22 Traditional Authority in Social Context: Explaining the Relation between Types of Family and Types of Family-Controlled Business Groups

The existence of family-controlled business groups challenges assumptions of rational economic behaviour in a corporation. These organizations embrace unrelated diversification, appoint executives based on lineage rather than expertise, and engage in non-arms length transactions between firms in the family group that are often not based on market pricing. Despite contradicting well-established best practices of corporate behaviour, family-controlled business groups are successful and represent a growing proportion of global commerce. We lack an overarching theoretical explanation for the success of family-controlled business groups. This chapter offers a theoretical framework that explains the success and geographical variation of these unique organizational forms. Our core argument is that variations in the governance structure of FCBGs reflect variation in the manifestation of family authority globally. In the west, where FCBGs are quite rare, so too is the hierarchical authority structure of the traditional extended family. As a result, the success of FCBGs outside the US, Canada, and the UK occurs because of two factors: the legitimacy of the extended family and its prevailing governance structure premised on patriarchal authority, and the explosive growth in population in those countries that embrace the extended family.