Nonmarket values in family businesses.

• Author: Means, Benjamin
• Position: Introduction to III. Contract and Status in Private Ordering A. Family Law Contractualism, p. 1185-1219

TABLE OF CONTENTS INTRODUCTION I. CORPORATE LAW'S CONTRACTARIAN FRAMEWORK A. The Corporate Contract B. The Role of Judicial Monitoring II. FAMILY BUSINESS AS EMBEDDED ECONOMIC INSTITUTION A. Defining Family Business B. Overlapping Values 1. Social Identity Theory 2. The Three-Circle Model C. A Conflict Typology 1. "Spillover" Oppression 2. Incompatible Values III. CONTRACT AND STATUS IN PRIVATE ORDERING A. Family Law Contractualism B. From Contract to Context 1. Relational Values 2. Practical Implications 3. Beyond Value Distinctions IV. REVISITING FAMILY AND BUSINESS VALUES A. Choice of Entity B. Multidisciplinary Practice C. Adjudicating Plural Values 1. Standing 2. Reasonable Expectations CONCLUSION INTRODUCTION

Countless New Yorker cartoons trade on the incongruity of family life and the workplace. A husband looks across the kitchen table and says to his wife and four children, "I've called the family together to announce that, because of inflation, I'm going to have to let two of you go." (1) A corporate executive asks an older employee, "How long have you been with our firm, Dad?" (2) At a board meeting, a man and woman announce to a stunned group of executives, "We're not your real parent corporation." (3)

In each cartoon, the humor depends on our awareness of a distinction between family relationships and business relationships. (4) Most families aspire to distribute roughly equal resources to their children, (5) to offer special protection to their most vulnerable members, (6) and to preserve their identity over time. (7) Although families engage in economic production, consumption, and exchange, (8) family relationships are considered valuable for their own sake and not principally for their economic or other instrumental advantages. (9) By contrast, a traditional business relies on contracts negotiated at arm's length, aims to make a profit, and must identify and reward merit. (10) In a competitive market environment, businesses adapt to take advantage of new opportunities. (11) For investors, the business serves as a means to an end. (12)

In a family business, (13) however, the values associated with family life must coexist with the values of the marketplace. (14) For instance, when the junior employees in a business venture are also the children of the founders, family concerns become work concerns and vice versa. (15) Individuals cannot negotiate the distinct expectations associated with each environment simply by adopting one social identity when in the workplace with colleagues and another when at home with family. (16) Thus, a successful family business must find ways to mediate the tension between expectations rooted in family life and expectations inherent to the marketplace. (17)

As long as these expectations align, the business and family both stand to benefit, (18) The strength and durability of family relationships can be harnessed to solve business problems. (19) For instance, family members might create or modify business roles without formal contracts and managers generally have the flexibility to pursue long-term opportunities at the expense of short-term profits. (20) In a pinch, family members will sometimes loan money to the business or agree to work without compensation. (21) Moreover, business ownership can provide nonmonetary benefits to family members such as stable employment, status in the community, and agreeable working conditions. (22) Indeed, some commentators celebrate family business as a model for creative, humane capitalism. (23)

However, the strengths of a family business are also potential weaknesses. (24) Over time, "conflicts manifest themselves in the form of normative contradictions whereby what is expected from individuals in terms of family principles often violates what is expected from them according to business principles." (25) For example, the transfer of control from one generation to the next invites tension between the family norm of equal treatment and the business norm of meritocracy. (26) In a crisis, the close emotional bonds that once supported a family business can become obstacles to rational action. (27) Siblings sue siblings; (28) children sue parents; (29) spouses divorce; (30) families and businesses fall apart. (31)

If family businesses in the United States were relatively rare or economically unimportant, a lack of attention to their distinctive features might be understandable. However, family businesses are a vital part of the economy: they are the clear majority of all businesses, employ about half the nation's workforce, and contribute a substantial amount to the nation's gross domestic product. (32) Small businesses often begin as entrepreneurial family ventures, and some of the nation's largest corporations are family controlled. (33)

Yet, the "study of family business is still relatively new." (34) As one legal commentator has observed, "corporate law casebooks are astonishingly devoid of any systematic consideration of family dynamics." (35) More broadly, "the family owned and controlled firm is either absent or treated as an exception ... [i]n prominent theories of the firm." (36) The most straightforward explanation for the oversight is doctrinal: as a matter of business enterprise law, affective ties among shareholders are irrelevant; a family business, after all, may be closely held or publicly traded and may be organized as a partnership, corporation, or limited liability company (LLC). (37) Thus, despite extensive ongoing research in other disciplines, the study of family business for U.S. legal scholars has remained in large part the specialized province of estate planners and tax lawyers. (38)

The dearth of legal scholarship concerning family business governance may also reflect deeper methodological limitations. Corporate law scholars do not often pause to consider the influence of social relationships on governance choices; instead they ask how economically rational, autonomous investors would select appropriate default governance rules and bargain to protect their individual interests. (39) From this perspective, business entities are fundamentally contractual. (40) To the extent that family relationships intrude upon the rational actor's solipsistic domain, they are perceived in economic terms as a trust mechanism that may substitute for ex ante bargaining, lowering the transaction costs of investment. (41)

To be sure, family relationships can lower transaction costs, but this is not the whole story; the rational-actor model of standard law and economics lacks the conceptual resources necessary to fully appreciate the nature of private ordering within a family business. This Article contends that family businesses are an extension of family relationships, in which the participants find intrinsic and not merely instrumental value. (42) Whether organized as partnerships, corporations, or LLCs, family firms are economic institutions embedded in a context of family social roles and values. (43) In interpreting the parties' business contract, social context has explanatory power and deserves normative weight. In short, family status matters. (44)

The Article's argument has four parts. Part I summarizes the widely accepted view that corporate law is fundamentally contractual and the application of that view to typical governance conflicts in close corporations and LLCs. Part II argues that the standard contractual theory fails to adequately address potential conflicts in family businesses because it relies upon an impoverished theory of human behavior. Part III contends that if contract principles can regulate intimate relationships, (45) as some family law scholars have asserted, corporate law scholars should likewise recognize that intimacy can substitute for arm's length contracting in family businesses, affecting the goals family businesses set and the methods they adopt to achieve them. Part IV asserts that when conflicts arise in a family business, courts should give weight to shared family values relevant to the parties' expectations. Although some might object that recognizing overlapping value systems creates indeterminacy and thus undermines the effectiveness of private ordering, the opposite is true--a clearer appreciation of the family and business values at stake would help courts respect the parties' actual choices.

1. CORPORATE LAW'S CONTRACTARIAN FRAMEWORK

   Modern corporate law scholarship reflects the profound influence of law and economics. (46)...