Abstract
Agency and stewardship theories are prominent perspectives to examine myriad issues within family firms. Although considered opposing theories, both address the same phenomena: the individual-level behaviors and firm-level governance mechanisms that predict organizational outcomes. Accordingly, we review and synthesize these theories concurrently, using the concepts of behavior and governance as our organizing framework. Our review encompasses 107 family firm articles grounded in agency and/or stewardship theory, published between 2000 and 2014 in 24 journals across several disciplines. Additionally, we identify future research areas that provide scholars opportunities to push theoretical boundaries and offer further insights into the family firm.
Introduction
Research on family firms often applies mainstream theories to explain their unique aspects. Two such theories, agency theory and stewardship theory, have been relied on heavily for this purpose (Verbeke & Kano, 2012). Family firm researchers have made significant strides in not just applying and testing these theories but also in advancing the field (e.g., Corbetta & Salvato, 2004b; W. S. Schulze, Lubatkin, Dino, & Buchholtz, 2001; Shukla, Carney, & Gedajlovic, 2014; Villalonga & Amit, 2006). They have provided insights into the behavior, governance, and performance of family firms through the lens of agency and stewardship theories, and have expanded the theoretical boundaries through examinations within this unique context.
Originally, agency problems were not expected in family firms because of their unified ownership and management, resulting in an assumed environment where interests are aligned and monitoring is unnecessary (Chrisman, Chua, & Litz, 2004; Jensen & Meckling, 1976; Fama & Jensen, 1983). Since this early thinking, family firm scholars have expanded theoretical boundaries by highlighting previously overlooked agency problems and conflicts. For example, nontraditional agency problems, such as asymmetric altruism and executive entrenchment (Block, 2012; Moores, 2009; Nicholson, 2008; W. S. Schulze et al., 2001; W. S. Schulze, Lubatkin, & Dino, 2003a, 2003b), have been brought to light. Moreover, research demonstrates that agency governance mechanisms, such as a board of directors, incentive compensation plans, and monitoring activities, serve their theorized purpose within family firms (Anderson & Reeb, 2004; Braun & Sharma, 2007; Chrisman, Chua, Kellermanns, & Chang, 2007). Research also introduced new principal–agent conflicts, such as those stemming from the family–nonfamily shareholder relationship (Ali, Chen, & Radhakrishnan, 2007; Villalonga & Amit, 2006). These research endeavors document the remarkable efforts of scholars to push the boundaries and bring agency theory into the family firm, a context once thought to be irrelevant to agency theory.
Yet, certain unique aspects within family firms, such as noneconomic goals and family involvement, can lead to behavior and governance variations that deviate substantially from agency theory. Hence, scholars turned to stewardship theory (Davis, Schoorman, & Donaldson, 1997; Donaldson & Davis, 1991), which also has contributed to a greater understanding of the family firm (Eddleston & Kellermanns, 2007; Le Breton-Miller & Miller, 2009; Zahra, Hayton, Neubaum, Dibrell, & Craig, 2008). Tenets of stewardship theory are pronounced, not just applicable, in the family firm (Corbetta & Salvato, 2004b). Scholars successfully extended stewardship theory into this context and expanded its tenets to include myriad behaviors, such as identification with the family firm (Vallejo, 2009), commitment (Davis, Allen, & Hayes, 2010), and reciprocal stewardship (Pearson & Marler, 2010). Additionally, research demonstrates that family firm stewardship governance is predictive of several pro-organizational outcomes, such as performance (Eddleston & Kellermanns, 2007), innovativeness (Craig & Dibrell, 2006; Dibrell & Moeller, 2011), and strategic flexibility (Zahra et al., 2008). This research highlights contributions to theory and expands our knowledge of the behaviors and governance that ultimately facilitate the performance of family firms.
Our purpose is to review the family firm literature grounded in agency theory and stewardship theory to highlight the achievements made thus far and to recommend areas for further expansion. Our purpose is not to provide an extensive review of agency and stewardship theories in family firms because this has already been done quite successfully (e.g., Chrisman, Chua, & Sharma, 2005; Miller & Le Breton-Miller, 2006; Shukla et al., 2014). Rather, we go beyond these extant literature reviews and offer three unique contributions. First, we consider agency and stewardship theories concurrently, moving away from their current dichotomous treatment. Extant literature treats agency and stewardship as separate and opposing lenses for viewing the family firm. Although we believe they are conceptually distinct, the theories offer mutually enabling explanations of the family firm. In essence, they are interdependent theories that are simultaneously contradictory and complementary (Farjoun, 2010), and therefore are presented in this manner. This perspective offers a finer-grained review by categorizing and organizing the agency and stewardship literature by the core theoretical tenets of each, behavior and governance. Second, we provide a comprehensive table that identifies, characterizes, and summarizes 107 family firm articles adopting an agency and/or stewardship perspective. Third, we develop and illustrate a consolidated framework to guide future family firm research grounded in these theories. By approaching our research in this manner, we hope to facilitate scholarly work that can further extend theory and advance our knowledge of the family firm.
Theory
Agency theory describes the relationship between two parties, the principal and the agent-manager (Eisenhardt, 1989; Jensen & Meckling, 1976), addressing the relationship from a behavioral and a governance perspective. The principal-manager relationship describes any type of relationship where work is delegated from a principal to a manager, regardless of actual position (Eisenhardt, 1989). Rooted in economics, agency theory suggests that managers will choose opportunistic self-interested behavior rather than behavior aimed at maximizing the principal’s interest (Davis et al., 1997; Eisenhardt, 1989; Jensen & Meckling, 1976). As such, principals will enact governance mechanisms to monitor the manager’s behavior, intending to thwart behavior not aligned with the interest of the principal (Cruz, Gómez-Mejía, & Becerra, 2010; Eisenhardt, 1989; Fama & Jensen, 1983; Jensen & Meckling, 1976). In turn, interests will align and the performance of the firm will increase (Fama, 1980).
Stewardship theory also describes the relationship between two parties, the principal and the steward-manager (Davis et al., 1997). Like agency theory, it addresses this relationship from a behavioral and a governance perspective. Because of its roots in sociology and psychology, stewardship theory describes a more humanistic model of man than the economic view of agency theory (Corbetta & Salvato, 2004b; Donaldson & Davis, 1991). It portrays managers as stewards, whose behavior is based on an intrinsic desire to serve the firm and will therefore naturally align with the principal’s interests (Corbetta & Salvato, 2004b; Hernandez, 2008; Zahra et al., 2008). Governance mechanisms that empower steward behavior are prescribed to facilitate the continued alignment of interests, thereby resulting in pro-organizational behavior and increased firm performance (Davis et al., 1997). Table 1 summarizes these basic tenets.
Summary of Agency and Stewardship Theories.
Some family firm scholars suggest that “agency theory offers a rich and fruitful frame of reference by which the peculiar problems of family businesses might be studied” (Chrisman et al., 2004, p. 351), while others describe stewardship theory as “ideal for explaining governance in the family business context” (Davis et al., 2010, p. 1093). These theories offer opposing assumptions and predictions for firm performance (Chrisman et al., 2007; Cruz et al., 2010; Tosi, Brownlee, Silva, & Katz, 2003; Wasserman, 2006), and therefore have sparked an ongoing debate regarding the predictive ability of each theory in this unique context (Le Breton-Miller & Miller, 2009). Solid arguments have been made and supported on both sides of the debate, thereby creating ambiguity about governance mechanisms that lead to family firm performance. Therefore, we synthesize the family firm literature grounded in agency and stewardship theories, present the theoretical advancements made by family firm scholars, and suggest areas for further advancement.
Scope of the Review
We used several established strategies to identify a comprehensive list of agency and stewardship theory articles within the family firm context. First, following the methodological approach of De Massis, Frattini, and Lichtenthaler (2012), our search started with the extensive annotated bibliography of the 215 most influential family firm research contributions from 1996 to 2011 (De Massis, Sharma, Chua, & Chrisman, 2012). By searching for keywords agency and stewardship in the entire bibliography of each of these articles, we identified 81 articles. We read these articles to determine their fit for inclusion. To be included, the theoretical underpinning for the conceptual or empirical model had to be agency or stewardship theory; we excluded articles if the main theoretical framework was not agency or stewardship theory. For examples, we excluded socioemotional wealth articles grounded in behavioral agency theory, rather than agency theory (e.g., Gómez-Mejía, Haynes, Núñez-Nickel, Jacobson, & Moyano-Fuentes, 2007; Gómez-Mejía, Makri, & Larraza-Kintana 2010). We excluded an article examining entrepreneurial orientation because agency theory was not the focus of the investigation, rather it was a supporting theory referenced in only one of the seven hypotheses (e.g., Short, Payne, Brigham, Lumpkin, & Broberg, 2009). Similarly, we excluded Corbetta and Salvato (2004a) because although it reviews agency theory, it suggests a contingency theory framework may be more appropriate for examinations of boards of directors. Additionally, we excluded articles that synthesize the family firm literature and include sections on agency or stewardship theory (e.g., Chrisman, Chua, & Steier, 2003; Chrisman, Kellermanns, Chan, & Liano, 2010; Chrisman et al., 2005; Young, Peng, Ahlstrom, Bruton, & Jiang, 2008). Based on these criteria, 51 of the 81 articles were considered relevant for our review.
Second, we took steps to minimize biases against recent and older articles. To capture relevant articles published after the annotated bibliography, we electronically searched the 2012, 2013, and 2014 issues of the same 33 journals used in the bibliography (De Massis et al., 2012). We used combinations of keywords such as family firm, family business, family enterprise plus agency theory, agency problems, agency costs, or stewardship theory. This procedure resulted in 126 articles that were reduced to 28 based on our inclusion criteria. To capture relevant articles published before the annotated bibliography, we reviewed the 226 article bibliographies found in the annotated bibliography of influential family business research from 1971 to 1995 (Sharma, Chrisman, & Chua, 1996). This step yielded no additional articles, as neither agency nor stewardship theory appeared before 2000 in the family business context.
Third, we opened our search to the broader agency and stewardship literature by examining articles citing the foundational theoretical works and review articles (e.g., Davis et al., 1997; Donaldson & Davis, 1991; Eisenhardt, 1989; Jensen & Meckling, 1976) to determine whether these studies investigated family firms. By doing so, we added 28 relevant articles. In sum, these steps led to 107 articles grounded in agency or stewardship theory within the family firm context that serve as the basis for our review.
These 107 articles span more than a decade, from 2000 through 2014, and comprise 22 conceptual articles and 85 empirical articles. Agency theory is the main theoretical framework in 70 articles, stewardship theory in 18 articles, and both agency and stewardship theories are considered in 19. The articles appear in 24 journals across several disciplines that include family firm–specific journals such as Family Business Review; entrepreneurship journals such as Entrepreneurship: Theory & Practice and Journal of Business Venturing; mainstream management journals such as Academy of Management Journal and Journal of Management; and finance, accounting, and economic journals such as Journal of Finance and Journal of Accounting and Economics. Table 2 presents the article counts by journal and discipline.
Family Firm Agency and Stewardship Research by Discipline and Journal.
Our review considers agency and stewardship theories together because they address the same phenomena: The individual-level behaviors and firm-level governance that facilitate enhanced firm performance (Davis et al., 1997; Fama & Jensen, 1983; Tosi et al., 2003). Behaviors refer to the actions of individuals and can be categorized as self-serving or other-serving (Davis et al., 1997). Governance refers to the explicit and implicit control systems or mechanisms of the organization (Mustakallio, Autio, & Zahra, 2002). We rely on these basic ideas to organize our review. Table 3 presents the characteristics and key findings of the 107 family firm articles in our review, organized by focus (e.g., behavior, governance, both) and then by theoretical perspective (e.g., agency, stewardship, both).
Family Firm Agency and Stewardship Research by Focus.
Behavior Within the Family Firm
Agent Behavior
Research supports nontraditional agency problems that are uniquely related to behavior within family firms, such as those created by asymmetric altruism (Moores, 2009; W. S. Schulze et al., 2001; W. S. Schulze et al., 2003a; 2003b) or the misalignment of shareholder goals (Villalonga & Amit, 2006). Altruism, which is regarded as selfless behavior that benefits others, may represent a form of opportunism in family firms (Eddleston et al., 2008). That is, agency theorists suggest that altruism may be asymmetric, which is not reciprocal, is potentially exploitable, and can cause harm to family firms (Chua et al., 2009; Wright & Kellermanns, 2011). Family firms are embedded in family relationships, such as the parent–child relationship (W. S. Schulze et al., 2003a). Parents can be overly generous to their children, and their children may take advantage of this generosity by shirking or free-riding (Chrisman et al., 2004; Dawson, 2011; Eddleston et al., 2008; W. S. Schulze et al., 2001). Termed a moral hazard agency problem, this is compounded by the family firm leaders’ propensity to refrain from monitoring family members’ behavior (Chua, Chrisman, Kellermanns, & Wu, 2011; Eddleston, Chrisman, Steier, & Chua, 2010). Asymmetric altruism can also create adverse selection agency problems when family firms hire family members instead of nonfamily, regardless of whether they are the most qualified or skilled for the position (Eisenhardt, 1989; Fama, 1980; Karra et al., 2006; W. S. Schulze et al., 2001; W. S. Schulze et al., 2003b), and may even pay them more generously (Chua et al., 2009). These asymmetric altruism-created agency problems result in decreased family firm performance (Eddleston et al., 2010; Wright & Kellermanns, 2011) or create additional agency costs as governance mechanisms to monitor and assess behavior are implemented (Chua et al., 2009; Lubatkin et al., 2007).
Opportunism is not only a potential threat when the interests of owners and managers diverge, but family firm scholars have found that it may also present a threat as the interests of majority and minority shareholders diverge, also referred to as a Type II agency problem (i.e., conflict between family and nonfamily shareholders; Ali et al., 2007; Villalonga & Amit, 2006). For example, family firms often pursue noneconomic goals at the expense of financial gain (Gómez-Mejía et al., 2007). Behavior that diverts resources in order to pursue the family’s noneconomic agendas may negatively impact firm performance (Chrisman et al., 2004), thus creating conflict between family and nonfamily shareholders.
Steward Behavior
Research demonstrates the theorized benefits of steward behavior within the context of the family firm. Psychological factors, such as intrinsic motivation and identification, are suggested to facilitate steward behavior (Davis et al., 1997). Family firm empirical research examines these behaviors and their links to firm performance. High employee identification with the family business is positively associated with firm profitability and survival (Vallejo, 2009). Davis et al. (2010) demonstrate that family firms foster trust and commitment among employees, making stewardship the “secret sauce” for creating a competitive advantage in family firms. Altruistic tendencies that are other-serving, as opposed to the self-serving asymmetric altruism found in agency theory research (Corbetta & Salvato, 2004b), are shown to positively affect the growth and financial performance of family firms (Eddleston & Kellermanns, 2007).
Aside from beneficial firm-level outcomes, we also learn from this research that leadership is an important factor in fostering stewardship behavior (Hernandez, 2008). Pearson and Marler (2010) argue that the leader’s stewardship choice can motivate and facilitate reciprocal stewardship behavior from the employee. Likewise, Eddleston (2008) suggests that transformational leadership can lead to a stewardship culture. These ideas capture the essence of McGregor’s (1960) classic Theory X and Theory Y and Corbetta and Salvato’s (2004b) argument that “the owning family has a crucial impact in shaping the ‘model of man’ prevailing within the organization as either the self-serving, economically rational man postulated by agency theory, or the self-actualizing, collective serving man suggested by stewardship theory” (p. 357).
Agent and Steward Behavior
A common theme of the behavior-focused articles adopting both theoretical perspectives is family involvement. Research highlights that family involvement has a strong impact on the behavior within the firm. Behaviors investigated include workplace deviance (Eddleston & Kidwell, 2012), nonfamily CEO success (Blumentritt, Keyt, & Astrachan, 2007), and opportunistic and trusting behaviors (Howorth et al., 2004). For instance, Eddleston and Kidwell (2012) suggest that altruism can cause children who work in the family firm to behave as agents or stewards, depending on the parent–child relationship. Blumentritt et al. (2007) argue that both theories are equally applicable in family firms by examining CEO competencies and board support on the success of a nonfamily CEO. From an agency perspective, success stems from principals hiring the most competent and skilled CEOs to run their business; from a stewardship perspective, success stems from the CEOs ability to build a relationship with the family, fit with the organizational culture, and rely on the board for support rather than monitoring (Blumentritt et al., 2007).
This research also demonstrates that family behaviors can affect firm performance. Westhead and Howorth (2006) suggest agency theory is more applicable when owners focus on financial objectives of the firm and thus implement agency governance mechanisms to monitor managers. They also argue stewardship theory is more applicable when owners focus on nonfinancial objectives or “family agendas” (Westhead & Howorth, 2006, p. 303). Furthermore, they suggest the CEO has the greatest power in influencing the objectives and thus performance of family firms. In a similar vein, leadership embeddedness is also examined from both an agency and stewardship perspective. Embeddedness is defined as “the relationship between an actor’s economic behavior and the social context in which it occurs” (Le Breton-Miller & Miller, 2009, p. 1171). Family firms reside at the intersection of the family system and the business system (Goel, Mazzola, Phan, Pieper, & Zachary, 2012). Research suggests that if the family is more embedded in the family system, an agency environment is more likely to exist because of the hierarchical nature of family and the family’s self-serving interest. In contrast, if the family is more embedded in the business system, a stewardship environment is more likely because the family is willing to put the interest of the business first (Le Breton-Miller & Miller, 2009).
Summary of Behavior
The behavioral assumptions of agency theory (i.e., economic model of man) and stewardship theory (i.e., humanistic model of man) are both captured in the family firm environment. Classic agency theory assumes nonfamily managers will behave as agents, and this is theorized and supported within nonfamily firms. Brought into the family firm, research shows that destructive agent behaviors, stemming from opportunism and asymmetric altruism, are also found with family managers. Similarly, family firm research assumes steward behavior is inherent in family members, but it has also been demonstrated among nonfamily. Beneficial steward behaviors, stemming from identification and commitment to the family firm, can be cultivated in nonfamily managers. Taken together, family and nonfamily managers exhibit both agent and steward behaviors. As theorized, agent behavior can be detrimental and steward behavior can be advantageous to the family firm. Thus, the governance of the family firm is of importance because of the impact it has on curbing agent behavior and/or enhancing steward behavior within the firm, thus positively affecting the performance of the firm. Below, we discuss the governance component of agency and stewardship theories in more detail.
Governance of Family Firms
Agency Governance
Agency theory prescribes governance mechanisms to curb opportunistic behavior and subsequently increase firm performance (Eisenhardt, 1989). These traditional prescriptions, such as the presence of a board of directors, monitoring activities, and compensation incentive plans, are supported in the family firm literature. For instance, research demonstrates that a board of directors is desirable; outside board members are put in place to monitor the family, and family members have a place on the board to monitor the business (Anderson & Reeb, 2004). Likewise, investigations reveal that family firms using agency governance mechanisms (i.e., monitoring, incentive compensation) have higher levels of performance (Chrisman et al., 2007). Studies that investigate compensation practices find that nonfamily CEOs need pay incentives to align their interests with the principal (McConaughy, 2000) and that family CEOs receive fewer incentives because the family is structuring the compensation system to help the family CEO avoid excessive personal risk (Gómez-Mejía, Larraza-Kintana, & Makri, 2003).
In addition to supporting traditional agency theory governance mechanisms, research exposes nontraditional governance within family firms, such as entrenched family ownership (Block, 2012; Moores, 2009; Nicholson, 2008). Family ownership is often described as an effective organizational governance mechanism because it reduces problems associated with the separation of ownership and management (Anderson & Reeb, 2003a; Chirico, Ireland, & Sirmon, 2011; Jensen & Meckling, 1976; Tsai et al., 2006); however, there is evidence that suggests otherwise. Block (2012) contends that family firm ownership is not a superior form of governance because family dynamics and conflicts are difficult to monitor. Ineffective monitoring allows for increased moral hazard problems, and is empirically shown to be associated with lower productivity (Block, 2012). Nicholson (2008) suggests family ownership can facilitate agency problems such as the inability to make sound business decisions due to an excessive emotional attachment to the firm or due to the lack of a qualified family successor for the business. Accordingly, agency governance mechanisms are necessary to alleviate these family firm specific problems in order for the business to thrive (Block, 2012; Nicholson, 2008).
Family firm research on agency governance has also branched out to explore new principal–agent relationships, new contexts, and new performance outcomes. Moving beyond the classic principal-manager relationship, studies consider the majority-minority shareholder relationship (Anderson, Duru, & Reeb, 2009; Anderson & Reeb, 2003b) and the relationship between society (i.e., the principal) and firm owners (i.e., the manager; Block 2010). Family firm research extends agency theory to new contexts, such as emerging economies (Choi et al., 2012), market institutions (Luo & Chung, 2013), and international business (H. L. Chen et al., 2013). New performance outcomes within family firms have also been investigated through an agency theory lens, such as investment and dividend decisions (Asaba, 2013; Kuo & Hung, 2012; Pindado, Requejo, & Torre, 2012), firm-level innovation and risk taking (De Massis et al., 2015; Liang et al., 2013; Zahra, 2005), and bankruptcy avoidance (De Maere et al., 2014).
Stewardship Governance
Theory suggests there are situational factors that define the stewardship nature of the work environment and culture of the organization (Davis et al., 1997). Examples of stewardship governance include systems that allow for employees to have a high level of authority and discretion, such as an involvement-oriented approach to management and a collectivist culture (Davis et al., 1997). The rationale for implementing stewardship governance mechanisms can be linked back to McGregor (1960). Unlike the traditional control-oriented mechanisms that are seen in agency governance, stewardship governance encourages cooperation and empowers and motivates employees, thereby enabling pro-organizational behaviors and ultimately enhanced firm performance (Davis et al., 1997; Eddleston & Kellermanns, 2007; McGregor, 1960).
Stewardship governance research demonstrates that family firms have stewardship mechanisms in place and that these mechanisms serve their theorized purpose on behavior and performance. For example, when compared to nonfamily firms, family firms are shown to have more stewardship governance, such as an organizational culture that is inclusive, flexible, and where employees are nurtured, trained, and given broader responsibilities (Miller et al., 2008). Stewardship governance, depicted through strategic decision making responsibilities and participative management, has been linked to higher levels of corporate entrepreneurship in family firms (Eddleston, Kellermanns, & Zellweger, 2012). It is argued that family firms are able to identify and exploit entrepreneurial opportunities when the critical insights of family members are combined with the diverse perspectives of nonfamily when both are able to participate in the decision making process (Eddleston et al., 2012). Family firm stewardship governance has also been associated with strategic flexibility (Zahra et al., 2008), innovativeness (Craig & Dibrell, 2006; Dibrell & Moeller, 2011), and firm performance (Craig & Dibrell, 2006). This is because stewardship governance facilitates steward behaviors, such as high levels of commitment and helping behaviors (Zahra et al., 2008). These other-serving steward behaviors naturally align with the interests of the organization, and in turn, result in pro-organizational outcomes (Davis et al., 1997).
Agency and Stewardship Governance
Governance-focused articles adopting both agency and stewardship theories primarily investigate family involvement. These articles are concerned with how the family affects the governance of the firm, rather than on the individual-level behaviors within the firm. For instance, articles examine agency and stewardship perspectives on the presence of a board of directors (e.g., Pieper et al., 2008) and board characteristics (Jaskiewicz & Klein, 2007). Research suggests that when goal alignment is high between owners and managers, a stewardship environment will prevail, making the monitoring role of the board of directors less important (Pieper et al., 2008). In contrast, when goals diverge, a board of directors is more likely to exist (Pieper et al., 2008), and the board should be larger in size and have a higher ratio of outside members, thus resulting in an agency environment (Jaskiewicz & Klein, 2007). Not taking other explanatory attempts of the literature into account (e.g., founder-run family firms vis-à-vis other family and nonfamily firms), utilizing insights from both agency and stewardship perspectives suggest that performance is higher in family firms than in nonfamily firms because of (1) lower agency costs (Chrisman et al., 2004) and (2) family leaders are stewards of the family wealth (Graves & Shan, 2013). Research shows family ownership can have either a positive or negative effect on internationalization decisions based on agency or stewardship perspectives; monitoring mechanisms, creating a hierarchical form of governance, and implementing a board of directors may be necessary to overcome stagnation and realize the benefits of stewardship (Sciascia et al., 2012).
Summary of Governance
Based on our review, agency and stewardship governance both serve their theorized purpose of enabling pro-organizational behavior and enhancing family firm performance. Although the literature treats agency and stewardship governance in opposition, we suggest this may not necessarily be the case. Agency governance is often depicted by monitoring mechanisms, whereas stewardship governance is depicted by participatory and collectivistic environments. These depictions in the literature are not necessarily opposite; just because a firm implements monitoring mechanisms does not mean they cannot also have collectivistic cultures. These collective structures themselves can impose norms that curtail undesired behavior. Indeed, formal governance systems may limit actions and constrain choice. But, these systems can also foster trust, preserve autonomy, and regularize collective thinking (Simons, 2013). Our review highlights that research treats these theories in a dichotomous way, neglecting the organizational reality that both types of governance may coexist.
Future Research
Although research has successfully applied and extended agency and stewardship theories into the family firm context, interesting research opportunities still exist. Figure 1 presents our framework illustrating the core constructs and relationships theorized by both agency and stewardship theories. As inferred from our review, we illustrate that the behavioral assumptions a principal has about a manager guide the decision about which type of governance exists within a family firm. Governance influences the actual behavior of the manager and subsequently firm-level outcomes. We suggest the relationship between behavior and governance is dynamic; meaning, governance mechanisms may be implemented based on the actual behavior of the manager, rather than based only on the behavioral assumptions the principal has of the manager. We also suggest behavior has an effect on firm-level outcomes, contingent on the level of informational symmetry. Specific to the family firm environment, there are interesting opportunities for future research found within this framework. We describe some of these opportunities below, intending to guide scholars in their continued efforts to extend theoretical boundaries and provide new insights about the family firm.
Framework for future agency and stewardship research within family firms.
Behavioral Assumptions
The divergence of agency and stewardship governance stems from the behavioral assumptions a principal has about a manager. Agency theory assumes an economic and opportunistic model of man, whereas stewardship theory assumes a humanistic and other-serving model of man. Extant research infers the principal has an accurate behavioral assumption of managers. Meaning, when a principal assumes managers are agents, agency governance mechanisms are enacted. Likewise, when a principal assumes managers are stewards, stewardship governance mechanisms are enacted. Research shows that agency and stewardship governance serve their theorized purpose on the actual behavior of the managers.
However, research has yet to examine the effect of inaccurate behavioral assumptions. If the principal’s behavioral assumption about managers is inaccurate, then misaligned governance mechanisms may be implemented thus triggering undesirable behavior. To elaborate, agency governance mechanisms may curb the opportunistic behavior of agents, but might have different effects on stewards (Wasserman, 2006). Said differently, “what works well to control or motivate an opportunistic manager may not work well to control or motivate a steward” (Lee & O’Neill, 2003, p. 212; see also Pieper et al., 2008). Agency governance controls self-interested behavior, rather than empowering other-interested behavior. Accordingly, for stewards under agency governance, motivation is decreased and pro-organizational behavior is undermined (Chrisman et al., 2007; Corbetta & Salvato, 2004b; Davis et al., 1997). Additionally, these monitoring and control mechanisms can “result in a narrowing focus on individual goals to the exclusion of value-enhancing cooperation with coworkers” (Becker & Huselid, 1992, pp. 337).
Likewise, stewardship governance may empower pro-organizational behavior of stewards but might have different effects on agents. Stewardship governance creates an environment where managers are trusted and empowered to behave in the firm’s best interest (Davis et al., 1997; Donaldson & Davis, 1991) and is considered “dysfunctional under the agency theory model of man” (Davis et al., 1997, p. 26). Agent behavior is likely to surface under stewardship governance for several reasons. Stewardship governance depicts a socially interactive and collectivistic work environment (Davis et al., 1997; Dibrell & Moeller, 2011; Eddleston et al., 2012; Eddleston & Kellermanns, 2007; Zahra et al., 2008). Specifically in family firms, social interactions may involve more time spent discussing family affairs rather than business affairs (Zhang, Cone, Everett, & Elkin, 2011). Collectivistic work environments can also increase free-rider problems; individuals are compelled to reduce effort when working collectively because they assume individual contributions are less identifiable (J. M. George, 1992).
Taken together, this suggests that an inaccurate behavioral assumption will lead to a misaligned governance structure, and subsequently results in undesirable behavior and negative firm-level consequences. Investigations of these issues would require a stronger focus on and measurement of actual behavior of the manager in the principal–manager relationship, whether it is agent behavior (i.e., counterproductive behavior, shirking, free-riding) or steward behavior (i.e., identification with the firm, organizational commitment, organizational citizenship behavior). It would also require measurement of the principal’s implementation of governance mechanisms, whether agency (i.e., monitoring activities, compensation incentives) or stewardship (i.e., participatory management systems). These mechanisms would serve as a proxy for the principal’s behavioral assumption about the manager; the actual behavior of the manager would inform us if there is alignment. When there is alignment between governance and behavior, we would expect enhanced firm performance; when there is misalignment, we would expect a detrimental effect on firm performance.
Additionally, and more specifically to family firms, we encourage research that examines the behavioral assumptions and resulting outcomes with regard to kinship. It may be plausible that in a family firm where managers can be family or nonfamily, differences may result between the two groups (Chua et al., 2009; Davis et al., 2010). Research, albeit limited, suggests principals have different behavioral assumptions of family versus nonfamily managers. Chrisman et al. (2007) suggest family managers are agents, while other scholars suggest family managers are stewards (Kellermanns et al., 2008). Verbeke and Kano (2012) suggest both agent and steward behaviors can happen simultaneously in the family firm. They further suggest that the key to family firm success is addressing the asymmetric treatment of family and nonfamily. Accordingly, we encourage future agency and stewardship theory research to examine these behavioral assumptions between family and nonfamily members in more depth. For example, asymmetric altruism creates agency problems and the need for agency governance within family firms (W. S. Schulze et al., 2001; W. S. Schulze et al., 2003b), but this literature is focused solely on the relationship between family members (i.e., parent–child). Research is necessary that addresses the relationship between family and nonfamily within the family firm. Differences in perceptions, behaviors, and individual-level performance all provide fruitful opportunities for investigation.
Relationship Between Governance and Behavior
Agency and stewardship theories describe the manager’s actual behavior as the result of the governance structure of the firm. Agency theory assumes agents are self-serving; and therefore, principals enact governance mechanisms to curb the opportunistic behavior (Eisenhardt, 1989; Jensen & Meckling, 1976). Stewardship theory assumes that stewards are other-serving; and therefore, principals will enact governance mechanisms that create an environment that empowers and fosters this steward behavior (Davis et al., 1997). Some research in our review demonstrates a reversal of the order of causality. For example, Jaskiewicz and Klein (2007) suggest that goal alignment triggers stewardship governance and goal misalignment triggers agency governance. However, theory suggests that stewardship governance enables the manager’s steward behavior and therefore goals will naturally align; agency governance curbs the manager’s opportunistic behavior in order to create goal alignment between principals and agents. Future research should include both the contributing factors and resulting outcomes of agency and stewardship theories, and in the causal order theorized. Alternatively, research could address the rationale for applying theory in a way not originally theorized.
The rationale for this may be found in considering the relationship between governance and behavior in a dynamic, rather than static, way. Dynamic perspectives can advance theory by examining when and why governance and behaviors change relative to each other over time. There have been calls for family firm research to explore temporal dimensions (Sharma, Salvato, & Reay, 2014), yet little research exists (for exceptions, see Allison, McKenny, & Short, 2014; Brigham, Lumpkin, Payne, & Zachary, 2014; De Massis, Chirico, Kotlar, & Naldi, 2014; Moss, Payne, & Moore, 2014). Examinations of time within family firms is particularly salient, as “new temporal lenses in family business studies can help investigate behavioral patterns and outcomes that only become visible over generations” (Sharma et al., 2014, p. 17). For example, investigations can consider firm-level temporal dimensions, such as the firm’s life cycle (Habbershon, 2006) or professionalization (Chua et al., 2009) to determine how family firm governance changes over time and across generations, and how those changes affect behaviors within the firm. Agency theory offers little explanation after goal alignment is realized (i.e., principal–agent conflicts are minimized), whereby stewardship theory explains that a trusting and supportive climate emerges as goals are aligned. In essence, agency theory does not address the extent to which the firm’s governance may evolve over time.
Additionally, future research could consider how governance and behaviors change over time based on individual-level relationships. For example, the incorporation of a social exchange theory or balance theory lens might be appropriate. Social exchange theory describes a series of dyadic exchanges with behavior being contingent on the actions of another (Blau, 1964; Cropanzano & Mitchell, 2005). In this context, as the principal–manager relationship develops over time, the principal may implement different governance mechanisms based on the behavior of the manager (i.e., from agency to stewardship or vice versa); the manager’s behavior may then change accordingly (from agent to steward or vice versa). Balance theory, derived from social psychology, describes triadic relationships by its focus on an individual’s perception of his or her relationship with a second individual and a third entity such as another individual or an organization; theory suggests that a balanced state exists when relationships among the entities are harmonious (Peterson, 2006). Balance theory could prove useful in examinations of relationships between the principal and manager and the manager’s attitude toward the governance of the family firm. It could also be an appropriate lens for investigations of the triad of the principal, a family manager, and a nonfamily manager. These investigations could examine the level of harmony within the triad and its impact on the performance within the firm.
Firm-Level Outcomes
Firm performance is the theorized outcome of both agency and stewardship theories, albeit in slightly different ways; namely, improved performance is realized by cost minimization in agency theory (Corbetta & Salvato, 2004b; Davis et al., 1997; Fama, 1980) and by wealth maximization in stewardship theory (Davis et al., 1997). Measuring firm performance is a challenging aspect of family firm research (Amit & Villalonga, 2014; Colli, 2012). Nonetheless, family firm scholars successfully captured measures of firm performance that align with the theoretical framework utilized. Additionally, a host of other dependent variables unique to the family firm environment have been investigated. A recent study categorized the outcomes of a decade of family business empirical studies into seven clusters, including performance, strategy, governance, and family dynamics, among others (Yu, Lumpkin, Sorenson, & Brigham, 2012). Our review included studies that explored outcome variables within each of the seven clusters. We encourage future research to push the boundaries of agency and stewardship theory by continuing to explore additional outcomes.
Specifically, outcomes (particularly changes in stocks and flows of noneconomic benefits) evaluated against family-centered noneconomic goals deserve further research and integration into both agency and stewardship theories (Chua, Chrisman, & De Massis, 2015, B. Schulze & Kellermanns, 2015). The desire to preserve and pursue these goals are highlighted as a key feature of family firms (Gómez-Mejía et al., 2007) and has gained tremendous traction in research (Berrone, Cruz, & Gómez-Mejía, 2012; Gedajlovic, Carney, Chrisman, & Kellermanns, 2012). The endowment derived by the utilities of these non-economic goals is referred to as socioemotional wealth (SEW). SEW extends the behavioral agency model (Wiseman & Gómez-Mejía, 1998) and suggests that nonfinancial reference points, rather than financial references, are used in decision-making processes in family firms (B. Schulze & Kellermanns, 2015).Yet, this literature fails to address how SEW-related decisions are made. Agency and stewardship perspectives may provide insights into this decision process. For example, if the individual reference points and thus the utility derived from a SEW endowment differ between individual family members, or very likely between family branches, the pursuit of SEW can generate agency conflicts among family members as interests are not aligned. Yet, even if all family members involved in the firm (and potentially family members not involved with the organization, but exercising influence, e.g., spouses, retired family members) were to act in accordance with stewardship assumptions, research needs to address how the individual-level preferences aggregate to consistent firm-level preferences and behavior. Here, understanding the positive role of emotions, an underresearched area in the literature, may be helpful (for exceptions, see Morris, Allen, Kuratko, & Brannon, 2010; Stanley, 2010).
Second, as we consider socioemotional factors, we encourage researchers to consider the heterogeneity among family firms. That is, family firm performance is difficult to define because what it means to be a highly performing firm will vary from one family firm to another. Much of the research that explores the impact of family ownership and management rests on the premise that family firms differ from nonfamily firms and that these differences matter for their performance. Yet, two recent meta-analyses found no significant direct performance differences (Carney, Van Essen, Gedajlovich, & Heugens, 2015; O’Boyle, Pollack, & Rutherford, 2012). These studies, however, do not account for the differing strategic choices that could theoretically influence the extent to which agency and stewardship factors offer relative advantages as the heterogeneity of family firms is considered.
Information Assumptions
Agency and stewardship theories differ in their assumptions about information symmetries and goal alignment between the principal and manager. Agency theory is explicit in its assumption that information between the parties is asymmetric (Eisenhardt, 1989). Accordingly, governance mechanisms are put in place to align the goals and enhance firm performance, regardless of the level of information symmetry. In contrast, stewardship theory assumes the goals of the manager are other-serving and therefore naturally align with those of the principal (Davis et al., 1997). Therefore, it can be interpreted that stewardship theory assumes information is symmetric. Future research is needed to investigate this assumption.
Investigations of this nature would require data from both the principal and manager to determine if there is symmetry in information about the future goals and direction of the family firm. Information symmetry assumes steward managers have an understanding of the principal’s goals in order to behave in the intended way. It is assumed that stewards act in the best interest of the firm, but if the best interest of the firm is unknown or misinterpreted, behavior may not have the intended consequences. To elaborate, if the principal’s vision for the firm is to have the highest financial performance possible but managers assume the primary vision is to increase the family’s reputation, their steward behavior would not align with increased financial performance. This future research opportunity is particularly salient for family firms because of a common desire to pursue noneconomic goals or to preserve socioemotional wealth over pursuing economic goals (Gómez-Mejía et al., 2007; Yu et al., 2012). This research opportunity would allow for distinctions to be made between stewards of the family versus stewards of the firm and would possibly alter predictions made about family firm performance.
Limitations
We acknowledge that there are limitations of our research. Although we think our article selection method was comprehensive and inclusive, other literature search approaches may have generated a slightly different list of studies. Yet, we believe that conclusions drawn from our review would remain unchanged and the identified future research opportunities unaffected. Furthermore, we only briefly touched on other important theoretical perspectives in the future research section. For example, behavioral agency model and the resulting literature on SEW is certainly worth further study (for recent reviews, see Berrone et al., 2012, 2014). As recent articles suggest, more theoretical development in SEW is necessary (Chua et al., 2015; B. Schulze & Kellermanns, 2015). Here, it would be interesting to see if the tenets of SEW, stewardship and agency theory could be integrated to build a strong theory of the family firm.
Conclusion
Considerable strides have been made to understand the behavior, governance, and performance of family firms through agency and stewardship theoretical perspectives, and our review highlights the efforts and successes of family business scholars in applying and extending these theories into this unique context. We organized our review by the core theoretical tenets, and we provided insights about family firm behavior and governance through these theoretical lenses. This is a unique and value-added contribution, as extant reviews treat agency and stewardship theories in a dichotomous way. Our review highlights that traditionally theorized agent and steward behaviors occur in family firms but also that family firm specific elements inform these theories. We also show that governance mechanisms of both theories serve their intended purpose with regard to pro-organizational behavior and family firm performance but that family involvement has the potential to create both agency and stewardship governance environments that are unique to family firms. Research in these streams has provided a solid foundation so that scholars can continue to push theoretical boundaries and gain a richer understanding of the uniqueness and competitive advantage of family firms.
Footnotes
Declaration of Conflicting Interests
The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The author(s) received no financial support for the research, authorship, and/or publication of this article.
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References
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