Governance Theory

Three theories have been put across that discuss the governance of family owned firms. According to the agency theory, family business owners are self-interested and rational, viewing the business as security and source of income. Their strategies are conservative and tend to promote personal rather than the firm’s interest. Agency behavior tends to deliver lower long term returns to the firm’s shareholders. However, to counteract agency related behaviors, an ideal board must comprise of the CEO and outside directors. Their main mandate is to provide counsel and oversight on vital business issues.

The stewardship theory came about to disclaim the agency theory where managers and owners were depicted as being motivated by self-interest. Their motivation aligns with the principal’s objectives. It is typically shown when there is an emotional attachment by family members to the firm. The firm is viewed as a source of family legacy, family honor and career opportunity. Decision making can be influenced by considering future generations encouraging innovation and associated risks. Family members will tend to support such strategies and investments that will reflect and promote the firm’s long term goal; this benefits all the shareholders.

Embeddedness is a concept taken from sociology that seeks to merge the conflicting theories of agency and stewardship. It argues that people are embedded in social relationships that shape their perceptions, motivation and finally their actions. In business, several factors such as the dispersion of power and voting control and involvement of later generations in the firm determine embeddedness within a family. These factors include It is easy to engage in stewardship if the founder CEO is the only family member since they are less likely to be influenced in their decision-making. This is because they have knowledge of the firm and ties to investors and employees.