Organizational performance refers to the analysis of a company’s objectives and goals vis-à-vis its actual market performance, financial performance, and shareholder value (Corvellec, 2018). Many factors influence the organizational performance of a company, including leadership, corporate culture, motivation, and knowledge management. Family-owned businesses are run by families. Because of their inherent characteristics, family-owned companies have unique advantages as well as challenges in realizing a high return on investments and distribution of the company’s output. By using resource-based theory and agency theory, the impacts that families have on their businesses become clear.
The principle of agency theory is used to explain and solve problems that arise in the relationship between agents and their principals. The agent represents the principal. Agents have the power to carry out day to day activities in a company on behalf of the principal. The principal, in this case, has delegated the authority to make decisions to the agent. The losses that may be incurred during transactions carried out by the agent are the principal’s losses, even though these damages were realized from the actions of the agent. With that said, agency theory suggests that individuals are naturally opportunistic and are driven by economic motives. The agency theory also suggests that people work for their profit regardless of the costs to the company. Agency theory applies to the family business, as well. Because family members run family businesses, these members tend to rely on trusting that everyone will do what is best for the company. As such, lazy family members may free-ride or take advantage of other members. Additionally, family relationships may encourage moral hazard. With the agency principle in mind, families must set up mechanisms and policies that will shield the company from failures that may arise because of family issues.
The resource-based theory holds that companies differ in their organizational performance due to the differences in their valuable resources that are unique and cannot be copied (Lonial & Carter, 2015). Resources that cannot be imitated assist firms in developing a competitive advantage over rivals. Resource-based theory can, therefore, be used to deduce the impact of family on the success of a family business.
Family culture is an example of an intangible resource that can confer a competitive advantage to a firm. Regardless of the business, the culture that is characteristic of the family running that particular business can either have a positive effect or a negative one in organizational performance. This explains why there are family businesses that have been around many years since they were founded like Merck Company, for example. A productive family culture is one that develops congruence of goals, creates a shared vision for the future of the company, and a collective will for the success of the organization. When families adopt such productive tacit cultures in their business issues that have the potential of lowering performance, such as moral hazards, free- riding and succession conflicts can be avoided (Lobley & Baker, 2016).
Corvellec, H. (2018). Stories of achievements: Narrative features of organizational performance. Routledge.
Lobley, M., & Baker, J. R. (2016). Succession and retirement in family farm businesses. In Keeping it in the Family (pp. 17-36). Routledge.
Lonial, S. C., & Carter, R. E. (2015). The impact of organizational orientations on medium and small firm performance: A resource‐based perspective. Journal of Small Business Management, 53(1), 94-113.