Governing by managing identity boundaries: the case of family businesses.

Organizational Life Cycle. Several organizational life cycle theorists have long argued that the culture of an organization evolves as a firm develops and thereby shapes its behavior (Cameron & Whetten, 1981; Gersick, Davis, Hampton, & Lansberg, 1997). These theorists posit that the firm's challenges and opportunities vary across its life cycle, driving the internal context and choices that firms make. Ward (1986) similarly outlines three stages of family business evolution: early, middle, and late stage. The early stage is marked by an entrepreneurial culture fueling a desire for the firm to survive. In this stage, resource needs are high and the founder engages in less planning and more spontaneous decision making with a vision and passion for the business. While early stage founders will vary to the extent they merge their business and family identities, they are more likely to draw on their family social networks and financial resources and values. Moreover, the family and business needs are likely to be consistent and the family business most likely represents a substantial portion of the owner's assets. Furthermore, in most family businesses the owner serves as the president for over 20-30 years, a sufficient time in which to influence the business culture and identity (Ward, 1986). These institutional conditions are likely to steer the firm toward integration of family and business identities. In the middle stage, the enterprise grows and flourishes, and more intermingling of finances is likely, particularly in the direction of business to family as a way to reward members for years of sacrifice. Debt is also likely to be paid off, reducing external influence. Additional family members are likely to join a flourishing enterprise during this period, fueling the integration of family and business domains. As the organization matures, relying exclusively on family members for managing the business is less feasible, promoting nonfamily influence and more separation of family and business. At the same time, business capital needs to fund new strategies increasingly pushing the firm to seek debt. Thus, increased professionalization and external equity nudge the firm toward more segmentation.

Governance Implications of Integrated Identities

When there are children in the business, there is tremendous loyalty and trust and dependability and feeling of ownership and caring. The disadvantage is that it is very hard to wear two hats as a boss and as a parent.

--Stew Leonard, Sr. in Mancuso and Shulman (1991, p. 93)

In this section, we advance the argument that integrated family and business identities can potentially contribute to a culture of identification and shared identity that have functional consequences; however, integration also evokes blurting between roles that can foster dysfunctional conflicts. High segmentation evokes the reverse effects in that it can dilute the level of identification but reduce role blurting. This approach of conceptualizing integration-segmentation as two ends of the same concept surfacing the opposite effects is similar to that taken by those doing boundary research (Ashforth et al., 2000; Nippert-Eng, 1996). Also, the degree to which a firm experiences the pros and cons of integration will depend on the level of integration/segmentation, which in turn depends on the contingencies discussed. Thus, in the following sections we present the pros and cons of high levels of integration but note that the reverse is true for high levels of segmentation.

Identification and Shared Identity: A Key Advantage of Integrated Identities Comingling of family and business identity can potentially promote an "idiosyncratic pool of resources and capabilities" or "familiness" that can be the basis for competitive advantage (Habbershon, Williams, & MacMillan, 2003, p. 460). These resources are path dependent and based fundamentally on social phenomenon such as strong identification of stakeholders with the family business. Organizational identification, "the degree to which a member defines himself or herself by the same attributes that he or she believes define the organization," is a cognitive state that influences behavior (Dutton, Durkerich, & Harquail, 1994, p. 39).

First, a shared identity and strong identification can more easily form in an integrated context based on kinship, familiarity, commonality of personal characteristics, history, and extended period of experience (Tagiuri & Davis, 1996). Family ties and shared experiences build an "emotional bond [that] ... enables a person to 'feel' as well as to 'think' like the other" (Lewicki & Bunker, 1996, p. 122), helping to identify with a common set of goals and norms. Furthermore, since the reputation of the family and the business are intertwined and the family name carries with it a particular identity that has meaning for those within and outside the firm, family members are likely to police one another's behavior. Furthermore, fulfilling family obligations can be a source of pride, serve as an important nonmonetary incentive, and provide a common rallying ground for members of the family firm (James, 1999).

Shared identity and common ground can enhance the quality of decision making (Mustakallio, Autio, & Zahra, 2002). The history of interaction among individuals allows one to know each other's strengths and weaknesses, enhancing predictability of behavior. This deep knowledge can serve as a lubricant for smooth ongoing communications within the organization that are essential for high-quality decisions (Steier, 2001). Based on a study of Inc. 500 firms, Ensley and Pearson (2005) found that family involvement, particularly parental involvement in the top management team, leads to more effective behavioral dynamics. Teams with parental involvement had a stronger belief in their abilities, a greater sense of belonging to the team, greater consensus on the strategic direction of the firm, and less detrimental relationship conflict. Thus, integration of the family and business identities provides a basis for firms to develop a unique set of behavioral dynamics such as higher cohesion, potency, and shared strategic consensus that can be particularly valuable in dynamic markets.

Integration of the family and business identity can be pivotal for encouraging entrepreneurial activity. The start-up stage of a business is marked with considerable uncertainty and therefore access to capital and labor markets is limited. During this entrepreneurial stage, the firm can benefit when the horizons of decision makers are lengthened. Families play an important role in filling this void and represent a critical and often used resource for start-up businesses (Chrisman, Chua, & Steier, 2005; Steward, 2003). Research across a number of cultures indicates that during the early stages of a start-up, families play an important role in the mobilization of financial resources and the provision of human and physical resources (Aldrich & Cliff, 2003: James, 1999; Sanders & Nee, 1996). Furthermore, family employees may accept lower salaries so that revenues can be reinvested in the company, extending the time horizon that is critical for the success of entrepreneurial firms. These investments can be an important source of patient capital (Gundry & Welsch, 1994).

Integration of family and business identities can foster the entrepreneurial spirit in more mature firms as well. (1) The concentration of ownership and control in a family can enhance the speed of communication between owners who are embedded in common social networks (Carney, 2005); these connections can reduce constraints to decision making and enable a firm to quickly change its course of action, which can be particularly valuable in dynamic environments where first-mover advantages are significant. As noted earlier, the family can also serve as a source of patient capital for new ventures that involve entrepreneurial risk taking. High family ownership and multigenerational family involvement can promote venturing into new markets and investing in new technologies and radical innovations (Zahra, 2005).

The intermingling of the family and business identity and the resulting identification can have a beneficial influence on stakeholder relations (Donnelley, 1988). Not only does close association with a prominent family enable a family firm to raise money, but it can also be valuable for attracting and retaining customers (Donnelley, 1988; Steier, 2001). This close association is also used as a marketing tool, as in the case of companies such as Johnson & Johnson and Longaberger, implying quality, care, and special attention to customers. By projecting themselves as a family company they are leveraging the assumption that family companies have a long-term horizon (Brokow, 1996).

Employee loyalty and identification with the firm can be fostered, particularly if there is a succession of competent family managers (Donnelley, 1988). The presence of family employees is particularly helpful in employee relations because their loyalty typically spills over to the next generation. For example, in his research, Donnelley found that in a small metal treatment company the employees and unrelated executives were actively concerned about training the owner-manager' s son because they did not want "outsiders" owning and managing the organization. Thus, nonfamily employees identified with the company and were engaged in perpetuating integration of the family and business systems. Yet such integration of domains poses significant costs, which we discuss in the next section.

Blurring between Roles: A Key Disadvantage of Integrated Identities