Download Identity Diversity in Family Firms: Concept and Implications

Identity Diversity in Family Firms: Concept and Implications
Dr. Alain Praet
Hogeschool-Universiteit Brussel, Faculty of Economics & Management
Research Centre for Entrepreneurship
Stormstraat 2, 1000 BRUSSELS, Belgium
Tel: +32- (0) 2 609 82 50; Fax : +32 (0) 2 217 64 64
[email protected]
Abstract
Based on Akerlof and Kranton (2000, 2005), I introduce the concept of identity, a
person’s sense of self, as a novel way to approach the concept of familiness. As such it
extends the classical economic theory that depicts utility as a fixed function of income
and effort to a utility function that is situation-dependent. A person’s identity is
determined by the perceptions of how one should behave according to the social category
one belongs to. Accordingly, I view the family firm as a combination of different groups
that may have different identities. These groups include family members as well as other
stakeholders such as the employees. As a result, family firms exhibit varying degrees of
diversity in identities. Therefore, I suggest a categorization of family firms based on the
diversity of identities and performance measures that fit each of these different
categories.
Key words: Identity, Diversity of family firms
Introduction
Despite many efforts, research up till now has failed to demonstrate a clear
relationship between ‘familiness’ and performance (Rutherford, Kuratko & Holt, 2008).
On one hand, this follows from the difficulty of measuring familiness and the different
ways of operationalizing this. On the other hand, many different performance measures
have been used, including accounting-based measures and self-reported performance
measures. However, both approaches entail difficulties since families may pursue noneocnomic goals (Gomez-Mejia, HaynesNunez-Nickel, Jacobson & Moyano-Fuentes,
2007;. Zellweger & Astrachan, 2008), which implies that traditional profit measures
become less relevant as performance benchmarks. Using self-reported measures on the
other hand assumes that the perception of performance is homogeneous within the firm
which is reflected upon in a fair way by the respondent. Standard economic theory is
unable to explain these problems and the behavior that accompanies it.
However, the validity of this approach has been criticized and recent research
emphasizes the diversity of family firms. Westhead and Howorth (2007) identify six
types of private family firms dependent on the dominance of the family in ownership and
management. Accordingly, the objectives of the family firm will vary between purely
financial objectives and family objectives. Although this kind of approach provides
interesting insights, it does not take into account the role and the impact of people that
play a role in the family firm as a stakeholder or as an individual that influences family
behavior. Howorth, Westhead, Rose & Hamilton (2010) state that the role of invisible
members such as women is under-researched although they contribute to family
dynamics.
In order to include these different elements into a unifying theory on family firms, I
apply Akerlof and Kranton’s (2005) idea that the identity, a person’s self-image, has an
impact on the decisions they take, on family firms. As such it extends the classical
economic theory that depicts utility as a fixed function of income and effort to a utility
function that is situation-dependent. A person’s identity is determined by the perceptions
of how one should behave according to the social category one belongs to. Accordingly, I
view the family firm as a combination of different groups that may have different
identities. These groups include family members as well as other stakeholders such as the
employees. As a result, family firms exhibit varying degrees of diversity in identities.
Therefore, I suggest a categorization of family firms based on the diversity of identities
and performance measures that fit each of these different categories.
Identity and the family firm
Traditional economic theory has used utility functions and posits that people will
act as to maximize their utility. However, this traditional approach has failed to explain
concepts from sociology and psychology, such as altruism and nepotism, that have been
proven to be important concepts in family firms. According to Akerlof & Kranton (2000,
2005), introducing identity into the utility function of an individual and extending the
standard economic analyses, allows the explanation of these concepts.
Identity is used to describe a person’s social category but is also defined as a
person’s sense of self. As such it departs from the assumption in traditional economics
that the utility functions are not situation dependent. Falck, Heblich & Luedemann argue
that this concept of identity depends on a person’s socialization. They find that
entrepreneurial intentions result from parental influence but also from peer influence. In
their conception, utility functions change because norms of appropriate and inappropriate
behavior differ across space and time. Since the same person belongs to different social
categories, for example man/woman, worker/manager, shareholder/non-shareholder or
family member/non-family member, that person’s behavior will depend on the specific
circumstances. This leads to the following specification of the utility function (Akerlof &
Kranton, 2000):
Uj = Uj (aj,a-j,Ij)
where utility for person j depends on j’s identity Ij as well as on j’s own actions aj
and others actions a -j. A person’s identity can then be modeled as (Akerlof & Kranton,
2000)
Ij = Ij (aj,a-j;cj ,j ,P)
where a person’s identity depends on j’s assigned social categories cj, the extent to
which j’s own given characteristics match the ideal of j’s assigned category, indicated by
the prescriptions for that specific category P, and the extent to which j’s own and other’s
actions correspond to the prescribed behavior indicated by P.
This concept of identity allows the distinction between family firms and non-family
firms in the first place. Although one’s family is a relevant social category for everyone,
family firms distinguish themselves from non-family firms in that the family becomes a
relevant social category in the working environment. This implies that in professional
situations, family will be relevant and the expectations from the family will impact the
family member’s behavior. As a result, family members may take actions that are hard to
explain by traditional economic theory but make sense from an identity point of view. A
typical example concerns the existence of altruism (Schulze, Lubatkin & Dino, 2003).
Although altruistic behavior may impose costs on the organization, family members may
be willing to incur these costs although they lead to a decreased utility. Since the family
constitutes an important element in the identity of some family members, they are willing
to incur costs to avoid loss in identity. Although this cost will lower the utility of the
individual family member, they will still engage in this activity when the cost to preserve
the identity is smaller than the loss in utility that would follow if no action is undertaken.
This will be the case if the incurred loss is smaller than the expected loss in utility by
non-altruistic behavior due to the loss in identity when family as a social category is very
relevant. This view thus would provide an alternative explanation for the finding that in
some cases family members are willing to provide human, social and financial capital to
the firm (Danes et al., 2009).
On the other hand, given that family as a social category will be relevant to the
family members involved in the firm, does not mean that the perception of the
appropriate behavior will be the same for all family members. Family firms are often
plagued by substantial conflict. Kellermans & Eddleston (2004) stress that although
conflict is often perceived to have negative effects, it can also be beneficial under certain
circumstances .They distinguish between task conflict, process conflict and the
moderating role of relationship conflict. They posit that altruism will also play a role an
diminish the relationship conflict in family firms. Dependent on the expectation of what
is appropriate, family members will behave differently in similar situations and they will
have different expectations with respect to the preferred outcome in terms of financial or
non-economic goals. An example here is transmitting the firm to the next generation,
which is a crucial element in defining the family firm and has received a lot of attention
in previous research. From an identity point of view, the next generation in the family
could have a completely different view and expectations about the firm. Whereas the
founders that started the firm might be tempted to consider the firm and its well-being as
a crucial element of their identity, even at the expense of their family life, this could be
different for the following generations. For the next generations, the firm and its
continuance may still be important but at the same time they may not exhibit the same
willingness to sacrifice their personal life. Generational involvement is also expected to
have an impact on the relationship between task and process conflict on one hand and
performance on the other hand (Kellermans & Eddleston, 2004). As a result, the
transition of the family firm to the next generation which has been shown to have an
impact on performance (Molly, Laveren & Deloof, 2010), may in fact reflect a shift in
identity in which later generations have different preferences.
Identity and work incentives
Although it is straightforward that family members are the ones most likely to
include the family in their identity, other stakeholders as well may consider the family as
an important element. A first category of stakeholders that play an important role are the
employees, including the top management team. Applying identity to organizations, this
leads to the following utility function for a worker (Akerlof & Kranton, 2005)
U(y,e;c) = ln y – e + I c – t c e*(c) - e
Where U denotes the worker’s utility, y is her income, e is her actual effort, c is her
social category, Ic is her identity utility from being in category c and t c e*(c) - e is the
disutility from diverging from the ideal effort level for category c, denoted e*(c).
Akerlof & Kranton (2005) show in their theoretical model that a worker, dependent
on whether he feels like an insider or outsider, will engage in more or less effort. This has
important implications since identity and monetary incentives could be substitutes. When
a family succeeds in attracting workers that feel like insiders, in this case as people that
consider the founding family as a relevant social category to their identity function,
wages could be lower and effort could still be high. In the same vein, hiring a family
member CEO or hiring an external CEO is in this case not the relevant issue but rather
whether he identifies himself as an insider with the same identity who wants to act in the
best interest of the family. As a result, the agency conflict, which is traditionally
described as the conflict between the management and the owners, will disappear if the
CEO feels like an insider. In the latter case, he will behave as a steward for the interests
of the shareholders.
Nevertheless, the choice between a family member and an external as CEO not only
has direct implications but also indirect ones. This follows since one has to take into
account that actions from others, the other employees, are also relevant. When the family
decides to appoint a family member as CEO since this reinforces their identity and the
associated utility, employees may have the feeling that the selection process was unfair.
Appointing a family member that has insufficient legitimacy towards the employees
could create a loss in identity for the other employees. As a result, they could adjust their
behavior and react with potentially adverse effects for the firm as a whole.
Familiness and performance
From the previous it has become clear that identity concerns and the relevance of
the family in the identity will be quite different for the different stakeholders within the
firm. Even within the group of family members identity concerns may be quite. As a
result, family firms will be characterized by differing levels of diversity with respect to
their identity. Although this approach shows similarities to the literature of organizational
identity (eg Zellweger et al., 2010) or corporate culture, it is still different. The approach
used here views corporate culture as the division of stakeholders into different groups
where each group differs in the extent to which they identify with the family where each
group has its own prescribed behavior and will adopt different goals. As a result, different
groups within family firms may have different views on performance. So performance
evaluation within family firms would be more appropriate when the identity of the
stakeholders in the firm and their preferences are revealed. Failing to take this into
account would lead to a misspecification in the relationship between familiness and
performance. Familiness, which has its roots in the resource based view and has been
described extensively by Frank, Lueger, Nosé & Suchy (2010), would thus depend on the
diversity of the family identity.
Identity and firm classification
Based on the previous, I suggest a novel approach to defining and classifying
family firms. As can be made up from figure 1, I suggest that firms would be classified
based on the two following dimensions: family firm identity and influence. As described,
family firm identity would be measured dependent on the importance of the family in an
individual’s identity. The second dimension I consider is the influence a particular
member or group of members could exercise. This goes further than simply considering
the level of ownership or the involvement in the management as is done in the
components approach. Even stakeholders that have no ownership, for example workers,
spouses of the family members, a non-active founder, could be quite influential in the
family firm.
Figure 1: An identity framework for family firms
Family identity
Family group 2
Workers group 2
TMT
Workers group 1
Family group 1
Influence
Central in each of these two dimensions is thus the perception by the different
stakeholders involved. An approach to imply this empirically could be with the technique
of multidimensional scaling where all stakeholders are mapped based on their
perceptions.
An example of a possible configuration can be found in figure 1. It shows that the
firm is characterized by two groups of workers and family members that differ
significantly in influence and relevance of the family to their identity. As a result,
performance will have quite a different meaning to them and the use of a self-reported
measure by for example the top manager (TMT) would give an inaccurate view. Family
firms could thus be characterized based on the diversity of the family identity of the
different stakeholders.
Using this identity approach also allows new insight into the concept of familiness
(Habbershon & Williams, 1999). When diversity within the family firm is small, a family
identity can be built, which is hypothesized to be an important dimension in familiness
(Zellweger, Eddleston & Kellermans, 2010). On the other hand, when the family firm is
characterized by a large degree of heterogeneity in family members’ identity, familiness
may be created if control over the firm’s resources is concentrated in the hands of a few
people. As a result of this identity approach, the essence element (Chrisman, Chua &
Sharma, 2005), which entails greater effort by family members, can thus be viewed as a
consequence of identity rather than a separate dimension.
Implications and conclusion
This paper has adopted the view that family firms could be classified based on two
different dimensions: influence and identity. Identity, a person’s sense of self, will play
an important role in explaining the behavior of stakeholders within a family firm and
extends as such the traditional economic theory.
Adopting the view that the identity of stakeholders in the family firm plays a
determinant role has many implications for family business research. First of all, instead
of focusing on easily observable variables such as gender, family or non-family
management or generation, it would be more relevant to use a classification based on
identities. The traditional variables are typically included in empirical research but may
be poor proxies for the real identities that lie behind them.
Secondly, from the point of view of the family members, realizing that the family
may have different meanings to different family members will have important
consequences. With respect to the issue of succession, it has become clear that
differences in identity may lead to conflict between the different generations. Allowing
family members in the family firm, is also an important issue to consider since this may
improve family identity on one hand, but harm the identity, and the associated effort of
the other workers on the other hand. So clear rules with respect to those issues would be
necessary in order to guarantee the long term well being of the firm.
Evidently, this paper is one particular approach to classifying family firms which
may benefit from other theoretical lenses as well. Still it seems a promising avenue to
explain the relationship between family firm types and performance.
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