The clash between entrepreneurship and family management – and the survivability of a company

Why family companies avoid it...
Why family companies avoid it…

Through the study of  a unique period of economic history, a recent piece of research by a group of academics has highlighted an important contradiction at the heart of family businesses when it comes to their longevity and entrepreneurship.

The research, recently published in Family Business Review, found that the survivability of family firms in times of crisis goes up if the family is directly involved in the management of the business. But at the same time, family management is likely to erode the entrepreneurial orientation of the business, and ultimately undermine the company’s long-term survivability.

Failure entails unique costs for the controlling family in terms of both financial and socioemotional wealth

The academics behind the research were three Spaniards – Antonio Revilla, Ana Pérze-Luño, and María Jesús Nieto – and were able to look at a unique set of circumstances in the Spanish economy to back the findings. The country’s economy experienced four years of negative economic growth between the third quarter of 2008 and second quarter of 2013, which severely undermined Spanish companies. Many of them collapsed during this period.

But the academics found the companies that were more likely to survive during this period were managed by their family owners. The researchers say that family involvement in management, in particular, creates a distinct set of family-centred goals and increases the cost of failure on the controlling family. “Failure entails unique costs for the controlling family in terms of both financial and socioemotional wealth,” says the research. There is a bigger stigma attached to the failure of a family company than to a non-family firm, and that stigma is even bigger if the family are directly involved in the management of the business.

A controlling family in many cases is willing to contribute personal resources, like free labour and their own money, to keep the business running. This helps to explain “patient capital”, where family businesses trade short-term profitability for long-term sustainability when the business survival is at stake. Family owners will undertake further investments and pursue the turnaround of the business rather than its dissolution.

But this can come at a big price when it comes to entrepreneurship, say the academics. If a family business is committed to entrepreneurship it is likely to undermine the family’s management of the business. A business with a strong “entrepreneurial orientation” will tend to temper the effects of family involvement in management by introducing an additional source of “heterogeneity” among the family business. By emphasising the entrepreneurial orientation of a family firm might expose the weaknesses in family management, potential undermining the family’s authority in relation to the business.

The academics say their findings could have important implications on the balance between business-centred and family-centred goals of family firms. What those implications are weren’t discussed, but one potential lesson for family businesses is the need to support their entrepreneurial orientation during the good times, but easy off on these commitments in favour of greater family control during bad times.