Alternative Methodologies for Identifying Family- versus Nonfamily-Managed Businesses

Family-firm research has gained increasing amounts of attention in recent years (Dyer 1986, Handler 1989, Ward 1987), largely due to the economic importance of this sector of firms. Family firms represent the most prevalent form of enterprise in the United States today (Alcorn 1982, Danco 1980, Kirchhoff and Kirchhoff 1987, Sexton and Van Aucken 1985), generating from 40 to 60 percent of the gross national product (Ward and Aronoff 1990). While family firms are found in all sizes, more than 80 percent of all businesses in the United States today are small, family-owned firms (Kirchhoff and Kirchhoff 1987). Despite the prevalence and economic importance of the family-owned enterprises, social scientists have largely neglected the study of family-owned and operated businesses (Dyer 1986). This may be, in part, because one of the greatest barriers facing researchers is the difficulty in identifying and defining the family firm. Most large firms (e.g., Fortune 500 firms) are not family-owned or operated. The majority of small firms, however, do fit this category (Ward 1990). These firms often prove to be the most difficult to access for research purposes. The objective of this study, then, is to develop and test a technique to identify companies exhibiting family ownership and management characteristics, without intervention-type inquiries such as telephone interviews. Both qualitative and quantitative methods for identifying family and nonfamily firms were employed. Discriminant function and logistic regression analyses are used for examining firm characteristics and processes which are believed to differentiate family versus nonfamily ownership and management in small firms, where the impact of ownership and management are likely to be most salient. Literature which supports the proposition that family versus nonfamily businesses can be identified based on firm age, firm size, the strategic profile emphasized by the firm, and use of internal control mechanisms is presented. THE IMPORTANCE OF FAMILY VERSUS NONFAMILY CONTROL Questions concerning the extent to which ownership and control of the firm affect organizational characteristics and processes (Cubbin and Leech 1983) remain unanswered. Agency theory (Fama 1980, Jensen and Meckling 1976, Fama and Jensen 1983), however, provides an explanatory framework for examining this important management type distinction. Agency theory relies on the contract as a metaphor for explaining the behavioral implications of ownership rights (Jensen and Meckling 1976). The agent-principal relationship is defined as a contract whereby the principal (owner) engages the agent (manager) to perform some service which allows for discretion in decision making. Agency costs occur because these contracts are not costlessly written and include monitoring costs borne by the owner, bonding costs borne by the manager, and residual loss (Jensen and Meckling 1976). Agents, in this case professional (nonfamily) managers, are hypothesized to impose costs on the firm. These costs are derived from the diversity of interests between owners and managers, and the moral hazard and potential for opportunism that obtains when ownership and control are separate. Actions which serve managerial self-interest result in performance disadvantages for the firm (Fama 1980). Costs result when managers seek to maximize their utility functions and owners seek to maximize their utility functions, but these are different functions (Daily and Dollinger 1992). Managers, for example, may use profits for personal gain, such as salary increases and extra benefits and perquisites. Owners will likely seek to maximize firm value and realize gains directly (Demsetz 1983). When ownership is concentrated this conflict should disappear (Williamson 1981). To the extent that ownership and management affect firm performance, the family/nonfamily distinction remains a critical variable for organizational research. …