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Understanding Entrepreneurship in Family Firms: A Socioemotional Wealth approach

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.

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Understanding Entrepreneurship in Family Firms: A Socioemotional Wealth approach

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

  2. 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 ..

  3. WHY FAMILY BUSINESSES?

  4. WHY? Facts & Figures

  5. WHY? Facts & Figures

  6. 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.

  7. 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

  8. 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)

  9. 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)

  10. 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

  11. WHY? Selected empirical evidence

  12. 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).

  13. WHAT MAKES FAMILY BUSINESS DIFFERENT?

  14. Theoretical approaches • Earlystudies in thefieldsufferedfromsignificantmethodologicalproblems and werelargelydescriptive and atheoretical. • As thefieldevolved, different “borrowed” paradigms: • Agencytheory(Morck & Yeung, 2003; Schulze, Lubatkin, Dino & Buchholz, 2001) • Stewardshiptheory(Miller & LeBreton-Miller, 2006) • Resource-basedview of thefirm(Habbershon & Williams, 1999; Habbershon, Williams & MacMillan, 2003)

  15. A duality of goals

  16. An emergent paradigm : A Socioemotional wealth approach to family business • SEW: • Stock of affect-relatedvaluethat a family derives fromitscontrolling position in a particular firm. (Gomez-Mejia, et al, 2007) • “Affectiveendowment” of familyowners(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.

  17. 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

  18. 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

  19. Implications Family firms are NOT risk averse (but SEW loss averse) “Whenissues are framednegativelybythefamily in terms of SEW losses, familyprincipalstendtochooseriskyeconomicactionsthat preserve SEW” Berrone, Cruz & Gomez-Mejiia, in press

  20. 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)

  21. 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)

  22. 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

  23. 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 )

  24. 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)

  25. 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)

  26. A contingency approach One size fits all? • Family firms Heterogeneity • Size • Family Stage • % Family Ownership • ...

  27. 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)

  28. 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

  29. 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.

  30. SEW DIMENSIONS Berrone, Cruz & Gomez-Mejia, in press

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

  32. 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)

  33. 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

  34. 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? • ……

  35. Implications for family owners & practitioners HOW DOES YOUR FAMILY DEFINE SUCCESS?

  36. 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…)

  37. 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. FAMILY BUSINESS Sucession Estate Planning Continuity Family Conflict ENTREPRENEURSHIP Opportunity seeking Risk taking Innovation Growth Implications for family owners and practitioners ENTERPRISING FAMILIES

  39. 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.

  40. Implications for family owners & practitioners It is not about choosing the next successor… it is about DEVELOPING THE NEXT GENERATION OF FAMILY ENTREPRENEURS

  41. QUESTIONS?

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