Family, wealth, and governance: an agency account

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Date: Nov. 2015
From: Entrepreneurship: Theory and Practice(Vol. 39, Issue 6)
Publisher: Sage Publications, Inc.
Document Type: Report
Length: 11,328 words
Lexile Measure: 1540L

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Family firms often evolve into ownership constellations with multiple family owners. Building on agency theory, we argue that the growing complexity within a group of family blockholders gives rise to what we label family blockholder conflicts, defined as conflicts within a group of family owners. To curb family blockholder conflicts, families often separate the family from its assets and install intermediary governance structures. We explore four frequently applied structures (uncoordinated family, embedded family office, single family office, and family trust), which vary in their degree of separation between family owners and assets and consequently the extent to which the firm might incur family blockholder costs and the double-agency costs associated with appointing agents to oversee agents. We conclude with a discussion of the distributive effects of the four family governance constellations for family wealth over time.


Much of the extant family firm literature treats family firm owners as a unitary group of owners with shared interests that differ from those of nonfamily owners (e.g., Carney, 2005; Morck & Yeung, 2003). This broad-brushed view of family firms, however, neglects the variety within the group of family firm owners. Such heterogeneity in part arises from the natural drift of families across generations and the resulting increase in the complexity of family ownership over time (Gersick, Davis, McCollom Hampton, & Lansberg, 1997). In contrast to founder-controlled firms, many later-generation family firms are controlled by multiple family owners, and long-lived family firms, such as the German Haniel group, founded in 1756, are sometimes controlled by several hundred family owners.

Multiple family owners likely differ in their financial and nonfinancial interests, leading to potential family feuds and conflict (Bertrand, Johnson, Samphantharak, & Schoar, 2008; Eddleston & Kellermanns, 2007). A closer look at the agency literature, which figures most prominently in explaining the governance of family firms (Anderson & Reeb, 2003; Chrisman, Chua, & Litz, 2003; Schulze, Lubatkin, Dino, & Buchholtz, 2001), reveals that authors largely assume away the existence of heterogeneous interests, goals, and preferences among individual family owners and implicitly converge on a central assumption about family ownership: the family acts as a united group of owners and thus as a monolithic blockholder. Family sociologists, therapists, and advisors, however,

provide striking accounts of the heterogeneous interests behind the facade of seemingly united families (Kets de Vries, 1993) and of the demand for family governance regulations to align these interests (Ward & Aronoff, 2010).

The complexity arising from heterogeneous interests among multiple family owners creates a need for coordination among family member interests and hence mitigation of what we label family blockholder conflicts. One way for families to address these conflicts is to separate family owners from their (business) assets via the establishment of intermediary structures, such as family offices or family trusts (Dunn, 1980; Marcus & Hall, 1992). But setting up such intermediary structures aimed at curbing family blockholder conflicts and related costs creates a double separation of ownership and control, which gives rise to double-agency costs (Carney, Gedajlovic, & Strike, 2014). Double-agency...

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Gale Document Number: GALE|A436543053