Self-serving or self-actualizing? Models of man and agency costs in different types of family firms: a commentary on "Comparing the agency costs of family and non-family firms: conceptual issues and exploratory evidence".

In their article "Comparing the agency costs of family and non-family firms: Conceptual issues and exploratory evidence," Chrisman, Chua, & Litz (2004) develop a conceptualization and empirical investigation of the effects of agency relationships in family firms. Their main purpose is to understand whether, and to what extent, family firms have higher total agency costs than non-family firms. The authors develop a conceptual framework, which is of particular value to researchers of family businesses, outlining four conditions that determine the relative level of agency costs in family and non-family firms. These are (1) asymmetric altruism; (2) separation of ownership and management; (3) conflict of interests between owners and lenders; and (4) conflict of interests between dominant and minority shareholders. Although the framework is not directly tested by the authors, it is, in itself, a valuable addition to the literature and research thrust of the field. A second main contribution is offered by the extensive empirical test of the impact of agency issues on performance of family firms.

As the article compellingly suggests, we believe that agency theory permits us to arrange several family business issues into a simple and sound analytical framework. In particular, agency theory allows for the investigation of the determinants, costs, and remedies of "dysfunctional" behaviors attributable to family involvement (Chua, Chrisman, & Steier, 2003). Hence, agency theory is a particularly suitable framework to explain the effects of relationships among organizational actors on "efficiency" (Greenwood, 2003), and the organizational arrangements aimed at minimizing costs related to dysfunctional behaviors. What is missing is a conceptual lens to explain behaviors aimed at maximizing potential performance within organizations in which a pro-organizational attitude coexists with self-serving motives. Such a conceptual lens, more in line with the human assumptions prevailing in family businesses, may point to the determinants of organizational actors' willingness to pursue entrepreneurial opportunities and growth. In this commentary we propose stewardship theory (Davis, Schoorman, & Donaldson, 1997) as an alternative perspective, which may usefully complement the agency framework in explaining entrepreneurial, organizationally centered behaviors. Our main contribution is to suggest that differences in organizational performance are not driven by family involvement or lack thereof, but by the prevalence of agency or stewardship relationships within the firm, whatever the degree of family involvement.

Self-Serving or Self-Actualizing? Models of Man in Different Firm Types

Empirical research so far has shown compelling evidence of agency relationships and costs within family firms. However, results are at least partially contrasting (Gomez-Mejia, Nunez-Nickel, & Gutierrez, 2001; Schulze, Lubatkin, & Dino, 2003; Chrisman et al., 2004). Reasons for these mixed empirical results may rest in family firm characteristics. Family firms are often depicted as relying on mutual trust, intra-familial altruism in its purest sense (i.e., unselfish concern and devotion to others without expected return to oneself), and clan-based collegiality. Models of man (Simon, 1957) in which organizational behaviors are rooted may differ between family and non-family firms, among different family firm types, and among family firms active in different countries. Hence, some of the assumptions on which agency theory is based may not hold in family firms.

Agency theory rests on human assumptions of self-interest and present value maximization. In contrast, it is generally accepted that wealth creation is not necessarily the only or even the primary goal of all family businesses (Davis & Tagiuri, 1989; Sharma, Chrisman, & Chua, 1997). As Chrisman et al. (2004) explicitly acknowledge, it is generally accepted that family firms have both economic and non-economic goals.

What is the favored model of man in family firms, then? Psychological and situational factors that differentiate between agency and stewardship theories define two different models of man. According to agency theory, organizational human behavior is rooted in economic rationality (Simon, 1997). The model of man underlying agency theory is that of the self-serving individual, a rational actor who seeks to maximize his or her individual utility (Jensen & Meckling, 1976). Instead, the model of man underlying stewardship theory "is based on a steward whose behavior is ordered such that pro-organizational, collectivistic behaviors have higher utility than individualistic, self-serving behaviors" (Davis et al., 1997, p. 24). This model is essentially that of the "self actualizing man" described by Argyris (1973). It is worth noting that self-actualizing behavior is not "irrational." Rather, according to Simon's (1997, p. 85) suggestion, "a decision is 'organizationally' rational if it is oriented to the organization's goals; it is 'personally' rational if it is oriented to the individual's goals." This model clearly counters traditional agency theory assumptions, but also the economically--or "personally"-rational view of altruism adopted in agency theorizing.

The arguments put forward in this section suggest that other frameworks--such as stewardship theory--may be adopted besides agency concepts, to account for organizational behaviors in family firms. These additional frameworks should be used in a complementary fashion (Steier, 2003), because they have a lower degree of conceptual and empirical refinement, and because human assumptions, and related models of man, may vary along an organization's life cycle, or among different family firm types.

A Complementary Framework: Stewardship Theory Explanations of Agents' Behavior in Family Firms

The different model of man behind organizational behavior, at least in some types of family firms, suggests that stewardship theory may be a potentially suitable vantage point to address family business dynamics. In contrast to agency theory, stewardship theory defines situations in which managers and employees are not motivated by individual goals, but rather behave as stewards whose motives are aligned with the objectives of the organization, such as sales growth, profitability, innovation, international expansion, and company reputation (Davis et al., 1997). The steward's pro-organizational behavior, aimed at maximizing organizational performance, will in turn benefit the steward's principals.

Despite its potential, stewardship theory has not been extensively adopted in family-business studies. Chrisman et al. (2004) admit that stewardship relationships may exist, or even prevail, at least in some family firms. However, their analysis--coherently anchored to the agency framework--does not develop this alternative any further. Yet, the low coefficient of determination yielded by their test (Adjusted R2 is only .081) indicates modest predictive power for their regression model. There may therefore be an a priori risk of specification error through omitted variables bias in agency models applied to family firms. In other words, agency theory alone offers a significantly, but only partially, appropriate explanation of family firm performance.

One of the main arguments suggested in this commentary is that the impact of family structure and dynamics on the family firm is mediated by the "model of man," provided it is widely shared. As a matter of fact, the owning family has a strong influence on virtually all psychological and situational antecedents of organizational behavior. Hence, the owning family has a crucial impact in shaping the "model of man" prevailing within the organization as either the self-serving, economically rational man postulated by agency theory, or the self-actualizing, collective serving man suggested by stewardship theory.

An analysis of the family business literature suggests that the family exerts an impact on the prevailing "model of man" through the role played by family goals, degree of altruism, degree of trust, emotions and sentiments, and their influence on relational contracts (Figure 1).

[FIGURE 1 OMITTED]

Family firms are arenas characterized by financial and non-financial family goals (Tagiuri & Davis, 1996). When financial goals prevail in a family, family members' motivation to operate in the family firm will be based on lower order needs and extrinsic factors, thus favoring the emergence of agency relationships. On the contrary, when non-financial goals prevail, this will foster motivation based on higher-order needs and intrinsic factors, thus favoring steward-principal relationships.