The Impact of Outside Board Members
on Decision Making in Family Firms
Jeremy A. Woods
Doctoral Student
University of Cincinnati
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Paper Overview
Why study family businesses?
• Studies suggest that over 80 percent of all businesses in the U.S. are closely
held family businesses, and that these companies employ over 60 percent of the
U.S. workforce and generate over 60 percent of the nation’s Gross Domestic
Product (Astrachan & Shanker, 2003).
• Family-owned businesses are the dominant business type in many countries
around the world, including Australia, Brazil, Canada, Chile, Finland, Germany,
Italy, Sweden, and the United Kingdom (Family Firm Institute, 2005).
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Paper Overview
Why study boards of directors/boards of advisors?
• Debate exists in family business scholarship about the appropriate role of the
board in family businesses.
Why study outside board member impact on decision making in family firms?
• Input from outsiders can improve environmental scanning and questioning of
assumptions, which can positively impact firm performance.
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Mainstream Theories on
the Role of the Board
Agency Theory (Jensen & Meckling, 1976; Fama & Jensen, 1983) – the board protects
interests of principals and minority shareholders.
• Often less relevant in owner-managed, closely-held family businesses with no
real minority shareholders.
Resource Dependence Theory (Pfeffer & Salancik, 1978) – the board provides access
to resources, including advice and information (Hillman & Dalziel, 2003; Forbes &
Milliken, 1999; Westphal, 1999; Daily & Dalton, 1992, 1993).
• Closely held, owner-managed family businesses often use a board for this
purpose (Blumentritt, 2006).
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Types of Board Members
Boards are often divided by scholars into inside members and outside members
(Hillman & Dalziel, 2003; Forbes & Milliken, 1999; Westphal, 1999; Daily & Dalton,
1992, 1993).
• Inside Board Members – board members who also work in the firm. Often
share similar knowledge and perspectives. Common in closely held, ownermanaged family firms.
• Outside Board Members – board members who do not work in the firm. Often
have heterogeneous knowledge and perspectives from inside board members.
Not as common in closely held, owner-managed family firms.
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Boards in Family Businesses
There has been a good deal of family business scholarship focused on defining the
proper structural forms and roles of boards in family businesses.
• High owner-manager goal alignment (i.e., the goals of the owner and the goals
of the manager are the same – often because the same person plays both roles)
often leads to the absence of a board in a family business (Jaskiewicz & Klein,
2007; Lane, Astrachan, Keyt, & McMillan, 2006).
• If a family business does have a board, high owner-manager desire for control
often leads to the absence of outsiders on the board (Bammens, Voordeckers, &
Van Gils, 2008; Fiegener, Brown, Derux, & Dennis, 2000).
• If a family business does have a board, the family firm CEO often also serves as
the chairman of the board (Braun & Sharma, 2007) and functions as the firm’s
key decision-maker (Feltham, Feltham, & Barnett, 2005).
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Board Impact on Decision Making
in Family Firms
Some scholars have examined the role of the board in decision making in family firms.
• Board members’ social capital (i.e., their relationships with other individuals or
organizations) influences decision making activities in family firms (Jones, Makri,
& Gomez-Mejia, 2008; Lester & Cannella, 2006).
• Board members’ human capital (i.e., their knowledge, abilities, and other
personal traits) influences decision making activities in family firms (Calabrò,
Mussolino, & Huse, 2009; Chen, Mahoney, & Tan, 2009; Ding & Pukthuanthong,
2009).
• Outside board members tend to have heterogeneous social capital and human
capital to that of inside board members (Lester & Cannella, 2006; Hillman &
Dalziel, 2003).
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Decision Making Challenge:
Concentration of Control
One key decision making challenge facing family businesses is the high concentration
of control common in closely held, owner-managed family firms.
• Individual human decision makers are prone to faulty evaluation of information
(Levitt & March, 1988), incorrect estimation of risk (Khaneman & Tversky, 1979),
and escalation of commitment (Barton, Duchon, & Dunnegan, 1989; Staw &
Ross, 1978; Staw, 1976).
• Goals are often based on the maximization of socio-emotional wealth, rather
than the maximization of financial wealth (Gomez-Mejia, Haynes, Nez-Nickel,
Jacobson, & Moyano-Fuentes, 2007).
• Decision making in family businesses, made by a limited number of individuals
in conditions of high control concentration, is prone to incomplete information,
faulty reasoning, and escalation of commitment (Barton 1990, 2010; Ensley,
2006).
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Theoretical Framework
and Propositions
P1
Board
with
Outside
Members
P2
Effective Decision Making
Firm Performance Outcomes
 Environmental Scanning
 Questioning of Assumptions
 Opportunity Recognition
Proposition 1: The presence of a board with outside members in a family firm will improve the effectiveness
of environmental scanning and questioning of assumptions in the firm’s decision making process.
Proposition 2: The improved decision making activities in proposition 3 will lead to improved family firm
performance outcomes – in particular better opportunity recognition.
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Proposition 1
The presence of a board with outside members in a family firm will improve the
effectiveness of environmental scanning and questioning of assumptions in the firm’s
decision making process.
• Outside board members’ social capital and human capital, which is
heterogeneous to that of inside board members (Hillman & Dalziel, 2003), often
bring additional access to information from the external environment, and
different perspectives, to the decision making process.
• This helps family firms to question underlying assumptions, identify more and
better opportunities, and avoid the escalation of commitment problems
common to firms with high control concentration (Barton, Duchon, & Dunegan,
1989; Staw & Ross, 1987; Staw, 1981).
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Proposition 2
The improved strategic planning activities in proposition 2 will lead to improved
family firm performance outcomes – in particular, better opportunity recognition.
• Effective strategic planning has been shown to affect opportunity recognition in
family firms (Kellermanns & Eddleston, 2006)
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Next Steps
Quantitative research – Goering Center member firms.
• Independent variable: board with outside members.
• Dependent variables: product markets, profitability per product market.
• Controls: industry, size, generation of family.
Interviews – Goering Center member firms.
• Proxies for outside board member impact on decision-making process.
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Alternative Theoretical
Framework
Informal
Network
of
Advisors
Cognitive
Abilities
Effective Decision Making
Firm Performance Outcomes
 Environmental Scanning
 Questioning of Assumptions
 Opportunity Recognition
Decision
Making
Process
???
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Questions/Comments?
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