Availableonlineatwww.sciencedirect.com
Revista
de
Administração
http://rausp.usp.br/ RevistadeAdministração51(2016)409–411
ThinkBox
Socioemotional
wealth
preservation
in
family
firms
Matias
Kalm
∗,
Luis
R.
Gomez-Mejia
ArizonaStateUniversity,DepartmentofManagementandEntrepreneurship,Tempe,UnitedStates
Abstract
Inthisarticle,wereviewliteratureonsocioemotionalwealth.Weexplainhowtheconceptofsocioemotionalwealthbuildsonpreviousfamily firmresearchshowingthatfamily-ownersderiveutilityfromthenonfinancialaspectsoftheirfirm.Wealsodiscusshowfamilyfirms’needfor socioemotionalwealthpreservationexplainsbehavioraldifferencesbetweenfamilyandnonfamilyfirmsinmanagerialdecisionmaking.Finally, wediscussthecurrentstateofsocioemotionalwealthresearchandproposepotentialdirectionsforfutureresearch.
©2016DepartamentodeAdministrac¸˜ao,FaculdadedeEconomia,Administrac¸˜aoeContabilidadedaUniversidadedeS˜aoPaulo–FEA/USP. PublishedbyElsevierEditoraLtda.ThisisanopenaccessarticleundertheCCBYlicense(http://creativecommons.org/licenses/by/4.0/).
Keywords:Socioemotionalwealth;Familyfirms
∗Correspondingauthor.
E-mail:Matias.Kalm@asu.edu(M.Kalm).
PeerReviewundertheresponsibilityofDepartamentodeAdministrac¸ão, FaculdadedeEconomia,Administrac¸ãoeContabilidadedaUniversidadede SãoPaulo–FEA/USP.
Introduction
Research shows that family-owned firms make decisions unlikethoseofnonfamilyfirms(Gómez-Mejía,Cruz,Berrone, & De Castro, 2011). Extending previous research, Gómez-Mejía,Haynes,Nú˜nez-Nickel,Jacobson,andMoyano-Fuentes (2007)explainthosedissimilaritiesbyproposingthat family-owners’seekutilityinthe formofpreservingsocioemotional wealthgeneratedbythe noneconomicaspects offamily busi-nesses.
Family-owners derive socioemotional wealth from several sources,includinghavingthefamilynameassociatedwiththeir firms, emotional attachment to the firm, and the satisfaction of family members workingfor the company (Gómez-Mejía et al., 2011). However, sinceone task of a familyfirm is to sustainandincreaseowners’socioemotionalwealth,its preser-vation affects thebusiness decision-makingof family-owners andthe firm’smanagers. Inother words,decisionsthat seem unprofessionaltooutsideobservers,suchasappointingan unex-perienced family member as the CEO of the firm, might be logicaltofamily-ownersbecausetheyprovidenonfinancial ben-efits.Hence,family’sdesiretopreservesocioemotionalwealth affectsfamilyfirms’long-termperformancebothpositivelyand negatively.Theeffectsmightnegateeachotherasresearchyields mixedresultsregardinghowfamilyownershipaffectsfirm per-formance(Gómez-Mejíaetal.,2011).Thisstudyexplainsand provides examples of socioemotional wealth and encourages futureresearchtoinvestigateprocessesthatmediatehow family-owners’desiretopreserve socioemotionalwealthaffectstheir firms.
http://dx.doi.org/10.1016/j.rausp.2016.08.002
410 M.Kalm,L.R.Gomez-Mejia/RevistadeAdministração51(2016)409–411
Socioemotionalwealth
Empiricalresearchconsistentlyshowsthatfamilyand non-family firmsbehave differently insignificant ways (Berrone, Cruz, & Gomez-Mejia, 2012; Gómez-Mejía et al., 2011). Building onpreviousresearchon familyfirms, Gómez-Mejía etal.(2007)proposetheconcept ofsocioemotionalwealthto explainthosedifferencesinbehaviorsoffamilyandnonfamily firms.Socioemotionalwealth,theyexplain,encompasses“the utilitiesfamily-ownersderivefromthenoneconomicaspectsof thebusiness”(Gómez-Mejíaetal.,2007).
Family-owners derive socioemotional wealth from several sources.Forinstance,theyfeelconnectedwiththefamilyfirm; hence,forminganemotionalbondwiththefirm(KetsdeVries, 1996;Tagiuri&Davis,1996).Thisemotionalbondbetweenthe familyandthefirmaffectshowthefamily-ownersmanagethe firm(Baron,2008).Membersoftheowningfamilyoftenidentify withtheirfirm,especiallyifitbearsthefamilyname,andvalue theirfirm’spublicimagebecauseitreflectsonthefamily(Dyer &Whetten,2006).In otherwords,apositivepublic imageof thefirmenhancesthesocioemotionalwealthderivedfromthe firm.
Family-ownersalsorelyonthefirmtodiffusethefamily’s valuesamongemployeesandthroughoutsociety(Gómez-Mejía etal., 2011). Overtime, these valuespermeate the organiza-tionalcultureoffamilyfirms. Finally,the impulsetoimprove thewelfareofthe familyunit motivatesfamilyfirmsstrongly (Gómez-Mejía etal., 2011). Family-ownersare gratifiedthat familymembers workfor the firm.Forinstance,the founder gratifiedbyprovidinganopportunityforherchildrentowork forthefamilyfirm.
As explained above, family-ownersderive socioemotional wealth from several sources and they are keen to sustain theirsocioemotionalwealthendowment.Toachievethisgoal, families are willing to make decisions that seem financially inexplicable and unprofessional become logical in light of the family’s desire to preserve socioemotional wealth. Con-sequently, executives making managerial decisions in family firmsareconcernedofbothfinancialfactorsandsocioemotional wealthpreservation. Whileexecutives innonfamily firmsare mainlyconcernedwithfinancialfactors, familyfirmsareless drivenby prospects that are financially lucrativebutthreaten socioemotional wealth. Thispossibility explains why empir-ical research finds that behaviors of family and nonfamily firmsdiffer.Italso explainswhydeterminingwhether family firmsfinancially outperform nonfamily firmsis inconsequen-tial.Above,wehavediscussedhowfamilyandnonfamilyfirms differ.Next,wewillexamineeffectsofsocioemotionalwealth preservationinmanagerialdecisionmakinginfamilyfirms.
Theeffectsofsocioemotionalwealthpreservation
The family’s need for socioemotional wealth preservation affects how family firms make managerial choices. In their discussion of socioemotional wealth preservation, Gómez-Mejíaet al.(2011)classifythe managerial choices of family firms into five dimensions: management processes, strategic
choices,organizational governance, stakeholderrelationships, andbusinessventuring.Followingtheircategorization,wenow examinehowfamily-owners’desiretopreservesocioemotional wealthaffectstheirstrategicdecision-makingandorganization governance.
Strategicdecision-making
Previous research on family firms has shown major dif-ferences between family and nonfamily firms in strategic decision-making(Gómez-Mejíaetal.,2011).In general, fam-ilyfirmsaremorerisk averse—andtherefore,generallymore stable—because the family’s wealth might be tied to their firm, making family-ownerswary of high-riskstrategies that could diminish their wealth. However, family firms are not always risk averse. On the contrary, family firms are will-ing totake largefinancial risks topreventextensive loseson their socioemotional wealth.If the family firmis threatened, for instance, family-ownersmight take risks to guarantee its survivalandassociatedsocioemotionalwealth.Thatsaid, how-ever,family-ownersappearhappierthannonfamily-ownerswith lowerfinancialreturnsiftheypreservesocioemotionalwealth. Therefore,thedesiretopreservesocioemotionalwealthmight leadtohigherorlowerrisk-taking,dependingonhowoutcomes areperceivedtoaffectsocioemotionalwealth.
Family firmsarealsoless likelytodiversifythan nonfam-ilyfirms.Diversificationoftenmeansseekingfinancingviadebt financingor equityparticipation,whichdilutesfamily owner-ship.Eitherreducesfamilycontroloverthefirmanddiminishes family’s socioemotional wealth. Therefore, family firms are less likely to diversify. In addition, family firms might lack the specialized knowledge or talent needed todiversify suc-cessfully,andhiringexternalhelpwouldincreaseinformation asymmetries, diminishing socioemotional wealth andmaking diversificationunappealing.Theseconsiderationsalsoexplain whyfamilyfirmsarelesslikelytomakeacquisitionsandfinance operationsviadebt.Theirreluctanceisgroundedinthedesire topreservesocioemotionalwealth.
Thatdesireinfluencesstrategicdecisionssuchaschoiceof accountingpractices(Gómez-Mejíaetal.,2011).Agency the-orysuggeststhatfamilyfirmswouldaggressivelyavoidtaxes becausefamily-ownersbenefitrelativelymorefromtax avoid-ance than other owners of the firm. However, Chen, Chen, Cheng,andShevlin(2010)showthatfamilyfirmsavoidtaxes less aggressivelythan nonfamily firms. Their finding follows thelogicofsocioemotionalwealthbecausefamily-ownersfear negativeoutcomesassociatedwithaggressivetaxavoidancethat may diminish family’s socioemotional wealth. Gómez-Mejía etal.(2011)concludethatfamilyfirmsapparentlyvaluetheir reputationandfirmimageovershort-termbenefitsof account-ing practices that could reduce socioemotional wealth. Their conclusionsuggeststhatcorporatefamilyfirmsvaluecorporate citizenship.
M.Kalm,L.R.Gomez-Mejia/RevistadeAdministração51(2016)409–411 411
bigrisksalthoughtheydosotopreservesocioemotionalwealth ifit is threatened.Next,we will discuss how socioemotional wealth preservation affects corporate governance in family firms.
Organizationalgovernance
Socioemotional wealth preservation is important for fam-ily owners and Gómez-Mejía et al. (2011) suggest that this affects the governance of family firms. The literatureof cor-porategovernancetraditionallyregardsfamilyownershipasan exemplarymodeofgovernance(Fama&Jensen,1983); how-ever,Schulze,Lubatkin,Dino,andBuchholtz(2001)showthat thisisnotthewholepicture.Familyfirmshavegovernance prob-lemsnotdissimilartothoseofnonfamilyfirms,buttheirorigins differ.Family-owners’desiretopreservesocioemotionalwealth meansthatfamilyfirmsmight,forinstance,preferprojectsthat are financiallyless optimalor hire family members irrespec-tiveoftheirabilities.Again,thesedecisionsmightprovideother benefitstothefamilyfirm,suchasimprovingitsreputationor retainingmoredevotedemployees.
Anotherdifferencebetweenfamilyandnonfamilyfirmsisthe positionoftopexecutives.Gómez-Mejíaetal.(2011)propose thatfamilyCEOsarelesslikelytobedismissedthan nonfam-ilyCEOs;however,theircompensationisgenerallylowerthan thoseof nonfamily-firm CEOs. That is, familyfirms provide greaterjobsecuritybutlesscompensation.
Finally,thepreservationofsocioemotionalwealthaffectsthe compositionofboardsofdirectorsoffamilyfirms.Forexample, ifinvestorsinapublicly-tradedfamilyfirmperceiveittohave governanceproblems,thefirmmightappointoutsidedirectorsto signalitsqualityandlegitimacy.Toconclude,boardsoffamily firmsservefunctionsabsentinnonfamilyfirmsbecauseofthe preservationofsocioemotionalwealth.
Wehavediscussed how family-owners’desire topreserve socioemotionalwealthaffectsthegovernanceoffamilyfirmsin comparisonwithnonfamilyfirms.Bothfacegovernanceissues; however,thoseissuesaredistinctivebecausethedesireto pre-servesocioemotionalwealthguidesdecision-makinginfamily firmsbutnotinnonfamilyfirms.
Conclusion
Toexplain thedisparate resultsof studiesexamining fam-ilyandnonfamily firms,Gómez-Mejíaetal.(2007)proposed thattheownersoffamilyfirmsdesiretopreservetheir socio-emotionalwealth,whichistheutilitythatfamily-ownersderive from the noneconomicaspects of the firm.The authors built on the previous research showing that family-owners value highlythenonfinancialbenefitsthattheyderivefromthefamily firm.The authorsalso suggestedthat family-owners’need to preservesocioemotionalwealthisamajorfactorexplain differ-encesinbehaviorsoffamilyandnonfamilyfirms.Whenmaking managerialdecisions,familyfirmsconsiderthepreservationof
socioemotional wealth alongside financial factors. Therefore, decisionsthatmayseemunprofessionalmightbemotivatedby family-owners’desiretopreservetheirsocioemotionalwealth. Empirical studiesstrongly support theseresults, andwe find itinconsequentialthattheydonotdefinitivelyanswerwhether familyfirmsfinanciallyoutperformnonfamilyfirms.
To conclude, we are not suggesting that the research on socioemotional wealth has reached its peak; on the contrary, themostof thecurrentresearchlimitsitsscopetoexamining how family-owners’desiretopreservesocioemotional wealth affects managerial choices. Therefore,it would be important that future research would help us to understand processes that mediate the relationships between family-owners’desire topreservesocioemotionalwealthandoutcomevariables.For instance,researchers could applythe logic ofsocioemotional wealthinthe fieldofentrepreneurship toexplainhow family firmsbecome entrepreneurially orientated. Doingso suggests thattheleveloftheanalysisshouldshiftfrommanagerial-level toemployee-level. Furthermore, suchresearch couldadvance theunderstandingofhowfamilyandnonfamilyfirmsdifferand whetherthedifferencesarelimitedtothehigherlevelsof orga-nizationsoraretheyalsoobservableatthelowerorganizational levels.Thisresearchwouldprovideimportantimplicationsfor allfamilyfirmresearchers.
Conflictsofinterest
Theauthorsdeclarenoconflictsofinterest.
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