Entrepreneurship and growth: An international perspective
Understanding Entrepreneurship in
Family Firms: A Socioemotional Wealth
approach
Cristina Cruz, IE Business School
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
2004 Assessment of Entrepreneurship in the US
(Reynolds, 2005)
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.
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

A small business owner when asked why he
decided to split the company in two parts:

“The company was split not because there
was any demand from the market for such
a move, it was just to give them (the
brothers) something to do”
(Ram 1994, p.89)
Why? Anecdotic evidence

Some famous splits for “family feuds”
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)
“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)
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
Mishra and
McConaughy (1999)
690 US publicly held Capital Structure
firms
Chrisman, Chua, and
Litz (2004)
1,141 small privately
held U.S. firms
Family businesses are better at managing
conflicts and offer greater job satisfaction
and harmony in the work place.
Family firms use less debt to avoid a loss
of control and decrease the
likelihood of bankruptcy
Family involvement reduced overall
agency costs and increase performance,
measured by short term sales growth
Family firms employ in general less
complex HRM practices than non family
firms
Family firms exhibit better environmental
performance than non family firms
Family firms diversify less both
domestically and internationally than non
family firms.
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
Agency costs
Reid and Adams (2001) 300 Irish SMEs
Human Resource
Management Practices
Berrone et al (2010)
Environmental
Performance
Diversification decisions
Gomez-Mejia et al
(2010)
Gomez-Mejia et al
(2011)
194 US publicly held
firms
360 firms from
COMPUSTAT
database
403 publicly held US
companies
R & D and Technological
innovation
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
NON
FINANCIAL
GOALS
FINANCIAL
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 &

Family owners are concerned about preserving their
SEW

Family owners frame problems in terms of
assessing how actions will impact family
socioemotional endowment
Gomez-Mejia, 1998).
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)
SEW
FW
A contingency approach
One size fits all?
The Empirical evidence

Strategic choices are more likely to be driven by
economic considerations in later generations (GomezMejia 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
F
• Family control and influence
I
• Identification of family members with
the firm
B
• Binding social ties
E
• Emotional attachment of family
members
R
• Renewal of family bonds to the firm
through dynastic succession
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?
Financial
performance
(FW)
More intangibles
(SEW)
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
Implications for family owners and
practitioners
FAMILY BUSINESS




Sucession
Estate Planning
Continuity
Family Conflict
ENTREPRENEURSHIP




Opportunity seeking
Risk taking
Innovation
Growth
ENTERPRISING FAMILIES
38
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?
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A Socioemotional Wealth approach to