When More Is Better: Multifamily Firms and Firm Performance

Abstract

Does the presence of multiple and unrelated family controllers improve firm performance? Drawing on both agency and behavioral agency theories, we argue that multifamily firms outperform single-family firms since families in multifamily firms actively monitor owners’ socioemotional goals. Additionally, we suggest that a balanced distribution of control among the owning families facilitates the monitoring process. Finally, we argue that the focal relationship follows an inverted U-shaped pattern depending on the number of families controlling the firm. We test our hypotheses using a sample of Chilean publicly listed family firms. Our study extends current knowledge of the uniqueness of multifamily firms.

A Dynamic Framework of Noneconomic Goals and Inter-Family Agency Complexities in Multi-Family Firms

“…Third, our framework includes ex ante and ex post governance mechanisms that can be effective in MFFs to manage inter-family agency problems. Although the extant literature emphasizes the importance of mutual monitoring as an ex ante governance mechanism for MFF success (Duran & Ortiz, 2020; Mukherjee et al, 2019; Pieper et al, 2015), a more nuanced description of the idiosyncratic features of mutual monitoring is needed. Thus, to deepen our understanding of MFF governance, we illustrate the detailed mechanisms of mutual monitoring, including bidirectional vertical monitoring and hierarchical horizontal monitoring, between and across members of the owning families.…”

“…Chua et al (1999) consider MFFs in their theoretical definition of family firms but it took more than a decade for scholars to turn their attention to this interesting organizational form (e.g., Brigham & Payne, 2015; Pieper et al, 2015). The studies that have been done indicate that MFFs often outperform SFFs, as well as nonfamily firms and lone-founder firms (Chen et al, 2012; Duran & Ortiz, 2020; Mukherjee et al, 2019). Other studies indicate that to do so, the governance of MFFs is especially important (Kudlats et al, 2019; Lim, 2018; Pagliarussi & Rapozo, 2011; Pieper et al, 2015).…”

“…First, since MFFs involve more than one family, they are, by definition, more complex than SFFs (Brigham & Payne, 2015; Pieper et al, 2015). Second, since MFFs can draw on the resources and governing capacity of more than one family, they appear to enjoy a performance advantage over SFFs (Duran & Ortiz, 2020) and surprisingly over lone-founder firms and nonfamily firms as well (Chen et al, 2012). Third, to effectively manage complexity and achieve superior performance, the governance of MFFs is especially important (Lim, 2018; Mukherjee et al, 2019; Pagliarussi & Rapozo, 2011).…”

“…Put differently, MFFs that have been able to devise governance solutions for the complexity inherent in the form may be overrepresented in studies of mature organizations. In turn, conforming to the dominant paradigm in the family firm literature, Duran and Ortiz (2020) suggest the complexity of MFFs is rooted in the pursuit of family-centered noneconomic (FCNE) goals that lead to socioemotional wealth (SEW). 2 However, except for altruism (e.g., Lubatkin et al, 2005; Schulze et al, 2001), the literature has not yet identified the nature of the problems or solutions in any nuanced way, particularly in regard to the impact of FCNE goals on MFFs.…”

“…We further theorize that evolving family dynamics, such as changes in the composition, desires, or resources of the families, can upset the balance of power of MFFs and create new or more intense inter-family agency problems that must be controlled to enable their economic and cooperative survival. Thus, we illustrate in detail the mutual monitoring mechanisms in MFFs, which have been recognized as essential to their governance (Duran & Ortiz, 2020; Mukherjee et al, 2019; Pieper et al, 2015), and we introduce contract renegotiations (Ariño et al, 2008; Duplat et al, 2020) as a way to neutralize dynamic inter-family agency problems and recalibrate the monitoring mechanisms that are needed to preserve cooperation between the owning families.…”