Are Founder-Led Firms Less Susceptible to Managerial Myopia?

[We’re pleased to welcome authors Charlotte L. Schuster of Technical University of Dresden, Alexander T. Nicolai of the University of Oldenburg, and
Jeffrey G. Covin of Indiana University. They recently published an article in Entrepreneurship Theory and Practice entitled “Are Founder-Led Firms Less Susceptible to Managerial Myopia?,” which is currently free to read for a limited time. Below, they briefly write about the motivation and impact of their research.

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What motivated you to pursue this research?

“Over the last two decades, critical concern among academics and practitioners increased that managers act myopically. This criticism refers to managers sacrificing a company’s long-term for its’ short-term goals – often expressed in cutting R&D expenses to meet earnings targets. Among the most cited reasons for managerial myopia in management research are short decision horizons of opportunistic managers. While existing research in different disciplines mainly focused on “professional” managers and CEOs of publicly listed companies, it is not clear whether myopic management practices also apply to founder-CEOs. Founders might differ inherently from salaried managers in terms of passion and intrinsic motivation, incentive structure, and duration in the company. This motivated us to analyze empirically whether founder-CEOs who built up a company and accompanied it from its early stage through and beyond the company’s IPO are, indeed, less susceptible to managerial myopia than nonfounder-CEOs.”

Were there any specific external events—political, social, or economic—that influenced your decision to pursue this research?

“Several recent events suggested that managerial myopia is prevalent among very big companies. For instance, the German Automotive Manufacturer Volkswagen gained negative publicity with the systematic manipulation of emission values on the test stand. By risking an immense image loss in the long run and the payment of high conversion and compensation costs to customers in the medium term, the company preferred to save R&D expenses in the short term and, thus, forewent the process of developing a better technology.

In contrast to professional managers, founders often claim to be long-term oriented. They seem to be more interested in demonstrating and pursuing a long-term vision for the company than committing to short-term earnings goals. For example, Jeff Bezos, founder and CEO of Amazon.com took losses for years and withstood the capital market pressure to make quick profits in order to realize his vision of building up the company. In a similar vein, Elon Musk, founder and CEO off Tesla Motors and SpaceX, is known for trying to win support for his views – ignoring the earnings expectations of the capital market.
Such contradicting company examples further motivated us to explore the investment behavior of founder- versus nonfounder-led firms in the context of short-term earnings goals.”

In what ways is your research innovative, and how do you think it will impact the field?

“Our study is the first to examine the phenomenon of managerial myopia in the context of founder- versus nonfounder-led firms. We leverage insights drawn from agency theory and stewardship theory as bases for explaining both a specific myopic earnings management practice as well as the influence of CEO founder status on the likelihood of this practice occurring. Specifically, our study contributes to knowledge based on corporate governance and entrepreneurship research that employs stewardship theory to explain the behavior of individuals who place their firms’ interests above their own self-interests. While we did not find a negative relationship between stock ownership and myopic R&D cuts as agency theory would suggest, our results document the influence of founder status as a factor associated with CEOs being good stewards of their firms’ assets, congruent with the stewardship theory position regarding founder-CEOs’ behavior. Our empirical results shed light on how firms can benefit from founder management and illuminate the financial conditions under which potentially detrimental earnings management practices may surface. Thus, our study contributes to a growing understanding of how and why founder management can well serve a firm’s long-term interests.”

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The 2011 FBR Best Paper Award Goes to…

Family Business Review (FBR) announced that Jörn Block, TechnischeUniversität München, was announced the winner of the 2011 Best Paper award for his article entitled “Family management, family ownership, and downsizing: Evidence from S&p 500 Firms,” which appeared in the June 2010 issue.

The Judging Panel commented that “this article is a most interesting study with wide appeal to scholars in strategic management and family business. The panel appreciated the focus on social identity and agency theory driving the research, as well as the author’s usage of an impressive sample.”

Honorable mention goes to Carlo Salvato, Bocconi University, and Ken Moores, Bond University, for their guest editorial entitled “Research on Accounting in Family Firms: Past Accomplishments and Future Challenges,” which appeared in the September Special issue of FBR on Accounting in Family Firms.

“The panel found this to be a thorough review of an interesting and important area. It presents a clear and well organised coverage of accounting issues and family firms which will be of great value to current and future scholars in the field.”

These articles, among others, can also be found in FBR’s Editor’s Choice Collections.

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Research on Accounting in Family Firms

Carlo Salvato, Bocconi University, and Ken Moores, Bond University, published “Research on Accounting in Family Firms: Past Accomplishments and Future Challenges” in the September 2010 issue of Family Business Review. Professor Salvato and Professor Moores kindly provided the following thoughts on their article.

Who is the target audience for this article?

We explicitly designed this editorial to meet the interests of two different, yet connected target audiences. First, our main desire was to intrigue family business scholars to the study of accounting in family firms—a rarely addressed topic in the field, despite its relevance. To this aim, we provided an extensive literature review of all papers published in this area, and what we believe are exciting avenues for future research. Second, we were equally interested in attracting mainstream accounting scholars to the investigation of family firms—a relatively unusual empirical context for these colleagues. To this aim, besides the mentioned extensive literature review, we pointed to a number of gaps and controversies in the accounting literature that we believe could be fruitfully addressed by investigating family controlled firms more extensively.

Were there findings that were surprising to you?

By far the most surprising finding of our extensive literature review was the incredibly limited number of works published on accounting in family firms: only 47 papers over the past three decades were squarely focused on accounting in family firms. If we consider that family firms represent between 70-90% of all firms, and that they create well over 50% of Gross Domestic Product and new jobs in most countries, the limited attention devoted to how and why these firms differ in terms of accounting behavior was truly unexpected. It was especially surprising to learn that only 3 papers (about 6%) were concerned with management accounting topics, an area in which the context has long been known to affect the form and content of control systems. The fact that the unique context of family firms has not been explored further is perhaps understandable in terms of the limited access to data that inhibits all management accounting research of this type relative to the more accessible capital market and annual report data. The limited exploration of this context to dateclearly it opens up a number of exciting avenues for future research, debate and applications.

How do you see this study influencing future practice?

Despite our prevailing research-oriented aims, the article may offer significant insights to practice. Family entrepreneurs and accountants will learn what are the most typical accounting and reporting behaviors of family firms, by tracing them to different situations and contingencies. Practitioners would hence learn, for instance, under what conditions family firms tend to hire large international vs. small and local auditing firms, or under what conditions voluntary disclosure is more beneficial to different types of family business.

How does this study fit into your body of work/line of research?

This editorial is a perfect complement to both our lines of research. It was through the intuition of Editor-in-Chief Pramodita Sharma that we joined our different, yet converging backgrounds. Carlo Salvato, devoted most of his career to the study of management and organization in family firms, paying increasing attention to unexplored issues in the field. Ken Moores invested most of his academic career in exploring accounting topics. Over the past decade, however, he has been paying increasing attention and research efforts towards the field of family business management. These more recent efforts prompted his school, Bond University in Australia, to award him a higher Doctoral degree in Business (DBus.

How did your paper change during the review process?

Special Issue editorials follow a different review process at FBR, as in most other academic journals. Yet we benefited immensely from the comments of Editor-in-Chief Pramodita Sharma, and from countless discussions with colleagues within both the family business and accounting fields. Given the relative novelty of the topic, we found it essential to explore the different points of views and suggestions of scholars from both the fields that the Special Issue we edited was trying to connect—family business and accounting. The interpretations and suggestions for future research presented in our editorial are hence, in a way, also a “collective effort” that we performed with the help of colleagues, with the aim of offering a more shared view of this promising field of study.

What, if anything, would you do differently if you could go back and do this study again?

Our paper is the first systematic review of the accounting literature in family firms. It is also the result of several discussions with colleagues active both in the family business and accounting fields. After our paper was published and made available, we had several opportunities to present and discuss it with different audiences. These discussions significantly extended and deepened our understanding of the literature, and provided countless additional insights and directions for future research. Although this happens for any publication, it would have been probably beneficial to perform more of these exchanges with colleagues before publishing the paper. This would have allowed to further extend the extent of our insights, including perhaps opening up the issue of the knowledge foundations of accounting and their consistency with the reality of family business functioning, and suggestions for future research efforts in the field.

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