Arizona State University
W. P. Carey School of Business, Department of Management
P.O. Box 874006. Tempe, AZ 85287-4006
Phone: 602 543 6126; Fax 602 543 6220
Insper Institute of Education and Research
R. Quatá, 300. São Paulo, SP Brazil 04546-042
Phone: 55-11-4504-2432; Fax: 55-11-4504-2350
Faculdade Campo Limpo Paulista
Entrepreneurship Research Division
R. Guatemala, 167, Campo Limpo Paulista, SP, Brazil 13231-230
Phone: 55-11-4812-9400; Fax: 55-11-4812-9400
Arizona State University
W. P. Carey School of Business, Department of Management
P.O. Box 874006. Tempe, AZ 85287-4006
Phone: 602 543 6126; Fax 602 543 6220
Texas A&M University
Mays School of Business – Department of Management
420 Wehner, Mailstop 4221, office 430F
Ph 979.845.4851; Fax: 979.845.9641
January 10, 2012
We thank FIA – Fundação Instituto de Administração. São Paulo, Brazil.
The Socio-Emotional Wealth Logic: An Empirical Investigation on the Antecedents of Family Firm Administrative Practices and Performance
In the family firm literature, researchers agree that decisions driven by social and affective family motives are often made at the expense of efficiency and transparency in the managerial ranks. Yet, firms controlled by families comprise about half of the Fortune 1000 index and many family businesses have become household brand names around the world, such as Harley-Davidson, Hyundai, Ford, Hilton and Marriott, hence indicating they are quite competitive. In this paper, we address this paradox. We argue that family firms are just as rational as their nonfamily peers when making managerial choices, except that the criteria for judging whether choices are good or bad vary between these two types of firms; for the former it matters whether their socio-emotional wealth (SEW) is maximized, whereas for the latter, it matters whether efficiency is achieved. Ultimately, family firms tradeoff efficiency and risk taking for stability and stakeholder loyalty, whence these benefits and costs compensate one another, leading family businesses to be just as efficient as nonfamily ones. We specify a model wherein family businesses tend to adopt <i>caring administrative practices </i>and <i>caring stakeholder relations</i>, and investigate how these choices trace to firm performance. We find support for our conjectures, based on a large survey sample from over 18,900 employees, from 82 of the largest firms in Brazil. We derive implications for theory and practice.
Key words: socio-emotional wealth, family firms, caring administrative practices, stakeholder relations, performance, and competitive advantage
Research on family firms has grown considerably in the past few decades. A quick search in Google scholar for the term produces over 15,000 hits, most of them representing studies published in the last 15 years. This voluminous body of research concludes that family firms – understood generically here as those business entities whose family owners exert much influence over their affairs (Gomez-Mejia et al, 2011: 658) – are a distinct type of organization from the usual ‘profit oriented ideal’ portrayed in the business literature. For instance, when deciding over myriad of issues such as diversification, compensation, management-employee relationships, growth through acquisitions, governance, or even corporate social responsibility, family firm managers tend to display non-economic behavior, therefore focusing on priorities that seem contrary to the profit oriented agenda of their nonfamily counterparts (Gomez-Mejia, Larraza-Kintana, & Makri, 2003; Schulze, Lubatkin, Dino, & Buchholtz, 2001; Gomez-Mejia, Makri, & Larraza-Kintana, 2010; Miller, Le Breton-Miller & Lester, 2010; Schulze, Lubatkin, & Dino, 2003).
A vital pillar driving these differences, according to this literature, embodies a socio-emotional element that pervades most areas of decision-making. Essentially, families conform to an enclosed social milieu of individuals sharing emotional ties that range from relational warmth, affection, support, family-name pride, and happiness, all the way to possessiveness, incongruity, and resentment (Epstein, Bishop, Ryan, Miller & Keitner, 1993; Gomez-Mejia et al, 2011: 654). What is more, the identity of the family name is often conflated with that of the firm (Dyer & Whetten, 2006), such that how others perceive the organization directly affects the self-esteem and reputation of its owners (Chen, Chen, Cheng, & Shevlin, 2010). Because of their socio-emotional ties, the ability of family members to exercise authority and control over business decisions embodies a source of satisfaction (Schulze et al, 2003; Gomez-Mejia et al, 2011). Certainly emotions are present in all types of firms, but the literature suggests that they play a much larger role in family businesses not only because of the affective stock (which influences the behavioral, social, and cognitive aspects of business management) but also because of the generational ties that evolve across managerial ranks, thereby increasing employee exit barriers and reducing turnover.
The paradox that this literature raises is that decisions driven by social and affective family motives often tend to be made at the expense of efficiency and transparency in the managerial ranks, and consequently family firms are often seen as bastions not of financial wealth creation, but of inefficient and non-rational processes that are likely to reduce value. Interestingly however, anecdotal evidence sometimes suggests the opposite; although most family firms are smaller in size, firms controlled by families comprise about half of the Fortune 1000 index (Gomez-Mejia et al, 2010). All the while, many family businesses have become household brand names, displaying strong competitiveness in their respective industries, such as Harley-Davidson, Hyundai, Ford, Hilton and Marriott.
In this paper, we investigate this paradox. We follow Gomez-Mejia et al (2007) who suggest that family firms are just as rational as their nonfamily peers when making managerial choices, except that the criteria for judging whether choices are good or bad vary between these two types of firms. For the former it matters whether their socio-emotional wealth (SEW) is maximized, whereas for the latter, it matters whether efficiency is achieved. But to this core idea, we add that ultimately the decision-making patterns of family firms tradeoff efficiency and risk taking for stability and stakeholder loyalty. We argue that ultimately, family firms do emphasize administrative control in their day to day decision making, therefore creating some hierarchical rigidity aimed at increasing SEW and perpetuating family values as well as reducing business risk; in the process, family firms tend to underperform non-family organizations. On the other hand, the caring relationships demonstrated with inside and outside stakeholders implicate loyalty that increases relational capital; in the process, family firms tend to outperform non-family organizations. Ultimately, our argument is that these decisions present tradeoffs and imply that the gains in employee productivity and community reputation arising from personal commitment and loyalty compensate for the losses in bureaucracy and non-economic-oriented decision-making. Our contribution then is to demonstrate that, albeit they tend to be less diversified and slightly smaller than their non-family peers, family firms are no less profitable.
We test our theoretical model in a large sample of over 18,900 employees, from 82 of the largest firms in Brazil. Our intended contribution is to the family firm literature. Most literature to date compares performance outcomes of family versus non-family entities, but few have looked inside organizations to derive the administrative mechanisms that differentiate family organizations from their peers. In the final section, we derive implications for theory and practice.
Socio-Emotional Wealth defined
A broad literature on family firms agrees that the owners of such organizations derive a series of non-economic utilities from business ownership. These utilities can be broadly summarized into three large categories of caring administrative orientation (Gomez-Mejia et al, 2007; 2011): amassing emotional capital; perpetuating family values; and catering to the welfare of those in close proximity more than other organizational stakeholders. In regards to emotional capital, the literature on family firms is quite accepting of the fact that organizational and strategic decision making up and down organizational hierarchies involve emotions (Baron, 2008; Sharma, 2004). The affective nature of decision making then implies that organizations many times become the recipient of the family’s emotive stock; while emotions exist in all organizations, the difficulty of family members leaving the organization implies that personal feelings are trapped inside, and cumulatively affect the behavioral, social, and cognitive aspects of business management (Gomez-Mejia et al, 2011: 655). A myriad of such emotions have been explored in the literature, such as possession and attachment (Astrachan & Jaskiewicz, 2008; Habbershon & Pistrui, 2002), commitment entrapment (Chirico & Salvato, 2008); as well as emotive befits and costs (Bjornberg & Nicholson, 2007; Astrachan & Jaskiewicz, 2008).
In regards to the perpetuation of family values, Aronoff (2004: 57) describes that they often conform the cultural pillars of family businesses, hence establishing a key source of differentiation. In a thorough review of the literature for instance, Astrachan, Klein, & Smyrnios (2002) cite a broad spectrum of anecdotal and empirical evidence that family values shape distinct organizational cultures. Family values permeate their organizations (Dyer, 2003; Fletcher, 2000), and drive cultural aspects of the organization not only during founding periods, but also across generations (Hall & Nordqvist, 2008). This perpetuation enables families to immortalize not only their core values (Handler, 1990), but also their dynasties (Casson, 1999).
A third area where socioemotional aspects are said to drive decision making in family organizations involve the altruistic behavior of family members, wherein they tend to cater to the welfare of the family unit. The logic of altruism in family businesses can be traced back to an utilitarian orientation where each individual engages in exchanges with an unselfish motivation to maximize the welfare of the entire family which is collectively engaged in a common enterprise (Becker, 1981). More recent family business literature tends to emphasize that family members wish to increase not only the well being of their blood relatives but also that of employees, independent of their relative contribution to the organization, or even their capacity to reciprocate (Gomez-Mejia, et al, 2011: 656).
By collectively labeling these non-economic utilities ‘the socio emotional wealth’ of a family, Gomez-Mejia et al (2007) recently argued that families are likely to gauge their stock of such wealth as a primary objective, wherein good ‘family firm decisions’ are those that bring profit or avoid excessive costs on their socio emotional stock, independently of how such decisions bring about traditional forms of efficiencies or other economic-oriented considerations. Looking at the family firm from this perspective then these organizations may be just as rational as their nonfamily counterparts when making managerial choices, except that the primordial criteria – or at least the one that has greater priority – become not financial but socio emotional wealth.
Thus, in this paper, we wish to supplement the above literature in two meaningful ways. First, we theorize about socio emotional wealth as a primary logic of how families conduct their businesses differently in their organizations vis-à-vis their nonfamily peers. Mostly, we argue, family businesses tend to employ caring internal administrative practices – involving areas that range from professionalization as well as human resources management, and a degree of personification in agent-principal relationships, as well as caring external stakeholder relationship practices – such as caring for their external stakeholders, as well as the broader community in general. In the end, we examine theoretically and empirically whether such choices present tradeoffs when it comes to financial performance of the organization. A caring orientation means that the family considers the interest of others as part of its own socioemotional utilities because doing so enhances the family’s image, the family’s reputation, as well as the family’s emotional connection to internal and external stakeholders.
We summarize our model in Figure 1, below. Essentially, we conjecture that, in contrast to what happens in non-family firms, family firm managers will establish caring contracts with both internal (e.g. employees) as well as external (e.g. community) stakeholders. In essence, we believe that family firms’ choices of administrative policies reflect their owners’ concerns for preserving and even increasing their socio-emotional wealth. In this section then, we define each of our constructs, and hypothesize on their relationships.
<< Figure 1 about here >>
Family versus Non-family Businesses
So what is a family firm? At the theoretical level, scholars generically agree that family businesses are those where a family owner exercises much influence over the firm’s affairs. When it comes to materializing such definition into measurable proxies however, there is much dissent in the empirical literature. Gallo & Sveen (1991) understand family firms as those where a single family holds the majority of shares; Westhead, Cowling, & Howarth (2001) see them as those wherein the family holds 50% or more of ordinary voting power; Anderson & Reeb (2003) define them as those where a family member holds office or is a director in the firm; Gomez-Mejia et al (2003) see them as those where family ownership exceeds 5% and at least one person is on the board, whereas Cruz et al (2010) adopt the threshold of 20%, as recommended by LaPorta et al (1999).
Albeit the literature varies in its choice on how to operationalize it, there seems to be a consensus that the degree of influence of family members onto the business varies across contexts. For instance, some studies have shown that a mere 5% of family ownership is enough to give Fortune 1000 firms its ‘family flavor’ (Gomez-Mejia, Tosi, & Hinkin, 1987; Hambrick & Finkelstein, 1995; McEachern, 1975; Werner, Tosi, & Gomez-Mejia, 2005), whereas in Spain, Cruz et al (2010) find this threshold may hover around 20%. In the end, as Gomez-Mejia et al (2011: 659) suggest, every operational definition is context specific, rather than generalizable, and is likely to depend on various factors, such as the access of other owners, either atomistic or large block ones (Hambrick & Finkelstein, 1995; Hoskisson et al, 2002) as well as rules that conflict out the interests of all shareholders (Aghion, Van Reneen, & Zingales, 2009). Given the context-specific nature of the definition, we deem imperative to determine a firm’s identity as family or non-family based on the contextual characteristics of the country where our data comes from: Brazil. As recently as 10 years ago, Brazil saw the passing of very strict legislation in its BOVESPA stock market, wherein all businesses are required to follow transparent governance rules (Funchal, 2008). The results have been two-fold: for one, there has been a dramatic increase in the participation of minority stockholders in all sorts of businesses, and a massive increase in the availability of capital to firms, thereby catapulting BOVESPA to being one of the largest stock markets in the world (Economist, 2010). On the other hand, family firms are now required to relinquish control and must disclose all aspects of their operations publicly. The relinquishing of such control may represent a big problem; Gomez-Mejia et al (2007) for instance found that family firms may choose to abandon public funding opportunities and even accept a performance hazard, if such opportunities require loss of independence and decision-making space. As a result, publicly traded firms in Brazil, we understand, are much less subject to family influences than privately owned ones. Hence, we define a family business (in Brazil) as that which is not publicly traded, whereas it is classified as a non-family business otherwise.
Caring administrative practices
Broadly, because socio-emotional wealth is a fundamental endowment of family principals, potential losses to that endowment increase subjective decision-making, wherein family members are therefore more willing to adopt internal administrative as well as external stakeholder practices that help prevent such losses. In trying to maintain their socio-emotional wealth, we expect family businesses will be more inclined to adopt caring administrative practices than their non-family business counterparts. We define caring administrative practices as those organizational policies that are less formalized but at the same time more personable and concerned with the personal integrity of individuals. We expect in general that managers of non-family businesses will have relationships with employees that are more arm’s length, whereas their chains of command as well as human resources practices will be well established and more formal. Particularly, we expect non-family firms to have more formal organizational structures and information sharing, more access to formal training and open promotion policies, as well as more arm’s length relationships with personnel. We detail each of these in turn.
In regards to promotion of employees from within, it is expected that the pool of candidates will be more constrained in family firms. A socio-emotional wealth reasoning would lead us to believe that family firms would tend to favor promotion from within the family, even if a better candidate exists internally or even externally in the labor market (Kets de Vries, 1993). Evidence from a study by Zellweger, Kellermanns, Chrisman, and Chua (in press: 11) concludes that family owners count the future benefits of control (i.e. by favoring the promotion of family members rather than outsiders) as part of their current social emotional wealth endowment. This favored promotion practice often associates with the owner’s desire to retain control (Astrachan et al, 2002) and to satisfy a “dynastic” family ambition (Gomez-Mejia, 2011: 661), even if such decision defies economic rationality. Moreover, when preparing candidates for promotion, non-family firms may tend to favor outsourced formal preparations (e.g. executive development seminars, and formal training); the family firm in contrast will avoid such practices as it favors personal relationships between the leader and successor (e.g. mentoring and coaching) so as to strengthen their mutual trust (Fiegener, Brown, Prince, & File, 1996). The choice for informal mentoring and coaching in family businesses tends to ensure a better transfer of idiosyncratic knowledge across generations (Castanias & Helfat, 1991; 1992), as much as it increases the emotional attachment of the newly promoted manager with the organization (Sharma, 2004).
In regards to professionalization of a firm’s structure and policies, non-family firms tend to incorporate more formal management structures and processes (Dyer, 1989), whereas the literature suggests that family businesses are generally more reluctant to professionalize the organization (Gomez-Mejia et al, 2011: 662). For instance, family firms often avoid delegating greater responsibilities within (Kets de Vries, 1993; Schulze, Lubatkin, & Dino, 2003; Gomez-Mejia et al, 2007). This reluctance of family firms to professionalize follows our socio-emotional logic; delegating authority and relying on a command structure that is independent of family are likely to increase information asymmetries (Gomez-Mejia, Hoskisson, Makri, Sirmon, & Campbell, 2011), decrease family control over important decisions (Gomez-Mejia, 2011: 663) as well as increase behavioral uncertainty (Cruz et al, 2010). All in all, we expect that family firms will be less formalized when it comes to HR practices (De Kok, Uhlaner, & Thurik, 2006).
In regards to agency relationships, family businesses will tend to be more personable and caring in treating their employees. Employee relation approaches tend to emphasize businesses communication with employees through informal (e.g. impromptu meetings, social gatherings) rather than formal systems (e.g. formal communication structures, management by objectives) (Harris & Reid, 2008). Such practices follow our socio-emotional wealth logic. The implementation of long term, focused developmental plans rather than short term training may help indoctrinate new employees with the norms and values of the organization, thus strengthening an identification with the firm and fostering the family’s socio-emotional wealth. Moreover, compensation and appraisal programs tend to consider non-economic criteria, such as fulfilling family obligations and contributing to the harmony of the context (Beehr et al, 1997). The use of informal communication channels can also be interpreted as the family’s desire to build a familial atmosphere that helps transmit the family culture and values (Harris & Reid, 2008). In a recent study for example, Cruz et al (2010) found that firms with family ties are more likely to foster caring relationships (e.g. oriented towards support, understanding, and consideration of the agent’s welfare). In sum, we expect that:
Hypothesis 1: family firms are more inclined to adopt caring administrative practices in contrast to their non-family counterparts.
Caring Stakeholder Relationships and Corporate Citizenship
More recently, scholars have begun exploring whether the idiosyncratic nature of family firms affects how they relate to their external environment, which is comprised of an extended set of stakeholders, including not only buyers and suppliers, but also their community at large. Essentially, a stakeholder includes any group of individuals who can affect or is affected by the achievement of the organization’s objectives (Freeman, 1984: 46). In this segment of our theory, we are concerned with ‘external’ stakeholders, such as buyers, suppliers, and even the community at large within which the firm is immersed. Hence, we discuss these developments based on the emerging literature of corporate social responsibility and stakeholder management.
The core of stakeholder management lies in “the never-ending task of balancing and integrating multiple relationships and multiple objectives” (Freeman & McVea, 2001; Gomez-Mejia et al, 2011: 681). Albeit several scholars suggest that stakeholder management is relevant for family firms (E.g. Chrisman et al, 2005; Lubatkin et al, 2007), the concept has rarely been applied to family firms in a formal manner (Gomez-Mejia et al, 2011: 681). Based on our socio-emotional wealth reasoning, we expect that family firms are to be much more responsive to the claims of external stakeholders. Our logic is as follows. First, social and reputational sanctions are often imposed on firms exhibiting less than desirable corporate citizenship; however, in the case of family firms, such costs are also transposed to the family name (Adams, Taschian, & Shore, 1996; Dyer & Whetten, 2006), thereby affecting their legitimacy and reputation (Gomez-Mejia, 2001: 682). To avoid being stigmatized as an irresponsible corporate citizen, family firms are thus more likely to respond to external claims, even if there are few or even no direct financial rewards (Zellweger and Nason, 2008).
Besides, we expect family firms to work towards the creation of long term relationships with external stakeholders, such as buyers and suppliers, in order to amass social capital and stocks of goodwill (Carney, 2005). We reason that these relationships may also serve as a form of social insurance, protecting the firm’s assets in times of crises (Godfrey 2005), so that if damage is to occur, stakeholders are more likely to give the organization and the family the benefit of the doubt. Moreover, because family organizations have this long time orientation and are less pressed for short-term results, they are more apt to build these relationships in a path dependent way (Miller & Le Breton-Miller, 2005). Indeed, a recent study by Berrone, Gomez-Mejia, Cennano, and Cruz (2011) justified the greater inclination of family businesses to undertake proactive stakeholder engagement activities as a combination of social legitimacy and reputation, as well as social connections with the community; both of these reasons conform well with our socio-emotional logic.
Just like family businesses are likely to work towards building long term relationships, they are also more likely to exhibit higher levels of corporate social responsibility and good community citizenship (Berrone et al, 2010; Deniz-Deniz & Cabrera-Suarez, 2005; Dyer & Whetten, 2006) than non-family firms. Dyer & Whetten (2006) for instance found preliminary empirical evidence that family firms are much more likely to avoid actions that may make them appear as socially irresponsible. Berrone et al (2010) also demonstrated that controlling families tend to adopt environmentally friendly strategies more frequently, especially when the firm is socially and geographically embedded at the local level. This is so, they explain, because family members tend to be much more exposed to reputational loss from environmental transgressions.
Based on the above, we predict that:
Hypothesis 2: family firms are more inclined to adopt caring external stakeholder relationships in contrast to their non-family counterparts.
Though we expect family firms to adopt both caring administrative practices (i.e. caring for the welfare of their employees, through personable relationships with them), as well as caring external stakeholder relations (i.e. demonstrating a stronger stance of corporate citizenship towards the outer community), we expect that such choices will emphasize much more the former than the latter. One of the strongest characteristics of family firms, according to previous literature is altruistic behavior among family members. This means family owners have a greater desire to cater to the welfare of the family unit, more than they wish to cater to the welfare of others. Research by Economics Nobel Prize laureate Gary Becker details the logic of altruism. According to Becker (1981), altruism has a strong utilitarian orientation, wherein altruistic exchanges among family members are meant to maximize the welfare of the broader group of family members engaged in a common endeavor (i.e. in our case, running a business). For Becker (1981), altruism associates with economic rationality in family firms, and more recent literature (Jorissen, Laveren, Martens, & Reheul, 2005, Lubatkin, and colleagues 2005; 2007; Miller et al, 2007) indicate that family owners receive satisfaction by benefitting family members independent of their relative contribution to the organization, or their capacity to reciprocate in kind. According to these authors fulfillment of family obligations takes precedence over other matters, in that blood ties become more relevant a criterion for judging stakeholder relations in family firms. Based on this, we conjecture that:
Hypothesis 3: family firms are more inclined to adopt caring internal administrative practices than they are to adopt external stakeholder relationship practices.
Over the past two decades or so great effort has been devoted to finding the direct consequences of family ownership on performance. In fact, several reviews and meta analyses have appeared in the past 5 years. The main conclusion from this body of research is mixed: on average, family firms have similar or at best slightly superior performance relative to their non-family counterparts. Sacristan-Navarro, Gomez-Anson, and Cabeza-Garcia (2011), after studying 20 published empirical studies that examine the relation between family ownership and performance found that the pattern is inconclusive. In fact, their own study with 118 nonfinancial Spanish firms, with 711 observations between 2002 and 2008 concludes that once endogeneity is controlled for, family ownership has no association to performance (2011: 88). Tsao, Chen, Lin, and Hyde (2009) also suggest “there is still a need to investigate the relationships between the two concepts (page 319).
We believe that such controversial findings stem from the fact that some approaches to preserving socio-emotional wealth in family firms carry “positive” while others carry “negative” consequences to firm performance. In essence, both positive and negative probably may coexist in family firms, and it would be difficult to determine which predominates when it comes to performance results. A further complication is that positive and negative may at times be two sides of the same coin (e.g. affective commitment versus more time spent handling emotions, or long term orientation versus entrenchment; Gomez-Mejia, 2011: 691), so it may be possible that the “goods” neutralize the “bads”; for instance, some strategic choices (e.g. less formal organizational structure) may negatively affect performance, while others (e.g. more caring agency relations) may positively affect performance. As such, we expect the socio-emotional wealth logic to provide no relationship to firm performance, albeit we state our hypothesis in a form to be falsified:
Hypothesis 4: (a) Caring administrative practices and (b) caring stakeholder relations positively associate to performance.
We collected primary data from a set of firms, each of which was invited to participate in a survey. Our unit of analysis is the company, albeit for most of the variables we derive firm-level values by averaging responses from multiple employees.
The survey instrument was developed and applied with the support of Fundação Instituto de Administração (FIA), a non-profit think-tank research and executive education institute from São Paulo, Brazil. Since 2006, FIA has been published the “Best Places to Work for in Brazil” Annual Guide, on which our questionnaire items derive. To administer the survey, FIA randomly selected employees from all participating companies. Specifically, FIA asked participating companies for a numbered list of employees from which, based on a numerically random selection process, it chose the ones to be contacted for the survey. All selected people included formally hired employees; unrelated or outsourced staff were excluded. FIA sent the questionnaire directly to each employee by e-mail. To ensure a higher response rate, FIA presented the survey with a support letter from their firm, a brief statement from FIA stating its research goals, as well as anonymity guarantees to respondents.
Two different surveys are completed by different parties. For one survey, employees answered all questions about the firm’s administrative practices (see Table 2 for question items), as well as control variables, such as gender, age, time of employment, education level, and relative position in the organizational hierarchy. For the other survey, a general manager from the organization was asked to disclose financial data (such as revenues, which is used to compute our performance metric) from the organization.
Due to the nature of FIA’s survey, the entire population of firms targeted for this survey usually comprised large firms. Therefore, to ensure that the sample was actually representative of the organizational population, we required a minimum number of 200 responses from each firm. Additionally, because a few firms made a point of non-disclosure of some of their basic financial information, necessary for the empirical analysis of our model, we ended up with a smaller number of firms in our sample.
A total of 552 companies spontaneously enrolled in the survey process. This resulted in 142,913 employees answering the questionnaire. In Table 1 we outline the parameters used to select firms in the survey. After eliminating firms that did not disclose the necessary financial information (necessary for the computation of our performance model), as well as firms without the minimally required number of respondents (in which case we were less sure about the representativeness of the population), we ended up with a sample of 82 organizations, for a total of 18,792 employee-questionnaires. This is a very large sample, which makes us confident in the statistical power of the analysis of employee perceptions regarding the firm’s administrative practices.
<< Table 1 about here >>
Variables and Measures
In our survey, we desired to comprehend the types of administrative practices that firms adopt, and divided these regarding how they relate to either internal or external stakeholders. Research by Fulmer, Gerhart, and Scott (2003) indicates that performance (e.g. ROA) of organizations on the list of ‘100 best firms to work for’ is, in general, better than that of companies from a comparison group, not classified among the 100 best. At the same time, research conducted worldwide, by the Great Places to Work For Institute, in the United States and in more than 30 other countries, suggests similar tendencies. In essence, firms that have good working environments are frequently more profitable than their competitors (Fulmer et al, 2003; Levering, 1997). Levering (1997) for instance carried out a survey with American firms that found a positive relationship between performance and organizational environment; he concluded that operational profit and stock appreciation were twice larger for firms in the ‘100 best firms to work for’ list, compared to firms in the S&P500. Dean Witter Reynolds repeated the analysis, and found that income was 18% higher among the top 100 to work for.
We followed this literature, and included several questionnaire items of our own to gauge employee perceptions regarding how the firm relates to its internal as well as external stakeholders. Specifically, our measure caring administrative practices include several items that reflect whether employees perceive the firm to maintain a more caring agency relationship (e.g. whether employees can relate to their bosses in more personable ways, whether the employee feels their health and family benefits are well taken care of, etc); whether career advancement and promotion opportunities are open (e.g. training and career advice is open to all, and opportunities are distributed fairly); as well as whether the organizational structure is formalized and communication patterns are open (e.g. expectations are clear, communication among division is quick and transparent, decision criteria are consistent, organizational routines are fair and efficient, etc.). In Table 2, we specify these questionnaire items, and provide evidence that our items have construct validity. All items were measured in a 7-point Likert scale.
Also in Table 2, the reader will find our itemized list of questions for our second perceptual construct, caring external stakeholder relations. Our measure includes items that reflect whether employees perceive the firm to care for its surrounding environment and community, and whether the organization strives to maintain a balanced relationship with suppliers, workers, and stockholders, among others (see Table 2 for details, a full list of questionnaire items, and factor loadings that confirm construct validity). Like with caring administrative practices, items were measured with a 7-point Likert scale.
Family Ownership: As far as the ownership structure is concerned, we set out to measure in a binary way whether a firm is family (i.e. privately held, which means there are few owners who are free to direct the administrative destination of the organization) or non family (i.e. publicly traded, in which case diffused ownership would make it more difficult for shareholders to directly influence the administrative policy choices of the firm). We coded family firms as 1, and non-family firms as 2.
Performance: As far as performance is concerned, we wished to gauge whether administrative choices would enhance (or decrease) the attachment of employees to the organization, therefore increasing (or decreasing) the sales performance of the organization per employee. In this case, performance stands for the firm’s revenue divided by its number of employees.
Control Variables: Although we are interested in developing a parsimonious model, other alternative factors may also influence the relationships stated in Figure 1; we thus include control variables to ensure results are not unjustifiably influenced by these factors.
First, we control for firm size. Because larger firms may possess a larger pool of resources and people, it may be the case that their adoption of more formal (i.e. less caring) administrative practices as well as more arm’s length (i.e. less caring) stakeholder relations stems from this characteristic. We measure firm size as the log number of employees. We also control for employee characteristics, such as tenure with the firm, hierarchy level of the employee, as well as her educational level. We expect that employees who have been longer with the firm are more likely to perceive the organization as caring to his own needs, and therefore respond more favorably to the questionnaire items. Moreover, employees at higher managerial levels are likely to also be more ingrained in the strategic decision making, therefore being likely to positively answer questions. Lastly, employees with higher educational levels are expected to respond more favorably to the questions as well, as we expect their understanding of complex social relations to differ from their less formally educated peers.
<< Table 2 about here >>
In Table 3, we include our basic correlation matrix as well as descriptive statistics, whereas in Table 4 we show our main results. Akin to Anderson and Gerbing’s (1988) two-stage process for validating measures before testing a substantive model, we first used confirmatory factor analysis (CFA) to test whether the variables selected to measure each construct show convergent validity (i.e., whether items are fairly correlated with one another) and discriminant validity (i.e., whether variables across constructs clearly measure different constructs). In particular, we aggregated individual responses by firm and then analyzed firm-level survey data with CFA.
We also followed Anderson & Gerbing’s (1988) formal analysis for convergent validity by computing t-tests for factor loadings. We kept indicators for which factor loadings were greater than twice their standard errors (Table 2). Lastly, we assessed discriminant validity. Here, we used chi-square difference tests for constrained and unconstrained models. The constrained model sets the covariance between two constructs equal to one; a significantly lower chi-square value for the unconstrained model supports the discriminant validity criterion. CFI differences between nested models exceeding 0.01 also are indicative of discriminant validity (Cheung & Rensvold, 2002).
<< Table 3 about here >>
Our Table 4 includes both figures as well as a direct assessment in the replicated Figure of the path values and their respective significance. To assess model fitness, we examine chi-square and three other goodness-of-fit statistics: normed and the non-normed fit indices (NFI and NNFI), as well as the comparative fit index (CFI). A commonly accepted rule of thumb for these fit indices is that they should be greater than 0.90 (Anderson & Gerbing, 1988). Probability levels on chi-square of 0.10 or higher are generally considered evidence of ideal models (Bentler, 1989).
Our measurement model resulted in good fit. Our theoretical model, represented in Figure 1, has a significant chi-square (chi-square = 3413.6, with 274 df, and p < 0.05), which could be cause for concern. In such cases, Anderson & Gerbing (1988) argue that the chi-square test is frequently not valid when Ns are large, and recommend that this statistic be treated as a general goodness of fit index, but not as a statistical test in the strict sense. The fact that our goodness of fit indices are within expected ranges (i.e. above 0.9) makes us confident that our model is acceptable. Our NFI equals 0.915; our NNFI equals 0.921; while our CFI equals 0.921.
Table 2 reports that all factor loadings are significant and sizeable, support convergent validity for our indicators for the two administrative dimensions. While the two factors are highly correlated (.85, p < .05). When we compare two measurement models—one positing two factors and another specifying one factor, the chi-square test was statistically different (938.77, p < .05), while the CFIs differed by more than .01 (Cheung & Rensvold, 2002). Such findings support discriminant validity as treating the two factors as one reduces model fit—statistically and practically.
<< Table 4 about here >>
Based on the fit of our measurement model, we subsequently proceeded to stage 2, which involves path analyses with observed variables. Given the relatively modest sample of firms, we used single indicators for all constructs (rather than test a latent variables structural model). Figure 4 presents our results, in a graphic way. We used the EQS maximum likelihood estimation method. Our chi-square resulted non-significant, with a p-value > 0.05 (chi-square = 1.60; df = 1). Our NFI = 0.987, while NNFI = 0.969. CFI = 0995.
We summarize results in Table 4, which – in order to more visually show results, and facilitate the job of the reader – includes a replication of Figure 1. Hypothesis 1 states that family firms are more likely than non-family firms to adopt caring internal administrative practices. We find full support for our conjecture. Our standardized parameter value is 0.28, while p < 0.05. Hypothesis 2 states that family firms are more likely than non-family firms to adopt external stakeholder relationship practices. We do not find support for this conjecture. Our parameter value is 0.10, while p > 0.05. Hypothesis 3 states that family firms will significantly adopt more caring internal administrative practices than caring external stakeholder relations. We find full support for this conjecture. A t-test for the difference of the two paths is significant, with p < 0.05. Hypotheses 4a and 4b respectively state that caring administrative practices and caring stakeholder relations will have non-significant impact on performance (Note: hypotheses 4a and 4b are stated in their null form, so our findings here are stated in opposite fashion). We find support for 4a, but not for 4b. Path 4a indicates that caring administrative practices has no significant impact on sales revenue per employee (in accordance with our theory); however, path 4b indicates that caring stakeholder relations has, contrary to our expectations, a statistically significant positive association to performance.
Based on an analysis of 18,900+ surveys, from 82 firms across different economic segments in a large economy, such as Brazil, we are confident in our results. The socio-emotional logic seems to be a useful concept to explain that family firms are willing to take stronger steps towards ensuring the welfare of those close to them (i.e. employees).
Contrary to our expectations, we do not find that family firms are more likely to adopt caring external stakeholder relations. Albeit the logic would indicate that family firms are willing to safeguard their family name reputations in the eyes of external stakeholders, such as buyers, suppliers, and even the wider community, our statistical analysis indicates this not to be the case in our large sample. Interestingly however, as per our theory, the family firm caring stance is confirmed to be stronger with internal employees than with external stakeholders.
What is more, contrary to popular belief that family firms are less efficient, and tradeoff efficient administrative practices for less rational ones, thereby attaining lower economic performance, we observe that caring administrative practices has no impact on firm performance. Based on our socio-emotional wealth argument, we conjectured that such practices bring additional loyalty from employees, thereby offsetting any negative effects that may arise due to lower internal efficiencies. On the other hand, firms that adopt caring external stakeholder relations are also the ones observing higher performance. Due to our cross-section analysis, we are unable to verify at this point whether such citizenship practices influence performance, or whether there exists a concomitant effect in which case firms that perform better also have more resources to adopt such practices.
CONTRIBUTIONS & CONCLUSION
Research interest on family businesses has mushroomed in the past few decades. Family entities account for the vast majority of business concerns across many countries; in developed nations they represent the majority of organizations (e.g. in Spain, according to Cruz et al, 2010, they account for over 80% of businesses, whereas in the U.S. they account for over 70%, according to Sirmon & Hitt, 2003). Concomitantly, in developing nations they account for even larger shares. Family controlled organizations are often seen as rather distinct from the ‘profit oriented ideal’ often portrayed in the strategy and management literatures however. They are often seen as entities which are less rational, when deciding over myriad of issues, such as compensation, management-employee relationships, corporate social responsibility, and others, wherein managers tend to display non-economic behavior, hence attaining less than ideal profit maximization results. Yet, the literature seems to be inconclusive about whether family firms are less or more profitable than their non-family counterparts (Epstein et al, 193; Gomez-Mejia and colleagues, 2003; 2010; 2011; Miller et al, 2010; Schulze and colleagues, 2001; 2003).
In this paper, we aim at adding to this literature. We begin by reviewing the concept of socio-emotional wealth (Gomez-Mejia and colleagues, 2010; 2011), and conjecturing that family firms are more likely to adopt (a) caring internal administrative practices and (b) caring external stakeholder relationship practices. We also conjecture that (c) family firms will adopt caring administrative practices more consistently than they adopt caring external stakeholder relations, and that (d) neither caring administrative practices nor caring external stakeholder relations, when they are adopted, matter to performance. In essence, our argument is that, even if family firms do adopt managerial practices that are seemingly less efficient- or even less profit-oriented, such practices trade off economic efficiency for stakeholder loyalties, and in the end positive and negative effects may balance out. The underlying logic is that family members operating to preserve their socio-emotional wealth is an as-logical and as-efficient way of managing business concerns. In our analysis, as expected, we do find that family firms are indeed more likely to adopt caring administrative practices, and that such practices do not hurt (nor benefit) performance. We do not find however that such firms are more likely than non-family organizations to adopt caring external relations, albeit we do find that the firms that do are also those who perform better.
Our theory and findings bring relevant and much needed contributions to the literature. For one, previous studies on family firm performance have often approached the issue from an ‘either-or’ perspective, wherein empirically one tries to separate family from non-family entities and associates that classification with higher or lower performance (see Gomez-Mejia et al, 2011 for a review). In this study, we scrutinize the black box inside, and attempt to theorize – through a socio-emotional wealth logic – on the antecedents of performance when they make administrative choices that stray away from a logic akin to economic efficiency. Based on a large employee survey, we find that all in all, if family firms adopt caring administrative practices they are neither more nor less likely to be good performers. We do however find that firms adopting good citizenship approaches to business (i.e. firms treating buyers and suppliers as well as their surrounding communities with more caring concern) are also those who perform better, albeit we do not find that family firms are more likely to adopt such practices.
In regards to the types of caring concern that family firms are more or less likely to adopt, we conjecture and empirically find that these entities are much more likely to care for stakeholders which are more immediately close to the family, such as employees, than they are to care for stakeholders that are more relationally distant, such as buyers, suppliers, and the community at large. This is not to say that family firms are less likely to care about external stakeholders vis-à-vis their non-family counterparts.
Albeit we are confident in the validity of our findings, based on a survey with a large number of employees across many economic different sectors, we are also aware of important limitations that can be addressed in future research. For one, ours is a cross-sectional examination of administrative choices versus performance. We are hence unable to determine causality. A longitudinal study would be better suited for this task. Concomitantly, albeit our data counts with a large number of survey respondents, with 18,900+ questionnaires returned, with a large representation from individual firms, our firm sample is still small, compared to the larger population of firms. To this end, our team continues to work to collect more data that would enable us to examine the remainder of our 552-firm sample as we enter the year 2012.
All in all, we are confident that initial empirical findings offer strong evidence for our socio-emotional wealth conjectures, and hope they pave the way for interesting research on the large and still growing topic of family firms.
Figure 1 – Socio-Emotional Wealth Model of Stakeholder Relations
Table 1 –Sample Selection
Total of companies enrolled in the process
Companies that did not reach the minimal required number of employee questionnaires answered
Companies that refused to disclose financial data
Companies we were unable to classify as family or non-family, in time for the Academy of Management 2012 submission deadline (January 10, 2012)
* Note: 552 firms voluntarily entered the survey process. We then proceeded to select only firms within the profile described, and ended with a sample of 82 organizations, from which we collected 18,792 questionnaires (an average of ~258 questionnaires per firm).
Table 2 – Standardized factor loadings from firm-level confirmatory analysis
Table 3 – Correlation Matrix
Table 4 - Results
Note: EQS – Maximum Likelihood. Chi-square = 1.60; DF = 1, p>0.05. NFI = 0.987, NNFI = 0.969, CFI=0.995. Family owned firms coded as 1, whereas non-family coded as 2. We linearly transformed sales to reduce variance dissimilarity, and achieve convergence. Parameters are standardized, and shown in the Figure above.
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 The NNFI (Bentler & Bonnett, 1980) is defined as “the percentage of observed-measure covariation explained by a given measurement or structural model … that solely accounts for the observed measure variances” (Anderson & Gerbing, 1988: 421). NNFI is often viewed as a superior variation of the Bentler & Bonnett’s (1980) normed fit index (NFI) since it has been shown to be more robust in reflecting model fit regardless of sample size (Anderson & Gerbing, 1988; Bentler, 1989). The other index, Bentler’s (1989) CFI, is similar to the NNFI in that it provides an accurate assessment of fit regardless of sample size. The CFI tends to be more precise than the NNIF however in describing comparative model fit as it corrects for small sample size by subtracting the degrees of freedom from their corresponding χ2 values (Bentler, 1989).