Understanding Entrepreneurship in Family Firms: A Socioemotional Wealth approach Cristina Cruz, IE...
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Transcript of Understanding Entrepreneurship in Family Firms: A Socioemotional Wealth approach Cristina Cruz, IE...
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
38
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?