Governance Systems in Family SMEs: The Substitution Effects between Family Councils and Corporate Governance Mechanisms

Abstract

The main objective of this paper is to explore the role of family councils vis‐à‐vis corporate governance mechanisms. Particularly, the paper explores whether family councils perform only their distinctive family governance role or if they also substitute for the roles performed by corporate governance control mechanisms. Based on a sample of 243 talian family s, our research findings show that the family council partially substitutes the shareholders' meeting and the board of directors in playing their respective corporate governance roles of ownership and monitoring. These findings are interpreted in the light of both agency and relational perspectives.

Notes

1. For completeness's sake, we also measured the family governance role, that is, how the family council covers its governance role. Two items were related to this variable based on family governance tasks: Q10 on designing and managing family–firm relationships and Q11 on planning generation transition (Carlock and Ward 2001; Gallo and Kenyon 2004; Lansberg 1999; Mustakallio and Autio 2001). The variable was calculated as follows: mean of Q10's and Q11's performed tasks = (Q10 + Q11)/2 (α = 0.91). In addition, we measured how each of the three corporate governance roles and the family governance role were covered by all the other, noncorresponding mechanisms (for example the monitoring role by shareholders' meetings and the CEO). Actually, multiple responses were allowed, so that the same task could be attributed to different governance mechanisms. In other words, each respondent was asked each of the eleven questions (Q1–Q11) four times, that is, once for each of the four family and corporate governance mechanisms considered (family council, shareholders' meeting, BOD, and CEO).

2. We also proceeded to test the CFA. No signs of problems (for example nonconvergence, nonpositive definite matrices, unreasonable standard errors, and so on) emerged. The model is empirically identified as shown by a converged solution, by the absence of any out‐of‐bounds or unexpected parameter estimates and by the absence of any warning or error messages.

Additional information

Notes on contributors

Luca Gnan

Luca Gnan is Professor of Organizational Behaviour at Department of Economics and Finance, Tor Vergata University of Rome.

Daniela Montemerlo

^*Daniela Montemerlo is Professor of General Management and Management and Governance of Family Firms at the University of Insubria, and Professor of Strategy and Family Business at SDA Bocconi School of Management.

Morten Huse

^*Morten Huse is Reinhard‐Mohn‐Chair of Management and Governance at the University of Witten/Herdecke, and Professor of Organisation and Management at BI Norwegian Business School.