Mazagatos (2007) speaks of FOB as a nexus of contracts between co-specialized resource owners who are linked through a special contractual structure that combines economic relations and family ones. The family manages the firm and thus can control the firm to guide decision making toward its main concern: to maintain control of the firm over the course of generations, for the sake of the non-pecuniary benefits that the family obtains from this control such as lifestyle within the community, job creation for family members and so on.
From the family business view, the firm’s capacity to create value depends not only on the quantity and quality of its resources, but also on the quality of the ties that link the resources within the firm. This fact creates a trade-off. The aim of guaranteeing family control of the firm reduces its array of potential financial resources and thus limits its entire resource structure.
Lack of financial resources is one of the chief causes affecting the development, growth opportunities, and long-term survival of private family businesses. Anderson (2003) argues that value creation depends not only on the resources held but also on the way resources are managed by the firm. The particular ties that link family resources are characterized by altruism. The nature of this altruism and the types of agency problems engendered by it are contingent on the ownership stage of the family business.
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In the first generation, the duality of economic and family ties acts as a regulator and incentive for a cooperative attitude on the part of resource holders that reduces agency costs in their relationships. With succession, however, family businesses suffer from adverse selection costs, since managers are selected altruistically. Even more, ownership dispersion and the lessened intensity of family ties will engender agency costs, so the family business will need to increase its financial resources to maintain the firm’s value.
Addressing the issues of succession, McConaughy (2001) argues that once successors join the firm, the agency costs derived from the relations among different resource owners will increase. Altruism exposes family businesses to agency problems associated with lack of ability because family successors are more likely to occupy senior management positions irrespective of merit.
Because hiring and promotion are not subject to either external market mechanisms or internal evaluation processes, family businesses are deprived of the best managerial talent possible. Thus, family interests in management appointments may harm corporate objectives, such as maximizing value creation. Additionally, the dispersion of ownership and the diversity of roles that family members may perform in the firm over the course of generations will increase conflicts of interest and information asymmetries between owners and managers.
Schulze (2003) argues that fractional ownership reduces the managers’ motivation to exert effort in promoting cooperation, while it increases their incentive to act opportunistically because they bear only a part of the cost of such action but enjoy all the benefits. In addition, as the branches of the family continue to fan out, the affective bonds with the original family will be less intense, and family interests will be centered on the new family unit that each member is forming.
In this context, altruism will have less power to drive cooperative attitudes. Members will give priority to current rents, which may be enjoyed by their new nuclear family, to the detriment of long-term rents that will go to the extended family. The family members’ objectives will disperse, and the information asymmetries will increase. Therefore, agency conflicts among the different resource holders will rise and there will be greater possibilities for managerial opportunism.