Private Equity Minority Investments - Universität St.Gallen

Chapter II: Theoretical Foundationsserves to join self-esteem with corporate success. 336 Family shareholdersthat give up a minority stake in their company to raise capital are still likelyto feel that the company is their firm and to connect their sense of identityand self-esteem with the firm’s success. 337 They take pride in running thefirm successfully and continuing the family tradition. The company’ssuccess not only drives their own fortunes, careers, and sense of pride andhonor, but also that of their relatives and offspring. 338 These factors, whichreinforce family shareholders’ emotional commitment to the long-termsuccess of the firm, along with their sense of family firm duty and loyaltyare assumed to be stronger than the temptation to engage in opportunisticbehavior for short-term gains. Moreover, to maintain the firm’s stability andsupport the firm’s long-term success, family shareholders are motivated tobuild trusted and enduring relationships with the minority investor. 339PEMIs are not only valued for the funds they provide, but also for theirprofessional expertise, experience, ideas, and business contacts. From thelens of the stewardship theory, controlling shareholders actively engagePEMIs to contribute to corporate decision making and freely shareinformation with them, rather than keeping them at arm’s length andoutside of the decision-making loop.2.2.2 Minority Investor PerspectiveAs a result of the aligned interests of the controlling shareholder and thePEMI, the minority investor’s primary focus shifts from monitoring andsupervision to being a sparring partner, providing valuable input tostrategic decisions and assuming an integrative role. 340 From thestewardship theory lens, the negotiation for legal rights of voice, exit, andinformation loses significance since the controlling shareholder is assumedto actively initiate close interaction and professional cooperation with theminority investor, voluntarily reduce information asymmetries, and makecorporate decisions in alignment with minority investor views and interests.In addition to mutual interests and goals, the parties’ relationship is basedon trust, rather than control. Monitoring and incentivizing are not onlyconsidered unnecessary, but counterproductive as these activities are costly336See DONALDSON/DAVIS, p. 51; DAVIS/SCHOORMAN/DONALDSON, p. 29. See, in detail onstewardship in family firms, EDDLESTON et al.337Similarly for venture capital, see ARTHURS/BUSENITZ, p. 157.338See LE BRETON-MILLER/MILLER, p. 1171.339See ibid, p. 1176.340See, with respect to the board of directors, HUNG, p. 106.65