Academic journal article Journal of Small Business Management

The Impact of Goal Alignment on Board Existence and Top Management Team Composition: Evidence from Family-Influences Businesses*

Academic journal article Journal of Small Business Management

The Impact of Goal Alignment on Board Existence and Top Management Team Composition: Evidence from Family-Influences Businesses*

Article excerpt

Using a sample of 714 private family influenced businesses in Germany, we investigate the relationship of goal alignment between owners and managers and the existence of a board of directors. Agency theory and stewardship theory serve as theoretical bases for our study. We find that firms with relatively high levels of goal alignment are less likely to have a board of directors. Our results provide support for the substitution hypothesis of formal by social control mechanisms. Furthermore, the findings show that firms without a board and with relatively low levels of goal-alignment have less family members in the top management team. This circumstance might in turn be a trigger for owners to install a board.

Introduction

Agency theory (Eisenhardt 1989; Jensen and Meckling 1976) and steward-ship theory (Davis, Schoorman, and Donaldson 1997) are the two prevailing paradigms in coporate governance research (Sundaramurthy and Lewis 2003; Tsai et al. 2006). Rather than conrtrasting the two theories, it has been argued that one theory seems to be better suited to describe some organizational settings than the other (Lee and O'Neill 2003; Sundaramurthy and Lewis 2003). For the approprite design of effective corporate governance mechanisms, it is therefore important to understand the distinctive organizational characteristics that make one approach more appropriate than the other.

We contribute to this stream of research by investigating a fundamental point of distinction in management-owner relations as described by agency and stewardship settings: goal alignment (Sundaramurthy and Lewis 2003). The leading question of this paper is whether different levels of goal alignment, reflecting either agency or stewardship-oriented organizational settings, lead to different governance structures in terms of the existence or lack of a board of directors in a family-influenced business. Goal alignment reflects the overlap of goals and values of the owners on one hand and the management on the other (Mayer and Schoorman 1992). A family-influenced business is a business where a family exerts power over the organization and its strategic direction through ownership, top management, or board positions (Astrachan, Klein, and Smyrnios 2002). Like any other type of business organization, a family business can use contractual (formal control) mechanisms, such as a board of directors, to align the interests of family owners and managers (Fama and Jensen 1983a; Fama 1980; Jensen and Meckling 1976). In addition, family-influenced firms have a large array of relational (informal or social control) governance mechanisms (i.e., communication within the family, inclusion/ exclusion from family events) based on prevalent kinship ties at their disposal (Mustakallio, Autio, and Zahra 2002; Tagiuri and Davis 1996; Daily and Doll-inger 1992; Geeraerts 1984).

Because family-influenced firms can use both formal and informal control mechanisms, they represent natural set tings to explore the contingencies making one type of managerial control preferable to the other. Toward this aim, we hypothesize that on one side, goal alignment (as suggested by stewardship theory) acts as a substitute for agency control mechanisms, such as a board of directors. On the other side, we expect that a relatively low level of value overlap between owning family and management engenders agency dynamics and results in more formal governance, such as a board of directors. We operationalize goal alignment through the culture subscale of the Family-Power, Experience, and Culture (F-PEC) scale (Klein, Astrachan, and Smyrnios 2005) and test our model on a random sample of all companies listed in the German Trade Register in the year 2002. Our choice for a single national environment is motivated by the fact that in most legal forms of incorporation, a board of directors is not required by law in Germany.

Our study makes four important contributors to management research. …

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