Impact of Institutional Overlap on Family Firm Governance: An Institutionalist-Agency Perspective

Abstract

This study examines how institutional overlap of business and family influences the use of governance in family firms. Due to institutional overlap, family firms pursue business-centered economic (BCE) as well as family-centered noneconomic (FCNE) preferences. Drawing on actor-centered institutionalist framework and agency theory, we argue that owing to this overlap, formal family governance is needed to mitigate FCNE goal conflicts between family shareholders and family managers; and formal family governance and board of directors are complementary mechanisms. Based on a 26-country survey of 960 family firms, we find that the use of formal family governance is determined by the extent business decisions take FCNE goals into consideration, agency relations between family shareholders and family managers, and board characteristics (number and ratio of family board and board activeness). These findings lead us to conclude that formal family governance is actually a form of corporate governance mechanism. This study contributes to a social theory of agency and suggest a way for corporate governance literature to bridge macro vs. micro and economic vs. social divides.