International Journal of Law and Management

Regulation compliance in small Finnish companies

Helena Sjgrn Pasi Syrj

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Regulation compliance in small

Finnish companies

Small Finnish
companies

Helena Sjgrn and Pasi Syrj

School of Business and Management,
Lappeenranta University of Technology, Lappeenranta, Finland

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Abstract

649
Received 3 March 2015
Revised 3 March 2015
Accepted 20 April 2015

Purpose The purpose of this paper is to learn more about how regulation affects small business in
the Finnish context. The authors create a framework for understanding owner-managers attitudes
towards business legislation. It is authors understanding that not enough is known about how small
firms make strategic choices that drive business in a highly regulated environment.
Design/methodology/approach This paper contributes to the existing knowledge of
entrepreneurship and small business management. The empirical data used to test the hypotheses were
drawn from the postal survey. Differences between owner-managers attitudes towards business
regulation were identified with factor and cluster analyses methods.
Findings Regulation often exerts only a limited influence over owner-managers decision-making.
Family entrepreneurs are more compliant towards business regulation. Regulation is not too heavy a
burden to all in business in Finland, even though Finland is a highly regulated country.
Research limitations/implications The real impact of regulation on small firms performance is
really difficult to prove, because small firms operating in the same regulatory context have different
performance outcomes. Additionally, often owner-managers awareness of specific regulations is
limited.
Practical implications There could be gap between the presumed effect of policymakers and the
real effect of regulation among owner-managers. In Finland, policymakers should find other
motivations to encourage business than lightening the regulatory burden. They should concentrate
more providing external support to small firms in the form of information, training and financing new
small firms.
Originality/value It is authors understanding that not enough is known about how small firms
make strategic choices that drive business in a highly regulated environment.
Keywords Attitudes, Regulation, Owner-manager, Family business, Compliance, Small business
Paper type Research paper

1. Introduction
There has been growing recognition amongst policymaker on the importance of
competitiveness in small businesses. By improving and simplifying their business
regulation, governments try to boost business environments and the competitiveness of
small firms, because the current legislation is a significant factor in the operating
environment for the small firms (Harris, 2002). The impact of government regulation on
business is an important policy concern for economies worldwide (European
Commission, 2011), but regulation is not a homogenous phenomenon and does not have
a uniform effect on all small businesses. Some regulations are either targeted at
particular types of businesses or can be expected to vary in their impact across
businesses (Small Business Research Centre of Kingston University, 2008). The
complexity of the legislation may account for the limited awareness among

International Journal of Law and

Management
Vol. 57 No. 6, 2015
pp. 649-661
Emerald Group Publishing Limited
1754-243X
DOI 10.1108/IJLMA-03-2015-0010

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650

owner-managers of specific regulations (Kitching, 2006; Atkinson and Curtis, 2004;

Harris, 2002). The effective regulation of small business is a policy challenge in all
jurisdictions because the small firms (and their owner-managers) have a number of
unique characteristics and what motivates small firms owner-managers is likely to be
very different from what motivates the behaviour of managers in large firms.
The results of earlier work (Edwards et al., 2004; Vickers et al., 2005) seem to indicate
that there could be a gap between the assumed and the real effect of regulation among
owner-managers. The real effect of regulation appears in how owner-managers adapt
their behaviour to the regulatory framework. Owner-managers vary in their capacities
to discover, interpret and adapt to regulation and pursue different strategic priorities.
According to the Small Business Research Centre of Kingston University (2008),
owner-managers who were conscious of the regulations affecting their businesses
tended to adapt more dynamically the best business practices. Research (Jorissen et al.,
2005; Smith, 2007) on family firms reveals that family firms differ from non-family firms
in terms of ownership, control and management processes. Owner-managers of family
firms may also differ in their capacities to discover, interpret and adapt the regulations.
It is our understanding that not enough is known about how small firms make
strategic choices that drive performance outcomes in a highly regulated environment. In
our paper, we will create a framework for understanding owner-managers attitudes
towards business legislation which emphasises owner-managers varying
characteristics and motivational bases. The purpose of this paper is to learn more about
how regulation affects small business in the Finnish context and to explore the
relationship between the capability to cope with regulations and compliance with them.
2. Literature review
Because of the importance of the small business sector to the economy, in many
countries, the government has tried to facilitate its operating environment. Researchers,
too, are increasingly attempting to model and measure how entrepreneurial activity is
affected by different institutional factors (Stephen et al., 2005). A competitive business
environment requires flexible corporate and business legislation, which should enhance
the range of possibilities and therefore improve the business conditions for companies.
The regulation of basic factors, like property rights and contracts, is necessary for an
advanced market economy. A stable legal environment offers to the owner-managers of
small firms possibilities to equally effective methods for contract enforcement, which
also means lower transaction costs. Regulation is necessary for stable trading
conditions and to develop levels of business trust (Welter and Smallbone, 2006).
Schn (2006) was concerned about the tendency in international research to ignore
the legal perspective and replace it with a business-oriented approach. He presupposes
that a purely business-oriented approach leans on the economic data of the company and
is built solely on the managements business plans. This is dangerous because business
plans ignore the existence and enforceability of the companys engagements. Schn also
admits that a purely legal perspective does not ensure that the company can fund
business operations in the future. Research focusing on compliance costs and benefits
should draw attention about the precise consequences in particular small business
settings. It should also demonstrate the importance of regulation, relative to other
factors, in generating particular levels of business performance (Small Business
Research Centre of Kingston University, 2003).

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Opponents of regulation argue that it constrains business entry, impedes growth and
performance and has an influence on business failure (Vickers et al., 2006; Welter and
Smallbone, 2006). Nevertheless, Kitching (2006) noted that competition and the economy
were cited more frequently as an obstacle to success. In the majority of cases, the
regulatory burden on entrepreneurial and small firms is relatively high and small firms
bear a higher cost burden from regulation than do larger businesses (Chittenden et al.,
2003; Levie and Autio, 2011). For small firms, the burden of regulatory compliance is
perceived to be too high given their limited resources (Kitching, 2006). It is very
important to find out why owner-managers are dissatisfied and report negative or
positive opinions and, most importantly, whether this causes owner-managers to adapt
their behaviour in other ways. This may have consequences for business performance.
When owner-managers have a positive opinion about regulation, they are usually aware
that regulation offers opportunities to develop more efficient ways of working (Small
Business Research Centre of Kingston University, 2008).
Owner-managers awareness of specific regulations has been reported to be limited
(Kitching, 2006; Atkinson and Curtis, 2004; Harris, 2002). For instance, according to the
Finnish Limited Liability Companies Act[1], there are legal requirements and
procedures that need to be followed when making corporate decisions, for instance
concerning the distribution of the assets of the company. These rules regulate how
owner-managers can get money out of their businesses, and they should be aware of the
rules concerning their incomes. However, our previous research findings (Sjgrn et al.,
2011, 2009) provided evidence that owner-managers are unaware of the peremptory
provisions of the Companies Act. This could lead to a situation where the
owner-manager takes more dividends than the Finnish corporation legislation allows. In
any case, the importance of the rule relates to restrictions on the distribution of the assets
can be questioned because of the entrepreneurs ignorance. Other researchers
(Arrowsmith et al., 2003; Edwards et al., 2004; Gilman et al., 2002; Ram et al., 2001) have
come to the same conclusion; the regulations often have only a limited impact on
owner-managers decision-making.
As Edwards et al. (2004) and Vickers et al. (2005) found in their study, many
respondents reported negative effects of regulation, but they were not able to identify
specific provisions in the legislation that were related to their business. The results seem
to indicate that there could be gap between the presumed effect and the real effect of
regulation among owner-managers. Small business Owner-managers of small business
lack the internal resources (time, money and specialist expertise) to cope with regulation.
Owner-managers find it more costly and difficult to find out about regulations and how
to apply or how to best comply with regulations (Small Business Research Centre of
Kingston University, 2008). Hence, although owner-managers may be fully aware of the
regulations, they do not necessarily comply with them. Researchers have found different
attitudes to compliance, e.g. Vickers et al. (2005) proposed a fourfold typology by which
businesses can be differentiated in terms of attitudes towards regulation; avoiders/
outsiders; reactors, including the sub-categories of minimalists and positive responders;
and proactive learners. Whereas, Arrowsmith et al. (2003) demonstrated three
distinctive sets of responses: implement, ignore and critical event. Petts et al.
(1999) found vulnerable compliance; many owner-managers lack a proper
understanding of some regulations, they do not know whether they are meeting their
obligations or not. Yet, this does not mean that owner-managers break rules; compliance

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with standards of professional practice and a desire to do correct business may cause
owner-managers to act in accordance with regulatory requirements without complete
knowledge (Vickers et al., 2005).
Regulation may enable business owners to achieve their business aims but fact is
that regulation has no effect at all unless owner-managers change their behaviour as a
result of it. Usually, owner-managers draw upon regulations to achieve their business
objectives (Kitching, 2006) and meet their personal needs. And sometimes, if the
regulatory change is minor, owner-managers may prefer to continue business as before
because there are no incentivises to reform their business practises (Arrowsmith et al.,
2003).
Regulation does not have uniform consequences for small business
owner-managers: everything depends on how owner-managers adapt to regulatory
change (Kitching, 2006). Previous research (Small Business Research Centre of Kingston
University, 2008) discovered that owner-managers with greater resources (finance,
equipment, management capability, workforce knowledge and skills) are better
equipped to deal positively with regulation. Owner-managers attitudes towards
regulation are likewise salient when small firms adapt to regulation (Vickers et al., 2005).
For instance, female owner-managers are less likely to consider regulation to be an
obstacle (Small Business Research Centre, 2005). Several studies (Jorissen et al., 2005;
Smith, 2007) have established differences in behaviour between family and non-family
firms. According to agency theory, family firms are different because they may
demonstrate overlapping owner and manager relationships. The theory of transaction
cost proposes that family firms have a higher level of trust, superior decision-making
processes and lower monitoring costs than do non-family firms. Therefore, family firms
behave differently (Tagiuri and Davis, 1996).
A family management influence exists in how family representatives serve as board
members, or through the direct influence of an owner-manager (Astrachan et al., 2002).
According to the stewardship philosophy, there is a sense of psychological ownership
that motivates the family to behave in the best interests of the firm (Corbetta and
Salvato, 2004; Zahra, 2003).
Astrachan et al. (2002, p. 50) pointed out that it is reasonable to assume:
[] that owner-managers who regard their business as a family business are highly likely to
be attentive to issues and opinions of family members, as well as meeting the needs of family
members.

In our sample, about 65 per cent of respondents identify themselves as family firms and
about 80 per cent of all respondents answered that the owner-manager has over a 40 per
cent share of the company (about 60 per cent own over 50 per cent)[2]. According to the
definition of the Finnish Family Firm Association (2010), 80 per cent of all Finnish
companies can be considered family firms. Astrachan et al. (2002) as well as Rl et al.
(2010) emphasise that the core of a family business must be within the familys major
influence when it comes to control, decision-making, management and equity. For this
study, we follow this view and define a family firm as a company in which the majority
of capital as well as the majority of top management power is held by one or more
members of a family.
In this paper, we concentrate on the most essential areas of regulation (labour law, tax
law, company law) which have an effect on small businesses in multiple industry

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settings. As mentioned earlier, regulation is not a homogenous phenomenon. After all,

some regulations are either targeted at particular types of businesses or can be expected
to vary in their impact across businesses. Several studies (Klapper et al., 2006) have
pointed out that regulation hamper activity of small firms. An early study (Djankov
et al., 2002) linking regulation and entrepreneurship pointed out that employment
legislation raised the operating costs of a small business and so made entrepreneurship
less attractive. Michaelas et al. (1999) argued that taxes on small firms profits were
likely to lead to lower growth rates, because the retained profits are the most important
source of funding for small firm investments. Earlier studies (Davidsson and
Henrekson, 2002; Akinboade and Kinfack, 2012) have argued that company law is one of
the primary regulations that have a negative impact on small businesses. One reason is
minimum capital requirements, which have been justified on the grounds of providing
creditor protection, whereas Van Stel et al. (2007) found that the minimum capital
requirement required for starting a business did not lower entrepreneurship rates.
3. Empirical analyses
3.1 Sampling and data collection
The empirical data were drawn from a postal survey conducted in spring 2012 by means
of a structured questionnaire. We selected the most essential areas of regulation (labour
law, tax law and company law) which have an effect on small businesses in multiple
industry settings. In our survey, characteristics of owner-managers/firms (type of firm
founder, number of firms owned, family firm/non-family firm etc.) were also identified.
The initial population consisted of small firms in southern and eastern Finland with
a sales turnover between 0.5 and 5 million Euros. A total of 14,549 firms were identified
from the financial statement database Voitto, and a systematic random sample of
1,024 firms was drawn. The pre-tested survey questionnaire and an introductory cover
letter were mailed to the respondents, who were assured of confidentiality and promised
a summary of the results. A reminder was sent to those who had not responded within
two weeks. Final responses were received from 151 companies, yielding a satisfactory
effective response rate of 14.75 per cent (151/1,024). Non-response bias was examined by
comparing the early (first-round) responders with the late responders (second-round) on
the assumption that there are no differences between early and late responders
(Armstrong and Overton, 1977; Covin and Slevin, 1989). No significant differences were
found between these groups in the distributions of the key variables. Another test for the
representativeness of our data was the comparison of responding and non-responding
firms in terms of size. Using self-reported data from single informants may carry a risk
of common method bias (Podsakoff et al., 2003). However, the owner-manager is
considered to be the most knowledgeable person regarding the strategic vision and
managerial practices, which would be very hard to measure without some degree of
subjectivity. We were conscious of respondent bias, e.g. a firm may provide inflated
estimates of compliance costs, in the hope that politicians will consider regulatory relief
(Chittenden et al., 2003). Furthermore, entrepreneurship researchers often use
self-report, and these reports have been shown to be reliable (Chaganti et al., 2002).
3.2 Measures and results
The factor solution consists of statements intended to measure if owner-managers
perceive business regulation as an opportunity for their businesses. The principal

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component analysis with varimax rotation resulted in three factors explaining together
67.8 per cent of the total variance, (Table I). The first factor relates to the
owner-managers opinion that regulation secures their position in existing markets and
provides some cost benefits. The statements of the second factor imply that some
owner-managers even consider that business regulation can offer them some
competition advantages and new business opportunities. The third factor imply that
some owner-managers take business regulation as given and are not willing to take any
cost or completion advantages from changing regulation.
The 11 attitude items towards business regulation as an opportunity are loosely
based on Kitchings (2006) study. In our study, the statements were slightly adapted
(some also added) to the Finnish context. After rotation, the factor analysis suggested
the existence of three factors with eigenvalues greater than one. Factor 1 (explaining
44.00 per cent of variance) consists of five items all clearly linked to owner-managers
positive attitudes towards business regulation and their view that business regulation
provides security and continuity for their businesses. This factor was named trustful
orientation towards regulation. Factor 2 explains 13.03 per cent of variance. It is called
competition advantage seeking orientation towards regulation. This factor encompassed
four items related to the attitude that business regulation also provides some cost and
completion advantages for some owner-managers businesses. Factor 3 consists of two
items explaining 10.75 per cent of variance. This factor was named minimal compliant
orientation towards regulation. The communalities of this factor solution varied from
0.53 to 0.79.
After the factor solution, we calculated sum variables from those statements loading
on the same factor. The companies from our sample clustered (Ward Method, Table II)
into two heterogonous groups which are internally homogenous. These two groups
were named as follows; less compliant and more compliant.
The main descriptive statistics of clusters are presented in Table III. As notes in the
literature (Kitching, 2006), it is very important to find out why owner-managers are
dissatisfied and report negative or positive opinions and, most importantly; whether
this causes owner-managers to adapt their behaviour in other ways. This may have
consequences for business performance. These two clusters seem to be very
homogenous as regards sales, performance and number of employees. The Small
Business Research Centre of Kingston University, 2008 discovered that
owner-managers with greater resources (finance, equipment, management capability,
workforce knowledge and skills) are better placed to deal positively with regulation. Nor
there are any statistically significant differences in education between these clusters.
This could imply that owners experience of regulation (less or more compliant) has no
impact onto business success, and owners education does not affect how owners
perceive regulation (Tables IV and V).
Not all differences in means are statistically significant, but, in all cases, the values
are higher in cluster two than in cluster one. Our sample is unfortunately quite small,
which could in part mean that differences were not statistically significant. We believe
that our results indicate that for entrepreneurs who deem family involvement more
important (and the business goes from one generation to the next) are also more
compliant towards business regulation. Instead, contrary what might be expected on
light on the existing literature (Small Business Research Centre, 2005), we found nothing
to suggest that female owner-managers are less likely to consider regulation an obstacle.

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Variables
In our business, we can adapt
more quickly new regulation
than our competitors
Regulations provide us with
an opportunity to gain a
competitive advantage over
other firms
Regulations have resulted in
our business being run more
efficiently
The introduction of new
regulations is easy to adapt
in our business
The introduction of new
regulations has encouraged
us to take action to ensure
your business remains
competitive
Having to meet the minimum
legal requirements is the only
impact of regulations on our
business
There are costs to our
business of meeting the
minimum regulation
requirements
Regulations have increased
the level of employee
productivity in our business
Regulations provide new
market opportunities for our
business
Regulation increases the level
of customer confidence in our
business and its products and
services
Regulations encourage
businesses to enter the
markets we operate in
Eigenvalue
% of variance
Cumulative % variance
KMO 0.624

Factor 1
Trustful orientation
towards regulation

Factor 2
Competition advantage
seeking orientation
towards regulation

Factor 3
Minimal compliant
orientation
towards regulation

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655

0.811

0.857

0.462

0.700

0.554

0.555

0.624

0.773

0.808

0.729

0.782

0.830

0.635
4.840
44.00
44.00

1.433
13.03
57.03

1.182
10.75
67.78

Table I.
Factor analysis
results for ownermanagers attitudes
towards business
regulation as a
business opportunity

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Table II.
t-test, the differences
of means of sum
variables between
clusters

Cluster/sum
variable

Cluster 1,
less compliant n 69

Cluster 2,
more compliant n 66

Trust
Mean
SD

2.19
0.67

3.09
0.64

8.01***

Comp
Mean
SD

1.86
0.54

3.14
0.51

14.14***

Mini
Mean
SD

3.10
1.09

2.80
0.68

t-value

1.90**

Notes: *** p 0.01; ** p 0.05; *p 0.1

Cluster/descriptive
statistics (means)
Owners education
Sales
Performance ranking
Number of employees

Cluster 1,
less compliant

Cluster 2,
more compliant

3.74
1,542 t
3.90
12

3.95
1,841 t
3.63
10

Notes: Performance ranking: 5 excellent; 4 good; 3 satisfactory; 2 sufficient and 1 poor;

Table III.
Descriptive statistics education: 1 primary school, 2 vocational school, 3 secondary school, 4 upper secondary
school, 5 polytechnic, 6 university
of clusters

4. Conclusions and discussion

We did not find that regulation impedes business performance. This would seem to
indicate that the impact of regulation on small firms performance is really difficult to
prove. The research of the Small Business Research Centre of Kingston University
(2008) yielded the same results. One finding of the report was that small firms operating
in the same regulatory context have different performance outcomes. Whereas many
researchers have found a lot of potential influences on growth, the literature (Storey,
1994; Delmar, 1997; Davidsson and Henrekson, 2002) typically identifies them as
follows:
firm characteristics (size, age and ownership);
characteristics of owner managers (education, experience and gender);
strategic choices; and
external environment (market conditions, public policy and regulation).
Hence, there is a wide range of influences not just the regulation itself. Other studies
(Arrowsmith et al., 2003; Edwards et al., 2004; Gilman et al., 2002; Ram et al., 2001;
Sjgrn et al., 2011, 2009; Duvns et al., 2010) have come to the same conclusion; the
regulation often exerts only a limited influence over owner-managers decision-making.

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Cluster/statement
The role of family members in
our firms decision making is
Shared goals of the family in
business are
Shared values of family in
business are
The role of non-family
members on the companys
board of directors is
Keeping the firm in the family
is

Cluster 1,
less compliant
mean (SD)

Cluster 2,
more compliant
mean (SD)

3.88 (1.23)

4.19 (0.90)

1.26 (0.19)

3.86 (1.14)

4.19 (0.87)

1.46 (0.15)

3.77 (1.23)

4.19 (0.81)

1.78 (0.08)**

1.19 (1.36)

2.24 (1.48)

0.96 (0.34)

3.82 (1.15)

3.97 (1.15)

0.558 (0.58)

t-value
(Significance)

Notes: ** p 0.05; 5 very important; 4 important; 3 quite important; 2 less important and 1
not important

Cluster/statement
Family members are ready to
work more than average for the
firms success
We discuss firm business between
family members
Our family is loyal to our firm
It is important to us, that our firm
is family-owned
It is important to our firms
company image that it is profiled
as a family business
Family entrepreneurship affects
the firms success
Family members have shared
opinions about the firms success
Family members have shared
opinion about the firms future

Cluster 1,
less compliant
mean (SD)

Cluster 2,
more compliant
mean (SD)

t-value
(Significance)

3.98 (1.14)

4.51 (0.69)

2.44 (0.017)**

4.04 (1.05)
4.40 (0.73)

4.41 (0.79)
4.62 (0.63)

1.78 (0.080)*
1.41 (0.162)

3.81 (1.04)

4.19 (1.10)

1.61 (0.111)

3.14 (1.26)

3.79 (1.15)

2.21 (0.03)**

3.60 (1.19)

4.00 (0.97)

1.67 (0.111)

3.80 (0.83)

4.14 (0.85)

1.84 (0.070)**

3.92 (0.85)

4.16 (0.86)

1.30 (0.197)

Notes: ** p 0.05; * p 0.1; 5 totally agree; 4 agree; 3 agree/disagree; 2 almost disagree

and 1 disagree

Several studies (Klapper et al., 2006) have shown that regulation has a negative effect on
business entry. Yet the choice to start a business is determined by considerations of
factors that influence the ability of individuals to generate appropriate returns on their
human, social and financial capital (Levie and Autio, 2011), whereas the role of
regulation is basically a matter of less importance.

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Table IV.
t-test, differences in
means of family
involvement
statements between
clusters

Table V.
t-test, differences in
means of family
involvement
statements between
clusters

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The literature portraying regulation as a burden often focuses on the costs and
constraints of regulation, but according to the alternative argument, a stable legal
environment offers markets legal security and predictability. This leads to the lower
transaction costs. In the other words, some individual small business owners may
consider that the regulation has costly consequences, but the consequences at the macro
level can be cost-efficient.
The paper has demonstrated that regulation does not really have direct effects on the
business of small firms. This finding differs slightly from those earlier studies (Kitching,
2006; Atkinson and Curtis, 2004; Harris, 2002). The reason for this could be the different
legal heritage of countries. Finland belongs to the Nordic legal family which is
positioned somewhere in between the Continental and the Anglo-American legal
families, with features typical of the both civil law and common law (Mhnen, 2011). In
addition, policy in Finland is to provide external support to small firms in the form of
information, training and financing new small firms.
In sum, we do not agree that regulation is too heavy a burden on business in Finland,
even though Finland is a highly regulated country. Policymakers should find other
motivations to encourage business activity and growth than lightening the regulatory
burden.
One limitation of this study was that our survey data provided information only on
what business owners think about regulation, we were not able to show what they do
about it. Additionally, often owner-managers awareness of specific regulations is
limited. The real impact of regulation on small firms performance is nearly impossible
to prove reliably, because small firms operating in the same regulatory context have
different performance outcomes. There are a lot of potential influences on business not
just the regulation itself. Kitching (2006) also claimed that sometimes survey data rely
too heavily on sound-bite responses. For example he noted that some owner-managers
reporting regulation as an obstacle to business success could not cite any specific
regulation as an obstacle.
Notes
1. Chapter 13 of the Limited Liability Companies Act (624/2006 OYL).
2. For instance, Miller and Le Breton-Miller (2006) defined a family business according to La
Porta et al. (2006, p. 74): by a family business, we mean one that is partly owned by one or
more family members who together control at least 20 per cent of the total votes outstanding.
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About the authors
Helena Sjgrn, D. Sc. (Econ. and Bus. Adm., Business Law), is an Associate Professor in Business
Law at the School of Business and Management, Lappeenranta University of Technology,
Finland. Her primary areas of research interests are company law, corporate governance, social
value creation, social entrepreneurship, small- and medium-sized enterprises and family business.
Helena Sjgrn is the corresponding author and can be contacted at: helena.sjogren@lut.fi
Pasi Syrj, D. Sc. (Econ. and Bus. Adm., Accounting), is a Professor in Accounting at the School
of Business and Management, Lappeenranta University of Technology, Finland. His primary
areas of research interests are taxation, dividend distribution, financial and management
accounting in SMEs, social value creation, social entrepreneurship and family business.

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