Journal of Business Research 60 (2007) 1030 – 1038

Are family managers agents or stewards? An exploratory study

in privately held family firms
James J. Chrisman a,c,⁎, Jess H. Chua b,1 , Franz W. Kellermanns a,2 , Erick P.C. Chang d,3
a
Mississippi State University, Mississippi State, MS 39762-9581, United States
b
Haskayne School of Business, University of Calgary, 2500 University Drive NW, Calgary, Alberta, Canada T2N 1N4
c
Centre for Entrepreneurship and Family Enterprise, University of Alberta, Edmonton, Alberta, Canada T6G 2R6
d
College of Business, Arkansas State University, State University, AR 72467, United States
Received 1 July 2006; received in revised form 1 November 2006; accepted 1 December 2006

Abstract

Family business researchers are split on whether family managers in family firms are agents or stewards. If family managers behave as agents,
family firms are expected to impose agency cost control mechanisms on them, and this will improve performance. The results based on a sample
of small privately held family firms indicate that family managers are monitored and provided with incentive compensation. Those who do so
obtain higher performance, thus suggesting the existence of agency behavior among family managers.
© 2007 Elsevier Inc. All rights reserved.

Keywords: Family firm governance; Agency theory; Stewardship theory

1. Introduction the organization's best interest (Davis et al., 1997). Family

Early work in agency theory (e.g., Fama and Jensen, 1983;
Jensen and Meckling, 1976) posits that family firms are unique
arenas of interest because conflicts between owners and
managers are minimized as a result of family involvement in
both ownership and management. Recent work on family
business (Lubatkin et al., 2005; Schulze et al., 2001) based on
behavioral economics of families (Becker, 1981) argues,
however, that asymmetric altruism and self-control problems
of parents could create unique agency problems for family
firms. According to the latter view, even family managers
working in family firms may behave as agents.
Conversely, stewardship theorists suggest that family
managers, regardless of ownership, will generally behave in
⁎ Corresponding author. Tel./fax: +1 662 325 1991/8651.
E-mail addresses: jchrisman@cobilan.msstate.edu (J.J. Chrisman),
chua@ucalgary.ca (J.H. Chua), fkellermanns@cobilan.msstate.edu
(F.W. Kellermanns), ec79@cobilan.msstate.edu (E.P.C. Chang).
1
Tel./fax: +1 403 220 6331/282 0095.
2
Tel./fax: +1 662 325 2613/8651.
3
Tel./fax: +1 662 325 3952/8651.
0148-2963/$ - see front matter © 2007 Elsevier Inc. All rights reserved.
doi:10.1016/j.jbusres.2006.12.011
managers are presumed to behave this way because they
subordinate personal goals to family goals, pursue non-financial
goals, and abide by relational contracts that govern family firm
behavior (Corbetta and Salvato, 2004).
Clearly, agency problems between family firm owners and
family managers would not exist in the presence of a sole family
owner–manager because the owner and manager would be the
same person. If other family managers are involved, however,
the sole or principal owner, regardless of involvement in
management, could still be exposed to agency costs generated
by the behaviors of the other family managers. The term family
manager is used in this study to refer to managers in family
firms who are members of the owning family but are not
themselves the principal owner.
Inasmuch as the competing depictions of agency and
stewardship theories regarding family managers flow logically
from very different basic assumptions about how family managers
are motivated, the assumptions may be disputed but cannot be
assailed on the logic of their implications. As a result, which one is
a more accurate description of family managers is an empirical
matter. But determining the nature of family managers directly is
difficult; thus, this study presents the results of an indirect test of
 J.J. Chrisman et al. / Journal of Business Research 60 (2007) 1030–1038
the relative validity of the two theories in terms of their conflicting
predictions about the behaviors of family managers and owners.
The two theories conflict in their implications for family firm
behavior with regard to the imposition of agency cost control
mechanisms on family managers. If family managers behave
more like agents, one should observe: (1) agency cost control
mechanisms being imposed on family managers; and (2) firm
performance improving as a result. Conversely, if family
managers behave more like stewards then one should observe
the relative absence of agency cost control mechanisms and a
negative relationship between their imposition and performance.
This study tests the conflicting predictions of agency and
stewardship theories with regard to family firms. Cross-
sectional data from a sample of small family firms are used
for this purpose. The study contributes to the discourse about
the motivation of family managers and the extent to which
control of their behavior will improve family firm performance.
The specific mechanisms studied are incentive compensation
and monitoring. Research has shown that agency problems can
exist in family firms (Gomez-Mejia et al., 2001; Schulze et al.,
2001) and that monetary incentives improve family firm
performance (Schulze et al., 2001). However, little to no
previous research examines monitoring methods and incentive
compensation together or investigates the fundamental assump-
tions of agency and stewardship theories.
The remainder of this article discusses the bases and
implications of agency and stewardship theories regarding the
imposition of agency cost control mechanisms on family
managers in family firms. The hypotheses and methodology are
then presented. Finally, a discussion of results and their im-
plications for theory and future research are provided.
2. Implications of the agency and stewardship theories
Agency theory and stewardship theory are both concerned
with the role of managers in achieving firm goals (Tosi et al.,
2003; Wasserman, 2006). The theories diverge in their
predictions, however, about how managers will act in this
regard because they make very different assumptions about the
motivations of managers.
2.1. Agency theory and agency cost control mechanisms in
family firms
Agency theory assumes that: (a) Owners and managers have
conflicting goals; (b) managers may pursue their own goals even to
the detriment of owners; (c) owners have difficulty observing some
aspects of managers' behavior; and (d) owners have bounded
rationality (Jensen and Meckling, 1976; Williamson, 1981).
The first two assumptions imply that owners may incur costs
if they ignore the self-serving behavior of managers. But if all
aspects of managers' behavior are easy to observe, then, at least
theoretically, self-serving managerial actions that are detrimen-
tal to owners can be eliminated through contracting. If relevant
aspects of managers' behavior are difficult to observe, however,
then contracts cannot solve the agency problem because owners
will not be able to tell whether managers are behaving as
1031
prescribed in the contract. Moreover, bounded rationality
(Williamson, 1981) precludes contracts that completely pre-
scribe managers' behavior in all future eventualities. Therefore,
even if all aspects of the behavior of managers were observable,
not all aspects of their behavior in all future eventualities could
be prescribed in advance in a contract.
The solutions are to monitor those behaviors that can be
prescribed and are observable and to align as much as possible
the interests of managers with owners. Once the interests of
managers and owners are in congruence, the fact that managerial
behavior is not completely observable does not matter as much
because, in pursuance of self-interest, managers will likely act in
the interests of owners, even when faced with unanticipated
circumstances for which no behavior has been prescribed. Thus,
in order to avoid the costs arising from ignoring agency
problems, incentives must be provided to align the interests of
managers with those of owners and behaviors that are
prescribable and observable must be monitored. These control
mechanisms are costly, however, and should be used only if they
yield positive net benefits. Assuming that implementing agency
cost control mechanisms eliminates at least some of the costs of
ignoring the problems, then the criterion for implementing
agency cost control mechanisms is whether the costs of doing so
is less than the costs of ignoring agency problems.
Clearly, owner–manager related agency problems arise only
if a family firm has at least one family manager who is not the
sole or principal owner of the business. If family managers are
agents, and family business owners rationally implement
agency cost control mechanisms (whenever and only when
the benefits exceed the cost), then the following implications
flow directly from agency theory: (1) Owners will impose
agency cost control mechanisms on family managers; and (2)
imposing agency cost control mechanisms on family managers
will improve the economic performance of family firms.
2.2. Stewardship theory and agency cost control mechanisms in
family firms
Diverging from the self-serving human to which agency theory
subscribes, stewardship theory has its roots in theology
(Thompson, 1960) and suggests that managers behave as
stewards devoted to the interests of the owners. This is theorized
to happen in a number of ways. For example, within the agency
theoretic framework, Chrisman et al. (2005) show that steward-
ship requires only that family business owners and family
managers value the interests of the other as much as their own.
Outside the agency framework, researchers appeal to the
subordination of personal goals to firm goals, the importance of
non-financial goals, and the nature of relational contracts
between family business owners and family managers as the
sources of stewardship (Argyris, 1973; Davis et al., 1997; Tosi
et al., 2003). The personal goals of family managers may be
subordinated to firm goals because they are intrinsic to family
managers. Family managers may place a high value on integrity
and associate integrity with attaining firm goals; they may seek
self-actualization in terms of achieving firm goals; or achieving
firm goals may have higher utility than achieving individual
1032 J.J. Chrisman et al. / Journal of Business Research 60 (2007) 1030–1038
goals. In other words, the motivations for their behavior extend
beyond merely economic self-interest.
Corbetta and Salvato (2004) argue that pursuance of non-
financial goals in family firms will motivate family managers to
focus on higher order intrinsic needs. For this to have relevance,
however, the actions that flow from meeting the higher order
intrinsic needs of family managers must be in the owners'
interest as well. Corbetta and Salvatto (2004) also argue that
emotion and sentiment-laden long-term relational contracts
between family business owners and family managers will
motivate family managers to pursue owners' interests.
In summary, stewardship theorists believe the interests of
family managers and family business owners will be aligned if
family managers are intrinsically inclined to pursue the interests of
owners; when non-financial goals are similar and important to both
family business owners and family managers; and when the
relationship between family business owners and family managers
is long-term and emotion laden. Agency problems would not exist
if this is true. Theoretically, in terms of the criteria for
implementing agency cost control mechanisms, the cost of
ignoring agency problems would be zero and implementing the
mechanisms would incur costs and yield no benefit. In fact,
Corbetta and Salvato (2004) argue that imposing these mechan-
isms on family managers may actually “lower stewards'
motivation, negatively affecting their pro-organizational behavior,
both in the short and long run” (p. 360). Thus, performance may be
doubly impaired. Consequently, in its pure form, stewardship
theory predicts that: (1) Owners will not impose agency cost
control mechanisms on family managers; and (2) imposing these
mechanisms on family managers will lower performance.
2.3. Conceptual issues in differentiating agency and steward-
ship behavior
Depending on how one interprets stewardship theory, the
evidence required to prove agency behavior would differ. If, as the
evidence suggests, the agency problems in family firms are less
severe than those in non-family firms but not zero (Chrisman
et al., 2004), family managers in family firms may either be seen
as agents or as some combination of agents and stewards. Thus,
the behavior of family managers may lie along a range of
behaviors bounded at one end by a pure stewardship theory where
agency behavior among family managers is completely absent,
and bounded at the other end by a pure agency cost theory where
family managers act entirely in their economic self-interest. A
relative rather than absolute view is taken of agency behavior in
this paper; thus the presence of agency behavior is seen as
supportive of the precepts of agency theory but not to the extent of
completely negating stewardship theory as a depiction of family
manager behavior in certain decision situations.
Testing whether family managers are agents or stewards is
further complicated by observations made by researchers that the
behavior of family managers is affected not by their nature alone
but by their interactions with family business leaders as well. Davis
et al. (1997) observe that if assumptions held by family owners and
managers about human nature are misaligned, agency problems
will be amplified. For example, Lubatkin et al. (2005) observe that
owners can hold up information and operate under agency
relationships, frustrating family managers attempting to act as
stewards for the organization. Such misalignment could cause
stewards to become agents (Corbetta and Salvato, 2004; Davis
et al., 1997). These observations imply that the nature of family
managers cannot be easily deduced and tests should therefore be
based on behavior rather than nature. Thus, the hypotheses and
tests in this study are based on how family firm owners treat family
managers and the consequences of that treatment.
As discussed previously, agency theory has two implications for
the monitoring and incentive compensation policies of family
firms. The first is that family firms will monitor family managers
and provide them with incentive compensation. This is a necessary
but not sufficient condition because family firms may impose
monitoring and provide incentive compensation to family
managers for other reasons. For example, incentive compensation
may be used for risk sharing rather than agency cost control
(Cadenillas et al., 2004) or, as suggested by neo-institutional theory
(DiMaggio and Powell, 1983; Meyer and Rowan, 1977–1978),
agency cost control mechanisms may be imposed upon family
managers to mimic large professionally-managed non-family firms
and signal to non-family managers and other stakeholders that the
family firm is “professionally-managed” and “legitimate”.
Second, monitoring and incentive compensation are costly. If
agency problems exist among family managers and these
agency cost control mechanisms are economically efficient in
the sense that applying them yields more benefits than costs,
then family firm performance should improve. Thus, agency
theory, which assumes rationality for both family firm owners
and family managers, implies that performance improvement as
a result of the imposition of agency cost control mechanisms
constitutes sufficient proof that family managers act as agents.
Even if family managers behave as agents, family firm owners
may, nevertheless, not impose agency cost control mechanisms on
them and firm performance may suffer. Alternatively, if family
managers impose mechanisms that are higher in costs than
benefits, performance will also be adversely affected despite
effective control over agent behavior. But, when playing by
agency theory rules, the presence or absence of performance
improvement is what matters. Thus, if one accepts the agency
theory stand that performance improvement associated with the
employment of agency cost control mechanisms constitutes
sufficient evidence that family managers behave as agents, then
the absence of such performance improvement must also
constitute proof that family managers do not behave as agents.
With this in mind, the two conditions differentiating agency and
stewardship behaviors are formally developed below as hypoth-
eses, stated from the agency point of view.
2.4. Hypothesis development
Agency problems may exist between family business owners,
regardless of involvement in management, and family managers if
the latter engage in behaviors that benefit their own interests at the
expense of the former. When these conditions exist, family business
owners can use monitoring to control observable behaviors and use
incentives to align the family managers' interests with their own to
 J.J. Chrisman et al. / Journal of Business Research 60 (2007) 1030–1038
control unobservable behaviors. But as noted above, agency cost
control mechanisms are costly. For example, monitoring requires
the preparation of additional or more frequent reports or the
employment of auditors or more senior managers who themselves
may require monitoring. Incentives, such as bonuses, profit sharing,
or stock, are more costly, even when they are not extra but sub-
stitutes for fixed pay, because risk aversion demands that their
expected values be higher than the fixed pay forgone (Milgrom and
Roberts, 1990). Thus, if agency problems between family business
owners and family managers do not exist, agency cost control
mechanisms would not be needed and, if owners behave rationally,
they will not impose them. As a result, according to agency theory,
the degree to which agency cost control mechanisms are used on
family managers in family firms should correspond directly to the
extent that family managers act as agents. From this emerges the
following hypothesis, which is a necessary condition for proving
agency behavior of family managers:
Hypothesis 1. (Necessary condition)
Family firms monitor family managers and compensate them
with incentives.
According to agency theory, family firms will impose agency
cost control mechanisms whenever and only when the benefits
exceed the costs of imposing the mechanisms, thus enhancing
performance. Therefore, agency theory also implies the following
hypothesis:
Hypothesis 2. (Sufficient condition)
Monitoring family managers and compensating them with
incentives improve family business performance.
3. Methodology
Cross-sectional data were obtained from a larger project
designed to assess the economic impact of the counseling activities
of the Small Business Development Center (SBDC) program in
the U.S. Data from 49 states (excluding South Dakota) and the
District of Columbia were collected in 2004. Two mailings of the
questionnaires were sent to the entire population of 32,156
operating businesses that received five or more hours of counseling
assistance from these SBDCs in 2002. A total of 5779 firms
responded to the mailings resulting in an 18% response rate. Given
the size of the firms that receive SBDC assistance, the vast majority
of the respondents were both the principal owner and principal
manager of their firm. However, as noted by Jensen and Meckling
(1976), the precepts of agency theory also apply to the hierarchical
relationships between managers, regardless of ownership.
3.1. Screening of family firms
Although applications of agency theory are not limited only
to the situations facing large, public corporations (Jensen and
Meckling, 1976), testing the hypotheses nevertheless required a
sample of family firms that were of sufficient size and age to
have the potential to experience situations involving asymmet-
ric information regarding motivations and unobservability of
1033
behavior between family business owners and family managers.
Accordingly, only those firms (including both family and non-
family) that had 10 or more employees and had been in business
for at least 5 years were considered.
To distinguish the family firms in this sub-sample from the non-
family firms, the theoretical definition of Chua et al. (1999, p. 25)
was used. Those authors define a family firm as “a business
governed and/or managed with the intention to shape and pursue
the vision of the business held by a dominant coalition controlled
by members of the same family or a small number of families in a
manner that is potentially sustainable across generations of the
family or families”. This definition has been used in previous
studies as a basis for distinguishing between family and non-
family firms (e.g., Chrisman et al., 2004). Procedures identical to
those used by those authors to operationalize the definition were
followed. The constructs included the (1) percentage of the
business owned by family members, (2) number of family
managers, and (3) expectation that the future successor as
president of the business will be a family member, operationalized
through a categorical Yes–No response. The quick clustering
technique in SPSS yielded a dichotomous classification of family
and non-family firms. The cluster solution classified 482 (81%)
firms as family firms and 129 (19%) as non-family firms, a
proportion consistent with previous research (Chrisman et al.,
2004). However, since the objective of this study is to test whether
family managers are agents or stewards, non-family firms are not
included in the final sample because, by definition, such firms
cannot have family managers. Thus, the research is necessarily
limited to the study of family firms.
The sample also had to be limited to family firms with family
managers who were not the primary owner in order to be able to
differentiate principals from agents. Thus, only those family
firms with at least one family manager (other than the owner–
manager) were retained for the analysis. This reduced the usable
sample of family firms available to test the two hypotheses to
208. Although unfortunate, such reductions to meet the re-
quirements for hypothesis testing are not unusual in studies
using the SBDC data base (e.g., Chrisman et al., 2004).
3.2. Agency cost control variables
3.2.1. Monitoring
Five items were used to assess monitoring activities of owners
toward family managers. Because monitoring can include a wide
array of methods for obtaining information on the activities and
performance of family managers, the respondents were asked to
indicate how often they used “personal direct observation”,
“regular assessment of short-term output”, “progress toward long-
term goals”, “input from other managers” and “input from
subordinates”, to monitor their family managers. All items
utilized a five-point Likert-type scale with scores of 1 indicating
that the monitoring procedure was “never” used and scores of 5
indicating that the monitoring procedure was used “very often”.
Conceptually, different monitoring methods could be comple-
ments or substitutes. They would be complements if the
information gathered by each method to deal with information
asymmetry is incomplete and does not wholly overlap that
1034 J.J. Chrisman et al. / Journal of Business Research 60 (2007) 1030–1038

gathered by another approach; they would be substitutes if tests for common method variance discussed by Podsakoff et al.
sufficient redundancy exists in the information gathered. Thus, a (2003) were performed. The tests showed no evidence of a
family firm's choice not to use a particular monitoring method common method bias problem. Unfortunately, due to government
would not indicate an absence of monitoring; an overall measure regulations pertaining to the use of SBDC data, an independent
of monitoring is needed. For this purpose, an Overall Monitoring verification of the self-reported data was not possible.
Construct was created based on the average of the five items. Testing whether family firms monitor family managers and
Factor analysis confirmed the uni-dimensional nature of the compensate them with incentives (Hypothesis 1) requires
construct. The Cronbach alpha of the scale was 0.88. evidence that family firms employ agency cost control
mechanisms. Lacking standard tests in the literature, tests
3.2.2. Incentives specific to this study had to be devised. For monitoring, finding
Respondents were asked to indicate which types of incentive the averages for the individual monitoring mechanisms and the
compensation were paid in addition to regular wages on a Yes (1) Overall Monitoring Construct were significantly more than
or No (0) basis. Categories included bonuses, profit sharing, and “sometimes” (the descriptor for the midpoint of the 5-point
ownership share in the business. Again, because these incentive Likert scale) was interpreted as support for the hypothesis that
compensation schemes are substitutes, and in order to have a family firms monitor family managers. With respect to the
measure of the overall extent to which incentive compensation is incentives provided to family managers, whether the frequen-
used by family firms on family managers, an Overall Incentives cies for individual approaches and the average for the Overall
Construct was created by adding the number of different types of Incentives Construct were significantly higher than zero was
incentives. Values ranged from 0, for no incentives provided, to 3 used as the determining test.
for all three incentives provided to family managers. Hierarchical regression was used to test whether the use of
monitoring and incentive compensation for family managers
3.3. Firm performance variable improves family firm performance (Hypothesis 2). Performance
was first regressed against the control variables. In the second
Performance was assessed by asking respondents to indicate step, the Overall Monitoring Construct and the Overall
on a 5-point Likert-type scale whether the return on sales of their Incentives Construct were added.
firm was much lower (scored as 1) to much higher (scored as 5)
than competitors over the last 5 years. Although performance was 4. Results
self-reported, research shows that subjective and objective
performance data are correlated (Dess and Robinson, 1990). Descriptive statistics on sales, employment, age, and family
manager involvement for the sample are presented in the top
3.4. Control variables panel of Table 1. The middle panel of Table 1 shows that
monitoring is most frequently done by direct observation of
Agency or stewardship relationships between family owners
and family managers may vary in different types of family firms Table 1
depending on the influence of other variables, which must be Family firm characteristics and use on family managers of incentives and
controlled (Chrisman et al., 2004). First, dummy variables were monitoring
constructed for firms competing in retail, service, and Mean SD t-statistic Significance
manufacturing industries. Second, controls for size (natural Firm characteristics
logarithm of sales) and for the age of the business (natural Sales ($000) 3546 5924
logarithm of age) were used. The logarithmic transformations Employees (number) 32.20 38.07
were necessary to minimize skewness. Finally, substantial Firm age (years) 26.86 24.70
Family managers (number) 2.51 1.11
evidence shows that family or concentrated ownership affects
business performance (McConaughy et al., 2001; Morck et al., Monitoring: indicators measured on 5-point Likert scale (1 = never; 5 = very
1988). Consequently, the total percentage ownership of the often)
family was used as a control variable as well. Observation 3.97 1.12 12.50 ⁎⁎⁎
Regular short-term assessment 3.62 1.16 7.64 ⁎⁎⁎
Progress toward long goals 3.65 1.13 8.30 ⁎⁎⁎
3.5. Data analysis ⁎⁎⁎
Input from other managers 3.56 1.23 6.50
Input from subordinates 3.35 1.24 4.02 ⁎⁎⁎
An ANOVA was conducted to investigate whether signifi- Overall monitoring construct 3.63 0.95 9.50 ⁎⁎⁎
cant differences in terms of the utilized variables existed (average of the five indicators)
between early and late respondents; none were found. Since
Incentive compensation: indicators measured as 1 (Yes) or 0 (No)
later respondents could be expected to be more similar than ⁎⁎⁎
Bonus 0.48 0.50 13.84
earlier respondents to non-respondents (Kanuk and Berenson, Profit sharing 0.26 0.44 8.63 ⁎⁎⁎
1975; Oppenheim, 1966), this test suggests no significant bias Ownership 0.25 0.44 8.41 ⁎⁎⁎
in any of the key variables in the study. Overall incentives construct 1.00 0.88 16.30 ⁎⁎⁎
Since the data were collected via a self-reported questionnaire, (sum of the three indicators)
the potential for common method variance was present. Various N = 208; ⁎⁎⁎p b 001.
 J.J. Chrisman et al. / Journal of Business Research 60 (2007) 1030–1038 1035

Table 2
Correlations, means and standard deviations of variables used in regressions
Mean SD 1 2 3 4 5 6 7 8
1. Ln (sales) 14.41 1.11
2. Ln (age) 2.96 0.79 0.26⁎⁎⁎
3. Family ownership 98.27 5.80 0.04 0.01
4. Service 0.10 0.31 − 0.15⁎ − 0.15⁎⁎⁎ 0.08
5. Retail 0.21 0.41 − 0.04 − 0.01 0.01 − 0.18⁎⁎
6. Manufacturing 0.37 0.48 0.30⁎⁎⁎ 0.27⁎⁎⁎ − 0.06 − 0.27⁎⁎⁎ − 0.40⁎⁎⁎
7. Monitoring 3.63 0.95 0.018 − 0.03 − 0.12 0.01 − 0.11 −0.01
8. Incentives 1.00 0.88 0.12 0.07 0.06 0.05 0.04 0.08 0.14⁎
9. LT performance 3.01 1.03 0.16⁎ 0.01 0.15⁎ − 0.06 0.02 0.01 0.16⁎ 0.22⁎⁎⁎
N = 208; ⁎p b 0.05, ⁎⁎p b 0.01 and ⁎⁎⁎p b 0.001.

family managers' behavior and least frequently done by seeking results suggest that family firms that monitor family managers
input from subordinates. The means for the different family and compensate them with incentives have better performances.
manager monitoring methods are all between 3 (sometimes) and
4 (often). Statistically, they are all significantly more than 3.00 5. Discussion
( p b 0.001).
The bottom panel of Table 1 shows that 48% of the family This exploratory study investigated whether family firms
firms paid bonuses, 26% had profit sharing, and 25% shared monitor family managers and compensate them with incentives
ownership with family managers. The means for the individual and whether these agency cost control mechanisms improve
incentives and the Overall Incentives Construct are all performance. The first set of findings indicates that family firms
significantly greater than zero ( p b 0.001). Overall, these two make liberal use of both incentive compensation and monitoring
sets of results provide support for Hypothesis 1, which states mechanisms on family managers while the second suggests that
that family owners impose agency cost control mechanisms on using monitoring and incentive compensation results in a better
family managers. performance.
Correlations, means, and standard deviations for the These findings partially contradict classical agency theory
variables used in the hierarchical regressions are shown in (Fama and Jensen, 1983; Jensen and Meckling, 1976) which
Table 2. The results of the hierarchical OLS regression used to assumes that the agency costs associated with family manage-
test Hypothesis 2 are shown in Table 3. Model 1 tests the control ment will approach zero. The results are, therefore, more in line
variables. Only log sales and family ownership are significant with contentions made by Schulze et al. (2001) who suggest that
( p b 0.05). The adjusted R2 for model 1 is only 0.02 and not owners need to manage the unique agency problems caused by
significant. asymmetric altruism and self-control.
Model 2, which adds the monitoring and incentive variables, As discussed previously, monitoring and incentive compen-
shows a significant increase in R2 ( p b 0.001) with an overall sation should not positively affect firm performance unless
adjusted R2 of 0.08 and an F-statistic of 3.26 ( p b 0.01). Both family managers are agents and family business owners are
monitoring (β = 15; p b 0.05) and incentives (β = 19; p b 05) are rational in implementing agency cost control mechanisms
positively and significantly related to performance. These whenever and only when such implementation will yield more
benefits than costs. The results indicating performance
improvement from imposing such mechanisms thus suggest
that family business owners indeed act rationally in the sense
Table 3
Results of OLS regression: dependent variable is long-term performance
described above. Apparently, their altruism does not blind them
to the reality that kinship ties do not unconditionally guarantee
Model 1 Model 2
appropriate behavior by relatives.
Ln (sales) 0.16⁎ 0.14 The fact that monitoring appears to improve performance
Ln (age) − 0.03 − 0.03
also implies that family owners act on the information obtained
Ownership by family 0.15⁎ 0.16⁎
Service − 0.07 − 0.08 to control behavior (or at least family managers believe that the
Retail 0.00 0.00 information will be acted upon). These findings are consistent
Manufacturing − 0.04 − 0.05 with the suggestion of Lubatkin et al. (2007-this issue) that
Monitoring 0.15⁎ altruism may appear in many different forms. Indeed, the results
Incentives 0.19⁎
suggest a type of altruism that operates in a somewhat different
F-statistic 1.86 3.26⁎⁎
R2 0.05 0.12 manner than previously believed. Thus, rather than involving
Change in R2 0.07⁎⁎⁎ iron-clad entitlements with few or no consequences for bad
Adjusted R2 0.02 0.08 behavior, the altruism manifest in family firms appears more
Number of observations 208 208 consistent with an interpretation that opportunities (that may be
⁎p b 0.05; ⁎⁎p b 0.01; ⁎⁎⁎p b 0.001. unavailable to non-family managers) are provided to family
1036 J.J. Chrisman et al. / Journal of Business Research 60 (2007) 1030–1038
members with the stipulation that subsequent behavior can have
positive or negative consequences.
6. Conclusions
The results of this study contribute to knowledge concerning
agency and stewardship relationships in family firms. Earlier
research tended to focus on either agency or stewardship theory
individually (for an exception see Tosi et al., 2003). This study
considered both and obtained results that are more supportive of
the presence of agency relationships than stewardship relation-
ships. Furthermore, while prior research addressed the potential
of agency costs in family firms (Schulze et al., 2001) and the
benefits of stewardship behavior (Corbetta and Salvato, 2004),
this study is the first to show that family business owners seem
to regard family members as agents. Finally, this study is the
first to investigate the use of monitoring mechanisms to control
family managers' behavior in family firms.
The findings of this study are important in light of earlier
findings showing that agency costs in family firms exist due to
asymmetric altruism (Schulze, Lubatkin and Dino, 2003).
Extensive use of agency cost control mechanisms was found,
suggesting that the problems of altruism are better understood
and controlled by family owners than prior theory (Schulze et
al., 2001) might have led one to conclude. Furthermore, as
previously implied, the findings also suggest that the manner in
which altruism operates in family firms may be more
complicated than previously believed. Future research that
leads to a better understanding of the complex relationship
between family owners and family managers would therefore be
valuable.
6.1. Limitations
This study has several limitations that offer opportunities for
future research. First, interpretation of the results suffers from a
weakness shared with many other strategic management studies
in that a neo-institutional explanation for the observed
organizational behaviors is possible. Neo-institutional theory
would suggest (DiMaggio and Powell, 1983; Meyer and
Rowan, 1977–1978) that family firms may monitor and provide
incentive compensation to family managers in order to signal to
other stakeholders that the firm is “professionally-managed” or
“legitimate”. In other words, even though firms that impose
agency cost control mechanisms have better performance, this
could have come as a consequence of dealing with the agency
problems arising from relationships with other stakeholders
such as non-family managers or lenders.
Second, the study was cross-sectional in nature. Performance
was measured as of 2004, at the same time as the monitoring and
incentive compensation variables. As a result, assignment of
causality between the two sets of variables may be questionable.
However, arguments can be made that the problem is not serious
for this study. The descriptors for the monitoring variable ratings
preclude situations where monitoring methods have been set up
only at the end of 2004. For example, a respondent would not
have answered “sometimes”, “often”, or “very often” without a
repeated experience. Monitoring methods and incentive compen-
sation schemes are also likely to be stable. Furthermore, if these
mechanisms have any impact on performance, the effects would
likely be felt quickly in the small family firms studied here.
Finally, higher performance is unlikely to cause more monitoring,
although admittedly, increased profits may make family firms
more willing to pay bonuses to or share profits with family
managers, thus providing another explanation for the positive
relationship shown by the results.
Third, the study only investigated family managers in general
and did not distinguish between different kinship ties. Future
research could investigate if owners use different monitoring and
incentive packages depending upon the level and types of family
involvement. For example, an owner's spouse might behave
differently and respond to different controls and incentives than
children, cousins, or in-laws (Karra et al., 2006).
Finally, this study implicitly assumes that family firms are
homogeneous (other than by size, age, industry, and family
ownership which were controlled) but this is obviously not valid.
Although central tendencies have been explored herein, further
work to identify different types of family firms in order to tease
out the variations and complexities of relationships between
family owners and family managers would be desirable.
6.2. Implications for future research
In the previous section, the evidence needed to refute
stewardship theory as a valid depiction of family managers was
discussed; the question asked was whether a single widespread
family business practice indicating the presence of agency
problems would be sufficient to do this. If one takes an
“imperialistic” agency point of view, one could certainly so
conclude. As stated previously, however, the supposition used
in this paper is that the relationship between the family owners
and family managers is much more complex; family managers
may behave alternately as stewards or agents in different
decision situations, at different stages of the family firm's life,
and at different stages of the family manager's life. For
example, decisions that have long-term effects on the next
generation may be more likely to cause agency problems when
some family managers have many children while others have
few or none. Family managers in a family business facing a
financial crisis may be more (or less) opportunistic. A family
manager who has just been bypassed for promotion or is denied
an ownership stake in favor of a sibling may be more likely to
pursue self-interest at the expense of other family members.
Therefore, while the results suggest the presence of agency
behavior on the part of family managers, more research is
needed to identify the situations, business stages, and personal
life stages within which family managers are more likely to act
as agents or stewards.
Family business researchers, when discussing agency theory,
typically use the simple and convenient setting of one owner (or
owner block) and a homogeneous group of manager(s). Many
situations exist, however, where more than one family manager is
involved. For example, the family members in the ensuing
generation may consist of many members with varying levels of
 J.J. Chrisman et al. / Journal of Business Research 60 (2007) 1030–1038
ownership, expected ownership, qualifications, and opportunistic
intentions. The family owner group could contract with the family
managers individually, as a group, or in separate coalitions, while
the family managers could cooperate, partially cooperate, or
compete. The dynamics of such combinations of family managers
and the resulting agency cost control strategies would be a very
fertile field to gain understanding of family business. The
economics literature on agency problems of multiple agents
(e.g., Demski and Sappington, 1984; Holmstrom, 1982; Ishiguro
and Itoh, 2001) would be a good place to start.
Longitudinal studies that track family relationships, behav-
ior, and performance over time might reveal patterns that cannot
be detected with cross-sectional studies. Indeed, stewardship
may take a considerable amount of time to develop (Corbetta
and Salvato, 2004) or, alternatively, may even be eroded over
time (Karra et al., 2006). Tracking behavior and performance in
family firms when succession is imminent would be a
particularly interesting way of studying the time element. For
example, quasi-natural experimental research could observe
whether the behaviors of appointed successors and members of
their branch of the family change after succession and the length
of time a firm needs to settle into equilibrium.
Another question deserving of study is whether family firms
treat family managers and non-family managers differently in
terms of agency cost control mechanisms. If the agency problems
associated with non-family managers arise from asymmetric
information but those associated with family managers are caused
by asymmetric altruism, the agency cost control mechanisms may
have to be different. The problem of comparisons is further
complicated by the possibility of different types of altruism
(Lubatkin et al., 2007-this issue), each of which might alter
relationships between family owners and family managers.
A number of other topic areas require further study. For
example, control and incentive systems need to be investigated
more fully. While this study focused on traditional monetary
incentives and traditional organizational controls through
monitoring, other non-financial incentives and controls could
be investigated. Family firm culture, unique family firm
attributes, or normative pressures by family members or family
structures might result in an alignment of behavior (Davis et al.,
1997; Sharma and Manikutty, 2005). Furthermore, if the long
association between family owners and family managers is
positive, this should breed trust and, thus, reduce the amount of
monitoring and incentives needed to solve the agency problem
of moral hazard. On the other hand, since incentive compen-
sation also has a risk-sharing function, because some fixed costs
are converted to variable costs, family managers may be
compensated with more incentives even when the family firm's
agency problems with them are less severe.
Additionally, other forms of performance should be
considered in family firms. While classical agency and
stewardship theories focus on maximizing shareholder wealth
(Tosi et al., 2003), this assumption may need to be relaxed in
family firms to include both monetary and non-monetary
benefits. In family firms that depend on intrinsic rewards,
somewhat different control and incentive structures may yield
higher pay-offs than those commonly found in non-family
1037
firms. So far no systematic investigation of this possibility
seems to have been conducted.
This study has addressed the agency–stewardship debate
only from the perspective of moral hazard between family
owners and family managers. However, the potential for
adverse selection complicates agency–stewardship issues in
family firms. Stewardship theory was not meant to deal with
problems of adverse selection. Thus, agency and stewardship
issues might operate side by side in some family firms. Further
research is needed to explore this possibility.
Another issue not directly addressed by stewardship theory
that requires future research is the relationship between majority
and minority owners. This is because studying the potential for
agency costs in family firms requires a full accounting of possible
conflicts of interest and potential asymmetries of information and
altruism between family owners and family managers as well as
between majority and minority family owners.
In conclusion, this study provided evidence that owners in
privately held family firms treat family managers as agents in
terms of the compensation packages and monitoring mechan-
isms used, thus suggesting that family firm managers act as
agents, in general. However, the differences between agency and
stewardship theories are many and relationships between key
constructs can be interpreted in different ways. For example,
agency theorists treat CEO duality as a proxy for entrenchment
that should be avoided while stewardship theorists believe that
CEO duality empowers the positions of owners and stewards
(Donaldson and Davis, 1991; Tosi et al., 2003). This study
addressed the fundamental contentions of agency and steward-
ship theories but much more research needs to be done.
References
Argyris C. Organization man: rational and self-actualizing. Public Adm
1973;33:354–7 [July/August].
Becker GS. A treatise on the family. Cambridge. Harvard University Press; 1981.
Cadenillas A, Cvitani J, Zapatero F. Leverage decision and manager
compensation with choice of effort and volatility. J Financ Econ 2004;73(1):
71–92.
Chrisman JJ, Chua JH, Litz R. Comparing the agency costs of family and non-
family firms: conceptual issues and exploratory evidence. Entrep Theory
Pract 2004;28(4):335–54.
Chrisman JJ, Chua JH, Sharma P. Trends and directions in the development of a
strategic management theory of the family firm. Entrep Theory Pract 2005;29(5):
555–76.
Chua JH, Chrisman JJ, Sharma P. Defining the family business by behavior.
Entrep Theory Pract 1999;23(4):19–39.
Corbetta G, Salvato C. Self-serving or self-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”. Entrep Theory Pract 2004;28(4):355–62.
Davis JH, Schoorman FD, Donaldson L. Toward a stewardship theory of
management. Acad Manage Rev 1997;22(1):20–47.
Demski J, Sappington D. Optimal incentive contracts with multiple agents.
Entrep Theory Pract 1984;33:152–71.
Dess GG, Robinson RB. Industry effects and strategic management research.
J Manage 1990;16(1):7–27.
DiMaggio PJ, Powell WW. The iron cage revisited: Institutional isomorphism
and collective rationality in organizational fields. Am Sociol Rev
1983;48:147–60.
Donaldson L, Davis J. Stewardship theory or agency theory: CEO governance
and shareholder returns. Aust J Manage 1991;16:49–64.
1038 J.J. Chrisman et al. / Journal of Business Research 60 (2007) 1030–1038
Fama E, Jensen M. Separation of ownership and control. J Law Econ 1983;26:
301–25.
Gomez-Mejia L, Nunez-Nickel M, Guitierrez I. The role of family ties in agency
contracts. Acad Manage J 2001;44(1):81–95.
Holmstrom B. Moral hazard in teams. Bell J Econ 1982;13(2):324–40.
Ishiguro S, Itoh H. Moral hazard and renegotiation with multiple agents. Rev
Econ Stud 2001;68:1–20.
Jensen MC, Meckling WH. Theory of the firm: Managerial behavior, agency
costs and ownership structure. J Financ Econ 1976;3:305–60.
Kanuk L, Berenson C. Mail surveys and response rate: a literature review.
J Mark Res 1975;22:440–53.
Karra N, Tracey P, Phillips N. Altruism and agency in the family firm: exploring the
role of family, kinship, and ethnicity. Entrep Theory Pract 2006;30:861–77.
Lubatkin MH, Schulze WS, Ling Y, Dino RN. The effects of parental altruism on
the governance of family-managed firms. J Organ Behav 2005;26(3): 313–30.
Lubatkin MH, Durand R, Ling Y. The missing lens in family firm governance
theory: a self-other typology of parental altruism. J Bus Res
2007;60:1022–9 (this issue),, ____________________________
doi:10.1016/j.jbusres.2006.12.019.
McConaughy D, Matthews CH, Fialko AS. Founding family controlled firms:
performance, risk, and value. J Small Bus Manage 2001;39(3):31–49.
Meyer JW, Rowan B. Institutionalized organizations: formal structure as myth
and ceremony. Am J Sociol 1977–1978;83(2):364–85.
Milgrom P, Roberts J. The economics of modern manufacturing: technology,
strategy, and organization. Am Econ Rev 1990;80:511–28.
Morck R, Shleifer A, Vishny RW. Management ownership and market
valuation. J Financ Econ 1988;20:293–315.
Oppenheim AN. Questionnaire design and attitude measurement. New York:
Free Press; 1966.
Podsakoff PM, MacKenzie SB, Lee J, Podsakoff NP. Common method biases in
behavioral research: a critical review of the literature and recommended
remedies. J Appl Psychol 2003;88:879–903.
Schulze WS, Lubatkin MH, Dino RN, Buchholtz AK. Agency relationship in
family firms: theory and evidence. Organ Sci 2001;12(9):99–116.
Schulze WS, Lubatkin MH, Dino RN. Exploring the agency consequences of
ownership dispersion among inside directors at family firms. Acad Manage J
2003;46(2):179–94.
Sharma P, Manikutty S. Strategic divestment in family firms: role of family
structure and community culture. Entrep Theory Prac 2005;20(29):293–312.
Thompson T. Stewardship in contemporary theology. New York: Association
Press; 1960.
Tosi HL, Brownlee AL, Silva P, Katz JP. An empirical exploration of decision-
making under agency controls and stewardship structure. J Manage Stud
2003;40(8):2053–71.
Wasserman N. Stewards, agents, and the founder discount: executive
compensation in new ventures. Acad Manage J 2006;49:960–76.
Williamson OE. The economics of organization: the transaction cost approach.
Am J Sociol 1981;87:548–77.