The Influence of
Experience and Familiness
on Financial Performance
in Dutch Businesses
Author
Rémy Phijffer | 11398302
Supervisor
Dr. R. van der Voort
MSc Entrepreneurship thesis
Vrije Universiteit Faculty of Economics and Business Administration
Universiteit van Amsterdam Economics and Business
Academic year: 2016/2017 Submission date: 30-06-2017
2
Abstract
Keywords: Governance, Management, Succession, Experience, Familiness, F-PEC, Financial
Performance, Dutch Family Business
______________________________________________________________________________________ In the family business literature, consensus is still missing on what defines a family firm and its appropriate setup to examine the link to performance. The solution to this heterogeneity is still under debate resulting in a so-called family business theory jungle. Delightfully, it has become a predominant topic in family business literature since the introduction of the F-PEC scale by Klein, Astrachan and Smyrnios in 2002. This standardized and valid instrument revolutionizes the way in that family firms are measured in degrees of ‘familiness’, instead of dichotomously categorizing firms in family or nonfamily. In essence, the three-factor model measures the family influence on the subscales Power, Experience and Culture, wherewith the Experience subscale is elaborated in detail throughout this paper. This study deploys the F-PEC scale for the first time in the Netherlands, examined in a sample of family businesses. The purpose of the present research is to measure how the Experience construct is related to a selection of performance indicators in the Netherlands. Consequently, the research question posed is: ‘Does the family influence on Experience have a relationship with financial performance in Dutch family businesses?’ Correspondingly, fundamental theories are explained in order to obtain knowledge of the inseparable underlying mechanisms that determine family distinctiveness in respect to nonfamily firms. The results find a significant and positive relationship with solvency. The outcomes with respect to familiness and performance provide that there is a relationship, albeit with mixed results, which will be further elaborated in the discussion and conclusion.
3 The copyright rests with the author. The author is solely responsible for the content of the thesis, including mistakes. The university cannot be held liable for the content of the author’s thesis.
Table of Contents
Abstract ... 2
1.0 Introduction ... 4
2.0 The F-PEC Scale ... 8
3.0 Fundamental Theories ... 9
3.1 The Resource-based View ... 9
3.2 Family Capital ... 10
3.3 Socioemotional Wealth ... 11
3.4 Social Capital Theory... 12
4.0 Theoretical Framework ... 14
4.1 Succession ... 14
5.0 The Research Model ... 18
5.1 Financial Indicators ... 18
5.2 Experience Subscale: Reliability, Validity and Generalizability ... 19
6.0 Methodology ... 21
6.1 Sample... 21
6.2 Data Collection ... 21
6.3 Questionnaire Operationalization ... 21
6.4 Data Analytical Procedures ... 22
7.0 Results ... 23
7.1 Sectoral Comparison ... 27
8.0 Discussion and Conclusion ... 29
8.1 Limitations ... 29
8.2 Theoretical Contributions ... 31
8.3 Practical implications ... 32
8.4 Avenues for Future Research ... 32
9.0 References ... 33
10.0 Appendix ... 36
10. 1 Complete Qualtrics Survey ... 36
10.2 Figures... 40
4
1.0 Introduction
For the ordinary mortal, the two most important things in life are family and employment. The combination of these two has been an evolving field of inquiry over the last decades. However, due to the multidisciplinary character of a ‘family business’ there is still much debate and heterogeneity to solve (Carney et al. 2015; O’Boyle et al., 2012; Anderson & Reeb, 2003). The heterogeneity and complexity of the subject could be a result of unknown moderators or mediators that have not been included in available papers yet (Mazzi, 2011).
Source:Harms (2014, p.291)
Harms (2014) analysed 267 journal articles to draw a picture of the academic landscape with regards to family involvement topics. As seen in the figure above, performance studies which mostly address financial (e.g. Return on Assets) and nonfinancial performance indicators (e.g. Corporate Social Responsibility) have been the predominant topic for family business research (i.e. 151 studies). The results of many of these studies are mixed (e.g. Anderson & Reeb, 2003; Martinez, Stohr & Quiroga, 2007; Sraer & Thesmar, 2007; Flören et al., 2010).
The definitional issue and search for clarification on what defines a ‘family business’ have been largely to the concern of the past, to a great deal of researchers in the respective research arena. Rutherford et al. (2008) refer to this as the ‘family business theory jungle’ to point out the lack of consensus because of many competing theories that examine familiness related to
5 certain performance measures1. Harms (2014) attempted to clarify the definitional issue by systematically clustering the relevant articles, to obtain an overview of their definitional disparity.
Source:Harms (2014, p. 296)
As can be seen in the figure above, the majority of the articles in the author’s sample are without an explicit definition. Thereafter, a quarter of the articles consist of self-developed definitions. Accordingly, one can get a good intuition in how this missing unified definition concerning family business can cause problems in the research field. As Dyer (2006, p.254) concludes: ‘Thus, some studies likely included firms in their ‘family firm’ sample that would
not have been included in other studies’ samples and this mixing of ‘apples and oranges’ might account for the ambiguous findings’. Consequently, it does not come to a surprise that
in the twenty-three studies Rutherford et al. (2008) reviewed between family involvement and firm performance, nine demonstrated neutrality, nine studies showed a positive relationship, four studies provided partial support for a positive relationship and only one study found a negative relationship.
In general, family firms have advantages over ‘regular’ firms in the long term since it is understood that positive factors such as orientation, loyalty, teamwork, shared values and (reciprocal) altruism are more established within these firms; also known as the ‘bright side’ of family involvement. Contrarily, the ‘dark side’ poses possible downsides of family involvement such that businesses could be subject to conservatism, conflict, free-riding,
1 See for example Kraiczy, 2013; p. 22-30, for an overview of different definitions of authors, with the
6 deviance, and lack of professionalism (O’Boyle, Pollack, & Rutherford, 2012). The bundles of resources and capabilities, that are distinct for a family firm are referred to as ‘familiness’ that can be uncovered with help of the resource-based view (Bromiley & Rau, 2015).
Consequently, the question is raised whether the advantages will be offset by the disadvantages, wherewith the effects are cancelled out; suggesting neutrality of familiness to performance. Or else, do the disadvantages dominate the advantages derived from familiness of a firm –or vice versa? To come to a meaningful conclusion which of the three scenarios prevail, the research question is: does the family influence on the Experience subscale have a
relationship with financial performance in Dutch Family businesses? In addition, the F-PEC
is tested for a relationship with financial performance, as Experience is a subscale derived from the total model. Because, to overcome the preceding definitional obstacles and measurement incongruities, the author of this paper adopted the F-PEC measurement scale. This scale is created by Astrachan, Klein & Smyrnios (2002), which measures familiness as a degree, instead of a dichotomous (i.e. you are, or you are not a family firm) manner. Additionally, the F-PEC has been validated and operationalized in the form of a questionnaire by Astrachan, Klein & Smyrnios (2005) and was further tested by Holt et al. (2010).
This study deploys the F-PEC scale for the first time in a sample of Dutch family businesses. In collaboration with Ernst and Young (EY), independent research is done wherewith a comparison is struck between listed and non-listed family businesses with the intention to find out more about this special kind of leading businesses in differing sectors. The purpose of the present research is to measure how familiness (i.e. the degree of F-PEC) and each of its embedded constructs are related to a selection of performance indicators. A database was developed concerning results of the F-PEC constructs, retrieved from questionnaires sent to the companies in the sample.
The three-factor model measures the family influence on the subscales Power, Experience and Culture which will be briefly introduced in chapter two. Each construct has been separately researched, whereat the focus of this paper is on the Experience subscale which will be covered in chapter four. This subscale is intended to measure the judgment, intuition and knowledge of a family firm aggregated throughout generations. This is of good importance, because succession plays a vital role in the survival of family businesses (e.g. 70 percent of family firms do not survive the first succession). To say something meaningful
7 about family businesses, it is notable to examine which factors distinguish a family business from a non-family business. Therefore, a resource-based view is consulted and knowledge of adjacent theories (e.g. social capital theory) is provided to get a good grasp of the underlying mechanisms, which will be elaborated in chapter three. The results of the Experience index and the total F-PEC in relation to the financial performance indicators will be discussed in chapter 7. Lastly, limitations and avenues for further research are addressed.
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2.0 The F-PEC Scale
The F-PEC model is a scale to help understand the dynamics of family business on a continuous, rather than a dichotomous (i.e. simplistic categorization) scheme (Harms, 2014; Holt et al., 2010). This means that businesses are not merely defined as family or nonfamily, but that there is a certain degree of involvement from the family which is most often referred to as ‘familiness’. The three dimensions of involvement of the family within the business are measured according to the F-PEC scale. The abbreviation stands for: Family influence on (1) Power: the influence the family has on governance and management of the firm. (2) Experience: the information knowledge, judgement, and intuition that comes through successive generations. And (3) Culture: the alignment of the family’s goals with the firm’s (Cliff & Jennings, 2005 p.342). Still, the main aim of this paper is to focus on the Experience subscale. The figure below arrives at the model of all subscales with its corresponding dimensions in the F-PEC scale.
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3.0 Fundamental Theories
3.1 The Resource-based ViewIn order to unveil resources and characteristics of a (family) firm, the resource-based view theory (hereafter, RBV) is consulted. According to Bromiley & Rau (2015), most RBV studies cite two authors as the basis of this grounded theory due to their extremely high number of citations, namely: Barney (1991) and Peteraf (1993). Therefore, these citations are most often taken to define the RBV.
Namely, the RBV endeavours to identify and assess sustainable competitive advantages. Correspondingly, the VRIN concept may disclose the competitive edge, derived from a firm its composition and embeddedness of the valuable, rare, inimitable and non-substitutable resources (Kraiczy, 2013; p.9). It is the bundle of tangible and intangible resources that that are the firm its disposal, that make a family firm distinct from a nonfamily one. Indeed, these are dynamic and complex in nature, and therefore hard to uncover, let alone to directly relate to corporate financial performance. Good examples of hard to imitate and valuable resources are family capital and socioemotional wealth, which will be explained in the upcoming paragraphs. Moreover, complementary to the RBV is the dynamic capability view (Teece et
al., 1997). This view points out that not only these resources must be present to obtain
competitive superiority, but must also be encompassed within a suitable organizational structure that ought to be in place, to optimize and leverage these VRIN resources (Den hertog et al., 2010). As Mazzi (2011) concisely concludes: ‘In the long run, a sustainable
competitive advantage then depends on dynamic capabilities, that is on the firm’s ability in building, adapting, integrating, and reconfiguring internal and external organizational skills, resources and functional competences to address rapidly changing environments’ (p.167).
Thus, an RBV approach can help to identify and explain how and to what extent family firms are distinct from non-family firms. Evidently, firms are dynamic, complex and heterogeneous entities that comprise intangible factors and are rich of peculiarities which ultimately lead to a certain performance outcome (Mazzi, 2011). Specifically, the complexity increases for family firms as there is a dyadic interaction at play between family life and business life (i.e. personal vs. professional). Hence, a ‘family factor’ is introduced, wherewith sociological
10 (e.g. relationships) and psychological (e.g. cognitive and affective) factors have an effect, which contribute to the unique asset of the family firm; the so-called ‘familiness’ dimension.
Therefore, this complicates factors, such as goals, vision and motives due to interactions between family members and other systems (i.e. on a business, family and individual level). The social system regarding family businesses is a mixed set of different components. As Habbershon et al. (2003, p.454) state: ‘The family business social system is a ‘metasystem’
comprised of three broad subsystem components: the controlling family unit -representing the history, traditions, and life cycle of the family; the business entity -representing the strategies and structures utilized to generate wealth; and the individual family member -representing the interests, skills and life stage of the participating family owners/managers’.
Therefore, the author stresses the notion that there is a unified systems model at play, where action and interaction of each subsystem is feedback into the metasystem in a continuous fashion2. The combination of the two complex social systems and consequent overlap of the system boundaries are what primarily distinct family from non-family firms.
As aforementioned, appropriate management is key to these resources, as many of them are a double-edged sword. That is, it can be to the benefit or cost for the organization. When idiosyncratic resources and capabilities emanating from familiness are formulated into competitive advantages, it results in ‘distinctive familiness’ (Habbershon et al., 2003). Now, what are exactly these resources and capabilities that make a family business different?
3.2 Family Capital
Sirmon & Hitt (2003) shed light on different capital stocks that are unique to a family firm. Namely, human capital, survivability capital and patient capital. Human capital refers to the attributes of the individual, such as knowledge-base, skills and capabilities of a person. Which, in summation of individual inputs, proposes the total human capital of the family firm. Because of the forenamed duality of the personal and professional relationship, it creates a unique context for a family’s human capital, with its negative as well as positive sides: on the one hand, commitment, friendly, warm and intimate relationships with tenderness, happiness and love can be present. On the other hand, there could be jealousy, anger, hatred and ambivalence (Gomez-Meija et al., 2011).
11 Furthermore, patient financial capital is different from financial capital due the long-time horizon typically attributed to family firms. Sirmon and Hitt (2003) briefly explain that ‘firms
with patient capital are capable of pursuing more creative and innovative strategies. As such, patient capital is a valuable asset for family firms’ (p.343). Because family firms are not
pressured for short-term results, they construct effective structures to manage financial capital, which is in accordance to the desire to perpetuate the business for future generations (Sirmon & Hitt, 2003). Additionally, family firms in general have limited external sources for financial capital because they typically avoid sharing equity with members that are not part of the family. Therefore, traditional financial markets are not the most obvious financing option.
Consequently, survivability capital is sometimes need and is introduced as a unique asset to family businesses. It represents the aggregation of personal resources of family members, which they are willing to share, loan or contribute to the benefit of the family business. This could take the form as in monetary loans, forms of free or loaned labour, additional (personally injected) equity investments and individual dedication (Carney, 2005). Ultimately, with a favourable corporate climate conducive to the positive elements of family capital and socioemotional wealth (explained in the next paragraph), lead to the creation and intergenerational diffusion of firm-specific tacit knowledge, which is the most unique VRIN resource (Sirmon & Hitt, 2003). Thus, under the lens of the RBV approach, one can attribute the favourable sides of human capital (e.g. intimate relationships), patient capital and survivability capital to a competitive advantage that leads to distinctive familiness and ultimately to remarkable financial performance.
3.3 Socioemotional Wealth
Socioemotional Wealth (hereafter, SEW), is a concept that is largely derived from behavioral theory. It is still relatively new3, as Gomez-Meija et al. (2007) developed a first general model. Dawson & Mussolino (2013) argue that the SEW model is the most important concept that differentiates the family firm as a unique entity, referring to ‘affective endowments’, or non-economic aspects of family firm owners. It consists of five dimensions on the analysis at the individual level, that are labelled by Berrone et al., (2012, p. 259) as ‘FIBER’, which stands for: “Family control and influence, Identification of family members with the firm,
12 Binding social ties, Emotional attachment of family members, and Renewal of family bonds to the firm through dynastic succession”. The first dimension is related to ‘particularism’, which refers to the personalization of authority as family influence can be based on non-rational factors because as they see the business as ‘their business’ –and henceforth, their decisions. Meaning that family members intervene in decision-making processes based on affective dimensions instead of economic rationality (Carney, 2005).
The second dimension is related to identification towards the firm and is inextricably linked with reputation, as the firm is considered to be an extension of the family members. Especially, when the firm carries the family name. Thirdly, binding social ties are not only the reciprocal relationships between family members, but also kinship ties with external constituencies (e.g. time-honoured suppliers) that might be viewed as –or can actually be– family members. Fourthly, emotional attachment concerns emotions in the context of family business as ‘[...] in organizations where family relationships dominate, there is a longer
history and knowledge of shared experiences and past events that converge to influence and shape current activities, events, and relationships’ (Berrone et al., 2012, p. 263). Preserving
the SEW is a key goal of family firms by which the corresponding strategic decision-making and policy choices are based hereupon (Dawson & Mussolino, 2013). Moreover, decisions are made in thus far, that it might actually be to the detriment of financial performance, due to decisions made through the SEW preservation inclination. An example in the study of Gomez-Meija et al. (2007) reveals that olive mills owned by families were three times less likely to pursue a joint venture collaboration (i.e. a lucrative option) than non-family owned mills, suggesting that the preservation of the SEW through loss aversion of family assets, is the preferred strategy.
3.4 Social Capital Theory
Social capital is a unique resource to family firms that constitutes distinctive familiness. Namely, the family uses, builds upon, and is a source of social capital. It derives from trust, connections and relationships between different actors (e.g. individuals and organizations) wherewith value is created through these complex, intangible features and consequent configurations. As Mazzi (2011, p.168) explains in brief: ‘Social capital is by definition
socially complex, related to norms, values, cooperation, vision, purpose, and trust that exist in the family firm’. Social capital consists of three dimensions: structural, relational and
13 cognitive (Kraiczy, 2013). The structural dimension concerns the linkages between actors in a social network by means of organizing theory (for a discussion on this topic, see Peverelli & Verduyn, 2012). Relational theory describes the aforementioned trust, obligations and norms wherewith social networks are able to exist. The cognitive dimension concerns the interpretation, a shared language and systems of meanings within a respective social network. These three dimensions are interrelated and embedded in two ways. Namely, within the family and with external stakeholders.
Sirmon & Hitt (2003, p.342) elaborate hereupon as: ‘[...] the family’s social capital increases
by connecting these diverse social structures, the firm can build more effective relationships with suppliers, customers, and support organizations (e.g., community financial institutions), while maintaining legitimacy with other important constituencies. In so doing, family firms garner resources from their constituencies and networks (e.g., knowledge, financial capital, and so forth). Additionally, they can more easily communicate the value of the firm’s goods and services to potential customers’. It is evident that social capital is formed throughout the
years (i.e. building experience) which can be leveraged to a competitive edge in comparison to non-family firms. For instance, key actors (e.g. staff or even other family firms) are kept close and result in an auspicious collaboration, with better terms, than an arm's length relationships would have, as is often the case with (listed) non-family companies (Le Breton-Miller & Breton-Miller, 2015). This, because social capital is a decisive resource that fosters innovation, which can have a positive effect on a firm its achievements (Kraiczy, 2013).
With knowledge of the resource-based view theory, one can attribute the family-specific bundles of resources and capabilities. Inclusively, family capital, social capital and preservation of social emotional wealth identify the unique factors that distinct the family firm from non-family ones. Notably, and most surprisingly, with eye to the latter theory (i.e. SEW), businesses that are led by families show differing strategies that seem to be at odds at the normal way of enterprising. Now that one is equipped with a first multi-layered theoretical briefing of how unique aspects of family firms are deployed within various levels of the family business phenomenon, the Experience construct is ready to be introduced.
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4.0 Theoretical Framework
As is already briefly introduced, the second subscale of the F-PEC framework is Experience. This measure contains the set of knowledge, judgement and intuition that is acquired through successive family generations within a family business that is created over time (Rutherford
et al., 2008). Similarly, Holt et al. (2010) explain that ‘In the family business setting, this longitudinal knowledge base and family-focused memory orientation is brought to the business through leadership succession’ (p.80). This knowledge base (including skills and
capabilities) that is aggregated over time and through succession, is in accordance with family capital theory. Judgement is derived from SEW preservation, as an example is in the case of the abovementioned ‘particularism’. Intuition is explained with help of social capital theory where social network, norms and values play a vital role. Informative scales of this measure are the generation of ownership, generation active in the management team, generation active in the board and the number of contributing family members within a company as can be seen in the figure below.
Source: Astrachan et al. 2002 (p. 50)
Furthermore, succession is an important category of the experience construct, especially because it is closely linked to the amount of generations active in a company, which is from major importance in the experience subscale as can be traced in the previous figure.
4.1 Succession
Succession is the transfer of management and/or ownership from one generation to another. Such ownership and management transfers to next generations is considered to be one of the most difficult steps in the lifecycle of a family business (Poutziouris et al., 2006). Even more, a study of Van Stein Callenfels (2016) demonstrates that with every transfer of ownership, firm performance deteriorates. Namely, only 30% survived the first transfer of ownership to the next generation, only 13% the second, 3% after the third and only 1% exists after the fifth
15 generation. A reason for this, is that a family firm is constrained to a limited pool of potential successors. This is explained with theory about SEW preservation, which suggests the owner’s inclination to protect the family dynasty, therefore choosing a family candidate instead of a perhaps better suited candidate outside the family environment (Gomez-Meija et
al., 2011). Similarly, De Massis et al. (2016) argue that ‘[…] this could mean that incumbents have other considerations producing contrary influences. For example, maintaining ownership control gives the family the power and legitimacy to pursue intrafamily succession’ (p. 291). These non-rational strategies typify certain family firms through SEW
preservation theory.
Gomez-Meija et al. (2011) also clarify that a current family business owner can be reluctant to plan its succession, especially when being a founder CEO. This reluctance is attributed to the inclination of retaining the prominent position within the family (firm). Because it contains perks as reputation, power and status, which by retirement means a loss of them. Moreover, the current incumbent can see his or her position as the result of a lifelong effort, at personal cost and great dedication. Therefore, the executive family member can be motivated to retain control and perpetuate influence over the affairs of the firm. Another possible explanation is the lack of trust from the founder entrepreneur in the next generation, which results in protecting the power of the first generation. Because maintaining ownership is essential in the prevention of losing the unique identity residing in family businesses. Herewith, the ‘danger’ arises with that of conservancy, hereby (excessively) safeguarding family assets (e.g. for his or her retirement) and curbing or even eliminating entrepreneurial intentions of the next generation. Herewith, the successive generation operates in the so-called ‘founder’s shadow’. That is, they are now the owner of the family firm, though still serve the company under the rules of the first generation (Molly et al., 2010). Plausibly, one explanation for the acute decline in survivors through succession of the first to the second generation.
There are two ways in which succession could take place: via storytelling wherewith family values are made explicit, or adjustment and rejuvenation of values. The study of Van Stein Callenfels (2017), explains the former as a succession of firm identity. That is, the formed prototype a dominant family member has developed over time, is transferred. To this blue-print, norms and values are derived, wherewith younger family members experience these through time and sometimes through stipulated documents (Van Sein Callenfels, 2017). In
16 addition, the right use of narratives and storytelling could be a very effective way to convince and excite the next generation. Dalpiaz, Tracey & Phillips (2014) performed a case study in an Italian owned design firm. The authors introduced narrative as an alternative way of conceptualizing important aspects of the succession process in family firms. In this way, the company plays an essential role in the evolution of the family legacy.
Via the second way (i.e. adjustment and rejuvenation), new generations reinterpret behaviour and values though meaningful dialogue and examination. This, to keep up with the ‘zeitgeist’ and new dilemmas that appear with changing environments (e.g. economic crises). Herewith, family members jointly transform characteristics and properties which are inherent to the firm.
The difficulties of the succession phases translate itself in several ways. Several studies find evidence that many of the agency problems in family businesses arise and further increase when businesses are transferred from one generation to another. For example, occurrence of managerial entrenchment, in which family members serve top positions, whilst not being competent enough. Such problems are also recognized by Miller et al. (2008), arguing that succession can trigger elements of the dysfunctional nature of the family firm (e.g. family conflicts). However, there have also been studies that point out potential positive consequences of succession. For example, Zahra (2005) and Fernández & Nieto (2005) find evidence that when new generations become actively involved in the family business, wealth increases and strategic renewal becomes more important (i.e. succession through adjustment and rejuvenation). The underlying argument is that with each succession in a firm, new family members bring fresh knowledge and insights into the company, which positively affect the incentives to innovate, internationalize and grow (Molly et al., 2010). In the same line of reasoning, Astrachan et al. (2002) demonstrate an exponential continuum what regards to succession and experience value in the figure below.
17 Source: Astrachan et al., 2002 (p.49)
After having considered the previously mentioned negative and positive consequences of succession, Molly et al. (2010) tried to find to what extent firm performance is affected by succession. Firm performance was expressed in asset growth and profitability, wherewith the authors analysed a sample of 110 family SMEs. After having analysed their financial measures around the periods of succession, conclusions were drawn. The authors did not find evidence that the profitability of family businesses is affected by succession. However, it did find considerable evidence for a decline in firm growth after a transfer of the business from the first to the second generation, arguing that family firms face a slower growth after being transferred for the first time. This decline in firm growth cannot be seen when looking at transfers between later generations.
Nonetheless, in the study of Van Stein Callenfels (2017), it is stated that family lead businesses perform better than comparable nonfamily companies in the Netherlands. Reasons for this, are because of strong family values resulting in cohesion of the latter with higher motivated personnel that identify themselves with the company. Moreover, family firms have a lot of social capital: good relationships with clients, suppliers and the communities in which they operate.
Still, as is evident from this chapter, the one big hurdle is that of succeeding the first generation to the second generation. Nonetheless, based on the foregoing discussion, the largest increase in value of experience happens from the first to the second generation as is evident in the figure above. Moreover, the more successions and generations that are involved in a family firm, the more room for the potential of family capital, SEW and social capital to be developed and mobilized. It is to be positively associated with firm performance
18 as they are VRIN and thus potential competitive advantages. Nonetheless, the theory concludes with ambiguity. Therefore, the following predictions are hypothesized:
H0: Experience has a positive relationship with financial performance HA: Experience has a negative relationship with financial performance
5.0 The Research Model
As the previous chapters have shed light on the different systems at work within family businesses, it is interesting to research what consequences these could have on a firm its performance measures. By construction of the research model, the Experience subscale is theorized as the explanatory variable of the model, whereas the financial performance indicators act as the dependent ones. Respectively, Revenue Growth, Net Profit Margin, return on assets (ROA), return on equity (ROE), return on capital (ROC) and Solvency.
5.1 Financial Indicators
For the data collection part of the financial statistics, the 38 companies provided 1.248 results and with these 1.248 results 1.094 financial ratios were calculated. The seven financial indicators used to measure financial performance are as follows:
1. Revenue growth rate, which is calculated by dividing revenue of a respective year by a previous year, expressed in a percentage. This is a general indicator of a company's growth over the particular year.
2. Solvency, is equity divided by total assets in a percentage. This will show the ratio between equity and liabilities on the balance sheet. This gives an indication whether the company is able to pay its debts (Heaton, 2007).
3. Net profit margin, is calculated by dividing the net profit with the revenue multiplied by 100%. This will show an indication of the profitability of the business. By the
19 changes in this rate the company can analyse their business models and whether it works satisfactorily (Blaine, 1994).
4. Return on assets (ROA), which is the net profit divided by the assets in a percentage. It is a key figure indicating the profitability of the average total assets before interest deduction.
5. Return on equity (ROE), is the net profit divided by the equity in a percentage. It is a key figure indicating the profitability of equity before interest deduction. This is like the ROA as an accounting-based indicator to capture a firm’s internal efficiency. 6. Return on capital (ROC) is the net profit, divided by the equity and the long-term
debts. The ROC attempts to measure the return earned on capital invested in an investment.
After having assessed the degree of Experience within the business of the study’s sample it allows to investigate whether there are any relations visible to the degree of Experience and Financial Performance. Inevitably, the total indices concerning F-PEC are analysed in tandem. Herewith, the research model is presented as follows:
5.2 Experience Subscale: Reliability, Validity and Generalizability
To give power to the measurement techniques, the measurement constructs ought to be validated and should be reliable and generalizable. Astrachan, Klein & Smyrnios (2002), could be regarded as ‘the founding fathers’ with respect to the inception of the F-PEC scale. In order to give meaningfulness to the latter scale and its corresponding subscale Experience, the same authors and a team of skilled people, such as academic researchers, practitioners and family business owners developed the questions necessary to develop the F-PEC scale in aggregate. The authors proceeded with pilot testing and focus group discussions with a
20 number of family businesses in order to validate the scale with analysis of modelling techniques.
Evidently, items that were shown to demonstrate ambiguity, lack of discriminatory power or redundancy, were eliminated (Astrachan et al., 2002). Furthermore, external validity was tested on a large sample of groups (i.e. n > 500) by means of cross-cultural comparison. As Astrachan et al, (2002, p. 52) conclude: ‘The F-PEC index of family influence on the business
provides researchers, for the first time, with a tested standardized instrument that allows integration of different theoretical positions as well as comparisons of different types of data’. Later, Klein, Astrachan & Smyrnios (2005), further tested the F-PEC scale in a sample
of 10.000 randomly selected company CEOs through exploratory and factor analytical techniques, to prove reliability (Klein et al., 2005).
In addition, Holt, Rutherford & Kuratko (2010) further tested the measurement properties of the F-PEC scale. Hence, further testing the items and making the operationalization more robust. Thereby, giving power to the generalizability, internal consistency and reliability of the construct. Exploratory and confirmatory factor analysis were conducted and provided support to the model. As Holt et al., (2010) discuss: ‘Although we are not by any means
suggesting that the F-PEC represents an end to the search for definitional clarity, our findings do suggest that the F-PEC offers family business researchers a valid and reliable scale with which to more finely classify family firms. Moreover, it measures several intangible factors that may be used as the dimensions of involvement and essence (a yet to be measured construct) are refined and converge’ (p.84).
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6.0 Methodology
6.1 SampleThe sample was constructed by selecting 93 companies where eventually 41 companies filled in the questionnaire, resulting in a response rate of 44 percent. However, three companies have been removed from the sample because there was not enough data available. Exclusion of these companies lead to a total of 38 companies which entirely filled in the questionnaire and had a complete data set.
6.2 Data Collection
To measure the effects of Experience on several aspects of the business, information gained from questionnaires and year reports have been manually collected. To every family business in the sample, a questionnaire has been sent in order to collect the information needed to fill in the modelled variables and to test the hypothesis. The questionnaire has been made in Qualtrics and have been sent by E-mail. The contact-details of each company have been obtained through the databases called Company.Info, LinkedIn and Orbis. Before the questionnaires were sent, each company was contacted by phone to try to increase the response rate and to ask for E-mail addresses to send the introduction mail together with the link to the questionnaire. The questionnaire was sent to participants of the founding family or members of the highest management or governance boards.
6.3 Questionnaire Operationalization
The goal of the questionnaire is to acquire information about the degree of familiness in the targeted family businesses. In addition, the Experience construct is divided in three factors, which in turn are derived from relevant questionnaire questions. The factors are generation of ownership, generation of the management board and the generation active in the governance board. The questions4 concerning the Experience subscale are derived from Astrachan et al. (2002). The survey intended to unveil which generation is active on the governance board, which generation owns the highest percentage of shares and which generation manages the company (with eyes to the management board). Each factor is weighted as ⅓ to the total Experience scale. The Experience scales were indicated from generation 1 to generation 10+.
22 This was asked with a ‘multiple answers possible’ question from the 1st to 10th+ generation5. As discussed, by means of the exponential continuum between the experience value and generations, each generation has a different impact on Experience. For this reason, the generations are weighted accordingly: Generation 1 (G1) = 0; G2 = 0.5; G3 = 0.75; G4 = 0.875; G5 = 0.9375; G6 = 0.96875; G7 = 0.996775 and G8+ = 1 (Holt et al., 2010).
6.4 Data Analytical Procedures
The data collected from the questionnaires and year reports have been processed and analysed with help of SPSS. As discussed, the financial performance indicators have been hypothesized as the dependent variables and the familiness variables as the independent variables. Multiple linear regressions have been executed for every dependent variable: ROA, ROE, ROC, Solvency, Net Profit Margin, Turnover Growth and Net Profit Margin. Furthermore, the age of the company and the number of employees have been included as control variables. As an example, the equation of the financial indicator ‘ROA’, as the dependent variable is provided below:
ROA
i, t=
∝ + 𝛽𝛽
1Exp
i+
𝛽𝛽
2Age
i+
𝛽𝛽
3Empl
i +∈
Herewith, regressions have been executed where also Experience is replaced with Familiness (derived from a collective database), in order to measure the effect of the total F-PEC score on the dependent variables.
Still, the regression analysis assumes fixed index scores when assessing a relationship with the financial performance indicators. Therefore, further analysis is conducted with help of the collective database to dig deeper in the sample its variables and corresponding outcomes. Especially, to make the indices relative, in contrast to the previous regression approach. Herewith, and because of the sample of 38 companies, a Mann-Whiney U Test is justified to try to find other outcomes when applying different F-PEC scores related to performance. This, because the sample size is rather small and therefore a bit unequally distributed. Within the sample, the scores of the F-PEC and each construct hereof are categorized in high (i.e. above average) and low (i.e. below average). This, to capture effects in differing degrees of the indices to the average financial performance measures taken on average over six years.
23 Additionally, the five highest and five lowest scoring firms are tested along the same lines of reasoning to capture larger effects due to these extremes. Lastly, a cross-comparison of the sectors is conducted to account for sector-specific differences. Here, the respective sectors ‘food and drinks’, ‘consumer goods’, ‘construction’ and ‘industry’ are compared by means of six independent two-sample non-parametric tests to identify potential differences6.
7.0 Results
The null hypothesis, predicted a positive relationship between Experience and financial performance. The results do not support the hypothesis for every financial performance indicator but solvency. That is, H0 can be accepted for solvency, which demonstrates a strong positive significant relationship on the 99 percent significance level (β =.230, p < .001). See table 1 below, for an overview of the regression results with respect to their significance. The p-values in brackets indicate a negative sign regarding the beta coefficient. An asterisk indicates significance on a 95-significance level.
Sig. ROE ROA ROC Solvency Turnover Growth
Net Profit Margin Experience (0,175) 0,272 (0,188) 0,000* (0,372) 0,138
Table 1: Regression Results
Table 2 provides an overview of the relevant indices and corresponding scores tied to the company and sector. Here, sector one until four indicate food and drinks, consumer goods, construction and industry, respectively.
6 That is, Food & Drinks versus Construction; Food & Drinks versus Industry; Food and Drinks versus Consumer
24 Table 2: Variables and Corresponding Outcomes
The average of total familiness in the index is a score of 0.71, whereas the sample average of Experience is 0.67. Non-parametric tests are applied to strike a comparison between above average and below average firms (w.r.t. experience index) and their respective performance measures. Table 3 shows the descriptive statistics of the sample its distribution with respect to the financial measures.
25 Table 3: Descriptive Statistics
The results of the non-parametric test are shown in table 4, which demonstrate that with a below average degree of experience, one has a higher solvability and turnover. Contrarily, with an above average degree of Experience, firms have a higher net profit, ROA, ROE and ROC. Unfortunately, no real meaningfulness can be derived from the output as the results are insignificant7.
Table 4: Variables and corresponding Outcomes
26 The author sought to strike a more extreme comparison with means of the top five and bottom five firms on the Experience index. Herewith, when having a low experience level, results indicate significance on a 90 percent confidence interval for turnover growth and on a five percent significance level for ROE and ROC. Table 5 and 6 shed light on these respects.
SOLVABILITY TURNOVER GROWTH
NET PROFIT MARGIN
ROA ROE ROC SIG. (2-TAILED) .917 .077* .917 .157 .034* .034* Table 5: P-values of variables w.r.t. firms with the 5 highest and lowest degrees of Experience
Table 6: Results of Mann-Whitney U for 5 highest and lowest degrees of Experience
Then, with respect to the results of the cross comparison of industries, table 7 shows the descriptive statistics for all variables included in the sector analysis.
27 Table 7: Descriptive Statistics
7.1 Sectoral Comparison
The sectors show differences scores with respect to their Experience index8. When comparing the results of the Mann Whitney U Test between Food and Drinks and the Construction sector, one can conclude that Food and Drinks performs (insignificantly) better than on every aspect and significantly (α = .10, p = .096) better in terms of ROE9. Regarding the Food and Drinks and the industry sector, the latter scores significantly higher on the culture construct (α = .10, p = .098). the Food and Drinks market outperforms the other on ROC10 (α = .10, p = .089). When comparing Consumer Goods with Food and drinks, the results do not show any significance. Concerning Consumer Goods versus Construction, the former results in a higher ROE and ROC11 (p = .031 and p = .045, respectively). When having a glance at the outcomes of Consumer Goods and Industry, the latter outperforms the former on the Return indicators (i.e. equity, capital and assets) on a 95 percent confidence interval (p = .024). Industry and construction. Lastly, when comparing Industry and Construction, the results do not show any significant differences12.
8 See Appendix, Table 1: Index Scores per Industry
9 See Appendix, Table 23: Test Statistics between Food and Drinks and Construction 10 See Appendix, Table 24: Test Statistics between Food and Drinks and
11 See Appendix, Table 25: Test Statistics between Consumer Goods and Construction 12 See Appendix, Table 26: Test Statistics between Industry and Construction
28 Additionally, the overall results including Familiness and its constructs, Power, Experience and Culture, derived from the database show miscellaneous outcomes. See the table below for an overview of the regression results13 with respect to the constructs of the F-PEC and their significance. Again, the p-values in brackets indicate a negative sign regarding the beta coefficient. The asterisks indicate significance on a 95-significance level.
Sig. ROE ROA ROC Solvency Turnover Growth
Net Profit Margin Experience (0,175) 0,272 (0,188) 0,000* (0,372) 0,138
Familiness 0,743 0,068 0,639 0,025* (0,906) 0,013*
Familiness (i.e. F-PEC) demonstrates a significant, positive relationship with solvency, which is convergent with Olson et al. (2003) who have identified a positive relation between the involvement of multiple generations and financial performance. Broccardo et al. (2015) strengthen this as they found that in general non-family firms perform better with exception of the solvency ratio. This could be explained by the long-term orientation and risk averseness that typifies the family firm. Therefore, the different family capital inputs and social capital theory might be true, in that family businesses have relatively fewer debt with more family involvement. Furthermore, Culture demonstrated positive and significant effects for ROE, ROC and Net Profit Margin. Additionally, familiness showed as well, a positive significant relationship with Net Profit Margin. This might be interpreted with means of shared family values, reciprocal altruism, shared family language, loyalty, trust and strong relationships translating in efficiency and effectiveness. Herewith, suggesting that the ‘bright side’ of familiness takes the upper hand.
13 See Appendix, Tables 1 until 22 for an overview of the individual regression results per performance
29
8.0 Discussion and Conclusion
Experience and familiness demonstrated a significant and positive relationship with solvency, which is in accordance with Olson et al. (2003) who identified a positive relation between the involvement of multiple generations and financial performance. Broccardo et al. (2015) strengthen this but do not specifically address Experience factors. These authors focused on differentiating family owned wine companies with nonfamily wine companies and found that in general non-family firms perform better with exception of the solvency ratio as they explain with: ‘Analysing the financial performance, it emerged that nonfamily firms
outperform in Current Ratio and Liquidity Ratio, but family firms are the best in Solvency ratio’ (Broccardo et al, 2015; p. 207). This could be explained by the long-term orientation
and risk averseness that typifies the family firm. Therefore, the different family capital inputs and social capital theory might be true, in that family businesses have relatively few debt, the higher the family involvement. This could mean that they have accumulated family capital, deployed patient capital and brought in own resources in various forms (i.e. survivability capital) as described in the literature review.
Initially, The F-PEC was operationalized to overcome the definitional disparity across studies that has been demonstrated. Therefore, it prompted the need for a revolutionary scale that has the potential to elevate the confusing state of the definitional issues regarding a ‘family business' (Rutherford & Kuratko, 2008). By utilizing the F-PEC and relating it to six different financial indicators, this paper also sought to answer whether familiness has a relationship with firm performance in Dutch businesses. When it comes to Experience of a Dutch family firm, a relationship with solvency has been discovered.
8.1 Limitations
As can be derived from the discussion section, it is evident that there are some limitations to the study. For example, the sample group (the N) is not that large. The reason of having a low N is intelligible for this research, because the group of large family firms is limited. Nevertheless, looking at the population of large family firms, the response rate is relatively high. Besides that, the person who had to fill in the survey ought to be from the board of directors, which often have a tight schedule and therefore little time available. That makes it still difficult to give reliable conclusions for the entire population of family businesses in the Netherlands. Another possible bias in case of the respondents is a well-known problem with
30 questionnaires. People tend to give answers which are positive for themselves, or overestimate certain aspects; a so-called overconfidence bias. Especially, family business owners and entrepreneurs, who are proud of their heritage, could be overconfident or overestimating themselves in their responses (Forbes, 2005).
The sample of this research consist of firms with an average revenue of more than 600 million euros. That means that a lot of companies have difficult entity structures with different groups and holdings. This could have been a limitation in this study: if the respondent fills in the information of a different B.V. or Holding, the survey could potentially be linked to the wrong business entity, although this bias is minimized through a control question. The size of these firms could be the cause of another limitation. There are companies which are registered as industry companies, but also execute construction activities. If that is the case, it is not completely clear in which sector they should be classified.
Another limitation that should be acknowledged is the fact that we have measured the amount of familiness on a fixed point in time and the financial performance indicators have been measured over a six-year timespan. It can be very much be the case that the level of familiness has changed in the last years, further research could try to incorporate a control question in the questionnaire to account for these changes.
It could also be the case that firms which perform well, develop prominent levels of familiness instead of our current method where financial performance indicators are the endpoint. That is, a possibility for reverse causality could exist.
The last limitation is the uncertainty of the financial indicators and the financial ratios. Despite the double check and manually deriving them from the annual reports, net profit is a precarious factor. This research derived the net profit after tax. Though, taxes could differ between listed and non-listed firms, and the more profit a firm has, the more income taxes a firm is paying. That means that it is not a complete reflection of the performance, because the firm with less profit before taxes will level the company with high profit after taxes. Perhaps, other financial performance indicators should be integrated, such as growth in labor productivity to measure firm performance. Or to measure firm growth, one could adopt a measure of growth in employee-base.
31
8.2 Theoretical Contributions
This paper contributes to the existing literature on various levels. At first, this is the first time the F-PEC framework is used in this manner in a research in the Netherlands. There are no studies available which investigate the influence of familiness, executed with the F-PEC scale, on financial performance of Dutch companies.
The second contribution is the method of researching, which is comprehensive in many aspects. The financial ratios are used to calculate the financial performance of the sample group, in this way the performance of a firm is not based on only a few financial indicators. The majority of previous studies only based their conclusion on two or three ratios. The size of the profit as a percentage of the revenue is very different in case of a company with low product cost price than for example a construction company with high production costs, this means that it is best to use as many different ratios as possible.
Another comprehensive aspect of the research method is the sample group. Out of the 93 companies approached, almost half of them eventually participated in the research. The target group is representative for the population (the biggest family firms and listed firms) in the Netherlands, and the participating group is then again representative for our target group. The target group of other papers like Flören et al. (2010) included mostly small family firms (2-9 employees) which makes it questionable whether these companies encounter the same family dynamics as their bigger counterparts. This present paper only included the biggest firms in the Netherlands. As according to Rutherford et al. (2008), there is more robustness in the relationship between familiness and performance for studies with samples of larger firms.
The third contribution to the family business field of inquiry is that all the financial rates were manually picked from the official annual reports. At first, the combined annual statements were checked with the actual annual reports. The conclusion of this check was that the information of these combined statements contained a lot of inconsistencies. All the indicators and ratios calculated in this present paper are the same as in the annual reports of the companies and were checked at least twice. If other papers did derive their data from combined annual statements, that means their conclusions could be inconsistent as the data could be flawed as experienced first and by the author.
32
8.3 Practical implications
For the owners and managers that exert influence on the family firm, it could be valuable for them to explore the different theories and corresponding elements that have been shown to positively affect the business. Factors that are included in the ‘bright side’ of familiness could be evaluated and employed to embed these critical variables in the corporate culture. It could well be that influential family members are unfamiliar with these components, or that they already have created a stewardship culture, though not purposefully. Similarly, by looking at the ‘dark side’ effects of familiness, the influencers could reverse the negative features into positive ones and weaknesses into strengths when familiarized with the concepts.
8.4 Avenues for Future Research
In addition, it would be very interesting to the family business research arena to capture the family assets that are intangible in nature. That is, the measurement and consequences of for example conflict, nepotism and entrenchment effects. Potentially, a recommendation could be made on where bottlenecks for better firm performance could be present. In addition, a larger sample for measurements of familiness throughout consecutive years and controlled for different industries could be examined to obtain more robust and novel results. Moreover, prospective researchers could be motivated to inspect the reverse causality which stipulates that familiness is higher because of satisfactory performance.
Finally, it is expected that the input and findings of this study function as an instigator to further the needed inquiry on what determines successfulness in the family business phenomenon and its distinctiveness to the non-family side of business. Still, with the research of Van Stein Callenfels (2016, 2017), that only 30 percent of Dutch family firms survive the first transfer of ownership to the next generation, only 13% the second and only 1% exists after the fifth. The question remains how to survive the first round of succession and what determines the successfulness of these rare and grand family firms that prosper through generations throughout the centuries.Finding this ultimate answer is what excites the family business field of research.
33
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10.0 Appendix
10. 1 Complete Qualtrics Survey
Dear respondent,
Thank you very much for participating! This survey will take approximately 15 minutes of your time.
All the answers will be treated confidentially. The results will be published in totals per industry and only show correlations between variables. This means that it is not possible to relate the results to your business. You will be a part of the group of people to receive our report from first hand, in first instance.
This research is a collaboration between the Amsterdam Business School (UvA), Vrije Universiteit and Ernst & Young. This questionnaire will help us relate the involvement and commitment of the family within the business to potential financial and non-financial indicators. This extensive family business research is unique in The Netherlands and will give new insights into the interesting dynamics of these special companies.
This questionnaire should preferably be filled in by a member of the management board (directie-lid) or governance board (raad van toezicht).
For questions and results, please contact: Nick Minderhoud (06-11773465) or Marnix Teters (marnix.teters@student.uva.nl).
Thank you in advance,
Dr. Prof. Roel van der Voort, Rémy Phijffer, Nick Minderhoud, Martijn Claessen & Marnix Teters
Q1. What is the name of your company (+ legal entity)?
Q2. In which year was the company founded?
Q3. If you had to choose between the following sectors, which sector would best fit your company? -Food & Drinks (1)
-Construction (2) -Industry (3)
-Consumer goods (4)
Q4. How many employees does the company have?
Q5. How many family members participate actively in the entire business?
Q6. Are you part of the founding and/or owning family? Yes (1)
No (2)
