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Entrepreneurship and growth: An international perspective Understanding Entrepreneurship in Family Firms: A Socioemotional Wealth 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 WHY ME? 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. .

WHY FAMILY BUSINESSES? WHY FAMILY BUSINESSES?

WHY? Facts & Figures WHY? Facts & Figures

WHY? Facts & Figures WHY? Facts & Figures

WHY? • • • Facts and Figures 2004 Assessment of Entrepreneurship in the US 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.

WHY? The anecdotic evidence Wanda Ferragamo, when asked about the reason behind the acquisition WHY? The anecdotic evidence 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 A small business owner when asked why he decided to 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)

Why? Anecdotic evidence Some famous splits for “family feuds” With the blessing of Srinathji 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)

Why? Anecdotic evidence • CHANGING THE LOGO: “It was a “sensitive” subject for the 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

WHY? Selected empirical evidence AUTHORS SAMPLE VARIABLE OF INTEREST Beehr, Drexler and Faulkner, 1997 WHY? Selected empirical evidence AUTHORS SAMPLE VARIABLE OF INTEREST Beehr, Drexler and Faulkner, 1997 198 privately held firms Work relations Mishra and Mc. Conaughy 690 US publicly held (1999) firms Capital Structure Chrisman, Chua, and Litz 1, 141 small privately (2004) held U. S. firms Agency costs Reid and Adams (2001) Human Resource Management Practices Environmental Performance Berrone et al (2010) 300 Irish SMEs 194 US publicly held firms Gomez-Mejia et al (2010) 360 firms from Diversification decisions COMPUSTAT database Gomez-Mejia et al (2011) 403 publicly held US R & D and Technological companies innovation MAIN RESULTS 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 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 firms Family firms exhibit better environmental performance than non family firms Family firms diversify less both domestically and internationally than non family firms. In high technology industries family controlled firms tend to invest less in R&D and engage in lower technological diversification than nonfamily controlled firms

WHY? The conclusion Family firms are not simply a unique phenomenological setting but are WHY? The conclusion Family firms are not simply a unique phenomenological setting but are significantly different from non-family firms (Gomez Mejia, Cruz, Berrone & De. Castro , 2011).

WHAT MAKES FAMILY BUSINESS DIFFERENT? WHAT MAKES FAMILY BUSINESS DIFFERENT?

Theoretical approaches Early studies in the field suffered from significant methodological problems and were Theoretical approaches 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 & Le. Breton-Miller, 2006) Resource-based view of the firm (Habbershon & Williams, 1999; Habbershon, Williams & Mac. Millan, 2003)

A duality of goals NON FINANCIAL GOALS A duality of goals NON FINANCIAL GOALS

An emergent paradigm : A Socioemotional wealth approach to family business • SEW: • 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 An emergent paradigm : A Socioemotional wealth approach to family business Rooted in the BAM (behavioral agency model) (Wiseman & Family owners are concerned about preserving their SEW Family owners frame problems in terms of assessing how actions will impact family socioemotional endowment Gomez-Mejia, 1998).

Implications SEW has a major impact on strategic decision making in family firms Managerial 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

Implications Family firms are NOT risk averse (but SEW loss averse) “When issues are Implications Family firms are NOT risk averse (but SEW loss averse) “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

Implications SEW preservation goals can conflict with economic objectives “When there is a threat 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)

Empirical evidence Gomez –Mejia et al (2007) 1237 Spanish olive oils mills Family-owned olive 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)

Empirical evidence Berrone, Cruz & Gomez-Mejia (2010) 194 US publicly held firms in polluting 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

Empirical evidence Cruz, Becerra & Gomez-Mejia (2010) 122 privately owned Spanish firms Family principals 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 )

Empirical evidence Gomez-Mejia et al (2010) 360 publicly held US firms Family firms are 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)

A contingency approach Family firms are more willing to make economically driven decisions as A contingency approach Family firms are more willing to make economically driven decisions as firm faces greater performance hazard Family owned olive mills are more willing to join coops as the volume of olive oil sales decreases (Gomez Mejia et al, 2007) Firms are more willing to diversify as performance deteriorates (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) SEW FW

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

The Empirical evidence Strategic choices are more likely to be driven by economic considerations 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)

Conclusions SEW as an overarching construct to capture family firms idiosyncrasy SEW as promising 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

The Challenges How to measure SEW? Berrone, Cruz, Gomez-Mejia, 2012: 30 items to capture 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.

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

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

The Challenges Under which conditions is an emphasis on SEW preservation beneficial for firm 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)

The Challenges How does SEW affect entrepreneurial outcomes? SEW + Family embeddedness perspective to 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

Many others unresolved questions…. What factors play a role in determining the different weights 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? ……

Implications for family owners & practitioners HOW DOES YOUR FAMILY DEFINE SUCCESS? Financial performance Implications for family owners & practitioners HOW DOES YOUR FAMILY DEFINE SUCCESS? Financial performance (FW) More intangibles (SEW) Long term survival Growth Profitability Harmony Stable Employment

Implications for family owners & practitioners How can we ensure the preservation of the 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 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 Implications for family owners and practitioners FAMILY BUSINESS Sucession Estate Planning Continuity Family Conflict ENTREPRENEURSHIP Opportunity seeking Risk taking Innovation Growth ENTERPRISING FAMILIES 38

Implications for family owners and practitioners • IT IS NOT about how to assist 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… Implications for family owners & practitioners It is not about choosing the next successor… it is about DEVELOPING THE NEXT GENERATION OF FAMILY ENTREPRENEURS

QUESTIONS? QUESTIONS?