Agency Cost Apologists

…it seems that strong families tend to be good for people individually, but bad for the world as a whole. Family clans tend to bring personal benefits, but social harms, such as less sorting, specialization, agglomeration, innovation, trust, fairness, and rule of law.

That’s Robin Hanson.

In his post there are many quotes with interesting perspectives on this idea. I focused on this one:

Risk taking …in family firms … is positively associated with proactiveness and innovation. .. Even if family firms do take risks while engaged in entrepreneurial activities, they take risk to a lesser extent than nonfamily firms. … Risk taking in family firms is negatively related to performance. (more)

Interesting.

The essence of agency costs is that somebody else pays when something goes wrong. This encourages risky behavior.

Is risk really so great? Just hire some managers to bet the farm more often and everyone wins? What is “risk”, anyway? After a bit of digging I was able to find this definition of risk taking:

Thus, firms with an entrepreneurial orientation are often typified by risk-taking behavior, such as incurring heavy debt or making large resource commitments, in the interest of obtaining high returns by seizing opportunities in the marketplace…

Presently, however, there is a well accepted and widely used scale based on Miller’s (1983) approach to EO, which measures risk taking at the firm level by asking managers about the firm’s proclivity to engage in risky projects and managers’ preferences for bold versus cautious acts to achieve firm objectives.

Ok, so it’s survey data (ie watch out for bias!). Large, agent-run companies, remember, have their own risk-killing system which shrugs off survey results: bureaucracy. One can imagine a situation in which agents raise their status by boldly proclaiming a desire for risk with no hope of having to actually act.

These papers should say “professed desire for risk taking is associated with inferior results” for family-run companies. It’s my own view that real corporate strategy involves making lots and lots of small, decent bets.

Never swing for the fences. Never bet the firm. Big risks are unconscionably stupid business.

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