises under certain conditions, such as identification. As Davis et al. explain, individuals are more likely to behave as stewards when they can identify with the organization and see the performance of the organization as an extension of their own well-being. Family member advisors can be expected to be more engaged and believe that they have a common family responsibility to see the organization prosper (Eddleston & Kellermanns, 2007) than other advisors who are not members of the owner family (Boyd et al., 1999). Another condition relates to the type of power that individuals have in the organization. Individuals are more likely to behave as stewards when their power emanates from personal relationships rather than from formal positions (Davis et al., 1997). The power of family member advisors is connected to their knowledge and family relationships (Boyd et al., 1999). Thus, we argue that bringing in family member advisors favors family firm performance. The presence of family member advisors may strengthen stewardship behavior toward the organization (Miller et al., 2008) and exhibit commitment to proactively search for innovative strategies, ensuring the continuity of the firm across generations (Miller et al., 2008; Miller & Le Breton-Miller, 2005).

Stewardship leads family member advisors to emphasize product research, market share, and reputation development. Intensive training programs may help family owners and managers coach employees to do their job well, create new products, and acquire new knowledge. To this end, family member advisors devote significant efforts to build “a group of talented, motivated and loyal employees” to guarantee the firm’s prosperity over time (Miller et al., 2008, p. 55). They may encourage family owners and managers to “build enduring networks and associations with clients and other suppliers of valuable resources,” reinforcing the company’s market share (Miller et al., 2008, p. 56) and enhancing performance by leveraging family firm specific assets.

There is a limit, however, to the number of family member advisors that a family firm can rely on to boost performance. We expect that the performance benefits stemming from stewardship behavior will be offset by monitoring and agency costs associated with high numbers of family advisors (e.g., Le Breton-Miller et al., 2011; Le Breton-Miller & Miller, 2009). We build our arguments on Chrisman, Chua, Kellermanns, and Chang (2007), who highlight the agency costs occurring among members of the same family, and on the literature on groups, which warns against the challenges presented by larger groups (Hackman, 2002; Levine & Moreland, 1998; Staats, Milkman, & Fox, 2012; Steiner, 1972).

Groups literature rooted in psychology has shown that an increasing group size can present challenges, involving coordination, motivation, and conflicts (Hackman, 2002; Levine & Moreland, 1998; Staats et al., 2012; Steiner, 1972). The potential for coordination losses increases as the number of family advisors increases “because the number of communication linkages among members increases at a nonlinear rate” (Staats et al., 2012, p. 133). High numbers of family member advisors increase the risks of miscommunication and holding-up information (Mueller et al., 2012), which in turn require the implementation of monitoring mechanisms and enhance agency costs (Chrisman et al., 2007).

A second challenge involves advisors’ motivation to behave as stewards to the business. When there is a higher number of family member advisors, each advisor may experience decreased motivation to behave as a steward because his or her contribution to the well-being of the business is less identifiable (Steiner, 1972). Thus, a high number of family member advisors may amplify particularistic behaviors (for a discussion of particularism, see Carney, 2005) and favor family-centric, self-interested conduct over stewardship. This conduct may include advising family owners to hire incompetent family members, extracting resources for family purposes, and avoiding taking business risks to preserve the family wealth (Le Breton-Miller & Miller, 2009; Lubatkin et al., 2007; Schulze et al., 2001). For instance, Le Breton-Miller et al. (2011) found that “the higher the level of family embeddedness, [ . . . ] the more likely it is that a family’s self-interested behavior will dominate business stewardship” (p. 707).

A third challenge is the increasing potential for conflicts and rivalry among different family member advisors (Salvato & Corbetta, 2013). Family relations among the advisors can make these conflicts more difficult to resolve because these “relations [ . . . ] are likely based on emotions, sentiments, and informal linkages, which may result in less effective monitoring and disciplining” (Peng & Jiang, 2010, p. 258) of family member advisors. Conflicts can also result in the misuse of business resources to solve problems or avoid strife (Schulze et al., 2001). Conflicting relationships can frustrate family member advisors who attempt to behave as stewards, causing them to become agents (Chrisman et al., 2007).

Taken together, these arguments suggest that family member advisors can initially have a positive influence on firm performance. Once the number of family member advisors reaches a certain threshold, however, the emergence—and increase—of monitoring and coordination costs as well as the potential for group think and relationship conflict are likely to exceed any stewardship specific benefits, resulting in declining firm performance. We expect the relationship between the number of family member advisors and firm performance to be positive initially, but to become negative after reaching a certain point.

The Moderating Role of Family Generation in Control

In line with recent research (e.g., Beck et al., 2011; Casillas et al., 2010; Cruz & Nordqvist, 2012; Eddleston et al., 2013; Ling & Kellermanns, 2010; Mazzola et al., 2012), we suggest that the family generation in control, that is the generation of the founder’s family that owns the firm (Ling & Kellermanns, 2010), serves as an important moderator. The literature suggests that the founder’s generation and later generations have distinctive knowledge endowments, different patterns of interpersonal relationships, and different approaches to management (Gersick et al., 1997; Lansberg, 1999). Following this logic, we argue that the nonlinear relationship between the number of family member advisors and family firm performance is moderated by the generation in control of the family firm. The inverted U-shaped relationship will become positive as the number of family member advisors increases for first-generation firms and maintains an inverted U-shape for later-generation firms.

In firms controlled by the first generation, the risk of adopting risk adverse behaviors is low since family creativity and entrepreneurial spirit are high (e.g., Salvato, Chirico, & Sharma, 2010) and there are no earlier generations of owner-managers who might want to preserve previous strategy. Similarly, family member advisors have no legacy from the past to preserve. With relatively few people involved in first-generation family firms, agency costs resulting from information asymmetries tend to be lower. Yet a business that is small, young, and has low product diversification needs the insights and knowledge of multiple family members, especially professional family member advisors, to thrive and grow (Churchill & Lewis, 1983; Gedajlovic, Lubatkin, & Schulze, 2004; Kellermanns & Eddleston, 2004; Greiner, 1972), as family members are usually acknowledged as holders of firm-specific tacit knowledge (Barbera & Hasso, 2013). Knowledge ranging from production efficiency to financial control is needed, and in addition, “the founders often hate to step aside” even if they lack knowledge in important areas (Greiner, 1972, p. 42) and are reluctant to rely on professional management (Hall, Melin, & Nordqvist, 2001; Hall & Nordqvist, 2008). For this reason, family member advisors can play an important stewardship role by offering direction and providing mentoring in critical areas, thereby supporting the founder and other stakeholders in pulling the organization together and foster the growth of the new venture with a clear direction (Greiner, 1972, 1997). Thus, we expect a positive relationship between the number of family member advisors and first-generation family firm performance. While a low number of family member advisors is expected to have little or no positive impact on performance, a higher number of advisors will have greater effects on performance outcomes.

In later-generation family firms, however, we argue that there is an inverted U-shaped relationship. While an increase in family member advisors may have a positive effect initially (Eddleston & Kellermanns, 2007), negative effects are more likely with higher numbers of advisors. After a certain threshold, an increased number of family member advisors is more likely to represent the self-interest of different individuals and groups within the family, rather than promoting the development of the business (Le Breton-Miller et al., 2011) and, due to divergent family branches and internal politics, may create and amplify relationship conflicts and reduce advisors’ motivation to behave as stewards (Eddleston et al., 2013; Gersick et al., 1997; Lubatkin, Schulze, Ling, & Dino, 2005). In contrast to the founding generation, later-generation family member advisors may preserve inherited wealth (Beck et al., 2011; Kellermanns, Eddleston, Sarathy, & Murphy, 2012) and become more risk averse (van Essen, Carney, Gedajlovic, Heugens, & van Oosterhout, 2011; Zahra, 2005). This effect is exacerbated by advisors’ tendency (along with family owners and managers) to rely on past strategies due to their emotional attachment to ancestral values (Habbershon & Pistrui, 2002) in their attempt to protect the wealth built by the founding generation (Salvato et al., 2010). While these values may have been highly effective historically, they may become dysfunctional in a changed context, leading to the firm’s regression (Gagliardi, 1986). We suggest that in firms controlled by later generations, an inverted U-shaped relationship exists (as described in Hypothesis 1).

Sample and Data Collection

Our initial random sample of 500 firms, which was drawn from Statistics Sweden, comprises small- and medium-sized manufacturing firms in Sweden. Firms were surveyed by telephone and online. Out of the 171 firms that responded, 128 answered “yes” to the following questions: (a) Are ownership and management control of the company dominated by one family and (b) do you consider your business as a family business? These 128 firms comprised our study sample and were matched with archival data. While the initial response rate was 34.2%, our final sample resulted in a response rate of 25.6%.

Data on the independent and moderator variables were collected by telephone and online. To improve reliability, the targeted respondent was each company’s CEO. Data on the dependent variable were gathered from business registers (i.e., Företagsfakta and Retrivier). For the control variables, we sought additional objective secondary data from Statistics Sweden and from Företagsfakta and Retrivier.

To test for nonresponse bias, we examined differences between respondents and nonrespondents on known attributes. T tests showed no significant differences based on return on assets (ROA; T = 0.83, p > .1).

Measures

Implications for Research and Practice

Our findings follow prior evidence suggesting that first-generation family firms, especially, need to employ skilled and professional executives who are external to the family rather than relying solely on the knowledge and skills of family members (Casillas et al., 2010; Dyer, 1988; Martinez, Stöhr, & Quiroga, 2007). Gedajlovic et al. (2004), for example, refer to crossing the threshold from founder management to professional management to gain competitive advantage, thus showing the need and willingness to rely on external advisors that, to different degrees, may be embedded into the family business (Barbera & Hasso, 2013).

Our analysis may also facilitate scholarly efforts to better understand advising issues involving other organizational forms, since many features of the relationships that occur in a family firm context could be generalized (see Arregle et al., 2007). Close relationships in family firms may be similarly developed in other types of organizations that are influenced by a predominant social group.

For practitioners, that is, family members involved in family firms, externally recruited employees, or external advisors, our research highlights the need to be aware of both the benefits and the detriments of family member advisors. As both family members and outsiders have specific skills and resources that can add value to the advising process, choosing advisors is not an “either/or” question. Managers of family firms should try to find the right combination of the two categories. Although family member advisors, per se, do no harm in family firms, there is a significant risk that too much reliance on family member advisors by later generations may lead to agency problems and fail to solve family business issues.

Later-generation family firms must be more attentive to the personal preferences and dispositions of family member advisors than are first-generation family firms. Family members who are driven by the desire to preserve established structures or who are likely to allow personal conflicts to affect decision-making processes are probably not suitable as advisors. Otherwise, the risk of relying on path-dependent solutions will most likely become a routinized behavior with negative consequences for family firm performance.

Limitations and Future Research

We did not consider succession or succession planning as a control. Because a succession event can be difficult in family firms and may lead to firm failure when not handled effectively, it can strongly affect a firm’s need for advising (Salvato & Corbetta, 2013) and its potential benefits. Likewise, we also did not control for actual family relationships of the advisors. Depending on underlying dynamics, family relationships with the owner/managers of the firm may affect the ability of the family firm advisor to influence outcomes. We encourage future research to take a closer look at relationships among family members working in the firm, in general, as well as their relationships with family member advisors working in the firm. Although we do not directly measure either stewardship (for a measurement example, see Davis, Allen, & Hayes, 2010) or agency behaviors in the family firm, we indirectly assess their outcomes through the interaction of the number of family member advisors and the generation in control of the firm. Future research may try to assess stewardship and agency behavior more directly.

Our sample focused on small- and medium-sized enterprises. In larger firms, board of directors are more established (Pieper, Klein, & Jaskiewicz, 2008) and additional complex governance structures like family councils or family offices can be found (e.g., Melin & Nordqvist, 2007; Decker & Lange, 2013). Future research needs to investigate not only the effects of family member advisors on larger firms, but also the interplay between potential governance bodies as well as the interplay between family and nonfamily members that occur.

We focused on the effect of the number of family member advisors on firm performance, measured as ROA. Although we find support for our hypotheses, the cross-sectional nature of our study design does not infer causality or properly account for the lagged effects of family member advisors on firm performance. These limitations can be addressed by future longitudinal studies. Other measures of financial and nonfinancial performance as well as the existence of cognitive and relational conflicts among family members (including family member advisors) should also be considered. Building on the stewardship/agency framework, future studies may develop deeper arguments on family members’ and advisors’ (conflict) relationships, history, culture, and their potential effects on firm outcomes.

More fine-grained information on the qualifications of family member advisors may be worthwhile. For instance, because the effectiveness of family member advisors may be dependent on their experience inside and outside the family business, future research could consider human capital as a proxy for the quality of advice that may positively affect performance (Barbera & Hasso, 2013; Sirmon & Hitt, 2003). Family member advisors’ effectiveness may also depend on the fact that family firms simultaneously have economic and noneconomic goals, as has been suggested (see, e.g., the concept of socioemotional wealth, by Gómez-Mejía, Haynes, Núñez- Nickel, Jacobson, & Moyano-Fuentes, 2007). The relationship between family involvement and the organizational goals adopted by family firms is likely to be complex (Chrisman et al., 2012); therefore, future research should analyze the effect of family member advisors via the role played by the great diversity of family business goals.

We examined only a small number of firms with multiple family advisors. In order to ensure that our findings were not driven by extreme observations, we applied the usual diagnostic tests, that is, the studentized residuals, the Cook’s D, and the DF-betas (Hair et al., 2010). These tests confirm that the results of our study are not driven by outliers. Still, our study is exploratory in nature and we encourage scholars to replicate and extend our findings with larger or more balanced samples. In addition, advising needs to be further contextualized. How effective are family versus nonfamily advisors before or after a succession event or during periods of growth or decline? What type of advisor is more suitable for which problem? For example, in order to settle relationship conflicts, external nonfamily member advisors are often suggested as a remedy (Kellermanns & Eddleston, 2006), since family member advisors are likely to be less suited. Future studies may also use a qualitative approach to examine relationships among family members working in the business, family member advisors, and family members not involved in the business. A better understanding of how family member advisors interact with nonfamily advisors is necessary.

We hope this exploratory study serves as a basis for understanding the role of family member advisors and their impact on family firm performance. We encourage others to build on our findings and investigate how and when advisors to the family firm can have beneficial performance effects.