The Water Supporting A Boat Can Also Sink It

One of the biggest differences between family and non-family businesses is the family relationship. The social relationship between family members is one of the unique characteristics of family businesses and is essential to the family system. It exerts significant influence on the operation of a family business, either directly or indirectly. Many family businesses don’t realize the significance of the family relationship to the success of their business until the relationship comes apart.

Family Wealth and Family Businesses: From the SEW and Governance Perspectives

In recent history, family business, especially in emerging markets, has evoked negative ideas, such as nepotism, family interest-orientation, lack of professional management, barbarism, short sightedness, cronyism, and lack of strategy. The media have reported many cases involving father-and-son battles, husband-and-wife separation, and falling out between siblings. These are not China-specific phenomena. They happen everywhere in emerging markets, including Taiwan, Singapore, Indonesia, and Malaysia. However, we are happy to say that we have discovered that family businesses have also demonstrated their advantages. Many have shown resiliency and growth momentum that has enabled them to withstand the current global financial crisis. Therefore, despite their negative images, family businesses also have a valuable heritage.

What is this heritage? How can a family keep afloat the “boat” they have built with their business instead of sinking it? In a stable market environment, equity decentralization, relatively perfect governance structure and mutual restriction in various aspects are often considered to be advantages for non-family firms. The equity centralization and conservative financial arrangements often adopted by family businesses are considered by outsiders to be disadvantages. But in an unstable economic environment, they often turn out to be effective strategies to help the business survive financial crisis by generating lower debt levels, stronger liquidity and higher growth. This is the valuable heritage of family businesses.

Family Relationship: An Advantage or Disadvantage?

Why do family relationships play such an important role?

What are the advantages? Family businesses tend to have low management costs, prompt decision-making, commitment from family members, strong cohesion, centralized organization, a low cost psychological contract, strong centripetal effect, family reputation which helps elevate business reputation, and the exemplary role set by the family leader.

What are the disadvantages? These include conflicts between business and family interests and business and family roles, affection and relationship orientation, satisfying too many family demands, male dominated decision making, lack of innovation, little room for career development, and complex relations as a result of excessive intervention by family members.

A family business demonstrates the overlap of two systems - the family system and the business system. These two systems have different value orientations. The value orientation of family is relatively subjective, affection-driven and relation-oriented. It is unconditional and tends to protect family members. By contrast, the value orientation of business is objective, goal-driven and utilitarian-oriented. It is conditional and usually focuses on employment relationship. The overlap of these two value orientations can cause confusion and gives the family business a paradoxical nature as it involves more relations than an ordinary company. This paradox can be a time bomb, which, if handled improperly, usually explodes during the transition of power from the first-generation to the second generation of leaders. It may also appear when the third generation inherits the business, and during future transitions.

Social Emotional Wealth

Following the outbreak of the current global financial crisis, some economists and management experts began to put forward the “social emotional wealth” (SEW) theory of family spiritual wealth. The Dean of the W. P. Carey School of Business at Arizona State University studied the decision making behavior of over 1,200 family-owned businesses in Spain in 2007, and his research results indicate that when facing the trade-off between economic wealth and spiritual wealth, family businesses tended to pursue family spiritual wealth. Rather than being completely wealth-oriented, the owners of family businesses mostly choose to maintain the sustainable development of their businesses.

SEW refers to the non-economic benefits derived from membership in the firm by being the owner, decision-maker and manager. SEW includes a variety of related forms, including the ability to exercise authority, the satisfaction of needs for belonging, affection and intimacy, the incorporation of family values throughout the business, the preservation of the family dynasty, the conservation of the family firm’s social capital, the fulfillment of family obligations based on blood ties, and the opportunity to be altruistic to family members. The concept can be extended to include non-family members involved in family businesses. Therefore, the “family” is a wider concept than simply a consanguineous one.

There are five dimensions of SEW, namely, the identification of family members with the firm, binding social ties, emotional attachment, family control and influence, and renewal of family bonds to firm through dynastic succession. First-generation entrepreneurs generally devote themselves to their family business. Compared to professional managers, family members demonstrate higher emotional commitment to their business. As a founder or potential successor of a family business, the family member considers the business to be their lifeblood and tries their best to protect it from harm. In terms of family control and influence, the transmission of family values can directly or indirectly influence the operational management and strategic decisions of the business. As for business succession, family members regard the business as a long-term investment that will endure over generations. That’s why family business entrepreneurs think in a different way when making decisions. They usually focus on long-term investment rather than short-term benefits.

Family Wealth and Family Businesses: From the SEW and Governance Perspectives

Family businesses seek both financial and non-financial objectives. Financial objectives, or economic benefits, include sales revenue, profit, market share, and growth rate. What are non-financial objectives? These include building up the family reputation, sustaining the family’s social status, satisfying the family’s emotional needs, and carrying forward the spirit of the family. Family wealth is more than just money, and family heritage means more than inheriting economic wealth. What matters most is the sustainable prosperity of spiritual wealth.

SEW is a double-edged sword. Its pros include altruism within the family, strong commitment to family, emotional bonds, and enhancement of family values and social reputation. The cons include self-interested behavior, emotional burdens, conservative strategy, and cronyism. During the past three decades since Reform and Opening Up began in China, many Chinese private enterprises have evolved through trial and error. They faced many challenges from factors beyond their control, and some of them reacted in an improper manner. However, we need to look ahead and believe that the future will be different. The question is how family businesses can turn their disadvantages into advantages and survive in a more complex environment. We believe that if they can face and overcome these difficulties, they will demonstrate their strengths and find innovative solutions.

Source: Prof. Jean Lee’s Speech at the 2nd China Family Heritage Forum 2013: The Affection and Governance Dimensions of Family Businesses-The water supporting a boat can also sink It, June 1, 2013.