Organizational Learning through Board Interlocks in Family Firms: Adoption of the Board Reform

There is a growing research interest in family business and family firms in the organization and management research. One of the key dimensions that differentiate family firms from non-family firms is that managerial decisions and choices in family firms are often influenced not only by financial incentives but also by non-economic goals of family owners. Extant research indeed indicates that family owners are driven by incentives to preserve and enhance not only their financial gain but also their non-financial goals. Large family owners have been shown to use the board to strengthen their control over top managers to protect and enhance the family’s interests and to legitimize the appointment of directors and executives whose strategic choices foster the family’s non-economic goals or socioemotional wealth. Other studies reveal that family firms tend to value employees’ loyalty and long-term focus which enhance those employees’ identification with the firm and promote shared values with family owners. Family firms’ governance practices hence reflect the objectives to enhance non-economic goals of family.

This study analyzes the adoption of board reform – i.e., a better separation of decision-making rights from monitoring – right after its introduction in Japan in 1996 among listed family firms. Japan presents an ideal context to examine this issue, as the seemingly unfavorable practice had started to spread in the late 1990s. By trying to maintain strong family control over the board, a firm may risk losing legitimacy in the eyes of external stakeholders if the board is dominated by family members. In contrast, the board reform which aims to enhance the board’s monitoring function may not be favorably perceived by family owners, but might enhance the firm’s external legitimacy, leading to potential conflict between different dimensions of non-economic objectives. We aim to examine the effects of family control on the adoption of this newly introduced practice which has conflicting implications on family owners’ non-economic goals. 

To examine this issue, we focus on the impact of board interlocks that are theorized to facilitate organizational learning. In a firm’s decision to adopt a new practice, access to relevant information is likely to be critical.  In this study, we investigate the effects of board interlocks with other non-family and family firms on the adoption of board reform.  We theorize that family firms are more likely to learn from other family firms that tend to share common values, interests and relevant experiences. However, we contend that family power and ownership control may moderate the impact of board interlocks with other family firms on the focal firm’s learning. This is because such factors reflect the degree of the family’s involvement and unique identity, which influences family firms’ reliance on other family firms for information on the new practice. Our empirical analyses largely support that these factors indeed affect the adoption decision.