ISSN: 2306-9007 Harjito & Singapurwoko (2014) 1369 I www.irmbrjournal.com September 2014 International Review of Management and Business Research Vol. 3 Issue.3 R M B R The Relationship of Agency and Performance in Family Business: Small and Medium Enterprise in Yogyakarta DWIPRAPTONO AGUS HARJITO Department of Management, Faculty of Economics, Universitas Islam Indonesia Email: agus_h@uii.ac.id ARIF SINGAPURWOKO Department of Management, Faculty of Economics, Universitas Islam Indonesia Email: arif_singa@uii.ac.id Abstract The purpose of this research is to determine the effect and the relationship between controlling mechanism variables and family business performance. This research uses 20 small and medium size family businesses in Yogyakarta as the sample. The controlling mechanism variables used as the independent variables are insider ownership, debt policy, and dividend policy. The other independent variable that is not included as the controlling mechanism is business size, operating profit, and business risk. The dependent variable used in this research is the business performance which is proxy by Tobin’s Q. The multiple regressions used to test the effect of independent variable toward the dependent variables simultaneously and individually. The result of this research can explain the insider ownership, debt policy, and dividend policy which significantly affect business performance in simultaneously and individually. This research also found that business performance has positive relationship with those three variables. Key Words: Good Corporate Governance, Agency Conflict, Tobin’s Q, Family Business. Introduction In general, family business is different with non-family business especially in its complexity and in its management. However, family business has similar goals with non-family business. Family business has higher complexity than non-family business. The complexity is more likely because family business has to accommodate three integrated system, which is family system (family first business), management system (management first business), and ownership system (ownership first business). Which system is the priority will depend on the vision of the company’s owner. Family first business system emphasize on the fact that the company was built for the family business. Family interest is the main concern, which is why the decision made that will affect the future of the company will depend on the family. The management first business emphasizes more on the business interest than the family interest. The performance of the working family member will be evaluated with those who are not from the family member. The leadership is hold by professional not from the family. The ownership first business system describe the existence of the business is not the main concern, but the return on capital will be the main concern. The company is built or bought which later on be transferred to the other owner as long as it is profitable for the family. The family business that uses management first business will have conflict of interest among the owner and the management, which usually called agency problem. Jensen and Meckling (1976) describe that agency relationship as a contract between the owners (principal) with the management (agent). The criterion of this agency relationship is there is a distinction between the owner and the management. The agency problem