Blood and money: kin altruism and the governance of the family firm

Blood and money: kin altruism and the governance of the family firm
Document type
Paper
Author(s)
Noe, Thomas
Publisher
Said Business School, Oxford University
Date of publication
15 April 2012
Subject(s)
Small business & enterprise: the practicalities of running a small business and the theory of entrepreneurship, Management & leadership: including strategy, public sector management, operations and production
Collection
Business and management
Material type
Reports

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This paper develops a theory of family-firm governance based on inclusive fitness maximisation (Hamilton, 1964). Family members weigh the payoffs to relatives in their decisions in proportion to their relatives’ degree of relatedness. The theory shows that family management entails both costs and benefits. A family bond between owners and managers leads managers to partially internalise owners’ gains from their actions and thus reduces agency conflicts over ex ante decisions. At the same time, family bonds weaken owners’ incentives to monitor managers and thus causes a “policing problem” within the family business. This policing problem results in both increased diversion and increased monitoring costs. Family control is characterised by lower formal compensation of managers, more informal compensation through diversion as well as better alignment of firm/manager effort incentives. Whether the costs or benefits of family governance dominate depends the institutional environment in which the family business operates. Family ownership is not a substitute for governance institutions. Rather kin relatedness and governance institutions are complements, with family firms extracting more marginal value from governance improvements than non-family firms. Moreover, private equity markets and markets for professional managers lead owners to abandon family management in cases where family management produces no efficiency gains and can even improve the performance of family firms that do not resort to these markets.

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