Understanding Entrepreneurship in Family Firms: A Socioemotional Wealth

approach

Cristina Cruz, IE Business School

Entrepreneurship and growth: An international perspective

WHY ME? More than 10 years of experience working, teaching

and researching on family business IMBAs, Exective Couses .

4th generation family owned company

Thesis on Corporate Governance in family Firm

Academic publications (AMJ,ASQ,ETP,JBV..)

Cases & Articles ..

WHY FAMILY BUSINESSES?

WHY? Facts & Figures

WHY? Facts & Figures

WHY? Facts and Figures

• 29.5% of all start-ups are initiated by existing family firms.

• 16.9% of new firms are related to existing family firms.

• 17.8% of established entrepreneurial firms are related to another family firm.

• 29.5% of start-ups expect family ownership.• $218 Billion informal investment primarily from

family firm owners.

2004 Assessment of Entrepreneurship in the US (Reynolds, 2005)

WHY? The anecdotic evidence

Wanda Ferragamo, when asked about the reason behind the acquisition of a hotel chain by the 90´s:

Why did I buy the hotels? It is easy…. I need to give employment to my grandchildren”!!!

WHY? The anecdotic evidence

Why? Anecdotic evidence Some famous splits for “family feuds”

“The battle never ended between the two of them. Back then there was a butcher who served Puma and a butcher who served Adidas. The town was divided”

Kit Chellel (founder´s grandson)

With the blessing of Srinathji (a reference to the Hindu god Krishna) I have today amicably resolved the issues between my two sons”

Kokilaben Ambani (mother)

Why? Anecdotic evidence

• CHANGING THE LOGO: “It was a “sensitive” subject for the family, our shareholders almost carried their identity card written in gothic letters”

• DIVEST (Heating Division) :

“It was not an easy decision but the family had to get over very import emotional links, in what was at the very origins of the company.

Jose Miguel Roca. CEO Roca Corporation

WHY? Selected empirical evidence AUTHORS SAMPLE VARIABLE OF INTEREST MAIN RESULTS

Beehr, Drexler and Faulkner, 1997

198 privately held firms Work relations Family businesses are better at managing conflicts and offer greater job satisfaction and harmony in the work place.

Mishra and McConaughy (1999)

690 US publicly held firms

Capital Structure Family firms use less debt to avoid a loss of control and decrease thelikelihood of bankruptcy

Chrisman, Chua, and Litz (2004)

1,141 small privately held U.S. firms

Agency costs Family involvement reduced overall agency costs and increase performance, measured by short term sales growth

Reid and Adams (2001) 300 Irish SMEs Human Resource Management Practices

Family firms employ in general less complex HRM practices than non family firms

Berrone et al (2010) 194 US publicly held firms

Environmental Performance Family firms exhibit better environmental performance than non family firms

Gomez-Mejia et al (2010) 360 firms from COMPUSTAT database

Diversification decisions Family firms diversify less both domestically and internationally than non family firms.

Gomez-Mejia et al (2011) 403 publicly held US companies

R & D and Technological innovation

In high technology industries family controlled firms tend to invest less in R&D and engage in lower technological diversification than non-family controlled firms

WHY? The conclusion

Family firms are not simply a unique phenomenological setting

but are significantly different from non-family firms

(Gomez Mejia,Cruz, Berrone & DeCastro , 2011).

WHAT MAKES FAMILY BUSINESS DIFFERENT?

Theoretical approaches

Early studies in the field suffered from significant methodological problems and were largely descriptive and atheoretical.

As the field evolved, different “borrowed” paradigms:

Agency theory (Morck & Yeung, 2003; Schulze, Lubatkin, Dino & Buchholz, 2001)

Stewardship theory (Miller & LeBreton-Miller, 2006)

Resource-based view of the firm (Habbershon & Williams, 1999; Habbershon, Williams & MacMillan, 2003)

A duality of goals

An emergent paradigm : A Socioemotional wealth approach to family business

• SEW: • Stock of affect-related value that a family derives from its

controlling position in a particular firm. (Gomez-Mejia, et al, 2007)

• “Affective endowment” of family owners (Berrone,Cruz, Gomez-Mejia et al, 2010)

“While non-family principals and managers might experience some of this, the value of socioemotional wealth to the family is more intrinsic, its preservation becomes an end in itself, and it is anchored at a deep psychological level among family owners whose identity is inextricably tied to the organization”

(Berrone, Cruz, Gomez-Mejia & Larraza-Kintana. 2010: 87.

An emergent paradigm : A Socioemotional wealth approach to family business

Rooted in the BAM (behavioral agency model) (Wiseman & Gomez-Mejia, 1998).

Family owners are concerned about preserving their SEW

Family owners frame problems in terms of assessing how actions will impact family socioemotional endowment

Implications

SEW has a major impact on strategic decision making in

family firms

Managerial choices in family firms tend to reflect the family’s desire to preserve its socioemotional wealth apart from efficiency or economic instrumentality considerations

Gomez-Mejia, Cruz, Berrone & De Castro, 2011

Implications

Family firms are NOT risk averse(but SEW loss averse)

“When issues are framed negatively by the family in terms of SEW losses, family

principals tend to choose risky economic actions that preserve SEW”

Berrone, Cruz & Gomez-Mejiia, in press

Implications

SEW preservation goals can conflict with economic objectives

“When there is a threat to SEW the family is willing to make decisions that are not driven by an economic logic, and in fact the family would be willing to put the firm at risk if this is what it

would take to preserve that endowment.”(Berrone, Cruz & Gomez-Mejiia, in press)

Empirical evidence

Gomez –Mejia et al (2007) 1237 Spanish olive oils mills

Family-owned olive oil mills prefer to remain independent and not join a cooperative even though the co-op offers many financial benefits to the firm and greatly reduces firm risk.

Family owners are willing to accept a performance hazard (FW) in order to retain family control (SEW)

Empirical evidence

Berrone, Cruz & Gomez-Mejia (2010)

194 US publicly held firms in polluting industries Family-controlled firms tend to contaminate less ,

particularly if the plants are geographically congregated in a particular community

Family owners place a greater value on the legitimacy afforded by environmental initiatives because doing so would safeguard their

SEW (family image) even if it is economically risky

Empirical evidence

Cruz, Becerra & Gomez-Mejia (2010)

122 privately owned Spanish firms

Family principals tend to create contracts for the TMT that are more protective of their welfare when the team is composed of family members even though this action is decoupled from firm performance.

Family owners place a greater value on preserving the SEW by nurturing family members (emotional attachment )

Empirical evidence

Gomez-Mejia et al (2010)

360 publicly held US firms

Family firms are less likely to engage in coporate diversification

Diversification poses a hazard on the family SEW : it requires external funding, outside managerial talent and changes in the way the family firm is organized (loss of family control and influence)

A contingency approach

Family firms are more willing to make economically driven decisions as firm faces greater performance hazard

Firms are more willing to diversify as performance deteriorates (Gomez Mejia et al, 2007)

Family owned olive mills are more willing to join coops as the volume of olive oil sales decreases (Gomez Mejia et al, 2007)

Newspapers are more likely to terminate family directors when the probability of failure is high (Gomez Mejia et al, 2003)

A contingency approach

One size fits all?

The Empirical evidence

Strategic choices are more likely to be driven by economic considerations in later generations (Gomez-Mejia et al, 2007; Chen et al, 2010)

Strategic choices are more likely to be driven by economic considerations as firm grows (Gomez-Mejia et al, 2007; Miller et al, 2010)

Strategic choices are more likely to be driven by economic considerations with the presence of non family shareholders (Gomez-Mejia et al, 2011)

Conclusions

SEW as an overarching construct to capture family firms idiosyncrasy

SEW as promising “home grown” theoretical approach with a strong theoretical base

Built on the foundation of family firms + anchored in the behavioral tradition within management field

SEW reconciles previous approaches to family firms: It allows for differential risk preferences, it accounts for

non financial aspects and it contemplates both, positive and negative consequences of this non economic aspects

The Challenges

How to measure SEW?

Berrone, Cruz, Gomez-Mejia, 2012:

30 items to capture five dimensions of SEW and discussing some alternative ways to measure these.

SEW DIMENSIONS

Berrone, Cruz & Gomez-Mejia, in press

The Challenges

In search of the Holy Grail: What is the impact of family ownership on firm performance?

The Challenges

Under which conditions is an emphasis on SEW preservation beneficial for firm performance?

How does the different SEW dimensions impact performance outcomes?

Cruz, Justo & De Castro (2011) : Employing family members increases firm

performance in the context of MSEs

Cruz & Nuñez (Work in progress ) : Drives of Value creation among European publicly

traded family firms (sponsored by Banca March)

The Challenges

How does SEW affect entrepreneurial outcomes?

SEW + Family embeddedness perspective to entrepreneurship (Aldrich & Cliff, 2003)

Cruz, Justo & De Castro (2011) Family entrepreneurs context and the impact of family employment on performance

Cruz & Justo (Work in progress) : Family entrepreneurs context and the probability of being a portfolio entrepreneur

Many others unresolved questions….

What factors play a role in determining the different weights given to the dimensions of SEW?

Under what conditions do economic objectives become preferable to SEW related goals?

Under what conditions might be the preservation of SEW by controlling families beneficial for other stakeholders/stakeholders?

What are the minimum financial level that a company needs to reach to be able to neglect SEW objectives?

……

Implications for family owners & practitioners

HOW DOES YOUR FAMILY DEFINE SUCCESS?

Implications for family owners & practitioners

How can we ensure the preservation of the SEW aspects that are worth to the family ? (Governance mechanisms, Human Resource Practices, Succession Planning…)

Implications for family owners & practitioners

How can we ensure that actions towards SEW preservation do not act against (financial) value creation ?

AN ENTREPRENEURIAL FOCUS : The preservation of the family SEW and the perpetuation of the family ties to a business are overlapping, but distinct issues:

From Family Business to ENTERPRISING FAMILIES

From survival to A TRANSGENERATIONAL VIEW OF

WEALTH CREATION

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Implications for family owners and practitioners

FAMILY BUSINESS Sucession Estate Planning Continuity Family Conflict

ENTREPRENEURSHIP

Opportunity seeking

Risk taking Innovation Growth

ENTERPRISING FAMILIES

Implications for family owners and practitioners

• IT IS NOT about how to assist families to pass on a business over to the next generation….

• IT IS ABOUT how to assist families to preserve their SEW and at the same time to pass on the entrepreneurial mindset and capabilities that enable them to sustain and create new streams of wealth (financial and socioemotional) across many generations.

Implications for family owners & practitioners

It is not about choosing the next successor… it is about

DEVELOPING THE NEXT GENERATION OF

FAMILY ENTREPRENEURS

QUESTIONS?