The influence of familiness on stakeholder satisfaction An exploration within the automotive industry

(1)

The influence of familiness on stakeholder satisfaction

An exploration within the automotive industry

Master Thesis International Business and Management

University of Groningen Faculty of Economics and Business

By

SANDER WIERSMA 1752529

Supervisor: dr. M.A.G. van Offenbeek 2nd Supervisor: prof. dr. S. Beugelsdijk

(2)

Abstract

Surprisingly, the vast majority of literature on family firms and performance has focused on the financial results as single performance indicator. Moreover, in this context, most studies compare family firms with nonfamily firms and consequently fail to identify the family’s specific influence on the firm. Therefore, this study aims to broaden family firm research by exploring the relationship between the degree of family influences, the so-called ‘familiness,’ and the satisfaction of all stakeholders. This paper proposes, based on an extensive literature review, that familiness is positively related to stakeholder satisfaction. However, an exploration of ten family firms in the automotive industry indicated the potential existence of an inverted U-shape relationship between familiness and stakeholder satisfaction. Moreover, a positive influence of a family’s experience, gained through multiple generations, on stakeholder satisfaction was indicated by the results. Finally, the results provide a set of interesting directives for further research involving a large sample.

Keywords: family firm, familiness, stakeholder theory, stakeholder satisfaction, performance,

(3)

1. Introduction

Family businesses until this day play a dominant role in many industries. It is estimated that they represent about 75–90 percent of all the enterprises in the world (Eddy, 1996). In Europe, more than 70 percent of businesses are family-owned or controlled (Lank, Owens and Martinez, 1994), while 80-90 percent of North-American firms are considered family firms (Astrachan and Shanker, 2003). As a result, it is often argued that family businesses are the most substantial economic force in society (Weidenbaum, 1996). The abundance of family-owned business in so many industries comes as no surprise since originally, a new business regularly starts as a result of the ambition of relatives that trust each other. Whether or not the newly started family business is going to continue and be successful depends on many factors concerning for instance market developments, but also the handling of internal management issues (Leenders and Waarts, 2003). In this latter respect, the ‘family’ factor of a family business is an important characteristic that may on the one hand enable a company to succeed due to close ties between organization members. On the other hand, the family factor may be the cause of failure due to, for example, problems with succession (Dyer and Handler, 1994). Much research has been conducted on the question whether family firms outperform nonfamily firms (e.g. Jacquemin and De Ghellinck in 1980; Galve and Salas, 1996; Anderson and Reeb, 2003).

(5)

2. Problem statement

Recent academic literature has suggested financial outperformance of family firms compared to nonfamily firms (Anderson and Reeb, 2003; Villalonga and Amit, 2006; Zellweger, Fueglistaller, and Meister, 2007). Although these studies mainly focused on large family firms, there have nevertheless has been academic attention towards the identification of the source of family firm performance. Habbershon, Williams, and MacMillan (2003) use the resource-based view to tie the family’s unique bundle of capabilities and resources, to competitive advantage. This ‘family effect’ has been evaluated for its influence on a trust-based organizational culture (Corbetta and Salvato, 2004), human resource management (Sraer and Thesmar, 2006), loyalty of employees (Ward, 1988), decision making (Poza, Alfred, and Maheshwari, 1997), agency costs (Schulze, Lubatkin, and Dino, 2003), and continuity and a longer-term horizon (Zellweger, 2007). However, in this attempt to explain performance, research in the family business literature has historically focused financial performance as single performance indicator (Westhead and Cowling, 1997), by measuring for instance, profits, value-added, sales revenue, assets, or return on assets. In a comprehensive literature review, Jaskiewicz (2006) finds that for quoted firms the most used performance measure is stock market performance or Tobin’s Q, the market value of total asset divided by its replacement of the asset, whereas for unquoted firms, return on equity, return on assets, or gross profit margin are among the most used measures of performance.

Since 2000, the focus of most researches on family businesses and performance have shifted more towards the degree of familiness, instead of simply comparing nonfamily firms with family firms (Rutherford, Kuratko and Holt, 2008). Klein, Astrachan, and Smyrnios (2005) argue that the extent and manner of family involvement and influence on an enterprise is a pertinent issue which affects the firm’s financial performance. In their research they demonstrate the validity of their ‘familiness’ model which states that the three most important dimensions of family influence are 1) power, 2) experience, and 3) culture.

(6)

firms on stakeholders which is referred to as stakeholder satisfaction (Connolly, Conlon, and Deutsch, 1980; Miles, 1980). According to Chua, Chrisman and Steier (2003), relatively little attention has been devoted to studying the nature and functioning of family firms, even though these organizations are considered to have a unique behaviour, caused by the interrelations and dynamics between the family and the business systems. Moreover, Zellweger and Astrachan (2008) suggest after their extensive literature review on family firms and performance to investigate the relevance of non-financial outcomes and their interrelations. Therefore, this research is focused on how stakeholders are affected in family firms opposed to the single focus on financial performance.

To sum up, this research explores the notion that familiness increases family firm specific behavior from a stakeholder perspective on the firm’s performance. Therefore, the overall research question is the following:

To what extent does the degree of family influence affect the satisfaction of stakeholders in family firms?

Research objective

By answering the research question this research aims to fulfil the following objectives:

1. To increase the understanding on the ways in which familiness may affect stakeholders in the family firm.

2. To develop a framework for further research, by exploring the relation between familiness and stakeholder satisfaction.

(7)

3. Literature Review

This section reviews the literature on the relevant family firms themes and indentifies the important concepts for this study. It is divided in four sub-sections namely, ‘familiness and financial performance,’ ‘potential family firm factors,’ ‘stakeholder theory’ and finally ‘family firms and stakeholders.’

Familiness and financial performance

The relationship between family firms and performance has been an issue in family business research for decades. Roughly, there are two ways family firms are being studied: first the dichotomous approach which compares family firms and nonfamily firms and secondly the ‘familiness’ approach which examines differences amongst family firms. According to Habbershon and Williams (1999) ‘familiness’ is a characteristic that evolves in family firms due to the confluence of the two systems, family and business. In other words, familiness refers to family specific influences that affect the firm.

(8)

Table 1. Studies on the relationship between family firms and financial performance. Based on studies reviewed by, Rutherford et al., 2008)

Outcome

Number of

studies Positive Neutral Negative

Performance ROE 5 3 2 - ROA 5 4 1 - Tobin's Q 2 2 - Profits 3 2 1 - Sales growth 3 2 1 Other 8 2 3 3 Familiness Ownership 9 3 3 3 Management 4 2 2 - Both 10 9 1 - Other 1 - 1 -

Firm size Small & Medium 9 4 3 2

Large 13 9 3 1

All 2 1 1 -

Sample Dichotomous 15 9 4 2

Familiness 8 4 3 1

Both 1 1 - -

(9)

than half of the studies used a sample containing only large family firms, which might be due to convenience from a data collection standpoint (Rutherford et al., 2008). However, these studies show positive results in terms of financial outperformance. Finally, the vast majority of studies compare family firms with nonfamily firms.

According to Klein, Astrachan and Smyrnios (2005) these dichotomous studies fail to use a sound measure of family influences or ‘familiness.’ Therefore, they developed the Familiness-Power, Experience, and Culture scale (F-PEC) specifically to capture the effect of familiness on performance. Power refers to dominance exercised through financing the business (e.g., shares held by the family) and through leading and/or controlling the business through management and/or governance participation by the family. Experience refers to the summed experience that the family brings into the business and is operationalized by the generation in charge of management and ownership (the more generations, the more opportunity for relevant family memory). Culture refers to values and commitment and employs the Family Business Commitment Questionnaire (Carlock and Ward, 2001). Family commitment is seen in the overlap of business and family values. Rutherford et al. (2008) utilized the F-PEC scale on a large sample of family firms. Their results show that firms with a high degree of familiness perform similar to less family firms.

Potential family firm factors

This section deals with the family firm specific characteristics and factors in the literature that potentially influence the family firms financial and non-financial outcomes.

Organizational culture

(10)

variables that influence these family business cultures makes them distinct and difficult to imitate. Corbetta and Salvato (2004) stresses these influences can result in the creation of mutual trust amongst employees and in fact can even lead to a sort of clan-based collegiality. A case study by Jones (2006) confirmed that the family managers provide its employees with a powerful affirmation of cultural identity, which is then transformed into employee commitment, energy, and effectiveness. Moreover, Tokarczyk, Hansen, Green and Down (2007) support this finding and argue that family influences enable family firms to secure competitive advantage through their cultures. At the same time they acknowledge that family firms are vulnerable to spill-overs as a consequence of the trust-based culture. Haugh and Mckee (2003) observe that the image presented of the family culture appears to conform to the traditional view of harmonious relations in the family firm. However, they stress that this makes family firms vulnerable to conflicts, break up and the problems arising form the introduction of new members into the family unit. Zhara et al. (2004) established that besides commitment of employees, the organizational culture in family firms also creates entrepreneurship in family firms.

Social capital

Social capital is the sum of the actual and potential resources embedded within, available through, and derived from the network relationship (Nahapiet and Ghoshal, 1998). Geletkanycz and Hambrick, (1997) argue and find that, besides human capital (such as, experience, knowledge and expertise), a manager's social capital also plays a central role in business value creation. Therefore, it is an important job to motivate and reward managerial efforts in building external relationships and thereby create a firm's significant competitive advantage. Social capital’s contribution is derived from both intra- and inter-organizational relationships. Inside the organization, social capital can reduce transactions costs, facilitate information flows, knowledge creation and accumulation and improve creativity (Nahapiet and Ghoshal, 1998), while external to the organization, social capital increases for instance alliance success or sound supplier relations (Koka and Prescott, 2002).

(11)

stems from the factors such as stability, interdependence, and closure common in families. External to the organization, Anderson, Jack and Drakopolou (2005) and Jack (2005) find that family outside the boundaries of the firm is highly important for support and resources. In fact, a family firm’s organizational capital is likely to be strongly influenced by the family’s social capital because the firm’s network is often initially based on the family members’ networks. Furthermore, family members involved in the firm generate the firm’s initial network structure that in turn influences the development of family firm’s social capital. The strong ties among these family members play an instrumental role in the current and future activities of the family firm (Jack, 2005). Arregle, Hitt, Sirmon and Very (2007) argue that the social network brought to the firm by family members also includes external agents consisting of for instance religious organizations and members, school ties, professional organizations, and community groups. Lester and Cannella (2006) confirmed this argument and find that the community-level social capital generated by the network of family firms is an important reason for the survival and persistence of individual family firms, despite the existence of additional family-related costs. Furthermore, as families aim to pass on the firm to the next generation, Sirmon and Hitt (2003) and Klein et al. (2005) report that family firms have richer social capital due to the experience of multiple generations.

Agency costs

(12)

better financially than counterpart firms with a lesser degree of family control because the cost of monitoring a family-controlled business is considerably less.

Second, the conceptually opposing view, entrenchment theory, suggests that high levels of stock ownership, leads to executive decisions that are ‘inconsistent with growth oriented risk taking’ (Wright, Saran, and Awasthi. 1996). This view supports Schulze, Lubatkin and Dino (2003) assertion that strong family control results in additional entrenchment, providing family members with secure employment and privileges that may distract from firm profitability. The bankruptcy of family controlled Parmalat is an interesting case, which can be described as an excess of entrenchment theory.1 The results of researches testing whether agency or entrenchment theory is applicable to family firms, are mixed. Oswald et al. (2009) finding suggests that entrenchment theory is an appropriate theory to explain the ownership–performance relationship, although their study was based solely on medium-sized privately held family firms. This notion is also supported by Schulze et al. (2009) who find that family firms experience agency problems that can be very costly to mitigate. These results contrast the research of Christman, Chua and Litz (2004) which shows that family involvement decreases overall agency problems. One of the reasons is that the control mechanism for ‘strategic planning’ is far more costly in nonfamily firms. The literature review on family firms and performance (table 1) shows that firms managed and (partially) owned by family members outperform other family firms. One of the reasons could be that the agency problem and therefore costs are substantially lower in that case.

Risk taking

La Porta, Lopez-de-Silanes, and Shleifer (1999) warned that ownership concentration in a single firm, which is the case family firms, leads to greater risk aversion. In turn, the desire to minimize business risk can have the side effect of hindering the economic growth of the family firm. Morck and Yeung (2003) confirmed this notion in their research and found that family business domination can hinder economic development. Therefore, family firms are reluctant to engage in risky, yet potentially high-return alternatives because of their relatively undiversified ownership position.

However, Gomez- Mejía et al. (2007) argue that family owners are not only concerned with financial returns but also with their so-called socioemotional wealth through the firm.

1

Parmalat, is a multinational Italian dairy and food corporation, that collapsed in 2003 with a 14bn euro hole in its accounts in what remains Europe's biggest bankruptcy. Source:

(13)

Socioemotional wealth are the non-financial aspects of the firm that meet the family’s affective needs, such as identity, the ability to exercise family influence, and continuing the family dynasty. Consequently, family firms are likely to place a high priority on maintaining family control even if this means accepting an increased risk of below target firm performance. However, on the other hand Gomez- Mejía et al. (2007) argue that because family owners must also keep the firm from failing, they may also act more conservatively by avoiding risky business decisions. They found that family firms tend to make business decisions that have relatively low performance variability. Therefore, on the one hand family firms are risk averse in decisions associated with loss of family control, or remaining independent, which preserves the family’s socioemotional wealth. However, on the other hand these decisions may greatly increase its performance hazard. Consequently, family firms may be risk willing and risk averse at the same time.

Long-term orientation

There is a strong notion in the literature that family firms apply longer time horizons in their decision making (e.g. Ward, 1991; Sraer and Thesmar, 2006). First, family firms often try to pass their firms on to the next generation (Ward, 1997) and often display strongly committed shareholders providing patient capital (Dobrzynski, 1993; Ward, 1991), which is capital without threat of liquidation in the short run. Moreover, given the fact that family firms often strive for an entrepreneurial legacy that spans generations, time horizon is not necessarily limited to the life span of one individual but is potentially extended by the presence of a succeeding generation that will take over the firm (Zellweger, 2007). In line with this argument, Walsh and Seward (1990) find that in family firms managers are also interested in firm performance beyond their working life.

(14)

business goal to pass on the firm to heirs, longer CEO tenure and the resulting investment preferences, family firms tend to have a longer time horizon in their business activities and investment choices in contrast to most nonfamily enterprises.

Succession

One of the most contentious issues surrounding family firms relates to succession decisions. For instance, a CEO transition is likely to play a key role in determining a firm’s prospects, and they are arguably influenced by the preferences of controlling families, which often struggle between hiring a family member or an unrelated CEO (Bennedsen, Nielsen, Perez-Gonzalez and Wolfenzon, 2007). Handler (1990) stresses that these succession processes in family firms are complex and involve many factors at the individual, relational, and organizational level. Whether succession is beneficial or detrimental to the firm is still an unsolved issue. Athenassiou, Crittenden, Kelly and Marquez (2002) argue that a hazard is that, due to the fulfilment of family obligations, the appointment of a new top manager is based on blood ties rather than on strict criteria of competence. This notion is supported by Burkart, Panunzi and Shleifer (2003) who argue that managers are selected from a small pool of managerial talent. Bennedsen et al. (2007) findings suggest a negative relationship between family successions and a firm’s financial performance.

(15)

Conclusion

The literature is rich on family firms and their unique characteristics. First, the literature so far has established that family firms tend to have a strong organizational culture which clearly distinguishes them from nonfamily firms. However, Nicholson (2008) stresses that there is no clear answer to what the critical elements of organizational culture are that bring success and failure in family firms. The finding that family firms posses a strong family culture is in line with findings in the literature on the social capital of family firms. Both the intra and he inter-organizational relationships are a substantial contribution to the family firm. In terms of agency costs the literature provides mixed results. Therefore, it is still a puzzle whether agency or entrenchment theory should be applied in family firms. Furthermore, there is a strong notion in the literature that family firms tend to be more risk averse than nonfamily firms. On the other hand, Gomez et al. (2007) find that family firms can take riskier decisions in order to sustain the social emotional wealth of the family. Therefore, family firms may be risk willing and risk averse at the same time. However, the literature clearly finds that family firms tend to have a longer time horizon in their business activities and investment choices in contrast to most nonfamily firms. One of the reasons is that family firms have to deal with the succession issue. However, there is no consensus view in the literature whether succession is detrimental or beneficial to the family firm.

Overall, the literature points out a set of interesting family firm characteristics and factors that affect the outcomes of the firm. Therefore, the single focus on the financial outcomes of family firms may in fact be to narrow to increase the understanding of their functioning. Consequently, the next section deals with the stakeholder theory and stresses the importance of non-financial outcomes of an organization.

Stakeholder theory and stakeholder satisfaction

(16)

those groups. Using this theory Evan and Freeman (1988) initially explain the concept of a stakeholder as follows: ‘Stakeholders are those groups who have a stake in or claim on the firm.’ Specifically, they include suppliers, customers, employees, shareholders, the local community, as well as the management in its role as agent for these groups. Furthermore, they state that the very purpose of the firm is to serve as a vehicle for coordinating stakeholder interests. Berman, Whicks, Khota and Jones (1999) extended the stakeholder theory by deriving to two distinct stakeholder management models, 1) the strategic stakeholder management model and 2) the intrinsic stakeholder commitment model. Strategic stakeholder management entails that the sole reason for addressing stakeholder concerns is that the firm’s managers or owners believe that by doing so the financial performance is enhanced. In contrast, in the intrinsic stakeholder commitment model stakeholder concerns are addressed because the managers/owners feel they have the moral obligation to do so and that this commitment will drive strategic decision. In turn this will also enhance the firm’s financial performance.

(17)

Figure 1. General stakeholder model. Source: www.bized.co.uk

At the 1994 Toronto Conference on ‘Stakeholder Theory,’ a scheme for classifying stakeholders was developed. In this scheme the stakeholders, as shown in figure 1, are divided in three main categories:

• Core stakeholders are essential to the survival of the firm, such as employees, owners shareholders

• Strategic stakeholders are vital to the organization and the threats and opportunities the organization faces, such as suppliers and customers.

• Environmental stakeholders are all others in the organization's general environment and come in many forms. For instance, environmental groups and local communities. In other words, the broader society as stakeholder.

(18)

key role in the formation of society’s ethical demands and the ‘corporate ethical identity2’ emerges as a standard by which stakeholders compare the firm’s ethical behaviors to their expectations. Therefore, a strong ethical identity implies compliance with the ethical demands of the firm’s stakeholders, resulting in higher levels of satisfaction. In turn, satisfied stakeholders are expected to be more willing to provide their services and resources to the firm, thereby enhancing financial performance. In their research Berrone et al. (2007) find that application of sound corporate ethics increases stakeholder satisfaction. Moreover, they find that revealing information about corporate ethics results in enhanced shareholder value.

The next section will deal with literature concerning family firms and their relationship with various main stakeholders.

Family firm and stakeholders

In the same way there has been an attempt to explain financial performance of family firms, there is need for an explanation for the non-financial outcomes of family firms. Sharma, (2004) proposes that the aforementioned stakeholder theory (which in turn leads to a certain stakeholder satisfaction) might be helpful. Furthermore, Zellweger and Nason (2008) elaborate on the relevance of applying stakeholder theory to the family firm context. First, they propose that in contrast to nonfamily enterprises, family firms have an additional stakeholder group, the family. As the family is a unique and key stakeholder they also pursue unique goals, many of which can be considered non-financial, such as harmony, jobs for family members and family control.

Second, given that individuals in family firms often play multiple stakeholder roles (for instance, employee, owner, manager, family member), Zellweger and Nason (2008) expect that family firms have a higher incentive to ensure the particular satisfaction of the related individual stakeholders and stakeholder groups. Based on social identity theory, Dyer and Whetten (2006) show that family entrepreneurs often view their firms as an extension of themselves and their families, which makes them more likely to be socially responsible and thus more likely to satisfy stakeholders. These attempts are reinforced by the fact that family members cannot switch groups or easily change organizations, hence creating an even stronger incentive for individuals in the family firm to satisfy multiple stakeholders. Third, family enterprises have been reported to display strong community relations (Tagiuri and Davis, 1996). Moreover, as mentioned earlier Sirmon et al. (2003) report that family firms

2

(19)

display richer social capital due to their transgenerational outlook. Sirmon et al. (2003) find that this transgenerational outlook and patient capital allow family firms to devote the proper time to cultivating the necessary relationships with societal stakeholders, allowing these firms to establish more effective relations with support organizations (e.g. banks), while maintaining legitimacy with other important constituencies and societal stakeholders (Lounsbury and Glynn, 2001).

The next section will deal with each group of stakeholders, as proposed by the 1994 Toronto conference and their relationship with family firms.

Core stakeholders

Employees

According to Sraer and Thesmar (2006), consistent with the fact that family firms have longer horizons, family managers can build longer relationships with their employees in comparison with nonfamily managers. First, they find that firms managed by a family member (founding or descendant) pay significantly lower wages, for a given skill structure compared to nonfamily firms. Second, they provide insurance across the business cycle to their workers, which means employees may feel more secure to keep their jobs. Third, turnover is less likely for family members than it is for professional CEOs in family firms. These three results are consistent with an implicit insurance theory: family managers, because of their longer horizon, find it easier than professional managers to sustain reputational contracts with their workers, providing them with more insurance in exchange of lower wages. Therefore, these findings suggest family firms managed by family members apply a specific kind of human resource management which is more aimed at the sustainability of employees. Furthermore, professional managers, whether in family firms or in nonfamily firms may lack the credibility necessary to implement these reputational contracts.

(20)

is crucial in understanding how it operates and how it draws value from stakeholders. It appears that their reduced willingness to downsize is related to their intrinsic commitment towards their employees, expressed in the form of employee and community friendly approaches. This statement is in line with Budros (1999), who relates a company’s downsizing actions with the compatibility of employment traditions. Moreover, Stavrou et al. (2007) argue that as a consequence of family firm these employment traditions, it is possible that their unwillingness to downsize may stem from unique concerns and interests related to stability, remaining control of the firm and reputation and ultimately, to pass the business onto the succeeding generation as part of the family legacy. Another possible explanation could be Deniz and Suarez’s (2005) finding that owning families have values related to continuity and integrity which in turn influences policies on employee issues that the firms applies.

Family

(21)

Nonfamily shareholders

Besides the family, public or private large family firms have to account for other nonfamily shareholders who provide capital to the firm. These nonfamily shareholders are in line with Friedman (1987) shareholder theory most likely satisfied with high financial returns on their equity. Family firms with diversified ownership, which entails that the family shares its ownership with other shareholders, possess two important characteristics. First, the family usually has a concentrated ownership structure, with some large shareholders/family members owning a significant stake in the firm. Second, special ties exist among some shareholders/family members, so that the interests of family owners can diverge in which case nonfamily shareholders can be easily neglected (Barontini and Caprio, 2006).

(22)

Strategic Stakeholders

Customers

While family-owned businesses as a consequence of their uniqueness are considered to have specific advantages in customer relationships, limited research has been conducted to how these abilities are developed or understood by the public. According to Carrigan and Buckley (2008) consumers may indeed perceive family businesses differently from nonfamily businesses. However, this aspect has received little attention in the literature. Therefore they wrote an exploratory paper to gain understanding of consumer perceptions of family-owned businesses. From their research they find that consumers did perceive them as a unique entity within the business environment. Furthermore, for consumers, the notion of the family is working close together in their business is an attractive proposition and one that family firms, regardless of size, should be promoting. The respondents in their study recognized the social capital investment by family businesses both for the long-term benefit of the family members and the community. Moreover, their study confirms that family owned firms broaden the customer relationship, allow a better knowledge and understanding of the customer, and build customer loyalty. Finally, they conclude that family firms can utilize their family uniqueness as an important marketing tool to exploit whenever possible. Furthermore, consumers enjoy being part of a business chain that promotes local interests. Capitalizing upon their uniqueness and distinction allows favourable comparisons to be made relative to more homogenized business forms. However, these findings are interpretative and based on a small number of respondent views.

Suppliers

(23)

Furthermore, Zellweger et al. (2008) argue that family firms may be willing to reduce family wealth in the short run to assure timely payment of a key supplier that delivers critical supplies for a running production process.

Environmental stakeholders

(24)

those family firms do hold deeply seeded values for guiding their business behavior and decisions enhancing their corporate social responsibility.

Overall, there seems to be more literature supporting the notion that family firms are more responsible towards society. Although, Niehm et al. (2008) also find that firm size in an important factor in the ability of family firms to give, for instance, community support.

Conclusion

(25)

Table 2. Literature on family firms in relation to stakeholders and their outcomes3

Outcome/proposition

Positive Neutral Negative

Core stakeholders Employees 3 - -

Nonfamily shareholders 5 - 2

Family - - -

Strategic stakeholders Customers 1 - -

Suppliers 1 1 -

Environmental stakeholders 4 - 1

As table 2 shows, the literature hints at the notion that family firms are better able to satisfy their stakeholders than nonfamily firms. However, this statement lacks sufficient evidence to be fully supported. Moreover, the literature also argues that the focus on the family’s goals can be at the cost of shareholders and the general environment. The next section will utilize the literature reviewed here in order to derive a conceptual model and formulate expected relationships between familiness and the satisfaction of stakeholders.

4. Conceptual model and propositions

According to the literature reviewed, in the previous chapter family firms possess certain unique characteristics which affect the stakeholder and thus influence stakeholder satisfaction. Moreover, according to Klein et al. (2005) to what extent a firm shows family firm specific behavior depends on the degree of family influence, ‘familiness.’ They argue that the more family elements are present in the firm, the more family firm specific behavior the firm will display. For instance, observable differences are between a firm in which the family is simply the largest shareholder and a firm which is privately owned as well as managed by the family. To determine the degree of familiness they used measurements relating to power, experience and culture. However, Klein et al. (2005) and Rutherford et al. (2008) focused on financial performance, which did not result in significant differences. Therefore, this paper aims to use the degree of familiness to explore, through a stakeholder perspective, the outcomes for different stakeholders and consequently the stakeholder satisfaction. Consequently, as shown below, ‘familiness’ is the independent variable influencing the dependent variable ‘stakeholder satisfaction.’ In the methodology section the indicators of the ‘familiness’ concept will be further elaborated on.

3

(26)

Figure 2. Conceptual model

Propositions

Since the literature on family firms and stakeholders indicate certain outcomes for the satisfaction of stakeholders, propositions based on existing literature can be formulated. Therefore, by combining the theory of familiness as proposed by Klein et al. (2005) and the literature on all different stakeholders in family firms the expected relationships are elaborated on below. Finally, in the conclusion the propositions are summarized.

Employees

Haugh and Mckee (2003) argue that the harmonious culture in the family firm can be disrupted by introducing new members into the family unit, for instance an outside CEO or board member. This implies that outsiders reduce the presence of family culture, and will therefore reduce the familiness in the firm. Therefore, the higher the degree of familiness in a firm, the more they employees will be affected by family firm characteristics. According to Sraer and Thesmar (2006) employees tend to work longer within the same firm, which leads to lower turnover. Moreover, family firms tend to downsize less (Stavrou et al., 2007; Budros, 1999). This implies that higher degree of familiness results in a more employee friendly working environment and thus a higher satisfaction level. However, employees in family firms possibly risk earning lower wages (Sraer and Thesmar, 2006) which can possibly be detrimental for their satisfaction level.

Family

(27)

and board will be less likely to agree in a merger that lowers their control, even though it would increase their personal wealth.

Nonfamily shareholders

Jara-Bertin et al. (2008) find that a high concentration of family ownership is related to higher shareholder returns. Furthermore, the studies on family firms and financial performance, reviewed in chapter 2, revealed that nine out of ten studies concerning both family ownership and family management show an increased financial performance in family firms. This suggests that the higher the familiness, the higher the financial returns. Consequently, shareholders are more likely satisfied in high-familiness firms. However, the presence of large nonfamily shareholders can even be detrimental for the shareholders.

Suppliers

Zellweger et al. (2008) and File et al. (1994) have argued that family firms typically have strong relationships with their environment and thus their suppliers. This according to Zellweger et al. (2008) results in long term contracts and more on time payments. This implies that a higher degree of familiness results in stronger relationships with suppliers which increase their satisfaction level.

Customers

The finding of Carrigan and Buckley (2008) that family firms tend to build more customer loyalty seems more appropriate for firm with a high degree of familiness (for instance, local family firm with a local brand) than for a firm with low-familiness (for instance, a worldwide operating public family firm). Therefore, familiness may be positively related to the satisfaction level of customers.

Environment

(28)

Conclusion

The proposition of Klein et al. (2005) is that the degree of familiness is positively related to the extent to which family firms exhibit family firm specific behavior. This idea combined with literature on how family firms satisfy different stakeholders has resulted in an expected relationship between familiness and stakeholder satisfaction. In the case of all considered stakeholders a positive relationship between familiness and the separate stakeholders is expected, based on existing literature. Therefore, the overall stakeholder satisfaction is also expected to be positive. However, since the family is a unique stakeholder and the literature does not provide a unified answer to how families are satisfied, the expected relationship is unknown.

Table 3. Propositions.

Independent variable Dependent variable Expected relationship

Employee satisfaction Positive

Family satisfaction Unknown

Nonfamily shareholder satisfaction Positive Customer satisfaction Positive Supplier satisfaction Positive Environmental stakeholder satisfaction Positive Familiness

Overall stakeholder satisfaction Positive

(29)

5. Methodology

The conceptual model and propositions described in the previous section are explored according to the method explained in this section.

Sample and data

The propositions state that the ‘familiness’ present in a firm may lead to certain outcomes that positively influence the satisfaction of stakeholders. However, these outcomes have not been studied before which means the specific influences on stakeholder satisfaction as a consequence of ‘familiness’ are uncertain. Therefore, the method of this study is of an inductive nature. A case study approach is better suited than the use of a large sample since the theoretical argumentation does not result in any specific expected outcomes. Furthermore, according to Eisenhardt (1989) case studies increases the likelihood of creative framing leading to a new theoretical vision, which is the aim of this research. As the relationship between familiness and stakeholder satisfaction has not been studied before, this research can be classified, according to Yin (2003), as an exploratory case study. Moreover, since this paper is concerned with the implication for all stakeholders, which entails a broad spectrum of different interests, a qualitative approach suits this research best. Since, a sample size between 4 and 10 is a common number in case study research (Eisenhardt, 1989), the amount of 10 cases was chosen to be explored and submitted to an extensive analysis. However, this means that, as a consequence of the sample size, thorough (statistical) testing of theory is not permitted, which means the results can be interpreted strictly as an indication for potential findings.

(30)

line with the definition of high levels of stock ownership used by many researchers (e.g. McConnell and Servaes 1990; Shleifer, and Vishney, 1988; McConaughy and Matthews, 2001) to examine the relationship between family firms, performance and risk. Another criterion that is used to define family firms is the presence of the founder or descendants in the management or board (e.g. Schultze et al., 2001; McConaughy et al., 2001). In spite of the fact that the automotive industry is dominated by several large multinational companies, the industry displays a set of interesting examples of family firms. An internet scan of firms in the automotive industry worldwide with substantial family ownership (>7.5%) or family members/founders in the management/board and at the same time varying levels of ownership results in the following ten firms (table 4).

Table 4. Sample of family firms in the automotive industry.

Company Name Family

1 BMW Quandt

2 Fiat S.P.A Agneli

3 Ford Motor Company Ford 4 Magna International Stronach

5 Michelin Michelin

6 Porsche Porsche/piech

7 PSA Peugeot Citroën Peugeot

8 Sanden Ushikubo

9 Toyota Industries Toyoda

10 Toyota Motors Corporation Toyoda

As table 4 shows, the sample contains Toyota Industries as well as Toyota Motors, both in which the Toyoda family is present. Toyota Industries is the firm from which the larger Toyota Motors Corporation is developed. While the Toyoda family still owns a significant part of shares (22 percent) in Toyota Industries, their ownership in Toyota Motors has diminished to only 2 percent,4 although members of the family are seated in the board.

To analyze these firms in the context of this research, there is data required on the familiness of the firms and to what degree they satisfy all the firm’s stakeholders. The data on familiness is in the case of the firms in the sample publicly available in the annual reports and company websites. Data on stakeholders, on the other hand is impossible to derive from these sources, which therefore had to be collected from nonpublic sources. First, to define stakeholder satisfaction Clarkson’s (1995) framework (Appendix A) has provided a useful insight in relevant stakeholder issues. Berrone, Surroca and Tribo (2007) in their research also

4

(31)

examined stakeholder satisfaction, which is, according to them, a multidimensional construct that captures a wide range of items. They state that the KLD Social index has been used in many previous studies (e.g. Berman et al., 1999; Hillman and Keim, 2001) on stakeholder theory. However, Beronne et al. (2007) used a score provided by SiRi which is a company that aggregates the degree to which a company satisfies stakeholder’s interest. These company reports are mainly sold to financial institutions who seek sustainable investment opportunities. On the SiRi website, the company publishes a sample of such a company report5. This sample shows many similarities with the list of stakeholder issues reviewed by Clarkson (1995). According to Sharfman (1996) the SiRi score is validated as one of the best available measurements for stakeholder satisfaction. SiRi is a partner of the Dutch firm Sustainalytics who agreed to cooperate with this research. They are an international and independent sustainability research firm that also provides company and country reports to the financial sector. Sustainalytics is specialized in analyzing the environmental, social, and governance performance of companies. Consequently, their reports provide a detailed review of the way firms deal with all relevant stakeholders and related issues. The content of theses reports cannot be shown in this research; however the sample of the SiRi report shows considerable similarities, despite the industry specific indicators that Sustainalytics uses in various reports. Other data on familiness indicators and other stakeholder satisfaction indicators was gathered from annual reports, financial websites and online press sources

Measures

The measurements of the independent and dependent variable, as displayed in the conceptual model, are explained here.

Independent variable: familiness

First, the independent variably ‘familiness’ is determined. Although the firms in the sample are all in fact family firms, substantial differences exist amongst them. While, Porsche is completely family controlled and has family members in key-positions, Sanden has no voting rights. Therefore, an overview of the composition of familiness of the firms in the sample is provided. The familiness score will be determined by using the ‘Power’ and ‘Experience’ indicators from F-PEC scale of Klein et al. (2005) which are displayed in table 5.

5

(32)

Table 5. Familiness measures for power and experience

Power

Percentage of family share ownership

Percentage of family on the management team Percentage of family on the governance board Experience

Number of the generation that owns the firm Number of the generation that manages the firm

Number of the generation that is active on the governance board

The F-PEC scale gives a good indication of familiness present in the firm, although it is more suited for examining a large sample. As consequence of the small sample and qualitative and explorative approach, the different companies were examined more closely to determine their familiness. First, the F-PEC scale neglects the difference between voting rights and percentage of ownership. Many public firms utilize distinct classes of shares (voting vs. nonvoting). Issuing nonvoting shares allows families to attract additional capital without losing control, which can result in control which is in excess of their ownership (e.g. Magna). Therefore, since the aim is to measure the power of the family, this research utilizes voting rights. Second, the F-PEC scale does not differentiate amongst directors and top managers, while it is evident that the CEO and/or Chairman has more power than the other managers/directors (Anderson and Reeb, 2003). Third, Jara-Bertin et al. (2008) argue that nonfamily large shareholders can result in a power struggles with the family, which leads to reduced control in comparison with the single presence of minority shareholders, next to the family. Therefore, the presence of large nonfamily shareholders reduces the familiness of the firm.

(33)

Table 6. Score model familiness

Indicators Weight

Power (% of total) Voting rights 2

Management 2

Board 2

Number of generation Ownership 1

Management 1

Board 1

Family positions CEO 1

Chairman 1

Combo 1

Presence of nonfamily shareholders >2% -0,2

% ownership -1

Maximum score 12

The ‘power’ indicators are given the highest weight since they are a precondition for a family to have influence. Their score is calculated by multiplying the percentage with the weight (2). The ‘generation’ indicators are set in comparison with the highest generation present in the sample, which is 8 (Peugeot). The companies are provided with a score as a proportion of the highest value in the sample, thus, the number of generation/8. Furthermore, the firms receive addition points when a family member is chairman, CEO or both. However, points are subtracted if there are nonfamily shareholders present holding more than 2% of the shares. Moreover, the higher the percentage of nonfamily ownership the more points are subtracted. This results in a final score that indicates the familiness of each firm. Thereafter, the scores are transformed by giving the highest score a value of 10 followed by the other firms which are then scored relative to the highest value (10). This is due to the fact that in the analysis section familiness is compared to the satisfaction scores which results in more legible graphs.

Dependent variable: stakeholder satisfaction

To determine the satisfaction level of the stakeholders they are provided with a score for each firm. By comparing these scores the relative satisfaction level of each stakeholder is determined. To measure the satisfaction level of each stakeholder the information available in the Sustainalytics reports, the website of Reuters6 and data in the Amadeus database was utilized. Below a framework of the analysis is displayed consisting of stakeholder specific indicators, for the vast majority based on the Sustainalytics reports. In general the reports

6

(34)

contain data on all relevant sustainability issues measured in 2007 (except for Porsche (2008) and Sanden (2006)). The reports contain sections concerning specific stakeholders in the case of employees, customers and suppliers. Other sections of the reports review issues that directly affect the other stakeholders described in this paper and can be used to determine their satisfaction level. For instance, the issue ‘corporate governance’ is related to the satisfaction level of nonfamily shareholders. In turn, these stakeholder issues are categorized in sets of different indicators. First, all the public reports and communications on each issue is reviewed. Second, policies and principles refer to directives that firms carry out on different issues. Third, management systems7 that the firms have implemented are elaborated on. Fourth, the performance of the firm in relation with the particular issue or stakeholder was considered.

However, since the objective of Sustainalytics does not fully match the aim of this research other indicators were added. In the case of shareholders, the return of equity is added since this is a primary interest of nonfamily shareholders. Furthermore, the family element is not addressed in the reports, besides the disclosure of the family as major shareholder. Therefore, to analyze the satisfaction level of the family, other criteria were used. These criteria are difficult to determine since there is no consensus view on the interests of family shareholders or managers. Some argue (e.g. Wright et al., 1996) that families are primarily concerned with their own wealth, and thus will focus more on financial results, possibly at the expense of nonfamily shareholders, which is extremely difficult to measure. Others (e.g. Gomez et al., 2007) argue that families focus on socioemotional wealth, which means they are more satisfied with the long term prospect of the company, remaining family control and passing on ownership and/or key-positions to the next generation. Consequently, indicators for the family concern return on equity (Wright et al. 1996), the presence of family successors (Athenassiou, et al., 2002), and the long term outlook for the companies (Ward, 1997) which is based on the price-to-earning ratio (Siegel, 2007). According to Schultze at al. (2003) the ability to exercise authority is also of great value to families. However, since the outcomes that satisfy the family can differ considerably amongst families, the overall satisfaction level was not determined as it was the case with the other stakeholders. Another issue with the family as stakeholder is the possibility that ‘familiness’ itself is a determinant of the family’s degree of satisfaction. Since, according to Gomez et al. (2007) families often aim to remain in control of the firm, a high ownership stake and/or key-position may also increase the

7

(35)

satisfaction level of the family. Therefore, the indicators which possibly relate to the satisfaction of the family are merely reviewed and not provided with an aggregate score. All firms were analyzed according to the same indicators which are given equal weight in determining the score. Thereafter, all stakeholder scores were transformed to a scale of 10 in line with the familiness score. Finally, both satisfaction and familiness scores were compared and analyzed. Below a blue-print of all data used for the analysis of stakeholder satisfaction is shown, each provided with the scores which indicate their weight.

Employees

The firms will be provided with a score based on all indicators in the categories shown below. In total the firm can receive a maximum amount of 17 points if all indicators satisfy the criteria of Sustainalytics.

• Public information (4 points). Public reporting and external verification • Policies and principles (4 points)

• Management systems (1 point) targets to increase the diversity of the workforce • Performance (8 points): such as, lay-offs, job cuts, percentage of employees with fixed

term contracts

Shareholders

To measure the satisfaction of shareholders two separate issues are examined. First, data about the financial gains of the shareholder, measured by the return on equity, was collected. However, the Sustainalytics reports are not all based on the same year. Therefore the use of return on equity in different years can result in a bias due to varying market conditions in each year. Consequently, the return on equity data is based on the 5 year average of each company. Second, the protection of shareholders is examined through the corporate governance of each company reviewed in the Sustainalytics reports.

• Return on equity (Reuters) • Corporate governance

o Public reports and communications (3 points). Director’s remuneration and biographies based on GRI guidelines8

o Principles and policies (1 point). Remuneration policy.

8

(36)

o Management systems (6 points). Independent directors, composition of committee’s etcetera.

o Performance (3,5 points). Share classes, audit fees and controversies.

Both the return on equity and corporate governance score are transformed to the scale of 10. However, to determine overall shareholder satisfaction both scores are given equal weight and transformed to the scale of 10.

Family

As mentioned before the family as a stakeholder is not provided with a score as it is the case with the other stakeholders. First, the satisfaction criteria are different for each family which does not allow a reasonable judgment. Second, the independent variable (familiness) and the dependent variable (family’s satisfaction) overlap. Moreover, if the relationship exists it is more likely that ‘familiness’ leads to ‘family satisfaction’ instead of the other way around. Therefore, the indicators below are possible determinants of the family’s satisfaction level.

• Financial returns: 5 average return on equity (Reuters)

• Long-term prospects: price to earnings ratio (Reuters/Annual reports) • Control: percentage ownership, top managers and directors (Annual reports)

• Succession: presence of family members to continue family dynasty (various press sources)

Suppliers

The score is compiled out of the indicators present in the Sustainalytics reports. The maximum score is 6.5

• Public information (2 points) • Principles and policies (1 point) • Management systems (1 point)

• Performance (2.5 points): controversies concerning contractors

Customers

The score of each firm’s customer satisfaction is based on the Sustainalytics indicators which can result in maximum score of 12 points.

(37)

• Management systems (2 points): ISO 90009 certified sites.

• Performance (6 points): data on product recalls and controversies concerning customers

Environment

The satisfaction level of the broader environment consists of the firm’s concern for the community as well as their performance in relation with the environment.

• Community

o Public information (2 points): reporting and external verification on customer issues

o Principles and policies (1 points): signatory of the UN Global pact o Management systems (1 points): guidelines for philanthropic activities

o Performance (3 points): percentage of donations, areas of support and controversies

• Environment

o Public information (2 points): reporting and external verification on customer issues

o Principles and policies (2 points): environmental policy and on green procurement

o Management systems (5 points): targets on CO2 emission, renewable energy and improvement of suppliers etcetera.

o Performance (2 points): percentage of ISO 1400110 certified suppliers, data on emissions and controversies on pollution, waste etcetera.

Overall

Finally the overall satisfaction level of the stakeholders is presented. This is based on the results of all previous mentioned stakeholders (with the exception of the family). Mitchell, Agle and Wood (1997) advise to assess stakeholders on their power, urgency and legitimacy to determine their importance. Since the automotive industry is of vital importance for developed economies, all stakeholders are affected by these firms. Therefore, each stakeholder is weighted equally and scored on a scale of 10. In the next section the companies in the sample were analyzed according to these indicators per stakeholder. Thereafter an

9

ISO 9000 is a family of standards for quality management systems 10

(38)

(39)

6. Analysis

The collected data is analyzed according to the previously described method. In the next chapter ‘discussion’ the results are summarized and the outcomes are discussed.

Familiness

In this section the independent variable familiness is analyzed, the firms in the sample are ranked and classified in terms of familiness according to the described method. Table 7 shows all data based on the F-PEC indicators. The data shows there are substantial differences in the way family influences are present in each firm. For instance, BMW shows high voting rights, while the Ushikobo family (Sanden) has no voting rights. On the other hand, the Ushikobo family has is relatively most represented in the board of directors and management compared to the other firms. Also, the experience provided by the number of generations also show considerable differences. The 8th generation of the Peugeot family already owns the family’s shares, while the Stronach family (Magna) is only in the 2nd generation.

Table 7: familiness of the firms, based on the F-PEC scale (Klein et al., 2005)

Power (% of total) Number of generation

Company Voting rights Management Board Ownership Management Board

Porsche 100 0 45 2 - _{1 - 2} Magna 100 8 20 2 2 ₂ Peugeot/Citroën 45 0 35 8 - ₈ BMW 46 0 11 4 - ₄ Ford Motor 40 0 14 4 - ₄ Fiat S.P.A 34 0 19 5 - ₅ Michelin 24 10 13 4 4 ₄ Toyota Industries 22 11 37 3 3 ₃ Sanden 0 ₂₀ 40 2 1 ₂ Toyota Motors 2 0 18 3 - ₃

(40)

family. In other firms, such as BMW and Ford, the family does not have a majority of voting rights, but they only have to deal with minority shareholders, which means they are less likely to be opposed by the other shareholders.

Table 8. Additional familiness indicators, based on finding from Anderson and Reeb (2003) and Jara-Bertin et al. (2008)

Family positions

Presence large nonfamily shareholders

Company CEO Chairman Combo >2% total % voting rights

Porsche _- _yes _- _no _-

Magna International _- _yes _- _no _-

PSA Peugeot Citroën

yes - yes 2

BMW _- _- _- _no _-

Ford Motor Company _- _yes _- _no _-

Fiat S.P.A _- _- _- _yes ₁₈

Michelin _- _- _- _yes ₅₇

Toyota Industries _yes _- _- _yes ₂₂

Sanden

- - yes yes 11

Toyota Motors

Corporation - - - yes 29

After combining all indicators and providing them with scores according to their weight11 the resulting familiness scores are shown in figure 3. The scores show that the firms differentiate substantially in terms of their familiness. While Peugeot, Porsche and Magna have the highest familiness of the sample, Michelin and Toyota Motor Corporation have relatively low-familiness.

11

(41)

Figure 3. Familiness of firms (based on data in table 3 and 4)

Even though a few firms have quite similar familiness, their scores have different compositions. In fact, each family exercises their influence in a different manner, which can nevertheless result in a similar score. The companies in the sample are all large firms active in an important global industry. Therefore, compared to small and medium sized family firms the familiness is arguably low. However, considering the size of the firms they are all high on familiness in comparison with their nonfamily competitors. In fact, most large public firms originally were family firms, but at some point most families sell of their stake due to various reasons (e.g. Renault or General Motors).

Core stakeholders

First, the core stakeholders are explored by comparing the satisfaction level with the familiness.

Employees

(42)

exception in the overall view of the graph. Contrary, to the other high-familiness firms, Peugeot displays the highest interest in the well-being of their employees.

Figure 4. Employee satisfaction scores

(43)

Family

As argued in the ‘methodology’ section (5) the literature does not provide a clear answer to what satisfies founding families in a firm. Therefore, all possible issues that can determine the satisfaction level of the family are elaborated on. First, in terms of financial returns figure 5 shows the relative financial returns (measured by the 5 year average return on equity) compared to the relative ownership of the families. In contrast with former used voting rights of families (as familiness indicator), in this case the family’s actual ownership is used since this determines their financial gains. As figure 5 shows, compared to the other firms the Porsche/Piech family by far enjoyed the most financial benefits while at the same time holds the most shares in the company. In contrast, the Ushikubo family of Sanden holds a negligible amount of shares while the financial returns are the worst in comparison with the other firms. Moreover, in most cases the relative ownership of the firms is in line with the relative financial returns. This indicates that more family ownership leads to better financial results, thus increasing the family’s wealth. Except in the case of Toyota Motors and Ford where there is a discrepancy between ownership and returns. The case of Ford might be explained by a finding of the literature review on family firms and performance studies. Namely, the studies using a combination of ownership and management as familiness measure all have a positive outcome. The lack of financial results in the case of Ford might therefore be due to the absence of family members in the management and low presence of family board members. The sound financial results of Toyota Motors could be due to the supposed strong link with Toyota Industries.12

12

(44)

Figure 5. Relative ownership compared to relative financial returns

Secondly, long term prospects of the firms are rather disparate in comparison with the financial returns. The graph shows that the low-familiness firms have average to high long term prospects, while the opposite is the case in the higher familiness firms. The long term prospects, according to investors, are low for Magna and Ford while relatively high for Toyota Industries, Porsche and Peugeot.

(45)

Third, another indicator that possibly satisfies the family is the direct ‘power’ they possess in order to exercise control over the governance of the firm. Figure 7 shows the relative power and how that power in the firm is exercised. The families Porsche/Piech, Stronach and Ushikubo clearly have the most direct control, while the Ushikubo family holds no shares and therefore needs to have support of nonfamily shareholders. The Toyoda family has low direct control over Toyota Motors, however remains relative high control in Toyota Industries. Therefore, the absence of control in Toyota Motors, which can deteriorate the satisfaction of the Toyoda family, is compensated by their stake in Toyota Industries. Finally, the direct influence of the Ford/Quandt/Agnelli family is lowest, which in turn may lead to a lower perceived socioemotional wealth and thus a lower satisfaction level.

Figure 7. Power indicators

Fourth, according to various press sources most families have succession plans that involve family members. In the case of Ford there is speculation that the successor of the CEO will not be a family member13; however family members will remain present in the board. Agneli family (Fiat) may loose ownership control due to a merger.14 The same goes for the Stronach family (Magna),15 although a family member will remain seated as chairman of the board. In the case of Sanden no data was found on family succession. However, in their case,

The influence of familiness on stakeholder satisfaction An exploration within the automotive industry