Interorganizational Familiness: How Family Firms Use Interlocking Directorates to Build Community-Level Social Capital (1)

By Lester, Richard H.; Cannella, Albert A., Jr. | Entrepreneurship: Theory and Practice, November 2006 | Go to article overview

Interorganizational Familiness: How Family Firms Use Interlocking Directorates to Build Community-Level Social Capital (1)


Lester, Richard H., Cannella, Albert A., Jr., Entrepreneurship: Theory and Practice


We draw on the concept of community-level social capital and apply it to the situation of a family-controlled public corporation. While traditional agency theory argues that agency costs are minimized in a family-controlled business (FCB) due to an improved alignment of owner and manager interests, we argue instead that FCBs endure additional agency costs uniquely related to the family firm organizational structure. To mitigate these additional costs, we propose that FCBs use board interlocks to build and maintain community-level social capital. That is, the intercorporate network of FCBs generates shared understandings, values, problem solving techniques, and approaches to dealing with family issues. Further, the network generates a level of social support for family business owners and managers grappling with challenges endemic to family control of public corporations. We generate a number of propositions that can be used in future research to test the theory developed here. We conclude with the assertion that the community-level social capital generated by the network of FCBs is an important reason for the survival and persistence of individual family firms, despite the existence of additional family-related costs.

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Long discounted by both scholarly researchers and the business press (e.g., McCarthy, 2004), the topic of family business is reemerging with new vigor (e.g., Anderson & Reeb, 2004; La Porta, Lopez-de-Silanes, & Shleifer, 1999; Villalonga & Amit, 2006). (2) While family ownership in large U.S. corporations is quite pervasive and common across a broad range of industries (Schulze, Lubatkin, & Dino, 2003), many of these firms also appear to have survived, often intact, over longer periods of time than their nonfamily counterparts (Miller et al., 2005).

While recent scholarly discourse focuses largely on performance differentials, we are more interested in examining the perpetuation of the family firm structure. How is it such firms are able to maintain their family status over time, given the obvious difficulties and costs associated with this form of ownership? Our interest lies in examining family firms in which two or more persons with kinship ties work as executives in the business, have the power to determine the composition of the board of directors, and have the objective of passing the firm to the next generation of family members. Throughout this article, we will refer to these organizations as family businesses or family-controlled businesses (FCBs).

We begin with the notion that public corporations structured as family businesses confront more, or at least different, challenges than similar, nonfamily, corporations. These differences exhibit themselves in a number of ways, at times clearly in line with firm survival and shareholder interests and at other times not. Gersick, Davis, Hampton, and Lansberg (1997) suggest these costs and issues arise from distinctions made between family, ownership concentration, and business issues. We can think of many related and intersecting issues when a family firm is viewed in such a context: e.g., succession, cousin consortiums, sibling rivalry, free riding, and unprofessional or unprepared management.

Accordingly, we do not attempt to parse the differential nature of family costs into categories and, while we recognize their existence, leave the latter for other research. Suffice it to say that while all corporations must deal with business and competitive concerns, and all public corporations have an additional burden of meeting the regulatory restrictions of public ownership, family corporations must also deal with an additional matter--family issues (Miller et al., 2005; Paisner, 1999). Miller et al. (2005) describe this second set of complexities, noting the parallels and differences between the agency costs created by the traditional separation of ownership and control, and the so-called costs of conflict, referring to the problem of dispute resolution among powerful family owners. …

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