Examining formal and relational governance in family small medium enterprises

Abstract

Purpose The purpose of this study is to investigate factors that influence the application of governance mechanism in family small and medium-sized enterprises (SMEs) in Indonesia. Design/methodology/approach This study used multiple regression analysis to examine the hypothesis. For data collection, questionnaires were distributed to 337 owners and managers of SMEs around 7 districts in Java Island in Indonesia. Findings The result indicates that uncertainty influences the application of formal governance in family SMEs in Indonesia. Meanwhile, asset specificity has impact on both formal and relational governance in the context of firms. Financial and non-financial objectives did not impact both formal and relational governance. Research limitations/implications Though this research was carried out in a particular cultural context, this study was not specifically designed to examine the interaction between cultural variables and family corporate governance variables. In the future, there is need for a study that examines how culture can influence the practice of formal and relational governance in family business. Practical implications The study will give guidance to owners or managers of family business in terms of governance mechanism when uncertainty increases. This evidence suggests that family firms need to adopt formal governance within family firms when uncertainty exists. Social implications The research finding indicated that uncertainty influenced the application of formal governance in family SMEs in Indonesia. This research finding suggests that family firms need to adopt formal governance when uncertainty exists. The adoption of formal governance, however, may implicate to some others organizational areas in family firms such as leadership, recruitment and selection and corporate culture. Originality/value This study is one of the few on family SMEs, which applied the transaction cost theory. Most of the studies use agency theory for investigating governance mechanism in the family business. This study is one of the few on family SMEs, which applied the transaction cost. This study provides an explanation about a factor that influences a family firm to choose formal and relational governance within the firm.

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“…However, the high development of SMEs is still overshadowed by obstacles. These barriers can differ in one region from another, in rural and urban areas, or between sectors, or between companies in the same sector (Kussudyarsana, Soepatini, Maimun, & Vemuri, 2019). Based on the findings, the use of technology tools for SMEs has a positive influence on economic activity.…”

Influence of Information Technology towards the Development Economics of SMEs in Indonesia

“…However, the high development of SMEs is still overshadowed by obstacles. These barriers can differ in one region from another, in rural and urban areas, or between sectors, or between companies in the same sector (Kussudyarsana, Soepatini, Maimun, & Vemuri, 2019 al. ( 2013) that information can be received by users who need it; information needs to be presented in a monitor.…”

Family governance and firm performance: exploring the intermediate effects of family functioning and competitive advantage

“…Broadly categorised in the literature as contractual and relational controls (Kussudyarsana, Soepatini, Maimun, & Vemuri, 2020), a family can exercise its governance through numerous mechanisms, including the ownership of shares, the direct management of the firm, the setting of strategic initiatives and monitoring through a board of directors, as well as through social relations that establish mutual trust, a shared vision, and a commitment to the success of the firm (Chrisman et al, 2018). From a systems perspective, these various governance mechanisms relate to different parts of the larger family business system (for an extensive discussion on the tasks and purposes of governance using the three-circle model, see Gersick and Feliu (2014)).…”