Abstract
Purpose
Drawing on the principal-principal conflict and identity literatures, the purpose of this paper is to investigate the Agency Problem Type II-bis in the context of family business. Specifically, the authors hypothesize that the size of the family owner group is related to firm growth and that this relationship is moderated by the extent to which the family identifies with the firm.
Design/methodology/approach
The hypotheses are tested on a sample of 265 medium and large German family firms (FFs) via moderated hierarchical regression analysis.
Findings
The main findings suggest that business family identity moderates the inverted U-shaped relationship between the size of the family owner group and firm growth in such a way that FFs with medium-sized family owner groups and high levels of business family identity reach higher firm growth.
Practical implications
In the context of FFs fully owned by one family, family owners might have different strategic preferences, goals, and identities, thus potentially making them subject to the conflict that could arise among the different family owners in relation to growth expectations. Recognizing this problem could help family owners find potential solutions to ensure the well-being of both the family and the business.
Originality/value
The combination of family ownership structure and family ownership dynamics affects firm growth. Challenging the homogeneity of the family owner group, the authors highlight the role of Agency Problem Type II-bis in hindering growth of FFs. A finer-grained view of principal-principal conflicts in FFs is thus discussed.
Keywords
Citation
Calabrò, A., Campopiano, G. and Basco, R. (2017), "Principal-principal conflicts and family firm growth: The moderating role of business family identity", Journal of Family Business Management, Vol. 7 No. 3, pp. 291-308. https://doi.org/10.1108/JFBM-02-2017-0005
Publisher
:Emerald Publishing Limited
Copyright © 2017, Emerald Publishing Limited
Introduction
Firm growth is at the heart of any successful entrepreneurial firm because in order to increase their survival rates, firms have to make proper investments to support growth (McKelvie and Wiklund, 2010). Growth is also important for family firms (hereafter FFs) as it represents the outcome of strategies FFs develop to more successfully seize opportunities in the market (Le Breton-Miller and Miller, 2008), give new employment opportunities to succeeding generations, or simply increase distributable dividends (Habbershon et al., 2003). Therefore, growth is not only a measure of business success but also of the well-being of the family over time (Olson et al., 2003). Despite studies investigating FFs’ growth as an outcome variable (Casillas et al., 2010; Eddleston et al., 2013; Le Breton-Miller and Miller, 2008), there is a lack of consensus over the main drivers of this growth. In the mainstream debate about firm growth, a firm’s ownership structure and its features are considered very important antecedents of firm growth (Shleifer and Vishny, 1997; Thomsen and Pedersen, 2000). Firm’s ownership seems especially interesting within the context of FFs as their ownership structures are generally driven by the family principals’ priorities and strategies (Le Breton-Miller and Miller, 2008). Nevertheless, little is known about how specific features of family ownership affect firm growth.
To address this limitation and considering the overlap of family members’ family, ownership, and business roles in the context of FFs, we focus on the intertwined situation of being both relatives and owners who care about family ownership unity as well as business unity. That is, individuals in this situation care about both return on investment and operational and strategic effectiveness (Tagiuri and Davis, 1996). In particular, the family itself might experience growth in the size of the family owner group, which – despite owners’ belonging to the same family – might not be a homogenous group in terms of strategic preferences (Memili et al., 2016), such as growth strategies. Indeed, while some family owners might prefer to receive steady dividends out of their shares, others might be more interested in further investing in the firm. The abovementioned dynamics among the group of family owners, which are a real problem that almost every FF experiences in its family/business lifecycle, can vary in intensity depending on the size of the family owner group.
By focusing on FFs that are fully owned by one family, the aim of this paper is to investigate whether different family owner group sizes (small, medium, and large) are related to FF growth. Theoretically, we build on arguments from the principal-principal conflict literature (Peng and Jiang, 2010; Young et al., 2008) and the recent debate within the FF context (Gu et al., 2016; Martin et al., 2016), and we challenge the assumption that the family owner group is homogenous. Even belonging to the same family, individuals differ in their goals, expectations, and aspirations, which often generates family principal-principal conflicts. Assuming that the size of family owner groups may hinder or boost principal-principal conflicts, we hypothesize an inverted U-shaped relationship between the number of owners and firm growth. We further consider to what extent family members’ identification with the firm (Berrone et al., 2012) moderates that relationship as developing a common identity affects family dynamics and can attenuate potential conflicts about firm growth decisions among family owners.
Our main hypotheses are tested on a sample of 265 medium and large German FFs. Our main findings suggest that there is an inverted U-shaped relationship between the size of the family owner group and firm growth. Furthermore, business family identity moderates that relationship in such a way that FFs with medium family owner groups and strong business family identities reach higher firm growth. Our contribution focuses on challenging one of the main assumptions within the principal-principal conflicts literature (Young et al., 2008) by contextualizing the problem in the particular case of FFs. Our research moves the current debate – which lies on the contraposition between majority (family) and minority (non-family) owners (Martin et al., 2016) – forward by dismantling principal-principal conflicts within the group of family owners (Gu et al., 2016) to better understand FF growth. Additionally, we contribute to this debate by introducing the dimension of business family identity to capture the family’s non-economic attachment to the firm, which overcomes conflicts among the group of family owners (Berrone et al., 2012).
Literature review and hypothesis development
Agency theory is the dominant paradigm used to study the governance of heterogeneous and diverging interests in organizations (Dalton et al., 2007). Over the last decades, the use of agency theory prescriptions in the context of family business research has offered various extensions of the classical agency theory approach by relaxing some of its basic assumptions, such as separation between ownership and control and opportunistic behaviors (Bammens et al., 2011).
Agency theory and principal-principal conflicts
The classical agency theory paradigm has primarily focused on minimizing agents’ opportunistic behavior (Jensen and Meckling, 1976), concentrating on the so-called Agency Problem Type I (the conflict of interest between shareholders and managers, which acknowledges the manager/agent as the key source of inefficiencies). This type of agency problem (Type I) is also valid for family-owned/influenced firms in contexts with a huge degree of separation between ownership and control (e.g. USA, UK, as discussed by Morck and Yeung, 2003). However, there are countries (e.g. Continental Europe, Asia, and Latin America) characterized by low separation between ownership and control (La Porta et al., 1999) and the presence of large shareholders (e.g. state, banks, families) that are also usually directly involved in managing the firm. These firms might be like the “perfect” organizational form in terms of “absence” of agency problems. Nevertheless, research has challenged that perspective and offered insightful contributions leading to the identification of a set of different and sometimes more severe sources of agency problems (Schulze et al., 2001, 2003). Among others, La Porta et al. (1999) have substantially contributed to furthering our understanding of concentrated ownership dynamics in different contexts characterized by divergent legal systems, markets for corporate control, and degrees of separation between ownership and control.
In parallel to the extension and application of classic agency theory to FFs, we have also seen the development of the debate about principal-principal conflicts (Young et al., 2008), which is a different type of conflict occurring between majority (controlling) shareholders and minority shareholders. This problem is also known as Agency Problem Type II. This research stream suggests that principals can be sources of inefficiencies and the cause of governance problems (Dalziel et al., 2011). Indeed, controlling principals can expropriate value from other shareholders through their control of the firm’s governance structure (Calabrò et al., 2013; Chang, 2003; Shleifer and Vishny, 1997).
Key to addressing such principal-principal conflicts is understanding the heterogeneous interests of principals (Connelly et al., 2010). In fact, there are numerous potential differences in principals’ interests even when they have ownership stakes in the same firm (Dalziel et al., 2011). For example, they may vary in risk preferences and their future growth intentions (Dutta and Thornhill, 2008). Within the FF context, family owners seek not only to financially profit from their investment in the firm but also to receive a measure of “psychic income,” or an emotional reward, from owning and controlling a firm with other family members (Le Breton-Miller and Miller, 2008).
Several studies have investigated principal-principal conflicts in the context of FFs with a primary focus on the juxtaposition of majority family shareholders and minority non-family shareholders (e.g. Villalonga and Amit, 2006). An underlying assumption in these investigations of principal-principal conflicts in FFs is that family owners are a monolithic or homogeneous group of people with congruent interests (Chrisman et al., 2004). However, within most family shareholder groups, family owners are likely to have conflicting interests due to different goals (Basco, 2017; Kotlar and De Massis, 2013) and diverse norms that can undermine either firm competitiveness or family unity (Tagiuri and Davis, 1996). Put differently, incongruent goals among family owners can expose the FF to the detrimental effects of principal-principal conflicts (Gu et al., 2016). Therefore, we aim to investigate the effect of the number of family owners on growth in light of the extension of agency theory we just presented.
When FFs have experienced at least one succession process, they may have multiple family owners and a combination of potential problems: lack of incentives, free-rider problems, and conflicting interests and identities. As diverging interests develop and family fractures arise, managing a large family owner group can become more challenging (Schulze et al., 2001). Hence, there is room for principal-principal conflicts to occur. This type of principal-principal conflict is different from the traditional principal-principal conflict (Agency Problems Type II) between the majority family blockholder and minority (non-family) shareholders because it takes place only among family owners who may have diverging interests (Gómez-Mejía et al., 2011; Gu et al., 2016). Hereafter, we label the Agency Problem Type II among family owners as Agency Problem Type II-bis[1], and instead of referring to principal-principal conflict, we refer to “family principal-principal conflict.”
Size of the family owner group, family principal-principal conflict, and firm growth
The aforementioned conflict in the context of FFs is important for understating strategic firm decisions, specifically the decision to grow and how to grow (e.g. organically and/or inorganically, in national and/or international markets (Zahra, 2003), which is part of most owners’ strategic view. For instance, family owners may differ in their expectations regarding strategic decisions, thus leading to different growth preferences (Thomsen and Pedersen, 2000). Furthermore, these differences may magnify with an increasing number of family owners. Therefore, we argue that the size of the family shareholder group may proxy Agency Problem Type II-bis affecting firm growth.
Small family owner group
There are both advantages and disadvantages in having a small family owner group that fully owns the FF. Indeed, FFs with few family owners might have a more precise and strategic view (Gersick et al., 1997) and more freedom to undertake risks, which may consequently favor firm growth. Because family members are also primarily involved in active management positions, resulting in high owner-management alignment and managerial discretion (Shleifer and Vishny, 1997), FFs with small owner groups are almost entirely free of Agency Problems Type I but might still be exposed to the potential detrimental effects of Agency Problems Type II-bis (family principal-principal conflict) when owners disagree on what is best for the firm and the family. Such disagreements arise due to differences in family owners’ personal identities, strategic preferences, risk perceptions, and goals. Moreover, when there are few family owners with a substantial amount of shares, those owners have the power to veto one another’s initiatives (Miller and Le Breton-Miller, 2006). Indeed, in small owner groups, identity diversity is more pronounced, and if a family principal-principal conflict is taking place, its magnitude is likely to be larger than the conflicts involving multiple family owners (who usually own small portions of the firm). When the family ownership structure gives room for this unbalanced situation, the overall risk of paralyzing the decision-making process is high as few family owners might fight with each other and, consequently, negatively affect firm growth.
Medium family owner group
FFs with medium-sized family owner groups might benefit from the presence of different views in relation to growth strategies and may therefore have a useful source of diverse opinions. In addition, family owners may have numerous opportunities to interact as well as share experiences and information, thus developing a straightforward understanding of the firm’s goals (Chen and Hsu, 2009). They may also be able to harness the diverging expectations that different owners bring to shareholder meetings about firm growth. Moreover, the fact family owners have diverse percentages of firm equity may spur them to listen to each other more. Therefore, although there is potential for family principal-principal conflicts in FFs with medium-sized owner groups, it is less likely to be exploited and thus less likely to hinder growth.
Large family owner group
When the size of the family owner group is large, it is generally difficult for family owners to converge on a shared understanding of what might be the best growth option for the firm. When the divergence of opinions is high and consensus building difficult, the decision-making process might be stuck and decisions for firm growth blocked. The detrimental effects of divergent expectations can be particularly severe considering that each owner’s holdings and voice are likely to be marginal in a large shareholder group (Davis and Herrera, 1998). Therefore, even if family owners are bound together by blood relationships, it might not be enough to prevent the pitfalls of family principal-principal conflicts given the potential lack of alignment among owners (Gu et al., 2016). The differences among many family owners might drive the business toward harvesting (Le Breton-Miller and Miller, 2008) instead of growth to satisfy family needs, such as the demand for resources (e.g. dividends, perquisites, jobs). Indeed, disperse group of family owners to be reluctant to invest deeply in the business, especially in speculative initiatives that are long term and uncertain (Bertrand and Schoar, 2006) with subsequent lower growth rates. Further, the risk of misaligned interests among many family owners (Gu et al., 2016) and consequently of intra-family conflicts hindering growth is further exacerbated as families age (Schulze et al., 2001).
The abovementioned arguments suggest the existence of an inverted U-shaped relationship between the size of the family owner group and firm growth with the highest detrimental effects of family principal-principal conflicts in the case of low and high numbers of family owners:
There will be an inverted U-shaped relationship between the size of the family owner group and firm growth.
The moderating role of business family identity
To better understand the nature of the hypothesized inverted U-shaped relationship, this study also contextualizes this relationship by analyzing to what extent business family identity influences family principal-principal dynamics (Schmidts and Shepherd, 2015). By business family identity, we refer to family owners’ close identification with the firm (Berrone et al., 2012). It refers to the meaning family owners attach to the family as an institution (Zellweger et al., 2010) and includes specific types of interpersonal relationships and behavioral expectations (Eddleston and Kellermanns, 2007) attached to these relationships (Berrone et al., 2012). Family owners who identify with their FFs usually share common experiences, anecdotes, and core values, which influence relationships among them and shape strategic choices (Memili et al., 2015). This reasoning is valid even if family owners are not actively involved in the FF as they are associated with the firm and benefit from the firm’s wealth, such as being treated with respect and deference in the community (Dyer and Whetten, 2006). Business family identity may significantly differ among FFs (Zellweger et al., 2013). On the one hand, a strong business family identity may lead family owners to feel that the family and the firm overlap to the extent that actions aiming at serving the firm are viewed as also helping the family (Uhlaner et al., 2015). On the other hand, family considerations may intrude business decisions and vice versa (Tagiuri and Davis, 1996).
Family owners not sharing identity
In FFs where family owners do not share a common business family identity, the likelihood that owners are more focused on obtaining regular income and security is quite high. Indeed, when the group of family owners is large, owners might be more oriented toward their own personal economic wealth and may thus expropriate firm income because aligning owners’ interests is difficult to initiate and sustain (Schulze et al., 2003). This mismatch of interests among family owners may generate the abovementioned family principal-principal conflicts. As a consequence, family owners who have strong economic goals as their main reference point are likely to promote and support conservative strategies aiming at short-term dividends (e.g. Claessens et al., 2002) at the cost of the firm’s liquidity (Morck and Yeung, 2003), which could in turn harm firm growth (Bertrand and Schoar, 2006; Claessens et al., 2002). When family owners do not share the same business family identity, the likelihood of having family principal-principal conflicts, and facing their detrimental effects on firm growth, increases.
Family owners sharing identity
Instead, when family owners share a common business family identity, they are more likely to make decisions that benefit the firm (and its reputation) in the long run (Deephouse and Jaskiewicz, 2013). These FFs probably establish mechanisms that help family owners understand each other’s point of view and respect different expectations for being a family owner. In these cases, all family owners understand that owning shares of the FF is an enormous privilege but at the same time also an onus. Therefore, especially when the size of the family owner group increases, a common and shared business family identity among the different family owners plays an extremely important role in firm survival in terms of enabling the business to have additional growth stages. It is thus important that different family owners have a strong sense of belonging to the FF and that the FF has a great deal of personal meaning for family owners (Berrone et al., 2012) so that this common business family identity fulfills the reciprocal expectations of close family owners by enacting their personal identities (Suess-Reyes, 2017) and helps mitigate the detrimental effects of family principal-principal conflicts when they do arise.
Differences among FFs in terms of business family identity are an important source of heterogeneity (Berrone et al., 2012); therefore, we argue that business family identity moderates the inverted U-shaped relationship between the size of the family owner group and firm growth as follows:
Business family identity moderates the inverted U-shaped relationship between the size of the family owner group and firm growth in such a way that (a) the size of the family owner group will be positively related to firm growth for high levels of business family identity, whereas (b) the size of the family owner group will be negatively related to firm growth for low levels of business family identity.
Methods
Data collection and sample
Data for this study were collected through a survey of medium and large German FFs[2]. Firms eligible for the survey were identified on the Bureau van Dijk Amadeus database. We consider each firm that has met at least one of the two following criteria a family business (Basco and Voordeckers, 2015): the firm has family members on the board or in management, and/or equity is divided among family members (at least 51 percent of the firm is owned by members of the same family). This definition is in line with previous studies (see review by Basco, 2013). To comply with these two conditions, we conducted an exhaustive review using the “hyper ownership viewer” of firms’ shareholder, governance, and management structures. Based on these conditions, the pool of potential observations for this study consisted of 1,567 firms.
Firms were contacted via corporate e-mail addresses and asked to participate in an online survey during the summer of 2013. The survey targeted the CEO, whom we expected to be the best key informant due to his or her knowledge of different firm-level and family-level issues (Kellermanns et al., 2008) – a recommendation followed in previous studies about FF growth (e.g. Eddleston et al., 2013). The questionnaire was first developed in English and then translated to German. The questionnaire-validation process was strengthened by the critical analysis of academic and FF experts.
We received 461 responses, reduced to 255 observations (response rate 16.27 percent) due to missing information, unanswered questionnaires, and the exclusion of firms that had less than 50 employees. The final sample included firms that were fully owned by a family and were in the second or subsequent generation (FFs in the first generation were excluded from the sample). We assessed potential sample selection bias by conducting an analysis of variance (ANOVA) between respondents before and after the follow-up mailing (Eddleston et al., 2008). The results indicated no differences between early and late respondents. Firm size (based on the number of employees) ranged between 50 and 15,000 employees, and the average size was 1,392 employees, and average firm age was 98 years. We did not find significant differences in the size and age of responding and non-responding FFs. Moreover, the sampled FFs have an average family owner group of 5.50 members, ranging between 2 and 30 family owners, and 20 percent of the sample is in the fourth generation or above. The descriptive information about average age and generation reflects our intention to target FFs that have overcome at least the founder stage in order to capture family ownership dispersion.
Variables and measures
Dependent variable
FF growth was measured using a four-item scale adapted from Eddleston et al. (2013) referred to as the firm’s current growth in relation to its competitors. Respondents indicated their firm’s current growth in terms of sales, market share, number of employees, and profitability compared to their competitors using a five-point Likert-type scale anchored at 1= much worse and 5= much higher. The individual growth indicators were then added together to form an overall score (e.g. Eddleston et al., 2013; Ling and Kellermanns, 2010). The reliability of this scale was high, with a Cronbach’s α of 0.80.
Independent variable
The variable size of the family owner group has mainly been used in finance studies (e.g. Bennedsen and Wolfenzon, 2000), while its use in family business studies is quite limited (e.g. Bammens et al., 2008). Information related to this variable was obtained by asking respondents about the size of their firm’s family owner group.
Moderator
We measured business family identity using a two-item construct adapted from Berrone et al. (2012). Specifically, we asked respondents the extent to which the following were important in their firms: family owners have a strong sense of belonging to the family business; and the family business has a great deal of personal meaning for family owners. Each item was measured on a five-point Likert-scale anchored at 1= very little importance and 5= extremely important. The individual business family identity items were then added together to form an overall score.
Control variables
Following previous research, we controlled for potential variables that could influence FF growth. Specifically, we controlled for firm size, firm age, top management team (TMT) strategic involvement, industry, and generation dispersion. First, firm size was measured by considering the number of full-time employees. Firm age was measured by taking into consideration the time since the firm was established. The firm size and firm age variables were both log-transformed to achieve normality. TMT strategic involvement was measured using Judge and Zeithaml’s (1992) constructs for board of directors’ strategic involvement adapted for TMT. TMT involvement was measured by asking the CEOs the extent to which they agree with the following statements: the TMT is setting strategic objectives related to growth, the TMT is developing strategic options related to growth, the TMT is evaluating strategic options related to growth, the TMT is implementing corporate growth strategies, and the TMT is evaluating the implementation of strategies related to growth. These items were measured using a five-point Likert-type scale measurement. TMT strategic involvement was operationalized as the average of the five items. Cronbach’s α for the final variable is 0.92. To control for industry characteristics, we used a dummy variable that distinguishes between manufacturing firms (1 value) and non-manufacturing firms (0 value). Generation dispersion was measured by considering if one or multiple generations were involved in the firm. The variable took the value of 1 if more than one generation was involved in the firm and the value 0 if there is only one generation involved.
Analyses
Our hypotheses were tested using moderated hierarchical regression (Cohen et al., 2003). The results of the White’s test did not show heteroskedasticity problems. All variance inflation factor (VIF) values for the variables involved in the model were below the cutoff (VIF<10) proposed by Hair et al. (2010), suggesting that multicollinearity is not a concern. The family business growth variable is normally distributed (kurtosis has a value of about 1 and skewness is slightly negative but is less than −1).
Because common method bias is a potential problem when the predictor and the criterion variables are obtained from the same source (Podsakoff et al., 2003), as is the case in this research, we applied an ex ante technique to minimize this potential problem and an ex post procedure to detect common method biases by following the suggestions of Podsakoff et al. (2012). Regarding the ex ante techniques, we tested the validity of the questionnaire by asking academics and family business experts (e.g. managing directors, CEOs, and members of boards of directors) to analyze the questionnaire to remove ambiguities and avoid vague questions. Second, we avoided asking for sensitive data. Finally, we adopted all necessary procedures to ensure confidentiality. Regarding the ex post procedure, we ran a factorial analysis (Harman’s single-factor test) and introduced all variables (independent, dependent, and control variables). Because there is no single factor accounting for the majority of the variance (i.e. there is no single general factor that accounts for the majority of variance among the variables), we can conclude that common method bias is not a problem in this study.
Additionally, we conducted a test with an unmeasured latent methods factor where items are allowed to load on their theoretical constructs as well as on a latent common method variance factor with the goal of analyzing the structural relationship before and after the introduction of the latent common method variance factor in each model (Podsakoff et al., 2012). Based on a comparison of goodness of fit between both models (i.e. with and without the method factor), our results showed a slight improvement, indicating the potential presence of common method bias. We analyzed the individual path (structural model) between the independent and dependent dimensions and found that the paths do not gain or lose statistical significance and do not change sign. Based on this information, we can conclude that common method bias is not a real concern because of the main relationships between dependent and independent variables.
Finally, we also checked for potential endogeneity problems, specifically reverse causality in the relationship between the dependent and independent variables. Indeed, FF growth could affect the entrance of family members as owners; therefore, to address this issue, we utilized the instrumental variable technique (Wooldridge, 2012). We used two instrumental variables that are correlated to our independent and moderator variables: the percentage of shares held by the largest family shareholder and the existence of a supervisory board. We performed two different tests for each potential endogenous variable (i.e. size of the family owner group and business family identity). Based on the Sargan statistic (p-value of 0.773 and p-value of 0.282 for size of the family owner group and business family identity, respectively), we could not reject the null hypothesis that our instruments were exogenous, indicating that our instrumental variables are not weak. Additionally, the non-significant χ2 test for the Wu-Hausman F-test and the Durbin-Wu-Hausman tests suggests that independent variables in the equation are exogenous and that their estimates are unbiased. There is evidence that an endogeneity problem is not a concern and that our ordinary least squares (OLS) results were robust.
Results
The descriptive statistics and correlations for the variables used in this study are shown in Table I, and the results of the regression analyses are provided in Table II. In Model 1, we controlled for firm size, firm age, TMT strategic involvement, generation dispersion, and industry. In Model 2, size of the family owner group was entered as a main effect. The results show that the number of family owners does not affect FF growth. Model 3 tests for the curvilinear effect of size of the family owner group. Both the size of the family owner group and the square of this value are significant, and a significant R2 change was observed over Model 2 (ΔR2=0.025, p<0.01). While the size of the family owner group has a positive effect, its square term has a negative effect, suggesting the existence of an inverted U-shaped relationship. Since the significance of the quadratic term is a weak criterion to determine the existence of a nonlinear relationship (Haans et al., 2016), we carried out a Sasabuchi test (Lind and Mehlum, 2010) to check the robustness of this relationship by considering two additional conditions: the threshold is within the data range and different slopes exist on each side of the turning point. The test confirms the existence of an inverted U-shaped relationship (p=0.001). Confidence intervals based on the Fieller method indicate that the values of the variable size of the family owner group were within the limits of the data (95 percent confidence interval (10.18-16.50)). Therefore, H1 received support[3]. In Figure 1, we plotted this relationship. The derivative calculation (Table II, Model 3) means that the optimal point is at X=11.66 (turning point). That is, in our database, firms reach their maximum firm growth (i.e. firm growth is highest) between 11 and 12 family owners.
In Model 4, we introduced business family identity into the equation. This variable is positively related to FF growth, but its coefficient is marginally significant. In Model 5, the interaction term between size of the family owner group and business family identity was entered, but it was not significant, while in Model 6, we additionally entered the interaction of the squared term of size of the family owner group and business family identity. The observed R2 change was significant (ΔR2=0.016, p<0.05) compared to Model 5. Consequently H2 is supported. To better interpret this effect, we plotted the interaction in Figure 2. The effect of size of the family owner group is not significant for FFs with low business family identity. However, the curvilinear relationship emerges for FFs with high business family identity. As we can observe in Figure 2, the interaction marginally affects the tipping point for firms with high levels of business family identity (the change is slight as the tipping point passes from 11.66 family owner members to 10 family owner members). However, since the coefficient of the interaction term between the square of size of the family owner group and business family identity is negative, the inverted U-shaped relationship becomes steeper. At levels higher than the mean of business family identity, the relationship between size of the family owner group and FF growth becomes more complex and curvilinear in nature but almost maintains the optimal point calculated without interaction. On the other hand, at lower levels of business family identity, the curve becomes flatter with a positive slope.
Additionally, to ensure that the findings presented above are robust, we replicated the aforementioned analyses by splitting the sample into different groups to determine whether there was a heterogeneity effect due to the different size and age of firms. Regarding size, we created a new sample by removing smaller firms with less than 200 employees and larger firms with more than 5,000 employees. In this case, we observed that the tipping point stayed around 11-12 family owners but the effect was steeper. Regarding age, we created two sub-samples: first, <100 years old and second, >100 years old. For the group of firms that were older than 100 years old, the results are consistent with our main findings. However, we found some interesting results for the group of firms that were younger than 100 years old. The main curvilinear relationship is not significant any more, but the interaction term is. Figure 3 shows the interaction. For high levels of business family identity, the inverted U-shape remains but the new tipping point is between seven and eight (meaning there is a shift to the left compared to the Figure 2). The real change occurs for low levels of business family identity values: the curve flips from an inverted U-shape to a U-shape.
Discussion and conclusion
This study investigated whether the size of the family owner group has an impact on firm growth and explored to what extent business family identity (as a mechanism to mitigate family principal-principal conflicts among family owners) moderates the abovementioned relationship.
The findings support the existence of an inverted U-shaped relationship between the size of the family owner group and firm growth with higher growth reached by FFs having medium-sized family owner groups (between 11 and 12 family owners, see Figure 1). Furthermore, when considering the moderating effect of business family identity, the results highlight that FFs with higher growth have medium-sized family owner groups (ten family owners) and high levels of business family identity (see Figure 2). Therefore, we contribute to understanding the role that family owners play in firm growth, providing novel insights to the debate, which shows contrasting results between maintaining the status quo and growth (e.g. Miller et al., 2011).
Discussion of the effect of the number of family owners on firm growth
Through the lens of principal-principal conflict, we were able to investigate the potential influence of having multiple family owners on FF growth. When the Agency Problem Type II-bis occurs, family owners may face complex and inefficient decision-making processes, which could lead them to pursue their own self-interests (e.g. Gómez-Mejía et al., 2011). As family owners struggle to manage the tradeoff between higher profits and family control issues (Gallo et al., 2004), they may prefer harvesting strategies that hinder the firm’s ability to grow (Le Breton-Miller and Miller, 2008). Our findings suggest that family principal-principal conflicts may vary in magnitude for different types of family owner constellations. In particular, the size of the family owner group necessitates different management of their diverse interests considering, on the one hand, the detrimental conflicts between few family owners who are also close relatives and shareholders and managers in the family business and, on the other hand, the increasing complexity of having a large number of family owners whose different voices may conflict in light of the intertwinement of family and business issues (Tagiuri and Davis, 1996).
Discussion of the moderating effect of business family identity
Furthermore, our findings suggest that fulfilling family needs (Cannella et al., 2015), which in the context of our study entails caring about the identification of family owners with the FF, does not exclude firm growth. Moreover, business family identity proves crucial in aligning family owners organized in complex ownership constellations, thus helping identify a common set of goals (economic and non-economic) related to fulfilling family obligations (Sundaramurthy and Kreiner, 2008). As shown in Figure 2, business family identity (through the support, cohesiveness, and unity it brings) lowers the potential detrimental effects of family principal-principal conflicts that may arise from having multiple family owners. This finding thus suggests a reconciliation between the different reference points family owners/principals might consider when making strategic decisions (Miller and Le Breton-Miller, 2014). However, this mitigating effect of a common business family identity is not linear; more specifically, developing a shared business family identity is not enough to overcome the detrimental effects of family principal-principal conflicts in the case of small and large family owner groups (see Figure 2). On the one hand, there are small family owner groups that might also have an equal number of shares, giving them huge power and influence over strategic outcomes. Hence, when disagreement in strategic viewpoints about growth arises in these groups, it is more complicated to solve the dispute. Even with a shared business family identity, family principal-principal conflicts arising in small family owner groups can be severe. On the other hand, with large family owner groups, the effects of family principal-principal conflicts are more detrimental than the positive effects of having a shared business family identity among all family owners. An especially large number of family owners does not allow any of them to exercise an influence “as lone owners” on the company’s strategic direction. In this case, family principal-principal conflicts may be the result of incompatible perceptions of economic vs non-economic goals, making it quite difficult for family owners to feel like they are part of the same unit (the family). In sum, to benefit from the potential positive effects of sharing a common business family identity, the size of the family owner group should be neither too small nor too large (in our sample, it should include ten family owners). When this condition is fulfilled, it is possible to reach higher firm growth.
Contribution to theory
We make theoretical contributions to three main areas. First, considering the size of the group of family owners as a possible source of inefficiencies (Dalziel et al., 2011) and family-specific principal-principal conflicts, this paper offers insights to overcome the traditional contraposition between majority (family) owners and minority (non-family) owners and further extends the principal-principal conflict literature (Peng and Jiang, 2010; Young et al., 2008). Indeed, we defined the Agency Problem Type II-bis, which is the potential conflict that could arise among different family owners (who together fully own the FF). Our study, with its focus on medium and large German FFs, also extends the mainstream debate on principal-principal conflicts, suggesting that this type of conflict also takes place in developed economies (Bozec and Laurin, 2008; Burkart and Panunzi, 2006), not only in developing and emerging economies as previously suggested (e.g. Lin and Chuang, 2011).
For the second area, our findings add to the understanding of the relationship between ownership structure and FF growth (Olson et al., 2003) by introducing the size of the family owner group (e.g. Bennedsen and Wolfenzon, 2000) as a demographic proxy for both dynamics among the group of family owners and potential risks and costs associated with the exploitation of family principal-principal conflicts. Moreover, considering ownership structures and characteristics as the main predictors of FF growth, our findings contribute to the current debate within the family business field about ownership and owners as the main predictors of firm growth (Thomsen and Pedersen, 2000).
In terms of the third area, our findings on business family identity as an important moderator mitigating the detrimental effects of family principal-principal conflicts complement our research by considering behavioral aspects – i.e., sense of belonging and personal meaning of the family business for family owners (Calabrò and Mussolino, 2013). Therefore, addressing our main research question regarding the potential relationship between the growth of the family and the growth of the firm, we suggest that a shared business family identity can alleviate the risks associated with family principal-principal conflicts that can arise when the family grows (in terms of increasing the size of the family owner group), thus supporting firm growth.
Contribution to practice
This study has practical implications, especially for family decision makers facing ownership succession. When succession in ownership has to take place, two options might be available for the incumbent family principal: reducing the size of the family owner group (pruning the family tree) or enlarging the size of the family owner group. In line with our findings, the decision to enlarge the size of the family owner group is sustainable from a firm growth perspective only if the size of the family owner group is moderate and the FF nurtures its business family identity. Therefore, when these two conditions are met, family owners can avoid serious family principal-principal conflicts, and their negative effects are less severe. Thus, it is important for FFs to constantly monitor the size of their family owner group and take actions to implement governance mechanisms that might help family owners manage potential conflicts through the development of a common business family identity that fosters loyalty, support, and cohesiveness.
Limitations and future research directions
We also acknowledge some limitations of this study and highlight future research opportunities accordingly. Due to the dearth of studies analyzing the effect of family business dimensions on growth, we relied on the size of the family owner group as our main predictor. We have indeed positioned this study within the research on ownership heterogeneity and borrowed our independent variable from the finance literature. However, we acknowledge that this variable can also be operationalized in different ways considering, for example, a weighted measure of ownership concentration, as offered by the Herfindahl index and applied in corporate governance studies (Baysinger et al., 1991; De Massis et al., 2013, 2015). We did not consider succession or succession planning as a control. Since a succession event can be a pivotal moment that causes a change in the ownership structure (Sciascia et al., 2013), it might be relevant for future research to consider whether family owners are involved in the succession process to further understand the effects of the dynamics and conflicts among them on growth.
Further, the cross-sectional nature of our study design prevents us from inferring causality or properly accounting for the lagged effects of family owners on firm growth. These limitations can be addressed by future longitudinal studies. More fine-grained information on active and passive family owners may be worthwhile. For instance, since the personal preferences of each family owner may depend on whether they are also involved in firm operations (Anderson and Reeb, 2003) or in the board of directors (Basco and Calabrò, 2017), it might be relevant to consider the number of active and passive family owners and the effect of those different family owner types on firm growth.
We hope this study serves as a basis for understanding how family owners’ role and identification with the family business affect firm growth. We encourage others to build on our findings and further investigate the relationship between the growth of the family owner group and the growth of the firm.
Figures
Descriptive statistics and correlations
| Mean | SD | 1 | 2 | 3 | 4 | 5 | 6 | 7 | |
|---|---|---|---|---|---|---|---|---|---|
| 1. Family firm growth | 3.28 | 0.65 | |||||||
| 2. Firm size (in number of employees) | 6.31 | 1.36 | 0.24** | ||||||
| 3. Firm age (in number of years) | 4.45 | 0.54 | −0.08 | 0.13* | |||||
| 4. TMT strategic involvement | 4.21 | 0.97 | 0.18** | −0.03 | 0.09 | ||||
| 5. Generation dispersion | 0.61 | 0.49 | 0.14* | 0.01 | −0.26** | −0.05 | |||
| 6. Industry (1= manufacturing, 0= other) | 0.69 | 0.46 | 0.14* | 0.10 | 0.17** | 0.04 | −0.11 | ||
| 7. Size of the family owner group (SFOG) | 5.50 | 4.60 | 0.09 | 0.20** | 0.23** | −0.08 | 0.20** | 0.15** | |
| 8. Business family identity (FI) | 4.28 | 0.95 | 0.21** | 0.02 | −0.12*** | 0.57** | 0.16* | −0.04 | 0.22** |
Notes: *p<0.05; **p<0.01; ***p<0.10
Hierarchical results
| Family firm growth | ||||||
|---|---|---|---|---|---|---|
| Variables | Model 1 | Model 2 | Model 3 | Model 4 | Model 5 | Model 6 |
| Firm size (in number of employees) | 0.12*** | 0.11*** | 0.10*** | 0.10*** | 0.01*** | 0.10*** |
| Firm age (in number of years) | −0.14* | −0.16* | −0.17* | −0.15* | −0.16* | −0.15**** |
| TMT strategic involvement | 0.13*** | 0.13*** | 0.14*** | 0.09**** | 0.09**** | 0.09**** |
| Generation dispersion | 0.17* | 0.15**** | 0.13 | 0.09 | 0.10 | 0.09 |
| Industry (1= manufacturing, 0= other) | 0.19* | 0.18**** | 0.13 | 0.14 | 0.14 | 0.14 |
| Size of the family owner group (SFOG) | 0.00 | 0.07** | 0.07** | 0.09* | −0.08 | |
| SFOG2 | −0.003** | −0.003** | −0.003** | 0.004 | ||
| Business family identity (FI) | 0.09**** | 0.11 | −0.04 | |||
| SFOG × FI | −0.004 | 0.04**** | ||||
| SFOG2 × FI | −0.002* | |||||
| R2 | 0.139 | 0.141 | 0.166 | 0.176 | 0.177 | 0.192 |
| R2 (Adjusted) | 0.122 | 0.120 | 0.142 | 0.149 | 0.146 | 0.159 |
| F-value | 8.06*** | 6.76*** | 7.02*** | 6.56*** | 5.84*** | 5.81*** |
| ΔR2 | 0.001 | 0.025 | 0.010 | 0.001 | 0.016 | |
| Partial F (for ΔR2) | 0.354 | 7.504** | 2.953**** | 0.242 | 4.782* | |
| n | 255 | 255 | 255 | 255 | 255 | 255 |
Notes: *p<0.05; **p<0.01; ***p<0.001; ****p<0.10
Notes
bis is a Latin prefix or suffix designating the second instance of something.
The European definition of medium and large firms was used: firms with more than 50 employees and at least 50 million euros in annual turnover.
Additional robustness tests were performed to confirm the inverted U-shaped relationship. First, we tested for a possible S-shaped relationship between number of family owners and FF growth, and the results are not significant. Second, the database was split in two sub-samples using the turning point as demarcation to see the relationships that emerge. The regression analyses confirm that the slopes in each sample are consistent with the predicted shape of the curve (inverted U-shaped).
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Corresponding author
About the authors
Andrea Calabrò is a Full Professor of Business Administration and Family Entrepreneurship at the Witten Institute for Family Business, University of Witten/Herdecke. His research interests are in the area of family business internationalization, corporate governance, and accounting, with a focus on board behaviors, effectiveness, and formal/informal governance mechanisms.
Giovanna Campopiano is an Assistant Professor at the Witten Institute for Family Business, University of Witten/Herdecke, at the Chair of Business Administration and Family Entrepreneurship. Her main research interests are in the area of family business, CSR, and corporate entrepreneurship.
Dr Rodrigo Basco is currently an Associate Professor at American University of Sharjah (AUS)-United Arab Emirates and holds the Sheikh Saoud bin Khalid bin Khalid Al-Qassimi Chair in Family Business. His research focuses on entrepreneurship, management, and regional development with special interest in family firms. His research has been published in international academic journals, including Journal of Family Business Strategy, Family Business Review, European Management Journal, Journal of Management & Organization, and International Small Business Journal, among others. Dr Basco recently edited a special issue of the Journal of Family Business Strategy on the topic “Family Business and Regional Development”.