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The Relationship Between Boards

and Planning in Family Businesses


Timothy Blumentritt

This study examines relationships between the existence of boards of directors and advisory boards and the use of planning in family businesses. It is argued that both of the
primary roles of boards, the governance of a firms management team for the firms stakeholders and the provision of valuable business resources to the firms management team,
are significantly related to the use of planning activities in family businesses. The empirical evidence, drawn from a survey of more than 130 family businesses, largely supports
the hypotheses. Conclusions and suggestions for future research close the article.
Research has established the importance of both
strategic planning and the formation of boards
for the success of family businesses (Sharma,
Chrisman, & Chua, 1996, 2003; Ward, 1988). Like
other forms of businesses, family-owned firms
that have clear perspectives on how their managers run their firms and that have proper and
effective governance structures are more likely to
enjoy long-term success. There are, of course,
alternatives to utilizing strategic planning and
boards. Instead of planning, managers may
choose to make decisions based on intuition or
simply continue on the trajectories set for the
business in years past. Boards may not be formed
or ignored once in place, and family businesses
may choose to rely only on informal interactions
with family members for the advice and aid provided by boards at other firms.
Scholars have explored both planning and
boards, to varying degrees, in family businesses,
but little or no research has been conducted on the
relationships between them. This lack of research
represents a significant gap in our understanding
of how family businesses grow and develop, especially in todays world of intense competition and
renewed interest in corporate governance. The
specific research question that guides this article
is: Is there a relationship between the existence of

boards and the prevalence of planning in familyowned businesses?

Planning in Family Businesses


The two most prevalent types of planning that
occur within family businesses are strategic planning and succession planning. Strategic planning
improves the performance and longevity of all
types of firms. The lions share of work on strategy in family businesses (for a review, see Sharma,
Chrisman, & Chua, 1997) has focused on factors
other than the drivers of strategic planning. There
are exceptions (Miller, McLeod, & Oh, 2001; Rue &
Ibrahim, 1996; Upton, Teal, & Felan, 2001). These
studies generally found that family-owned
businesses that engage in planning are likely to
perform better than those that do not engage in
planning.
Despite the perceived benefits of strategic planning, there is little or no research that investigates
the characteristics of family business that are
related to the use of strategic planning or the
drivers that cause a family business to engage (or
not) in strategic planning.
Succession planning is the deliberate and
formal process that facilitates the transfer of
management control from one family member to

FAMILY BUSINESS REVIEW, vol. XIX, no. 1, March 2006 Family Firm Institute, Inc.

65

Blumentritt

another (Sharma et al., 2003, p. 1). The ability to


pass leadership and ownership of a firm from one
generation to the next is at the heart of family
businesses. As such, many aspects of succession,
both as an event and as a process, have received a
great deal of attention in the family business literature. On the other hand, little is known about
the family business characteristics related to or
the impetus for succession planning. Sharma et al.
(2003) is an exception. That study hypothesized
that the intentions of the incumbent (or
founder/CEO) drive the development of the succession process, but the empirical results indicated that succession planning may be the result
of push behaviors by a potential successor rather
than the efforts of a family firms incumbent
leader.
One may suppose that the characteristics of
family businesses related to succession planning
have not been explored because researchers of
family business have assumed that a desire exists
to pass the firm along to family members, making
the need to study the drivers of succession planning superfluous. However, the conclusions drawn
by Sharma et al. (2003) open the door to consideration of factors that may be related to succession
planning other than the desires and initiative of a
family firms founder or CEO.

Boards in Family Businesses


The nature and roles of boards are also important
topics in the family business literature. Studies
have examined the general characteristics and
roles of boards (Corbetta & Salvato, 2004;
Corbetta & Tomaselli, 1996), the effects of ownership dispersion on the decisions made by boards
(Schulze, Lubatkin, & Dino, 2003), attractive qualities of candidates for boards (Mueller, 1988), and
the role of outsiders on family business boards
(Ward, 1988).
The primary roles of boards in business
have been identified as governance and provision
of resources; through these roles, boards contribute to their firms performance (Hillman &
Dalziel, 2003). The governance role centers on
corporate oversight on the behalf of shareholders
66

and other stakeholders, maintaining managerial


accountability, and ratification of strategic plans
and investment proposals. Largely based on the
ideas of agency theory, this role suggests that
boards are in place to ensure that management
acts in the best interests of a firms owners
(Hillman & Dalziel, 2003). Governance has
received increasing attention in recent years due
to well-publicized incidences of boards failing in
this capacity.
Less work has focused on the second role of
boards, the provision of strategic contributions to
the firm (Hillman & Dalziel, 2003). From this perspective, boards can actually improve a firms performance through the capabilities and resources
that members bring with them. To gain access to
resources through boards, the composition of the
board can be managed so that members have
skills, experiences, reputations, and contacts that
are valuable to the firm.
The theoretical basis for the resource provision
role of boards is resource dependence theory, as
opposed to agency theory, making this role of
boards distinct from the governance role. This
perspective introduces the notion of board
capital, or the human capital (experience, expertise, reputation) and relational capital (network of
ties to other firms and external contingencies)
(Hillman & Dalziel, 2003, p. 383) made available to
a family firm through the proper construction of
a board.

Advisory Boards
Within family businesses, a distinction must be
made between boards of directors and advisory
boards. A board of directors has legal standing
and voting rights as it formally represents shareholders in interactions with a firms management.
Studies of family business boards have largely
concentrated on boards of directors. However,
given that many family businesses are small
and/or developing, many do not have a formal
board of directors due either to a perceived lack
of need or simply because they have not made the
effort to construct one. Such firms may use less
formal advisory boards in their stead.

The Relationship Between Boards and Planning in Family Business

Advisory boards do not have legal standing and


are used primarily to provide advice to a firms top
managers (Tillman, 1988). These boards are often
comprised of people that are held in esteem by the
leaders of family businesses, people on whom the
leaders rely for objective opinions and business
insights (Jaffe, Lane, Dashew, & Bork, 1997). That
is, by their nature, advisory boards provide
benefits to family firms in terms of the resource
provision role of boards. However, because advisory boards do not have legal standing, their
impact on firm governance is significantly muted.
The nature, role, and composition of advisory
boards have received almost no attention in the
academic literature. There is an exception. Writing
on new entrepreneurial ventures, Morkel and
Posner (2002) note that advisory boards can
provide the CEO and management the benefits of
experience, expert knowledge, contacts and credibility without taking on the legal and administrative responsibilities associated with joining a
board of directors.

Family Business Boards


and Planning Activities
A positive correlation should exist between the
existence of boards and planning activities at
family firms. The hypotheses that follow are based
on the expectation that the two primary responsibilities of boards, management oversight and the
provision of business resources, are related to the
use of strategic and succession planning. This
relationship might exist for many reasons. For
instance, in carrying out their responsibilities, it is
expected that boards, those of both legal standing
and of advisory status, are likely to prod the firms
top managers to consider how they can best
improve the firms performance, and this guidance
is likely to lead to planning activities; Mustakallio,
Autio, and Zahra (2002) found an association
between boards that provide advice and counsel
and better strategic decisions.Alternatively, family
business managers who form strategic and succession plans may recognize the need for guidance
and assistance in carrying out their plans, leading
to the formation of a board.

First, there should be relationships between


boards of directors and both strategic and succession planning activities. Both roles of boards of
directors, those of governance and resource provision, are likely to be related to greater degrees of
planning at family firms. A boards governance
responsibilities may be satisfied by requiring the
development of plans for elements that will
significantly impact firm performance, such as
strategy and succession. In addition, it is possible
that board members, especially outside board
members, may actually have the expertise necessary to effectively build these plans. Even if the
members themselves do not have the right skills,
they may have personal relationships with others
that do.
Hypothesis 1a. A family firm is more likely to
engage in strategic planning if it has a board
of directors than if it does not have a board of
directors.
Hypothesis 2a. A family firm is more likely to
engage in succession planning if it has a board
of directors than if it does not have a board of
directors.
The relationships between advisory boards and
planning activities should be similar to those
between boards of directors and planning activities. Although there is no academic literature on
which to base these arguments, the nature of advisory boards as groups of informed and expert
advisors should prompt a firms CEO or management team to engage in planning activities or aid
their ability to capture the benefits of the planning. Theoretically, the association between advisory boards and planning activities within family
businesses is likely to be driven more by the
resource dependence perspective on board relationships than by the agency theory perspective.
Hypothesis 1b. A family firm is more likely to
engage in strategic planning if it has an advisory
board than if it does not have an advisory board.
Hypothesis 2b. A family firm is more likely to
engage in succession planning if it has an advisory
board than if it does not have an advisory board.
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Blumentritt

Data and Methodology


To test these hypotheses, a survey of family businesses was conducted.A center for family business
at a university in the Midwest identified 1,008
businesses in southeastern Wisconsin and northern Illinois. The vast majority of the firms in the
database are not members of the center. To preserve true confidentiality, no identifiers were used
on the surveys.
Each target respondent received a single
mailing. The target of the mailing was the firms
CEO as well as, in some cases, other top managers
at the firm. Usable responses were received from
149 unique firms for a gross response rate of about
15%. Of the 149 respondents, 12 indicated that
they were not family businesses, and four firms
did not provide full data on boards. These cases
were excluded from further analysis, leaving a
final sample size of 133 firms.

Measures
Dependent variables. To examine planning
behaviors, the study included several fact-based
measures. Firms can use strategic planning with
different degrees of intensity. Although some
firms may utilize a simple strategy review process,
consisting of activities such as informal discussions and general analysis, others may utilize a
formal process for constructing strategy. The
alternative to either of these planning methodologies is to not engage in planning at all. Further,
either informal or formal planning processes can
be codified into a written strategic plan. Therefore, three items were used for the dependent variables, each using dichotomous responses (yes/no),
to examine the use of strategic planning: Does
your company go through a strategy review
process on a regular basis? Does your company
employ a formal process for constructing strategy? and Does your company have a written
strategic plan?
Again using a fact-based item, succession planning was measured by asking if a successor had
been identified (yes/no). Although this item does
not measure planning behavior, it does capture
68

the supposed outcomes of succession planning:


the identification of a successor. Given that the
studys sample consisted of family firms only and
that the majority of the individuals who completed the survey were their firms founders
and/or CEOs, this simple measure should adequately capture the variance necessary to examine
the studys hypotheses.

Independent variables. The existence of


boards of directors and advisory boards was measured through two yes/no questions. The exact
text of the items was: Does your firm have a legal
Board of Directors (other than only family and/or
employees)? and Does your firm have an advisory board? The items guided respondents to not
consider other corporate governance groups such
as family councils, yet differentiated between
formal boards of directors and advisory boards.
Of the 133 responding firms, 74 did not have a
board at all, 31 had a board of directors but not an
advisory board, 20 had an advisory board but not
a board of directors, and eight had both a board
of directors and an advisory board.
Control variables. In the statistical tests, both
CEO tenure and the size of the firm were used as
control variables, as both may impact the prevalence of planning at family firms. CEOs with
longer tenures may be more likely to have established business practices and more experience,
and thus more likely to use planning activities,
particularly succession planning. CEO tenure was
measured by the number of years the CEO had
been in office. Second, larger firms may have additional resources available for planning activities.
Firm size was measured by the natural log of the
firms number of employees.
Statistics
Because the studys dependent variables are
dichotomous, logistic regression is the appropriate statistical procedure to test the hypotheses.
Logistic regression is suitable for analysis of
dependent variables, such as dichotomous variables, that do not satisfy the assumption of multi-

The Relationship Between Boards and Planning in Family Business

variate normality required for most forms of multiple regression analysis. Four equations were
used to test the hypotheses. The first three equations examined the dependent variables associated with strategic planning behaviors; the fourth
equation tested the independent variables on the
incidence of an identified successor.
Coefficient estimates (any bi) in logistic regression are treated slightly differently than in linear
regression. Instead of indicating a slope, each bi
indicates an odds ratio. An odds ratio is the degree
to which the odds of experiencing the dependent
variable increase given an increase in Xi, the independent variable associated with bi. The odds
ratio is computed as exp(bi), or e raised to the
power of bi. (The constant e is the base of the
natural logarithm and equals approximately
2.718.) For example, each additional unit of an
independent variable with a bi of 0.50 would
increase the odds of experiencing the dependent
variable by 64.87%.

Results and Discussion


Descriptive statistics and correlations among the
measures are provided in Table 1. The correlation
table indicates high correlations among the strategic planning variables, as should be expected.
Interestingly, the data do not indicate a correlation
between the strategic planning variables and the
identification of a successor, suggesting that the
two forms of planning are distinct. The correla-

tions suggest stronger relationships between the


various forms of planning with advisory boards
than with boards of directors.
The logistic regression equations used to test
the hypotheses indicate that the two forms of
boards have quite different influences on planning
behaviors. Equations 1, 2, and 3 examine the
impact of boards of directors and advisory boards
on different forms of strategic planning.
The results for Equation 1, examining the relationship between boards and strategy review
processes, must be discounted because the c2 statistic was not significant for the equation despite
the indication that the presence of a board of advisors is a driver of strategy review processes.
Equation 2 indicates that family businesses with
advisory boards are much more likely to engage
in formal strategy processes than are family businesses that do not have advisory boards; these
results suggest that the odds that a family business
engages in formal strategy process increase by
more than 300% if that business has an advisory
board (exp(1.389) = 4.01). Boards of directors did
not have a significant influence on the odds of
observing this dependent variable. Notably,
greater levels of CEO tenure decreased the odds
that a family business used a formal strategy planning processes.
Equation 3 indicates that the use of both boards
of directors (exp(1.252) = 3.50, odds increase by
about 250%) and advisory boards (exp(1.538) =
4.66, odds increase by about 365%) increase the

Table 1 Correlation Matrix and Descriptive Statistics

1.
2.
3.
4.
5.
6.
7.
8.

Board of directors
Advisory board
Written strategic plan
Strategy review
Formal process
Successor identified
CEO tenure
Employees

Mean

SD

0.29
0.22
0.42
0.51
0.37
0.41
18.4
4.1

0.46
0.41
0.50
0.50
0.49
0.49
11.9
1.55

0.01
0.32***
0.15
0.19*
0.07
0.14
0.40***

0.31***
0.23***
0.29***
0.25**
0.12
0.09

0.65***
0.67***
0.00
0.08
0.36***

0.58***
0.15
0.08
0.25**

0.06
0.06
0.34***

0.23**
0.06

0.02

* p < 0.05.
** p < 0.01.
*** p < 0.001.

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Blumentritt

Table 2 Logistic Regression Results (Wald Statistics in Parentheses)


Independent Variables

Equation
1

Strategy Review

Formal Process

Written Plan

Identified Successor

0.334
(0.563)
0.987*
(4.255)
0.001
(0.000)
0.012
(0.759)
5.789
0.045

0.610
(1.727)
1.389***
(7.805)
0.030
(0.119)
0.049**
(8.461)
20.701***
0.150

1.252**
(6.793)
1.538**
(8.820)
0.024
(0.072)
0.040*
(6.130)
23.288***
0.168

Dependent Variables

Board of directors
Advisory board
Number of employees
CEO tenure
Model c2
Cox & Snell R2

0.446
(0.748)
1.652**
(9.378)
0.596***
(21.814)
0.091***
(19.268)
41.857***
0.283

* p < 0.05.
** p < 0.01.
*** p < 0.001.

likelihood that a family business has a written


strategic plan, while increases in CEO tenure
decrease the likelihood of a written strategic plan
by about 5% (exp(0.049) = 0.95). However, the
measurement of the written strategic plan variable captures only the existence of such a document, not the timing of its creation. Therefore, it
is possible that respondents answered in the
affirmative to the question about a written strategic plan even if it was dated. This word of caution
would support a deduction that boards of directors are interested in having a written strategic
plan, even in the absence of a formal strategic
planning process, as evidence of fulfillment of
their legal oversight responsibilities regardless of
its impact on firm performance.
Equation 4 finds that advisory boards, not
boards of directors, are significantly related to the
identification of a successor (exp(1.652) = 5.22,
odds increase by about 420%). Both CEO tenure
and firm size were significantly related to successor identification. As should be expected, the
greater the tenure of the CEO, the better the odds
that a successor had been identified (exp(0.091) =
1.10, odds increase by about 10%). More surprisingly, firm size and successor identification were
negatively related, indicating that the odds that a
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family business has named a successor decrease as


it gets bigger (exp(0.596) = 0.55, odds decrease
by about 45%). One way to interpret this result is
that smaller firms may have fewer candidates from
whom to select a successor, making the decision
less open to uncertainty.
In summary, the empirical results strongly
support Hypotheses 1b and 2b, while giving weak
but partial support to Hypothesis 1a. The data do
not support Hypothesis 2a. This analysis, therefore, indicates that advisory boards are more
related to planning activities in family businesses
than are boards of directors.

Conclusions
The data and analysis presented in this article
suggest that boards of directors and advisory
boards have different relationships with planning
in family businesses. Although the correlation
matrix indicates that there are positive and
significant relationships between aspects of
strategic planning and the existence of a board of
directors, those relationships are minimized after
controlling for CEO tenure and firm size. Alternatively, the data suggest strong relationships
between advisory boards and planning activities.

The Relationship Between Boards and Planning in Family Business

There are at least two substantive and related


conclusions that can be drawn from these
findings. First, it is clear that advisory boards are
a potentially important tool in the management of
family businesses. Second, the role of the board of
directors may be different in family businesses
than in nonfamily businesses. The interpretation
of these conclusions leads to some intriguing
ideas with respect to the role and influence of
boards in family businesses.
As a starting point, these two findings suggest
that a boards role of resource provision is important in the context of planning at family businesses. Using general management theory, it was
argued that advisory boards are more heavily
geared toward resource provision than governance, which may explain the greater relationship
between advisory boards and planning. However,
there is still a question of causality, as there are at
least two ways of interpreting the relationship
between advisory boards and planning: either
family business managers and owners turn to
experts when they feel the need to plan or, once
an advisory board is created, it will prompt a
family business to engage in more planning.
Regardless how the relationship is construed, the
findings in this study suggest that advisory boards
are a significant element in understanding strategic and succession planning in family businesses.
The lack of significant relationships between
boards of directors and planning activities raises
additional research questions. Perhaps the boards
of family businesses are so dominated by their
CEOs that they have little influence on planning
activities. Perhaps the efficiencies in the governance structures of family businesses (Sirmon &
Hitt, 2003) mitigate the need for formal planning
activities, especially succession planning. Perhaps
the presence of a high degree of trust (Steier, 2001)
in family businesses creates relationships between
family business managers and boards that mitigate the need for planning.
These conclusions should act as initiators of
future research. First, there is much to be learned
about advisory boards in family businesses. Little
scholarly work has been dedicated to these seemingly important bodies. At the least, this finding is

a call to action on the part of academics to learn


more about the composition, structure, responsibilities, and management of advisory boards in
family businesses. Once we know more about the
fundamentals of advisory boards, more advanced
studies on the activities and impacts of these
boards will be possible. Second, work must
continue on understanding the role of boards of
directors in family businesses, especially in terms
of their influence on planning activities.
This study is not without limitations, the most
important of which reside in the studys empirical
work. To begin, it may be helpful to include a
measure of family business that delves into
various dimensions of the familiness of a business (see Klein, Astrachan, & Smyrnios, 2005). The
nuances provided by such a definition would allow
researchers to examine the relationship between
boards and planning in various forms of family
businesses. Further, it would be worthwhile to
examine the impact of other control variables,
including the number of generations involved in
the firm, its industry, and its geographic location.
Further, future studies should use more finegrained measures of planning and boards, which
would allow more precise links between planning
and boards to be formed. For instance, future
studies should examine not just if planning activities exist, but the nature and quality of the planning. It would also be helpful to gather more data
on the boards, including their composition, size,
tenure, and cohesiveness. Last, other constructs,
such as the personalities and preferences of CEOs
and potential successors, might be explored for
their impact on planning activities.

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Tim Blumentritt (Ph.D., University of South Carolina) is an Assistant Professor in the Department
of Management and Entrepreneurship at Kennesay
State University. His research interests include
strategic management and succession in family
businesses. He can be contacted at Kennesaw State
University, Coles College of Business, 1000 Chastain Rd., #0404, Kennesaw, GA 30144-3170;
Tim_blumentritt@kennesaw.edu.
The author thanks Kirby Rosplock for her
research assistance on this project.