Study on the Relationship Between Familiness and Performace of Family
Business
Yan-shuang Li1, Yong Wang2
1
2
School of Management, Hebei University of Technology, Tianjin, China
Wolverhampton Business School, University of Wolverhampton, Wolverhampton, UK
( lilicathy@163.com)
Abstract-This article analyzes the structure of familiness
and the evaluation indicators of family business
performance. Familiness is constructed by family
ownership, family blood thickness, and family member
CEO; Family business performance is divided into two
aspects: wealth creation and value creation. Three
propositions are postulated about the relationship between
familiness and performance. The conceptual exploration of
the structure of familiness, the evaluation of performance,
and the relationship between familiness and performance
may offer a unique perspective in the research domain,
future studies may work towards validating the propositions
put forward in this study.
Keywords: familiness, performance, family business,
blood thickness, family ownership
I.
INTRODUCTION
Nowdays, family business continue to be the
important part of the worldwide economy, no matter in
western or eastern countries (Shanker & Astrachan,
1996;). Some researchers present that many family
business usually have much better performance than their
non-family competitors because of the family
involvement ( Villalonga & Amit, 2004).
Family business has some different features
comparing with the non-famliy business. Such as the
family ownership of the family business, the unique
governance of the family business, the management style
and the sustainable vision of the family business. Some
scholars (Handler,1994) presented that family business
can be seen as the combination system of three
subsystems, that is family roles subsystem, family
business ownership subsystem, and family business
activities subsystem, there are “blurring” boundaries
among the three subsystems, and usually if a business
embodies the three subsystems or at least two of them, we
can pronounce that the business is a family business. (
Gersick, Davis, Hampton & Lansberg, 1997).
With regard to the question how to judge that a
business is a family business or what degree is the family
involvement
in a family business, some scholars
introduced the term ‘familiness’. The term ‘familiness’
was used to express the interaction relationship between
the family, the business, and business management
(Habbershon & Williams,1999). The authors who first
presented the term of ‘familiness’ are Habbershon and
Williams, in their paper, they defined the term of
familiness as the unique bundle of all of the family
business resources, and particularly, they think that the
bundle of resources come from the
interaction
relationship among the business, the family, and the
family members. Since then, many scholars have made
efforts on understanding the factors of family
involvement in the family business, the essence of the
family involvement, and consequently, the resulted
performance of the family business ( Chrisman, Chua, &
Sharma, 2005)[1].
The purpose of the present research is to discuss the
relationship between the familiness and the family
business performance. Based on the literature review
about the factors and structure of the familiness and the
evaluation construction of family business performance, a
series of propositions is presented, and suggestions are
made for ongoing research.
Ⅱ STRUCTURE OF FAMILINESS
Generally speaking, “familiness” is often used as a
mean to explain the interaction of various resources
within family business, or as a method to distinguish
between non-family and family businesses. Till now,
many scholars prefer to explaining familiness as the
combination of existing stocks of various resources in the
family business, such as the human resource, the social
resource, the financial resource, and the physical capital
resources, while the combination of the various resources
is resulted from the interactions relationship between
family and business subsystems (Sharma, 2008) [2]. In
order to evaluate the effect of family involvement,
Matthew, Donald & Daniel ( 2008) used the definition of
“high familness” and “low familiness” to express the
degree of family involvement, or the ‘familiness’ degree.
Astrachan et al.(2002) firstly presented the F-PEC
model for measuring the familiness of family firms, some
scholars ( Holt et al.,2007) tested that it is useful. In the
F-PEC model, F replaces family, P replaces power,
includes 2 items: 1) how many ownership/ownership
percentage is shared by family members; 2) how many
family members are on the family business’s governance
board; E replaces experience, includes 3 items: 1) which
family generation is owning the family business; 2) which
family generation is managing the family business; 3)
which family generation is acting on the governance
board; C replaces culture, includes 7 items: loyalty, pride,
and so on.
In our study, in order to present some propositions
for the empirical research, we mainly consider the
familiness from three measurable dimensions: 1) family
ownership, it refers to the number of family members that
share the family business ownership, the generation of the
family members that is owning the company, the overall
and individual ownership percentage of the family
members; 2) family blood thickness, it refers to the
numbers of family members that are on the family
business’s governance board and the relative blood
thickness among the family members; 3) family member
CEO, it refers to the family member who is acting on the
family business governance board and is managing the
company as CEO.
Ⅲ EVALUATION OF FAMILY BUSINESS
PERFORMANCE
Traditionally, family business’ performance is
evaluated by financial indicators, generally include sales/
revenue, sales/revenue per employee, debt-to-equity, and
growth. Sindhuja P N(2009) evaluated performance
under four dimensions: 1) Value Creation: it is mainly
measured by the Tobin’s Q Ratio; 2) Growth: it is mainly
measured by Compound Annual Growth Rate; 3)
Profitability: it can be measured by ROA (Return on
Assets) , RON (Return on Net Worth), Return on Capital
Employed, Profit Margin, Sales Turnover, Earning Per
Share, Market Capitalization, and Net Operating Profit
After Tax; 4 ) Risk: it is mainly measured by Debt-toEquity ratio and Net asset[3].
Jim Lee (2004) divided family business performance
into three aspects: profitability, operational efficiency,
and financial soundness[4]. The profitability can be
measured by net profit margin, gross profit margin, return
on assets, return on equity, and return on invested capital.
The operational efficiency can be measured by the
turnover of inventory, the days of sales outstanding, days
cost of inventory goods sold, turnover of asset, and net
receivables turnover flow. The financial soundness can be
measured by revenue growth in the last 12 months and in
the last three years, the net income growth in the last 12
months and in the last three years.
A number of academic researchers have argued that
accounting measures seem to be inadequate to indicate
the true performance of the family business
(Chakravarthy, 1986; Oswald and Jahera, 1991). Jira
Yammeesri & Sudhir C. Lodh (2004）selected the datas
between 1998-2000 on the Stock Exchange of Thailand to
analyze, they utilized both market returns and accounting
measures (profitability) as alternative proxies for family
business performance.
In order to successfully transfer the family business
to descendant generations, the family business usually
pays attention to both economic and noneconomic results.
Habbershon et al.(1999) explained that the familiness of a
family business will lead to the family business’
competitive advantage, and then the competitive
advantage will enhance family business’ wealth creation
or economic performance. Chrisman et al.(2003)
suggested that the familiness degree of the family
business will also lead to family business’ value creation
or non-economic performance, such as the preservation of
family blood ties or the value sustained across
generations.
Chrisman, Chua, and Zahra (2003) proposed that in
order to evaluate the family business performance, both
the economic and noneconomic benefits must be taken
into account. In our paper, the family business
performance is divided into two categories: wealth
creation and value creation. Wealth creation refers to the
economic outcomes, includes both market returns and
accounting measures; value creation refers to the
noneconomic outcomes, includes the loyalty, integrity,
commitment, harmony, social status, reputation of the
family business.
Ⅳ PROPOSITIONS ABOUT THE RELATIONSHIP
BETWEEN FAMILINESS AND
FAMILY BUSINESS PERFORMANCE
A. Family Ownership and Family Business Performance
Ownership structure of a family business is clearly
important in determining the family business’ goals, the
shareholders’ wealth as well as how managers of a family
business can be disciplined (Jensen, 2000)[5]. Some
researchers suggest that family businesses display
significantly better market and accounting performance
than their non-family counterparts. Maury(2005) tests the
relationship by a sample of European family business and
gets nearly the same conclusion, the result shows that
family business exhibits better financial and economic
performance than the non-family business[6].
Thomsen and Pedersen (2000) investigated
businesses’ financial indicators of 12 European nations,
they choosed three financial indicators: return on assets,
market-to-book value, and sales growth. The 12 nations
are United Kingdom, Germany, France, Italy, Spain,
Austria, Belgium, Denmark, Finland, Netherlands,
Norway, and Sweden. Their study suggested that in
relation to market-to-book value and return on assets,
family ownership exhibited a negative relationship
compared to institutional investors. Whilst in sales
growth regression, the result showed that sale growth
was significantly higher in businesses with family
ownership.
Jira Yammeesri & Sudhir C. Lodh (2004) examined
the relationship between family ownership and business
performance in Thailand, they calculated some
businesses’ data between 1998-2000, their results showed
that business controlled by family was positively
significant on the performance of profitability, but it was
less significant to the performance of market returns.
Roberto Barontini (2006) summarized that family control
is positive on valuation and operating performance for the
continental European corporations[7]. Based on the above
discussion, we present the following proposition:
Proposition 1: family ownership is positively related
to the family business performance;
B. Blood Thickness of Family Members and Family
Business Performance
Venter (2003) introduced the concepts of foundercapital, family-capital and generation-capital in
familiness transmission of capital model. Founder-capital
considers the founder of the family business as a
resource, family-capital considers founder’s children as a
resource, whilst generational-capital considers the
descendants of the siblings in the family business as a
resource. Venter indicated that once the founder retires or
leaves the family business because of other reasons, the
founder-legacy will be inherited by descendants, and the
founder-legacy will be internalized and absorbed within
the family business, then the founder-legacy will continue
to influence the next generations of the family business.
Nicholson (2008) found that human action will
exhibit obvious differences when humans act towards
relatives and act towards the person they do not familiar
with[8]. Generally, humans act much enthusiastic to their
close individuals, i.e., siblings in family business. Neyer
& Lang (2003) expressed the thickness of the family
governance board as factor r, which stands for the genetic
relatedness between the family members. To
monozygotic twins, they defined the value of r is 1, since
they share all the genes; to parent, child, dizygotic twins,
and full sibling, they defined the value of r 0.5; to
grandparent, grandchild, half-sibling, and avuncular
relationship, they defined the value of r 0.25; to cousins,
great-grandparents, great-grandchildren, great-uncles, and
great-aunts, they defined the value of r 0.125; and to other
kin , they defined r 0.0625, and so on. Sven-olof Y.
Collin, Jenny Ahlberg & Jonas Gabrielsson (2011) had
presented a term of family coefficient, which stands for
the sum of all r factors on the governance board of the
family business, it can replace the blood thickness of the
governance board, and can be seen as the overall
indicator of familiness[9]. The sum value of r can express
the total degree of familiness. Collin (2008) presented
that the governance board of a business has four
functions, namely resource, decision, control, and
conflict[10]. Sven et al. (2011) thought that the board
orientation towards the four functions will be influenced
by the total degree of the blood thickness on the board,
and subsequently, the overall activity of the board will
also be influenced. Based on the above discussion, we
postulate the following Proposition:
Proposition 2: blood thickness in family business is
positively related to the family business performance;
C. Management
Performance
Position
and
Family
Business
Morcketal (1988) presented that founder CEOs are
very important to the family businesses, they usually have
the capabilities and incentive to innovate in the family
business, and they are willing to invite the expertise to
help enhance the value of the family business[11]. Ronald
C. Anderson & Davidm. Reeb (2003) examined the effect
of family ownership on large publicly traded U.S. family
businesses’ performance, they found that the family
business with family member CEOs displays a positive
relation to economic performance. Where family member
CEOs means the CEOs are founders of the family
business or the CEOs are the descendants of founders in
the family business[12].
Indicating from a study of 500 S&P (Standard and
Poors) USA businesses, Anderson and Reeb (2003) got
the conclusion that when the Chief Executive Officers are
the founders or other family members of the family
businesses, the family businesses are more likely to have
better performance, they will outperform their non-family
competitors. Hence, we posit the following Proposition:
Proposition 3: family member CEO is positively
related to the family business performance;
Ⅴ CONCLUSION
This study discusses the relationship between
familiness and family business performance. The paper
has twofold implication. First, presenting the indicators of
familiness, which will facilitate the research domain in
the familiness constuction. Second, considering both
construction indicators of familiness and famiy business
performance may not only encourage empirical studies
between familiness and performance, but also drive
researchers in the area to develop theories specific to the
domain.
Following this conceptual exploration, future studies
may work towards validating the propositions put forward
in this study. Along this direction, a number of research
initiatives could be contemplated. First, more detailed
constructs to measure familiness and performance is to be
developed. In the paper, we mainly discuss the
measurable indicators, how to definite and measure the
qualititative indicators, such as the culture feature of
familiness and the noneconomic outcome is still need
effort. Second, qualitative/quantitative studies may be
followed to enrich the understanding of familiness
influence and validate the propositions proposed. Third,
the majority studies of previous efforts that examine the
relationship between familiness and family business
performance have been conducted as cases in the western
developed countries, such as the United Kingdom and the
United States, for which its familiness structure is
typically different to that of the cases in developing
countries. Hence, the empirical studies in the developing
countries are highly expected.
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