Harmony, Justice, Confusion, and Conflict in Family Firms: Implications for Ethical Climate and the “Fredo Effect”

Abstract

Family firm leaders acting as stewards of a close-knit enterprise may attempt to build a positive atmosphere of trust, clarity, and cohesiveness in the firm's operation. Yet, conditions unique to family firms may lead some family members to develop a heightened sense of entitlement and weaker bonds to the organization. This creates conditions for a Fredo effect, where a family member's incompetence, opportunistic behaviors, and/or ethically dubious actions can impede the firm's success, potentially resulting in a scandal that could lead to the firm's demise and negative economic impact on employees, customers, and other stakeholders. Surveying 147 family-firm members, we examine the role that linkages among perceptions of family harmony norms, distributive fairness, role ambiguity, and relationship conflict play in the emergence of a family member who acts as an impediment to the firm, which can be manifested in damaging unethical behaviors. As hypothesized, family harmony norms and fairness perceptions are negatively related to family impediment, while role ambiguity is positively related to family impediment. However, relationship conflict mediates these connections, underscoring the potential damage this type of conflict can create in a family firm, even if leaders of the firm attempt to establish conditions that reflect a stewardship approach to firm governance. We discuss how these findings impact the development of an ethical climate in the family firm and the implications for family business survival or scandal.

Agency theory and the family business

“…Second, the aspiration of family welfare might cause generous behaviour by family owning managers towards family members. As a result, family members affected by this generosity might exploit that attitude, especially when their personal interests are not congruent with the family's, creating costs due to moral hazard (see also Kidwell, Kellermanns, & Eddleston, 2012). Third, adverse selection might create additional costs, for example, by favouring the employment of family members instead of more qualified managers.…”

Psychological contract and social exchange in family firms

“…Within family firms, psychological contracts develop through family-and firm-driven social exchange relationships (Ward, Envick and Langford, 2007), and these unique longterm relationships may influence the psychological contract between family members employed by the family firm (Kidwell, Kellermanns and Eddleston, 2012). Familymember employees may feel pressure from the social exchange relationship with the family to join the family firm (Gómez-Mejía et al, 2011).…”

“…The lasting relationships between family-member employees can foster beneficial reciprocal exchanges (Lubatkin, Ling and Schulze, 2007;Sirmon and Hitt, 2003), which in turn generate extraordinary commitment (Aronoff and Ward, 1995;Carmon et al, 2010) and trust between family members (Bubolz, 2001;Schulze, Lubatkin and Dino, 2003). Unfortunately, these relationships can also negatively impact family firm performance (Eddleston and Kellermanns, 2007) through detrimental conflict (Harvey and Evans, 1994) and perceptions of inequity (Kidwell, Kellermanns and Eddleston, 2012) that threaten the firm's future (Danes et al, 1999).…”

Social identity theory and the family business

“…As Schröder, Schmitt-Rodermund and Arnaud (2011) propose, it could be insightful to further integrate the grandparent generation and their influence on socialisation as well as the cultural differences that families are subject to. What could happen when the socialisation process fails was described by Kidwell, Kellermanns and Eddleston (2012). In their article on 'black sheep' in family businesses, they describe cases of family members who go against the family prototype and display opportunistic behaviour, even damaging the business.…”