Document 1

The need for an integrated governance framework to better understand
the value creation process in family firms: a Continental European perspective
THE NEED FOR AN INTEGRATED GOVERNANCE

FRAMEWORK TO BETTER UNDERSTAND THE
VALUE CREATION PROCESS IN FAMILY FIRMS:
A CONTINENTAL EUROPEAN PERSPECTIVE
Patrice Charlier & Enrico Prinz

La RGE Research Center
EM Strasbourg Business School
University of Strasbourg, France
ABSTRACT
Empirical studies using a disciplinary perspective have, so far, provided
a relatively blurred picture of rent creation in family firms. This study
emphasizes the need for an integrated governance framework combining
disciplinary and cognitive arguments within a dynamic perspective.
Viewing value creation from this new angle reveals it to be a process that
is based simultaneously on monitoring efforts and the knowledge-based
contributions of stakeholders, thus offering a better understanding of how
family businesses in Continental Europe create value. Our developments
pave the way for future research into a combined approach to explain value
creation, and contribute to a better overall understanding of family firm
governance.
KEY WORDS
Family firm, corporate governance, disciplinary view, knowledge-based
view
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INTRODUCTION
The increasing interest in value creation by family businesses is reflected

by the hundreds of publications and communications analyzing them
over the last two decades. Economic evidence confirms that family firms
are the most widespread business form in Continental Europe, and
particularly in its two major economies, Germany and France. In an
analysis of more than 3,000 listed firms of the Old Continent, Faccio and
Lang (2002) show that 57.2% of them are under ultimate family control,
with a fraction of almost 65% for both German and French companies.
Numbers are even higher when only non-financial businesses are
considered, attaining levels of 69% and 71% on the German and French
sides of the Rhine River, respectively. Similarly, a previous study in a
German sample (Klein, 2000) finds that family businesses can make up
between 49% and 58% of all observed companies depending on how they
are defined. A study carried out by the Family Business Network (2008)
demonstrates that family firms make up 79% and 83% of German and
French businesses respectively, compared to lower, albeit high levels
for the United Kingdom and the Netherlands. A more recent article
by Franks et al. (2012) confirms the predominance of family firms in
Continental Europe with a 43.8% and 38.6% share of the 1,000 largest
groups in France and Germany respectively. Their study also reveals that
an even higher percentage (53.1%) of leading Italian companies is family
owned, compared to a relatively low level of just 21% of the biggest British
firms. Finally, it is interesting to note that recent public debates about the
performance and innovational strength of German mid-sized companies
(Mittelstand) have triggered further research on how family businesses in
Continental Europe create value (Bergfeld and Weber, 2011).
While there seems to be no doubt about the fundamental role that

family firms play in Continental European economies, empirical studies
applying a disciplinary framework (agency theory or stakeholder theory)
do not provide consistent results about the value creation processes
within these firms. Whilst some studies demonstrate positive effects of
family businesses in the form of higher value creation (Charreaux, 1991,
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Maury, 2006, Allouche et al., 2008), better accounting ratios (Allouche

et al., 2008) and more long-term oriented decision making due to fewer
time-horizon related agency problems (Kappes and Schmid, 2013),
others remain neutral about the effects on performance (Charreaux,
1991) or profitability (Gorriz and Fumas, 1996). Some authors even
indicate negative consequences due to higher agency costs (Cronqvist
and Nilsson, 2003). A recent study by Pindado et al. (2014) reveals an
inverted U-shaped relation between family ownership and corporate
value, indicating that positive disciplinary effects at low ownership levels
turn into expropriation risk when ownership exceeds half of the shares.
A similar picture can be seen outside Europe (for an overview, cf. O’Boyle
Jr. et al., 2012). Whereas some studies demonstrate lower productivity and
value creation in family firms (Holderness and Sheehan, 1988, Yermack,
1996, Wall, 1998, Lauterbach and Vaninsky, 1999, Shivdasani and
Yermack, 1999, Barth et al., 2005, Pérez-González, 2006), others underline
their superior performance (McConaughy et al., 1998, Anderson and
Reeb, 2003, Allouche et al., 2008b). Some authors show positive and
negative effects on value creation (Villalonga and Amit, 2006) or R&D
investments (Block, 2012), while others do not observe any significant
relation between family ownership and performance (Slovin and Sushka,
1993, Demsetz and Villalonga, 2001, Jiang and Peng, 2011).
This widely heterogeneous array of empirical studies analyzing the

value creation of family firms is obviously not only due to the varying
indicators, sample sizes and observation periods. Both the definition of
the family firm and its boundaries are considered to affect value creation
and the development of specific resources, competences and knowledge
(for overviews, cf. Sharma et al., 1997, Chua et al., 1999, Chrisman et
al., 2003, Sharma, 2004, Miller et al., 2007). Although authors agree that
the family business is characterized by the combination of two elements,
namely the firm and the family, the existing literature is characterized by
a lack of consensus about the definition that should be used. According to
Sharma (2004), definitions of family firms can be broadly classified into
three groups: articulations based on their operating nature (Westhead
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and Cowling, 1998, Astrachan and Shanker, 2003), explanations seeking

to model how far families are involved in their firms (Astrachan et al.,
2002), and more conceptual proposals of family business typologies
(Sharma, 2002). This is illustrated by Miller et al. (2007), who show that
the outperformance of these businesses depends on the definition of a
family firm used. In other words: the typical family firm does not exist;
it is rather a case of family businesses with various degrees of family
involvement coexisting (Sharma, 2004).
Even if a review of the expanded literature shows that the value creation
process of family firms may be analyzed from different angles, all
perspectives converge for the key characteristics they attribute to these
businesses: a significant share ownership of one or a few families and the
related intention to maintain control, the intimate involvement of family
members in crucial decision-making processes, the existence of a formal
or implicit transgenerational vision of the business and an underlying
strategy that is clearly oriented towards continuous development and
aims to ensure ongoing sustainability (Shanker and Astrachan, 1996,
Chrisman et al., 2003, Sharma, 2004). Accordingly, the uniqueness
of family businesses lies not only in family ownership or managerial
implication of family members, but also in the specific family patterns
that are considered to have a significant impact on the various processes
of goal setting, strategy definition and policy implementation within
a company (Lansberg, 1983, Chua et al., 1999). In order to gain more
insight into these points, some researchers proposed to distinguish family
firms according to whether they are family-owned or family-managed
(Neubauer and Lank, 1998, Anderson and Reeb, 2003, Burkart et al.,
2003). Some studies also suggest a distinction between full or minority
control of family ownership (Neubauer and Lank, 1998, Sharma, 2004,
Villalonga and Amit, 2006, Ali et al., 2007).
While comparative empirical research broadly confirms the economic

prominence of family businesses (Faccio and Lang, 2002, Franks et al.,
2012), the disciplinary perspective with its two major approaches of
agency and stakeholder theories mostly struggles to provide a satisfactory
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explanation of the process of value creation in family firms, particularly

for those located in Continental Europe. These difficulties appear to be
mainly related to the use of a static perspective, putting the focus on
conflicts of interest between the family and major stakeholders as well
as their resolve to reduce inefficiencies. That said, studies rarely consider
the impact of agency conflicts inside the family or within its broader
environment. Diverging results between Anglo-Saxon and Continental
European family firms may also be caused by institutional factors as
the evolution of these businesses seems to be contingent on the level of
investor protection (La Porta et al., 1999, Franks et al., 2012).
Furthermore, and even more importantly, the disciplinary perspective

neglects the importance of cognitive contributions for value creation,
thereby ignoring crucial elements such as organizational knowledge
generation and the very nature of the decision-making process (Prahalad,
1994). Considering a firm from a static viewpoint orients the focus
primarily towards the reduction of inefficiencies for a given situation,
rather than concentrating on the development of comparative advantages
through the active involvement of all stakeholders to ensure ongoing
value creation and the long-term survival of the business (Langlois and
Robertson, 1995). Finally, from a sociological viewpoint, family systems
are determined by the underlying culture, which may also explain
performance differences between countries (Todd, 1999).
Governance systems in Continental Europe often incorporate a more

stakeholder-oriented focus that takes into account actively managed
partnerships and interdependencies between stakeholders who seek to
guarantee continuous value generation through specific knowledge and
unique competences. The cognitive dimension of long-term cooperation
between relevant actors is therefore one of the decisive elements of a
firm’s economic success, if not the main decisive factor, and should be
systematically included in explanatory frameworks about the value
creation process. Furthermore, these issues are not limited to Continental
Europe. Comparative research on international governance systems
reveals that East-Asian countries like South Korea or Japan show some
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similarities, because family firms in these regions also show elements such
as distinct stakeholder orientation or employee representation during
decision-making (Thomas III and Waring, 1999, Aguilera and Jackson,
2003, Denis and McConnell, 2003).
Putting knowledge-based elements in the forefront produces a different

definition of the firm. Whereas disciplinary approaches consider a
business as a nexus of contracts organizing the contribution of actors
to production, those subscribing to the cognitive perspective define the
firm as a repository of knowledge whose success depends on its capacity
to use and combine the thinking patterns of all stakeholders to ensure
ongoing value creation (Fransman, 1998). The firm therefore becomes an
open system, and its performance is determined by knowledge generation
amongst the actors involved. This point of view better represents
stakeholder governance in Continental European family firms and its
impact on variables like innovation (Carrasco-Hernandez and Jimenez-
Jimenez, 2013, Sanchez-Famoso et al., 2014, De Massis et al., 2015).
Discipline-based theories are widely applied for the analysis of family

governance. However, they overlook the involvement of cognitive
processes within the firm whilst taking a static view of monitoring aspects
and inefficiency reduction, which significantly limits their explanatory
power. The replacement of these theories by a cognitive explanatory
framework appears more promising. However, empirical studies have
demonstrated for several decades that monitoring-related variables also
provide decisive elements to understand governance questions. Instead
of simply replacing disciplinary models by a cognitive perspective that
has been used for decades in sociology and strategy, some researchers
therefore have attempted to combine elements from both approaches
in an integrated theory of corporate governance (Prahalad and Hamel,
1990, Kogut and Zander, 1992, Nonaka, 1994, Prahalad, 1994, Foss, 1996,
O’Sullivan, 2000, Charreaux, 2000, Coff, 2010). Accordingly, a firm’s
value creation process is considered to be simultaneously determined
by monitoring and knowledge-related issues. Given the economic
importance of family firms as the most widespread organizational form
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of business in the world, a combined model is promising because it more

successfully incorporates the underlying characteristics, particularities
and values of these businesses, paving the way to new possibilities for
a more comprehensive explanatory model about the process of value
creation in family firms.
In the empirical literature, some researchers have already applied an

integrated model for explaining other specific governance issues. For
France and Germany, Prinz (2011) analyzes corporate networks based
on board interlocks and demonstrates that board seat accumulation has
both positive and negative effects on firm performance. In a case study
about the French group Air Liquide, Wirtz (2006) points out that the
role of disciplinary and cognitive variables on the value creation of a
firm depends on its evolutionary level and the degree of environmental
uncertainty. Likewise, de Andrés-Alonso et al. (2010) demonstrate that
the organizational performance of Spanish foundations is simultaneously
affected by disciplinary and cognitive dimensions, thereby emphasizing
the interest of a combined model taking into account both monitoring-
related and cognitive variables.
In view of the additional explanatory potential of the value creation process

in a combined approach, this paper seeks to promote the discussion about
family governance by emphasizing the need for an integrated framework
on family firms in Continental Europe. The contribution of our paper
is twofold. In a first step, we propose an overview of how traditional
discipline-based governance frameworks, namely the agency theory and
the stakeholder theory, explain the process of value creation in family
businesses, paying special attention to empirical studies conducted in
Continental Europe. We identify the major strengths and weaknesses of
both approaches and underline the heterogeneity of the results provided
by existing empirical research about family firm performance. In a second
step, we offer a presentation of the underlying elements of an integrated
approach and then pinpoint the potential advantages of applying a
combined model comprising both disciplinary and cognitive influence
factors on family firms. We highlight some particularities of Continental
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European family firms which are not covered by classical theories and
which may be better understood if a wider perspective is used. Our findings
demonstrate the greater explanatory potential of a two-pillar perspective
for explaining the value creation process in family firms and contribute
to a better overall understanding of family governance. Additionally, this
paper supports the argument that a combined framework allows a more
accurate analysis of the rent generation process in family firms, thereby
facilitating more precise empirical research on these organizational forms
of business in the future.
The remainder of the paper is organized as follows: In section 2 we

synthesize the arguments put forward for the discipline-based framework
in relation to the value creation processes in family firms. We first examine
the agency approach and finish with the more general stakeholder vision.
In this chapter, we pay particular attention to the empirical results of
research conducted on the performance of Continental European family
businesses. Section 3 suggests to apply an integrated model of family firm
governance. Here, we propose the use of a model combining disciplinary
elements with arguments from knowledge-based theories to explain
the process of rent generation. We explicitly refer to the suitability of
a two-pillar model, which integrates both disciplinary and cognitive
arguments when seeking to explain the particularities of European firms.
This combination used with a dynamic rather than a static vision offers a
better understanding of the value creation process of family businesses in
general, and specifically in Continental Europe. Section 4 concludes and
pinpoints further possible research about family firm governance based
on a combined perspective.
1. FAMILY FIRMS IN A DISCIPLINE-BASED GOVERNANCE

PERSPECTIVE
To date, an overwhelming majority of the theoretic and empirical research

about governance has taken a disciplinary perspective, considering
the firm as a nexus of contracts tying cooperating economic actors
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together. Based on the efficiency paradigm, value creation is understood

as a process of efficient resource use that is considered to be mainly
determined by disciplinary variables. Consequently, researchers usually
focus on mechanisms that seek to stimulate rent generation through
greater discipline amongst related parties.
The disciplinary vision is characterized by two main approaches: the

predominantly used agency theory, and the broader stakeholder view.
We describe hereafter how each of these frameworks addresses the value
creation of family firms, then evaluate the empirical research conducted so
far, paying particular attention to Continental Europe. The contradictory
results and various theoretic weaknesses of both approaches support
recent calls for a wider perspective when considering the process of value
creation of family businesses.
1.1 Agency theory
Although most of the literature refers to Berle and Means (1932) as the
starting point of agency theory, the earliest traces of governance issues
and related efficiency problems can already be found in the seminal work
of Adam Smith (1776), who described the problems of delegated decision
power in the wake of capital opening during industrialization in the 18th
century. The contribution by Berle and Means (1932) was a systematic
analysis of the effects the industrialization process had on capital
structures in the US at the beginning of the 20th century. They argued that
the separation of ownership and control was responsible for transforming
stockholders into passive capital suppliers, resulting in a loss of influence
on decision that jeopardized their status as exclusive profit claimants. In
their article, the authors therefore pleaded in favor of redefining the firm’s
role, aiming to encompass all other stakeholders in the form of a new
stakeholder approach. Astonishingly, most of the literature nevertheless
considers their work as the starting point of shareholder value governance
and, more specifically, the positive principal agent theory.
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Jensen and Meckling (1976) and Fama (1980) carried out more in-depth
reflections about the efficiency effects of delegating decisional power
from shareholders to hired managers, and these studies marked the
beginning of modern positive agency theory. Conflicts of interest amid
diverging utility functions and information asymmetries are considered
to generate inefficiencies that incur agency costs, negatively affecting
cooperation advantages. As the model is based on the assumption that
the monitoring of managers makes it possible to realign their behavior
to reflect the interests of shareholders, numerous internal and external
control mechanisms have been developed. Initially, the board of directors
(Fama, 1980, Fama and Jensen, 1983), incentive compensation (Jensen
and Murphy, 1998), internal hierarchy and mutual surveillance among
executives were the most highly debated control mechanisms. External
mechanisms are primarily made up of the goods and services market
(Demsetz, 1983, Hart, 1983), the managerial labor market (Fama, 1980,
Fama and Jensen, 1983) and the corporate control market (Manne, 1965,
Jensen and Ruback, 1983, Scharfstein, 1988, Morck et al., 1989). As the
agency theory addresses the effectiveness of governance mechanisms and
their impact on monitoring efficiency, empirical research mostly deals
with the performance effects of the board of directors, and particularly
aspects such as outside and independent directors, CEO duality,
managerial turnover, multiple directorships, board size and meeting
frequency (for overviews see e.g. Walsh and Seward, 1990, Dalton et
al., 1998, 1999, Bhagat and Black, 1999, Dahya and McConnell, 2005,
Dahya et al., 2008, Duchin et al., 2010). Despite their overwhelming
number, these quantitative studies fail to provide homogenous results
about the impact board directors have on managerial supervision. This
is probably because the effectiveness of a board appears to be determined
by endogenous effects such as national governance characteristics or
numerous definitions of independence, rather than individual and
mechanical cause-effect relationships.
A closer look at agency theory reveals different and sometimes conflicting

explanations about the effects family firms have on value creation. This
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blurred picture seems to primarily result from the variety of governance

structures found in family companies, which include firms that are fully-
owned and run by family members, businesses that are owned by family
representatives but run by external managers, and firms that are run by the
founders or their descendants but controlled by external shareholders. The
process of value creation and the final outcome in terms of performance
may therefore vary substantially depending on which type of family
business is considered. For the first of the three types, theorists usually
emphasize an inherent convergence of interests. Concentrated ownership
and the combination of property and control functions are seen as a
means to reduce agency costs because monitoring becomes more efficient
and easier to accomplish for large shareholders like families (Jensen and
Meckling, 1976, Fama and Jensen, 1983). However, problems may appear
if there is dissent among family members or between representatives
of the family and other major shareholders. This argument also goes
against the fact that ownership structures seem to result from business
decisions rather than constraining them, thus illustrating their seemingly
endogenous role within governance systems (Demsetz, 1983, Demsetz
and Lehn, 1985).
The advantage of conflict mitigation in family managed businesses may

however be overcompensated by a lack of professional competence in
decision makers. This has led some authors to consider that family firms
run by externally hired directors while the family maintains the control
over the voting rights may constitute a better means to achieve efficient
monitoring (Anderson and Reeb, 2003, Burkart et al., 2003, Barth et al.,
2005). This seems to particularly be the case during transmission to the
firm’s heirs (Morck et al., 1988). However, family control in this situation
can lead to the expropriation of minority shareholders (Schleifer and
Vishny, 1986, Morck et al., 1988), putting the conflict between shareholders
and executives back on the table. That said, the extent to which a national
legal system protects firm owners against potential expropriation may
be a major factor influencing decisions to hire external managers or to
attribute business management to family members (La Porta et al., 1999,
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Burkart et al., 2003). Indeed, there is an ongoing debate about whether

conflicts between majority and minority shareholders are more severe in
family firms (Ali et al., 2007, Charlier and Lambert, 2013). It can however
be argued that family directors may have a better understanding of their
business, logically reducing information asymmetries (Ward, 2004, Miller
and Le Breton-Miller, 2005).
More recently, a new scenario has been developed by Neubauer and

Lank (1998), Sharma (2001, 2004), Villalonga and Amit (2006) and Ali
et al. (2007). These authors added a third category to family businesses:
firms that are still run by a family member without the family holding the
majority of the shares. Independently of the family firm types mentioned
earlier, altruism and clan control can mitigate but also intensify agency
problems (Eisenhardt, 1989, Sharma et al., 1997, Schulze et al., 2003a,
2003b, Karra et al., 2006). Agency relationships in family firms thus
appear to be at least as complex as they are in other organizational
structures (Schulze et al., 2001, Dalton et al., 2007).
A closer look at empirical studies in Europe confirms the ambiguous

picture of the effects of family firms when the agency perspective is used.
Whereas some authors demonstrate positive value creation effects (Maury,
2006 for Western Europe), others observe higher agency costs (Cronqvist
and Nilsson, 2003 for Sweden) or show that productivity advantages of
family-owned firms do not necessarily lead to higher profitability (Gorriz
and Fumas, 1996 for Spain). More recently, Pindado et al. (2014) found an
inverted U-shape relation between family ownership and corporate value,
indicating that positive disciplinary effects at low propriety levels turn
into expropriation risk when ownership exceeds half of the shares. For
France, Charreaux (1991) shows higher Tobin’s Qs for family businesses,
but no outperformance when accounting indicators are applied. Allouche
et al. (2008a) also find that family firms outperform and have better ratios
of liquidity and solvency. According to a German study conducted by
Kappes and Schmid (2013), family firms make decisions that tend to be
based on more long-term targets, leading to superior performance as
time-horizon related agency problems decrease.
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Originally developed to address the governance issues of large American

firms with highly dispersed capital, the assumptions of the agency
framework are apparently insufficient to explain the heterogeneity of
ownership concentration outside the US, and the importance of family
firms in Continental Europe (La Porta et al., 1999, Faccio and Lang,
2002, Claessens and Tzioumis, 2006, Laeven and Levine, 2008). However,
even in Anglo-Saxon systems, this approach faces difficulties as the
fraction of companies without dominating shareholders is constantly
diminishing (Holderness et al., 1999). Consequently, the results remain
mostly ambiguous and do not allow any clear conclusions to be drawn
about performance effects (for an overview, cf. O’Boyle Jr. et al., 2012).
Whereas some studies find US firms that are managed by family relatives
to be less productive (Wall, 1998, Barth et al., 2005), less profitable and
lower valued by the market than firms managed by external executives
(Holderness and Sheehan, 1988, Yermack, 1996, Shivdasani and Yermack,
1999, Pérez-González, 2006), others demonstrate superior performance
for family firms or firms with managerial implication of family members
and their relatives (McConaughy et al., 1998, Anderson and Reeb, 2003).
Some researchers observe both positive and negative effects on value
creation (Villalonga and Amit, 2006) or R&D investments (Block, 2012),
mainly depending on whether the firm’s founder or a descendent is
directly in charge of managerial decisions or not. Other authors do not
find any significant relation between family ownership and performance
(Slovin and Sushka, 1993, Demsetz and Villalonga, 2001) or demonstrate
that outperformance depends on the underlying definition of family firms
(Miller et al., 2007). The wide range of empirical results is also confirmed
when we examine family firms in other countries. Whereas some authors
identify positive value creation effects (Allouche et al., 2008b, for Japan),
others stress lower efficiency (Lauterbach and Vaninsky, 1999 for
Israel), or cannot find any significant relation between family firms and
performance, rather pointing to the decisive role of legal and regulatory
institutions (Jiang and Peng, 2011 for Asia).
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Even if monitoring issues dominate the literature, disciplinary measures

may be countered by manager-specific defense strategies. The agency
theory therefore also includes arguments related to the entrenchment
behavior of decision makers. As a manager seeks to maximize personal
utility, his primary motivation is to stay in the job – to entrench himself
– by appearing valuable and making his replacement as expensive, and
thereby as unlikely, as possible. Entrenchment can be based on numerous
measures such as beneficial contracts, favorable compensation, private
benefits, empire building, specific investments or diversification strategies.
Their impact mainly depends on the managers’ skills to keep their
discretionary space while foreclosing potential competitors (Manne, 1965,
Shleifer and Vishny, 1989, Walsh and Seward, 1990, Edlin and Stiglitz,
1995). Accordingly, the greater protection of managers is seen as a means
to enlarge their field of action, alleviate disciplinary pressure and lower
the likelihood of sanctions for opportunistic behavior. As incumbents use
greater latitude to maximize personal utility, shareholders are expected to
suffer from higher wealth extractions and private benefits, less responsible
decision-making, the rejection or deferment of acquisition proposals
and incoherent or misdirected investments. The final consequence is
that stockholders will be harmed by lower value creation (Grossman
and Hart, 1980, Easterbrook and Fischel, 1981, Shleifer and Vishny,
1989). While negative arguments seem to dominate the literature,
entrenched incumbents may under some circumstances also be beneficial
for stockholders, leading, for example, to higher value creation during
takeovers (Stein, 1988). Likewise, managerial entrenchment in the
form of longer tenures and additional board seats can stabilize a firm’s
relations with its external environment and does not necessarily harm
performance, thus making entrenchment a legitimate practice (Pichard-
Stamford, 2000).
Entrenchment behavior may also arise in family firms, particularly

when ownership and management are separated or when control rights
are dispersed among family representatives. The aim to keep family
control may therefore result in the emission of dual class shares or the
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creation of specific organizational structures like limited partnerships by

shares (Charlier, 2014). Moreover, and in contrast to managerial firms,
emotional aspects (discussed in more detail in the stewardship theory)
may cause substantial conflicts of interest among family members, an
adverse selection of external managers, delayed or obsolete investments
and self-serving behavior that all reduce or even fully neutralize
disciplinary governance measures (Morck et al., 1988, Gomez-Mejia et al.,
2001, Schulze et al., 2001). Instead of disappearing, agency problems may
therefore just take another form in family firms, although they still lead
to the expropriation of shareholders without any significant influence on
managerial decisions (Morck and Yeung, 2003).
Empirical analysis about entrenchment behavior in Continental Europe

is less abundant, but also shows mixed results. Gómez-Mejía et al. (2007)
find that family ties between principals and agents in Spanish family
firms are influenced by emotional rather than rational elements. Markets
answer by lower dismissal likelihoods, with abnormal positive returns if
a CEO leaves his position. Zellweger et al. (2007) observe lower earnings
variance for Swiss family firms, leading to stock market outperformance.
Charlier and Lambert (2013) find that some types of non-listed French
family firms have limited entrenchment risks and thereby perform better.
Externally appointed CEOs and family members without majority control
thus seem to encourage value creation more than other types of family
governance.
Outside Europe, studies are more numerous but continue to provide

mixed results. Some authors demonstrate the harmful effects of
aggregated entrenching provisions (Gompers et al., 2003, Bebchuk et
al., 2009), while others focus on individual aspects showing negative
impacts of entrenchment such as lower R&D activity (Meulbroek et
al., 1990), protective boards (Bebchuk and Cohen, 2005), lower returns
during takeover operations (Masulis et al., 2007), the greater likelihood
of private benefit extraction (Hartzell et al., 2004), a lower sensitivity
of CEO turnover and pay to firm performance (Faleye, 2007) or risk
avoidance during investment decisions (Bertrand and Mullainathan,
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2003, Atanassov, 2013), which all finally lead to lower value creation.
On the other hand, Bates et al. (2008) do not observe any significant
relationship between entrenchment based on board classification and
takeover performance. Although the domination of harmful shareholder
effects appears to prevail in existing literature, some authors nevertheless
find positive results. As Stulz (1988) highlights, entrenched managers
may generate higher acquisition premiums for target shareholders
during takeover negotiations. More recently, Zhao (2013) shows that
entrenchment based on managerial compensation can encourage value-
enhancing acquisitions.
Although the agency theory has apparently dominated governance

questions in industrialized countries for over 30 years, the framework
comprises several limitations that make it a less suitable tool for
explaining the value creation process of family firms. The weaknesses of
the theoretical framework can be summarized by three major points:
• the assumption of a privileged position of shareholders;
• the focus on governance mechanisms of widely held firms, and
• the limitation of agency issues on disciplinary elements.
The first point addresses the priority attributed to shareholders by the

agency theory. Unlike other stakeholders, equity owners are considered
to lack protection in the form of contracts that predetermine their risk-
related compensation, therefore being the sole residual claimants of the
firm. As the separation of ownership and control leads to decisional power
being handed over to externally hired executives, shareholders are thereby
exposed to the risk of spoliation and wealth extraction by opportunistic
managerial behavior. Agency theory therefore proposes incentive and
control mechanisms aiming to guarantee value creation for shareholders
by minimizing agency costs. In contrast to the importance of shareholders
stated by agency theory, equity issues only reflect 7.9% of all investments
made in the US between 1951 and 1996, compared to a level of 22.5% for
short- and long-term debt (Fama and French, 1999). In contrast to the high
weight of equity in capital structures (59.7%), stockholders’ implication in
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investment projects actually seems to be rather low. An extensive cross-

country analysis of Rajan and Zingales (2003) covering a period of almost
90 years confirms these findings. Moreover, as Charreaux and Desbrières
(2001) point out, shareholder primacy overlooks that equity owners are
not the only actors to be affected by managerial decisions within the firm.
Similarly, Cloninger (1995) argues that an exclusive focus on shareholder
value maximization can lead managers to apply practices that may harm
other stakeholders. Nonetheless, the roles of other stakeholders – even if
limited to the disciplinary level – are barely taken into consideration for
modeling agency relationships.
The second weakness of the agency perspective is the result of taking a

static and predefined view of widely held firms, then using this viewpoint
to conceive disciplinary and incentive measures designed to realign
managerial behavior on shareholders’ interests. Empirically, however,
the variety of ownership structures, even for defined levels of capital
dispersion, shows the weakness of this theory (Roe, 2002). Furthermore,
the systemic nature of corporate governance leads to varying relevance of
control mechanisms according to the prevailing context. In other words:
due to their substitutive and complementary nature, the monitoring
effectiveness of mechanisms can substantially differ from one firm to
another and between economic systems (Charreaux, 1991, Rediker and
Seth, 1995, Franks et al., 2001, Gillan and Starks, 2003, Rutherford et al.,
2007, Ward et al., 2009, Fan and Yu, 2010). As interactions of disciplinary
mechanisms appear to vary between organizational structures, overall
effectiveness of governance systems could therefore be achieved through
several means, as the principle of equifinality suggests (von Bertalanffy,
1969). Applied to family firms, several authors show evidence that
weaknesses of aspects such as higher agency costs resulting from interest
conflicts between dominating and minority stockholders or a lack
of professional experience and strategic planning can be adequately
compensated by the stronger efficiency of other aspects such as the
monitoring capacities of family actors, finally resulting in equal or even
lower overall agency costs and better value creation compared to non-
81
family firms (Chrisman et al., 2004, Villalonga and Amit, 2006, Ali et al.,
2007, Charlier and Du Boys, 2011). Even if the agency theory integrates
some of these aspects, its focus on managerial firms is not suitable to
provide a comprehensive explanation of governance issues in European
family businesses.
Finally, and most importantly, the unilateral orientation of the agency

framework on monitoring aspects attributes a purely discipline-related
and managerial latitude-based origin to the value creation process,
and fails to recognize the cognitive dimension of the organizational
rent generation process (Wirtz, 2006). However, research into strategy,
sociology and psychology considers cognition-related aspects like
knowledge and competence as decisive factors influencing value creation
(Prahalad and Hamel, 1990, Kogut and Zander, 1992). A look at the role
attributed by different explanatory frameworks to the most analyzed
governance instruments – the board of directors – clearly underlines the
importance of the perspective used to direct policy recommendations.
Whereas agency theory considers the board to be a decisional body whose
main role is to ensure the effective monitoring of managerial decisions,
researchers in strategy and sociology apply wider definitions and attribute
a dual role to the board, namely that of monitoring and providing the
management with strategic advice (Baysinger and Hoskisson, 1990, Cowen
and Osborne, 1993, Forbes and Milliken, 1999). As a consequence, the
board’s success is no longer limited to disciplinary aspects, but is first and
foremost determined by its capacity to mobilize the cognitive resources
of its members, namely the representatives of the owners or other
stakeholders, in a way that allows to jointly conceive the firm’s strategy
(Butler, 1981, Milliken and Vollrath, 1991, Charreaux, 2002). This gives
the board an active role instead of being a passive controlling instance
(Hendry and Kiel, 2004). Moreover, whereas relational aspects and
trust seem to be left aside by most agency-based studies, several authors
underline that these variables can alleviate or even neutralize observed
inefficiencies as they render agency relations more efficient, thereby
finally allowing to enhance value creation (Portales et al., 1998, Adams
82
and Ferreira, 2007, Migliore and DeClouette, 2011). The aforementioned

aspects appear to play a much more important role in family firms as both
agents and principals usually attach comparatively more value to variables
other than economic rationality, such as altruism (Karra et al., 2006),
trust (Corbetta and Salvato, 2004) or leadership (Miller et al., 2013). Nor
does the agency theory tackle particularities such as co-determination or
communication culture amongst stakeholders and the effect they have on
wealth creation; the classical framework fails to analyze how the cognitive
interaction of economic actors could affect the value generation process.
1.2 Stakeholder theory
While supporters of the stakeholder vision also present the firm as a

nexus of contracts, the priority status attributed to equity owners is
criticized. Considering the latter as the only residual claimants would
obstruct the view of other actors such as customers, suppliers, banks or
employees, thereby ignoring both their contributions to rent generation
and their cooperation synergies. Moreover, financing and strategic
questions are considered to be determined not only by the explicit
claims of fund providers, but also by the implicit expectations of non-
investing actors. Authors therefore plead for expanding the view to all
parties contributing to value creation (Freeman, 1983, Freeman and Reed,
1983, Cornell and Shapiro, 1987). Based on a widened property-rights
perspective, stakeholder theory states that the engagement of stakeholders
is determined by their participation in rent distribution (Grossman
and Hart, 1986, Hart and Moore, 1990, Garvey and Swan, 1994, Blair,
1999). In addition to the respect of formal claims, in which actors other
than stockholders, banks and bondholders play a minor role, a firm’s
management is therefore also responsible for showing non-investor
stakeholders that their implicit claims have been taken into consideration
in the form of promises about future supply, delivery or employment
(Cornell and Shapiro, 1987). As these claims are uncertain, stakeholder
engagement thus seems to be related to a firm’s information policy about
83
financial and strategic elements, and a disregard of these interests would

deprive the firm of resources and lead to lower wealth creation.
As the stakeholder model emphasizes the contributions of all actors,

the view of the firm changes, making it a nexus of specific investments
within which value creation appears as a result of the combination of
all stakeholders and the mobilization of their specific capital (Rajan and
Zingales, 1998, 2000, Zingales, 2000). Given this new angle, corporate
governance can be seen as a set of mechanisms seeking to assure
cooperation among stakeholders and encourage value creation by
respecting their legitimate interests and protecting their human capital
(Donaldson and Preston, 1995, Post et al., 2002, Freeman et al., 2007,
Harrison et al., 2010). The efficiency of a governance system therefore
depends on its capacity to reduce conflicts related to interaction and rent
distribution. In other words: “A stakeholder approach to business is about
creating as much value as possible for stakeholders, without resorting to
trade-offs” (Freeman et al., 2010, 28). Although the efficiency paradigm
remains the underlying model, the fundamental driver is the firm’s
specific management of the bundle of relationships rather than a unilateral
focus on shareholder value. Henceforth, ties between stakeholders are no
longer seen as simply independent and basically transactional, but are
rather viewed as relational links due to the role they play within an entire
network structure. In other terms, the central interest of the analysis
becomes the strategic nature of managing interaction with by developing
and setting up policies that proactively integrate their interests (Post et al.,
2002).
Widening our view to encompass all value-contributing actors and using

an implicit modeling of their interaction synergies also changes the initially
negative interpretation of agency aspects. Managerial entrenchment, for
example, can now be defined as a decision seeking to maintain specific
investments and to encourage the engagement of actors by protecting
their interests (Garvey and Swan, 1994, Charreaux, 1996, Charreaux
and Desbrières, 2001). On the other hand, setting up excessive discipline
measures may reduce a manager’s willingness to make non-contractual
84
investments and thereby thwart positive initiatives, leading to a decrease

in overall value creation (Burkart et al., 1997). Likewise, takeover defenses
may encourage stakeholders to realize specific investments whereas threats
of takeovers and the anticipation of consequent wealth transfer to equity
owners and the associated fear of reduced stakeholder compensation may
scare away shareholders and even lead to tightened financing constraints
(Chemla, 2005).
With the focus set on all rent-contributing actors, the integration of

both legal claims and more informal elements like social ties or networks
relating a firm’s partners, stakeholder theory seems more suitable than
the agency model for explaining governance issues of family businesses
(Sharma, 2004). Family firms can thus be considered as specific
organizational structures that have an additional stakeholder who is
involved in almost all parts of the business: the family (Chua et al., 1999,
Zellweger and Nason, 2008). As family representatives consider their
business as part and parcel of their personal life, they assure numerous
roles and show stronger commitment to their firms, which are more likely
to apply a policy striving to satisfy all stakeholders (Dyer and Whetten,
2006, Gómez-Mejía et al., 2007. In other words: as family representatives
not only contribute to financial capital, but also bring high levels of human
and social capital, their firms build more long-term relationships with their
stakeholders and have longer time horizon patterns in their management
(Zellweger, 2007, Zellweger and Nason, 2008). Long-term orientation is
also encouraged through ownership structures based on patient capital,
exposing these businesses to lower short-term pressure than non-family
firms (Ward and Aronoff, 1991). In addition, both emotional (affectio
societatis) and symbolic capital (affectio familiae) in family firms have
strong effects on internal decision making and seemingly lead to greater
stakeholder orientation (Blondel and Dumas, 2008, Cennamo et al., 2012).
It is interesting to note here that family businesses gain from better social
embeddedness and seem to have higher levels of social capital through
a more transgenerational orientation than that observed in non-family
firms (Tagiuri and Davis, 1996, Sirmon and Hitt, 2003). Consequently,
85
solid stakeholder relations appear to result in better economic stability in

the form of lower employee turnover, stronger robustness of the business,
lower earnings volatility or more advantageous financing conditions.
Following the stakeholder model, a management that respects the

interests of all legitimate actors and exploits these interests in such
a way as to encourage specific investments by protecting the firm’s
human capital should logically strengthen the company’s performance
(Freeman, 1983, Freeman et al., 2007). While this general idea is widely
accepted, there is still great debate concerning the choice of indicators to
measure stakeholder value (Harrison and Wicks, 2013). As managerial
decision making is easier to set up and control by measurable indicators,
most authors merely consider the economic nature of created value,
using financial indicators as independent variables to test and explain
the effects of a stakeholder-oriented corporate policy. However, even
when limited to financial indicators, only a handful of authors propose
applicable measures of stakeholder value whereas most use shareholder
value measurements or other agency proxies to studying the efficiency of
governance mechanisms (Charreaux and Desbrières, 2001, Charreaux,
2007, Carlon and Downs, 2014).
Other than the methodological problem, the exclusive mobilization of

financial indicators can also be misleading. This type of focus ignores
the fact that stakeholders may also be interested in more than a purely
economic participation in the rent created (Bosse et al., 2009, Harrison
et al., 2010). In the case of family firms, their aims may also comprise
control and power, reputation or socioemotional awards in the form of
pride, harmony, cohesion or transgenerational success (Cennamo et al.,
2012; Chrisman et al., 2004; Ward, 1997; Zellweger and Nason, 2008).
This brings us to another difficulty: as stakeholders may have different
ideas about the type of performance they are looking for, an explanatory
framework that seeks to quantify the performance of stakeholder must
integrate the systemic determinants of performance. This point seems
particularly important for the analysis of family firms whose performance
objectives may substantially differ from those of non-family businesses.
86
To the best of our knowledge, despite the high proportion of family firms
in Continental Europe, only one empirical study directly analyzes the
effects of stakeholder orientation on value creation. Bloch et al. (2012)
demonstrate evidence that family firms in France benefit from frugality
and a lack of short-term pressure, thus avoiding layoffs in times of crisis,
strengthening implicit social contracts, creating staff loyalty and retaining
skills within the company, making the family firm more resilient.
Empirical studies outside Europe broadly confirm the hypothesis of a link

between the explicit respect of stakeholder interests and performance, but
these studies are usually limited to indirect indicators that focus on one
specific, and often financial, variable. Results demonstrate evidence that
non-financial stakeholders, such as employees or suppliers, determine a
firm’s capital structure by influencing the bargaining powers of equity
owners (Sarig, 1998, Istaitieh and Rodríguez-Fernández, 2006), thus
leading to lower overall debt levels in firms where these actors realize
specific investments (Titman, 1984, Barton et al., 1989, Kale and Shahrur,
2008). Likewise, influential non-investor stakeholders seem to attenuate
tendencies for a privileged shareholder value orientation, as firms that
apply this strategy register lower dividend payout ratios than others
(Holder et al., 1998). On the other hand, management that is explicitly
oriented towards “primary” stakeholders like employees, customers and
suppliers can be compatible with the interests of owners as this also leads
to better shareholder value creation (Hillman and Keim, 2001). In their
analysis of several corporate social performance measures, Bingham et al.
(2011) indicate a stronger orientation of family firms towards corporate
social responsibility behavior than non-family companies.
Even if the stakeholder perspective offers greater insight into

organizational rent generation and its distribution among all stakeholders,
at least three weaknesses should be put forward:
• its static explanatory focus limited on conflict resolution among
stakeholders while failing to describe the nature of the value creation
process itself;
87
• a disregard of knowledge-based aspects and their relevance for both

organizational rent generation and long-term survival;
• a lack of research proposing applicable solutions for managing the day-
to-day business trade-offs among stakeholders.
Similar to the criticism of the agency framework, the stakeholder

theory’s main downfall is its mostly static perspective, as the model aims
to limit observed inefficiencies for a given situation. As the underlying
assumptions are mainly disciplinary, authors therefore usually define
stakeholder governance as a set of mechanisms seeking to determine
rent distribution and conflicts between stakeholders, but do not model
the process of value creation itself (Charreaux, 2008). As stakeholder
theory explicitly points out the importance of cooperation between the
firm’s actors and their potential long-term advantages, it is surprising
that existing relational aspects between them are only addressed in so
far as their impact on discipline is concerned. Likewise, the widened
theoretic perspective on all relevant economic actors also changes
the role of managers who then become responsible for protecting the
stakeholders’ interests and individual skills. While the stakeholder theory
makes it possible to broaden a management’s disciplinary responsibilities
using a strategic dimension, the topic itself remains, for the most part,
surprisingly unexplored.
As a consequence of these elements, the explanations of the framework

concerning the process of rent generation are generally static and neglect
the importance of knowledge-based aspects for highlighting potential
gains of cooperation among a company’s actors. Advantages are clearly
related to dynamic knowledge generation and the transfer of competences
that contribute to guaranteeing the survival of the firm in the long run.
However, as Charreaux (2008) points out, knowledge aspects can already
be found in Demsetz’ theory of the specialized firm (1988a), which
considers the acquisition and the use of organizational knowledge,
amongst other things, as key factors for value creation. While cognitive
and strategic aspects thus clearly gain in importance within such a
vision, stakeholder theory barely touches on these elements to explain
88
the process of value creation itself. Yet stability and closer relationships
within family firms make these elements even more likely to appear in
such organizational structures. Jirjahn et al. (2011), for instance, analyzed
the dynamic consequences of organizational learning in the context of
codetermination and found performance-enhancing long-term effects
due to better cooperation between the management and employee
representatives in work councils.
Finally, research mostly fails to propose practical solutions for the

management of conflict-related trade-offs between a firm’s stakeholders,
as there is still no consensus to develop all-matching indicators of value
creation. Furthermore, theory mostly remains normative and highlights
that the management should deal as well as they can with its stakeholders,
without explicitly detailing how these decisions should be made. This
makes the approach barely applicable in reality as tools for handling
conflicts and orienting management about stakeholder value – like in
the agency theory – are very rarely proposed. However, as Sharma et al.
(1997) and Berman et al. (1999) show, research about strategic stakeholder
management already proposes suitable solutions, particularly for family
firms.
As seen in this section, the discipline-based perspective with its two

major representatives, the agency and stakeholder theory, experiences
substantial difficulties to satisfactorily explain governance issues in family
firms. Due to its unilateral focus on monitoring, the relevance of cognitive
variables for value creation is usually ignored or is merely mentioned
without being explicitly modeled. However, knowledge-based aspects
appear to have particular importance in Continental European family
firms, which are characterized by close and long-lasting relationships with
stakeholders such as banks, employees or suppliers. Empirical studies from
a disciplinary viewpoint therefore have difficulties explaining the process
of value creation in family businesses, which are reflected by the absence
of clear-cut results about the effects of these firms on performance.
89
Given these points, a widened perspective of governance that includes

cognitive elements within a dynamic perspective may be more suitable
to explain the dynamic character of knowledge creation and cooperation
among stakeholders, and thus gain more insight into governance
processes. In the next section, we therefore propose to apply an integrated
perspective of corporate governance on family firms. The advantage
of a combined model lies in maintaining the explanatory strength
of monitoring mechanisms and complementing this with the use of
cognitive variables. It is not therefore a radically new model as such, but
is an approach combining two preexisting angles that have been used
mostly separately so far.
2. VALUE CREATION BY FAMILY FIRMS IN A COMBINED FRAMEWORK

OF CORPORATE GOVERNANCE
In the wake of globalization and changes of organizational structures, the

disciplinary view has obvious difficulties to provide satisfactory answers
about governance issues like the value creation process in family firms.
In order to overcome these weaknesses, substantial efforts have been
made to integrate monitoring-related arguments through the use of a
broader perspective. The new perspective is based on studies conducted
in evolutionary economics, strategy and psychology by authors who
emphasize the decisive role of human capital and organizational learning
for the rent generation process (see mainly Prahalad and Hamel, 1990,
Kogut and Zander, 1992, Nonaka, 1994, Prahalad, 1994, Foss, 1996,
O’Sullivan, 2000, Charreaux, 2000, Aoki, 2001, Charreaux, 2005, Coff,
2010). Following the cognitive approach, a firm’s actors have access to
an individual portfolio of knowledge, skills, motivations and values that
determines the way they perceive situations, process information and
conceive strategies for resolving specific problems (Wiersema and Bantel,
1992, Treichler, 1995). The cognitive dimension appears particularly
promising for the analysis of decision-making processes within teams like
the board of directors (Watson et al., 1993, Goodstein et al., 1994).
90
The inclusion of a cognitive dimension dramatically modifies the

definition of the firm, presenting it as a repertory of knowledge whose
success depends on the ability of related actors to collectively exploit it
for value creation rather than a bundle of contracts designed to reduce
conflict-related inefficiencies (Teece et al., 1994, Fransman, 1998,
Nahapiet and Ghoshal, 1998, Tsai and Ghoshal, 1998, Teece, 2004).
Based on frameworks like behavioral theory (Simon, 1947, Cyert and
March, 1963), evolutionary theory (Nelson and Winter, 1982) and the
resource-based view (Penrose, 1959), the cooperation of stakeholders
is considered to stimulate the creation of knowledge and competences
through organizational learning (Foss, 1996). This new definition
is not incompatible with the contractual angle – it has already been
demonstrated by Alchian and Demsetz (1972) and later Demsetz (1988b),
who all consider the firm as a repository of specific knowledge used for
managing economic relations and analyzing strategy. However, most
research applying a contractual view surprisingly continues to limit their
view of value creation to purely disciplinary elements.
The widened definition of the firm means that the missions included will
also change and include not only the consideration of legitimate interests
of related actors, which is already present in the stakeholder model, but
also an impetus to encourage cooperation, development of skills and
creation of innovation through continuous organizational learning
in all stakeholders (Prahalad, 1994). The initially static perspective
thus becomes dynamic, as value creation should be determined by the
availability of knowledge and its mobilization during interaction rather
than by discipline-oriented measures that seek to minimize inefficiencies
for a given situation. The ongoing evolution of stakeholders’ cognitive
skills forces a firm’s management to be proactive rather than simply
reacting to situations as they arise. Accordingly, performance depends on
the ability of decision makers to organize cooperation in such a way as to
stimulate knowledge creation (Prahalad, 1994, Lazonick and O’Sullivan,
1998).
91
Following theory, an organization’s rent creation, particularly in industries

where innovation and skills are crucial, depends on the availability of
knowledge, its exploitation and its transformation into comparative
advantages. Firms should therefore strive to mobilize cognitive
resources in order to stimulate knowledge generation. That being said,
diversification of mental schemes does not automatically guarantee
better performance. Literature remains rather neutral on this point,
arguing that knowledge asymmetries exist between interacting partners.
The asymmetries linked to differences in the perception of information
and its consequent transformation into competences by the different
actors may incur significant costs for an organization. Commonly called
cognitive costs, they are classified in three types: costs of mentoring, costs
of conviction and residual costs (Charreaux, 2002, Wirtz, 2006). Costs of
mentoring relate to the acquisition of competences by decision-makers,
considered necessary to ensure interaction with other stakeholders.
Conviction costs reflect the efforts to be made by decision makers to
convince other stakeholders about the core value of projects. Such
efforts may be in the form of meetings, committees and consultations,
and seek to bring together cognitive structures of interacting partners
and those of decision makers. Finally, residual costs are the remaining
misunderstandings between decision-makers and cooperating actors that
cannot be surpassed. If a firm seeks to increase rent generation, it should
therefore reduce its cognitive costs. Cognitive conflicts, however, are not
necessarily value-destructive but can also be considered as a starting point
for organizational learning that nurtures dynamic and innovative strategic
adaptability. Resolving cognitive conflicts thus involves reconciling
the mental patterns of all involved actors, for instance in the form of
coordinated action by decision makers to convince other stakeholders
about the intrinsic value of future projects and processes.
Studying an organization from a cognitive perspective significantly changes

the role attributed to key governance mechanisms. The mission of the
board of directors, for instance, becomes primarily strategic and consists
of advising managers, thereby helping them to define the firm’s strategy
92
(see mainly Baysinger and Hoskisson, 1990the board is a potentially

important instrument of internal control. This article develops theory and
propositions concerning (Finkelstein and Hambrick, 1996, Davies, 1999,
Conger et al., 2001, Hendry and Kiel, 2004, Dalton and Dalton, 2005). As
either internal executives or representatives of major stakeholders, board
directors usually have reliable knowledge of organizational processes,
industries, markets and products and may therefore be valuable sources
of strategic advice for managers. Their access to resources and networks
may also be advantageous for the firm. Moreover, board members can
prevent errors related to behavioral biases by actively participating in the
decision-making process rather than remaining passive rubber stamp
agents. While cognitive and behavioral aspects gain in importance, the
disciplinary issues associated with preventing opportunistic behavior
disappear. The changing perspective also provides greater coherence with
a stakeholder-oriented view, as the provision of strategic advice by the
board of directors is more likely to safeguard the interests of stakeholders.
Even if cognitive arguments appear to be new, the board has always had
a strategic role, as discussed half a century ago by authors like Backer
(1945), Copeland and Towl (1948) and Drucker (1954).
More generally, cognitive theories consider governance mechanisms as

cognitive levers stimulating cooperation and knowledge creation among
interacting stakeholders, helping decision makers to set up strategies
that ensure the long-term survival of the organization (Charreaux, 2008,
Wirtz, 2011). Within such a perspective, elements that were negatively
viewed from a disciplinary angle may now become positive and can be
a stimulation factor for rent creation. Larger boards, for instance, may
also provide a source of knowledge and competences that can enrich
exchanges and thus help to define a more appropriate firm strategy.
CEO duality may facilitate the transfer of knowledge and competences
between executive and monitoring instances, and thereby contribute
to performance through improved decision-making. In addition, the
presence of key stakeholders on the board can foster the transmission of
specific competences and thereby help to strengthen the firm’s position in
93
the market. Similar reasoning can be applied for knowledge generation in

specialized board subcommittees.
In the wake of renewed research interest in the cognitive dimension of

corporate governance, some authors focus on non-economic indicators
such as socioemotional capital in order to gain a better understanding
of how family firms are run (Gómez-Mejía et al., 2007, Zellweger and
Astrachan, 2008, Berrone et al., 2010). Familiness is a unique bundle
of specific resources including a high involvement of the family and
its individual members as well as their interaction with the business,
and as such should influence the firm’s decision-making process and
thereby drive the generation of comparative advantages (Habbershon
and Williams, 1999). In other words, the emotional binding of family
members towards their business and their individual cooperation
methods can be seen as a lever which may stimulate the development of
specific advantages that impact performance outcomes. Values, beliefs,
experience and culture influence the cognitive structures of a person, and
therefore affect their perception of issues. The analysis of these aspects to
develop concrete solutions and the inclusion of the concept of familiness
in a cognitive perspective of family firm governance therefore seems
promising. Accordingly, specific aspects like the transfer of knowledge
and skills during the succession process in family firms can be analyzed
from a cognitive dimension (Cabrera-Suárez et al., 2001, Steier, 2001). The
socioemotional capital of family representatives has an impact on their
relationships and interactions with other stakeholders of the firm, and is
therefore seen as a stimulating lever for the development of organizational
social capital in order to build competitive advantages (Arrègle et al.,
2007). In addition, family firms seem to have different attitudes towards
product innovation strategies and the practical set-up of the innovation
process in the firm, which may affect performance outcome (De Massis et
al., 2015).
As for the disciplinary view, the argumentation about the process of value
creation in family firms is contingent on the governance form considered.
In other words: the effects on performance depend on whether the
94
business is controlled and run by family representatives, owned by the

founders and their descendants but managed by an external executive
or run by family members while remaining under external control.
Consequently, argumentation about performance effects can be variable
and even conflictive. On the one hand, the lower variance of cognitive
structures in firms owned and actively run by family members reduces
the likelihood of cognitive conflicts and can thus stimulate performance.
The emotional binding of these actors to their business should lower the
likelihood of conflicts based on the perception of the firm, its current
economic situation and the definition of its long-term strategy. On the
other hand, family firms characterized by a combination of ownership
and control functions are more likely to show conformity of mental
patterns, hindering the possibility of a wider range of problem solution
proposals for governance issues. In the second scenario, hiring an external
manager by keeping family control can lead to substantial cognitive
conflicts if the manager does not perceive situations and problems in the
same way as the family or, even if he does so, applies solutions that the
family considers inappropriate. However, the combination of different
cognitive characteristics may also stimulate internal debate and induce
problem-solution thinking, thus stimulating firm performance. In the
third scenario, where family members run a firm without having control
over it, shareholders with different perceptions of the business may
put pressure on family managers to change strategy in order to boost
performance, but at the price of shutting down activities to which family
members are particularly attached.
Even though cognitive elements have gained in importance, the number of

empirical studies in Corporate Governance retaining this vision remains
far behind those applying a disciplinary slant. Consistent with theory,
existing empirical literature in Continental Europe broadly confirms the
importance of cognitive elements such as social and emotional capital.
In their study on Spanish family businesses, Carrasco-Hernandez and
Jimenez-Jimenez (2013) show a positive relationship between social
capital and product innovation as a consequence of interaction between
95
employees, but also emphasize the role played by moderating effects

of family characteristics such as culture and experience. Still for Spain,
Sanchez-Famoso et al. (2014) demonstrate that the social capital of both
family and non-family representatives stimulates innovation.
Outside Europe and consistent with arguments on a lower variety of

mental schemes in family firms, Gomez-Mejia et al. (2010) demonstrate in
a study on American companies that family firms seem to be characterized
by a lower likelihood of diversifying their business compared to non-
family firms, suggesting a higher aversion to related business risks and
induced losses of socioemotional wealth.
Given the characteristics of both the disciplinary and cognitive

perspectives presented so far, the idea of an integrated model for
corporate governance which combines disciplinary and cognitive
arguments seems promising, as it offers the possibility to integrate the
strengths of each approach within an widened view of the organization
while surpassing their individual weaknesses (Hodgson, 1998). From
a discipline-based perspective, using an integrated model allows to add
variables reflecting socioemotional wealth, knowledge creation and the
generation of innovation. This contributes to the consideration of value
creation as a dynamic process, permitting the development of comparative
advantages that help ensure the long-term survival of the firm (Langlois
and Robertson, 1995). From a cognitive perspective, the inclusion of
traditional disciplinary settings related to monitoring helps to fine-tune
the analysis of key impact factors in organizational knowledge creation. In
addition, the inclusion of contractual boundaries in firms and efficiency-
related arguments maintains the underlying idea that the value creation
process is essentially based on efficiency contemplation.
There are several examples showing the advantage of an integrated model

in governance literature. For France and Germany, Prinz (2011) analyzes
corporate networks based on board interlocks and demonstrates through
a two-pillar model that board seat accumulation has both positive and
negative effects on firm performance. In a case study about the French
96
chemical group Air Liquide, Wirtz (2006) points out that the role of
disciplinary and cognitive variables on value creation by a firm depends
on its evolutionary level and the degree of environmental uncertainty.
Likewise, de Andrés-Alonso et al. (2010) demonstrate that organizational
performance in Spanish foundations is simultaneously affected by
disciplinary and cognitive dimensions, thereby emphasizing the interest
of a combined model.
The creation of a broader perspective that integrates both the disciplinary

and the cognitive perspective leads to a changing view of the process of
value creation in family firms. This new slant on family businesses shows
them to be specific repositories of knowledge whose rent generation
process is jointly determined by monitoring-related and knowledge-
based interaction between the family, its relatives and all stakeholders.
Furthermore, the proposed distinction according to which a family
firm can be owned and run by family members, owned by the latter but
managed through an executive or led by the family whilst remaining
under external control, can be maintained in an integrated model. The
model also provides a better understanding of family governance issues
in Continental Europe. A stronger focus on stakeholder interests and
close cooperation between them – whether or not this is institutionalized
in the form of co-determination or based on firm-specific long-lasting
and environmentally anchored ties with suppliers or customers – can be
interpreted as a means to lower the variance of mental patterns between
decision makers and various stakeholders. Cognitive conflicts should
therefore be less likely, stimulating organizational development in the
long run. Likewise, the dominating home bank model has resulted in
the (albeit decreasing) tradition of bank representation on the board of
directors in numerous German, Austrian and Swiss firms, contributing
to less cognitive conflicts and thus stimulating long-term value creation.
Furthermore, the resulting lower residual cognitive cost of companies can
favor innovation and thereby become a source of competitive advantage,
especially in times of economic crisis.
97
While the generation of specific knowledge and competences through the

interaction of stakeholders does not constitute the main characteristic of
family businesses in Continental Europe, shareholder interaction appears
to be shaped by disciplinary aspects such as the concentration of ownership
in the hands of few shareholders with long-term investment horizons, or
a lower likelihood of opportunistic managerial behavior. Furthermore,
a culturally anchored behavior oriented towards cooperation between
stakeholders is expected to stimulate communication and mutual
organizational learning, generating advantages for all related partners.
As the company benefits from the continuous acquisition of knowledge
about its stakeholders’ individual requirements, it also develops routines
and skills related to interaction, thus reducing cognitive conflicts.
3. DISCUSSION AND CONCLUSION
Family businesses are by far the most frequent form of economic activity
across the globe. Although their high number has been confirmed for
Continental Europe, empirical literature to date is unable to offer a clear
description about the value creation process in these businesses, which
substantially hampers the understanding of family firm governance.
Paradoxical as it may sound, the process of value generation in family
firms thus still appears to be a black or at best a dark gray box. The wide
heterogeneity among empirical results cannot simply be explained by
a lack of consensus about the definition of a family firm: it also seems
to be due to the use of theoretic frameworks that struggle to provide a
satisfactory explanation of how family firms create value, particularly
those located in Continental Europe.
The objective of this article was twofold. In a first step, we presented a

literature overview of how traditional discipline-based governance
frameworks, namely the agency theory and the stakeholder theory,
explain the process of value creation in family businesses, paying
particular attention to empirical studies carried out in Continental
Europe. We demonstrated that the disciplinary perspective – whilst
98
broadly dominating research into corporate governance – suffers from

a static view that focuses on inefficiency reduction through monitoring
while neglecting the cognitive dimension of the rent generation process,
significantly limiting its explanatory power. Yet these elements appear
to be crucial elements in the development of organizational knowledge,
specific skills and competitive advantages in firms that apply a stakeholder
vision of the business, which is the case in numerous Continental
European firms.
Given the difficulties of the disciplinary vision, we emphasized, in a

second step, the potential advantages of a combined framework of
governance that is simultaneously based on monitoring-related and
cognitive arguments to provide a more precise explanation of the value
creation process in family firms. We presented an overview of strategy and
psychology research into the knowledge creation process and highlighted
its usefulness when seeking to understand how value is generated in
family businesses. Within this combined perspective, organizational rent
generation becomes dynamic and depends mainly on the mental patterns
of a firm’s stakeholders rather than disciplinary variables alone. This
reveals innovation and knowledge generation as decisive aspects, whereas
monitoring aspects are maintained as additional influence factors. The
combination of two major perspectives creates a two-pillar framework that
provides a clearer explanation of the creation of long-term comparative
advantages and the practice of intensive exchange between stakeholders,
which appear to be frequent in Continental European family firms.
As existing literature on other governance issues has shown, a combined

framework based on disciplinary and cognitive arguments provides
a more accurate tool for the analysis of the process of value creation.
The empirical application of the integrated framework on family firms
therefore appears promising and should contribute to a better overall
understanding of family governance. Our paper provides a first proposal
for the more detailed study of how value creation occurs in family firms,
but further research is necessary to pinpoint key factors determining the
99
cognitive performance of family businesses and investigate how these

elements can be measured within empirical models. 
100
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The need for an integrated governance framework to better understand

the value creation process in family firms: a Continental European perspective

THE NEED FOR AN INTEGRATED GOVERNANCE

Patrice Charlier & Enrico Prinz

The increasing interest in value creation by family businesses is reflected

While there seems to be no doubt about the fundamental role that

Maury, 2006, Allouche et al., 2008), better accounting ratios (Allouche

This widely heterogeneous array of empirical studies analyzing the

and Cowling, 1998, Astrachan and Shanker, 2003), explanations seeking

While comparative empirical research broadly confirms the economic

explanation of the process of value creation in family firms, particularly

Furthermore, and even more importantly, the disciplinary perspective

Governance systems in Continental Europe often incorporate a more

Putting knowledge-based elements in the forefront produces a different

Discipline-based theories are widely applied for the analysis of family

of business in the world, a combined model is promising because it more

In the empirical literature, some researchers have already applied an

In view of the additional explanatory potential of the value creation process

The remainder of the paper is organized as follows: In section 2 we

1. FAMILY FIRMS IN A DISCIPLINE-BASED GOVERNANCE

To date, an overwhelming majority of the theoretic and empirical research

together. Based on the efficiency paradigm, value creation is understood

The disciplinary vision is characterized by two main approaches: the

1.1 Agency theory

A closer look at agency theory reveals different and sometimes conflicting

blurred picture seems to primarily result from the variety of governance

The advantage of conflict mitigation in family managed businesses may

Burkart et al., 2003). Indeed, there is an ongoing debate about whether

More recently, a new scenario has been developed by Neubauer and

A closer look at empirical studies in Europe confirms the ambiguous

Originally developed to address the governance issues of large American

Even if monitoring issues dominate the literature, disciplinary measures

Entrenchment behavior may also arise in family firms, particularly

creation of specific organizational structures like limited partnerships by

Empirical analysis about entrenchment behavior in Continental Europe

Outside Europe, studies are more numerous but continue to provide

Although the agency theory has apparently dominated governance

The first point addresses the priority attributed to shareholders by the

investment projects actually seems to be rather low. An extensive cross-

The second weakness of the agency perspective is the result of taking a

Finally, and most importantly, the unilateral orientation of the agency

and Ferreira, 2007, Migliore and DeClouette, 2011). The aforementioned

1.2 Stakeholder theory

While supporters of the stakeholder vision also present the firm as a

financial and strategic elements, and a disregard of these interests would

As the stakeholder model emphasizes the contributions of all actors,

Widening our view to encompass all value-contributing actors and using

investments and thereby thwart positive initiatives, leading to a decrease

With the focus set on all rent-contributing actors, the integration of

solid stakeholder relations appear to result in better economic stability in

Following the stakeholder model, a management that respects the

Other than the methodological problem, the exclusive mobilization of

Empirical studies outside Europe broadly confirm the hypothesis of a link

Even if the stakeholder perspective offers greater insight into

• a disregard of knowledge-based aspects and their relevance for both

Similar to the criticism of the agency framework, the stakeholder

As a consequence of these elements, the explanations of the framework

Finally, research mostly fails to propose practical solutions for the

As seen in this section, the discipline-based perspective with its two

Given these points, a widened perspective of governance that includes