Interorganizational Familiness: How Family Firms Use Interlocking Directorates to Build Community–Level Social Capital1

We draw on the concept of community–level social capital and apply it to the situation of a family–controlled public corporation. While traditional agency theory argues that agency costs are minimized in a family–controlled business (FCB) due to an improved alignment of owner and manager interests, we argue instead that FCBs endure additional agency costs uniquely related to the family firm organizational structure. To mitigate these additional costs, we propose that FCBs use board interlocks to build and maintain community–level social capital. That is, the intercorporate network of FCBs generates shared understandings, values, problem solving techniques, and approaches to dealing with family issues. Further, the network generates a level of social support for family business owners and managers grappling with challenges endemic to family control of public corporations. We generate a number of propositions that can be used in future research to test the theory developed here. We conclude with the assertion that the community–level social capital generated by the network of FCBs is an important reason for the survival and persistence of individual family firms, despite the existence of additional family–related costs.