Abstract
Prior studies find that nonfamily managers enhance family firm performance, yet other studies note that family firms have difficulty attracting high-quality nonfamily managers, often settling for average-quality nonfamily managers. Given these findings, how is it possible that average-quality nonfamily managers enhance family firm performance? We address this paradox by theorizing that lower-performing, rather than higher-performing, family firms are more likely to benefit from employing nonfamily managers. Using a sample of 324 small family firms, we find that family firms with below-average performance significantly benefit from employing nonfamily managers, whereas family firms with above-average performance do not experience the same benefit. We attribute the difference to the presence of family-management capacity constraints in lower-performing family firms. For family firms with such constraints, the employment of nonfamily managers is more beneficial than it is for higher-performing family firms, which are not bound by these constraints.
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Notes
Managerial quality refers to the skills, abilities, experience, and qualifications of an individual to perform managerial work. Although we recognize that the quality of individual managers varies, we assume that, in general, the nonfamily managers employed by nonfamily firms are of higher quality than the nonfamily managers employed by family firms. This aligns with prior studies, which suggest that the average quality of the managerial labor pool available to family firms is lower than that available to nonfamily firms (Chrisman et al. 2014; Schulze et al. 2001).
Although the quality of individual managers will differ, we assume nonfamily managers in family firms are average in quality to distinguish their skills, abilities, experience, and qualifications both from nonfamily managers in nonfamily firms who are likely to be higher in quality and from high- and low-quality family managers in family firms.
It is important to note that the instrumental variables may be indirectly related to the dependent variables. This is to be expected because the instrumental variables should be related to the nonfamily manager independent variable, which, in turn, should be related to the dependent variables. However, this should not invalidate our instruments because other than through the explanatory variables included in the second stage regression, they are uncorrelated with performance (Adams et al. 2009). It should also be noted that, by definition, the instrumental variables are related to the proportion of family managers in a family firm, which is the inverse of our independent variable (i.e., 1—proportion of nonfamily managers). However, we do not consider this to be a problem since our purpose is to identify instruments that will limit the effects of endogeneity on the relationship between the nonfamily manager variable and the sales growth and ROS variables.
Full results of the robustness tests are available from the lead author upon request.
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Acknowledgements
The authors appreciate the feedback from Zonghui Li and participants at the Family Enterprise Research Conference. The United States Small Business Development Center is acknowledged for use of the data, and the Center of Family Enterprise Research at Mississippi State University is appreciated for its support of the study.
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Fang, H., Chrisman, J.J., Daspit, J.J. et al. Do Nonfamily Managers Enhance Family Firm Performance?. Small Bus Econ 58, 1459–1474 (2022). https://doi.org/10.1007/s11187-021-00469-6
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DOI: https://doi.org/10.1007/s11187-021-00469-6