The Impact of Family Governance on a Firm's Performance - Literature review Example

A literature review on the impact of family governance on a firm’s performance (Author’s name) (Institutional Affiliation) (Instructor’s name) (Date) Introduction According to (Miller and Miller, 2006) each family has a number of financial objectives that they intend to achieve in a given period. This involves integrating of family wealth such as quantitative implications and qualitative elements. Combining both qualitative and quantitative features of family governance involves the focus on both psychological and financial investments. Family governance is based on the premise that places the significance on creating family wealth. A carefully integrated family plan caters for the long term and short term goals set by the intended parties. Achieving family integration and family governance involves the incorporation of a number of steps. The first steps involve the creation of the wealth. This is followed by the maintenance of the wealth making it a critical aspect. The final step focuses on the separation of the wealth to various avenues. The aspect of family governance has come under an enormous amount of criticism over the years owing to the lack of cohesion experienced. This in turn, exposes the practice to various forms of criticisms which argue against its lack of viability in the long run writes (Mallin, 2007). The focus of this paper is to provide an analysis of documented literature on family governance and firm’s performance. Managing businesses is often perceived to be a corporate issue in that personal relations are separated from the running of the business. Family governed businesses are however, beginning to rise due to the change in the dynamics of the modern business. The paper provides a number of arguments that advocate for and against family governed businesses. It looks at the challenges such families face in the creation of their vision, mission and values in a competitive business environment. Morris, Pinto and Soderlund (2010) mention that this issue has forced a number of supporters of family governance and integration plans to showcase the advantages of having integrated system in terms of business. One of the advantages of family governance is the creation of direction, communication and responsible decision making as a family unit. Most of the integration systems are geared towards achieving a common mission, vision and values. Mallin (2007) explains that before one understands the concept of family governance, there has to be a definition of family. Family in this case, not only refers to the basic unit but the overall extended family. The definition of family thus, reflects on the modern forms of family that considers divorced members, adopted children and in laws as a basic family unit. The initial aspect of forming a governance system is the establishment of family roles, goals and concerns. It is essential to establish this group so as to ensure that all members feel part and parcel of the union. These roles differ in terms of position, age, qualification and relation of the family members. Another significant aspect to look into is the foundation of the four principles that dictate on the running of the business. The first premise advocates for the running of a longstanding multigenerational family like that of a corporate company. This ensures the adaptability of a professional form of management as opposed to that of personal preference. The second premise looks at the appreciation of both a family as a unit of financial capital and human capital. Third is the implementation of the second premise through the previous performance and roles of the family members. Last is the observation of the establishment of an overall consensus of the family which states that they all volunteer and understand the terms of the agreement put forth imply (Morris, Pinto and Soderlund, 2010). Managing a family unit gives rise to the creation of wealth amongst a community. This involves taking into consideration the general rules and regulations required to organize and run a corporate establishment. Family governance units as a result face a number of challenges owing to the premise in which the unit is formed. This is one of the issues that opposes of the system use to discredit its adaptation explains (Miller and Miller, 2006). Family controlled businesses according to Mallin (2007) have for a long time, faced a number of criticisms in regard to their sustainability. Most investors choose to distance themselves from such establishments in that they are dubbed problematic. The change in a number of social aspects has however, changed the dynamics of family owned businesses making them an attractive venture in the present economy. Research shows that family owned businesses are increasingly outperforming other business arrangements making them more marketable. Such businesses have not acquired their success easily seeing as they have had to prove their critics wrong. Some of the disadvantages that are associated with Family owned businesses are nepotism, incompetence and minority exploitation. Family owned businesses are to date either highly successful or record a number of failures. To provide a better understanding of the issues at hand, an analysis of vital factors such as stewardship and agency have to be studied suggests (Morris, Pinto and Soderlund, 2010). According to Agard (2010), the agency theory is a major factor in the current business relations presented to date. It is essential to understand this concept in order to examine the effectiveness of a family governed business. The principles of agency differ from the ones of stewardship making their adaptation have different implications on a business. The agency theory was first experienced in the early 1970s that saw the need to solve a number of issues that arose from both shareholders and managers. The agency theory results from the involvement of more than one principle in the conduction of a business transaction. A firm places an agent in charge of a number of responsibilities giving them authority to make decisions in regard to the firm. The firm or individual who hires the agency is referred to as the principal. A key agency a relationship is that of the shareholders verses managers’ theory. Agard (2010) writes that one of the issues that arise from this type of arrangement is the conflict of interest between the management and shareholders. Managers are tasked with the responsibility of organizing an establishment to reflect the goals and objectives projected. This entails the completion of the goals put in place during the particular financial year. These goals may however, conflict with that of the shareholders. Shareholders are an essential part of the running and decision making process in a company or establishment. They hold an enormous amount of authority due to their colossal investment in the company. Their opinion is thus, valid in the event of the rise of a conflict or disagreement according to (Morris, Pinto and Soderlund, 2010). Morrone (2008) suggests that hiring a third party to run the events in a company is bound to lead to a number of conflicts. One of the conflicts is credited to the personal preference and interest of a key member. Family controlled businesses run the risk of facing such issues due to the personal interest displayed brought about by the lack of professionalism. As stated earlier, shareholders maintain the bulk of authority in the management and decision making process. They therefore have the ability dictate on the type of policies they see fit. The issue arises when a shareholder decides against the management making the two principals disagree in one way or another. Mangers on the other hand, may have ulterior motives that do not act in favor of the general values of the business. The agency theory is applicable in any business owing to the need to collaborate in a number of transactions. Family owned businesses are not excluded from such disputes due to the different interests that may arise over the years concludes (Agard, 2010). Supporters of family owned businesses argue that a well integrated family governance system has a higher probability of surviving such conflicts. This is made possible by the formation of coherent values, goals and objectives. The agency theory expects managers to advocate for their policies at the expense of the welfare of the shareholders. This result in a power struggle that sees both parties protects their interests. One of the ways of avoiding this issue is by ensuring that all parties do not have different expectations and influences. Potential areas of conflict are brought about when an owner has claim to more than 100 percent of the firm’s common stock. This makes the managers vulnerable to key issues that affect their overall authority in a firm. A manager in this situation has the sole interest of increasing their common stock so as to increase their influence and authority in the company concludes (Morrone, 2008) As explained by Miller and Miller (2006), another key factor in reference to the running of a family owned business is the stewardship theory of management. The stewardship system of management and employee management is primarily compared to the agency system. It is thus expected to have a proper understanding of both elements so as to conclude on their impact on family governance. The stewardship form of management is reserved for the management of higher and more advanced companies and establishments. The need to create businesses that place emphasis on long term sustainability and high profit returns is on the rise. Experts in the field are beginning to recognize stewardship as the appropriate form of management. The agency theory continues to hold the most credibility of the two. This however does not take away the effectiveness of stewardship in the control and organization of both family run businesses and other forms. Stewardship form of management is an alternative form of management that advocates for the allocation of sole control of an establishment on a manager. The managers take on the role of stewards who are in charge of asset management and control. Stewardship differs from the agency theory on several grounds owing to the role of the mangers in each case. The role of the manager in the stewardship form of management is placed in high regard reducing that of the main shareholders and interested parties (Morrone, 2008). This new form of governance expects the role and ambition of the manager to reflect on their needs of the organization as opposed to the need for personal growth. The first requirement for the stewardship management is defining a manager as an owner as opposed to an employee. This limits the manager from elevating their position to that of the shareholders argues (Miller and Miller, 2006) In reference to the viability of family owned businesses, stewardship is highly effective due to the fact that all members are shareholders. The management in this case is chosen from qualified parties in the family unit. Stewardship involves the reliance of ethical issues and values which ensure the proper running of a company. Mangers are trained to uphold number principles that determine their conduct. Giving managers more power insures the proper running of a company. It also reduced the interference from the shareholders who at most times pass policies that do not assist the overall growth of the company. The manager has the sole responsibility of maximizing of the company’s capital and human assets so as to establish sustainable growth. This is done through the generation of vast amount of profits through the observation of both the company and shareholders values state (Morris, Pinto and Soderlund, 2010). Miller and Miller (2006) state that for the stewardship system to be effective, the manger has to fulfill all the required qualities that entail trust and discipline. It is significant to note that human nature plays a vital role in the success of this system of organization. The human condition refers to the state and capabilities of an individual in each given time and situation. Most persons act in a way that is advantageous to their wellbeing. It is thus difficult to place trust solely on the principles and values on a manager. Critics of the stewardship system argue that a manager cannot ignore their own plight or interests owing to their human nature. It is ideal to place managers in check so as to maintain the flow of power between manager and shareholders. The debate on the most effective system to undertake continues to dominate the business world. The issue has resulted in the split in preference of ideologies with some opting for the agency system vice versa. A look at the stewardship theory in reference to the family owned businesses changes the perception of such establishments. As stated earlier, family owned businesses reduce the possibility of personal interests and preference due to the integration of the values, mission and vision. This has seen the growth of such businesses in the international spectrum making FOBs a force to be recognized concludes (Morrone, 2008). Conclusion The question on whether agency is more effective than stewardship continues to dictate on the form of organization to undertake. The implications of both systems determine the results and performance of a company. The situation is made more complex when studying the management and integration of a family owned business. Different businesses have reacted both positively and negatively in respect to the system enforced. The agency form of management continues to dominate the management system in most companies. The stewardship systems however, continue to receive more supporters. The growth of family governance and firm performance is one of the key issues of the inception of present business. With more families choosing to integrate so as to create wealth, it is only a matter of time before the alternative forms of businesses are phased out. References Agard, K. A. 2011, Leadership in nonprofit organizations: a reference handbook. Thousand Oaks, Calif, SAGE Publications. Mallin, C. A. 2007, Corporate governance. Oxford [u.a.]: Oxford University Press. Miller, D. Miller, I. 2006, Family governance and firm performance: Agency, stewardship, and capabilities. Family Business Review, Vol. 14, No. 1. Morrone, M. 2008, Family governance: a key tool for successful family wealth planning. Wells Fargo Bank. Morris, W. G., Pinto, J. K., & Söderlund, J. 2010. The Oxford handbook of project management. Oxford: Oxford University Press. Read More