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Marita Rautiainen
DYNAMIC OWNERSHIP IN FAMILY BUSINESS
SYSTEMS – A PORTFOLIO BUSINESS APPROACH
Acta Universitatis
Lappeenrantaensis 485
Thesis for the degree of Doctor of Science (Economics and Business
Administration) to be presented with due permission for public examination
and criticism in the hall of Kalevi Aho at Lahden Musiikkiopisto, Lahti,
Finland on 2th of November, 2012, at noon.
Supervisor Professor Timo Pihkala
Lahti School of Innovation
Lappeenranta University of Technology
Finland
Reviewers Professor Matti Koiranen
School of Business and Economics
University of Jyväskylä
Finland
Associate Professor Rainer Harms
School of Management & Governance
University of Twente
Netherlands
Opponent Professor Matti Koiranen
School of Business and Economics
University of Jyväskylä
Finland
ISBN 978-952-265-292-8, ISBN 978-952-265-293-5 (PDF)
ISSN 1456-4491
Lappeenrannan teknillinen yliopisto
Digipaino 2012
ABSTRACT
Marita Rautiainen
Dynamic Ownership in Family Business System – A Portfolio Business Approach
Lahti 2012
214 pages
Acta Universitatis Lappeenrantaensis 485
Diss. Lappeenranta University of Technology
ISBN 978-952-265-292-8, ISBN 978-952-265-293-5 (PDF)
ISSN 1456-4491
Family businesses are among the longest-lived most prevalent institutions in the world
and they are an important source of economic development and growth. Ownership is a key to
the business life of the firm and also one main key in family business definition. There is only
a little portfolio entrepreneurship or portfolio business research within family business
context. The absence of empirical evidence on the long-term relationship between family
ownership and portfolio development presents an important gap in the family business
literature. This study deals with the family business ownership changes and the development
of portfolios in the family business and it is positioned in to the conversation of family
business, growth, ownership, management and strategy. This study contributes and expands
the existing body of theory on family business and ownership.
From the theoretical point of view this study combines insights from the fields of
portfolio entrepreneurship, ownership, and family business and integrate them. This cross-
fertilization produces interesting empirical and theoretical findings that can constitute a basis
for solid contributions to the understanding of ownership dynamics and portfolio
entrepreneurship in family firms.
The research strategy chosen for this study represents longitudinal, qualitative,
hermeneutic, and deductive approaches.The empirical part of study is using a case study
approach with embedded design, that is, multiple levels of analysis within a single study. The
study consists of two cases and it begins with a pilot case which will form a pre-
understanding on the phenomenon. Pilot case develops the methodology approach to build in
the main case and the main case will deepen the understanding of the phenomenon.
This study develops and tests a research method of family business portfolio
development focusing on investigating how ownership changes are influencing to the family
business structures over time. This study reveals the linkages between dimensions of
ownership and how they give rise to portfolio business development within the context of the
family business. The empirical results of the study suggest that family business ownership is
dynamic and owners are using ownership as a tool for creating business portfolios.
Key words: family business, portfolio entrepreneurship and ownership.
UDC 658.11:334.722:336.76
ACKNOWLEDGEMENTS
As I write these acknowledgements, I am faced with the reality that a long and
difficult, productive and rewarding journey is coming to an end. I did not embark on this
journey alone, and truth be told, I never would have made it this far on my own. There are
many people to whom I am indebted for helping and supporting me during my journey. To all
these people I am forever grateful; you have made the completion of this project possible and
the journey a memorable one.
First and foremost, I would like to thank my supervisor Professor Timo Pihkala for his
guidance and advice, and especially for putting his trust in me during these long years of hard
work. His patience and his confidence in me, even when my own faltered, made me believe I
could start and complete this dissertation. I would also like to express my gratitude to
Professor Matti Koiranen of the University of Jyväskylä for acting as my public examiner,
and to Dr. Rainer Harms of University of Twente, who acted as my external examiner. Their
suggestions greatly helped me in finalizing the dissertation.
I have had the opportunity to make some good friends through this project, and to
enjoy the camaraderie of colleagues who have expressed interest and offered encouragement.
A special thanks goes to Professor Markku Ikävalko, who has been my co-author and
supporter. He always welcomed different research approaches with an open mind, which gave
me the opportunity to try out new perspectives. I have had the privilege of being a member of
a research group that has acted as a sounding board for specific research issues. I would
especially like to thank Tuuli Ikäheimonen, Elena Ruskovaara, and Johanna Kolhinen for
their constructive and encouraging comments and advice. Their inspiration and faith in me
gave me the strength to improve my work. I would like to collectively thank everyone from
the LUT Lahti School of Innovation; they opened up a new world to me and warmly
welcomed me as one of the group.
This dissertation would not have been possible without the co-operation of family
businesses. I would like to express my warmest gratitude to Nurminen family, especially Juha
and Jukka Nurminen, who gave me the opportunity to travel through their family business
history and opened up the world of ownership to me. I would also like to thank Markku
Suutari and Kari Sohlberg for the insights they offered. Family business has always been a
part of my life, and I have been privileged to be a part of different families and firms.
Whether the business was music, shoes, or fish, I met inspirational people, and I would like to
express my sincere gratitude to them for the experiences I have gained through working with
them. I gratefully acknowledge the financial support from the following foundations:
Yksityisyrittäjäinsäätiö, the Foundation for Economic Education, and the Finnish Cultural
Foundation.
Finally, I want to express my gratitude to my dear family. My mother, Eila, showed
me that if you work hard, you can achieve what you want. I also owe many thanks to my
father, Olavi, and to my sisters Helena, Susanna, Tiina, and Anu, as well as to my brother
Pasi. You were there whenever I needed it, in good times and bad. And my dear daughter
Janika: thank you for showing me that there is much more to life than research
Lahti, October 2012
Marita Rautiainen
ABSTRACT
ACKNOWLEDGEMENTS
TABLE OF CONTENTS
LIST OF FIGURES
LIST OF TABLES
TABLE OF CONTENTS
1 INTRODUCTION 14
1.1 Family business as a research context 14
1.1.1 Why study family business ownership? 17
1.1.2 Why study portfolio businesses? 18
1.2 Defining the research gap 19
1.2.1 Family business 20
1.2.2 Ownership 22
1.2.3 Portfolio entrepreneurship and portfolios in family business 23
1.3 Research problems and objectives 26
1.4 Research method overview 28
1.5 Structure of the dissertation 29
2 THEORETICAL REVIEW OF RESEARCH ON FAMILY BUSINESS,
OWNERSHIP, AND PORTFOLIO ENTREPRENEURSHIP 31
2.1 Current research on family business 31
2.1.1 Family business management 37
2.1.2 Development of family business 39
2.1.3 Family business consists of individual actors 44
2.1.4 Family relations, familiness and succession 46
2.2 Dimensions of ownership 48
2.2.1 Legal ownership and property rights 51
2.2.2 Psychological and behavioural sides of ownership 53
2.2.3 Collective ownership 55
2.3 Ownership logic in family business 57
2.3.1 Individual owners in family business 60
2.3.2 Ownership groups in family business 62
2.4 Behavioural aspects and activities in family ownership 65
2.4.1 Family member behaviour and motivation; exit, voice, and loyalty model 67
2.4.2 Active ownership through other businesses 70
2.5 Review on portfolio business research 72
2.5.1 The entrepreneurial approach to portfolio entrepreneurship 73
2.5.2 Portfolio business formation by an entrepreneurial team 75
2.5.3 Business growth and simultaneous ownership of several businesses 77
2.6 Conclusion of the literature review 79
3 DYNAMIC OWNERSHIP IN FAMILY BUSINESS 83
3.1 An open-systems approach to characterizing the drivers of ownership change 83
3.2 Ownership processes from a dynamic perspective 85
3.2.1 Drivers affecting changes in ownership 85
3.2.2 A tool for analyzing the use of ownership 88
4 RESEARCH METHODOLOGY 90
4.1 The methodological challenges emerging from the nature of family-owned portfolio
ownership 90
4.2 Significance of the research approach 96
4.2.1 A comparison of qualitative and quantitative research 97
4.2.2 The case study approach 98
4.3 The research method used in this study 100
4.3.1 Pre-understanding on the phenomenon 101
4.3.2 Case selection for this study 103
4.3.3 Data collection and methods of analysis 105
4.3.4 Qualitative research evaluation 109
4.3.4.1 Reliability of the research 109
4.3.4.2 Validity of the research 110
5 PILOT CASE: FLOWERGARDEN LTD. 113
5.1 Case description 115
5.2 Summary of the pilot case 117
5.2.1 Portfolio development in Flowergarden Ltd. 117
5.2.2 Drivers and family business development 121
6 CASE JOHN NURMINEN 124
6.1 Founding and the first generation 126
6.2 Second generation: business development 127
6.2.1 John Viktor, entrepreneur 127
6.2.2 Business partner takes over the company 129
6.2.3 The new John Nurminen Ltd. 132
6.2.4 Shipping, forwarding, and moving towards the travel business 133
6.3 Third generation: management of business portfolios 134
6.3.1 Matti Nurminen initiates management changes in the company 135
6.3.2 Getting a stronger foothold in the forwarding and travel businesses 135
6.4 Fourth generation: concentrating on board management and ownership 139
6.4.1 The Nurminens´ company becomes more complex 140
6.4.2 The freight forwarding industry changes 142
6.4.3 The board works more efficiently 143
6.4.4 The effects of the recession on the company´s structure 146
6.4.5 Portfolio management 149
6.4.6 Developing into a tightly focused logistics company 150
6.5 A new strategy for development 154
6.5.1 Defining the final alignment 154
6.5.2 Portfolio evolution 156
6.6 The portfolio in 2010 159
6.6.1 Portfolio performance in the Nurminen case 161
6.6.2 Private companies 162
6.7 Ownership development in the Nurminen case 167
6.8 Portfolio development in the case company 170
6.8.1 John Nurminen Ltd. ownership portfolio 178
6.8.2 Nurminen family members´ individual ownership portfolios 180
7 CONCLUSIONS AND IMPLICATIONS 182
7.1 Contributions and findings of the study 184
7.1.1 Family business is an open system 187
7.1.2 Ownership is a dynamic element and used as a tool 188
7.1.3 Family business develops through portfolio business 189
7.1.4 Significance of research methodology 189
7.2 Discussion 190
7.2.1 Implications for policy and practice 190
7.2.2 Limitations and suggestions for further research 192
REFERENCES 194
LIST OF FIGURES
Figure 1. Research design of the study 30
Figure 2. Toward the development of family business theories 34
Figure 3. The three-circle model of the family business system 36
Figure 4. The dimensional model of the family enterprise 41
Figure 5. The family holding company model 43
Figure 6. The hermeneutic circle 102
Figure 7. Guidelines for reading figure 8, the history of Flowergarden Ltd. 113
Figure 8. Flowergarden Ltd. business history during 1952-2007 114
Figure 9. Ownership changes at Flowergarden Ltd., 1952-2007 120
Figure 10. Company portfolio of Flowergarden Ltd. in 2007 123
Figure 11. Guidelines for reading Figure 12,
Company history of John Nurminen Ltd. history figure 124
Figure 12. John Nurminen Ltd. business history during 1871-1932 125
Figure 13. John Nurminen Ltd. business history during 1932-1965 131
Figure 14. John Nurminen Ltd. business history during 1965-1990 138
Figure 15. John Nurminen Ltd. business history during 1990-2000 145
Figure 16. John Nurminen Ltd. business history during 2000-2008 153
Figure 17. John Nurminen Ltd. business portfolio in 2010 158
Figure 18. The Nurminen family three 167
Figure 19. Nurminen family company ownership portfolio in 2010 179
Figure 20. Ownership portfolio of Nurminen family members in 2010 180
Figure 21. Conceptual relationships in ownership changes 186
LIST OF TABLES
Table 1. Key topics in the field of family business research 31
Table 2. Ownership issues in an evolving family business 42
Table 3. Ownership research in family business context 49
Table 4. Types of ownership 50
Table 5. Stages of family business evolution 65
Table 6. Exit, voice, and loyalty within the family business context 67
Table 7. Selected research in the field of portfolio business 72
Table 8. Factors used in the analysis of ownership changes in family businesses 89
Table 9. The cases constituting the empirical basis of this thesis 104
Table 10. Sources of evidence: strengths and weaknesses 108
Table 11. Validity of measurements 110
Table 12. Business portfolio development criteria in Flowergarden Ltd 118
Table 13. The ownership structure of John Nurminen Ltd. in 1939 133
Table 14. John Nurminen Ltd. ownership structure in the 1960s 139
Table 15. John Nurminen Ltd. ownership structure in 1972 139
Table 16. John Nurminen Ltd. ownership structure in 1977 141
Table 17. Ownership in different Nurminen family companies in the 1990s 148
Table 18. Nurminen Logistics Plc. ownership portfolio in 2010 159
Table 19. The ownership portfolio of the family business
John Nurminen Ltd. in 2010 161
Table 20. Companies in private ownership not part of John Nurminen Ltd. 164
Table 21. Drivers in portfolio business development
at John Nurminen Ltd., 1871–2010 170
My ventures are not in one bottom trusted
Nor to one place; nor is my whole estate
Upon the fortune of this present year;
Therefore, my merchandise makes me not sad.
Act I, Scene 1
Shakespeare’s Merchant of Venice
14
1. INTRODUCTION
This dissertation addresses portfolio entrepreneurship and ownership in family
business, answering the question How do families use ownership in family businesses? This
introductory chapter first outlines the background and the purpose of the study. Secondly, it
gives a brief overview of the key definitions. Thirdly, it presents the structure of the study. It
also shows the motives for why the selected subject is a relevant, important, and interesting
field of study.
1.1 Family business as a research context
Family businesses are among the longest-lived, most prevalent institutions in the world
(Astrachan 2010). Very little attention has been paid to the study of family businesses in
previous scholarship (Carter, 2003; Hautala, 2006), although family businesses constitute a
highly important component of most countries’ economies and the concept of family business
seems to present continuous challenges to researchers. On a global level, the overwhelming
majority of family businesses are small or medium-sized, and in several countries, they form a
majority of all businesses. The figures for various countries are: France (60%), Germany
(60%), the Netherlands (74%), Portugal (70%), Belgium (70%), United Kingdom (70%),
Spain (79%), Sweden (79%), Greece (80%), Cyprus (80%), Italy (93%), Australia (75%) and
the USA (96%) (van Buuren, 2007). Data from most other countries provides a similar
picture, and in Finland as well it has been demonstrated that family entrepreneurship is
important to the national economy, as over 80% of Finnish companies are family businesses
(Heinonen, Toivonen, and Sten, 2003; Koiranen, 2003).
Family businesses come in many forms: sole proprietorships, partnerships, limited
liability companies, holding companies, and even publicly traded (albeit family-controlled)
companies. Family businesses can range in size from a small corner store to a large
multinational corporation (Birley, Ng, and Godfrey, 1999). One important and descriptive
feature of a family business is that the entrepreneur or, in later generations, the CEO, and one
or more members of his or her family play an influential role in the firm. This influence can
take the form of participation, ownership, control, strategic preferences, and/or the culture and
values imparted to the enterprise. Family members can be involved in the enterprise as
members of the management team, board members, shareholders, or members supporting a
15
family foundation. The familial influence bestows family businesses with characteristics that
differentiate them from non-family businesses (Moores, 2009). The unique blending of
family, management, and ownership subsystems forms an overarching family business
system. Although many researchers indicate that the familial influence is what distinguishes a
family business from a non-family business, there is a need to identify what makes a family
firm distinct and the process by which these distinctions result from family involvement
(Chua, Chrisman, and Sharma, 2003). In particular, we need more information on the family’s
impact on the visions and goals of the firm, as well as on the family’s ability to create unique
resources. It is also important to be aware of the issues that make family firms behave and
perform differently from other family businesses and non-family businesses.
What do we mean by the term family business? Defining a family business is
controversial process, and there is no single agreed definition of what precisely constitutes a
family business. Chua, Chrisman, and Sharma (1999) found 21 different definitions of family
businesses in their review of 250 research articles. The definitions included three qualifying
operational combinations of ownership and management. They noticed that all researchers
included the combination “family owned and family managed” in their definitions. There
were also disagreements among definitions, some of which included combinations such as
“family owned but not family managed” or “family managed but not family owned”.
Astrachan, Klein, and Smyrnios (2002) have pointed out that the definition of family is often
missing from these descriptions. This absence poses problems in an international context,
where families and cultures differ across geographical boundaries and also over time. To get a
better handle on the subject, it is essential to agree on an accepted definition of what
constitutes a family business. Researchers have traditionally started their definition of a
family business by looking at three areas of involvement in a business: ownership,
management, and succession from one generation to the next (Koiranen, 2003; Hoower and
Lombard-Hoower, 1999; Davis and Tagiuri, 1989). A family business is owned, governed,
and managed with the intention of shaping and pursuing a vision of the business as one that
lasts across generations of one or more families. In their research on the impact of family
business on the US economy, Shanker and Astrachan (2003) point out that, “a common
definition of what constitutes a family business does not exist.” They conclude that there are
three family business types, depending on whether the defining criteria are broad, middle, or
narrow. The broad and narrow definitions involve a scenario in which multiple generations
have a significant impact on the firm.
16
Family firms behave and, consequently, perform differently from other companies, and
explaining how and why they behave and perform differently is the underlying reason for the
research at hand. Debates over definitions will continue, but there can be no doubt about the
critical importance of family business on every economy in the world. After having analyzed
existing definitions, the European Commission Expert Group proposes the following
definition (European Commission, 2009):
A firm, of any size, is a family business, if:
The majority of decision-making rights are in the possession of the natural person(s) who
established the firm, or in the possession of the natural person(s) who has/have acquired
the share capital of the firm, or in the possession of their spouses, parents, child or
children’s direct heirs.
1) The majority of decision-making rights are indirect or direct.
2) At least one representative of the family or kin is formally involved in the
governance of the firm.
3) Listed companies meet the definition of family enterprise if the person who
established or acquired the firm (share capital) or their families or
descendants possess 25 per cent of the decision-making rights mandated by
their share capital.
Usually, the management processes for both family and non-family firms are similar.
The differences lie in the firm’s set of goals, the manner in which the process of meeting these
goals is carried out, and the participants in this process (Sharma, Chrisman, and Chua, 2004).
In research on family business management, researchers explain the dominance of the family
as a lack of willingness to share control with external partners, since family members have a
personal management style and decision-making is rather emotional and informal (Chrisman
et al. 2003). However, research on family business (European Commission, 2009) recognizes
that in larger family businesses, it is common to employ individuals who are not family
members as managers. Family business management has featured particularly important
dimensions in research on succession: the role of the founder, the perspective of the next
generation, and succession as a process. In this discussion, there is an implicit assumption that
top managers lead a strategic planning process that incorporates management succession with
long-term continuation of the business. Family businesses focus on long-term development of
the firm; the realization of short-term profits is not seen as relevant, since the business is
meant to be passed onto another member of the family. This is one of the main characteristics
of family business that differentiates it from non-family business. Long-term survival and
sustainability are central considerations in family business development. Although this is
17
recognized as important in the field of research, there are relatively few publications dealing
with the subject in any organizational context, and though there are many examples of long-
lived family businesses, their sources of longevity are not well understood (Astrachan 2010).
Astrachan (2010) also notes that not much is known about the growth strategies of family
businesses. Recent research offers evidence of a CEO’s entrepreneurial approach, as is an
entrepreneurial orientation in the second generation, as being related positively to growth
(Kellermanns et al. 2008), while CEOs with long tenures have a constraining effect on growth
(Zahra, 2005). Family ownership has been found to be inversely related to one popular tactic
for growth: acquisitions as a response to a family’s priority of retaining control and
concentrating wealth (Anderson et al., 2003; Zahra, 2005). Miller et al. (2010) found that the
propensity to make diversifying acquisitions increases with the level of family ownership. An
increasing level of family ownership potentially increases the chances of an undiversified
personal wealth portfolio (Rabbiosi and Stucchi, 2012).
1.1.1 Why study family business ownership?
Ownership is a key element of a firm’s existence. Ownership is also a key to defining
family business; it enables a clear distinction to be made between family and non-family
businesses. Taking the ‘ownership perspective’ rather than the ‘company size’ perspective can
help improve understanding of the phenomenon of family business. Family businesses are
special in that ownership is held by the members of a family or kin-related group (Astrachan,
2010; Johnston, 2007). Ownership has special meaning in family firms, since it involves a
strong personal aspect. Long-lived family businesses face particular challenges as the family
and business grow older and larger over time. Family ownership may be seen as an
opportunity or a threat, depending on a variety of factors. Family-internal management–
ownership interactions can produce significant adaptive capacity and competitive advantage,
or alternately can be a source of significant vulnerability in the face of generational or
competitive change. As ownership is dispersed, control over the business becomes harder to
exercise (Schulze, Lubatkin, and Dino, 2003). Firms develop from family-owned business
into managerially controlled enterprises with broadly shared ownership (Franks et al., 2010).
Ownership in a family business is not seen as a liquid asset, but as property that is built and
developed by the family over generations.
Family businesses do not only thrive, many are also expanding. With this expansion in
size and scope, the family business comes up against limits in management capacity, financial
18
capacity, and the human and technical resources that the family can offer. When a family
business expands in scope into industries requiring greater amounts of capital, such as
manufacturing, the family often needs to obtain the capital externally. Family ownership and
commitment to the business may be understood as adding value, but at the same time,
investors may look with distrust on family-controlled companies because of the risk that the
controlling family may abuse the rights of other shareholders. According to Chandler (1995),
when a joint stock company grows in size, original shareholders, such as family members and
limited numbers of investors, cannot secure the entire share. Many researchers have noted
(Ward, 2001; Davis, 2007; Gersick et al., 1997) that families give up ownership slowly,
family control of the business remains strong even after several generations, and there is little
separation between ownership and control. The ownership configuration or stage of
ownership evolution helps explain behaviour in family businesses and suggests prescriptions
for family business conduct (Gersick et al., 1997; Ward, 1997). Perhaps the most popular
ownership configuration model describes three stages of ownership evolution: owner–
manager, sibling partnership, and cousin collaborative (Gersick et al., 1997).
1.1.2 Why study portfolio businesses?
Although the observation that some entrepreneurs own more than one business is not
new in the literature (Rosa and Scott, 1999; Westhead, Ucbasaran, and Wright, 2005), little
research on portfolio entrepreneurship or portfolio businesses has been conducted within a
family business context. This could be because, as a research subject, portfolio
entrepreneurship is very empirical in nature. Research stems from empirical findings
regarding the interlinking of businesses through ownership (Rosa and Scott, 1999; Alsos and
Carter, 2004). Scott and Rosa (1996) point out that the processes of establishing a firm are
separate from growth processes. Analysis at the level of a single firm does not suffice to
explain multiple business ownership or portfolio business. Alsos and Carter (2006) state that
while many studies have speculated that previous venture experience endows entrepreneurs
with a greater propensity for future business success, there is almost no evidence of this in the
research literature. In their study of the farm sector, Scott and Rosa (1996) noticed that there
were no systematic assessments of the frequency of multiple business owners in the economy
and that the existing data on multiple ownership is often firm-centred; data on firms and data
on individuals don’t talk with each other. The more owners use their ownership for
diversification, the less evidence there will be of growth in small firms. Researchers have
19
recently argued that future studies of portfolio entrepreneurship should focus on illuminating
the context, the content, and the processes in action (Carter and Ram 2003; Pasanen, 2006).
Ownership and management issues as well as growth and survival in portfolio
entrepreneurship are topics of interest to researchers. Alsos and Carter (2006) note that there
is substantial resource transfer from the originating business to the new businesses owned by
portfolio entrepreneurs, especially among entrepreneurs who have been successful in creating
one well-functioning, resource-rich business. Huovinen and Tihula (2008) found that learning
from previous experiences strengthened entrepreneurial knowledge and contributed to
management team formation and positive effects on the firm’s success. A small business
group is both the outcome of and antecedent to growth and corresponds to an entrepreneurial
management style (Lechner and Leyronas, 2009). Business portfolios owned by families
present a challenge to researchers and at the moment there is no recognized research tradition
or theoretical framework developed for investigations of them. Research on portfolio
entrepreneurship and management in the context of family business is increasing, as the
survival of business and ownership changes in family business create interesting research
questions about portfolio ownership, management, and growth. Empirically, such research is
very challenging, and there is a clear need to find different methods of getting a better
perspective on the phenomenon.
1.2 Defining the research gap
What questions deserve attention? Asking the right questions is the first critical step to
finding the right answers. The selection and definition of the level of analysis is not only
important in terms of the design of empirical studies; it is also essential for determining the
appropriateness of different potentially applicable theories. In order to assess the levels of
analysis most relevant for studies of family business, portfolio entrepreneurship, and
ownership, the contents of these studies must be analyzed. One important task here is building
a theoretical understanding of why these topics are pertinent to this study and what they mean,
as well as how they emerge in family business contexts. This study combines and integrates
insights from the fields of portfolio entrepreneurship, ownership, and family business. This
cross-fertilization should produce interesting empirical and theoretical findings that provide a
basis for solid contributions to the understanding of ownership dynamics and portfolio
20
entrepreneurship in family firms. The key definitions at the core of this study are family
business, portfolio entrepreneurship, and ownership.
1.2.1 Family business
Family firms are an important source of economic development and growth; they
create value through product, process, and service innovations that fuel growth and lead to
prosperity. The long-term nature of ownership in family firms allows them to dedicate the
required resources to innovation and risk taking, thereby fostering entrepreneurship (Zahra et
al., 2004). The kinship ties unique to family firms have a positive effect on entrepreneurial
opportunity recognition (Barney, Clark, and Alvarez, 2002). Owner–managers understand
that the survival of their family firm depends on their ability to enter new markets and
revitalize existing operations in order to create new business.
The basic characteristics of a family business are the intertwining of business,
ownership, and family. Shanker and Astrachan (1996) note that the criteria used to define a
family business can include: 1) percentage of ownership, 2) voting control, 3) power over
strategic decisions, 4) involvement of multiple generations, and 5) active management of
family members. They argue that a broad definition of a family business should incorporate
some degree of control over strategic decisions by the family and the intention to leave the
business in the family (Shanker and Astrachan, 1996). Furthermore, they argue that to be
considered a family business, the business’ members must strive to achieve, maintain, and/or
increase intra-organizational family-based relatedness. In an effort to resolve the definitional
uncertainty surrounding family business research, Litz (1995) suggests that businesses can be
defined as family businesses when the ownership and management are concentrated within a
family unit.
Families and businesses have often been treated as naturally separate institutions
(Sharma, 2004). Aldrich et al. (2003) suggest that families help founders establish ventures
and lend support to ensure their founding and survival over time. They argue that families and
their businesses are inextricably intertwined. Changes within the family have implications for
the emergence of new business opportunities, opportunity recognition, business start-up
decisions, and the resource mobilization process. Aldrich et al. (2003) also suggest that
entrepreneurship scholars would benefit from a family embeddedness perspective on new
venture creation. The proposed definitions seem to suppose that the primary focus of research
21
on family business is the business and the way in which it is related to the family; the business
is central and the family is an adjunct. If a family business is defined from this perspective,
the implication is that the involvement of family members will not be high, and therefore
attitudes and values will not be a prominent influence (Handler, 1989). If, on the other hand, a
family business is defined from a perspective where the family is central and the business is
an adjunct, a different scenario arises. Habbershon et al. (2003) conclude that “theory and
practice indicate that in family-influenced firms, the interaction of the family unit, the
business entity and the individual family members create unique systemic conditions and
constituencies that impact the performance of the family business social system.” To explain
the interaction of these different units, we need multiple levels of analysis that could develop
into a model of family business. This model should account for the unique characteristics and
diversity of family businesses and should address the dynamics among family business
subsystems. According to Chua et al. (1999), “What makes a family business unique is the
pattern of ownership, governance, management, and succession that materially influences the
firm’s goals, strategies, structure, and the manner in which each is formulated, designed, and
implemented.” They propose that a family business behaves in a more unified manner than
other firms.
A common perception of a family business is that a founding entrepreneur wants to
pass on a legacy on to his or her children. According to Dunn (1999), ensuring the long-term
survival of a family business means preparing it for the personal and organizational
development tasks it will face in the future, by considering people, families, and businesses as
dynamic entities undergoing clinical processes of birth, growth, and decline. Family
businesses are unique; no other type of business enterprise has this structural form. This
explains the complexity that goes with having a family system, a business system, and an
ownership system linked together through wealth, legal structures, employment structures,
and emotional or relational bonds. There are different kinds of ownership, management,
employment systems, and single businesses connected to business networks or business
groups. Who the owning and controlling party is, is the key question to understanding the way
in which family businesses operate. Many family businesses are controlled by individuals
with large networks and whose portfolios, ownership, and entrepreneurship are
interconnected. As businesses develop and begin to involve next-generation members,
ownership issues become more important. The ownership system becomes more complex,
since the business can include a wide range of companies; the owner of one company
22
becomes the owner of many companies, and ownership is often shared with other family
members or with external owners. At the moment, family business research does not deal with
data on how developing family businesses change in terms of ownership systems, and what
kinds of action the family takes in this system. From this point of view, there is a clear
research gap that needs more clarification. In the family business context, more information is
needed on multiple businesses owned by a single family.
1.2.2 Ownership
The family component shapes family businesses in a way that does not occur in non-
family businesses. According to Johnston (2007), when scholars have compared family
business to other forms of business, the primary criterion has been ownership. The notion of
ownership is fundamental to family business (European Commission, 2007), and to illustrate
the family component, one has to extend the debate into family business ownership. There are
numerous definitions of ownership, and scholars cannot seem to agree on one operational
definition. In studies of family business and ownership, ownership is seen in dimensions such
as legal–financial, psychological, responsibility, socio-symbolic, and identification (Chrisman
et al., 2003; Brundin et al., 2005). Researchers have defined family business operationally,
according to the components of a family’s involvement in the business: ownership,
management, and trans-generational succession. Still, there seem to be a problem precisely
delimiting any of these components; for example, does family ownership require total
ownership, controlling ownership, or effective control (Chrisman et al., 2003)? In definitions,
ownership is linked to the power and control (Ikävalko, 2010; Pierce et al., 2003). From the
perspective of ownership of a family business, there are also psychological and social
dimensions (Pierce et al., 2003; Mattila and Ikävalko, 2003; Koiranen and Karlsson, 2003),
and all dimensions of ownership are foci when the family business system, ownership, and
management interact.
As a theoretical concept, ownership refers most often to jurisdictional meanings, to
holding the rights to and being responsible for some specific, defined object. The relationship
between family and business has largely followed this reasoning: the research on family
business has treated ownership as a stable phenomenon – that is, a constant used for
explaining various anomalies in the behaviour of family businesses (Rautiainen, Pihkala, and
Ikävalko, 2007). The basic model of ownership involves an owner (subject), an ownable
object (object), and the relationship between them (ownership) (Ikävalko and Pihkala, 2005).
23
Psychological ownership deals with the relation between individual persons and ownable
objects, but does not necessarily address legal ownership (Pierce et al., 2001). In family firms,
the owner is the connector between two social systems: the family and the firm. Nordqvist
(2005) introduces socio-symbolic ownership as processes of social and symbolic interaction
having other attributes than legal and structural ownership: stakeholders and interest groups
create closer ties with the owners and develop a social interaction with both retirees and
succeeding generations. Social ownership takes place during social interaction, includes
negotiations regarding ownership, and results in mutual agreements about ownership
(Brundin et al., 2005). Within a family firm, emotional attachment to ownership may detract
from the firm’s focus on economic goals; thus, a typical family firm violates almost all the
underlying assumptions of traditional governance theories (Mustakallio, Autio, and Zahra,
2002). Long-lived family businesses face particular challenges when both the family and the
business grow older and larger. When ownership disperses, control over the business becomes
harder to exercise (Schulze, Lubatkin, and Dino, 2003). Ensuring the continuity of multi-
century family ownership is challenging (Astrachan, 2010). A family consists of individual
family members who, through their existence and social action, jointly construct the family. A
family business is owned together by several family members and decisions are made
collectively, while at the same time, the members involved are individuals who make their
own decisions. In family business research, open questions continue to exist, especially with
regard to ownership changes during family business development. How does the family
transfer ownership during succession, and what kinds of challenges does business
development pose for ownership? What are the impacts of family members’ shared ownership
on the business? What kinds of situations does this create? The existing research has bypassed
these questions; there is relatively little literature available that is specifically dedicated to
ownership changes in family businesses. Therefore, research into a detailed understanding of
ownership in family business and the role of the family collective as an actor would be
worthwhile. More in-depth case studies are needed to reveal the connections between family,
business ownership, and business.
1.2.3 Portfolio entrepreneurship and portfolios in family business
Entrepreneurship can involve the founding of new, independent firms, as well as the
ownership and development of purchased and inherited independent businesses (Ucbasaran et
al., 2001). Different studies have made a distinction between different types of entrepreneurs.
24
Portfolio entrepreneurship – that is, the simultaneous ownership of several businesses – is
becoming an important theme in small business research. Definitions of portfolio
entrepreneurship and portfolio businesses come primarily from finance, where portfolios have
been one strategy for reducing business risks, as indicated in the following definition of the
concept:
“A group of assets. For individuals, a portfolio might include stocks, bonds, rental
real estate, bank accounts, and collectibles. For businesses, a portfolio is all of the assets
included on the firm's balance sheet. For example, a real estate trust holds a portfolio of
office rental properties (also called investment portfolio).”
The American Heritage Dictionary of Business Terms, 2010
Although originally viewed as a means of reducing business risk, the ownership of
multiple businesses by a single entrepreneur is now recognized as an important growth
strategy. Portfolio entrepreneurship can be defined as a mode of operation in which the
entrepreneur founds, owns, manages, and controls, instead of one company, several
companies at the same time. Portfolio entrepreneurship is usually studied in terms of the
individual, and recent studies often highlight entrepreneurial activity undertaken by teams of
people (Cruz et al., 2008). Curran et al. (1991) studied individuals whose parents were owners
of small firms and noticed that they tended to follow in their parents’ footsteps and become
business owners. In their study of succession processes in a Honduran family business, Cruz
et al. (2008) found that succession focuses on keeping the family in the business through the
development of a portfolio business. For family-owned businesses, a key element of the
dynamics of the portfolio is likely to derive from the resources immediately available to the
family (Carter, Ram, and Dimitratos, 2003). Approaches to portfolio ownership can be seen
as a strategy for family survival, through the introduction of alternative income sources
(Carter and Monder, 2003), as well as a structural regulator to accommodate to business
succession (Ram, 1994; Mullholland, 1997). The portfolio approach also serves the business
logic of wanting to out-perform capital markets through risk diversification for shareholders
inside the business (Schwass, 2008). Carter and Ram (2003) suggest that the analysis of
portfolio enterprises requires taking a portfolio approach to the unit of analysis, with
researchers concerned with addressing each element of the family business (firm, individual,
and family) equally. In different circumstances and contexts, portfolio entrepreneurship
approaches take different forms and perform different functions. There is a need for
25
information on the rationalities for diversification and growth in the business portfolio, but
despite the multitudes of research on firm growth, theoretical development in the field has
been slow. Several researchers are calling for more studies on the creation and growth of
business groups (Low and MacMillan, 1988; Zahra, 2007; Iacobucci and Rosa, 2005).
The ultimate aim of the field of family business studies is to improve the functioning
of family firms (Sharma, 2004). Why would a family not only attempt to increase the scale of
its business but also create enterprise groups by increasing the number of firms under its
control? The emergence of a family business portfolio can be revealed and justified in several
ways, as the family business system, family ownership system, and family system are
constantly changing. A longitudinal portfolio business study in a family business context
reveals, for example, different transitional stages in business (e.g. start-ups, successions, exits,
and acquisitions). In addition, business growth can mean more than a single company's
growth, and to fully understand family business growth, different research perspectives are
required. Family business growth is a process that occurs over time across several generations
through a variety of business transactions. The family keeps its business going by investments
in single businesses and shared investments, and with multiple branches of the family, they
can share control and ownership. This makes on-going family solidarity and perpetuation of
the family firm more difficult. The family institution, with family retreats, family meetings,
family assemblies, family codes of conduct, and family councils, becomes particularly
important. The solution to the problem of pooling capital and sharing risks is the family
business group. Family institutions have always been important to economies, and if the
family members in control of a business group are ethical and competent, the group can be a
valuable asset to its economy (Morck and Yeung, 2003). There are strictly solely individual,
solely business, and solely family elements, as well as operations where all these elements
play a role at the same time. Often and eventually, family businesses become complex
structures, with several branches, diverse interests, and a range of stakeholders. A portfolio
structure could be the result of these developments. The existing literature does not
sufficiently take into account either the role of the family as owners, or the growth of family-
business portfolio groups. There is a clear and present need for longitudinal studies on the
processes involved in portfolio business growth in family businesses and the role of the
family during the existence of a business group.
26
1.3 Research problems and objectives
When conducting a study, one must ask a critical question: what might the theoretical
contribution of this study be – in this case, what might it mean in the context of research on
family business? Will it contribute to the development of theory in the field? Kilduff (2006)
proposes that “the route to good theory leads not through gaps in the literature but through an
engagement with problems in the world that you find personally interesting”. Theory is not
the summation of existing empirical research; upon formulating one’s research idea, one
should examine the existing literature on the topic, and this process should lead to new
research questions. Comparing real-life experience to the relevant literature reveals what has
been already said. In family business research, theoretical development is called for, insofar
as current theory is incapable of addressing the problems encountered in family businesses
today. Applying theory is not the same as contributing to theory (Ready and Whetten, 2011).
To make a theoretical contribution, a study must actually improve theory (Whetten, 1989).
According to Ready and Whetten (2011), there are two ways of improving theory: in the first,
the authors demonstrate that the old theory is not quite right, while in the second, much rarer
manifestation, the authors show us that the old theory was completely wrong. Theorizing is an
integral element of empirical investigation, just as empirical analysis has meaning only
through reference to the theory from which it is generated (Dubin 1969). According to Dubin
(1969), the most important thing in theory building is the notion of unit (concept). Units are
not theories; it is only when the units are put together into models of the perceived world that
theories emerge. Also important is understanding the interaction among units within the
system. Whetten (1989) sets forth the building blocks of a complete theory by pointing out
that a good theory must first and foremost reliably explain a phenomenon of interest. To do
that, some critical questions should be asked. First, what are the key factors critical to
explaining the phenomenon of interest? Secondly, how are these key factors related to each
other? Thirdly, why does this representation of the phenomenon deserve to be considered
credible? And lastly, what are the conditions under which we should expect the predictions of
the theory to hold true?
The strength of building theory from cases lies in the likelihood of generating novel
theory (Eisenhardt, 1989). Reviewing the past literature on portfolio ownership in family
business contexts reveals that little knowledge of the phenomenon exists. Current perspectives
seem inadequate, because they have little empirical substantiation; there is a need for new
27
perspectives. Theory building from a case study is particularly appropriate in situations like
this, as it does not rely on previous literature or prior empirical evidence. It is also suitable
because the phenomenon is complex and difficult to approach. One promising approach for
analyzing portfolios could be a longitudinal embedded case study that involves more than one
unit or object of analysis and is not limited to qualitative analysis alone (Scholz and Tietje,
2002; Yin, 2003). There are three ways of stating the purpose of a study: declarative
statement, question, or hypothesis. An initial definition of the research question is important
in building theory from case studies. The appropriate method depends on the level of the
question and the extent of existing knowledge about the problem.
The focus of this study is one dimension of family business: what happens when
ownership of the family firm shifts to members beyond the first generation. As a system, a
family firm involves three units: 1) the family unit, 2) the individual family member, and 3)
the business unit. The research problem can be addressed in the question:
• How do families use ownership in family businesses?
As a term, use is very ambiguous; originally, the creation of uses was a desire to avoid
the strictness of the rules of common law. In real property law and common law countries, use
(cestui que) amounts to a recognition of the duty of a person, to whom property has been
conveyed for certain purposes, to carry out those purposes (Wikipedia). Common law does
not recognize cestui que use, but affirmed the right of ownership through feoffee use. In
English law, feoffment was a transfer of land or property that gave the new holder the right to
sell it as well as the right to pass it on to his heirs as an inheritance (Wikipedia). Use could
avoid these difficulties by allowing the tenant to convey his land to a friend, on the
understanding that the friend would permit, after the grantor's death, the grantor's designated
persons to have the full benefit and enjoyment of the land. The term use is suitable in a
family-business context since in family businesses, the (legal) inheritance and transfer of all
rights (power and control) from one individual to another makes it possible to determine the
ownership at levels other than the statutory.
The word “using” needs the question “using for what goal” It is important to business
development to understand what motivates family businesses and their individual owners and
what impact their values and goals might have on the nature and performance of business
development. Are family and owner-operated businesses motivated primarily by goals e.g.
28
lifestyle or family-centered goals, and does this impact on their growth and profitability? The
definition of goals in family businesses is ambiguous since family firms aim to achieve a
variety of financial and non-financial goals. The concepts of motivation, goal directed
behavior, and perceptions of successful outcomes are important elements in the
entrepreneurial process (Goldsby et al., 2004). According to Boyd and Gumpert (1983)
entrepreneurs enjoy the opportunity to seek financial and personal rewards. Entrepreneurs are
individuals seeking independence, wealth, and opportunity (Burch, 1986). Gersick et al.
(1997) noticed that family businesses are more likely to be associated with personal, family or
lifestyle dreams than with objective business projections. Sharma et al. (1997) stated that
family business goals differ from the firm-value maximisation goal assumed for the publicly
traded and professionally managed firms. Family businesses accept lower returns or longer
paybacks on their investments and sustain a lifestyle rather than maximise profits or personal
revenue (Dunn, 1995).
Applying Zachary’s (2011) concepts, the importance of the family system and the
development of the field of family business are essential to our understanding of the current
state of our conceptualization and theory building. Ownership is in the key role in this study,
and it has been described as a dynamic element that reveals ownership actions. The aim of
this study is to show the use of ownership in family business by presenting two different
family business cases. There are only few historical studies of family business (Niemelä,
2006; Colli, 2003; 2011), and there is clearly a need for longitudinal case studies of family
businesses conducted over substantial lengths of time. The absence of empirical evidence on
the long-term relationship between family ownership and portfolio development creates a
significant gap in the literature on family business. To better understand family business
ownership, this study uses case studies in building a theory of ownership dynamics in family
businesses. Addressing the research problem requires identification of those elements that will
promote portfolio development and also construction of a theoretical model that will describe
the relationship between these elements.
1.4 Research method overview
The next issue concerns pre-understanding and understanding of family business
ownership. In order to understand and describe the process used in theory building, a
qualitative, hermeneutic approach will be applied. A hermeneutic circle is a dialogical
29
interpretative process between the researcher’s pre-understanding (bias) and (objective)
understanding of a phenomenon, and it is a good tool for developing knowledge. According to
Gadamer (1975), pre-understanding is an intentional structure of feelings and thoughts that
are activated when we regard something as something. The empirical part of this study
consists of two cases: it begins with presentation of a pilot case that will provide pre-
understanding of the phenomenon, while the main case will deepen understanding of the
phenomenon. The pilot case develops the methodological approach used in building the main
case. This study relies on a case study approach incorporating embedded design – that is,
multiple levels of analysis within a single study. The selected research strategy represents
longitudinal, qualitative, hermeneutic, and deductive approaches.
Analysing data is the heart of building theory from case studies (Eisenhardt, 1983). A
historical study poses challenges for data analysis. Historical research is a type of secondary
data analysis to determine past social attitudes and community structure and how these have
changed over time. Historical data is difficult to work with since the data may be affected by
many factors. Data set can be biased or illegible (e.g. letters, diaries) or incomplete. Historical
research is intertwined with a hermeneutic research strategy, because perception is always
based on past interpretations one makes. One aim in historical studies is to provide
explanations for phenomena. The nature of this study is exploratory and descriptive; this is
suitable for a problem that has not been clearly defined. A study’s reliability is not about the
veracity or credibility of the data involved (Yin, 2003). Eisenhardt (1989) points out some
criteria for evaluating reliability: 1) assessment turns on whether the concepts, framework, or
propositions that emerge from the process are good theory, 2) assessment depends upon
empirical issues: strength of method and the evidence grounding the theory, (have the
investigators followed a careful analytical procedure, does the evidence support the theory,
have the investigators ruled out rival explanations), and 3) strong theory-building research
should result in new insights. The point of the process is to develop, or at least begin to
develop, a theory. Methodological factors are examined in more detail in Chapter 4.
1.5 Structure of the dissertation
This study is divided into seven chapters (see Figure 1). The aim of the introduction,
Chapter 1, has been to briefly introduce the topic of the dissertation and to set the stage for the
research problem, the research question, and the purpose of the study. The research design
30
outlines and shapes the framework for conducting the study. Chapter 2 will discuss in greater
depth what has been written on family business, portfolio businesses, and family business
ownership with relevance to the current study and offer a literature review on these subjects.
Chapter 3 presents the theoretical framework used in the study, the central tool for the
empirical analyses to follow. Chapter 4 outlines the methods used, qualitative research
methodology, research strategy and design, and selected cases. Data collection and analysis
methods for case materials are presented in this chapter, as are validity and reliability.
Chapters 5 and 6 contain the empirical case descriptions. The cases introduced – the family
firms Flowergardens Ltd. and John Nurminen Ltd. – act as the basis for the empirical study.
The study will present both companies’ timelines from their beginning until the present day.
In Chapter 7, the results of the study are reviewed in light of prior research and the main
conclusions of the study are presented. Chapter 7 also includes a critical assessment of the
study and presents suggestions for further research. The practical and educational implications
are discussed in the analysis of the empirical study.
Figure 1. Research design of the study
31
2. THEORETICAL REVIEW OF RESEARCH ON FAMILY BUSINESS,
OWNERSHIP, AND PORTFOLIO ENTREPRENEURSHIP
This theoretical review is based on various articles from the field of family business
studies. The literature on family business is presented according to the focus of analysis: the
individual, the family, or the business. This section also provides an overview of the literature
on ownership from different fields – philosophy, law, finance, economics, and psychology –
followed by a discussion of the notions of ownership relevant for this study. In addition, the
motivations for and processes involved in portfolio entrepreneurship are investigated more
deeply. An understanding of each of these three aspects is important, as most of the literature
focuses on only one level as opposed to the conceptually complex domain of multi-level
theorizing.
2.1 Current research on family business
Although family business research is at least thirty years old as a field, only recently
has it attracted significant academic attention. In the past ten years, interest in family business
has become an international phenomenon. Table 1 introduces key topics in family business
research from various perspectives pertinent to this study.
Table 1. Key topics in the field of family business research
TOPIC OF FAMILY
BUSINESS RESEARCH
KEY REFERENCES
RESEARCH FOCUS
Definition of family
business
Astrachan and Shanker, (2003)
Chua, Chrisman, and Sharma,
(1999)
Litz, (1995)
Hoower and Lombard-Hoower,
(1999); Koiranen, (2003); Chua et
al., (1999)
Tagiuri and Davis, (1996);
Koiranen, (2003); Heinonen and
Toivonen, (2003);
three definitions: broad, middle or
narrow
21 different definitions; three qualifying
operational combinations of ownership
and management
complementary approaches: structure-
based and intention-based
involvement of three areas: ownership,
management, and succession
control has to be in the family
32
Habbershon et al., (2003)
interaction of the family unit, the
business entity, and the individual family
members
Family business models
Tagiuri and Davis, (1996)
Habbershon, Williams, and
MacMillan, (2003)
Gersick et al., (1997)
Jaffe and Lane, (2004)
Pieper and Klein, (2007)
classic three-circle model
familiness model; the unique bundle of
resources a particular firm has because of
the system’s interaction between the
family, its individual members, and the
business
dimensional model of the family
enterprise
the family holding company model
open system model
Family business
management
Chrisman et al., (2003)
Lansberg, (1983); Sirmon and Hitt,
(2003); Burt, (1998); Adler and
Kwon, (2002)
personal management style and lack of
sharing control
management of human resources, human
capital, social capital
Family business
performance and
development
Miller, Le Breton-Miller, and
Lester, (2010)
Jaffe and Lane, (2004)
Chrisman et al., (2003); Anderson
and Reed, (2003)
Wortman, (1994)
business growth by acquisitions
governance as a critical issue for long-
term survival
resource-based theory and agency-cost
theory explaining family business
performance and behaviour
survival of the family business in both
the long and short term on a global basis
Succession in family
business
Davis et al., (1998); Miller et al.,
(2006); Morris et al., (1997).
Chrisman et al., (2003)
Handler, (1994); Schein, (1995)
succession from the individual level,
family level, and business level
statistically differentiate intention in
family succession
role of the founder in succession
Family business
entrepreneurship
Kellermanns et al., (2008);
Alizadeh, (1999)
Zahra, (2005)
Johnston, (2007); Sharma, (2004)
Handler, (1989)
Sharma, (2004); Dumas, (1989);
Cole, (1997); Poza and Messer,
(2001); Curimbaba, (2002)
entrepreneurial behaviour and growth,
the family contributes to the likelihood
of individuals becoming entrepreneurs
second-generation behaviour and growth
company founders
next-generation members
women in family firms; father–daughter
dyad, the roles women take in family
firms, gender-related issues
33
Davis, (2007); Astrachan et al.,
(2002)
power issues in the family business
system
Differences between family
and non-family firms
Anderson and Reeb, (2003); Gorriz
and Fumas, (2005); Pajarinen and
Ylä-Anttila, (2006)
Sharma, Chrisman, and Chua
(2004)
Moores, (2009)
Chrisman et al., (2003).
family firms perform better than non-
family firms
differentiation in goals, processes, and
participants
characteristics of differentiation
large family firms and management role
of non-family members
The family business social
group and familiness
Barney, Clark, and Alvarez, (2002)
Habbershon, Williams, and
MacMillan, (2003); Pearson, Carr,
and Shaw (2008); Zellweger,
Eddleston, and Kellermanns,
(2010); Frank et al., (2010)
kinship ties and positive effect upon
entrepreneurial opportunity recognition
familiness as resources
Conflict in
family business
Jehn et al., (2001); Kellermanns and
Eddleston, (2004)
Sharma, (2004)
Harvey and Evans, (1994); Cosier
and Harvey, (1998); Handler,
(1991)
task, process, and relationship conflicts
relationship conflict
interpersonal or inter-family conflicts
Family businesses are inherently complex, and the literature on family business has not
settled on a single, precise definition of what constitutes a family firm. In order to understand
the uniqueness of family business and explain the justification for dedicated research on it, the
definition of family firms, the source of the field’s distinctiveness, and the various facets of
family business performance require clarification (Sharma, 2004). Numerous attempts have
been made to articulate conceptual and operational definitions of family firms. Handler
(1989) pointed out that one of the challenges inherent in this exercise is determining the
criteria by which a business enterprise can be classified as a family firm. Chua, Chrisman, and
Sharma (1999) identified 21 different definitions of family business in their review of 250
research articles. The definitions included three qualifying combinations of ownership and
management. Astrachan and Shanker (2003) present three definitions of family business,
including a broad or inclusive definition, a middle definition, and a tight or narrow definition.
The broad or most inclusive definition demands only some family participation in and control
of the business, while the middle level requires the business owners’ intention to pass the
business on to another member of the family and one or more family members’ playing a role
34
in running the business. The narrow level means that multiple generations have a significant
impact on the business. The level of inclusiveness depends on the perceived degree of family
involvement in the business. Litz (1995) suggests two complementary approaches to
conceptualizing family firms: the first approach is structure-based, focusing on family
involvement in firm ownership and management, and the second approach is intention-based,
focusing on management’s intent to maintain or increase intra-organizational family
involvement. The first approach is consistent with the conventional definition of a family
business. Many researchers have come to the conclusion that the primary definition of a
family business is that control of the business exists within the family (Tagiuri and Davis,
1996; Hoower and Lombard-Hoower, 1999; Heinonen and Toivonen, 2003; Koiranen, 2003).
In her review of 217 articles, Sharma (2004) notes the need for theory building in
family business studies. She claims that a starting point for achieving this ultimate objective is
re-examining the current theories from the fields of family and organizational studies to test
the extent of their validity when these two systems are intertwined. This filtering process will
ensure that the theories developed are valuable, robust, and applicable to the vast majority of
organizations in the world (Sharma, 2004).
Figure 2. Toward the development of family business theories (Sharma, 2004)
Earlier research sought to identify family businesses in terms of ownership,
management, and control structures, as well as trans-generational transfer. While this
provided some insight into the nature of family businesses, it failed to account for why some
firms were identified by their owners or managers as family businesses despite meeting none
Organizational
theories
Family system
theories
Family firm
filter
(When the two
systems
operate as one)
FAMILY
BUSINESS
THEORIES
35
of these criteria. Similarly, it did not account for why other firms, in which these criteria for
being a family business were met, disavowed the title of family business. Recently, research
has shifted to focus on ascertaining the intention and vision of a particular firm as a means of
determining whether it can be defined as a family business. Along with this ‘strategic’ view of
a firm, a perspective has also emerged that examines the bundle of resources (e.g. knowledge,
materials, capital, human resources) available to a particular firm as a way of determining its
status. This resource-based view of a firm suggests a firm is a family business when the role
of a family has a demonstrable effect on the function and performance of an associated
business. While previous definitions and understandings of family business have not been
entirely superseded, there is now a shift in analytical focus to include important components
of business practice, such as intentions, vision, and culture. There is still a need for
information about family businesses’ ability to minimize their inherent weakness and leverage
their inherent strengths.
It is clear that there are peculiarities unique to family businesses. Particularly the
influence and involvement of the family makes family businesses unique. Tagiuri and Davis
(1996) elaborated upon the two-circle system, introducing a third circle in the early 1980s.
Tagiuri and Davis (1996) presented a classic three-circle model consisting of separate areas
with strong interaction between them. In this model, the family business is made up of three
separate but overlapping systems: 1) the business system, 2) the ownership/governance
system, and 3) the family system. In the overlap of these three systems, conflicts arise when
family goals conflict with business goals. Since family members run the business, family
issues are brought into the business, and business issues are carried over into the family. This
three-circle model remains the foundation upon which most family business consultation and
systems analysis is conducted today. According to Gersick et al. (1997), “the reason the three-
circle model has met with such widespread acceptance is that it is both theoretically elegant
and immediately applicable.”
36
Figure 3. The three-circle model of the family business system (Tagiuri and Davis, 1996)
Schwass (2008) found that family businesses can be seen as passing through three
phases, each with its particular interplay of business, ownership, and family issues and its
own culture. The first of these is the 1) entrepreneurial stage, in which an entrepreneur
founds a company. At this level, the business is the important issue. Ownership does not mean
so much, nor is family an issue. The family business culture is undergoing revolutionary
change; the business is new, different, and has to be created first. This is followed by 2) early
generations and smaller families; at this stage, the children of the founder(s) step in. The
family business culture tends to be evolutionary: the business is developing from what the
founders established without changing completely. Ownership is emerging and becomes an
emotional issue. Family members have equal ownership, and family becomes an issue. The
third phase, 3) later generations and larger families, can involve several hundred family
members, each with an inherited share in the business. The family business culture can be
evolutionary, revolutionary, or a mix of both. The issue of ownership really comes to the fore.
Here the business faces one of the most difficult questions: should it continue along the old,
traditional path, or adapt to new market needs? In the sphere of the family, there is a need to
address the larger degree of diversity that comes with a larger number of family members and
the addition of new blood through spouses.
In defining family businesses, researchers have sometimes relied on the factors that
distinguish it from other organizations. Defining the distinguishing differences between
family firms and non-family firms can be used to explain the conceptual and operational
Ownership
Business Family
37
definitions of family firms. There is strong empirical evidence that family and non-family
firms are different in certain dimensions. Several studies (Anderson and Reeb, 2003; Górriz
and Fumás, 2005; Pajarinen and Ylä-Anttila, 2006) support the overall conclusion that family-
owned firms perform better than non-family-owned firms, according to performance
indicators including return on total assets, return on equity, and return on sales (profit
margin). Using cluster analysis to produce a dichotomy between family and non-family firms,
Chrisman et al. (2003) demonstrated that it is possible to statistically differentiate family
firms from non-family firms on the basis of ownership, management, and intention of intra-
family succession without the use of arbitrary cut-off points. On the other hand, a number of
studies have found few or no differences between family and non-family firms in dimensions
such as sources of debt financing, strategic orientation, management and governance
characteristics, and problems and needs for assistance (Welsch, Gerald, and Hoy, 1995;
Coleman and Carsky, 1999; Gudmunson, Hartman, and Tower, 1999; Westhead, Cowling,
and Howorth, 2001). Family firms also differ from rational economic ventures in methods of
operation; they are not homogeneous (Reid et al., 1999). Ward (2002) points out that there are
different types of family firms. In some families, economic rationality dominates decision-
making, while for others, a ‘family first’ ethos takes precedence. There are also family firms
that respond to both economic and family considerations. An overly broad definition
encompasses firms that may not be family firms, while an overly narrow one can result in a
possible loss of important subjects (Handler, 1989). Accordingly, this study defines family
businesses by integrating the components of majority ownership, family involvement in
management and operations, and the presence of multiple generations. This study will
consider a family business as a business in which a family possesses controlling ownership,
controlling management, and the ability to pass these elements to the next generation. This
definition is close to Astrachan and Shanker’s (2003) narrow definition, which involves a
scenario in which multiple generations have a significant impact on the firm.
2.1.1 Family business management
Many empirical studies on family business management have revealed that the success
of family firms depends on the effective management of the overlap between family and
business (Sharma, 2004). When management transfers from one generation to the next, the
transition is often far from orderly. In addition, as the company develops, there is a need for a
management style that goes beyond survival thinking (Barnes and Hershon, 1994). The
management of human resources in family firms has also been studied when family norms
38
and business norms overlap (Lansberg, 1983). The issue of survival over the long term is
based on business strategy and family strategy. Studies should focus on the interactions
between family systems and business systems (Wortman, 1994). Jaffe and Lane (2004)
studied large-scale family dynasties and their ability to survive from generation to generation.
They noticed that the most critical issue was governance. Corporate governance is defined as
the internal and external mechanisms of discipline used to steer the behaviour of corporate
management toward the interests of stakeholders (Lambrecht and Uhlaner, 2005). Key to
effective governance of a family business is recognizing when the family business is
transitioning from one stage to another and designing revisions to the governance structure
that will meet its needs in the next stage (Gersick, Davis, and Hampton, 2003).
Without a dominant paradigm for family business management, typical management
issues have revolved around succession, conflict resolution, strategic planning, boards of
directors, consulting, and so on. (Chrisman et al. 2003). Often a dichotomy is created between
the ‘family’ and the ‘business’, in which these are claimed to form distinct subsystems
interacting so as to comprise a whole system known as the ‘family business’. If family
dynamics and business dynamics demonstrably interact and influence each other, then
researchers contend that a synthesis exists between the two, meaning the emergence of a new
and unique system identified as a ‘family business’. More attention should be directed at the
levels of firm and business. There are few or no studies of the environments in which family
businesses operate. In terms of strategy, investigations should be carried out to discover the
issues most critical in family businesses.
Firms use, however, economic criteria such as profits, market share, and efficiency to
measure performance. Research on family firms indicates that family goals and needs often
drive decisions regarding location, financial strategy, and business strategy (Ward, 1988;
Kahn and Henderson, 1992; Mishra and McConaughy, 1999). Ward (1988) finds that family
businesses encourage family-oriented environments and inspire strong employee loyalty.
Family firms tend to bring out better performance in their employees (Moscetello, 1990) and
are seen as having greater trustworthiness (Ward and Aronoff, 1991; Tagiuri and Davis,
1996). Anderson and Reed (2003) determined that company performance increases until a
family owns about third of the business, after which it tends to decrease. Research also
indicates that good preparation of the next generation and its positive relationship with the
senior generation has a significant influence on the next generation’s performance (Sharma,
39
2004). This supportive relationship will smooth transition of knowledge, social capital, and
networks across generations.
Sirmon and Hitt (2003) studied resource management in family firms and found that
the most important resource for a family firm is its human capital. It is, nevertheless,
complicated by the close proximity of dual relationships. Members of the family participate
simultaneously in both business and family relationships in their personal and professional
lives. Whereas human capital focuses on individual attributes, social capital involves
relationships between individuals or between organizations. Human capital refers to
individual ability; social capital refers to opportunity (Burt, 1998). According to Adler and
Kwon (2002), social capital affects a number of important company activities, like inter-unit
and inter-firm resource exchange, the creation of intellectual capital, inter-firm learning,
supplier interactions, product innovation, and entrepreneurship. Lambrecht and Uhlaner
(2005) suggest that there should be an active and long-term commitment to the family,
business, and community and to balancing these commitments with each other. The building
blocks for responsible ownership include articulation of shared values, the socialization of
subsequent generations, acquiring competences and skills, strategic planning of the family
and of the business, informal gatherings, and setting up formal family governance structures
(Lambrecht and Uhlaner, 2005). Although improved financial performance may be one
possible outcome of close monitoring of the firm, responsible ownership, especially with
respect to other stakeholder groups, may also lead to other consequences, such as greater
corporate responsibility, better employer, and overall economic growth.
2.1.2 Development of family business
Entrepreneurship theory suggests an enterprise goes through a period of dynamic
growth in its initial phase up to a certain point of time when it reaches the mature phase.
According to Ward (1997), the popular perception is that family-owned businesses do not
grow. He lists several special challenges to growth that are unique to family-owned
businesses: 1) maturing business life cycles and increasing competition, 2) limited capital to
fund both family needs and business growth needs, 3) weak next-generation business
leadership, 4) entrepreneurial leadership’s inflexibility and resistance to change, 5) conflicts
among sibling successors, and 6) disparate family goals, values, and needs. On the contrary,
Heinonen and Stenholm (2006) found no evidence of or reason for growth in family
businesses that diverge from those of non-family businesses. Their conclusion is that, due to
40
less risky behaviour, growth in family businesses is realised in a more moderate way in the
short run, while a higher level of sustainability and economic performance is attained in the
long run. At the same time, the lower growth rate in the short run is due to the family
businesses’ often-perceived reluctance to bring in external investors in order to avoid sharing
control. For many family businesses, the stability of the enterprise and its maintenance for
future generations is more relevant than short-term growth.
The unique contribution of family development theory to studies of family businesses
lies in its focus on explaining how families change (White, 1991). Early formulations of the
theory suggested that families pass through a predetermined sequence of life-cycle stages.
According to Mattssich and Hill (1987), one criticism was that many families did not fit into
the normative life cycle and the theory ignored the historical timing of significant life events.
According to White (1991), family development has no determined cycle; rather it is a
stochastic process. Stages are marked by events, such as marriage, birth, death, and divorce
that change the structure of the family. White (1991) also stresses that the timing and
sequencing of these events determine how families function as they move into the next stage.
During the family business life cycle, the family will pass through different phases, and
several models have been developed to describe and analyze the various stages that family
businesses go through during their existence. The founder starts as an entrepreneur; over time
and generations, the business holds the branches of the family that emerge after the founding
generation together (Schwass and Diversé, 2006). The business is part of the family’s history
and tradition, and it is difficult to see it simply as an investment forming part of the family’s
overall wealth (Schwass and Diversé, 2006). There has been little insight into the evolution of
the processes of wealth development in family businesses over time. The factors that
influence this development also deserve more detailed examination. According to Schwass
and Diversé (2006), as a family business develops, there is a need to think strategically about
the family’s financial position and design a new structure and a plan of action – the family has
now become a family-in-business.
Gersick et al. (1997) conclude that there are two perspectives to explain how
organizations and the behaviour of the entrepreneur change over time. The first focuses on the
external social and economic forces exerting pressure on the organizations. The other
perspective is based on organizational life-cycle models, where companies change in a
sequence of predictable stages, partly motivated by internal environmental conditions, but
41
mainly due to complex maturation factors within the organization. The environment
influences organizational development; the internal perspective suggests that the entrepreneur
assumes a more active than reactive role in the development and success of the venture.
Gersick et al. (1997) have adopted a variation of the three-circle model, choosing to focus on
family, ownership, and business and breaking each up into an individual life cycle. The result
is a three-dimensional matrix they call their ‘dimensional model’ of the family enterprise.
This developmental model of family businesses was one of the first models that made a real
attempt to look at family businesses as three independent yet interdependent systems.
the
Figure 4. The dimensional model of the family enterprise (Gersick et al., 1997)
When the founder starts a business, he or she must decide its form: sole proprietorship,
partnership, corporation, or limited liability company. Which of these forms is right depends
on the type of business the founder wants to run, how many owners it has, and its financial
standing. In family businesses, the owners usually choose a business entity that takes
advantage of what the entity could offer in capitalization, income tax, and management
structure. Usually the business begins with a single owner. Over time, the family business
moves through sibling partnership to cousin consortium (Gersick et al., 1997). However, it
can also take the form of a company owned by combinations of family members, public
shareholders, or other companies. The structure and distribution of ownership affects other
business and family decisions, as well as operations and strategy. By the time the family
reaches the dynasty stage, it is a given that the diversity of the ownership group will be an
issue if there are a substantial number of heirs or beneficiaries (Jaffe and Lane, 2004). This
diversity involves business skills, motivation, temperament, and lifestyle issues.
Maturity
Expansion/formalization
Start-up
Ownership axis
Controlling owner
Sibling partnership
Cousin consortium
Business axis
Family axis
Young business
development
Entering the
business
Working
together
Passing
the baton
42
Andersson and Reeb (2003) note that family ownership is a very effective
organizational structure. The structure of ownership in a family business can remain static for
generations, even as the individual owners change (Gersick et al., 1997). The search for
understanding of a family business throughout its life cycle must be supported by the
understanding of the owning family and ownership behaviour. This wide usage of the concept
of ownership often results in a paradox in research, as it is seldom explicitly defined, or tends
to be defined depending on the analytic purpose (Foss and Foss, 2001). Gersick et al. (1999)
note that there are three main forms of ownership structure, inevitably with many variants:
controlling owner, sibling partnership, and cousin consortium. According to Lansberg (1983),
cousin consortia are reported to be relatively rare in the United States but frequently found in
Europe, Asia, and Latin America. Table 2 presents the different ownership stages and
dominant shareholder issues in an evolving family business.
Table 2. Ownership issues in an evolving family business (Gersick et al., 1999)
Ownership stage
Dominant shareholder issues
Stage one: the founder(s)
• Leadership transition
• Succession
• Spouse insurance
• Estate planning
Stage two: the sibling
partnership
• Maintaining teamwork
and harmony
• Sustaining family
ownership
• Succession
Stage three: the family dynasty
(also called the cousins’
confederation)
• Allocation of corporate
capital: dividends debt and profit
levels
• Shareholder liquidity
• Family tradition and
culture
• Family conflict resolution
• Family participation and
role
• Family vision and mission
• Family linkage with the
business
43
While Gersick et al. (1997) present a model of generational evolution, Jaffe and Lane
(2004) present the family holding company model (see Figure 5), which describes how
complex multigenerational family businesses and investments can be. When a family business
develops, it becomes a multigenerational business with several family branches. Jaffe and
Lane (2004) outline the key challenges that a family must face to create an effective dynasty
over generations. They show that when a family business faces continual changes in the
business environment and in internal pressures as people develop, the family must come up
with a clear infrastructure to manage the interrelationship of people, business, and investment.
Figure 5. The family holding company model (Jaffe and Lane, 2004)
There is a growing interest in system models of family business. As with system
models in general, the tendency has been from closed to open systems (Pieper and Klein,
2007). The classical three-circle model (Tagiuri and Davis, 1996) and its later applications
(Gersick et al., 1999) have addressed the interlinking of three separate systems in family
firms: family, business, and ownership. System theories have not only been popular for the
purpose of describing actual phenomena, but also for their role in general scientific thinking.
They form platforms for academic reasoning (Newman and Peery, 1972), and this could also
be the case in family business research. Despite crucial differences between closed and open
system models, in both theoretical and empirical considerations (Chick and Dow, 2005), there
is surprisingly little focused research on the closed-open dynamics of family business system
models. An open-systems approach (Pieper and Klein 2007) is used in combining the various
elements of a family business. It addresses the unique characteristics and diversity of family
businesses and the dynamics among family business subsystems, offering multiple levels of
analysis. Ashmos and Huber (1987) note that the system paradigm in general assumes that
44
“systems are composed of interrelated components and that the properties of both the system
and its components are changed if the system is disassembled in any way.”
2.1.3 Family business consists of individual actors
Low and MacMillan (1988) suggest that entrepreneurship should be defined as the
“creation of new enterprise”. The purpose of entrepreneurship research should be to “explain
and facilitate the role of new enterprise in furthering economic progresses”. Low and
MacMillan (1988) continue by stating that entrepreneurship studies could and should be
carried out at multiple levels of analysis and that these analyses could and should complement
each other. Schumpeter (1934) had already linked the entrepreneurial initiatives of individuals
to the creation and destruction of industries as well as to economic development. He says that
it is individuals who carry out entrepreneurial initiatives; these often result in innovations,
which may in turn alter existing industries. So far, research on family businesses has focused
on a few different objects at the individual level. Studies have been conducted on company
founders, the role of the founder in succession, and creating organizational culture (Handler,
1994; Schein, 1995). Founders have an anchoring role in their firms and a significant
influence on corporate culture, values, and performance (Sharma, 2004; Schein, 1995). There
have been efforts to understand leadership by comparing family leaders and their relationships
to non-family leaders, as well as their relationships with other family and non-family
members (Chrisman et al., 2003; Sharma, 2004). In a family business, tenures are longer, and
due to their centrality of position in the family and the firm, founders exert considerable
influence on culture and performance. Family businesses face challenges due to duality or
multiplicity of roles (i.e. as father, husband, and president of the company), and problems can
occur when one family member acts out a role inappropriate for the situation (Johnston,
2007). Family life has an effect on the development of individuals. A significant amount of
research on founders focuses on the theory of development stages (Sharma, 2004). So there is
a need to subject these conceptual ideas to empirical tests to gauge their validity and
generality in practice.
Next-generation family members have also been an important group in research. So
far, researchers have focused on studying successors, stakeholders, women, and non-family
employees. There have been studies of next-generation members in which, for example, the
power issues in the family business system can be difficult to resolve because of the way
power is distributed among individuals in the three circles of the family business system
45
(Davis, 2007). Astrachan et al. (2002) have developed a scale, F-PEC, for assessing the extent
of family influence on a business organization, using the dimensions of power, experience,
and culture. The power scale articulates the interchangeable and additive influence of family
power through ownership, management, and governance. The experience scale measures the
breadth and depth of the dedication of family members to the business through the number of
individuals and generations of family members involved in the business. The culture scale
measures the family’s commitment to the business and its values. An important point made by
Astrachan et al. (2002) is that family power is defined not only by ownership (voting power)
but also by family participation in boards and management. They note that power, experience,
and culture are important and influence the business organization. The power of the family
has a strong affect on ownership, management, and governance. Stakeholders have also been
studied from the individual point of view by Freeman (1984), who identified 16 generic types
of stakeholders, although he did not identify family members as a separate group. However,
Sharma (2001) extended this concept into the family business context and drew a distinction
between internal and external stakeholders of family firms. Those involved with the firm as
employees and/or owners and/or family members are referred to as internal stakeholders.
Stakeholders who are not linked to the firm but have the capacity to influence its long-term
survival and prosperity are referred to as external stakeholders.
Even though it has been said, that women in family firms continue to remain in the
background, their observations, intuition, and emotional capital can make a difference
between the success and failure of a family firm (Sharma, 2004). Dumas (1989) studied
similarities and differences between father–daughter dyads in family-owned businesses with
the literature on father–son dyads in family-owned businesses. Cole (1997) interviewed
women and other family members about how gender-related issues affect their work. There
are also studies that characterize the roles that women in family firms tend to take (Poza and
Messer, 2001; Curimbaba, 2002), but this does not explain, for example, the implications of
these roles for firm performance. There is a rising trend to study women as owners and
managers, but no systematic research has yet been conducted on the factors that lead women
to positions of leadership or ownership of a company (Sharma, 2004). Non-family employees
have also caught the interest of researchers as an important stakeholder group (Chua et al.,
1999; Gallo, 2004). Non-family employees possess idiosyncratic knowledge of the firm that is
valuable when mentoring future generations. In large firms, non-family members have been
found to play a critical role in strategic decision-making (Chrisman et al., 2003). The field of
46
family business has not explicitly identified the entrepreneurial potential of the family
ownership group nor adequately delineated the strategic requirements for families in wealth
creation (Habbershon and Pistrui, 2002).
2.1.4 Family relations, familiness and succession
All forms of social organization experience conflicts. Developing conceptual models
to understand the nature, causes, and implications of conflicts is just the beginning. So far,
three types of conflicts have been conceptualized in the literature (Jehn et al., 2001): task,
process, and relationship conflicts. Most of these studies have been cross-sectional in nature,
focusing on static levels of conflict instead of temporal issues. Task conflict is an awareness
of differences in viewpoints and opinions pertaining to a group task. Process conflict is
associated with lower levels of productivity and group morale. Relationship conflict is
detrimental to individual and group performance (Sharma, 2004). Kellermanns and Eddleston
(2004) found that task and process conflicts interact with relationship conflict to influence
company performance. Research indicates that the relationship between conflict and
performance is moderated by the ownership structure of the firm (Kellermanns and Eddleston,
2004). When the business matures and more complex organizational forms emerge between
the family and the firm, there will be more conflicts between family members. Usually these
conflicts manifest themselves in the form of normative contradictions whereby what is
expected from individuals in terms of family principles often violates what is expected from
them according to business principles (Lansberg, 1983). Many healthy businesses are sold or
destroyed due to family disputes rather than business failings (Carlock and Ward, 2005).
The role of the family is seen as very important to determining the vision and control
mechanisms used in a firm, as well as creation of unique resources and capabilities (Chrisman
et al., 2003; Habberson et al., 2003). Family-owned businesses typically have a set of shared
traditions and values that are rooted in the history of the firm. Depending on how they are
viewed, these traditions and values can be a positive or a negative influence. Members of the
family are first exposed to the traditional issues arising from family relationships: family
culture, parent–children interactions, sibling rivalry, gender, ethnicity, change, and conflict.
Family businesses may include numerous combinations of people, including husbands and
wives, parents and children, extended families, and multiple generations, in the roles of
stockholders, board members, working partners, advisors, and employees. Extended family
members can play a wide range of roles in a family business. Family firms tend to coordinate
47
family members in the firms better than non-family firms do their executives and staff (Brice
and Jones, 2008). The literature (Hall, Melin, and Nordqvist, 2001; Chrisman et al., 2003)
shows that the competitive advantages of family firms are based on their organization’s
inimitable family-based culture. Specific and distinctive qualities of family firms include
goals that support family members and values of altruism (Brice and Jones, 2008). A family
business’s culture is the product of beliefs, values, and goals embedded in its history and
social ties (Hall, Melin, and Nordqvist, 2001). The generational transfer of beliefs and values
creates a stable family culture and family business.
The family may have a vision for trans-generational value creation (Chrisman, Chua
and Litz 2003). This familial coalition generates distinctive familiness (Habbershon and
Williams, 1999). When trying to build a familiness model, researchers have used different
perspectives and views to explain what familiness means in family businesses. Family firms
feature unique constructs, and it is important for the family business that the development of
this construct continues. Researchers have defined and identified the construct of familiness
as resources and capabilities that are unique to the family’s involvement and interactions in
the business (Habbershon, Williams, and MacMillan 2003; Pearson, Carr, and Shaw 2008;
Zellweger, Eddleston, and Kellermanns 2010; Frank et al. 2010). Habbershon and Williams
(1999) were the first researchers who introduced the term familiness; later on, Chrisman,
Chua, and Liz (2003) defined it as resources and capabilities related to family involvement
and interactions. Habbershon, Williams, and MacMillan (2003) used the concept of familiness
to characterize those interactions between individual family members, the family unit, and the
business. Familiness leads to systemic synergies with the potential to create competitive
advantages or disadvantages for the firm. Building upon the resource-based view, Habbershon
and Williams (1999) named the bundle of resources distinctive to a firm as a result of family
involvement as the familiness of the firm. However, Nordqvist (2005) suggested that not all
family firms have familiness capabilities that are unique, inseparable, and synergistic over
time, attributes needed to provide competitive advantage. Nevertheless, even if they lack of
these unique resources, it could be possible for such family firms to survive.
The prime objectives of many family businesses are the same as those of other
businesses, “to maintain control and pass on a secure and sound business to the next
generation” (Errington and Lobley, 2002). Succession is viewed by many scholars as a long-
term process involving multiple activities (Handler 1994; Sharma, Chrisman, and Chua,
48
1997). In the field of family business research, much attention has been directed at the topic
of succession (Koiranen, 2003; Hoower and Lombard-Hoower, 1999; Tagiuri and Davis,
1992; 1996). Successions have been studied at the individual level, family level, and business
level (Davis and Harveston, 1998; Miller et al., 2003; Morris et al., 1997). At the individual
level, the founder plays an important role; these studies concluded that a majority of leaders
of family firms want to retain control within the family beyond their personal tenure
(Astrachan et al., 2002). The incumbents and successors are in critical roles during the
transition process. Sharma et al. (1997) found that, in the succession planning process, the
successor’s role and his or her will to take over leadership of the firm is the force that controls
the transition process. Understanding the interests of next-generation family members is
crucial, as their careers and lives are involved in the firm.
Problems occur between the founder and the next generation in managing human
resources. Lansberg (1983) suggests that ownership and management should be separated so
that there are a distinct ownership perspective and management perspective. From an
ownership perspective, relatives would be subject to all the norms and principles that regulate
family relations, while from a management perspective, relatives would be affected by the
firm’s principles (Lansberg, 1983). In family businesses, ownership is usually shared with
other family members. Sometimes the business serves the family; sometimes the family
serves the business (Reid et al., 1998). There are families where economic rationales
dominate decision-making, families where the family ethos comes to the fore, and families
who respond to economic and family considerations together. Reid et al. (1998) conclude that
a considerable number of family firms may be lifestyle- rather than growth-oriented
businesses. Transfers of ownership and management and conflicts of interest may also create
inefficiencies that limit the ability of family businesses to create or renew distinctive
familiness (Chrisman et al., 2003). Due to their dissatisfaction with existing definitions,
several authors have shifted their approach to identify the ‘essence’ of a family firm, through
the question of the family’s influence in strategic decision-making (Davis et al., 1989;
Handler, 1994; Shanker et al., 1996).
2.2. Dimensions of ownership
Scholars in the field of finance have carried out much of the research on ownership,
and the majority of empirical research to date on ownership focuses on ownership structures
49
and financial performance (Uhlaner, 2008). There is substantial literature on certain aspects of
ownership, but very limited literature on ownership dynamics and business-owning groups.
Table 3 presents ownership research in family business contexts important for this study.
Table 3. Ownership research in family business contexts
TOPIC OF FAMILY
OWNERSHIP
RESEARCH
KEY REFERENCES
RESEARCH FOCUS
Ownership definition
Chrisman et al., 2003; Brundin et al.,
(2005); Pierce et al., (2003)
Koiranen, (2003); Heinonen-Toivonen,
(2003); Hoower-Lombard-Hoower,
(1999); Niemelä, (2006)
legal–financial, psychological,
responsible, socio–symbolic and
identified dimensions
in family businesses, the concept of
ownership is central
Family ownership
models
Gersick et al., (1997)
three stages of ownership evolution
Family ownership
groups
Astrachan, ( 2010); Johnston, (2004)
members of a family or kin-related
group, the family business social
system
Family ownership and
control
Schulze, Lubatkin, and Dino, (2003)
Ward, (2001); Davis, (2007); Gersick et
al., (1997)
Sharma, (2001)
Chrisman et al., (2003); Gallo, (2004)
ownership disperses and control
becomes harder to exercise
families give up ownership slowly
internal and external family firm
stakeholders
non-family employees as
stakeholders
Differences between
family and
non-family firms
Johnston, (2004)
Anderson and Reeb, (2003); Gorriz and
Fumas, (2005); Pajarinen and Ylä-Anttila,
(2006)
primary criterion in comparisons has
been ownership
family-owned firms perform better
than non-family-owned firms
Ownership succession
in family business
Ward, (2001); Gersick et al., (1997)
family firms move through six
possible ownership patterns:
entrepreneurship, owner–manager,
family partnership, sibling
partnership, cousins’ collaboration,
and family syndicate
Family business
development
Franks et al. (2010)
from family-owned enterprises to a
significant share of ownership
50
Ownership as a relationship between people and ownable things is a very complicated
issue to research, and the concept of ownership can be defined in several ways. Most often, it
is seen as legal or economic ownership. Rousseau (1950[1762]) stated that civil society
probably began when a person fenced off a piece of land and took it into his head to claim
‘this is mine’, and others accepted this declaration. According to Grunebaum (1987),
ownership is the relationship between the subject (owner) and the object (target). He relates
ownership of property to personal autonomy, as a set of relations constituted by rights and
responsibilities among persons with respect to things. This means that ownership is a much
broader concept than a particular legal regime and the status based on it.
Under certain conditions, formal ownership leads to, for instance, psychological
ownership, and it can also be felt towards non-physical entities such as ideas, words, artistic
creations, and other people (Pierce, Kostova, and Dirks, 2003). Feelings of ownership towards
various objects have important and potentially strong psychological and behavioural effects.
Kuratko, Hornsby, and Naffziger (1997) noticed that business owners are motivated by more
than just extrinsic rewards, such as increasing personal income. They suggest that intrinsic
rewards (e.g., meeting challenges), independence (e.g., maintaining personal freedom), and
family security (e.g., building a business) are important and motivating. Business success is,
then, about more than financial success. The structure and distribution of ownership affects
business and decisions and the strategies used in business.
Table 4. Types of ownership (Koiranen, 2006)
Type of ownership
Character
Nature
Routes
Legal–economic
Socially constructed
and institutionalized
Absolute, verifiable,
easily transferable
Social
agreements, like
law
Psychological
Emotional
Relativistic
Processual
Intimate knowing
Controllability
Self-investment
Social, i.e.
socio-psychological
and socio-symbolic
Socially constructed
and/or internalized in
a process of
interaction
Relativistic
Processual
Values,
Symbols,
Learned and
shared meanings
Koiranen (2006) has compared different dimensions of ownership and their characters,
natures, and routes (see Table 4), revealing the multidimensionality of ownership. In addition
51
to legal and economic ownership, a family firm can be the object of psychological ownership
and socially, role or identity constructed by possession, in the process of interaction
(Koiranen, 2006). Although ownership is usually seen in terms of a legal or financial,
typically subject–object association, it is multidimensional in nature and operates both as a
formal (objective) and psychologically experienced phenomenon (Pierce et al., 2001). Other
forms of ownership also exist, such as psychological, social-psychological, and socio-
symbolic ownership. These forms of ownership can exist even without legal ownership and
are typically based on emotions and feelings. Psychological ownership is recognized foremost
by the individual who holds this position. The personal/psychological dimension includes
“goals, ambition, motivation, commitment, responsibilities, and other things in the mind of an
owner that link him to the target of owning” (Mattila and Ikävalko, 2003). Property and
ownership are both real as well as psychologically experienced, as they exist in the ‘mind’
(Etzioni, 1991). Etzioni (1991) extended ownership from legal–economic to a more
psychological (emotional and behavioural) dimension. According to Etzioni (1991),
“Ownership is a dual creation, part attitude, part object, part in mind, part real”. It is the
individual who manifests the experienced rights associated with psychological ownership.
Socio-symbolic ownership (based on a status, a role, or an identity) extends the meaning of
ownership beyond its general financial, legal, and structural definition; it is constructed by
possessions (Nordqvist, 2005). Socio-psychological ownership refers more to possessing
something through (affective and collectivistic) emotions. In socio- psychological and socio-
symbolic ownership, one’s possessions are experienced as extensions of the self (Dittmar,
1992).
2.2.1 Legal ownership and property rights
“Ownership: The total body of rights to use and enjoy a property, to pass it on
to someone else as an inheritance, or to convey it by sale. Ownership implies the
right to possess property, regardless of whether or not the owner personally
makes constructive use of it.”
Webster’s New World Law Dictionary (2006)
Property rights are fundamental to economic analysis; ‘property’ is a general term for
the rules that govern people’s access to and control of things like land, natural resources,
means of production, manufactured goods, and also (in some accounts) texts, ideas,
52
inventions, and other intellectual products. The first possession theory of property holds that
ownership of something is justified simply by someone seizing it before someone else does
(Lueck, 1995). First possession has been the dominant method of establishing property rights,
and this rule grants an ownership claim to the party that gains control before other potential
claimants. There have been several discussions and speculations about property in the past;
Plato stated in The Republic that collective ownership was necessary to promote common
pursuit of the common interest, and to avoid the social divisiveness that would occur “when
some grieve exceedingly and others rejoice at the same happenings”. In Politics, Aristotle
responded that private ownership promotes virtues like prudence and responsibility: “When
everyone has a distinct interest, men will not complain of one another, and they will make
more progress, because everyone will be attending to his own business” (Waldrow, 2010).
The right to own is a well-protected tradition and can be regarded as the key axiom of the
market economy. The scope and limits of ownership can be derived from laws and court
decisions. It is a source of power and makes proprietorial decision-making possible, it creates
a domain, and it is sometimes manifested by symbols. Property is a target of taxation and can
be transferred, and it is also source of giving (philanthropy). Ackerman (1977) defined three
different types of property arrangements: common property, collective property, and private
property. In a common property system, resources are governed by rules intended to make
them available for use by all or any members of the society. Collective property is a different
idea: here the community as a whole determines how important resources are to be used.
Private property is an alternative to both collective and common property. In a private
property system, property rules are organized around the idea that various contested resources
are assigned to the decisional authority of particular individuals (or families or firms).
Although property is a system of individual decision-making, it is also a system of social
rules.
Legal ownership is the state or fact of exclusive rights and control over an asset; in
general, the ownership of an asset consists of three elements: the right to use the asset, the
right to appropriate the returns from the asset, and the right to change its form, substance, and
location (Libecap, 1999). Weber (1947) suggests that control of an enterprise is based on
private ownership. Legal ownership is the form recognized foremost by society, and hence the
rights that come with ownership are specified and protected by the legal system. The
responsibilities that come with legal ownership are often an outgrowth of the legal system
(Pierce et al., 2003). The motives met by legal ownership are instrumental or utilitarian
53
functions. Legal ownership is based on institutionalized agreements and is protected by law. It
is formal and governed by conditions recorded in a written legal agreement. Legal ownership
changes when the owner sells or buys assets. A person can also inherit ownership, be given it
as a gift, or, especially in family businesses, receive it through succession. The target can be
the whole company, part of it, or just its business. A change in ownership will transfer rights,
title, and interests from the current owners to another party. Research on ownership in a
family business context shows that as the concentration of ownership increases, owners have
more incentive and ability to get involved with running the company (Hoopes and Miller,
2006).
2.2.2 Psychological and behavioural sides of ownership
Psychological ownership has gained increased interest among researchers in recent
years (Pierce, Kostova, and Dirks, 2001; 2003; Hall, 2005; Mattila and Ikävalko, 2003;
Ikävalko and Pihkala, 2005). The theory of psychological ownership has been developed with
the aim of analyzing the employee–organization relationship (Lubinski, 2007). Psychological
ownership is the psychologically experienced phenomenon in which an employee develops
possessive feelings for the target (Van Dyne and Pierce, 2004). Independently of legal
ownership rights, the employees’ feelings of ownership explained changes in their attitudes
and behaviours. Recently, some family business scholars have picked up on the basic ideas of
this theory and stressed the need for further studies about the psychology of family ownership
(Van Dyne and Pierce, 2004; Sharma, 2004; Pierce, Kostova, and Dirks, 2001).
The greater the amount of control a person can exercise over certain objects, the more
they will be psychologically experienced as part of the self. Pierce, Kostova, and Dirks (2001)
propose a frame for a theory of psychological ownership. They define the roots of
psychological ownership, the reasons for its existence. They state that psychological
ownership emerges because it satisfies both generic and socially generated motives of
individual human beings. The motives are:
• Efficacy and effectance. It is important for an individual to be control. The
potentiality of being in control, being able to do something with regard to the
environment and to be able to gain the desirable outcome of actions are
important factors in creating psychological ownership.
• Self-identity. People use ownership as for the purpose of defining, expressing
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their self-identity to others.
• Having a place. This motive arises from the need to have a certain personal
area, a ‘home’. This includes both actual places and objects.
Hall (2005) has analyzed the sources of psychological ownership. These sources
include the ability to use and control the use of objects, the intimate knowledge of the target
(leading to a fusion of the self with the object), and self-investment in the target – in this case,
the family firm. Through a lived relationship with objects, individuals come to develop
feelings of ownership for those objects (Pierce, Kostova, and Dirks, 2003). People come to
find themselves psychologically tied to things as a result of their active participation or
association with those things. At times, psychological ownership may have a dark side. Much
like the overly possessive child, individuals may be unwilling to share the target of ownership
with others, or they may feel a need to retain exclusive control over it. Such behaviours will,
in turn, likely impede co-operation. People may also become preoccupied with enhancing
their psychological possessions and, for instance, obsessed with improving their ‘toys’ at the
cost of their family or community. Psychological ownership may also lead to deviant
behaviours, defined as voluntary behaviours that violate group norms and threaten the well-
being of the group or its members. Individuals separated against their will from that for which
they feel strong ownership (e.g., due to a restraining order, divorce, or estrangement) may
engage in deleterious acts such as sabotage, stalking, destruction, or physical harm as opposed
to letting others control, come to know, or immerse the self into the target of ownership
(Pierce, Kostova, and Dirks, 2003). They are likely to support change in a target towards
which they feel ownership when the change is self-initiated, evolutionary, and additive. On
the other hand, individuals are likely to resist change in a target of psychological ownership
when the change is imposed, revolutionary, and subtractive in nature. Empirical material
(Lubinski, 2007) proves that ownership is not sufficiently described as a legal agreement
alone, but also has to be understood as a culturally embedded construct. Especially in family
firms, in which the owner–business relationship is a part of a family culture and tradition, this
aspect is of high relevance for continuity, longevity, and success. In order to take this into
account, the psychology of ownership is of major importance.
In the field of behavioural finance, researchers study the behaviour of the individual in
decision-making. A large part of knowledge about behavioural finance on the level of
individual decision-making in markets stems from psychological research. Zellweger and
55
Astrachan (2008) have studied the emotional value of owning a firm for individuals. They
noticed that owners value non-financial aspects of the ownership stake. They define
emotional value as that part of willingness to accept unexplained by the financial value of the
ownership stake and the private financial benefits of control accruing to the owner. Zellweger,
Frey, and Halter (2005) showed that behavioural aspects play a significant role in how
managers of privately held firms make investment choices. There are two different
approaches towards behavioural finance. Both models try to explain observed prices, market
trading volume, and individual behaviour; the psychological results of individual behaviour
are screened to find an explanation for observed market phenomena (Glaser et al., 2003;
Ritter, 2003). If we look at ownership from the investor’s point of view as a behavioural
aspect of it, we can talk about the psychology of the investor. Behavioural ownership research
has usually painted a negative picture of it. There are four classes of anomalies: they have to
do with 1) investors’ perceptions of the stochastic process of asset prices, 2) investors’
perceptions of value, 3) the management of risk and return, and 4) trading practices (De
Bondt, 1998; Thaler, 1999).
2.2.3 Collective ownership
The category of social ownership was first extensively studied within the sphere of
property rights economics, a forerunner of institutional economics (Stallaerts, 1992), and it
has become a permanent source of debate. Social property is a special form of collective
property of means of production and other resources such that they belong to the community
and not to one collective, group, or individual (Stallaerts, 1992). Individuals can own
economic goods one by one, or they can own certain economic goods together. Private
ownership gives the individual the right to make final decisions concerning certain economic
goods; this grants him or her the power to use this right to his or her own advantage, even if
doing so produces injustice for others. Stein (1976) says that ownership is the social construct
linking items of property to one or more people, and in fact defines social relations among
persons. Property therefore also implies an actual or potential power relation between the
persons holding property rights and the persons excluded from their enjoyment; hence, when
there are changes in property rights, power is also redistributed (Moore, 2009[1965]). Social
action theory considers collectivity as an integrated system of norms such that the actors
attached to it regard behaviour within it as appropriately differing from behaviour outside it
(Parsons, 1964). Collectivity includes families, communities, nations, and organizations. Stein
(1976) writes that the essential point in collective ownership is that the collective must
56
exercise its ownership rights as a unit; individual members of the collective are not
themselves owners. Individuals are members of multiple social groups with a collective
identity. A collective identity is the cognitive, normative, and emotional connection
experienced by members of a social group because of their perceived common status with
other members of the social group. Collective identities emerge out of social interactions and
communications between members of the social group (White, 1991).
According to Cocutz (1953), there is no such thing as social ownership. He says that
making an economic decision is always an individual and private matter, and people cannot
make decisions together; rather, people make decisions in their minds and then compare their
individual decisions to see if they agree or disagree. Different individuals who own property
together are entitled as owners to make decisions, and these decisions usually conflict with
each other. Solving conflicts requires the establishment of rules regarding equal ownership or
equality of individual decisions in relation to each other, which will establish which one of the
various decisions will be the one to be enforced. The decisions are not made by the majority
as a group, but by each individual of the majority (Cocutz, 1953). This is much like
distributive ownership (Stein, 1976), where rights of ownership are vested specifically in
individuals rather than in a collective. Each individual owner can exercise his or her personal
rights at will. No collectivity is needed, and no interaction or relationships among individual
owners need be involved. One classical form of this is the shareholder corporation.
Shareholders are able to exercise their rights individually rather than as members of a group.
According to Stein (1976), the present powers of management in large corporations have
developed as a result of two institutional factors: shareholder ownership is distributive rather
than collective, and the property in the organization itself cannot be used as a source of
legitimate authority.
The concept of ownership arises and makes sense only when intelligent rules exist for
making decisions. Ownership is, then, a matter of economic decisions that are subjective and
can be exercised only by individual human beings. Owning together is a complex matter that
deserves a careful analysis. Property may be held in a number of forms, such as through joint
ownership, community property, sole ownership, or lease. These different types of ownership
may complicate an owner’s ability to exercise property rights unilaterally. In the loosest sense
of group ownership, the lack of legal frameworks, rules, and regulations may mean that group
ownership of property places every member in a position of responsibility (liability) for the
57
actions of each other member. A structured group duly constituted as an entity under law may
still not protect members from being personally liable for each other’s actions. Court
decisions against the entity itself may give rise to unlimited personal liability for each and
every member. An example of this situation is a professional partnership (such as a law
practice) in some jurisdictions. Thus, being a partner or owner in a group may give little
advantage in terms of shared ownership while producing a lot of risk for the partner, owner,
or participant.
2.3 Ownership logic in family business
Research from the fields of strategy, finance, and international business indicates that
family-owned and -controlled firms are among the most common corporate ownership
structures in the world (Schneper et al., 2008). Family ownership is the defining characteristic
of family businesses, and there are many forms that ownership may take in the business
(Gersick et al., 1997). There are family businesses owned by a sole owner, but when it comes
to the second generation, most of them turn into a sibling partnership with very few but strong
owners who hold large shares in the company. In the next generation, the ownership
transforms into a cousin federation, and perhaps one day a family dynasty. The relevance of
good family ownership in business is important: a healthy owning family with strong values is
a resource the gives strength and instils energy in the business. Still, the challenges revolving
around ownership in a family business are very complex and delicate issues, as the family is
at the intersection of several complex systems. The family faces continual changes in the
business environment and in internal pressures as people develop (Jaffe and Lane, 2004).
Families have to manage people, the business, and investment. The transfer of ownership
interests is usually the most meaningful and challenging task in family enterprise continuity.
To understand this complex structure, we need to look more closely at the kind of logic that
governs ownership during the life cycle of the family business. Family business ownership is
a chronological process, consisting of a continuum of reasoning and decisions concerning
control of and responsibilities towards the company and control of and responsibilities
towards the family.
One critical factor is the ownership structure, which affects the firm’s chances of
maintaining and improving its performance in the future. The ownership structure and control
of firms has been frequently investigated in the fields of corporate governance and family
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businesses. In public firms with a large, fragmented set of owners, the board of directors is
usually an internal disciplining mechanism; control and ownership are separated (Lambrecht
and Uhlaner, 2005). In a family business with a substantial family ownership interest, the
owning family itself plays a critical role in monitoring management actions. Shareholders
have the right to elect the board of directors and in this way influence the management, the
direction of the company, and even the company’s continued existence (Ward, 2001).
In family business, the building blocks for responsible ownership include articulation
of shared values, socialization of subsequent generations, acquiring competences and skills,
strategic planning of the family and of the business, informal gatherings, and setting up
formal family governance structures. Although improved financial performance may be one
possible outcome of close monitoring of the firm, responsible ownership, especially with
respect to other stakeholder groups, may also lead to other consequences, such as greater
corporate responsibility, being a better employer, and overall economic growth. In a study of
ownership profiles and a company’s strategic behaviour, Ikävalko and Pihkala (2005) suggest
that ownership is not a monolith, nor is it only a background variable related to formalities.
The target of owning represents many different things to the owner: instrumental value,
narcissism, responsibility to the generation to come, egocentric surfing on personal
accomplishment. The analyses also suggest that an owner–manager’s strategic behaviour is
affected by their personal relationship to the company that they own. Ownership influences
power in family business systems, and shifting power is often a difficult and slow process.
This is because ownership is transferred at the end of a generation, which gives the senior
generation high levels of power until late in life (Davis, 2007). The reality is that family
leaders and other family members use power all the time to influence members of the family
and the family business. Responsible ownership in a family business is an active and long-
term commitment to the family, business, and community and to balancing these
commitments with each other.
Business families have been seen to move through six possible ownership patterns:
entrepreneurship, owner–manager, family partnership, sibling partnership, cousins’
collaboration, and family syndicate (Ward, 2001; Gersick et al., 1997). These moves are not
necessarily linear, and not all family businesses go through all of them: they may skip phases
or circle back into a phase due to family ownership decisions or actions (Ward, 2001).
Shareholders face many challengers when it comes to dealing with ownership roles and
59
responsibilities: for example, those owners who are not employed by the family firm but are
owners of the business. Shareholders should understand their role as owners and balance
individual interests with the shared interests of the other family members who own the
business. Owners need to understand how their actions and demands will affect other
stakeholders in the family business (Ward, 2001). In research in the field, the ownership
configuration is defined according to the different phases the family business passes through,
each with its own challenges and characteristics (Ward, 2001). The composition of the
shareholders is determined by changes in the interaction between business and family life
cycles and the owners’ decisions. The type of composition varies through different phases,
from entrepreneurial to collaboration and family syndicate (Mussolino et al., 2005).
Ownership is a very important issue at the family level. What happens if one of the
family members wants to leave? On the whole, changes in ownership are not well planned.
Research shows that there is very little proactive planning for this (Schwass, 2008). Some
major problems arise in the family when the new generation wants to create their own sense
of personal worth to the business. The concept of ownership has generally referred to the
economic–institutional dimension of ownership (Westhead and Cowling, 1998; Chua,
Chrisman, and Sharma, 1999; Hall, 2005). As such, family firms represent relatively stable
systems, as long as the founder is present and in a leading role (Morris et al., 1997).
The leading role of one person within the family has posed a problem for family
business research. The relationship between family member–owners and the family member
who is the operational leader has been explained using a combination of agency theory and
stewardship theory. Agency theory basically argues that the relationship between the principal
and agent could be characterized as a control mechanism that seeks to ascertain that the agent
operates to secure the interests of the principal in all situations. The interests of the principal,
the incentives of the agent, and the agency costs arising from the control mechanism are
measured in monetary value. Stewardship theory builds on the idea that people are not
motivated and guided by monetary instruments alone, but are influenced by higher values.
These values would include also non-financial factors, such as responsibility, tradition, or
loyalty (Westhead and Howorth, 2001; Miller and LeBreton-Miller, 2006). The theory builds
on the relationship between the individual and collective; that is, it argues that individual
actors replace their self-serving objectives with those of the collective. In the context of
family firms, family members may thus show loyalty to the family’s objectives at the cost of
60
personal freedom of choice. In this sense, the family as a collective may in fact prevent some
individual entrepreneurial intentions and ventures, should those ventures not serve the family
agenda. According to stewardship theory, the origin of the family conflicts leading to a family
member’s exit from the family business is likely to revolve around collisions between family-
serving objectives and self-serving objectives.
2.3.1 Individual owners in family business
Much of the research on entrepreneurship is focused on answering two questions: who
is an entrepreneur, and what does an entrepreneur need to do to start a successful business?
Researchers studying family business have been interested in what happens to entrepreneurs
near the end of their working lives. Increasingly, age studies show that entrepreneurial
orientation is a major factor in generating high performance (Wiklund and Shepherd, 2008).
Family owners and managers are more likely to form strong personal identification with their
organization and view the firm as an on-going ‘social enterprise’ to be passed on to future
generations (Schneper et al., 2008). Alizadeh (1999) studied the network activities of
founders and found that the family is a very important part of their personal networks; the
family is activated for moral and operational support and acts as a vehicle for linking the
business with other people and organizations. A family contributes to the likelihood of
individuals becoming entrepreneurs (Alizadeh, 1999). Moog et al. (2009) note that owners as
individuals and their orientations drive the differentiated strategy and orientation of family
businesses. In the context of a family business, the individual family member can be seen as a
person weighing his or her options. The person is not only a member of the family, but he or
she is also an individual owner with original ideas, entrepreneurial spirit, and willingness to
make a difference in the family business.
Inheritance laws play an active role in determining the prevalence and persistence of
family firms in different countries (Colli, 2003). An equal subdivision among heirs shapes the
strategies of succession in family firms, and hence their governance and performance. The
prime objectives of many family businesses in the farming sector are the same as those of
other businesses: “to maintain control and pass on a secure and sound business to the next
generation” (Errington, 2002). To avoid fragmentation of the enterprise, daughters were
historically almost never expected to take an active part in the firm’s management. Usually
the authority of the first son, or successor, went unchallenged (Colli, 2003). Karlsson Stider
(2000) acknowledges that the members of the family do not only perceive their company
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ownership as an economic inheritance, but also a social, cultural, and symbolic inheritance
from their ancestors; the inheritance can take financial (e.g. money), social (e.g. relations) and
symbolic (e.g. status) forms. The inheritance can be viewed as a relationship; a more complex
relationship to the company implies that the owner’s assessment of the company’s
development and strategies are not solely based on economic performance. The ownership
also values how the company develops in accordance with family/company ideals and
faithfulness to traditions. This close personal relation between owners and the company could
also implicate a different degree of ownership involvement in family businesses.
The intergenerational transfer of a family business involves three distinct but related
processes (Errington, 2002): inheritance denotes the legal transfer of ownership of the
business assets (including land and quota); succession refers to the transfer of managerial
control over the use of these assets; while retirement marks the withdrawal of the present
manager from active managerial control and/or involvement in manual work in the business.
Succession is viewed by many scholars as a long-term process involving multiple activities
(Handler, 1994; Sharma, Chrisman, and Chua, 2003). The family has to deal with succession
and estate planning and the overlap between personal and business relationships. Studies of
succession in family business tend to revolve around three interrelated themes: the
interconnectedness of family and business issues; structural forms before and after
succession; and the succession process itself, which encompasses planning, selection, founder
resistance, and preparation of an heir. Succession can be defined as the process through which
the leadership of the business is transferred from the outgoing generation to the successor
generation, which can either be a family member or a non-family member (van Buuren,
2008).
Ownership succession occurs when the life cycle of the business exceeds the period of
time the owner wishes to stay in the business. Rather than closing down the business, the
owner finds a way of exiting, by selling the business to an external owner or transferring
ownership to other family members or employees in an internal, non-market-based
transaction. How and why owners take particular routes is an under-researched area (Martin et
al., 2002). One critical activity entailed in the succession process is the grooming of the future
leader of the firm (Fiegener et al., 1994; Sharma, Chrisman, and Chua, 2003), which ensures
that the successor is skilful and experienced enough to take over the business. There are cases
in which the founder wants more than one person to benefit from the family trust, and in these
62
instances the way ownership and control can be effectively shared between successors
becomes an important issue. This is particularly relevant in cases where control is being
passed to children who have different views on how the trust should be run and the trust
assets managed. Another important question is what role, if any, the founder is going to play.
In succession, there are two dimensions – ownership and management – that are usually
interlinked. In a family business, a large share of the private fortune is tied to the firm, and
because of this, family managers display a high preference for independence. Most family
managers strive to bequeath their firms to subsequent generations, so a preference for
independence influences their investment and financing decisions (Zellweger et al., 2005).
Zellweger et al. (2005) suggest that an investment preference in privately held firms –
especially family firms – is affected by individual behaviour.
2.3.2 Ownership groups in family business
What is the basic economic decision-making unit in a family business? This is an
important question when we need to understand economic exchange among family members.
Collective choice requires mutual objectives, and collective decision-making units can be
large (Altonji et al., 1992). In their research on altruism, Altonji et al. (1992) relied on a
definition of family that involved an extended family, a family that includes, in one
household, near relatives in addition to a nuclear family. According to them, family members
may engage in selfish economic exchange with one other, and family does not imply a
collective decision-making unit. In turn, groups that have organic solidarity may be
considered a clan. This clan form is based on the solidarity to which Durkheim (1997[1893])
refers: the union of objectives between individuals that stems from their necessary
dependence upon one another. Clan systems can be family units or based on local groups, and
family businesses could be treated as clans. Ouchi (1980) compared the modern industrial
organizations to clans. In these organizations, varieties of social mechanisms reduce
differences between individual and organizational goals and produce a strong sense of
community.
In family businesses, group ownership can be seen as a ‘clan’ only for family
members. Ownership is based on social agreements, such as legislation, and is a social
construct. Social, interactive, and symbolic aspects and things owned are ascribed certain
meanings and come to symbolise these meanings: ownership is an inter-individual process of
socialization, attendant on the contextual dimensions of ownership. A family consists of
63
individual family members who, through their existence and social action, jointly construct
the family. Habbershon et al. (2003) note that it is not just individual family members’
feelings associated with the business, since they simultaneously belong to a multi-
generational tradition as business owners. This social group offers a place for narrations and
collectively negotiated role responsibilities (Lubinski, 2007).
Although it is common for family businesses to have one controlling owner group,
knowledge of controlling owner families and the reasons for exercising their ownership is
limited. Usually the research on family business ownership has concentrated on family and
non-family ownership. Family members become shareholders through purchase, inheritance,
or gifting, with all the attendant rights and responsibilities of ownership, regardless of their
training, experience, or other qualifications (Ward, 2001). Ward also points out that the future
character of the family business is significantly impacted when the shareholders gift or sell
stock to the next generation and in this way shape the future ownership group. Ownership
transitions create the most familiar yet least foreseeable kinds of liquidity crises in family
businesses (Visscher et al., 1995). A family business is a context for social learning through
role models and vicarious experience, a rich source of social and psychological support, and a
release system that makes use of personal networks (Alizadeh, 1999). Martin and Lumpkin
(2003) argue that a family firm’s strategy may feature a special orientation towards family
issues, defined as a family orientation.
The owners of a family business often have their personal wealth concentrated in the
business, and ownership is usually shared with the other family members. Shareholders are
usually shareholders for life. The research on family business has generally treated ownership
as a stable phenomenon, that is, a constant used for explaining various anomalies in the
behaviour of family businesses (Rautiainen, Pihkala, and Ikävalko, 2007). The family should
be taken seriously as a collective decision-maker at the same time as it is a metaphor for a
collection of individuals making their own decisions. By protecting ownership, those who are
majority shareholders of and hold management positions in family-owned businesses want to
maintain control of how the firm is run. According to Sund and Bjuggren (2008), there are
other motives more or less linked to this control. They found that 1) owners often wish the
next generation to become new shareholders and leaders of the business. If this is the primary
motive, it becomes important to keep ownership within the family. 2) The success of the
business is often dependent on delicate and fruitful cooperation between partners. If the most
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important purpose, with transfer restrictions, is to maintain this balance, it is crucial to
construct clauses that contribute to maintaining ownership positions. 3) A company can be
dependent on the skilfulness of a few owners and leaders. If this is the case, it becomes
important to prevent externals (e.g. inexperienced people or competitors) from becoming new
shareholders.
The long-term success of family businesses is achieved by meeting the needs of each
generation to re-affirm their commitment as responsible owners and proactively anticipating
the future needs of the family and the business (Schwass, 2008). Family businesses have a
long time horizon, so financial capital management is a long-term focus. Family businesses
are often run by multiple family members rather than a single person; ownership is also
usually shared with other family members. The interplay between multiple social and
financial factors is complex. There are behavioural factors, like the owners’ need to be in
control, that affect financial-structure decision-making processes. Sirmon and Hitt (2003)
termed this interaction of unique resources as survivability capital, in which the capital
represents the pooled personal resources that family members are willing to loan, contribute,
or share for the benefit of the family business. Members prefer protecting their wealth through
investment diversification. Family shareholders dramatically influence the family business.
The attitudes and behaviours of family businesses clearly vary across generations. Different
owners exhibit different interests. Each generation of leadership brings to the business new
strategic ideas that build on underlying, long-held competencies developed for earlier
strategies (Ward, 1997). As a family business develops and diversifies and ownership is
shared with other family members, the core business is often also divested or sold, or family
members inherit their own fortunes and go their separate ways (Jaffe and Lane, 2004). If the
family is successful, they can multiply the value of their businesses and investments across
the generations. Jaffe and Lane (2004) studied the key challenges that a family must face to
create an effective dynasty over generations (see Table 5). They also illustrated the shifting
characteristic of a family business as it evolves into a business dynasty.
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Table 5. Stages of family business evolution (Jaffe and Lane, 2004)
Generation
G1: Entrepreneur
G2: Family
partnership
G3: Business
dynasty
Business form
Entrepreneurship
Maturing business
Holding company of
family office, with
diversified assets
Mode of control
Founder/owner/manager
Sibling team
Family branches
Strategy
Personal vision
Renew business
Sustain profitability;
generate new wealth
Governance
structure
Ad hoc, implicit
Informal board,
implicit policies
Board with
outsiders, formal
policies
The family’s original fortune is usually created by a single founder, and over
generations, the fortune is divided among a growing pool of heirs and relatives. It is difficult
to keep the fortune unified; collaboration, conflict resolution, and shared governance are
difficult by nature. Issues of ownership, representation, management, and financial returns are
subjected to family and personal development considerations (Jaffe and Lane, 2004).
2.4 Behavioural aspects and activities in family ownership
In listed companies, ownership is typically spread across different owners
(shareholders) who are constantly trading in the company’s shares. Private companies owned
by individuals, families, or groups of individual stockholders differ significantly from listed
companies because there can be only one owner. Another important difference is that in
family companies, shareowners are not constantly changing. Instead of selling shares out of
the family, they are usually passed on to the next generation. When viewing ownership more
broadly, a useful starting point is the idea that while ownership may be the ultimate source of
capital for the business, that capital should not be viewed solely in financial terms. Active
ownership is conducted from a platform of continuous, fundamental analysis and an action
plan for value creation. As the business grows, families need to understand the financial goals
and trade-offs involved in running a business: achieving growth, improving profitability,
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managing risk, and providing pay-outs to owners (Aronoff and Ward, 1996). They should
understand not only financial goals, but also why the business exists and what it is trying to
achieve. The business has multiple stakeholders: employees, suppliers, customers, and
shareholders. Aronoff and Ward (2003) have drawn up a list of six different types of owner:
• Operating owner: an owner–manager or employed owner with direct
responsibility for the business. A hands-on owner who is in the business every
day, helping to run it and make decisions.
• Governing owner: a full-time overseer not involved in operations, such as
chairman of the board of directors.
• Involved owner: not employed in the business but takes a genuine interest in
the company, offers support to management and becomes involved as
appropriate.
• Passive owner: collects dividends but abdicates responsibility for the business
to others. Makes no conscious decision to stay an owner.
• Investor owner: very like passive owners except that if satisfied or dissatisfied
with their returns, they may make a deliberate decision to keep or to sell their
ownership.
• Proud owner: not engaged in the business or especially knowledgeable about
it, but nevertheless proud to be an owner.
Families with members who do not work in but are owners of the business have
developed roles for these members. Aronoff and Ward (1996) call this role active ownership.
These owners are vigilant about staying in touch with the business even though they are not
employed by it. They may work occasionally in projects or, most commonly, as chairman or
member of the board. In this way they sustain family involvement through their presence and
interest. A family-owned firm often represents the family’s tradition and legacy in addition to
monetary wealth. Family owners are more than typical investors; they have a personal and
emotional involvement in the business in which they are investing, and most family business
shareholders do not become owners by choice. According to Aronoff and Ward (2003),
“Inheritors become deserving of ownership and turn it into a voluntary act by stepping up to
their responsibilities”. They also group owners into insiders and outsiders, i.e. owners who
work in the business and owners who do not. In family businesses, these groups can consist of
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majority shareholders, minority shareholders, and those who do not have any shares. There
are owners who hold shares directly and owners whose interests are held in trust, married
couples where one spouse is an owner and the other is not. Family ownership represents
cultural values, family and social values, and symbolic values.
2.4.1 Family member behaviour and motivation: exit, voice, and loyalty model
Research on family ownership provides important insights into the behaviours and
motivations of family members. Karlsson Stider (2000) mentions two different strategies for
owners to communicate dissatisfaction with company management: voice and exit. According
to her, voice is when the owner decides to get more involved in the company’s management
to change it in the preferred direction, while exit is a strategy when the owner chooses to sell
some part of or his or her entire holdings in the company. Hirschman (1970) suggests that the
family member may choose between three different alternatives: exit, voice, and loyalty (see
Table 6).
Table 6. Exit, voice, and loyalty within the family business context
Exit
E1: Constructive
exit
E.g. After succession, partial ownership changes in the family
E2: Angry exit
E.g. After interpersonal or inter-family crisis
E3: Entrepreneurial
exit
E.g. Starting a new personal business separate from the family
business
Voice
V1: Constructive
voice
E.g. The person participates in decision-making; represents the
family, CEO, chair, etc.
V2: Critical voice
E.g. Power struggles in the family firm; successor–successee
disagreements
V3: Entrepreneurial
voice
E.g. Starting up new businesses on the family business
platform, possibly involving other members of the family;
building joint ventures
Loyalty
L1: Loyal silent
support
Staying an owner without participating in management;
becoming a team entrepreneur without an explicit role
L2: Loyal silent
resistance
E.g. Person chooses to neglect the business
L3: Loyal
responsibility
E.g. Assuming the steward’s role; can include stewardship
towards the family legacy or positive entrepreneurial
stewardship behaviour, developing the family business
L4: Loyal forced
participation
E.g. forced entrepreneurship; being involved without the
possibility to choose (children as owners; the only child
syndrome); being involved in the business to enable family
contact (social reasons); legacy reasons, jurisdictional reasons
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In terms of exit, the person’s leaving the family business may take three basic routes:
after a well-managed succession process, the family members agree on the successor of the
business, and the other family members step away to give the new management/ownership the
required space for individual entrepreneurship. This type of exit is by nature very
‘constructive’ – it seeks to promote the survival of the business and is very likely to benefit all
the exiting members as well in terms of monetary compensation or the like. A constructive
exit can include aspects of entrepreneurship on the part of the exiting members as well: the
compensation could comprise parts of the business, or monetary compensation can work as
the starting capital for a new business venture. An exit can be also the result of a conflict
within the family business. In family businesses, interpersonal or inter-family conflicts have
been reported and analysed by many scholars (Harvey and Evans, 1994; Cosier and Harvey,
1998; Handler, 1991). In many cases, the conflicts have been resolved through arrangements
where one or more members of the family leave the family business. The exit does not
necessarily suggest the leaving person’s low entrepreneurial spirit; on the contrary, the
original reason for the conflict may also arise from the family members’ different attitudes
towards entrepreneurial projects or risk. Finally, an entrepreneurial exit may arise not from
survival of the original family business nor conflicts within the family business, but from the
personal entrepreneurial endeavours of a family member setting off to start something on his
or her own.
In addition, the use of voice can be identified in several ways in family businesses. The
most usual manifestation of voice would be the family member’s active participation in
decision-making, possibly representing the family and supporting the family’s thinking in the
business. In constructive voice, the main orientation is not criticizing, but playing an
important role in the decisions regarding the family and the business. This could mean
bringing new insights into discussions or taking initiative in discussions on the business and
its development, or on the relationship between the family and the business, or other issues.
Thus, a family member as CEO or chairman of the board would typically assume the
constructive mode of voice. In Hirschman’s typology, voice emphasises criticism of the
business, the organization, or the management. In a family business context, critical voice
could be identified as, for instance, power struggles within the family or as difficulties in the
succession process. In family businesses, long-lasting disagreements and conflicts are rather