Are there differences between the goals of the family run management of the firm and the shareholders?
What I am assuming is that the firm is owned by family and partially by shareholders, and what I want to discuss is whether the goals of the family management and the shareholders are aligned. For example, Walmart was created by the Walton family and currently, three family members sit on the board, one of them is the chair and they have a majority stake in the company, so how do the external shareholders ensure that the goals of the family and of the shareholders are aligned?
It seems that family managed firms are overlooked by literature regarding agency theory. It is arguably because owner-managed firms need not necessarily incur large agency costs because surely if the firm is managed by the owners then goals are aligned? So why do most family run firms offer pay incentives and use other formal governance techniques to ensure firm performance? T
he original work on agency theory seems to assume that owner-managed firms are not at risk to agency theory because their goals should be aligned, however, this is not always the case. In face, private ownership and owner-management not only reduces the effect of external controls, but also exposes a firm to self-control, whereby owners are overcome by incentives that encourage them to make decisions that not only harm themselves but others around them. Furthermore, family managed firms are at risk of adverse selection because of the effect of private ownership on labour markets.
What I am assuming is that the firm is owned by family and partially by shareholders, and what I want to discuss is whether the goals of the family management and the shareholders are aligned. For example, Walmart was created by the Walton family and currently, three family members sit on the board, one of them is the chair and they have a majority stake in the company, so how do the external shareholders ensure that the goals of the family and of the shareholders are aligned?
It seems that family managed firms are overlooked by literature regarding agency theory. It is arguably because owner-managed firms need not necessarily incur large agency costs because surely if the firm is managed by the owners then goals are aligned? So why do most family run firms offer pay incentives and use other formal governance techniques to ensure firm performance? T
he original work on agency theory seems to assume that owner-managed firms are not at risk to agency theory because their goals should be aligned, however, this is not always the case. In face, private ownership and owner-management not only reduces the effect of external controls, but also exposes a firm to self-control, whereby owners are overcome by incentives that encourage them to make decisions that not only harm themselves but others around them. Furthermore, family managed firms are at risk of adverse selection because of the effect of private ownership on labour markets.
There are also issues because family firms may be stubborn in what they stand for, perhaps arising from the company's history, which is no longer relevant in the market and could be causing drift. Also, what if the firm appoints a family member who is not suitable for the role within the company but because he is a member of the family he will not be dismissed?
How can shareholders overcome these problems? Well they do have voting rights so they can make their opinion clear but if the family owns the majority shares then it becomes redundant. This creates a problem and families must accommodate shareholders opinions if they wish to raise capital for expansion and growth through equity finance.
There are several issues that shareholders can face in family owned firms, the fact that family owned firms are considered to not have agency problems seems ridiculous.
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