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Why Do Some
Family Businesses
Out-Compete?
Governance, Long-Term
Orientations, and
Sustainable Capability
Isabelle Le Breton-Miller
Danny Miller
This article seeks to link the domains of corporate governance, investment policies, com-
petitive asymmetries, and sustainable capabilities. Conditions such as concentrated own-
ership, lengthy tenures, and profound business expertise give some family-controlled
business (FCB) owners the discretion, incentive, knowledge, and ultimately, the resources to
invest deeply in the future of the firm. These long-term investments accrue from particular
governance conditions and engender competitive asymmetries—organizational qualities
that are hard for other firms to copy, and thus, if tied to the value chain, create capabilities
that are sustainable. Investments in staff and training, e.g., create tacit knowledge and
preserve it within the firm. Investments in enduring relationships with partners enhance
access to resources and free firms to focus on core competencies. And devotion to a
compelling mission dedicates most of these investments to a core competency. When such
investments are farsighted, orchestrated, and ongoing, capabilities will tend to evolve in a
cumulative trajectory, making them doubly hard to imitate and thereby extending competi-
tive advantage. Arguments are supported by making reference to the literature on corporate
governance and agency theory and to emerging research on FCBs.
Introduction
Recent evidence suggests that family-controlled businesses (FCBs) significantly out-
perform their rivals in returns on assets and sales (Anderson & Reeb, 2003; Anderson,
Mansi, & Reeb, 2003; McConaughy, Matthews, & Fialco, 2001; Weber, Lavelle, Lowry,
Zellner, & Barrett, 2003), market valuations or “Tobin’s Q” (Villalonga & Amit, 2006),
revenue growth for the first generation (Weber et al., 2003), and firm longevity (de
Geus, 1997; Mackie, 2001). This article attempts to explain such findings by arguing
that certain unique governance conditions make some FCBs especially apt to invest
Please send correspondence to: Isabelle Le Breton-Miller, e-mail: lebreton@generation.net at the University
of Alberta and OER Inc., 4642 Melrose Avenue, Montreal, Canada H4A 2S9.
PTE &
1042-2587
© 2006 by
Baylor University
731November, 2006
mailto:lebreton@generation.net
profoundly for the long term, thereby helping to create inimitable or “asymmetric”
capabilities that sustain competitive advantage (Miller, 2003). It proposes various gov-
ernance and leadership conditions that produce a long-term investment perspective
within some FCBs, and suggests the nature of the capability-creating investments that
will result from that perspective.
The literature on the resource-based view of the firm and on dynamic capabilities
argues that firms are able to outperform if they can develop valuable resources and
capabilities that rival firms cannot imitate or substitute (Barney, 1991; Helfat, 2000;
Teece, Pisano, & Shuen, 1997). Studies about how companies develop such advantages
indicate that they must invest generously, and in a concerted way, in core capabilities and
resources, and build these cumulatively by exploiting path dependencies (Dieryckx &
Cool, 1991). Investments may include those in knowledge capital (Winter, 2003), corpo-
rate culture (Barney & Hansen, 1994; Eisenhardt & Martin, 2000), exceptional infrastruc-
ture and business models (Sanchez & Heene, 2000), and win–win relationships with value
chain partners (Hagel & Singer, 1999).
The thesis of this article is that certain types of family businesses are especially apt
to develop distinctive core competencies. First, they embrace a number of governance
and leadership conditions that invite long-term investments and increase the resources
available to invest (Carney, 2005; Habbershon & Williams, 1999; Sirmon & Hitt, 2003;
Williamson, 1999). Second, their investments are especially likely to take the form of (1)
generously funding a substantive mission and its central competencies, (2) fostering the
talent to create those competencies, and (3) building close relationships with outside
stakeholders that access resources and allow a firm to focus on what it does best. Such
investments create competitive asymmetries in that they are difficult to emulate for firms
with different governance structures given the different incentives and conditions associ-
ated with those structures (Miller, 2003).
The first section of the article discusses the governance drivers of the long-term
orientations of some FCBs. The second section describes the roots, nature, benefits, and
requisite co-conditions of those orientations, and links these orientations to superior,
sustainable core capabilities.
Drivers of Long-Term Orientations in Family Businesses
We define long-term orientations as priorities, goals, and most of all, concrete invest-
ments that come to fruition over an extended time period, typically, 5 years or more, and
after some appreciable delay. Indeed, performance may suffer during the initial years as
the firm invests for the future or undertakes initiatives with significant short-term costs.
Long-term priorities include good stewardship aimed at reducing risk or building up
resources. Long-term goals are more specific and might involve achieving enduring
quality—or innovation leadership. Long-term investments are actual expenditures and
resource allocations intended to realize these long-term goals, and that have similar time
horizons and anticipated payback periods (James, 1999). These include research and
development (R & D) projects, major new infrastructure expenditures, and investing in
reputation or enduring relationships with employees, clients, suppliers, or the community.
We shall propose a number of leadership and governance elements that might drive
long-term orientations. These range from family ownership, control, and knowledge of the
business, to long CEO tenures and consideration for later generations of owners and
managers. Such drivers provide the incentives, discretion, resources, and information to
implement a long-term orientation. Although we expect the drivers to be more prevalent
732 ENTREPRENEURSHIP THEORY and PRACTICE
among FCBs than elsewhere, they will by no means be present in all FCBs, or entirely
absent in non-FCBs. Indeed, our propositions will argue that a long-term orientation will
be a function of the nature and prevalence of the drivers (see Table 1).
Long CEO Tenures
Family CEOs stay at the job on average of three to five times as long as the CEOs of
non-FCBs (Lansberg, 1999; Ward, 2004). The tenures at family controlled firms typically
exceed 15 years, and, over the histories of firms like Timken, Michelin, Coors, and Cargill,
they have often exceeded 20 years (Miller & Le Breton-Miller, 2005). Their ownership
and status give many family CEOs the power to stay at their jobs for such long periods.
These executives may also have an incentive to hold office until the next generation is
ready to take over.
The anticipation of lengthy tenures drives some leaders to take a farsighted, steward-
like perspective of the business. It makes them reluctant to engage in risky expedients such
as unrelated diversifications, hazardous acquisitions, or shortsighted downsizing, that
drain resources and may haunt them later in their tenures (Amihud & Lev, 1999; Morck,
Shleifer, & Vishny, 1990). Other habits that may be born of protracted tenures are
conservative financial leverage, careful cash management, and assiduous preservation of
resources (Dreux, 1990).
In a more proactive vein, lengthy tenures may encourage investment in long-term
projects such as infrastructure creation and R & D. Farsighted executives are willing to
commit to projects that will enhance company performance only years hence (Casson,
1999; James, 1999). Moreover, when executives’ tenures are long, their knowledge of the
company tends to be deep (Miller & Shamsie, 2001). Such knowledge may be especially
richwhere years have been spent learning the business at close quarters with relatives
(Lansberg, 1999). Thus, close familiarity with the business on the part of owners and top
managers has been shown to reduce uncertainty about future cash flows and therefore
Table 1
Governance Characteristics and Outcomes
at FCBs
Governance
characteristics Governance outcomes
Long CEO tenures Lengthy investment time
horizons, incentive to invest,
and stewardship over the firm
Care for future generations
Family and CEO control Discretion to invest
Ownership stake Reduces monitoring costs,
thereby generating more
resources to invest
Owner and CEO knowledge Knowledge reduces uncertainty
of long term investment
FCBs, family-controlled businesses.
733November, 2006
lengthen performance and investment time horizons (James, 1999; Laverty, 1996).
Owners or managers who profoundly understand a business are more confident in their
ability to manage and control it, and less fearful about projects with longer term payoffs
(Milliken, 1987). They also are less apt to stray from areas of core competency (Miller &
Shamsie, 2001).1
This long-term orientation is in striking contrast to what happens at many publicly
traded non-FCBs (Jacobs, 1991; Khurana, 2003). CEO tenures have shrunken over the last
2 decades from about 8 to less than 4 years, while top executive incentive pay has risen
dramatically, often to over 85% of total compensation, and is mostly based on near-term
share prices (Khurana, 2003; Miller & Le Breton-Miller, 2005). Board supervision,
increasingly, has taken the form of scrutinizing the quarterly numbers and distributing
rewards and punishments accordingly. So the pressure on CEOs to get quick results is
immense. Common ways of doing that are cost cutting to increase profits, and acquisitions
to boost revenues (Morck et al., 1990). Investments that compromise current profits or
benefit only the next cohort of executives are avoided (Jacobs, 1991; James, 1999).
Proposition 1a: Longer anticipated CEO tenures in FCBs will correlate with (1)
stronger attitudes of stewardship (e.g., fewer unrelated acquisitions, risky projects, and
avoidable episodes of downsizing), (2) deeper knowledge of the business and tolerance
for uncertainty, and (3) longer time horizons and investments in focal capabilities.
Concern for Subsequent Generations
For FCBs that plan to pass the business on to the next generation, time horizons
extend well beyond the tenure of any one leader. The 2003 Mass Mutual/Raymond
Institute Survey of family businesses reveals that the vast majority of family business
owners and leaders intend to keep the business in the family and the family in the business.
So the owners and executives of many FCBs preoccupy themselves with the health and
reputation of the company—not just over the coming years, but for decades to come
(Miller & Le Breton-Miller, 2005). They want to leave the business in good condition for
their heirs. This again is an incentive for long-term investment, and is expected to be
especially prevalent where a family CEO or active chairman runs the business and plans
to pass it to his or her own children (Casson, 1999; Grassby, 2001; Lansberg, 1999).
Proposition 1b: Investment in long-term projects and capabilities will be especially
strong where family owners intend to involve subsequent generations of their family
in the business.
The Discretion of Family Owners and CEOs
A willingness to invest in the long run is not enough to make it happen. Discretion is
required on the part of the executive investor. At many nonfamily public companies,
leaders are put under pressure by their boards to produce quick results. That constraint can
limit their latitude to embark on long-term pursuits and to make investments with delayed
1. We should say that long tenures are not always associated with responsible management. Notwithstanding
Miller and Shamsie’s (2001) finding that CEO performance tends to peak quite late in their careers, too much
job security can lead to complacency, stagnation, and insularity (Miller, 1990), especially in the absence of
strong complementary executives and directors. Moreover, yesterday’s knowledge may be dangerously
irrelevant in turbulent settings or industries undergoing significant change (Henderson, Miller, & Hambrick,
2006).
734 ENTREPRENEURSHIP THEORY and PRACTICE
paybacks. Such limitations are less common where family owners control the majority of
votes (Carney, 2005).2
Proposition 1c: Family and CEO voting control will be positively correlated with
longer time horizons of the business and its investments.
Reduced Agency Costs and Surplus Resources
Another crucial requirement for long-term investment is the availability of resources.
Evidence has begun to emerge that because of their unusually low free-rider agency costs,
some FCBs are in an ideal position to generate such resources (Anderson & Reeb, 2003;
Gomez-Mejia, Nunez-Nickel, & Gutierrez, 2001). In other words, FCBs not only invest
more of their resources for the long run, they also may have more resources to invest.
Demsetz (1988) has argued that where a party has a significant percentage of its assets
invested in a business, it has a strong incentive to monitor what goes on there. In most
family businesses, this major stake also confers the ability to appoint directors and
executives and to control major decisions. Thus, family owners have a motive to monitor
what top managers are doing, as well as the power to do so. In addition, they tend to have
a good deal of knowledge about the business (Demsetz, 1988). These three conditions
collectively reduce the information asymmetries that are said to exist between owners and
managers. Thus, manager-agents are no longer in a position to commandeer organiza-
tional resources for their personal benefit (Ang, Cole, & Lin, 2000). This is in contrast to
situations at many public companies where small private or institutional shareholders lack
the time, expertise, or power to monitor their executives (Fama & Jensen, 1983a, 1983b;
Jensen & Meckling, 1976).
The advantage of lower agency costs may be amplified when a family member actually
serves as the top executive or chairman (Anderson & Reeb, 2003). Indeed, differences
between owners and agents in effect disappear when the agent is a major owner.
The impact of the surplus resources freed up by agency economies is twofold. First,
there is more available to invest—more resources to plow back into the business. Second,
better monitoring may produce operating efficiencies, so that surplus resources need not
be used for immediate business requirements—but saved for longer-term projects that we
will describe later (Hoopes & Miller, 2006).
Proposition 1d: Firms controlled and managed by family owners will generate more
resources due to lower agency costs, and therefore will have more assets available to
fund long-term investments.
Family Control with Little Ownership
A family is apt to be less concerned about the future of its businesses where it has
minimized its personal investment. Control may be gained using devices such as pyramidal
2. We are not arguing that family owners or executives will necessarily invest generously for the long term.
But this will be a more natural tendency for many of them, and one they can act on. Again, non-FCB rivals
often are owned by remote investors whose satisfaction comes from regular and immediate financial returns.
Here the CEO will be rewarded mostly for getting those quick returns, so investments with late payoffs are
career liabilities. A disadvantage of a family CEO with dominant ownership is that that executive may get
away with diverting organizational resources for personal or family-related purposes (Morck & Yeung, 2003;
Schulze, Lubatkin, Dino, & Buchholtz, 2001). This is less apt to happen when there are outside directors
(Anderson & Reeb, 2004).
735November, 2006
business groups and super-voting shares. In the former, a family controls a hierarchyof
firms by taking majority ownership of each tier, so that several tiers down, it can control
companies with only a small percentage of shares. By shifting costs down the hierarchy and
revenues up, the family can exploit shareholders of the firms lower down (Almeida &
Wolfenzohn, 2004; Morck & Yeung, 2003). Other leveraged control devices include
super-voting shares for the family that give it many more votes per share than the stock
offered to the public (Bae, Kang, & Kim, 2002). These mechanisms afford little protection
to minority shareholders and may make it more likely that a family will use its power to
extract resources from the company at the expense of the firm and its other owners (Morck
& Yeung, 2003). Here, there is less incentive for the family to invest in the long-term
interests of businesses lower down the pyramid that, although controlled and exploited by
the family, are owned mostly by others (Bebchuk, Kraakman, & Triantis, 2000; Claessens,
Djankov, Fan, & Lang, 2002; Fama & Jensen, 1983a, 1983b; Morck & Yeung, 2003).
Proposition 1e: The higher the ratio of family votes to family ownership and the
more the use of devices such as pyramiding and super-voting shares, the less likely it
will be that FCBs will invest for the long term.
Notice that some of our propositions have two implications: First, they suggest that
FCBs as a class may, on average, embrace longer perspectives and invest more generously
in the future than rival nonfamily businesses operating in the same domain. Second, the
degree of those differences is expected to be a function of the level of the governance
factors or drivers in question (anticipated tenures, voting control, etc.).3
What Forms Do FCB Long-Term Orientations Take and What Resources
and Competencies Can They Build?
Our treatment of the nature of FCB investments has been generic. We have, until now,
focused only on outcomes such as family attitudes, knowledge, discretion, resources, and
a willingness to invest in the future (see Table 1). The next part of the article, however,
begins to describe what kinds of investments this discretion and these resources make
possible, and it speculates about the capabilities that will result—the inimitable “asym-
metries” that may bestow sustainable advantage (Miller, 2003).
We will argue that, depending on their circumstances, many FCBs will favor three
categories of farsighted investments. First, they will invest deeply in the competencies and
facilities required to attain the core mission of the firm. Second, they will invest in the
people who operate the business. Third, they will invest in sustaining relationships with
outside parties such as customers, suppliers, alliance partners, and the community. We will
argue that all of these investments contribute to the core competencies of FCBs and help
explain why they have been found, as a group, to outperform and out-survive their peers
(Anderson & Reeb, 2003; Mackie, 2001; Weber et al., 2003).
3. We should make clear that many of our propositions are not intended to apply to entrepreneurial
businesses—i.e., those owned and presided over by a single individual. Although such businesses do have
similar agency advantages to owner-run family businesses, FCBs have different incentive structures—
particularly where multiple family members and family generations are involved. As we argue, concern for the
well-being of later generations, for the pursuit of the family tradition and mission, and for the reputation of
the family and the business all tend to protract the time horizons of the business. Having said that, we suspect
that entrepreneurial businesses, because of their owners’ incentives, power, and independence from impatient
stockholders, may well have longer time horizons than broadly owned nonfamily public companies.
736 ENTREPRENEURSHIP THEORY and PRACTICE
Although FCBs, on average, may out-invest rival non-FCBs in competencies, people,
and relationships, the margin of difference will be a function of the governance factors we
discussed in the last section, as well as the nature of the strategies being pursued. In each
of the sections that follow, we will describe the drivers or roots of the investment, its
nature and strategic benefits, and the factors that condition its likelihood.
Investing in a Substantive Mission and Its Required Capabilities
Roots and Drivers. Many publicly traded non-FCBs are forced by their shareholders to
devote most of their attention to the financial bottom line (Jacobs, 1991; Khurana, 2003).
One aspect that distinguishes many family businesses is attachment to a substantive (i.e.,
nonfinancial) mission or craft that a family has long embraced and come to take pride in
(Donckels & Frohlich, 1991; Harris & Martinez, 1994). To many executives at long
established family businesses, the mission is very personal (Carney, 2005). First, it is often
connected with the family’s history and reputation. So the mission reflects the continuity
of a family’s craft and contribution and becomes a family tradition (Guzzo & Abbott,
1990). Second, some family executives have been brought up, through long apprentice-
ships, to treasure the social or economic importance of the mission (Lansberg, 1999;
Ward, 2004).4 Third, many family owners and executives are free to pursue substantive
missions and the investments and sacrifices they entail because, as noted, they have the
discretion and incentive to forgo today’s returns for the sake of the future (Carney, 2005;
James, 1999).
Nature and Benefits. Stories abound in the accounts of successful family businesses
about the centrality of the mission, both to family owners and top executives, and to the
outside world. The emphasis is often on concrete technological or social accomplishments
rather than short-term financial results (Guzzo & Abbott, 1990). At Timken, a major
manufacturer of tapered roller bearings and precision steel, the mission for over a century
has been to overcome mechanical friction and improve American productivity (Pruitt,
1998). The New York Times, again, for over a century, has striven to create an informed
electorate through complete and accurate journalism (Tifft & Jones, 1999). Corning’s
mission has been to benefit mankind with pathbreaking glass technologies—from the first
light bulbs to the first fiber-optic cables (Graham & Shuldiner, 2001). At Michelin, which
reinvented the tire and its manufacturing processes several times over, it is to make travel
more safe, enjoyable, and economical (Michelin & Levai, 1998). Even the more bottom-
line conscious Cargill and IKEA have as core objectives to make their staple offerings
available to virtually everyone who needs them by racing down the cost curve.
These substantive and ambitious missions were not simply slogans, but steadfast
beacons that shaped strategy, capabilities, and resource allocation at all levels. They also
elicited investments that were far more generous and skewed to the long term than those
of the competition (Miller & Le Breton-Miller, 2005). For decades, Corning, Michelin,
and Timken outspent their rivals in R & D by factors of two to five (Graham & Shuldiner,
2001; Michelin & Levai, 1998; Pruitt, 1998). The New York Times vastly surpassed its
competitors’ spending on foreign news bureaus, research, and editorial staff, and on
4. Again it is worth drawing a contrast with many non-FCBs, where leaders come from outside the firm and
even industry, and are relatively unattached to the mission and craft of the organization.
737November, 2006
realms neglected by other newspapers, such as science and the arts (Tifft & Jones, 1999).
Estee Lauder for decades had twice the promotion budget of its principal rivals, and L.L.
Bean for 50 years spent virtually all its profits on advertising and building its market
(Miller & Le Breton-Miller, 2005; Montgomery, 1984). Cargill and IKEA invested far
more than the competition on operations infrastructure—plants, equipment, client inter-
faces, and automation—sothat their systems and facilities were always state of the art
(Broehl, 1992, 1998; Ortega, 2000; Torekull, 1999).
The clear benefits of these forms of investment came in the form of market leadership
in innovation, quality, brand building, or operations excellence, respectively, and decades
of competitive advantage. Concrete manifestations of such leadership were evidenced by
patents, customer loyalty, quality indexes, and consumer survey results (Miller & Le
Breton-Miller, 2005).
One of the reasons these farsighted investments did result in such advantage is because
they were hard for rivals to match. In the case of R & D, investment often was for the next
generations of technologies and products; and in product development and enhancement, it
was to develop critical mass for, and sustain the long-term viability of, the brand.
Modifying and Facilitating Conditions. These investments will be a function of the
nature of the mission and strategy pursued by the organization. Innovators, e.g., put more
into R & D while those aiming for brand leadership spend more on promotion. The
investments will also tend to be more generous where family members both manage and
control the firm. They may be reduced, however, where family members are in conflict or
are remote from the business. Long-term investments, moreover, may be less useful or
“durable” in uncertain environments.
Proposition 2a: Compared to their rivals, FCBs are more apt to prioritize a substan-
tive, nonfinancial mission and make more generous long-term investments in the
competencies, activities, and resources needed to fulfill that mission. Investments may
be in long-term R & D, long-term brand building, and superior infrastructure creation.
Proposition 2b: Compared to their rivals, FCBs will have higher levels of patents,
customer loyalty, and quality, and thus deeper core competencies.
Proposition 2c: The nature of long-term investments will depend on mission and
strategy; their level will depend on the power and presence of family leaders; and their
utility will depend on the uncertainty of the environment.
Investing in People—Knowledge Creation and Preservation
Roots and Drivers. If a mission is especially valued, then often so are those who must work
to achieve it. There is, among many FCBs, an acute recognition that employees represent an
invaluable knowledge base that must be nurtured in order for the organization to thrive.
Another factor at work in family businesses is concern for later generations of the family
who will be taking over the business, and who will need a staff of talented, motivated, and
loyal people to help them. Then, too, there is often the emotional attachment family
owner-managers feel for those who work for them (Davis, Schoorman, & Donaldson, 1997;
Guzzo & Abbott, 1990). These circumstances are rarer in nonfamily companies whose
shareholders may bring to bear constant pressures to reduce costs (James, 1999).
Nature and Benefits. Empirical evidence suggests that FCBs do indeed treat their
employees better than other businesses do. Allouche and Amann (1997) found that family
738 ENTREPRENEURSHIP THEORY and PRACTICE
companies paid workers and managers better than nonfamily rivals, accorded employees
more generous benefits—especially long-term benefits such as pensions and health
insurance—and trained staff for more hours. (Interestingly, they paid their top executives
significantly less than did non-FCBs). Intensive training can build knowledge capital,
while generous treatment of employees keeps that capital inside the firm (Miller & Lee,
2001). Family businesses also tend to engage in fewer layoffs, and in general, enjoy lower
turnover than nonfamily businesses (Allouche & Amann, 1997; Guzzo & Abbott, 1990;
Miller & Le Breton-Miller, 2003). The lower rate of turnover itself represents significant
cost savings, but one of its most important benefits is that it keeps work teams intact, and
allows people to absorb the culture of the company and become familiar with their
coworkers. The result is that tacit social and team knowledge are preserved within the firm
so that people are better able to work together (Barney & Hansen, 1994; Habbershon &
Williams, 1999; Sirmon & Hitt, 2003). Well-trained and motivated employees also can be
more productive and perform a broader array of tasks with little supervision. This enables
the firm to benefit from organization designs that are flatter, less bureaucratic, and more
centered around the initiative of employees at all levels—another hallmark of FCBs
(Guzzo & Abbott, 1990).5
Facilitating Conditions. Investment in employees should be greater where the family
prizes—and its strategies demand—exceptional knowledge capital, and rely heavily on
employee talent and motivation as a source of competitive advantage. Family firms that
compete on constant innovation or superior service quality would be examples. By
contrast, FCBs competing mostly according to economy or infrastructure superiority
might not feel as compelled to invest in their people. Superior investment in people is also
apt to be most likely when the family has control and personal presence, and is concerned
to pass on a healthy business to its heirs.
Certainly, not all family businesses treat their people well, and if recent lawsuits are
any indication, FCBs like Wal-Mart and Tyson Foods, who compete mostly on efficiency
and superior infrastructure, have not been ideal employers. Some family owners engage in
destructive nepotism that demotivates professional managers, or unfairly redistribute rents
away from employees, and toward themselves (Shleifer & Summers, 1988; Singell, 1997).
Proposition 2d: Compared to their rivals, FCBs will invest more in paying, training,
and retaining their human resources, in long-term employee benefits, rewards for
seniority, opportunities for advancement, and designing attractive jobs.
Proposition 2e: Therefore, FCBs will have an edge over their non-FCB rivals in
creating and preserving organizational knowledge.
Proposition 2f: Superior investment in human resources is most apt to take place
when strategies rely heavily on employee knowledge and initiative, and when owners
plan to pass the business on to family heirs.
5. Hallmark and S.C. Johnson avoided layoffs for over 90 years. Miller and Le Breton-Miller (2005), in a
study of 41 very successful family businesses, found that most of these firms gave their employees lots of
initiative, employed very broad job definitions, and favored flat organization structures. Firms eschewed both
bureaucracy and a narrow piecework mentality, favoring instead employee relationships based on shared
values, career challenge, and reciprocity. These practices not only saved administrative costs, they also
resulted in a more motivated and capable workforce, and lower turnover rates that preserved knowledge inside
the company.
739November, 2006
Investment in Enduring, Broad-Based Relationships with
External Stakeholders
Roots and Drivers. Long-term associations with bankers, customers, and suppliers
provide valuable resources and lend stability to an enterprise. They sustain a business in
times of trouble, and make it easier for a new generation to take over and keep things on
track. Long-term relationships give companies access to rare and valuable resources (Das
& Teng, 1998, 2001; Saxton, 1997). They also are much more easily formed in a family
business whose CEOs are so influential and have such long tenures (Carney, 2005;
Gomez-Mejia et al., 2001; Morck & Yeung, 2003; Uzzi, 1997). In these contexts, partners
know that the management team is stable, that the family name is at stake, and that the
family has both the discretion and incentive to fulfill commitments (Ward, 2004). So
family businesses make for attractive relationship partners and are in an ideal position to
develop and benefit from their social capital (Blyler & Coff, 2003; Fukuyama, 1995;
Portes, 1998).6
Behavior and Benefits. Much has been written about the varioustypes of long-term
relationships fostered by family businesses (Ward, 2004). The nature of the external
relationship a family business invests in very much depends on its business strategy. Firms
that make extensive use of outsourcing, e.g., are apt to commit to enduring alliances with
suppliers. IKEA invested deeply in its Polish suppliers, in effect modernizing their entire
operations. The long-term commitment paid off in suppliers that were not only efficient,
but also cooperative and loyal (Torekull, 1999). Similarly, firms like Tyson Foods and J.R.
Simplot competed by providing superior customized customer solutions to very large
clients. They ploughed enormous resources into building special facilities and units, and
customizing products and services for individual clients. It could take years for those
investments to pay off, but the resulting client loyalty tended to be very high. Finally, firms
such as Bechtel and Bombardier network with financiers, suppliers, and governments to
realize their projects (McCartney, 1989; McDonald, 2001). They form enduring relation-
ships with bankers, political officials, and major clients, nurturing such connections even
decades after projects have been completed.
Results from such investments include a rich network of connections that can sustain
the business in times of trouble, as well as superior customer loyalty, excellent input
resources, and value chain partners that allow a focus on core competency.
Moderating and Facilitating Conditions. As noted, the nature and level of investments
in external parties will vary according to strategy—with firms whose strategies are built on
serving very large clients, working with value chain partners, or having close ties to public
agencies, all investing the most. It is these companies that stand to harvest the most from
generous, farsighted partnering (Hagel & Singer, 1999).
We believe also that investments in external parties will be especially large in FCBs
whose CEOs have been in office for some time, have ample discretion, and plan to keep
6. It is useful to contrast this long-term relationship orientation with the more transactional attitude of many
non-FCBs. As noted, public non-FCBs are often under pressure to maximize current returns, and that gets in
the way of investing in long-term relationships that will not pay off for quite some time. There is also the
question of the short tenures at non-FCBs such that the rewards of CEO A’s investments are garnered only
during CEO B’s tenure—not much of an incentive for those motivated by short-term stock options.
740 ENTREPRENEURSHIP THEORY and PRACTICE
the business in the family for future generations. This gives these managers the credibility,
power, and incentive, respectively, to commit the required resources.
There is, of course, a dark side to some long-term relationships. FCBs have been
accused of cronyism and influence peddling with government officials to secure prefer-
ential treatment or to constrain competition (Morck & Yeung, 2003). Here, family power
and stability may be used to gain unfair advantage rather than to build capability.
Proposition 2h: FCBs are more apt than their rivals to invest in long-term relation-
ships with external parties such as clients, suppliers, venture partners, and the com-
munity at large.
Proposition 2i: Investments in long-term relationships will be associated with out-
comes such as greater customer loyalty, concentration on few suppliers, and good
corporate citizenship behavior.
Proposition 2j: Investments in long-term relationships will increase with the use of
strategies based on attracting large clients and loyal value chain partners, or having
significant resource dependencies.
Proposition 2k: Investments in long-term relationships will be highest for FCBs
with long-tenured CEOs who have the discretion to commit resources, and plan to
keep the business in the family.
Conclusion and Qualifications
This article has tried to make clearer the connection between corporate governance
and sustainable competitive capabilities through the intervening mechanisms of
asymmetry-creating long-term investments. Table 2 summarizes its arguments.
There are a number of qualifying conditions that make it more likely for a family
business to embrace these time horizons and investment policies. First, real family voting
control is essential as otherwise, pressure from short-term blockholders might derail any
long-term philosophy. Second, ownership and board membership must be so construed
that family conflicts and personal agendas cannot compromise the business. Third, those
family executives given the most sway must intend to keep the business in the family.
Fourth, boards should have outside members with the power to speak truth to an
entrenched family boss (Anderson & Reeb, 2004). These conditions of governance will
make it more likely that top executives will have the power and incentive to invest for the
long run, and, typically, they are easier to achieve in first-generation FCBs than in later
generations where family control is diluted and family conflicts are more apt to arise
(Anderson & Reeb, 2003; Gersick, Davis, Hampton, & Lansberg, 1997). It must be said
that although a long-term orientation is more likely in family businesses, it can occur
wherever top executives have the motivation and wherewithal to pursue the interests of the
business in a farsighted and inclusive way.
Long-run investment, by itself, does not assure success. Some industries change so
rapidly that long-run investments become irrelevant before they can ripen. So our argu-
ments may be least apt to hold in the most dynamic settings (Henderson, Miller, &
Hambrick, 2006). This qualification is especially likely to hold for fixed types of invest-
ments, such as those in infrastructure, but is less applicable to the more flexible
knowledge-based investments. The institutional context also can condition our arguments.
In countries where there is much cronyism, protectionism, and corruption, the long-term
orientation of family businesses may have more to do with co-opting powerful political
actors than with capability creation.
741November, 2006
Subsequent researchers might wish to test our propositions by focusing on different
industries. It will be important to characterize governance at both FCBs and non-FCBs in
a rich way and to test independently and jointly factors such as CEO tenures, modes of
control by the family, owners’ knowledge of the business, etc. Long-term investments can
be assessed by industry-adjusted ratios such as R & D to sales; new plants and equipment
to total fixed assets; and projects with payback periods estimated at 3, 5 and, 10 years as
a percentage of the total portfolio. Investment outcomes can also be tracked, not simply
according to financial variables such as growth in market share or long-term profitability,
but by patents, percentage of sales to new products, customer loyalty, growth in volume
of business with suppliers, etc. The challenge will be to control for the appropriate factors
in the analysis—ranging from the strategies and competitive contexts of the firm, to the
governance variables we have mentioned. Clearly, there is much work to be done.
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Table 2
The Nature, Roots and Moderating Conditions of Long-Term FCB Investments
Nature and benefits of
long-term investment Roots and drivers Moderating conditions
Superior long-term investments in related
capabilities—Research and
development, brand building,
state-of-the-art quality and
infrastructure may yield potential
competitive advantages in all these
areas.
Family commitment to a substantive
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Nature of the longterm investments will
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Superior investment in a skilled and
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Family preoccupation with the future of
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facilitates outsourcing and therefore
capability focus.
Duration of advantage may depend on the
inimitability of the investments and the
level of uncertainty and change in the
environment.
FCB, family-controlled business.
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Isabelle Le Breton-Miller is Senior Research Associate at the University of Alberta and President of OER Inc.,
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Danny Miller is Professor of Strategy and Family Enterprise at HEC Montreal and Chair in Family Enterprise
and Strategy the University of Alberta.
746 ENTREPRENEURSHIP THEORY and PRACTICE