PROMOCIÓN DE LA BIBLIOTECA Y DEL APRENDIZAJE

Smith and Rogers (1869) presented a practical discussion of an inherent problem among joint stock companies – the impact of owners appointing others as stewards of their wealth. He suggested that managers of other people’s wealth cannot be expected to watch over it with the same anxious vigilance one would expect from the owners. Hence, negligence and profusion would often prevail in the management of such companies. This is a phenomenon that is also known as the neoclassical agency-

principal problem or Agency Problem I (Jensen and Meckling 1976). Preceding the

study by Jensen and Meckling (1976), Alchian and Demsetz (1972) had also analysed the similar problem of managerial shirking.

The key insight offered by Jensen and Meckling (1976) was to model the relation between the managers and the owners (shareholders) akin to those between principals and agents. The owners appoint the managers to perform the management tasks of a company, giving managers control over company resources. As both parties’ main purpose is to maximise their own utility and self-interest, conflict of interest naturally arises between both parties. The contracted managers are conjectured to have the incentive and the ability to consume perquisites at the expense of the company resources in consequence of the control over company resources granted by the owners.

As a result of the conflict of interest between the principals (owners) and the agents (managers), agency costs are incurred (Jensen and Meckling, 1976). These agency costs consist of (i) monitoring costs by the principal (owners); (ii) bonding costs by the agent (managers); and (iii) the residual loss. Monitoring costs are incurred by the principals (owners) throughout the process and activities that limit the agents (managers) from taking any harmful actions. The bonding costs are spent by the agents (managers) to ensure the principals (owners) do not take certain actions against the agents. Despite the optimal monitoring and bonding costs incurred by the principals and agents, losses still arise as a result of the agents’ (managers) decisions that diverge from the principals’ (owners) interests. These losses are referred to as the residual loss.

Analysis on the occurrence of agency costs in a company begins with the assumption that company equity is owned 100% by the manager. When the manager owns 100% of the equity, optimal pecuniary and non-pecuniary benefits are reached as the owner- manager bears all the costs of the actions. Non-pecuniary benefits can include having larger office space, using branded office furniture, shirking from work or overstaffing of personal assistants. Agency costs then naturally arise for the case when the owner- manager owns less than 100% of equity in the company. Accordingly, agency costs occur in consequence of their own-utility-maximisation behaviour by the self- interested owner-managers, while bearing only a fraction of the costs at the expense of the company resources.

In simpler terms, owners (shareholders) of a company have claims over the company’s net wealth. However, very often, not all owners run the company, but hire managers to manage the company on behalf of the owners. When the interests of hired managers are not aligned with those of the owners, it is possible that no productive work has been done by the managers despite enjoying private benefits and perquisite consumption, which may be detrimental to the value of the company.

Family-controlled firms in this case offer advantageous family-specific-features that naturally align the interests of principal-agent. Unlike widely-held corporations and non-family firms, family-controlled firms offer a distinctive type of insider ownership that naturally aligns the interests of managers and shareholders. Inherently, the positions of top management of family-controlled firms are often held by the controlling owners themselves or related family members (Claessens et al. 2000; Lins 2003; Carney and Child 2012); these managerial posts can be passed on through generations (Chrisman et al. 2012; Schulze et al. 2003), along with intrinsically high concentration of family ownership (Faccio and Lang 2002; Claessens and Yurtoglu 2013; Claessens and Fan 2002). These traits in family-controlled firms allow strong control by the controlling families, with the intention of retaining ownership and control throughout generations.

Additionally, family owners carry further incentives, attributes and human attributes different from other types of dominant owners, which directly benefit family-controlled firms and their stakeholders. First, for the purpose of passing down wealth throughout generations, family-controlled firms tend to view business and investment from a long- term perspective (Bertrand and Schoar 2006). Consequently, family-controlled firms execute better investment decisions and thus avoid managerial myopia in the decision- making process (Stein 1989). Second, unlike other types of controlling owners or large shareholders, family owners often possess thorough understanding of the business and its underlying processes, which reduces the information asymmetries between the owners and managers of the firm (Miller and Miller 2005). Third, since a controlling family typically holds a concentrated stake in a single firm, the financial well-being of the family often depends on the performance and financial strength of the firm. As such, a controlling family is more motivated than other types of owners in monitoring the operation of business (Anderson and Reeb 2004). Fourth, family reputation is also strongly linked to the success of a family firm (Déniz and Suárez 2005; Dyer 1994). The strong relation between family reputation and a family firm’s success tends to increase the level of family owner’s commitment as an effective monitor.

Family-controlled firms also are found to invest more efficiently than non-family firms (James 1999), which further enhance value of the family business. Additionally, family- controlled firms favour strong relationship with their stakeholders, patient capital and parsimony in scarce environment, which instigate continuous prosperity of family business (Tokarczyk et al. 2007). The inherent family commitment and close relationship to family businesses also generate sustainable competitive advantage and encourage managers to behave in the best interest of the organisations (Eddleston and Kellermanns 2007). As the well-being and reputation of the controlling families are directly tied to the welfare of the family-controlled firms, family owners have further incentives in mitigating Agency Problem I and improving firm performance to create long-lasting economic consequences (Anderson and Reeb 2003b).

Lastly, when it comes to monitoring, the controlling family naturally assumes the supervisory role in a family firm similar to the function of large shareholders in overseeing the performance of publicly listed firms. Compared to shareholders with diminutive shareholdings, large shareholders have stronger incentives in monitoring managers due to their large stake of investments in the firms and relevant claims over larger portions of company net resources, thereby reducing agency problems and improving firm values (Demsetz and Lehn 1985; Shleifer and Vishny 1986; Chang 2004). The substantial shareholdings of family owners also enable the controlling family owners to garner enough voting power. Consequently, family owners are able to address the agency-principal agency problems since they have sufficient control over the assets of the company to have their vested interests protected (Shleifer and Vishny 1997).

The aforementioned discussions overall reveal that families as large blockholders have substantial economic incentives in maximising firm values; they possess strong influence and substantial power for enforcement in order to achieve their purposes.

Such notion of family positive impact on firm value is supported by existing empirical findings. Existing empirical findings showed the benefits of family owners leading to better firm performances when compared to non-family firms (Andres 2008; Villalonga and Amit 2006). The interests of owner-manager are inherently aligned in family firms, which induce better firm performance (Ang et al. 2000; Anderson and Reeb 2003b; Ben-Amar and André 2006; Chrisman et al. 2004). The greater the family ownership, the more aligned the interests of managers are with those of the owners as described by the principal-agent agency theory of Jensen and Meckling (1976).