The Functional and Dysfunctional Properties of Family Governance: Insights from the Rothschilds

Abstract

We examine the interplay between the functional and dysfunctional pursuit of noneconomic goals in the first three generations of the Rothschild bank. The period analyzed covers the founding of the firm in the late 18th century, up to the European revolutions of 1848. Using an analytic narrative approach, we identify instances where the founding family’s pursuit of socioemotional wealth (SEW) resulted in value creation, as well as instances where unconstrained pursuit of SEW and associated biases destroyed value. We observe that dysfunctional properties of SEW pursuit begin to outweigh its functional properties as the structural and managerial complexity of operations increases. The interplay of constructs such as SEW and bifurcation bias explains both the successes of the Rothchild bank, such as its dominant position in European finance in the middle of the 19th century, and the firm’s key failures, such as the failure to capture the American market.