Why Family Businesses Sometimes Make Decisions That Seem Bad for the Family
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Innovation Entrepreneurship Organizations Dec 3, 2018

Why Family Businesses Sometimes Make Decisions That Seem Bad for the Family

Even non-family firms can benefit when they think beyond their immediate self-interest.

a family business owner offers a child a pair of shoes

Lisa Röper

Based on the research of

Scott Newbert

Justin B. Craig

The story of A.J. Bush, founder of the baked bean giant Bush Brothers & Company, presents something of a puzzle for those who study decision-making in family businesses.

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Bush kept a shoebox full of cash behind the counter of his shop in rural Tennessee. “He had a policy: there’s always money in the shoebox for children who do not have enough money for shoes to go to school,” says Justin Craig, program director for the Kellogg School’s Center for Family Enterprises.As Bush Brothers grew into a canned goods powerhouse, and after A.J. left the helm, its leaders continued to go out of their way to support their community. They hired local, created a generous pension plan for employees, and helped factory workers improve their literacy. They even gave away nutrient-rich wastewater from the plant to nearby farms.

Company leaders often claimed that these decisions were not mere charity but intentional choices central to the company’s mission. Yet this philosophy seemed to contradict everything experts knew about family businesses, Craig says.

Scholars have found that what sets family-run companies apart is their focus on creating rewards that will be reaped by later generations of their family, Craig says, whether by ensuring a livelihood for descendants, or building a brand that will make those descendants proud.

But if family businesses are so narrowly focused on making their own progeny happy, then why would Bush Brothers go to the trouble of aiding those beyond its own family tree? After all, that shoebox of cash could have gone to Bush’s heirs, not local kids who needed shoes.

To Craig, this suggests that something is missing from the usual thinking: a recognition that family firms care about the greater societal good they create.

In a new paper with Scott Newbert of Baruch College, Craig argues that family companies do not focus on their own families at the expense of their customers, employees, and neighbors. Instead, they devote resources to those outside the family because doing so benefits later generations, by sustaining both the business and the family’s sense of pride in its work.

This may seem to contradict traditional economic reasoning. But Craig notes that it is not without precedent. For example, Adam Smith, the 18th century classical economist and philosopher, acknowledged that people are obligated to treat one another well, even in business.

Craig found it remarkable that the father of self-interested capitalism had seen an imperative to look out for others. “This, to me, was the lightbulb moment,” he says, one that helped him consider how broader societal concerns could actually complement a company’s success, rather than cancel it out.

Craig explains the logic that guides how family business leaders make decisions: “Our legacy will be that we upheld the values of this company, and we handed it over to the next generation in better condition than we received it. So it behooves us to look after our nonfamily stakeholders—because if we don’t, the following generation is not set up to succeed.”

A Broader View of Socioemotional Wealth

Family companies have a huge economic footprint, accounting for 60 percent or more of the global workforce.

Yet until the last decade, little was known about these businesses, says Craig. This was partially due to a lack of data—unlike large, publicly traded companies, which produce earnings reports and other records that researchers can analyze, family firms have usually kept a lower profile.

Lately, however, countries like Holland and Australia have begun requiring small businesses to disclose more financial information. And in general, Craig says, scholars have begun to recognize how influential family businesses are. “There’s been an awakening, if you like.”

One conclusion from that awakening: Proprietors of family firms make decisions that help them cultivate what business scholars call “socioemotional wealth,” a set of nonfinancial benefits ranging from power and influence, to a sense of identity, to the continuation of the family name. Family companies will often make decisions that increase their socioemotional wealth even at the expense of profits, researchers have found.

But Craig wondered if family businesses might also accrue socioemotional wealth from helping people outside of their own families.

“It behooves us to look after our nonfamily stakeholders—because if we don’t, the following generation is not set up to succeed.”

For one, supporting nonfamily stakeholders can help leaders ensure the financial health of their children and grandchildren. Like any business, a family company’s longevity depends on maintaining healthy relationships with suppliers, customers, and employees, most of whom will not be blood relatives. Given that family businesses tend to have a longer-term perspective than your typical corporation (“they’re not handcuffed to the quarterly results,” says Craig), it seemed odd to the researchers that they would not consider these external constituents when making important choices.

In the paper, the researchers propose that family businesses regularly account for nonfamily stakeholders when making decisions, and that doing so boosts their socioemotional wealth in the long term. They come to this conclusion not only by observing individual cases like Bush Brothers, but by closely examining the logic behind socioemotional wealth.

A family business does not exist in a vacuum, they explain. By pursuing a self-centered kind of socioemotional wealth, the authors argue, family owners would risk alienating nonfamily stakeholders, like employees and customers, whom future generations need to survive and thrive. But by looking out for those stakeholders, whether through philanthropy, generous benefits for plant workers, or even doling cash out of a shoebox, they can better position the dynasty for long-run success.

The logical conclusion: a family business has good reason to look out for society at large, not just its own family.

“It’s very much a ‘we’ rather than ‘I’ perspective,” says Craig.

The Lesson for All Companies

This new perspective helps make sense of certain decisions in family businesses that may otherwise seem irrational.

Craig points to companies like S.C. Johnson, which has committed to using sustainable ingredients despite the higher costs, or plumbing product manufacturer Kohler, which has kept operations rooted in its Wisconsin hometown for more than a century, even though labor is cheaper in other parts of the country.

Craig thinks that taking a similar perspective could help nonfamily businesses recruit and retain talent in years to come. When choosing where to work, “this generation is looking for something more than previous generations were: a purpose-driven company,” he says. “If they’re not getting it, they’ll walk.”

But that need not be the case. If larger public companies adopted family businesses’ long-term orientation and concern for the broader community, Craig argues, they too could maximize their own socioemotional wealth while lifting up their employees and customers.

Featured Faculty

Justin B. Craig

Director of the Center for Family Enterprises

About the Writer

Jake J. Smith is a research editor of Kellogg Insight.

About the Research

Newbert, Scott, and Justin B. Craig. 2017. “Moving Beyond Socioemotional Wealth: Toward a Normative Theory of Decision Making in Family Business.” Family Business Review.

Read the original

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