Karen Vinton’s Executive Summaries recap two articles from the June 2013 issue of FBR.
In Is Nepotism Good or Bad? Types of Nepotism and Implications for Knowledge Management the authors look at two categories of nepotism, reciprocal and entitlement. Each type plays a different role in the effect of nepotism on the family business and the family.
SUMMARY 1: Is Nepotism Good or Bad? Types of Nepotism and Implications for Knowledge Management
Peter Jaskiewicz, Klaus Uhlenbruck, David B. Balkin and Trish Reay
Is nepotism good or bad? This is a question that has plagued family firms and family firm advisors over the years. Many articles over the years have portrayed nepotism as generally problematic, but this article develops a model which seeks to explain why nepotism works in some situations and not in others.
The authors identify two types of nepotism:
- Reciprocal nepotism is nepotism associated with the family conditions of interdependence, previous interactions between family members, and cultural norms that support obligations towards family members.
- Entitlement nepotism is hiring that is based solely on family ties (such as primogeniture).
A model is developed using three constructs (types of nepotism, effects on quality of exchange relationships and tacit knowledge management) and two contingency factors (firm size and sector of activity). The model was based on the following propositions:
- Nepotism in family firms may be beneficial when it is reciprocal, rather than entitlement nepotism, and when it results in generalized social exchanges that support long-term commitment and indirect reciprocity.
- Stable, long-term, trust-based relationships based upon reciprocal nepotism can produce generalized social exchange and can serve as a foundation for effective tacit knowledge management within the firm, which can in turn improve firm competitiveness.
Even though this model needs to be empirically tested, it provides a discussion framework for practitioners and their clients when faced with the challenges of nepotism.
Is nepotism good or bad? It depends.
In the second article, Economic and Technological Importance of Innovations in Large Family and Founder Firms: An Analysis of Patent Data the authors examine the differences between technological and economic innovations in family and non-family firms and the degree to which the differences can be attributed to ownership or management dimensions in the firms.
SUMMARY 2: Economic and Technological Importance of Innovations in Large Family and Founder Firms: An Analysis of Patent Data
Joern Block, Danny Miller, Peter Jaskiewicz and Frank Spiegel
Even though past research has shown that family firms have lower research and development spending than other firms, this article addresses the following questions:
- How does the economic and technological importance of innovations produced in family firms compare to the economic and technological importance of innovations produced in non-family firms?
- What differences exist between family and founder firms in this regard?
- To what degree can differences in the economic and technological importance of innovations between family, founder, and other firms be attributed to ownership or management dimensions of these types of firms?
Data for this study included patent data, ownership and management data, and accounting and financial data. A data set consisting of 1,659 observations from 248 firms in the S&P 500 concluded the following:
- Founder-managed firms produce innovations with high economic and technological importance, while family-managed firms are less likely to produce innovations of a radical and exploratory nature.
- Socio-emotional wealth (SEW) concerns may bias family firms toward incremental rather than radical innovation projects. In contrast, founders as managers, who favor an entrepreneurial orientation, appear to be gain seeking rather than loss averse.
- These motivational differences explain why founder-managed firms and family-managed firms approach innovations differently, having distinctive consequences on a firm’s performance.
Practitioners should help their clients realize that SEW concerns may have an impact on innovation. Family firms in industries which require radical innovations need to be aware of this bias and actively monitor their competitors. The article suggests that hiring an expert to review the family firm’s innovation portfolio might be a good idea.
The “Discussion” section of this article provides an excellent summary of the research findings and additional implications for practitioners and family businesses.
The third summary looks at CEO Compensation in Private Family Firms: Pay-for-Performance and the Moderating Role of Ownership and Management. CEO compensation is a lightening rod issue for family and non-family firms. But is pay-for-performance relevant for family-owned firms or owner-managed firms? The authors of this article conducted a survey of family-owned US firms and found that firm performance is positively related to CEO compensation in private family firms
SUMMARY 3: CEO Compensation in Private Family Firms: Pay-for-Performance and the Moderating Role of Ownership and Management
Anneleen Michiels, Wim Voordeckers, Nadine Lybaert and Tensie Steijvers
CEO compensation is a challenge for all businesses and the question always arises over whether CEO compensation should be dependent on firm performance. Most of the research to date on this question has been in the realm of large, publicly traded businesses. But is pay-for-performance relevant for family-owned firms or owner-managed firms? Using a sample of 529 privately-held, 100% family-owned US firms from the 2003 Federal Reserve Board Survey of Small Business Finance, the authors of this paper tested and found that firm performance is positively related to CEO compensation in private family firms.
A summary of some of the more specific findings follows:
- Firm performance (ROA) is positively related to CEO compensation in privately-held family firms.
- Concentrated ownership (1-2 owners) leads to a stronger pay-for-performance relation in private family firms.
- The generational stage of the business has an impact on the relationship between firm performance and CEO compensation. A positive relationship is only found during the controlling-owner stage.
- For family firms with a family CEO as well as those with a nonfamily CEO, firm performance has a positive effect on CEO compensation, but the pay-for-performance sensitivity is stronger for nonfamily CEOs.
The findings of this study have numerous implications for family business advisors and family businesses. This study demonstrates the importance of considering both ownership structures and CEO family status in the private family firm when designing an appropriate and effective CEO compensation package.
It is strongly recommended that practitioners read the “Introduction” and “Summary and Conclusions” section of this paper in order to have a more complete understanding of the findings of this study.
About the Contributor
Karen L. Vinton, Ph.D. is a 1999 Barbara Hollander Award winner and Professor Emeritus of Business at the College of Business at Montana State University, where she founded the University’s Family Business Program. An FFI Fellow, she has served on its Board of Directors and also chaired the Body of Knowledge committee. From 1997 through 2011, Vinton served on the editorial board of Family Business Review, and is the current assistant editor. Before retiring, Vinton served as director for her own family’s business (negotiating its eventual sale) and had her own family business consulting practice, Vinton Consulting Services. Karen can be reached at email@example.com.
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