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Family Businesses

What Makes The Family-Firm Tick? Five Research-Based Decision Drivers

What Makes The Family-Firm Tick? Five Research-Based Decision Drivers
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Many articles and conferences about family business talks about succession and conflicts without addressing the basics of why it is that we study family firms. What are the fundamental differences that set family firms apart from non-family firms? Researchers have been studying these differences for decades to lay the foundations of the family business as an academic discipline, but practitioners and consultants have yet to successfully extract basic differences, and determine knowledge-based implications based on these differences.

Traditionally, researchers suggested that family businesses differed from non-family business due to the continuous interaction between the family aspect and the business aspect. The concept has since developed, addressing the many types of family business, and in the process demonstrated that the influence of the family varies from one business to another.

While practitioners and consultants were only focused on the pitfalls of family businesses, researchers have proven that in many cases family firms outperform their non-family counterparts. Subsequently, attempts were made to dig deeper and find the underlying drivers as to why family firms performed better in these particular cases. Family firms and non-family firms were revealed to operate differently (and perform better) in some scenarios because of a shared dual goal-state: both financial and non-financial goals were found to be in alignment. Through research, it was also shown that these non-financial goals -also referred to as socio-emotional wealth (SEW)- rank higher in importance to family firms than financial goals. Pursuing socio-emotional wealth is unique to family firms, and it encourages them to achieve higher financial gains over the long-term.

Can SEW be defined? FIBER is an acronym used to describe the five elements that combine to make socio-emotional wealth. These elements rein supreme to family firms, overshadowing the financial aspects: Family Control, Identification, Binding Social Ties, Emotional Attachment, and Renewal of the Family Bond. Family firms often make decisions that aren't sound economically (from a financial perspective), but they are considered high utility maximizers to the family firm's SEW.

Understanding Fiber: The Five Factors Of Socioemotional Wealth

1. Family Control

Families make decisions to reject acquisition offers, eschew employment of non-family upper management, going public, and becoming a part of larger cooperatives. While the decisions don't necessarily appear correct from a profit-driven perspective, they opt to reject these offers all the same. This is most often done in order to maintain family control of the enterprise.

2. Identification

As many family firms bear the name of the family or are heavily associated with the family, these firms often decide key matters from a viewpoint that is rooted in protecting their legacy. Identification with the family firm colors these choices, rather than pure financial performance.

3. Binding Social Ties

As families have relationships within society –commonly found in the GCC family firms- many judgments are made to continue to frequent local suppliers or partners even if lower cost alternatives can be found elsewhere. These judgment calls are also influenced by the local environment, and a family firm's desire to support and keep small businesses operating, as they are all part of one shared community.

4. Emotional Attachment

Many decisions within family firms are based on emotional attachment between the relevant family members. It may be the case that a course of action is pursued to satisfy the requests of one family member, while in other scenarios decisions are avoided or stalled to protect family members.

5. Renewal Of The Family Bond

The renewal of family bonds to the firm through dynastic succession is of paramount importance. The succession process and passing the business from one generation to another is part of family firm tradition. Families habitually avoid deciding to sell often because of this bond, and in order to keep the business as a source of income, employment, and power for future generations of the clan.

These five factors, part of the family firm pursuit of SEW, increases both the sense of family member belonging and their stewardship-like behavior towards the firm. It's worth mentioning that SEW also emphasizes the long-term view over short-term gain, and the patient capital of family firms. The very same drivers of SEW also contribute to develop the mesh-style relationship between family firms and the communities around them, while simultaneously contributing to improving the overall brand of family businesses.