Agency theory and the family business

The conceptual domain of agency theory is one of the dominant organisational theory perspectives applied in current family business research (Chrisman et al., 2010). According to agency theory (Jensen and Meckling, 1976), agency costs generally arise due to individuals’ selfinterest and decision making based on rational thinking and oriented toward own preferences. With more people involved in decision making, such as through the separation of ownership and management, agency costs occur due to different preferences and information asymmetries between the owner (principal) and the employed management (agent) (Jensen and Meckling, 1976). In other words, agents take decisions based on their individual preferences (for example, short term, financial gains) instead of the owners’ preferences (for example, long term, sustainable development).

Behavioural agency theory and the family business

The behavioural agency theory was developed to provide a more comprehensive explanation and prediction of managerial risk taking, in response to some shortcomings of agency theory. In general, the theory offers explanations of why decision makers prefer some strategic choices to others. The use of behavioural agency theory in family business research has, however, been very limited. Family business scholars recently adapted this theory to construct the family business variant, the ‘socioemotional wealth’ construct, which offers better explanations for the risk taking and decision making behaviours of family firms. This chapter provides an overview of behavioural agency theory and the socioemotional wealth construct, explores how they have been used in family business research, and offers suggestions for how this theory can be used in further research to contribute to both the family business and the general management literature. Keywords: family business, behavioural agency theory, socioemotional wealth, family firm heterogeneity.

Behavioural theory and the family business

Fifty years have passed since Cyert and March’s 1963 A Behavioral Theory of the Firm. During this time, BTOF has been adopted across different research domains to investigate how organizations set goals, how they determine aspirations and how they finally react to performance aspiration discrepancies. Cyert and March’s framework has also recently emerged as one of the dominant paradigms to understand the ways in which family business organizations make decisions. In this chapter, I review the theoretical development and empirical results of BTOF and its application in the family business field of study in order to identify theoretical and empirical gaps and propose suggestions for future research. The conclusions suggest that BTOF is both a theoretically and empirically valid perspective in family business research, particularly when combined with other theoretical frameworks. The principal recommendation is to apply behavioral theory to enhance scholarly understanding of  how family organisations define their aspiration levels and respond to organizational problems.