Family business performance. The perception effect: exploring the internal point of view

The main contribution of this research project is the identification of the conceptual framework called “perception effect” in the family business performance, in the particular case of family business without the obligation to submit audited financial statements. The perception effect will define the tendency of the future business performance due to the influence on the current behavior. The contribution of this work is the identification of a conceptual framework useful for the decision-making process aiming to a better management of scarce resources. The construct of perception effect comes from the analysis of empirical evidence from Mexican case studies and interviews with independent business advisors. Mexico is considered an emerging market. In recent years emerging markets represent an important component of the world economic growth. Emerging markets are highly dominated by family businesses, whose performance improvement would benefit the economy in general. Family firms (FF) are very important for the economy to which they belong: placed in different sectors, they vary in size, age, objectives and nationality, among others. Different theoretical bases have been applied to explain the complexity of family firm performance. The principal theories used in the literature to explain the family business performance are the Agency Theory, the Stewardship Theory and the Resource Based View Theory (Chrisman, et al., 2005; Debicki, et al., 2009). The Agency Theory deals with one of the more common characteristics of family firms: the overlap of ownership and management; the Stewardship Theory calls for the altruism of family managers following the benefits of the organization rather than their own; the Resource Based View (RBV), looks into the particular resources coming from the family involvement. Those theoretical efforts have been useful to identify some of the complex dynamics that are present into the different types of family business. The influence the family brings into the business affects its performance through the coexistence of both financial and non-financial goals (Stafford, et al., 1999), although, in the literature, the assessment of family business performance is mainly based on financial measures. The literature on this topic is still growing and evolving. The current studies are mainly related to succession, corporate governance and strategic management, leaving a gap for more research in other related topics, as in the case of business performance – particularly, the use of financial information provided by family managers, as well as the system utilized to assess the business performance. Perception has an important influence in the decision making process of family managers. This is true particularly in the case of family businesses without the obligation to submit financial statements due to the lack of control of information – both financial and non-financial: family managers take core decisions under the perception effect. The financial reports are part of the performance measurement system (PMS) of a firm: knowing the current performance, it is possible to take decisions in order to keep or improve the business’ position. That is why it is important to understand how much of this information represents the real financial situation of a family firm, in the particular case of firms that do not have the legal obligation to submit audited financial statements. When a family firm is not obligated to submit such statements, the financial information they deliver might not represent a priority, leading to the replacement of the financial assessment with selected measures for the “perception” of performance. Little research exists about performance measurement system design and implementation in family firm. The current studies pay attention to the analysis of financial outcomes, leaving aside the reliability of this information, specifically for those family firms that, not being public companies, are not obligated to present audited financial statements. Companies that pursue accurate financial reports, base their decisions on financial information; companies that don’t, base their decisions on perception. The present work has the objective to contribute filling the gap by analyzing how the performance measurement system is implemented as well as how the financial information coming from this system is employed in order to take internal decisions. The arrival of a new generation into the family firm might trigger changes in the performance measurement system. This ingredient might increase the complexity of the situation. Goals, perceptions and personal necessities are considered during this analysis. This thesis aims to provide family managers with some insight on the importance of an adequate use of financial information and of a formal performance measurement system that might be useful to lead the company to the desired place, in terms of business performance. The academic community will achieve a perspective that extends the literature about family business performance, with particular reference to the use of financial information and the establishment of a performance measurement system, by pointing out the important effect of perception into the business performance. The limitation of this work consists in the absence of a measurement of the actual impact of a structured PMS. The use of complete and accurate financial information would influence the decision making process but, at the same time, will entail other costs, as tax payments and the implicit cost of control. Another important limitation is that the study considers only the Mexican environment, although it might be representative of the general conditions faced by family firms in emerging markets. Family firms without the obligation to submit audited financial statements may not have an established and organized PMS. The lack of an organized PMS does not mean that they don’t need it. This kind of family firms might consider as a PMS a set of activities aiming to collect, process and analyze information on the actual situation of the company, as well as the trends in some core areas of the business. The informal activities deal with incomplete information, with the consequence of low quality decisions. The use of automated systems and technological tools might be underexploited. Raw financial data can be confused with processed reports, preventing the creation of historical information. As the performance cannot be analyzed across time, decisions are taken on a day-to-day basis. This study points out the importance of the PMS establishment in a FB in order to improve the quality of the decision making process and of the business performance. The family and business goals are not necessarily established in an explicit way, translated into financial and non-financial measures and followed for their accomplishment. Family and business goals are clearly “perceived”, implicitly translated into financial and non-financial “measures”, the accomplishment of which are easy to be “felt” by the main shareholders. Family goals might represent the main objective of some FBs, but they might also compromise the business survival. A clear and objective PMS, designed and implemented according to the necessities of the business, might help to improve the quality of the decisions, leading to a better business performance over time. This research contributes also to the FB literature and business practice in understanding the possible benefits of the establishment and implementation of a formal PMS in a FB during a generational change. It highlights the importance of a formal PMS in creating a history on different indicators that permits the tracking of the business performance, helping FBs overcome their weaknesses and generate better financial and non-financial outcomes, with positive effects within the general economy. Future research may be focused on the presence of multiple family nucleuses with conflicting goals inside a single FB, affecting the design of the PMS, as well as the selection of measures and consequently influencing the business performance. A multiple case study may be conducted to confirm or reject some of the findings of this work regarding the influence that the family goals exert on the PMS design of the business. For future research, it would be important to understand the impact of formal and established PMS in the FB assessment because, if the process to collect and analyze information is not reliable, the assessment might lose its validity. Regarding the same topic, are the FBs using valid and complete information into their decision making process? If FBs provide incomplete information, the validity of the assessment of good or bad performance might be compromised. This research has been conducted at the Politecnico di Milano, Italy, under the supervision of Prof. Marco Giorgino; during the period abroad, at the Columbia Business School, New York City, USA, under the supervision of Prof. Eric Abrahamson. The empirical research was conducted in Puebla, Mexico.