1042-2587

Copyright 2004 by
Baylor University

Self-Serving or Self-
E T&P Actualizing? Models of
Man and Agency Costs
in Different Types of
Family Firms: A
Commentary on
“Comparing the Agency
Costs of Family and
Non-family Firms:
Conceptual Issues and
Exploratory Evidence”
Guido Corbetta
Carlo Salvato

I n their article “Comparing the agency costs of family and non-family firms: Con-
ceptual issues and exploratory evidence,” Chrisman, Chua, & Litz (2004) develop a con-
ceptualization and empirical investigation of the effects of agency relationships in family
firms. Their main purpose is to understand whether, and to what extent, family firms have
higher total agency costs than non-family firms. The authors develop a conceptual frame-
work, which is of particular value to researchers of family businesses, outlining four
conditions that determine the relative level of agency costs in family and non-family
firms. These are (1) asymmetric altruism; (2) separation of ownership and management;
(3) conflict of interests between owners and lenders; and (4) conflict of interests between
dominant and minority shareholders. Although the framework is not directly tested by
the authors, it is, in itself, a valuable addition to the literature and research thrust of the

Please send correspondence to: Guido Corbetta at [email protected] and Carlo Salvato at
[email protected].

Summer, 2004 355

field. A second main contribution is offered by the extensive empirical test of the impact
of agency issues on performance of family firms.
As the article compellingly suggests, we believe that agency theory permits us to
arrange several family business issues into a simple and sound analytical framework. In
particular, agency theory allows for the investigation of the determinants, costs, and
remedies of “dysfunctional” behaviors attributable to family involvement (Chua,
Chrisman, & Steier, 2003). Hence, agency theory is a particularly suitable framework
to explain the effects of relationships among organizational actors on “efficiency”
(Greenwood, 2003), and the organizational arrangements aimed at minimizing costs
related to dysfunctional behaviors. What is missing is a conceptual lens to explain behav-
iors aimed at maximizing potential performance within organizations in which a pro-
organizational attitude coexists with self-serving motives. Such a conceptual lens, more
in line with the human assumptions prevailing in family businesses, may point to the
determinants of organizational actors’ willingness to pursue entrepreneurial opportunities
and growth. In this commentary we propose stewardship theory (Davis, Schoorman, &
Donaldson, 1997) as an alternative perspective, which may usefully complement the
agency framework in explaining entrepreneurial, organizationally centered behaviors.
Our main contribution is to suggest that differences in organizational performance are
not driven by family involvement or lack thereof, but by the prevalence of agency or
stewardship relationships within the firm, whatever the degree of family involvement.

Self-Serving or Self-Actualizing? Models of Man in Different Firm Types

Empirical research so far has shown compelling evidence of agency relationships and
costs within family firms. However, results are at least partially contrasting (Gomez-
Mejia, Nuñez-Nickel, & Gutierrez, 2001; Schulze, Lubatkin, & Dino, 2003; Chrisman
et al., 2004). Reasons for these mixed empirical results may rest in family firm char-
acteristics. Family firms are often depicted as relying on mutual trust, intra-familial
altruism in its purest sense (i.e., unselfish concern and devotion to others without expected
return to oneself), and clan-based collegiality. Models of man (Simon, 1957) in which
organizational behaviors are rooted may differ between family and non-family firms,
among different family firm types, and among family firms active in different countries.
Hence, some of the assumptions on which agency theory is based may not hold in family
firms.
Agency theory rests on human assumptions of self-interest and present value maxi-
mization. In contrast, it is generally accepted that wealth creation is not necessarily the
only or even the primary goal of all family businesses (Davis & Tagiuri, 1989; Sharma,
Chrisman, & Chua, 1997). As Chrisman et al. (2004) explicitly acknowledge, it is gen-
erally accepted that family firms have both economic and non-economic goals.
What is the favored model of man in family firms, then? Psychological and situa-
tional factors that differentiate between agency and stewardship theories define two dif-
ferent models of man. According to agency theory, organizational human behavior is
rooted in economic rationality (Simon, 1997). The model of man underlying agency
theory is that of the self-serving individual, a rational actor who seeks to maximize his
or her individual utility (Jensen & Meckling, 1976). Instead, the model of man underly-
ing stewardship theory “is based on a steward whose behavior is ordered such that
pro-organizational, collectivistic behaviors have higher utility than individualistic, self-
serving behaviors” (Davis et al., 1997, p. 24). This model is essentially that of the “self-

356 ENTREPRENEURSHIP THEORY and PRACTICE

actualizing man” described by Argyris (1973). It is worth noting that self-actualizing
behavior is not “irrational.” Rather, according to Simon’s (1997, p. 85) suggestion, “a
decision is ‘organizationally’ rational if it is oriented to the organization’s goals; it is ‘per-
sonally’ rational if it is oriented to the individual’s goals.” This model clearly counters
traditional agency theory assumptions, but also the economically—or “personally”—
rational view of altruism adopted in agency theorizing.
The arguments put forward in this section suggest that other frameworks—such as
stewardship theory—may be adopted besides agency concepts, to account for organiza-
tional behaviors in family firms. These additional frameworks should be used in a com-
plementary fashion (Steier, 2003), because they have a lower degree of conceptual and
empirical refinement, and because human assumptions, and related models of man, may
vary along an organization’s life cycle, or among different family firm types.

A Complementary Framework: Stewardship Theory Explanations of

Agents’ Behavior in Family Firms

The different model of man behind organizational behavior, at least in some types of
family firms, suggests that stewardship theory may be a potentially suitable vantage point
to address family business dynamics. In contrast to agency theory, stewardship theory
defines situations in which managers and employees are not motivated by individual
goals, but rather behave as stewards whose motives are aligned with the objectives of
the organization, such as sales growth, profitability, innovation, international expansion,
and company reputation (Davis et al., 1997). The steward’s pro-organizational behavior,
aimed at maximizing organizational performance, will in turn benefit the steward’s
principals.
Despite its potential, stewardship theory has not been extensively adopted in family-
business studies. Chrisman et al. (2004) admit that stewardship relationships may exist,
or even prevail, at least in some family firms. However, their analysis—coherently
anchored to the agency framework—does not develop this alternative any further. Yet,
the low coefficient of determination yielded by their test (Adjusted R2 is only .081) indi-
cates modest predictive power for their regression model. There may therefore be an a
priori risk of specification error through omitted variables bias in agency models applied
to family firms. In other words, agency theory alone offers a significantly, but only par-
tially, appropriate explanation of family firm performance.
One of the main arguments suggested in this commentary is that the impact of family
structure and dynamics on the family firm is mediated by the “model of man,” provided
it is widely shared. As a matter of fact, the owning family has a strong influence on vir-
tually all psychological and situational antecedents of organizational behavior. Hence, the
owning family has a crucial impact in shaping the “model of man” prevailing within the
organization as either the self-serving, economically rational man postulated by agency
theory, or the self-actualizing, collective serving man suggested by stewardship theory.
An analysis of the family business literature suggests that the family exerts an impact
on the prevailing “model of man” through the role played by family goals, degree of
altruism, degree of trust, emotions and sentiments, and their influence on relational con-
tracts (Figure 1).
Family firms are arenas characterized by financial and non-financial family goals
(Tagiuri & Davis, 1996). When financial goals prevail in a family, family members’ moti-
vation to operate in the family firm will be based on lower order needs and extrinsic

Summer, 2004 357

Figure 1

Family Dynamics, Favored Model of Man and Organizational Performance

Family
• Trust • Relational contracts
• Altruism • Family goals

Family-related psychological and situational factors affecting the favored model of man

Favored model of man

(within the family firm)

Individualistic-utility motivation Higher levels of achievement

Self-serving man Self-actualizing man

(economic rationality)

Prevalence of Prevalence of
agency relationship stewardship behavior

Minimization of potential costs Maximization of potential performance

(Emphasis on efficiency) (Emphasis on innovation, proactiveness
and calculated risk-taking)

factors, thus favoring the emergence of agency relationships. On the contrary, when non-
financial goals prevail, this will foster motivation based on higher-order needs and intrin-
sic factors, thus favoring steward-principal relationships.
A second family dynamic influencing organizational behavior within the family firm
is the degree of altruism. Relationships in family firms are embedded in the parent-child
relationship found in the household, which is characterized by altruism. Altruism affects
organizational behavior in several ways. However, the assumption of altruism in the stew-
ardship framework is that of unselfish concern and devotion to others without expected
return (unlike the notion of altruism adopted by economic theory and borrowed by agency
scholars; e.g., Schulze et al., 2003). As such, this notion of altruism makes each employed
family agent a de facto owner of the firm, acting in the belief that they have a residual
claim on the family estate. This mechanism closely recalls the concept of psychological
ownership, whose primary effect is a strong sense of identification and high value com-
mitment towards the firm (Pierce, Kostova, & Dirks, 2001). Moreover, a high degree of
altruism influences individual conduct in family firms and helps strengthen family bonds,
thereby tempering the exercise of authority based on institutional power and high power
distance, both conducive to agency problems.

358 ENTREPRENEURSHIP THEORY and PRACTICE

 The degree of trust is a third family dynamic influencing family firm organizational
behavior. Family firms are usually depicted as “high trust” organizations (Jones, 1983).
When trust is of an “affective” or “relational” kind, family firms tend to be governed
according to an involvement-oriented management philosophy, i.e., by informal agree-
ments based on affection and entailing a high level of faith in the intentions of the other
party (Gomez-Mejia et al., 2001; Pollak, 1985). When trust is of a “calculative” kind,
organizational relationships rely less on informal agreements, and management philoso-
phy tends to be more control-oriented, as in agency relationships.
Finally, the extent to which family bonds are embedded in emotions and sentiments
and the impact of these bonds on relational contracts within the family firm also play a
significant role in shaping agency vs. stewardship behavior. In particular, embeddedness
of social ties in emotions and sentiments often contributes to building a collectivist culture
within the family firm, i.e., an organizational climate in which personal goals are subor-
dinated to the goals of the collective (Handler & Kram, 1988; James, 1999a).
The impact of family dynamics on the favored “model of man” has strong organiza-
tional implications. When the model of man favored by the owner family is the self-
serving, economically rational man, agency relationships will prevail in the family firm.
In this case agency theory predicts that organizational behavior will be designed to min-
imize potential losses to each party. Employees/agents will use all their discretionary
power in their own interest, and to the disadvantage of the organization and principals.
Principals, in turn, will try to hold the agents’ opportunistic tendencies in check through
controlling mechanisms (Jensen & Meckling, 1976). The organizational outcome of this
situation will be the minimization of potential agency costs (Figure 1), where efficiency
is assumed to be the effectiveness criterion (Eisenhardt, 1989, p. 59). In contrast, when
the model of man favored by the owner family is the self-actualizing man, steward-
principal behavior will prevail in the family firm. Employees/stewards will gain utility
from fulfilling the purposes and objectives of the organization. Likewise, principals will
design an organizational structure that is involvement-oriented and empowering. The
mutual gains resulting from this match of interests are high and the potential performance
of the group and of the organization is maximized (Davis et al., 1997). Increased goal
congruence motivates employees/stewards to adopt innovative and proactive behaviors
that involve calculated risks, but can also significantly improve firm performance. Like-
wise, the match of interests reduces the negative impact of information asymmetry on
innovative, risk-taking activities, inducing principals to more readily appreciate the merits
and potential outcomes of entrepreneurial initiatives envisaged by their employees/
stewards.
Stewardship theory also allows for reinterpretation of Chrisman et al.’s (2004) results.
Their study suggests that family involvement, regardless of the effects of agency cost
control mechanisms, does not generate any performance difference. This result may be
explained by their choice of short-term sales growth as the performance measure. The
main determinants of stewardship behaviors (trust, altruism, relational contracts, and non-
financial family goals; see Figure 1) take a relatively long time to exert their effect on
firm performance. This is in line with family business literature (e.g., James, 1999b),
which suggests that advantages related to family involvement should be measured over
long time spans, given the long-term orientation of most family firms. Hence, long-term
growth or non-financial performance indicators, such as opportunity recognition and
exploitation, innovativeness and proactiveness, may be better candidates than short-term
sales growth as dependent variables, within models aimed at explaining determinants of
value-enhancing organizational behavior in family firms. Stewardship theory also sug-
gests an alternative explanation for another relevant finding of Chrisman et al.’s (2004)

Summer, 2004 359

study, namely the greater benefits deriving from strategic planning to non-family firms.
Agency theory interprets this as resulting from a net agency advantage to the family form
of organization. However, this is inconsistent—in Chrisman et al.’s study—with the
lack of a significant, negative relationship between the existence of a board and perfor-
mance of family firms. Stewardship theory suggests that any form of direct or indirect
control may lower stewards’ motivation, negatively affecting their pro-organizational
behavior, both in the short and in the long term. In contrast, the lower degree of involve-
ment of board members in daily activities prevents their potential stewardship-oriented
behavior from generating any impact on short-term performance.

Agency and Stewardship Relationships in Different Types of Family Firms

Some of the results emerging from Chrisman et al.’s (2004) article may be biased by
the peculiarities of investigated companies. Firms in their sample are fairly small, very
young, and characterized by an unusually high growth rate. Most of them are probably
start-ups or first-generation family firms, still heavily dependent on their founder(s). Not
surprisingly, and without considering non-response, 79% of the companies in their sample
are family firms, according to the adopted definition.
However, family firms are not a homogeneous group of organizations. A recent,
empirically validated classification identifies three organizational types (Salvato, 2002)
based on variables such as ownership, the presence of shareholders and managers exter-
nal to the family, active involvement of family members, and number of generations
involved. The three resulting family firm types are (1) the founder-centered family firm;
(2) the sibling or cousin consortium, which is still fully owned and managed by the
family(ies); and (3) the open family firm, in which both ownership and control are par-
tially shared with non-family shareholders and professional managers. These firms differ
in the role the founder and/or owner families play in the life of the company. Moreover,
they differ in terms of their entrepreneurial orientation and its determinants. Hence, as
Chrisman et al. (2004) suggest in the discussion and caveats section, we can conjecture
that agency costs are different in each of the three firm types.
When, for example, ownership is concentrated in one individual (as in the case
of founder-based family firms), issues of asymmetric altruism (ALT) may simply not
exist. In contrast, when ownership is divided among several family members (as in a
sibling/cousin consortium), the hypothesis that ALT is higher in family firms may actu-
ally hold true.
Agency costs arising from separation of ownership and management (OM) depend
on the extent of owner-management, too. Whenever the company is managed by a
sole owner, as most founder-based family firms, OM may be non-existing. In contrast,
managerial control by individuals owning a minority of shares (as in many sibling/cousin
consortia), or even no shares at all (as in many open family firms) may raise OM to the
level of non-family firms. Moreover, there may be curvilinear effects between agency
costs and CEO stock ownership, as suggested by Morck, Shleifer, & Vishny (1988).
The family firm’s life cycle may also have an impact on agency costs arising from
the conflict of interest between owners and lenders (OL), depending on the debt/equity
ratio prevailing in each stage of a family firm’s life.
Finally, when ownership is concentrated in one or few related families, costs arising
from the conflict of interests between dominant and minority shareholders (DM) are likely
to be comparatively low, if not null. In contrast, if the family firm is participated by finan-
cial institutions such as venture capitalists or other shareholders external to the family,

360 ENTREPRENEURSHIP THEORY and PRACTICE

or if it is listed on the stock exchange, given the often-noted discrepancies in the inter-
ests of family and non-family owners, DM is likely to be higher.
Given these suggested differences in agency costs among family firm types, a more
fine-grained measure of family firms may explain why Chrisman et al.’s study did not
yield any significant performance difference between family and non-family firms. Such
difference may well exist between one specific type of family firm and its non-family
counterparts, while there may be no performance differences considering the other family
firm types. These considerations clearly suggest that the issue of agency and stewardship
relationships should be addressed avoiding simplistic dichotomies such as family vs. non-
family firms. Rather, future research will benefit from a clear distinction among concep-
tually sound and empirically validated family firm types.

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Guido Corbetta is a professor at the SDA Bocconi School of Management.

Carlo Salvato is a professor at the Università Cattaneo—LIUC, in the Entrepreneurship Research and
Development Center.

We appreciate the insightful comments we received from Lloyd Steier, two anonymous reviewers, and par-
ticipants in the Second Annual Conference on Theories of Family Firms at Wharton Business School, which
significantly improved our commentary.

362 ENTREPRENEURSHIP THEORY and PRACTICE