Journal of Business Venturing 18 (2003) 491 – 494

Discussion
Commentary on: ‘‘Toward a theory of agency and altruism
in family firms’’
Royston Greenwood
School of Business, University of Alberta, Edmonton, Alberta, Canada T6G 2R6

Abstract

Agency theory would predict a low incidence of agency costs within family firms because of the
fusion of ownership and control. The concept of altruism challenges this oversimplification. However,
the interesting findings by Schulze et al. rely upon two assumptions that should be examined in future
research.
D 2003 Elsevier Inc. All rights reserved.

Agency theory is a parsimonious and systematic analysis of the relationship between

principals and their agents. As usually formulated it makes two assumptions: first, that the
interests of principals and agents often (always?) diverge; second, that individuals (principals
and agents) seek to advance their own interests. Therefore, principals control agents either by
direct supervision or through use of incentives (usually monetary) that link the agent’s
compensation to measurable attainment of the principal’s goals. Use of incentives is
preferable under either/or both of two circumstances: first, where the agent has more
capability/knowledge than the principal, which renders direct supervision impractical;
second, when the ‘principal’ is diffuse (as in the case where there are many equity
shareholders). For agency theorists, supervision and/or the aligning of interests through
incentives incur agency costs, which make the firm less efficient.
The agency perspective has been applied in different settings, often and most successfully
in exploring the relationship between shareholders and senior management, an agency
‘problem’ of long interest to researchers. But it has also been applied, as by Schulze et al.
(2001), to explore intraorganizational issues, addressing issues more usually examined using
frameworks of organizational behavior. The paper by Schulze et al. (2003) is especially
interesting because it uses agency theory to better understand the dynamics of family firms,
and in doing so incorporates the notion of ‘altruism’, which is an aspect of social
embeddedness. Consequently, the authors are elaborating the boundary conditions of agency

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theory itself and extending its theoretical range. This dual theme within the paper is
sometimes handled a little unsurely, as though the authors were distracted in their purpose,
between whether to understand family dynamics or to develop agency theory. Here, my focus
is on the former. Does agency theory plus altruism help articulate the processes of family
enterprise?
Schulze et al. (2003) rightly point out that the governance arrangements of family firms
need not remove nor even reduce agency costs. In fact, for several reasons family firms might
suffer from especially high agency costs. For me, the application of agency theory by Schulze
et al. (2003) to family dynamics is interesting and provides a range of possible insights
because it frames a series of issues that are well accepted as characteristic of family firms:

 the possibility that family members are not the best qualified for positions to which they
have the inside track;
 the possibility that family members might shirk or free ride in their work roles, aware that
discipline might not be forthcoming;
 the possibility that family members might be neither motivated to, nor aware of the need
for, discipline;
 the possibility that owners might be unwilling to relinquish control even though they are
no longer capable of effective management; and
 the possibility of owners interfering with family members charged with managing the firm.

These are all documented ‘problems’ for family firms and agency theory allows us to
arrange them into an analytical framework, which permits assessment of their effects upon
‘efficiency’. The idea of ‘altruism’, moreover, elaborates these issues.
Not everyone would accept the directional tenor of agency theory, even with altruism
added [see, e.g., Perrow (1986, pp. 224–236)]. For, although the incorporation of altruism
into the model provides a measure of social ‘embeddedness’, which critics argue is typically
missing from agency theory, there are still some simplifying assumptions that might be
misleading or, at least, which limit the theoretical scope of agency theory. For example,
agency theory seems to assume that principals have power (derived from legal ownership)
whereas agents do not, except where principals neglect to exercise that power. This treatment
of power as a binary variable is misleading, and nowhere more so than in family firms where
power and influence can be dispersed amongst several family members. Power, moreover, is
not always a function of ownership—what, for example, might be the role of mothers in a
family firm? Once the idea of the owner having power and the agent being amenable to
coercive compliance is removed, agency theory loses some of its predictive force.
Another simplifying assumption that is questionable is that actors are motivated either
exclusively, or at least primarily, by their self-interests. Sociologists in particular find this
characterization troublesome, because it treats economic exchanges without any concern for
the constraining force of the social context within which they occur. Some theories of
governance (e.g., stewardship theory) explicitly deny the narrow economic definition of
human action and propose (with some empirical support) that actors often identify themselves
with a company and knowingly subjugate personal interests to the collective (Davis et al.,
 R. Greenwood / Journal of Business Venturing 18 (2003) 491–494 493

1997). This idea of stewardship has been found in legal partnerships and may well reside in
family firms, where cultural norms may be expected to have an unusually high salience. In
other words, the economically self-interested actor of agency theory may not be the best
portrayal of actors in family firms, where normative factors might play a significant role.
Schulze et al., by incorporating altruism into the agency framework, introduce social factors
but primarily as negative effects (i.e., for them, altruism raises agency costs) rather than as
positive effects (removing the agency problem) as would be implied by stewardship theory.
Nevertheless, there is much to admire in this paper and it provides observations that
enhance our understanding of family dynamics. Inevitably, given that the authors are drawing
upon a survey conducted by a third party (Andersen) and over the design of which they had
(presumably) little if any influence, there are some occasions where better operational
measures might have been called for. This, however, is a hazard found by all research of
this kind and has to be tolerated, given the scarcity of alternative data sources. But let me
suggest two assumptions central to the paper which should be questioned and explored
further in future research. It is not self-evident to me that the behavior of family members is
necessarily critical to a firm’s performance, especially in very large family firms such as those
included in the study. Family members might be important. But maybe family members are
much less significant than we sometimes believe, relative to professional managers. This
assumption, of course, begs the hoary old question of what constitutes a ‘family firm’. The
Andersen survey seems to define it as a firm incorporating some measure of family ownership
plus some measure of family employment. But we are not informed of the nature of the latter.
We do not know if the CEO (who received the survey questionnaire) is a family member, nor
how many of the management team (if any) are family members. The assumption is simply
that family members own and control the firm. But they may not, raising the possibility that
in many family firms there is a separation of ownership and control, which would have two
consequences: there would be agency costs different to those explored by Schulze et al.; and,
more importantly for present purposes, the debate about altruism and the role of incentives
would be of little relevance where family members do not control and influence the firm’s
performance.
Second, the firms in the study are assumed to have agency problems. The thesis of Schulze
et al. runs as follows: altruism (variable A) raises agency costs (B), but by using incentives
(C) under specified conditions (D) performance can be improved (E). Schulze et al. directly
measure and show the link between C, D and E but infer the links between (A) and (B) and
then to (C). It is not unreasonable, in an exploratory study, to report upon relationships among
variables that are consistent with the predictions of a given theory (in this case, agency
theory). However, given the potential significance of those relationships for practice, we
ought to be sure that the reported relationships really are a function of agency behavior (i.e.,
we should directly measure A and B). Future studies should therefore specify which agency
issues are being explored and the nature of their effects.
Agency theory is a limited analytical framework, but it is rigorous within its own terms of
reference and, as such, is capable of generating insights concealed within more elaborate
conceptual treatments. The paper of Schulze et al. (2003) provides insights into the dynamics
of family firms, not least the excellent account of how family firms might actually suffer from
494 R. Greenwood / Journal of Business Venturing 18 (2003) 491–494

abnormally high agency costs. This counterintuitive insight (most observers would anticipate
the absence of agency costs) deserves further examination and shows the theoretical promise
of applying this theory to family ventures.

References

Davis, J.H., Schoorman, F.D., Donaldson, L., 1997. Toward a stewardship theory of management. Acad. Manage.
Rev. 22, 20 – 47.
Perrow, C., 1986. Complex Organizations: A Critical Essay, 3rd ed. Random House, New York.
Schulze, W.S., Lubatkin, M.H., Dino, R.N., Buchholtz, A.K., 2001. Agency relationships in family firms: theory
and evidence. Organ. Sci. 12, 99 – 116.
Schulze, W.S., Lubatkin, M.H., Dino, R.N., 2003. Toward a theory of agency and altruism in family firms. J. Bus.
Venturing (this issue).