Hiring Family or Non-Family Managers When Non-Economic (Sustainability) Goals Matter? A Multitask Agency Model

Abstract

Prior economic research is oftentimes critical about family managers. Nepotism, altruism, lower managerial abilities, and a small pool of qualified family candidates are cited as reasons that speak against family management. However, empirical data shows that a large share of firms is run by family managers. Our study provides a rational economic explanation for this paradox, linked to the multitasking problem in family firms, whereby managerial tasks are related to the economic and non-economic goals of the business-owning family. Comparing the performance of family and non-family managers under moral hazard and imperfect performance measurement, we find that incentive pay leads to an effort distortion towards economic outcomes for both manager types. This effort misallocation is more pronounced when economic and non-economic management tasks are weak complements or even substitutes. While incentive pay is more effective for non-family managers, family managers are generally more reluctant to neglect non-economic goals. We show that this, together with the family managers' particular expertise regarding non-economic goals of the family business, can overtrump poor skills in economic tasks and even outweigh lower total abilities on average. This highlights why, in fact, family managers are often the optimal appointment choice, which becomes even more relevant in light of the increasing importance of non-economic sustainability goals. Notably, the interdependence between economic and non-economic goals of the owner family in the manager's job tends to have a moderating effect on the family manager's relative performance. We moreover verify that a family manager is more likely to outperform a non-family manager the more aligned the performance measure with the family's goals and the less severe the moral-hazard conflict with the family. Our study contributes to the literature about family management and agency costs in family firms and has practical implications for family businesses deciding between hiring managers from in or outside the family. By highlighting the importance of non-economic goals it moreover adds to the current discussion about the implementation of and the compliance with businesses' sustainability goals.

Keywords: family firms, family management, multitask model, incentives, non-economic goals

JEL Classification: D82, D86, M12, M21, M52, M54