Entrepreneurship and growth: An international perspective
Understanding Entrepreneurship in
Family Firms: A Socioemotional Wealth approach
Cristina Cruz, IE Business School


More than 10 years of experience working, teaching and researching on family business
IMBAs,
Exective
Couses .
4 th generation family owned company
Thesis on Corporate
Governance in family Firm
Academic publications
(AMJ,ASQ,ETP,JBV..)
Cases & Articles ..

Facts & Figures

Facts & Figures

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.


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”!!!


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)


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)

• 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

AUTHORS SAMPLE VARIABLE OF INTEREST MAIN RESULTS
Beehr, Drexler and
Faulkner, 1997
Mishra and
McConaughy (1999)
Chrisman, Chua, and
Litz (2004)
198 privately held firms
690 US publicly held firms
1,141 small privately held U.S. firms
Reid and Adams (2001) 300 Irish SMEs
Berrone et al (2010) 194 US publicly held firms
Gomez-Mejia et al
(2010)
360 firms from
COMPUSTAT
Gomez-Mejia et al
(2011) database
403 publicly held US companies
Work relations
Capital Structure
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
Agency costs 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
Human Resource
Management Practices
Environmental
Performance firms
Family firms exhibit better environmental performance than non family firms
Diversification decisions Family firms diversify less both domestically and internationally than non
R & D and Technological innovation 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

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

WHAT MAKES FAMILY BUSINESS
DIFFERENT?


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)

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 &
Gomez-Mejia, 1998).

Family owners are concerned about preserving their
SEW


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

“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

“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)



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)


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


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 )


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)



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)
FW
SEW


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)


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


Berrone, Cruz, Gomez-Mejia, 2012:
30 items to capture five dimensions of
SEW and discussing some alternative ways to measure these.

F
I
B
E
R
• Family control and influence
• Identification of family members with the firm
• Binding social ties
• Emotional attachment of family members
• Renewal of family bonds to the firm through dynastic succession
Berrone, Cruz & Gomez-Mejia, in press

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



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)


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


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

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
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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

QUESTIONS?