COMPARISON FAMILY BUSINESS THEORIES: SYSTEM THEORY, AGENCY THEORY, RESOURCES BASED THEORY and STEWARDSHIP THEORY Part 1

Family systems theory look at the family as a whole, it usually relatively closed in interactions between individual members. When a family owns and runs a business, an open systems view of the family tends to predominate. It emphasizes the interaction of the family within the business. In family-influenced firms, the interaction of the family unit, the business entity, and individual family members create unique systemic conditions and constituencies that impact the performance outcomes of the family business. Families influence business oftentimes work through their values and aspirations. They maintain their entrepreneurial orientation across generations to achieve their goal of creating sustainable business.

1. System theory:

The Three Circle Model is generally accepted as the standard model for family businesses and includes family, business and ownership as the three main components.  The acknowledgment that there are three separate circles is a significant accomplishment for a family business.  Too often, the circles are constantly intertwined.  This results in poor communication, resentment and a lack of commitment to the future – the very things the business family is trying to prevent.

Each circle has a governance structure and a plan. A family council would govern the family and prepare a family plan. A management team would lead the business and prepare a management development plan for succession and a business plan. A board of directors would govern the owners or shareholders and would be responsible for the strategic plan, continuity plan, contingency plan and the succession plan.

Within the three circles, there are seven potential positions that intersect and overlap and that various individuals can hold.  These positions can be the source of future successors for managers and owners. People normally change their positions over their lifetimes as they enter and exit the business or ownership.  However, their family membership remains constant although their role in the family will evolve as they move from childhood to adulthood.

Each circle contains various stages of development and each individual within the family, business or ownership circle can be at various stages of development.  Therefore, consulting to family businesses is complex and requires the determination of the various stages of development for both the business and the key individuals and family members that are involved. The family stage depends on whether the next generation is working in the business or interested in working in the business, but this paper assumes that the family is at the passing the baton stage.

2. Agency theory:

Agency theory is a relationship between principals and agents in the business. Agency theory is made to reduce the conflicts of interest between the owners and the managers of a firm. Agency relationships occur when the principals hire the agent to perform a service on the principals’ behalf. Principals commonly delegate decision-making authority to the agents.

Another central issue dealt with by agency theory handles the various levels of risk between a principal and an agent. In some situations, an agent is utilizing resources of a principal. Therefore, although the agent is the decision-maker, they are incurring little to no risk because all losses will be the burden of the principal. This is most commonly seen when shareholders contribute financial support to an entity that corporate executives use at their discretion. The agent may have a different risk tolerance than the principal because of the uneven distribution of risk.

To be continued..