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Is It Better to Govern Managers via Agency or Stewardship? Examining Asymmetries by Family Versus Nonfamily Affiliation

(Authors: Albert E. James, Jennifer E. Jennings, and P. Devereaux Jennings)

Research Applied précis prepared by Guido Corbetta, Bocconi University

Introduction

The core question of the article is clear: Is agency or stewardship governance more effective for aligning the interests of (family or nonfamily) managers with those of family owners?

We know that:

  • agency theory presumes that managers are primarily self-serving and opportunistic, and prescribes monitoring and incentive systems designed to bring the interests of managers into alignment with those of owners
  • stewardship theory presumes that managers are naturally pro-organizational rather than self-serving, and endorses trust-based governance systems that foster a sense of inclusion and allow for managerial discretion

In this article the authors use:

  • two indicators of pro-organizational behaviors and attitudes: manager’s job performance and manager’s organizational identification
  • three indicators of agency-type governance mechanisms: performance-based pay, share ownership, and family monitoring (manager reported direct supervision by a member of the owning family)
  • three components of stewardship governance system related to the degree to which owners engage in practices that empower managers’ autonomy, sense of belonging to the business, and competence recognition

Methodology and Findings

The research is based on a survey of 398 managers (70% nonfamily and 30% family members) working in family firms (firms owned by a family and with at least one family member involved in the business) with 250 or fewer employees across a variety of industries and geographic regions of the United States.

The main results of the research are the following:

  • Stewardship governance mechanisms are implemented to a greater degree (1.64 on a 0-3 scale) than the agency governance mechanisms (0.54 on a 0-3 scale)
  • Managers (both family and nonfamily) report relatively high levels of pro-organizational behaviors and attitudes (8.81 out of 10.0 for job performance and 5.48 out of 7.0 for organizational identification)
  • Nonfamily managers report a significantly higher level of job performance and a significantly lower degree of organizational identification (versus family managers)
  • Nonfamily managers are significantly less likely to be remunerated with performance-based pay or share ownership (versus family managers)
  • Stewardship-type mechanisms tend to be associated with higher levels of job performance and organizational identification irrespective of a manager’s family affiliation

Implications

I see two main original implications of this interesting research:

  • In small- and medium-sized family firms owners need to spend more time in defining stewardship mechanisms than agency-type ones. Both family and nonfamily managers appreciate a sense of inclusion that increases their job performance. The owners should share their values with the managers, develop with them the vision and the strategy of the company, and jointly analyze company results. If the owners are able to create a context where the managers are treated as stewards, the agency-based mechanisms (such as performance-based pay) might be viewed as a reward and not as a disciplinary action. It is not so clear if this policy could be important also for larger family firms.
  • In small- and medium-sized family firms (and probably also in large family firms) it is important to define agency-based mechanisms for family managers in order to increase their job performance. We know the problems created by “asymmetric altruism” toward family members and it is wise to develop policies designed to thwart family managers from engaging in opportunistic and self-serving behavior. In order to avoid fights and misunderstandings inside the owning family, these policies should be implemented using the role of a board of directors with some strong independent nonfamily members.

Go here to read the complete article.

About the contributor

Guido Corbetta is Alberto Falck Chair in Strategic Management in Family Business at Bocconi University in Milan, Italy. He is a member of the editorial committee of the Journal of Management Studies and the research applied board of Family Business Review. Guido is the co-author (with Carlo Salvato) of the 2014 FBR Best Article Award. He can be reached at guido.corbetta@unibocconi.it.

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