Principal-Principal Conflicts and Socioemotional Wealth in Family Firms

Abstract

Corporate governance is the concern of all the parties throughout the world regarding their viability in order to ensure the sustainability of the firm. As the family firms are listed in the public exchange, there are different kind of the investors in the corporation produce the resolution that are opposing to each other. Moreover, the large capital that is injected by the institutional investor complicates the role played in the corporation that shapes the culture and philanthropy. The phenomenon leads to the complex relationship in one corporation due to the different types of interest. Board composition and board independence are stretched by numerous scholars regarding the core importance in the corporation. Executive compensation is another area of corporate governance that is widely discussed by the scholars regarding the relationship with the long-term firm performance. Therefore, this review paper will focus on the application of the Principal-principal Conflicts theory and Socio-Emotional Wealth theory to narrate the whole scenario of the governance practice in the family firm. Throughout the paper, current rigorous practice of the family firms will be deeply investigated to cover the deep insights of the current phenomenon. The meticulous review of this paper is able to synthesize the significance of these theories towards the general governance setting in the family firms. Eventually, the working paradigm of the family firm can be clearly justified with the rationale that is justified. At the end of the review, the two main theories are concluded to be equally essential to illustrate the corporate governance practice in family firms across the globe.

Revisiting the agency conflicts in family owned pyramidal business structures: A case of an emerging market

“…However, the expropriation hypothesis views FO as a source of the expropriation of minority SH. Many prior studies (Kuan et al, 2017;Sauerwald & Peng, 2013) have argued that the expropriation of minority SH is higher than non-family firms.…”

“…However, in developing and emerging economies, due to weak legal institutions and poor enforcement of property rights, the major conflict is between the majority shareholder and minority shareholder. According to Kuan et al (2017), PP conflict is common in firms of which ownership and control are in the hands of powerful controllers. They further argued that in such firms, the controller's excessive powers act as a solution to PA conflicts.…”

“…The affiliation of family firms in a family group makes the expropriation of the minority SH easier and less expensive (Kuan et al, 2017). Rahman and Mansor (2018) claimed group affiliation as one of the reasons for expropriation.…”

“…The core structural characteristics of any business corporation are as follows: a) being a separate legal entity with shared ownership, b) have limited liability, c) centralized management under the control of a governing board elected by shareholders (SH), d) transferable ownership (shareholdings), and e) perpetual lifetime. According to Kuan et al (2017), the key elements that form a firm ownership are the controlling part and the beneficiary part: the former entails the immediate control of organization, whereas the latter claims the earnings. The prime objective of any corporate law is to guide the investors, managers and controllers on how the principle of wealth maximization can be followed in its entirety.…”

Empresas familiares: estructura de capital y riqueza socioemocional

“…(2016). Autores como Chua, Chrisman, & Steier, (2003) señalan que proveer de cargos elevados a familiares poco o nada preparados para esas responsabilidades incidirían directamente en el objetivo de maximizar el valor del negocio; por otro lado Seong, Goh, Tan, & Mohd, (2017) encontraron que las empresas familiares no están exentas de los conflictos entre principales, y por lo tanto del problema de agencia, el cual, puede incluso transferirse a problemáticas familiares con la incursión de lo socioemocional. En definitiva, se podría decir que la empresa familiar es un espacio en el que coexistirían rendimientos monetarios y de creación de valor para el negocio y rendimientos que no siendo monetarios reivindican valores familiarmente necesarios; siendo este un hecho que a priori, justifica plenamente el estudio de la empresa familiar como un grupo especial.…”