8th workshop on family firms management research, Jönköping, Sweden, May 31-June 2, 2012

Governance instruments as practices in strategizing: Towards a behavioral perspective of the family firm

Authors: Judith van Helvert Windesheim University of Applied Sciences PO Box 10090 8000GB Zwolle The Netherlands T +31 88 469 7189 E jmc.beugels@windesheim.nl Ilse Matser Windesheim University of Applied Sciences PO Box 10090 8000GB Zwolle The Netherlands T + 31 88 469 8828 E ia.matser@windesheim.nl Ron van der Pol Windesheim University of Applied Sciences PO Box 10090 8000GB Zwolle The Netherlands T + 31 88 4697834 E hwg.vander.pol@windesheim.nl

Work in progress; please do not quote!

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Governance instruments as practices in strategizing:

Towards a behavioral perspective of the family firm

Abstract

Specific events may alter the governance structure of family firms. However, current theories and

models of governance are rather insensitive to the causes of changes or developments in the

governance structure. For example, the model developed by Huse (2007) on the value creating process

of the board takes into consideration the contextual contingencies in which the process takes place, but

the underlying intentions of the actors or the factors that lead to action are undiscussed. In addition, it is

questionable whether value creation is the only process outcome of the governance change process that

should be measured. Family firms might have different goals than just value creation to change their

governance structure, depending on the event that triggers this change process. For example, firms that

face succession in a couple of years might want to change the governance structure to support this

process and manage the family relationships for the future. A successful transition might than be more

important as a process outcome than value creation.

This paper builds on behavioral theory and reports on the intention of family members in family firms

to change their governance structure. It relates recent behavioral thought on governance (Van Ees et

al., 2009) to strategizing in the context of the family firm to set up a research design which aims to

understand governance mechanisms as strategic practices to support the strategic decision making

process. The research design builds on the Strategy-As-Practice (SAP) perspective and focuses on 18

private family firms in the Netherlands that were sufficiently different in terms of overlap between

the family and the firm, the level of formalization and general characteristics like sector and size.

This study contributes by looking at change processes in strategizing while considering the specific

family firm context. Building on behavioral theory, we propose to test the assumptions underlying

I don’t have a working relation with my brother. We are just brothers who run a business together.

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behavioral theory in the context of the family firm, and aim to generate theory for the family business

research field.

Keywords: strategizing, governance, family firm, strategy as practice, behavioral theory

1. Introduction

Traditionally, strategy researchers viewed strategy as something that organizations have. This view has

led to numerous quantitative studies on the relation between firm- or industry level effects on

performance. There are a number of fundamental concerns to be made with respect to these studies

and their implications on strategy for private family firms. First, most of these studies focus on large

(listed) firms (as opposed to SMEs) and they provide contradictory findings. The second concern relates

to the methodology used; these are mostly quantitative studies that fail to explain what strategy

actually entails; it remains for example unclear which strategic tools are used by which actors and in

which situations. The third concern is that it is questionable whether financial performance is the main

goal of private family firms.

Relatively little attention has been paid to the strategy processes that family firms follow to achieve

their goals. Leading scholars in the strategy research field (e.g. Whittington, 2006; Johnson et al., 2003;

Johnson et al., 2007; Nordqvist & Melin, 2010, Jarzabkowski and Spee, 2009) have proposed to shift

attention to a more micro-level approach when studying strategy. This proposed focus on the micro

level is based on the view that strategy is an activity; something that people do instead of something

that organizations have. There is a need to understand what people actually do when they engage in

strategic activity to explain larger patterns of strategic actions.

This paper is part of a larger research project that aims to contribute to the identification of strategy

processes in private family firms in the Netherlands that are in the middle of a change in governance

structure. Governance mechanisms in SME family firms can be considered to be vehicles to provide

structure and discipline in strategic processes. In addition, the involvement of outside directors in

boards or top management teams can help in realizing strategic change (Brunninge et al., 2007). The

research project seeks to analyze who the actors involved in strategizing are, how, when, where and

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why they are involved, and how the governance mechanisms support this process. The firms that

participate in the project have the intention to adjust their governance structure. They all have their

own reason or ‘sense of urgency’ to invest time and other resources in this change process.

This paper focuses on the first part of the overall research project and seeks to analyze the intention to

change the governance structure in private family firms. Why do these firms intend to change their

governance structure? What are their expectations of a new governance structure? In addition, the

study aims to identify the context in which the potential change process takes place. Thus, the purpose

of this paper is to explore and understand the cause and goals of the intended change process of the

governance structure in family firms. The focus is on the following research question:

RQ: Which factors lead to the intention to change the governance structure of the family firm?

The next section discusses the literature and theory that provided a starting point for this study. We

will shortly introduce behavioral theory to understand strategizing and the supporting role of

governance mechanisms in the strategic decision making process in the family firm. After a section on

the sample, the findings from the interviews and the propositions resulting from the assumptions

underlying behavioral research are discussed in section 4 and 5. The conclusion and limitations will be

discussed in the last section.

2. Theoretical background

Strategizing

The research approach that pays attention to the micro processes and detailed activities of strategy

making is referred to as the Strategy As Practice (SAP) perspective, also referred to as strategizing. This

perspective is defined as “a concern with what people do in relation to strategy and how this is

influenced by and influences their organizational and institutional context” (Johnson et al., 2007). It

relates to “the detailed processes and practices which constitute the day-to-day activities of

organizational life and which relate to strategic outcomes” (Johnson et al., 2003). As noted by Nordqvist

(2011), the SAP perspective is important for two reasons: (1) to develop accurate theoretical concepts

on family firms that are based on a theoretical and methodological approach that takes into account the

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details of the processes through which strategy is formed, and (2) to pay sufficient attention to family

members as social actors and their interaction because of their influential role in strategy formation.

The SAP perspective is still relatively new. Since 2005, a growing number of studies takes a qualitative

approach to study the strategy process as opposed to strategy content. For example, the Center for

Family Enterprise and Ownership of the Jönköping International Business School in Sweden has

published a number of qualitative studies on strategizing in family firms (e.g. Nordqvist & Melin, 2010;

Brundin & Kjellander, 2010; Nordqvist, 2011; Hall et al., 2006). The little empirical research that is

available on strategizing in family firms provides indications of the actors that engage in strategizing

(Nordqvist & Melin, 2008), in which arenas they engage in strategizing (Nordqvist, 2011), and the

practices of strategic planning in family firms (Nordqvist & Melin, 2010). One of the major research

opportunities in strategizing which is still unexplored, relates to change initiatives. As explained before,

this paper focuses on the intention of family members in family firms to change their governance

structure to understand governance mechanisms as strategic tools in the strategic decision making

process.

Jarzabkowski and Spee (2009) have provided a literature review on studies within the SAP field,

using the following broad three research parameters: (1) practitioners, those actors that do the

work of strategy, (2) practices, the tools through which strategy work is done, and (3) praxis, the

flow of activity in which strategy is accomplished. Whereas eventually all three parameters will be

part of the study, the main focus of this research project, namely studying how governance can be

used as a tool to support the strategic decision making process, is covered by the practices

parameter.

Governance in family firms

Research in corporate governance addresses the nature of interaction and relationships among the

internal actors, the external actors and the board members in the process of decision making and

control over firm resources with the aim to create value for the organization (Van Ees et al., 2009; Huse,

2012). Internal actors are those who make decisions and take action (management), and external actors

are those stakeholders who seek to influence and control decisions (for example the owners). According

to this theoretical view on governance (e.g. by Mintzberg, 1983) family members working in family firms

might qualify as internal and external actor at the same time. In addition, family members might have

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objectives other than purely economic objectives that influence the interaction with other actors

involved in the decision making process. It is therefore important to consider the interaction in relation

to its history and specific context.

Because of ownership positions, family owners in family firms enjoy certain control rights over the firm’s

assets and use these rights to exert influence over decision-making processes. Carney (2005) argues that

the competitive advantage of family-controlled firms arises from their system of corporate governance.

His argument is based on the view that the control rights associated with the governance systems create

general propensities with regard to the formation of organizational capabilities and that governance

therefore influences the way managers develop internal routines, processes, and systems and the

manner in which firms contract with external entities such as financiers, capital markets, and other

business partners. According to Carney, the impact of the ownership’s control over the firm’s assets

generates three specific characteristics that provide advantages in scarce environments, that generate

social capital, and stimulate opportunistic investment processes. These three characteristics are (1)

parsimony (strategic decisions are made with personal wealth and in general family firms are therefore

more prudent), (2) personalism (the ultimate authority is incorporated in the person of the family

owner-manager), and (3) particularism (majority ownership permits the family to use particularistic

criteria next to rational calculative criteria in the decision-making process.

Next to formal or contractual governance systems, firms can also build on informal or relational

governance. Relational governance relates to values and agreed-upon processes in social relationships

that promote flexibility, solidarity and information exchange (Poppo and Zenger, 2002). These social

relationships are generally characterized by trust. In 2002, Mustakallio et al. have analyzed the effect of

contractual and relational governance on the strategic decision-making process in family firms. They

found that relational governance, based on social capital, augments contractual governance and leads to

higher decision quality and decision commitment.

The context of the family firm

Research has shown that family firms are different from non-family firms, among others in their social

relationships with stakeholders (Corbetta and Salvato, 2004), in the way they manage their resources

(Sirmon & Hitt, 2003) and next to economic objectives, family firms strive for the continuity of the firm,

family harmony, social status and family business identity (Chrisman et al., 2010). Because of these

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differences, family firms behave different from non-family firms. However, the family firm does not

exist. Family firms differ by the impact of the family on the firm. Chrisman et al. (2010) have shown that

family involvement is positively related to the adoption of Family Centered Non Economic (FCNE) goals

and that this relationship is partially mediated by family essence as measured by the transgenerational

control intention and family commitment. This is one way to look at the impact of the family on the firm.

The integrated system view as used by Hall et al. (2006) is another way to look at the impact of the

family on the firm, and proposes that the functioning of the family firm is not only the result of an

overlap in the family system, the business system and the ownership system, but of a synthesized

system with its own dynamic and logic. This integrated systems view is further illustrated by Litz (2008)

who not only talks about the family business but also the business family. He uses the Möbius strip as a

metaphor to conceptualize the family business and its reciprocal institution—the business family. The

family system and the business system are interrelated by their output which is turned into input for the

other system: “a business becomes a family business and, conversely, a family becomes a business

family, whenever cross-system transfers occur. For example, when a next generational family member

becomes a business employee, he or she helps generate profitable transactions for the business, which

in turn provides a financial return used to sustain the family. In short, the family-firm interface becomes

increasingly Möbius-like whenever each system’s outputs (the family’s child and the firm’s wages) are

transferred across systems to become the other system’s inputs, that is, the firm’s workforce and the

family’s income, respectively”. Litz continues by differentiating the level of interrelatedness by four

factors: scale, scope, sign and singularity. Scope relates to the diversity of dimensions ranging from

values to finances, scale is about the size of the transfer in absolute and relative terms, sign concerns

whether the input is positive or negative, and singularity concerns the complexity of the transfer.

From an integrated systems perspective, an understanding of the governance of the family business as a

practice to support the strategic decision making process must be built on the specific family business

context which is characterized by the level of integration of the family and the business (family

involvement). The perspective leads to expectations that the individual actors have their own specific

goals depending on their position in the firm (e.g. owner, manager or employee), and that actors are

subject to particular conditions of the family firm, such as social norms from the family that provide

guidance and boundaries in this strategy process (Hall, et al. 2006).

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Behavioral theory: why?

Recent developments in governance research to use behavioral theory to understand the conditions for

effective governance depart from the dissatisfaction about conflicting and ambiguous research results of

governance studies that use the agency theory perspective as a basis. This shift in theoretical

perspective is important because assumptions like rational decision making underlying agency theory

have proven not to be valid in reality. The behavioral theory of the firm (March and Simon, 1958) helps

to understand decision making in real business settings. According to behavioral theory, decision making

is an experiential learning process which develops by trial and error. During this process the goals are

adapted, and attention and search rules are developed (Huse, 2007). Van Ees et al. (2009) have applied

the assumptions underlying the behavioral theory of the firm to boards and corporate governance. This

paper proposes to use behavioral theory to study why and how actors choose and use specific

governance mechanisms as a tool to support the strategic decision making process.

After the next section that elaborates on the research method, the variables of interest and the sample,

we will discuss the intentions of the firms to adjust the governance structure. Then, we will introduce

the assumptions underlying the behavioral theory of the firm, put them in the context of the

participating family firms and relate them to the strategic decision making process.

3. Sample and research method

According to Johnson et al. (2007), in-depth and mainly qualitative research are a central requirement

for developing the SAP perspective. In this qualitative study, eighteen family firms participate that have

the intention to change their governance structure. These firms are sufficiently different in terms of the

formal structures and processes that could be expected to have an impact on strategic processes. The

characteristics of these firms are shown in Table 1, in the Appendix. Most of these firms have 50 or more

employees, however the number of family members working in the firm is limited to a maximum of

three. Three firms are managed by the first and second generation, seven firms by the second

generation, two by the second and third generation, two by the third generation, and 4 by the fourth

generation. Fifty per cent of the firms have management teams that partly consist of non-family

members, and only four firms have a board next to the management team.

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These company characteristics were acquired via semi-structured interviews, during which topics like

the intention to adjust the governance structure and the expectations of a new governance structure

were discussed. In addition, we talked about decision making processes in the firm and the involvement

of the family. These findings have been summarized in Table 2, also presented in the Appendix. We will

further elaborate on these findings in the next section.

As explained in the introduction, this paper is part of a larger research project that aims to contribute to

the identification of strategy processes in private family firms in the Netherlands that are in the middle

of a change process of the governance structure. This study aims to combine the behavioral theory of

the firm and the findings from these introductory interviews to set up a research design to analyze

whether and how governance structures can support the strategic decision making process and how this

is linked to the goals of the firm. After this first stage of the larger research project, we will select those

firms that provide diversity in terms of their intention to start the change process to do further case

study research. This approach is referred to as theoretical sampling (Glaser and Strauss, 1967). The goal

of theoretical sampling is to gain deeper understanding instead of a representative capture of all

possible variations. We will select two cases per intention or ‘sense of urgency’ to adjust the

governance structure to be able to make cross comparisons. Cross comparison and triangulation by

using multiple data collection methods leads to higher validity of the study and thereby provides

stronger substantiation of constructs and hypotheses (Eisenhardt, 1989). Therefore, multiple data

collection methods will be combined to gather the empirical material such as a large number of

interviews (with owners, managers, consultants, board members, family members, and accountants),

observations of meetings (board meetings, strategic planning meetings), casual conversations, and site

visits. Company reports, minutes from board and senior management team meetings, strategic plans,

newspaper articles and the web will be used. The goal of these case studies is both to test the

behavioral theory of the firm in the process of strategizing, and generate theory for the family business

research field. This means that a combination of an inductive and deductive approach is used. This

combination of analytical approaches is indicated as ‘abductive’ (Alvesson and Sköldberg, 2000).

Variables of interest

Possible variables of interest include the level of integration between the family system and the

business system, strategizing, goals and governance mechanisms. To differentiate between the different

family firms in the study, Litz’s (2008) idea of various levels of interrelatedness between the family

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system and the business system will be elaborated on. The second variable of interest relates to

strategizing and concerns the goals of the family firm. What are their economic goals, what are the non-

economic goals and to what extent are these goals important for either the family system, the business

system or both. Do family firms operate as ‘extensions’ of their owner-managers or the family? In

addition we want to know about the expectations of a new governance structure. How can the new

governance structure help in realizing the goals of the company? Again, the study will both focus on the

specific governance mechanism that is used, but also its interaction with contextual and scope

conditions. Furthermore, it is becoming recognized that the nature of governance mechanisms needs to

change as firms cross over the different thresholds in the life-cycle of their development (Zahra et al,

2009). So one important contextual or scope condition to take into account is the life-cycle of the firm.

Therefore, we have also asked about the intention of the firms to participate in the research project to

understand the reason why they want to reconsider their governance structures.

4. Initial observations

Because the number of family firms that has a board is rather limited (13.5 per cent of the family firms),

we want to know which strategic issues trigger firms to think about formalizing the governance

structure. Therefore, we have asked the firms for their motivation to participate in our research project,

for the expectations on a new governance structure, and the involvement of the actors. In this section

we will report and illustrate on these findings. 1

Intention to adjust the governance structure

The intention of the participating family firms to think about and reconsider the governance structure

can be categorized in three major factors: ownership structure, family management, and changes in the

market situation. Other factors which are mentioned are the need for an advisory ‘tool’ either for the

CEO or for the management team as a whole, a backup plan if something happens to the CEO, manage

relationships with non-family owners, and the need for more formalized strategic planning.

1 Due to translation from Dutch to English, slight deviations in meaning may occur in quotes.

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Ownership structure

One of the major strategic issues to think about the governance structure is a change in the ownership

structure. Nine of the eighteen family firms indicate that ownership issues are at least one of the

reasons to consider an advisory or supervisory board.

In the situation above, the change in ownership structure is related to a succession. However, also other

situations than succession might be a reason to adjust the governance structure. For example, the

involvement of the owner in the firm.

Family management

Another factor which is mentioned by a number of firms as the main reason to think about the

governance structure and consider to change it, relates to managing family involvement. This relates to

setting requirements for family members who want to work at the family firm, but also to manage

responsibilities of family members at different positions in the firm.

We know about the legal and tax issues involved in ownership succession, but we also want

to learn how to ensure continuity and the quality of employees.(…) And ehm, well, we want

to be informed about the different governance options and broaden our view. So orientate

on a new governance structure.

The sense of urgency to adjust the governance structure of the firm results from the change

in ownership structure. When I think about the former ownership situation, I notice that I

have a bad feeling about it. That I have not acted on it before and I have been paying

someone who did not add something to the firm, but who was quite demanding. And with

that experience, I now say that I want to manage things right.

Father: I am, ehm, I want, the priority is that I am and stay the father of my sons. And after

the succession I don’t want to control them. So the members of the board of supervisors are

all non-family members. The only place where I still talk about the firm with my sons now

they are in the business is at the kitchen table.

Son: And ehm (..) we have to do more to keep my sister a little bit involved. Because now

we say, here is the annual account, read it, and then you know what is going to happen. If

she does not understand it, there is too little communication to explain it and make

agreements. We need to formalize that.

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Another respondent responds in a similar way:

Growth and other changes in the market

The third category of factors that are mentioned as reasons to reconsider the governance structure

relates to developments in the market. Some firms struggle with uncontrolled growth whereas others

have difficulty to survive. They are all in need of expertise to help them to respond to these

developments.

It is clear that the respondent above is in need of advice of how to position the firm in a market which

becomes more tight. However, also companies that grow quickly have difficulty in managing this.

Expectations of a new governance structure

Fourteen out of the eighteen family firms indicate that continuity is the main goal. In general, we could

say that their expectation of the governance structure is to help them to realize this goal. With respect

to the governance structure, we see that the intention to change the governance structure is linked to

the governance mechanism that the company is considering. Those firms that struggle with family

management issues are considering family constitutions, whereas the other firms are considering

advisory or supervisory boards. Those firms that consider a family constitution expect that the

We have had some issues in our family. Last year, one of my brothers has given up his

ownership share and this has led to some tension. My children are still very young, but the

oldest of my oldest brother is 22 years old, so within a couple of years succession might

become a relevant topic. So it is interesting and important to manage things right and

know about the different possibilities, now I am thinking to set up a family constitution. But

are there other options? What are the advantages and disadvantages? I also like to talk

about these things with other entrepreneurs.

Since 2004 we have lost some of our major customers. Next to the financial and economic

crisis, we have experienced some major shifts in our industry. We want to know how we can

survive as a small family firm in a market in which the major customers make agreements

with the big franchising companies?

Should I interfere or should I let the manager ehm (..) do his job? Ehm and ehm not overrule

him, well I would not do that anyway when others would be able to hear or see. That is

what I struggle with. We are not bullies, but management can be more tight every now and

then.

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constitution will help them clarifying authority and ownership issues, and eventually to achieve the goal

of continuity and family harmony.

If we consider the expectations of an advisory or supervisory board in terms of the general distinction

between the service and control function of governing mechanisms, then most of the respondents

indicate that they are in need of this service function. A number of firms mention the focus on strategy

and organizational issues on behalf of a healthy company.

Involvement of actors

Then, as the last variable of interest in this initial stage of the project is the involvement of the actors in

this change process. In order to make inferences about the supporting role of governance mechanisms

in strategizing, we need to acknowledge the context in which the process takes place. Decision making

processes and the actors involved are very different. In one of the firms, the governance structure is

rather formal with a management team with four non-family members and a supervisory board with

three non-family members. Only one of the two owners, brothers, is the CEO and part of the

management team. The other brother has a sales position, however, via informal routes, this person has

an enormous influence on the strategic decision making process.

My father was still working fulltime when he died. We were already working in the

company at the time. My mother, ehm, inherited the ownership of the firm. And ehm (..)

she has never worked, well she knows a lot about the firm, but she never eh managed the

firm and we actually did that together with our father. With the new governance structure

we expect to manage the ownership succession without destroying the family, without

destroying the firm.

A board would be a manner to bring discipline in the strategic decision making process. And

it is about bringing in outside experience and expertise on certain topics. However, we have

always had the idea that if we have an advisory board, that it needs to be flexible. That we

can adjust the composition of the board to the life cycle of the firm.

Most of the time, my brother and I fully agree on the direction we want to go. We both are

very commercial-oriented. That means that we put the interest of the market first, and the

business needs to follow. Sometimes, the business has some difficulties with that. We ehm

sometimes we are ahead of time or we want to speed up the process. My brother

sometimes ignores the official organizational structure, that leads to problems every now

and then.

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Other firms try to keep the family and business situation separate in order to make sure that business

problems do not become family issues.

5. Behavioral theory in strategizing

In section four we have elaborated on the main variables of interest of the respondents for this paper.

Our first observations seem to indicate that we can make three broad categories of intentions to

reconsider the governance structure, namely ownership succession, managing family involvement and

changes in the market. In addition, we have shown that the intention, the goals and the expectations of

a new governance structure, lead to preferences for specific governance structures. The context in

which these processes take place are very diverse. The view of the CEO on who should or should not be

involved in strategizing and in which arena possibly depends on the number of family members

involved, the integration between the family and the business system, and the level of

professionalization. In order to analyze how these variables are going to influence the change process

towards a new governance structure, we suggest to use behavioral theory as a theoretical framework.

Therefore, in this section, we will elaborate on the assumptions underlying the behavioral theory of the

firm, and come up with propositions that can guide future research activities. These assumptions are

successively bounded rationality, satisficing behavior, routinized decision making, and political

bargaining.

Bounded rationality

The complexity of the business environment makes it impossible for decision makers to completely

acknowledge and understand the linkages among variables around them (Van Ees et al., 2009; Huse,

2007). Decision makers in organizations are limited in their ability to process information and solve

complex problems due to constraints on their decision making capabilities. This phenomenon is referred

to as ‘bounded rationality’. From this concept of bounded rationality we can deduct that decisions

cannot be regarded as optimal solutions, that subjective factors like cognitive bias and incompetence

Ehm, well, we have decided that eh, which works really well, that the women do not

interfere in our business decisions. I am sorry, but that is the way it is. When we still worked

in the firm with three brothers, you have to deal with three women of whom none has the

intention to do something in the firm. When we see each other in private, in family

situations, we don’t talk about business.

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have an effect on the outcome of the decision making process, and that the limited abilities of decision

makers might explain organizational inefficiencies and failure. Applied to governance, bounded

rationality implies that actors that either participate in or influence the decision making process cope

with the constraints on their capabilities to process relevant information by applying simple decision-

making heuristics to solve strategy and monitoring problems. It is likely that the more deeply these

heuristics are encoded in the organizational memory, the more they will be recalled and enacted on in

similar problem situations (Van Ees et al, 2009).

The concept of bounded rationality in the context of family firms is used very little. The studies that do

use the concept relate it to agency theory (Chrisman et al, 2003; Van den Berghe & Carchon, 2003).

However, we propose that the concept of bounded rationality can be linked to the inward orientation of

family firms. Especially in the process of strategic decision making, and the role of a governance

mechanism as a supporting tool to realize the goals, which is fully internally orientated, the danger may

exist that macro developments are insufficiently acknowledged by the family members. However, non-

family members that have a position in the board or management team might have the role in the

strategizing process to bring in this broader view. This leads to our first proposition:

P1: Family members who are internal actors in the strategizing process are led by internal developments

and apply inward oriented decision making heuristics in the decision making process.

P2: The more generations have been involved in the firm, the stronger the decision making heuristics

will be and that problems will be solved in a way, like ‘they’ve always been solved’.

P3: The added value of the involvement of non-family members in strategizing arises from bringing in

relevant ‘outside’ information and assist in well informed decision making.

Satisficing behavior and problematic search

The satisficing behavior assumption refers to the tendency of actors in the decision making process to

accept choices that are ‘good enough’. In real business settings, decision makers are mostly concerned

with solving immediate problems and finding short term solutions which is generally referred to as

problematic search. Problems are only recognized to the extent that the actors have failed to satisfy one

or more of their goals or when they expect to do so in the near future (Van Ees et al., 2009). In this

process, the actors risk attention allocation and selection bias (Huse, 2007). Decisions can therefore not

be regarded as optimal solutions to problems. They reflect solutions that satisfy particular aspiration

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levels and they are determined by history and the social environment (Van Ees et al., 2009). The

advantage of this narrow and focused search could be efficiency. However, the disadvantage is that it

could promote inertia that breeds strategic simplicity (Zahra, 2008).

When the concept of satisficing behavior is applied to governance settings, van Ees et al. (2009) refer to

the goal realization process. As soon as the goals of the actors are satisfied, the problem is solved. This

can be realized by finding an alternative to the existing solutions, or by revising the goals that make the

existing solutions acceptable. Huybrechts (2011) uses the concept of satisficing behavior to study the

gap between board task expectations (by which she means the needs of the firm) and board

performance in family firms. One of those needs could possibly be to realize the goals of the company.

To study the goal realization process, it is important to keep in mind that family firms have a

simultaneous focus on economic and non-economic goals. Although the research on goals of family

firms is still rather limited, we do know that the sustainability of the firm is considered important. In

addition, Chrisman et al. (2010) have identified that family harmony, social status derived from the firm

and a strong identity linkage are general Family Centered Non Economic (FCNE) goals that become more

important when family involvement and family essence become stronger.

The non-economic goals of family firms are not easily satisfied on the short term. Ensuring continuity

and trying to maintain family harmony can both be considered as processes which require continuous

attention. We therefore propose that:

P4: Satisficing behavior and problematic search are concepts that will be observed to a lesser extent in

family firms in which the family and business system are strongly integrated.

Routinization of decision making

The third assumption underlying the behavioral theory of the firm is the routinization of decision

making. Actors mostly rely on routines during the decision making process. These routines, also referred

to as performance programs (March and Simon, 1958) or standard operating procedures (Cyert and

March, 1963), consist of the codified memory of the firm, including past experience, personal

(experiential) knowledge, capabilities and beliefs, and the values and capabilities of the organization

(Huse, 2007). On the one hand, these routines provide a source of control and stability, by which they

17

enable organizational action. In addition, they serve as socially and historically constructed programs of

action. However, on the other hand, routines can also constrain organization action and they mostly

involve tacit knowledge which is hard to codify. Routines can be broken by learning processes, so next to

routines unlearning also plays a central role in behavioral theory (Van Ees et al., 2009).

According to behavioral theory, it is likely that board members (or actors in other governance

mechanisms) will deal with organizational problems by applying memorized routines to reduce the

complexity of decision making. It would be interesting to test this notion in research to find out how,

why, and under what conditions internal and external actors in governance situations reinforce, change

or unlearn routines used to solve problems and make decisions (Van Ees et al., 2009). Another

interesting question is whether routines lead to more formalization in the governance structure or

whether routines lead to more informal (or relational) governance.

Family firms have often developed strong routines. It happens that things are being done in a specific

way, because it has always been like that. The older the firm gets, the stronger the routines develop.

Although not mentioned explicitly, Zahra (2012) uses the concept of routinization of decision making to

examine the effect of family ownership on the breadth, depth, and speed of organizational learning. He

claims that the limited search for opportunities to solve problems could be broken by experimenting and

learning and that this is triggered by family ownership because of their incentives (performance of the

company). He indeed finds that the breadth and speed of learning could be enhanced by family

ownership, but that the depth of learning is negatively associated with family ownership.

P5: Because of accumulated tacit knowledge and specific values and norms that influence strategizing in

family firms, routines in decision making will be strong in family firms in which the family and business

system are integrated.

P6: New generation might have the ambition to add things to the firm, and develop these routines by

engaging in learning processes.

P7: The influence of non-family members in strategizing might challenge existing routines and further

develop them.

18

Political bargaining

Political bargaining explains the negotiation and bargaining process in the context of the firm among

coalitions of stakeholders or actors with conflicting interests and goals. When the coalitions change

because of the fact that one actor leaves the company or the family involvement becomes higher, the

decision making process is influenced because the goals, the goal-setting process, and the problem

solving process might change. Goal conflicts are solved through political bargaining rather than through

objective alignment by economic incentives. In addition, goal formation and goal conflicts are seen as

the outcome rather than the beginning of the bargaining process: they may drive the search for new

knowledge and information (Huse, 2007; Van Ees et al., 2009).

Classen et al. (2012) argue that behavioral factors like values and cognitive backgrounds of dominant

coalitions within a firm influence complex strategic decisions and they posit that the values and

cognitive backgrounds of key decision-makers within the firm influence the search breadth of family

versus nonfamily firms. In addition, they claim that family businesses prefer to minimize the influence of

coalitions that consist of external partnerships within the innovation process, partly because of their

focus on socio-emotional wealth (SEW) preservation and partly because of their limited cognitive

diversity and absorptive capacity. So, they expect that family firms influence the coalitions of actors that

participate in the decision making process to make sure that the goals of the family are preserved.

P8: The presence of non-family owners and non-family managers in family firms could lead to increased

political bargaining about the goals of the firm.

P9: The larger and the older the family firm, the more the involvement of external actors in the political

bargaining process and the higher the focus on family centered non-economic goals.

Behavioral theory applied to the supporting role of governance in strategizing provides a theoretical

framework that challenges the dominant agency perspective to open up the black box of the behavior of

internal and external actors in the decision making process in firms. The focus of behavioral theory on

the interactions and behavioral processes among and between the actors involved requires a qualitative

research approach. The challenge of this research approach lies in using the key concepts of bounded

rationality, satisficing behavior, routinized decision making and political bargaining to explain the

decision making process and by focusing on the effects of the context and history at the same time.

19

Conclusion and Limitations

This paper has aimed to set up a research design on the role of governance mechanisms as a tool to

enhance the strategic decision making process based on a behavioral framework. This research design

builds on the strategy as practice approach and views governance mechanisms as a practice to support

strategizing. Our first observations from our sample of family firms that reconsider their governance

structure in order to work on their own strategic issues are that these issues can be categorized in three

main groups: ownership succession, the management of family involvement, and market developments.

We have also seen that the intention, the goals and the expectations of a new governance structure,

lead to preferences for specific governance structures and that the contexts in which these change in

governance structures take place are very diverse. The actors that are involved in this process, and the

arenas in which the decision making processes take place, seem to depend on the view of the CEO, the

integration between the family and the business system, and the level of professionalization of the firm.

In order to analyze how these variables influence the change process towards a new governance

structure, we have come up with a number of propositions, built on the assumptions underlying

behavioral theory. We argue that this theory offers valuable insights, on the one hand to be tested in

the family firm context, and on the other hand to build and extend family business theorizing.

Most family firms in the Netherlands do not have a board; 13.5 per cent of the family firms have a board

versus 30.9 per cent of non-family firms (Flӧren et al., 2010). The use of family governance practices is

also limited; on average 15.4 per cent of the family firms has a family constitution and this figure is very

much dependent on the size of the firm. In the category 1-9 employees, the percentage is only 8 per

cent and in the category over 200 employees the percentage is 37.5 per cent. We are therefore aware of

the fact that there is a bias in our sample towards the willingness to have a more formal governance

structure. However, we argue that it is worthwhile to study this group of firms because of the potential

added value of a formalized governance structure. We consider the firms in our sample to be

forerunners in comparison with other family firms that face similar challenges.

20

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Appendix 1

Table 1: Firm characteristics

Firm A Firm B Firm C Firm D Firm E Firm F Firm G Firm H Firm I

Nō of employees 20 360 500 550 35 60 3 60 150

Nō of fam. members

working

3 3 2 3 2 3 2 2 3

Industry Automobile

service

Construction Wood

construction

Transpor-

tation

Cheese

produc-

tion

Nuclear

medicine

Automobile

service

Laboratory

supplier

Financial

services/

ICT/Food

Year founded 1954 1953 1978 1955 1973 1948 1895

Current generation

(managing)

3rd

2nd

and 3rd

2nd

3rd

2nd

1st

and 2nd

2nd

4th

4th

Nō of owners from nuclear

fam.

1 (2nd

generation)

1 (2nd

generation)

2 (2nd

generation)

2 (3rd

generation)

2 (2nd

generation)

1 (1st

generation)

1 (2nd

generation)

2 (3rd and 4th

generation)

2 (4th

generation)

Nō of fam. members in

management team

2 2 1 2 2 3 1 2 2

External members in

management team

0 1 4 7 0 2 0 0 0

Nō of fam. board members 0 0 0 0 0 0 0 0 2

External board members No Yes Yes No No No No No No

External chair of the board No Yes Yes No No No No No No

Family CEO Yes Yes Yes Yes Yes Yes Yes Yes Yes

23

Firm J Firm K Firm L Firm M Firm N Firm O Firm P Firm Q Firm R

Nō of employees 100 70 55 80 700 30 88 35 50

Nō of fam. members

working

3 1 3 1 2 2 2 3 3

Industry Facility

manage-

ment

Electrical

equipment

and

installation

Construc-

tion

Wood

production

Laundry Safety Safety

specialist

Construc-

tion

Meat

industry

Year founded 1999 1951 1918 1982 1913 1779 1988 1982 1952

Current generation

(managing)

1st

and 2nd

2nd

4th

1st

4th

2nd

2nd

2nd

2nd

and 3rd

Nō of owners from nuclear

fam.

2 (1st and 2nd

generation)

1 (2nd

generation)

3 (4th?

generation)

1 (1st

generation)

1 (3rd

generation)

1 (2nd

generation)

2 ( 2nd

generation)

2 (2nd

generation)

1 (2nd

generation)

Nō of fam. members in

management team

2 1 3 1 2 2 2 2 3

External members in

management team

1 2 1 1 1 3 0 0

Nō of fam. board members 0 0 0 0 0 0 0 0

External board members No Yes Yes No Yes No No No No

External chair of the board No No No No Yes No No No No

Family CEO Yes Yes Yes Yes Yes Yes Yes Yes Yes

Table 1 Continued: Firm characteristics

24

Participant Cause for participation

in the project

Goals of the family

firm

Expectations of new

governance structure

Overlap

family and

business

Actors involved Arena

Firm A Ownership succession 1. Continuity

2. Family harmony

1. Clarify communication and

authority issues, linked to the

ownership structure

2. When number 1 is satisfied,

there is more time to focus on

the business.

Large 4 Family

members

(3 siblings and a

mother) and the

accountant

Formal and informal (2

siblings in the

management team)

Firm B 1. Management and

ownership succession

2. Need for advice

Continuity Advisory and controlling

board that can help to focus

on strategy and that keeps

the owning manager keen on

developments in the firm.

Medium 2 family

members, 1 non-

family member

Formal

Firm C 1. New ownership

structure

2. There is no plan in

case the owning

manager withdraws.

3. Bad experience with

former ownership

situation.

1. Being number 1 or

2 in various market

segments.

2. Creation of wealth.

1. Knowing how to structure

to firm.

2. Managing ownership

relationships.

3. Organizing informal

consultation.

Small 2 family

members, 4 non-

family members

Formal and informal (1 of

the family members is CEO

and part of the

management team)

Firm D Formalizing the

organization to deal

1. Controlled growth

of the firm

1. Advisory function of the

board.

Large 2 family

members, 7 non

Formal and informal. The

two family members are

25

with the growth of the

firm

2. Continuity 2. Coaching of the managing

family members.

family members brothers who are also the

CEO’s.

Firm E Managing family issues

to prepare for the

future

1. Controlled growth

of the firm

2. Continuity

1. Making arrangements via a

family constitution to deal

with issues of ownership,

management and authority

2. to have a plan in case of

emergency succession

Large 2 family

members and the

accountant

Formal (business issues are

only discussed in the

business).

Firm F 1. Ownership

succession

2. Manage relationship

with non-family

owners

3. Formulate long term

strategy

Continuity 1. Focus on strategy

2. More formal

communication structure

Large 3 family

members, 3 non

family members

Formal and informal (2

brothers and father in

management team; the

business is owned by the

father and two non-family

members).

Firm G Survival in a bear

market

1. Having a satisfying

return.

2. Make the firm

ready for sale.

Advisory function of the

board.

Large 2 family

members and

advisor

Formal and informal.

Copreneurial couple that

discusses business issues

also with their children.

Firm H Ownership succession Make time available

for strategy.

1. Coach for the managing

owner.

2. Sounding board for the

management team

Medium 2 family

members (father

and son)

Formal and informal

Firm I Need for family

management

Continuity and

“bringing the best

Clarity about the different

roles in the family firm and

Large 2 family

members

26

possible quality and

reliability to our

customers”

the corresponding

responsibilities.

Firm J 1. Need for focus on

less markets

2. Need for strategy

development

3. Formalizing the

organization to deal

with the growth of the

firm

4. Ownership

succession

1. Continuity

2. Human Resource

Development

3. Stronger control

function

1. After having succeeded the

present generation, new

management will try and use

new governance instrument,

preferably an advisory board

Medium 2 family

members and 1

non family

member

Formal

Firm K Need for advice on

strategic issues

1. Continuity

2. Looking for new

markets

3 Human Resource

Development

4. Product innovation

Advisory function of the

board

Large 1 family member

and two non-

family members

Formal

Firm L 1. Involvement of non-

family management

board members

2. Ownership

succession

3. Need for growth in a

Continuity Making arrangements via a

family constitution to deal

with issues of ownership,

management and authority

Large 3 family

members and 1

non-family

member involved

27

competitive market

Firm N Family management

(making rules about

ownership and family

involvement)

Continuity 1. Keeping family-owners and

other family members who do

not work in the firm informed.

2. Hold on to family

philosophy, values and norms.

Medium 2 family

members and 1

non-family

member

Formal and informal

(father still likes to be

involved or at least

informed)

Firm O Managing

responsibilities; the

company is too

dependent on the

managing owner.

1. Being number 1 or

2 in the market.

2. Continuity

3. Managed

growth/profit

4. Financial

independence

5. Motivating

employees

1. Make the company ready

for sale.

2. Optimize the organization

structure on behalf of a

healthy company.

Medium 2 family

members and 1

non-family

member

Formal and informal (the

son-in-law has just entered

the business and is a

potential successor)

Firm P Need for strategic

planning

Continuity 1. Advisory function for the

management team

2. Structure and discipline in

strategizing

Small 2 family

members and 3

non-family

members

Formal

Firm Q 1. Ownership

succession

Continuity 1. Sounding board for the

management team

2. Coach for the managing

owners.

Large 2 family

members

Formal and informal. The

succession has recently

taken place and the father

still likes to be involved.

Firm R 1. Ownership

succession

Continuity Large 3 family

members (2

Formal and informal

28

2. Need for a more

professional structure

brothers and

father) and 1 non

family member

Table 2: Overview of variables of interest