Family firms and social responsibility: preliminary evidence from the S&P 500.

Little is known about the impact of family ownership and management on corporate social performance. Some scholars have suggested that family firms are not likely to act in a socially responsible manner, while others have indicated that socially responsible behavior on the part of the family firm protects the family's assets. This preliminary study compares the degree to which family and nonfamily firms are socially responsible using data from 1991 to 2000 from the S&P 500. Two hundred sixty-one firms (202 nonfamily and 59 family) appeared in the S&P 500 for the 10-year period, Findings show that family firms are more socially responsible than nonfamily firms along several dimensions. This is likely due to family concern about image and reputation and a desire to protect family assets.

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An increasing number of scholars have turned their attention to studying the impact that a family, which owns and operates a business, might have on that firm's performance (Dyer, 2005). Studies comparing the performance of family firms and firms with no family connections have focused on such variables as return on assets (Anderson & Reeb, 2003), sales growth (Chrisman, Chua, & Litz, 2004; Daily & Dollinger, 1992; Gallo, Tapies, & Cappuyns, 2000), job satisfaction (Beehr, Drexler, & Faulkner, 1997), and innovation (Tanewski, Prajogo, & Sohal, 2003). Little is known, however, about the impact a family might have on the corporate social performance (CSP) of a firm that it controls and there appear to be conflicting positions in the literature regarding the subject. Some scholars such as Morck and Yeung (2004) have argued that family firms are highly self-interested and merely want to protect their own parochial interests. Thus, the families that own various enterprises would not be inclined to improve the broader societies in which their firms are embedded. Indeed, such family firms may foster corruption, which undermines public confidence as well as the legitimacy of public institutions in order to protect their own interests. Others, such as Godfrey (2005), have suggested that firms, including those owned by families, have incentives to be socially responsible to maintain a positive image, since a positive reputation in the minds of key stakeholders may serve as a form of social insurance, protecting the firm's (and family's) assets in times of crisis.

To explore this rather complex and uncertain relationship between family ownership and control and CSP, this preliminary study will:

1. briefly discuss the concept of CSP;

2. discuss those theories that help us understand why family-owned firms may be more or less socially responsible; and

3. determine what empirical support there is for these theories by comparing the CSP of family and nonfamily firms, using a sample of companies in the S&P 500 during the years 1991-2000.

What Is CSP?

While there have been numerous approaches to defining and studying CSP (e.g., Margolis & Walsh, 2003; McWilliams & Siegel, 2001; Wartick & Cochran, 1985; Whetten, Rands, & Godfrey, 2001), H.R. Bowen's seminal idea that businessmen should "pursue those policies, to make those decisions, or to follow those lines of action which are desirable in terms of the objectives and values of our society" seems to capture the essence of the concept (Bowen, 1953, p. 6). The concept of CSP suggests that a society's firms, whose very existence is predicated on societal sanction and support, have the obligation to be economically and socially responsible "citizens" and act in publicly responsible ways (Wartick & Cochran, 1985). Prior research on CSP suggests that firms might be rated as to their degree of social performance along two dimensions: (1) positive "social initiatives" (e.g., charitable giving), where the firm proactively tries to improve society, and (2) the firm's ability to avoid activities that might prove to be of "social concerns" (e.g., polluting the environment) (http:www.kld.com). Firms who fail to engage in positive social initiatives or who become the target of social concerns may face legal, economic, or social sanctions from their stakeholders and society in general (Godfrey, 2005).

While Bowen and others argue that there is a moral dimension underpinning socially responsible behavior (Donaldson, 1982; Rawls, 1971)--that corporations should "do good" because it is the right thing to do--some have suggested that socially responsible behavior is also the profitable thing to do (Waddock & Graves, 1997). However, previous reviews of the various studies on this topic by Bragdon and Marlin (1972) and Griffin and Mahon (1997), and more recently Margolis and Walsh (2003) and Orlitzky, Schmidt, and Rynes (2003) suggest a tenuous link between CSP and corporate financial performance. This raises the question: Should corporations attempt to benefit society even if there is no apparent financial gain for the corporation's shareholders? Friedman (1970) has argued that managers who attempt to "do good" rather than helping the firm "do well" are violating their fiduciary responsibility to shareholders. Hence, he argues that a firm's manager should only act in a socially responsible manner if it helps to maximize shareholder wealth. Proper behavior should be determined by the market, not by moral imperatives.

In addition to the moral and financial arguments related to why a firm might be socially responsible, which are prevalent in this literature, there appear to be other determinants of CSP as well. In this regard, we will now turn our attention to the question as to whether or not family control of a firm should affect the firm's proclivity to be socially responsible. Because there are legitimate competing theories on why family firms are likely to be more or less socially responsible than nonfamily firms, we will draw on three streams of theory to develop two sets of alternative hypotheses. These streams include: (1) self-interest; (2) identity, image, reputation, and identification; and (3) moral capital.

Why Family Firms May Not Be Socially Responsible

In his classic work, The Moral Basis of a Backward Society, Edward Banfield describes a phenomenon he calls "amoral familism," a term he used to characterize the families of Southern Italy in the 1950s (Banfield, 1958). Banfield, working as an anthropologist, noted that the villages he studied were afflicted with severe poverty--poor roads, substandard schools, and other infrastructure weaknesses, along with poor economic conditions in general. As he attempted to understand the underlying causes of such poverty, he came to the conclusion that the families in these communities were unable to cooperate with one another to build a better society. This was due, in large part, to the lack of trust between families and those on the "outside." Banfield (1958, p. 116) writes: "towards those who are not of the family, the reasonable attitude is suspicion. The parent knows that other families will envy and fear the success of his family and that they are likely to seek to do it injury. He must therefore fear them and be ready to do them injury in order that they may have less power to injure him and his." From such attitudes spring behaviors on the part of a family that are based on self-interest, with the outcomes being at the expense of, or even injury to, other families and the broader society. In the context of a family firm, this dynamic of amoral familism would suggest that owning-families would not likely be socially responsible, but would likely emphasize self-interest. The outcomes of such beliefs might be behaviors such as nepotism that could disadvantage company employees and other stakeholders, or competing in the marketplace in ways that could prove harmful to the greater social good (Rosenblatt, de Mik, Anderson, & Johnson, 1985; Schulze, Lubatkin, Dino, & Buchholtz, 2001).

There appears to be some empirical evidence that family-controlled firms may indeed be irresponsible social actors, causing significant social concerns. Morck and Yeung (2004) examined the concentration of family-controlled firms in 27 of the larger industrialized countries in the world. They correlated the concentration of family firms with various dimensions of societal progress: economic development, physical infrastructure, health care, education, quality of government, and social development (as defined by the degree of income inequality). As a result of their analysis, they conclude: "countries whose large firms are controlled by great mercantile families are more backward in a number of dimensions. They are poorer. They provide worse public goods--including worse infrastructure, worse healthcare, worse education, and more irresponsible macroeconomic policies. They are less egalitarian" (p. 395).

Morck and Yeung (2004) discuss possible explanations for these findings and conclude that the owning-families are more invested in protecting their own interests than they are in developing their countries' economies and, in a sense, helping their "neighbors." To protect their interests, these families become adept at bribing government officials. As Morck and Yeung note: "established wealthy families controlling substantial assets can pay corrupt officials up front for subsequent favors" (p. 401). Hence, these families become "political rent seekers" at the expense of the broader society.