Commentary: a framework for managing the familiness and agency advantages in family firms.

This article uses a family-influenced, international, new venture creation case as a platform for addressing the importance of context when exploring entrepreneurship in start-up and growth companies. I raise crucial issues about how agency relationships and costs are evaluated in family firms, arguing that the competitiveness implications of agency can only be fully assessed in light of the larger context considerations. I suggest that agency is best evaluated as inputs and outputs in a contextual ecosystem. I utilize a family business ecosystems model to show that family is a distinct context for entrepreneurship and that it generates an idiosyncratic bundle of resources and capabilities that provide a potential agency advantage in new venture creation. Since the case findings indicate that the agency inputs and outputs change over time, I conclude by placing the potential agency advantages and constraints into an organizational life cycle framework. The goal of the article is to further the discussion on how families find their advantage in the entrepreneurial process.

Introduction

In their article "Altruism and Agency in Family Firms: Exploring the Role of Family, Ethnicity and Kinship," Karra, Tracey, and Phillips (2006) examined the relationship between altruism and agency costs in family businesses. They add life to the agency discussions by using an in-depth case study of a medium-sized Turkish fashion firm (Neroli) that produces and sells a full range of leather goods and clothing through the former Soviet Union and Eastern Europe. Specifically, their case focused on the founding and growth stages of Neroli as a new venture that was leveraging a complex network of family, kinship, and ethnic ties to establish their family business as an international start-up. They concluded that family influence led to both increased and decreased agency problems, depending on the stage of the business.

In the early stages, altruism aligned the interests of family members and reduced agency costs. They found, however, that there were limits to altruism and agency costs that increased as the family business became larger and more mature. They observed the moral hazard in which family employees and owners began to shirk, free ride, and consume perks. The case also demonstrated that altruistic behavior need not be confined to family and close kin, but may extend through networks of distant kin and ethnic ties. The owner-manager thus exhibited a similar set of altruistic behaviors toward blood relations and nonblood, quasi-ethnic family members. He was "rewarded" with similar early-stage agency advantages, but these later changed, creating the agency conflict of adverse selection as the firm struggled to find suitably qualified professionals outside of their ethnic networks. The Neroli case thus generated findings that extended the research and practice thinking on agency theory and family firms.

Neroli was more than an agency case, however. As a family-influenced, international, new venture-creation case, it raised crucial issues about how families find their advantage in the entrepreneurial process. The wide range of contextual factors presented in the case provides a perfect platform for addressing the importance of context when exploring entrepreneurship in start-up and growth companies (Aldrich & Martinez, 2001; Ucbasaran, Westhead, & Wright, 2001). We would argue that the competitiveness implications of the agency findings can only be fully assessed in light of these larger contextual considerations.

This article will therefore address the agency issues in the Neroli case as inputs and outputs in a contextual ecosystem. It will discuss the family as a distinct context for entrepreneurship and show how an ecosystem model generates an idiosyncratic bundle of resources and capabilities that provide a potential agency advantage in new venture creation. Since the Neroli case makes the point that the agency inputs and outputs change over time, we will conclude by placing the potential agency advantage and constraints into an organizational life cycle framework.

Agency from a Contextual Perspective

The entrepreneur does not usually start with all of the elements of a successful venture fully in place. They assemble the necessary resources incrementally in a "just-in-time" fashion during the entrepreneurial process. In a sense, they "manufacture" the requisite resources through their interaction with a wide variety of contextual factors. The context is thus a source from which the entrepreneur accesses or acquires the elements that enable them to build the capacity and to deliver value to the marketplace (Rice & Habbershon, 2007).

The entrepreneurial process in the Neroli case clearly demonstrated this manufacturing process. The family, ethnic culture, and the environmental conditions were key contextual drivers for Neroli's resource development. The entrepreneurial process began with the wish of an immigrant entrepreneur in a foreign environment--he wanted his family to move beyond survival mode and have a more secure future. This family wish became the contextual basis for the altruism that informed his agency beliefs. The larger ethnic and cultural conditions intensified these altruistic sentiments and shaped his business practices regarding the ownership and involvement of family and quasi-ethnic family members.

The founder's altruistic sentiments and practices matched well with the entrepreneurial requirements of the environmental conditions. Family and quasi-ethnic family involvement were essential for conducting trade and establishing distribution networks. Key resources were thus generated and exploited through this contextual matching process, which in turn became the basis for an early-stage entrepreneurial success. If the altruistic sentiments and practices were changed, it would have significantly altered the resource profile and changed the entrepreneurial process. Context is thus critical to interpreting agency issues, especially in new venture creation.

The case showed an increase in agency cost in the later growth stages of Neroli, which raises a contextual research concern that could be stated as follows: If Neroli in their later growth stage was participating in a point-in-time variance study on agency costs in family firms, they would be a data point leading researchers to conclude that family ownership and involvement increased agency costs. Without an in-depth qualitative examination of the context and life stage of the family and firm, we do not have a complete picture of the agency relationships and costs. This concern may provide a possible explanation for the current bipolar view of scholars on the agency problems and costs associated with family ownership and management. To date, no consensus has been reached as to whether family businesses have agency constraints or agency advantages (Carney, 2005; Chrisman, Chua, & Litz, 2004; Gomez-Mejia, Nunez-Nickel, & Gutierrez, 2001; Schulze, Lubatkin, & Dino, 2003; Schulze, Lubatkin, Dino, & Bucholtz, 2001; Steier, 2003). In order for agency theory to gain credibility in describing family-influenced organizations, researchers must more intentionally examine the full spectrum of organizational life stages and contextual factors impacting agency considerations. If the agency literature on family businesses is developed purely around large database studies of mature and public firms ("because the data is available"--Morck & Yeung, 2004), it will fail to explain the idiosyncratic nature of family-influenced firms and new venture creation, especially in environments where more adaptive strategies and practices are utilized.

An Ecosystem Familiness Approach

In order to fully consider the interplay between agency issues and contextual factors in the family-influenced company, we need a more comprehensive and integrated approach. A number of entrepreneurship scholars have suggested that an ecosystem model, which pictures the reciprocal input-output interactions between the entrepreneur and the context, is useful for understanding the resource development and allocation processes (Zacharakis, Shepherd, & Coombs, 2002). Habbershon (2007), extending earlier work on the theory of the family firm and performance (Habbershon, Williams, & MacMillan, 2003), has developed a family business ecosystems model that is useful for describing the context and source of agency advantage and constraint.

The model in Figure 1 shows concentric circles of contextual factors and the reciprocal input-output relationships they have with one another. The outer ring (1) represents the social and economic factors in the external environment that influence the family, individuals, and business. The middle ring (2) pictures the family business as the interaction of the family, individual family members and the business with one another. As these subsystem parts interact within the ecosystem, they generate distinctive resources and capabilities that form the resource profile shown in the inner ring (3). The resource profile is both an output that is generated by the interactions in the system and an input back into the system to be utilized in the entrepreneurial process. The ecosystems model thus shows how the family form of organization is a distinct context for entrepreneurship and, reciprocally, the source for the agency views and practices impacting the business.

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