Evolutionary Psychology and Family Business: A New Synthesis for Theory, Research, and Practice

Authors

  • Nigel Nicholson

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    1. London Business School, Regent's Park, London NW1 45A, UK
      Nigel Nicholson is Professor of Organizational Behavior at London Business School, Regent's Park, London NW1 45A, UK; nnicholson@london.edu.
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Nigel Nicholson is Professor of Organizational Behavior at London Business School, Regent's Park, London NW1 45A, UK; nnicholson@london.edu.

Abstract

The article seeks to show that the ideas of evolutionary psychology have not only a unique contribution to make to the study of family business but have an overarching capacity to integrate theory, resolve empirical debates, and lead research in new directions. The article considers, first, what is different about family firms before outlining the Darwinian framework and its implications, and then moves on to an analysis of kinship dynamics as central to understanding the roots of cooperation and conflict in the family firm. The article concludes with a discussion of the scope for theoretical synthesis, practical implications, and the position this analysis leads us to about the unique performance potential and liabilities of the family firm.

Introduction

The family business field is booming, partly in recognition of its continuing economic importance (Colli, 2003), and partly because of increased attention by scholars to its special characteristics, unique risks, and benefits. Interest in the sector can also be identified with some disillusionment in a post-Enron world with the supremacy of the public corporation, the resurgence of family business in the former socialist states and emerging markets, and demographic trends that are restructuring the nature of the family and thereby reshaping the outlook for the sector. Even so, family business still suffers to a degree from relative isolation as a field of management, as other scholars have noted (Litz, 1997).

One explanation is that a lack of coherence in theory and research about family firms prevents research from capturing the attention of other than a committed group of family business scholars (Sharma, 2004). It has been noted that there is increasing convergence of the main theoretical perspectives, though still hampered to a degree by lack of clarity about the nature of the distinctiveness of family firms (Chrisman, Chua, & Sharma, 2005).

The goal of this article is to introduce to the field the body of theory and research that goes under the name evolutionary psychology (EP), whose principles and propositions have great potential to resolve these issues. I aim to show that this field:

  • 1Has unique relevance to answer the question about how fundamental is the difference between family and nonfamily firms.
  • 2Offers an overarching framework that can integrate the contrasting theories that are being applied to the field.
  • 3Makes sense of the apparent inconsistent findings and claims about the performance and vulnerabilities of family firms.
  • 4Provides a new view of the fundamental sources of conflict and cultural advantage that family firms exhibit.

How Are Family Firms “Different”? The Competitive Advantage and Disadvantage of Family Firms

Versions of the gloomy British aphorism “clogs to clogs in three generations” are found in many cultures to express the tenuous hold family firms have on survival. Yet family firms remain popular because of their performance, longevity, and attractiveness.

A theme of this article is that the endurance and continuing popularity of family firms are due to their closeness in certain respects to the primal models to which our evolved psychology is particularly fitted. However, problems arise when the rest of the world is marching to a different tune. In contemporary society, regulation, the discipline of markets, demands for transparency, and rationality in decision making mean that family firms can often tread a fine line between where the infusion of family is a blessing or a curse.

To be more precise on the point—that is, the competitive advantages or risks that differentiate family from nonfamily firms—we need to identify what features are truly unique to them, that is, beyond what would apply to the privately owned firm. First, a definition of the family firm is needed. Many are possible (Shanker & Astrachan, 1999), but a prior requirement is a definition of family. The answer given by evolutionary biologists is: “An assembly of relatives who interact regularly, but do not necessarily share residence” (J. N. Davis & Daly, 1997). To define the family business can be added a clause that captures the usage of most authorities in family business (Neubauer & Lank, 1998; Ward, 1987): “firms where one or more families has an effective controlling ownership interest.”

Following this definition, a small number of features seem to be uniquely associated with the family firm. These are shown in Figure 1, where also are illustrated themes that make these firms on the one hand a source of competitive advantage and on the other a special area of risk or vulnerability. These themes are as follows.

Figure 1.

What's Unique About Family Business? Benefits and Risks.

  • 1Co-ownership by a kin-related group.
  • 2Intergenerational transmission of ownership.
  • 3Teamwork between kin and nonkin.
  • 4Genetic wildcard inheritance.

Family co-ownership lends a business identity and a sense of purpose. This genetic shareholding enables family businesses to generate an unusual attachment and involvement with what they own and produce: as one observer put it, the significance of having the “family name above the door” (Brokaw, 1992). The benefits are high attention to quality, service, customer and supplier relations, and ethical conduct, plus access to extended and durable network structures (Aldrich & Cliff, 2003).

The risks, in the world of changing markets and complex high-speed decision making, are overattachment, insularity, complacency, and failure to seek advice.

The mere possibility of intergenerational transmission of the title and ownership of the business within a family changes the dynamic of the enterprise, making even first-generation owner-managed firms inclined to take a view beyond their own lifespan. As Anderson and Reeb put it in their study of the performance advantage of quoted family firms: “Founding families view their firms as an asset to pass on to their descendants rather than wealth to consume during their lifetimes” (2003, p. 1305). In evolutionary theory, the family is the primary mechanism for the transmission of identity beyond one's lifespan (Emlen, 1982), which gives family firms a special power to imbue meaning, self-sacrifice, and altruism into their family owners and managers. Byproducts are long-term perspective strategic and financial perspectives (Aronoff, Ward, & Visscher, 1995), “patient capital” to go with their extended time horizons (Donckels & Frohlich, 1991), and a preference for financial strategies that will not put the firm at risk (Dreux, 1990).

The dark side of these advantages is discontinuity at points of intergenerational transition, and overly conservative and risk-averse approaches to strategic and financial decisions, due to the family's concern for preservation.

Teamwork between kin and nonkin is essential for any family business to grow beyond the dimensions of a mom-and-pop store. Modern evolutionary theory stresses cooperation and coalition with nonkin much more than “tooth-and-claw” conflict (Richerson & Boyd, 1999). Kinship, rather than dividing groups, can be the glue that holds unrelated people together. Family capital—the added value conferred by family identity with a business—is infused into the culture beyond the kinship group, generating competitively advantageous social capital (Habbershon & Williams, 1999; Nahapiet & Ghoshal, 1988). This is achieved typically by a value-driven leadership, often with a stewardship orientation that is coupled with effective partnership between kin and nonkin (Gomez-Mejia, Nunez-Nickel, & Gutierrez, 2001; D. Miller & Le-Breton Miller, 2006).

The risks are conflicting goals between owning and nonowning executives, family members free riding, and inequitable treatment across the family-nonfamily divide (Gomez-Mejia, Larraza-Kintana, & Makri, 2003).

Wildcard inheritance is the succession of family owners or executives who have different psychological characteristics from their forebears. As I shall examine later, behavior genetics shows that there is likely to be less similarity between successors defined by the turn of the genetic wildcard than those governed by selection and choice. This has potential advantages, such as the dynamics of naturally occurring diversity, renewal from the infusion of new perspectives, and the pragmatism that comes from knowing one has not been selected solely on merit.

The risks of this randomness involve the various negative consequences that come from defects of will and character in executive decisionmakers, and failures to assess the fit between individual characteristics and the demands of business roles.

There are firms that may be called family firms where these features are not present, for example, the family firm where one dominating owner-manager makes decisions to the exclusion of all others and has no intention of passing the business on to other family members. There are also nonfamily firms where kinship groups play a significant part. The point here is that for the most part these four features are the main markers that distinguish family firms from other types.

We shall return to the theoretical and empirical debate about the merits and demerits of the family firm at the end of the article. First, though, let us look at them more closely through the Darwinian lens.

Neo-Darwinism—Principles

The neo-Darwinian perspective is avowedly scientific and assumes “consilience,” that the goal of inquiry is unity of knowledge and that the boundaries that currently divide the social sciences are artificial (Tooby & Cosmides, 1992; Wilson, 1998). Thus, despite its name, evolutionary psychology (EP) extends well beyond the confines of psychological science, seeking common cause with neo-Darwinian perspectives from many other disciplines. Its project is to elaborate the idea of an evolved human nature and understand its consequences for contemporary social life (Barrett, Dunbar, & Lycett, 2002).

Core concepts in evolutionary theory are “modification by descent” and “reproductive fitness.” Modification by descent is the principle of variation-selection-retention that explains how “design” features become eliminated, retained, or altered over generations. The reproductive fitness of any organism is its capacity to replicate its genes. What attributes constitute fitness vary within and between species. For humans, as for most mammals, fitness depends on natural selection—having sufficient longevity and freedom from disease and other impairments to be able to reproduce—and on sexual selection—the capacity to mate and secure the benefit of a partner's “good genes” to invest in one's offspring (G. F. Miller, 2000). For humans there is a conspicuous additional fitness consideration—the availability of material investments and nurturance to protect and promote the reproductive fitness of one's children, that is, to try to underwrite one's genetic interests through to future generations (Wright, 1994).

The radical proposition of EP is that modification by descent applies equally to mind and body, creating in-built biases, propensities, and susceptibilities in human motivation and cognition (Barkow, Tooby, & Cosmides, 1992; Pinker, 1997). EP's project is to understand the nature of this “adapted mind” and its manifest consequences in contemporary life. Although one can point to remarkable economic and cultural “evolution” in recent eras, EP scholars point out that sociocultural systems are only viable within a bandwidth of what our more ancient evolved human nature will tolerate (Janicki & Krebs, 1998). The failure of many social experiments, such as command economies or idealistic communities, is due to the ineradicable contradictions they engender, stretching our environmental fit beyond the tolerances of our biogenetic identity and goals (Ridley, 1996).

In this context, organizational forms can be seen to have better or worse “fit” with what kind of animal we are (Nicholson, 2000). The root argument of this article is that family firms can claim an advantage in that many of their forms are more congruent with the human design than are nonfamily firms. From an EP perspective, the family firm endures as an appealing form because it is uniquely close to our evolutionary origins through the extreme overlap of family and work, the intergenerational transmission of responsibility for the economic unit of the family, and its capacity to generate binding community commitments and cooperation between kin and nonkin. Arguably it is the primary economic unit in the history of our species (Megarry, 1995; Sahlins, 1972).

Yet, as many scholars rightly point out, family firms have a unique set of risks and hazards, as we shall examine.

The Relevance of Evolutionary Theory to Family Firms

Evolutionary theory is gaining increasing acceptance and application across a wide range of disciplines. It is only comparatively recently that its radical implications have been explored in relation to organizational life (Nicholson & White, 2006). In this article, readers should note that I am only concerned with the literal, that is, biological, use of evolutionary concepts. They have been used in business research for many years by population ecologists (e.g., Hannan & Freeman, 1977), but strictly metaphorically (in the absence of genetic code and replication).

The study of family firms would seem to be a natural testing ground for the application ofDarwinian thought, as an arena where kinship and economy are brought together via organization and ownership. Evolutionary theory has particular insights on the question of kinship, which we will consider in the next section. First, however, let us examine the primary subdomains of EP and how they relate to family business. Five themes have absorbed Darwinian scholars. These correspond to the levels of analysis to which answers are needed to arrive at an integrated view of human nature and human society. The first is how the mind works, that is, what evolved drives, biases, and susceptibilities act as “gravitational” forces pulling human impulse, action, and preference in one way or another. The second concerns the dynamics of social interaction. As one of the planet's most supremely social species, the major questions are to do with how we judge each other, compete, and cooperate. Third, is the question of the evolutionary roots of culture, and how we respond to power, symbols, and structures.

These three themes are about what one might call the human condition, reflected in universals of social life and experience. The fourth and fifth themes I shall review are to do with differences between individuals, qualities that behavior genetics tells us are heritable, including sex differences.

Human Motives, Goals, and Cognitions

The need to belong and to acquire status are both fundamental to humans (Baumeister & Leary, 1995; Waldron, 1998). A family business has unique attractions for being able to satisfy these drives simultaneously. In many corporations, these needs are often stifled or regulated by prohibitory norms of emotional expression and the requirement that individuals subordinate personal goals to organizational rationality (Fineman, 2000). Family firms, in contrast, are notorious for the degree to which family members express emotions freely. They do so, confident in the durability of their bonds and because personal goals and organizational goals are more strongly aligned via ownership. This is a potential source of advantage in terms of commitment, and a source of disadvantage where it engenders destructive varieties of conflict (Kellermans & Eddleston, 2004).

The human brain is sometimes erroneously compared to a computer, but it processes information very differently from a computer—it is inaccurate, illogical, biased, selective, pattern-seeking, and intuitive (Gigerenzer, Todd, & ABC Research Group, 1999; Pinker, 1997). Organizational rationality battles hard to correct these tendencies through technical supports, systems, and routines. The modus operandi of family firms is typically informal, with a dislike of administrative rationality (Daily & Dollinger, 1991). This helps build strong cultures, but is the cause of familiar and sometimes fatal weaknesses in decision making (Gersick, Davis, Hampton & Lansberg, 1997).

Social Relationships

Much contemporary Darwinian theory and research is devoted to the analysis of social exchange, especially cooperation and conflict among related and unrelated individuals of the same species (Mock, 2004). In EP, much interest has focused on our powerful norms of reciprocation as a cultural universal (Reeve, 1998), our capacity for “strong” altruism (i.e., without expectation of return) toward nonkin as well as kin (Gintis, Bowles, Boyd, & Fehr, 2003), our sensitivity to perceived betrayal and contract violations (Cosmides & Tooby, 1992), and how we solve the problem of detecting and punishing free riders (Price, Tooby, & Cosmides, 2002).

These are themes that figure strongly in the family business literature. Agency theorists link altruism and free riding as hazards for family firm effectiveness (Schulze, Lubatkin, Dino, & Buchholtz, 2001). This may be true but, arguably, it understates the degree to which the altruistic norms may be a source of comparative advantage, and how strong the norms and informal sanctions that regulate free riding can be in family firms (Albanese & Van Fleet, 1985; Denison, Lief, & Ward, 2004). In other words, culture regulates these hazards. One may hypothesize that family firms are able to effect an unusually high degree of cultural control through the uniquely high-trust relationships they are able to maintain with stakeholder groups, and this gives them tangible competitive advantage (Barney & Hansen, 1994).

Communal Living

Evolutionists claim that the remarkable size and cost of human brain power—the head is a huge burden in weight and energy demands for relatively puny bipeds—is not for computing power but social intelligence (Whiten, 1991). It gives us the ability to navigate the social world, remember faces, read minds (empathizing and analyzing motives), bond, and detect cheats (Trivers, 2000).

It is also argued that primate brain size is related to social network capacity—the number of relationships we can keep track of—and for homo sapiens the natural limit to this is around 150 (Dunbar, 1996). This also seems to be the approximate size limit to sustain what the 19th-century sociologist Tonnies (1957) called the gemeinschaft, a community that is able to retain a familial ethos. There is plentiful evidence that business organizations that can keep unit and subunit size to within these dimensions derive substantial cultural benefits (Nicholson, 2000). Moreover, in family firms where the number of owners rises to these proportions, it can become a struggle to maintain clan unity without very sophisticated governance.

Family firms often counter this risk by adopting diversified structures within a unitary culture—growing over generations by cell division to accommodate multiplying family interests (Dutta, 1997; Gersick et al., 1997; Lansberg, 1999). It has also been observed that in primate groups, centralized food supply induces competitive hierarchies, but that dispersed provisioning creates more fluid egalitarian relationships. The parallel with business organizations has been noted by evolutionists (Pierce & White, 1999) and it is often the case that family firm structures are more “organic” in structure than are nonfamily firms (Denison et al., 2004).

Individual Differences

In evolutionary theory, variation in the phenotype (the observable characteristics of an organism) is a precondition for selection. In mammals, the exchange and transmutation of genetic material at the point of conception produces offspring with a uniquely configured immune system to combat pathogens (which are themselves evolving to evade our defenses). In humans, this genetic randomization equips each newborn with unique attributes and potentialities that will enable it to find functional roles and reproductive opportunities in complex social structures (Ridley, 1999). This assortment is known in evolutionary theory as “frequency dependent selection,” and it explains why humans (and other species) differ in personality types, ability, and interest (MacDonald, 1994).

Many individual differences in psychological attributes are being shown by behavior genetics to have a substantial nonadditive genetic component (Ilies, Arvey, & Bouchard, 2006), that is, the phenotype is the product of gene combinations and epigenetic processes (switching on and off of genes) that randomize outcomes (Ridley, 1999). This has the seemingly paradoxical consequence that many substantially heritable personal qualities do not run in families (Loehlin, McCrae, Costa, & John, 1998; Lykken, McGue, Tellegen, & Bouchard, 1992; Plomin, 1994).

We can call this randomization of heritable traits within a family the “gene lottery.” It means, as every parent knows, that children grow up to become themselves—they are neither the genetic clones of their parents nor passive recipients of parental molding by grooming and socialization. The observable consequence for family business is that there is no guarantee that children or other relatives will share a founder's or owner's interests and motives, as many a disappointed family leader can testify (Lansberg, 1999).

The gene lottery has two important consequences. The first is in the area of leadership succession. It carries the risk that family successors will lack the attributes to run the firm, but also the possibility of radical change arising from thedifferent orientations and aptitudes that the next generation may bring to the role. A second, less obvious, advantage is the “in praise of nepotism” (Bellow, 2003) argument that hereditary leaders will be less vulnerable than appointed leaders to the dangerous belief that they are specially fitted for their leadership role.

There is plentiful evidence of nonfamily businesses being derailed by the pathology of leaders driven to the top by their self-seeking ambition (McCall & Lombardo, 1983). Family successors to leadership may find it easier to shed such delusions, accepting both their good fortune and their limitations in leadership roles (Nicholson, 2001, 2005). This can take the form of a highly pragmatic orientation, including novel forms of leadership (Hollander, 1991): It is estimated that around 15% of family firms in the United States are operating co-leadership models (often brother and cousins) (Raymond Institute, 2003).

Their family status frees them to be more humble and see themselves and the stewards or servants of the business (J. H. Davis, Schoorman, & Donaldson, 1997; D. Miller & Le Breton-Miller, 2006). Recognition of their limitations enables family leaders to build communal relationships with nonkin around a kinship core, especially in areas where their need may be greatest (P. Davis & Stern, 1980). This amounts to an extension of family capital and it is no accident that one finds family firms attract and retain the loyal service of other, unrelated families.

Second, the gene lottery leads to executive teams of dissimilar individuals being yoked together by kinship rather than by choice. You get more “cloning” when executive groups associate freely by preference. The phenomenon of “homophily”—people of similar orientations and dispositions clustering together—well known in social psychology (Aronson, 2004) can be often seen in the composition of boards (Westphal & Zajac, 1995) and leader-follower pairings (Phillips & Bedeian, 1994). In short, the gene lottery dictates that family groups will display more diversity than one regularly finds in business teams. We also know that diverse groups achieve more creative synergy if they are able to deploy effective internal processes, such as informality and egalitarianism (Moscovici & Doise, 1994). So if a family group in business fails to achieve its potential, it is the failure of the second condition—its liability to authoritarian leadership, which will be the cause (Bengtson & Schrader, 1982).

Families that are able to introspect about their limitations in capability are the ones most able to make pragmatic choices about the need to incorporate nonkin with different attributes to themselves to cover the gaps. To be successful, family firms likewise have to be willing to exclude and deselect certain family members in the interests of family harmony and business performance. One may deduce that family firms have earned a reputation for being able to engage in fast, flexible, and pragmatic decision making (Tagiuri & Davis, 1996) on the basis of their awareness and willingness to compensate for the limitations imposed by the gene lottery.

Sex Differences

More has been written on this topic than perhaps any other in EP, for the Darwinian view is in sharp contrast with the gender-neutrality that came to predominate mid to late 20th-century social science, and it continues to be an area of controversy (Nicholson, 2005). Briefly, the EP view holds that men and women require different behavioral strategies to achieve reproductive fitness, and in consequence possess distinctive psychological architectures of aptitudes, motives, preferences, dispositions, biases, styles, and orientations (Browne, 2006; Feingold, 1994). These differences are often matters of degree, rather than absolute and categorical differences. They are associated with two human biocultural universals, patriarchy (Brown, 1991; Murdock, [1945] 1965), where status passes through the male line,1 and female exogamy, where females exit the natal family to bond with males of other kinship groups (Keesing, 1975).

The consequences are visible in family business. Patriarchal norms dominate, with male primogeniture the overwhelmingly predominant model of succession (Handler, 1994; Morris, Williams, & Nel, 1996). This is clearly a weak point in the functioning of family firms, for it surrenders leadership to the turn of the genetic wildcard. Recent research has confirmed that male primogeniture constitutes a sizeable liability to firm performance (Bennedsen, Nielsen, Pérez-González, & Wolfenzon, 2007). Female exogamy on the other hand is a lynchpin of family empires that consist of multiple branches, especially in cultures such as Japan and India, where arranged marriages create networks of alliances between business and financial entities (Dutta, 1997; Hambata, 1991). In the Japanese case, the limitations of the gene lottery are circumvented by the custom of sons-in-law taking on the family name when joining a family business where there is a shortage of suitable male offspring (Hambata, 1991). In many parts of the world, one can increasingly observe women exerting a greater influence in family firms than they do in nonfamily firms (Hollander & Bukowitz, 1996). This is partly due to the families' circumventing cultural norms that may restrict the entry of women into management (Baughn, Chua, & Neupert, 2006).

In many family firms, the influence of women is informal and unseen (Curimbaba, 2002; Wicker & Burley, 1991). Evidence is lacking on the point, but anecdotal observations seem to suggest that the glass ceiling, which seems to stubbornly persist in the corporate world, is more permeable in family firms, where often quite young women to rise to leadership positions (Nelton, 1998).

The Darwinian Analysis of Kinship: The Roots of Cooperation and Conflict

The family is a universal biosocial structure (Booth, Carver, & Granger, 2000; J. N. Davis & Daly, 1997), although it may take different forms around the world and over time. Modern Darwinism conceives of societies and cultures as co-evolving adaptive structures mediating between an unchanging human nature and ever-changing environmental contingencies (Janicki & Krebs, 1998; Richerson & Boyd, 2005). Nonetheless, the human family has a number of universal species characteristic themes (Brown, 1991) that are reflected in the functioning of family businesses.

The first is nepotism. This is what evolutionists call “kin selection”: the tendency to display bias in favor of one's relatives over nonrelatives (Kruger, 2003; Neyer & Lang, 2003). This is a source of influence that agency theorists rightly identify as a threat to family business. However, the Darwinian perspective also supports the argument that it forms the core of family firms' cultural competitive advantage, as I have argued above.

Second is exogamy, an incest protection device involving the quitting of the natal family by offspring of one sex (usually female) to pair bond and join the family of another kinship group (Barrett et al., 2002). As noted in the last section, this is instrumental in enabling the formation of large clan network structures via alliances between weakly or unrelated kinship groups. Many mature family firms have this structure, embedded via what network theorists call “weak ties” in a wider community (Aldrich & Cliff, 2003). The risk this entails is that marriage, the nongenetic “affinal” bond within the family system, is its most frequent fracture point (Karney & Bradbury, 1995).

Third is inclusive fitness: the phenomenon of individuals foregoing reproductive opportunities in order to enhance the reproductive fitness of others with whom they share genes (Cronk & Gerkey, 2007; Hamilton, 1964). Family businesses represent potent vehicles for inclusive fitness benefits, since they pool the material interests of a kinship group and preserve them for descendants. With mature family firms, quite large kinship networks can function as a powerful resource base for the mutual advantage of members (Gersick et al., 1997).

Fourth is the human capacity for adoptive relationships, what are called “putative kin” in anthropology (Silk, 1990). Among humans, paternity is always uncertain because unlike many other species we lack organs (such as smell) fordetecting kinship, nor do we have visible fertility markers (Fletcher & Michener, 1987). This means that much of our kinship is taken on trust, on the basis of what we are told by others and what we can infer (Symons, 1979). This apparent deficiency is actually an evolved design feature, whose function is to support the human capacity for affinal relationships, bonding, and coalition formation with nonkin. Within family business this is a critical success factor. None can be successful without the capacity to find common interest and cooperation between family and nonfamily executives and owners.

Together, these design features enable us to build large communal clans of loose genetic relatedness, including an unusual (relative to other species) acceptance of nonkin in close coalitions (Richerson & Boyd, 1999).

The foregoing arguments explain how kinship gives family firms advantages of cooperation and trust. EP also shows how it is a liability, for genetic interests divide as well as unite families. These center on three critical family relationships.

First is the parent-offspring relationship. Evolutionary theory notes that although parents and children have powerful bonds of shared interest, they are not symmetrical (Trivers, 1974). Parents wish to protect and direct their genetic investment. Offspring wish increasingly to assert their autonomy. Their goals also diverge around the extraction of resources (material and psychological). Offspring are motivated to demand unconditional benefits in greater amounts and for longer than parents are willing to give them, while parents are motivated to exert more control and to do so for longer than their offspring are likely to tolerate (Mock, 2004). These situations change over time. In most families, the conflict dissipates as offspring enter adulthood. In family firms, it is kept alive by continual co-dependence around the shared investment of power and wealth that is locked into the firm. Parent-offspring conflict most often comes to a head around the timing of succession, with the older generation reluctantly giving way to the younger, especially where there is a narrow age gap between fathers and sons (J. A. Davis & Tagiuri, 1989).

Second is the sibling relationship. Many family businesses are built around the sibling bond, but rivalry between siblings is also a source of conflict (Dunn & Plomin, 1990; Sulloway, 2001). Parents generally desire equality and cooperation among their offspring because their genetic stakes in them are equal, but from each offspring's perspective, interests are divided zero-sum with siblings, with whom they are in competition for the finite resources that parents have to offer (Hertwig, Davis, & Sulloway, 2002). Yet sibling rivalry is apt to disappear in the face of external competition from less related or unrelated others (Bank & Kahn, 1982), and also to dissipate with time. Family business research has generally confirmed both the propensity for these conflicts to occur in family firms (Levinson, 1971) and for collaborative biases to be positively linked with kinship (Handler, 1994). Many siblings successfully co-lead businesses. The kinship tie allows a more robust dynamic for problem solving than would otherwise be possible (Kellermans & Eddleston, 2004).

The contrasts between family members emanating from what we have called the gene lottery are accentuated by the tendency for siblings to seek to differentiate themselves from each other. Birth-order research suggests this follows an evolutionary strategy (Sulloway, 2001)—eldest children are motivated to succeed playing by the rules the parents have set, so as to extract maximum benefits from parents, while later-borns are more likely to rebel against this order, to overturn the rules that favor their elder sibling to secure a regime that delivers a resource allocation more favorable to themselves. This implies that a consequences of male primogeniture will be leaders who try to follow their parents' model, but with no guarantee they will be able to replicate the parents' skills or drive. In contrast, the succession of later-borns will increase the likelihood of discontinuity.

Third is the parent-parent relationship. This nongenetic (affinal) bond is a key fracture point, as divorce statistics would seem to confirm. It depends, variously, on the biochemistry of love, the economic advantages of cohabitation, thepsychological support of companionship, and the sunk costs of shared genetic investment in offspring to sustain it. In family firms, divorce and conflict between husband and wife “copreneurs” is a common hazard (Danes & Olson, 2003; Fitzgerald & Muske, 2002), as is the split between family branches in mature firms (Foley & Powell, 1997; Gersick et al., 1997).

Some cultures seek to minimize the fragility of this tie by encouraging cousin marriage, and in our ancestral environment weak genetic ties united the entire community, since tribes were constituted by interlocking family clans, with only rare incursions of strangers (Klein, 1999). In many cultures, business families recreate something like this model by fostering multiple interlocking marriages, which cement firms into business communities (Dutta, 1997; Hambata, 1991; Redding 1991). When this extends through financial institutions and into government, it becomes problematic as a source of corruption, and in many economies there are countervailing rules to prevent family influence spreading too far into business (Franks, Mayer, & Rossi, 2005).

Implications for Theory and Research on Family Firm Performance

The chief area of debate in the field is the strength of family firms relative to nonfamily firms in performance, and their relative vulnerability to life-threatening risks and hazards.

It has long been claimed that family firms are able to generate superior performance capability by means of cultural advantage, specifically in speed of decision making, unity of purpose, efficiency of communications, loyalty, and commitment of members (Beckhard & Dyer, 1983; Tagiuri & Davis, 1996). Yet, equally, there has been more gloomy prognostication, in line with public prejudices, media horror stories, and fictional sagas, about the dangers of psychological overspill from dysfunctional families into the businesses they run (Kets de Vries, 1996; Levinson, 1971).

The debate has been raised to a greater level of sophistication in recent times. Empirical evidence supporting the optimists has come from several studies of publicly quoted family firms. Anderson and Reeb (2003) undertook a controlled comparison of publicly quoted firms in the S&P 500, and confirmed that family firms not only outperformed their nonfamily comparators on ROA, but were also more profitable where a family member rather than a nonfamily executive was serving as CEO. These findings have been echoed by Lee (2006), who looked at the same sample over a 10-year period, and in a French study (Sraer & Thesmar, 2004), which found superior performance among founder and heir-managed family firms, specifically due to their resistance to industry shocks and lower costs. A study by Poutziouris and Barreto (2006) on U.K. FTSE quoted firms found them to be more profitable, though slower growing.

A more pessimistic view is taken by scholars who claim empirical support for predictions from agency theory that family firms are vulnerable to a unique range of hazards and risks (Schulze, Lubatkin, Dino, & Buchholtz, 2001). Villalonga and Amit (2006) concur, noting that advantages in what they call “Agency Problem I”—that family firms by unifying ownership and control eliminate the need for monitoring of agents by principals—are outweighed by the costs of “Agency Problem II”—that controlling shareholders are able to extract benefits to the detriment of other shareholders without restraint. For other scholars, the agency risks include the dangers of altruism—people making business decisions out of sentiment rather based on reason; adverse selection—making choices based on a narrow set of perceived interests rather than on the broader interests of the firm; holdout—individuals blocking decisions or obstructing change; free riding and shirking—extracting free benefits because of one's privileged position; plus a number of what agency theorists call “self-control” hazards. Research indicates that altruism and free riding are prominent sources of difficulty, though altruism also has benefits, as these theorists acknowledge (Schulze, Lubatkin, & Dino, 2003).

Karra, Tracey, and Phillips (2006) extend the altruism point, arguing that it is a beneficial input to family firms, reducing agency costs in their early stages of development, but raising the risks in more mature firms. Dyer (2006) also sees the answer to contradictory trends to be a segmentation of firms, to capture the costs and benefits of what he calls “the family effect.” This is an attempt to achieve a unified framework for agency theory and resource-based theory.

Resource-based theory is the chief alternative to the agency perspective in this domain, where it is argued that family firms generate unique intangible and tangible assets, sometimes referred to as “familiness” (Habbershon & Williams, 1999). D. Miller and Le Breton-Miller (2006, 2007) explore how these are a source of competitive advantage in terms not unlike some of the unique distinguishing features of family firms we considered earlier, such as “ownership stake” and “care for future generations.” As Corbetta and Salvato (2004) argue, there is a need to identify and explain the elements that enable family firms to achieve high performance. For them, it is the concept of “stewardship” that fills the gap.

How does evolutionary theory relate to this confluence of ideas? It supports and elaborates on all of them. First, in relation to agency theory, it agrees with the fundamental assumption of rational self-interest, but expands both elements: the nature of self-interest and the process of rationality. On the former point, EP offers the idea that underlying this is the fundamental (distal) utility of reproductive fitness, which is supported by immediate (proximal) goals such as prosocial behaviors, ethical values, kinship loyalty, group goals, and community identity (Dennett, 1995; Pinker, 1997). On the latter, EP also reaches toward an expanded conception of rationality that includes biases and heuristics that are not always focused on maximizing immediate payoffs or material gains (Evans & Cruse, 2004).

The implication for agency theory is that one cannot limit agency hazards to the short-term material benefits that may accrue to agents or principals, and that the decisions of either party are guided by considerations that are not always easily quantifiable. This applies equally to nonfamily firms. An interesting empirical example is to be found in the study where the authors (Beehr, Drexler, & Faulkner, 1997), hypothesizing from the received wisdom of the practitioner literature that they would find heightened role conflicts in family firms, using a matched sample design, found the opposite—a remarkable degree of creative integration. In other words, agents and principals may pull toward different sets of interests that go beyond such catch-alls as “altruism” or “rents,” for example, reputation, loyalty, belonging, status, and security (Lawrence & Nohria, 2002; Nicholson, 2000).

EP helps identify the generality of such wants and interests, and points out that in any particular case an individual differences approach is needed. The concept of family climate, for example, can help explain behavior at the level of the firm (Björnberg & Nicholson, 2007). It seems that the “family effect,”“familiness,” or “family capital” amount to the processes that people are able to engender from the intimacy, trust, intuition, and invention that come from shared identity, plus the motivational focus that shared goals engender. This concept would be mystical, but EP renders it tangible as a shared subliminal perception among family actors of their shared interests and the routines that will deliver them.

Yet EP agrees that the biases and hazards that agency theorists identify are also hardwired as part of the self-interest of the kinship group. The failures of modern family firms stem from excessive insularity, failures to satisfy the interests of stakeholders, and poor decision making by unconstrained powerful leaders (Gordon & Nicholson, 2008). Both theoretical schools are silent on such matters. These vulnerabilities depend on (1) the identity of the leader and (2) the social dynamic of the family.

Some practical conclusions that a Darwinian perspective draw us toward include the following.

  • 1Families generate a unique dynamic—a family climate—based on the individual differences of their members, many of them the result of what I have called the “gene lottery.” This confluence can be a liability or an advantage, depending on contextual conditions, but it suggests that some families are better suited to cooperative enterprise than others. Some should not attempt to run a business at all.
  • 2Family firms need to be flexible in their allocation of roles and responsibilities, mindful of the heritable individual differences of family members. Rigid adoption of practices such as primogeniture put the firm and the family at risk, as recent research has confirmed (Bennedsen et al., 2007).
  • 3The degree of conflict and cooperation depends on a combination of family structure and family climate (as analyzed in Nicholson & Björnberg, 2005). Family structure includes such factors as number, gender, and age spacing of siblings and parent-child age gaps.
  • 4Family governance is necessary to control the instincts of families and protect the firm from spillovers from the lines of fracture that the evolutionary perspective on kinship identifies. Especially vulnerable are the nongenetic ties—between spouses, in-laws, and branches of mature family firms.
  • 5Where family succession takes place, there will be a special need for the support of nonfamily executives with complementary assets. This means that a culture of teamwork will need to be fostered, including devices that protect the capacity of nonfamily executives to make decisions and act in the interests of the business. Family interference has to be visibly controlled for such positions to be attractive to quality executives.
  • 6Greater opportunities for women in leading positions as owners and executives will benefit many family businesses, especially where there is a propensity for conflict. Greater opportunities for later-born children will also favor innovative outcomes of intergenerational succession.

Conclusion—The Performance Balance Sheet

Let us conclude by returning to the theme highlighted throughout this article: the question of what is intrinsic or unique to family businesses that could enhance their performance capability or put them more at risk. The review the Darwinian perspective has led us through suggests the following.

  • 1Family firms are able to generate unique advantages through their capacity to bind naturally diverse individuals together in a common enterprise and purpose. These centripetal forces enable them to engage in processes and decisions that are much riskier for groups of decision makers who lack such ties. They also enable the family to counter many of the special agency problems that arise.
  • 2Family firms are also uniquely vulnerable to intra-family conflicts and their spillover into the business. Agency problems identified by researchers compound the risk. Additionally, they face challenges such as integrating nonfamily executives, idiosyncratic leadership, and other hazards of the naturally occurring array of individual differences among family actors.
  • 3It follows from the first two points that when using empirical evidence to compare family and nonfamily firms, one is not comparing like with like. Both sets are survivor populations, but family firms will have survived in fewer numbers against greater odds. This gives them (a) a selective advantage, and (b) a possible “annealing” advantage, that is, firms that have weathered and overcome difficulties have enhanced survival qualities and capabilities.

We lack research data to confirm this last prediction. There is no extant research that systematically compares the death rate of comparable family and nonfamily firms, or on the qualities of the resultant survivor populations.

This is but one of several avenues for future research that the Darwinian viewpoint prompts, as well as opportunities for further integration in this most complex and misunderstood of business domains.

Footnotes

  • 1

    There are exceptions. Matriarchy prevails where the survival of males is especially precarious, though status still passes through to the senior female's brothers or male cousins, and males also dominate the councils of decision in matriarchal societies (Keesing, 1975).

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