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