Family Business Facts
By Rania Labaki
Fact #1: Family Businesses are Predominant throughout the World and Contribute to Overall Economic Growth
Statistics show that family businesses are predominant throughout the world (López de Silanes, La Porta, & Shleifer, 1999) and contribute the most to the growth of worldwide economies. For more details, read Family Firm Institute’s Global Data Points article.
A recent study by Memili et al. (2015) examines the impact of the prevalence of Family Small and Medium-Sized Enterprises (SMEs) on economic growth at the state level in the USA. It suggests that the proportion of Family Small and Medium-Sized Enterprises (SMEs) will have an inverted U-shaped relationship with economic growth. Stated differently, there is an optimum level of Family Small and Medium-Sized Enterprises (SMEs) in a local economy. Up to that point, which is about 42.8 % of the Small and Medium-Sized Enterprises (SMEs) population, an increasing proportion of family firms have a positive influence on economic growth. However, beyond that point, more and more family firms in the economy appear to reduce economic growth.
Lesson #1: A balanced combination of family and non-family Small and Medium-Sized Enterprises (SMEs) is more conducive for maximizing economic growth than either type of business. Your family business takes an active part in promoting your country’s economy.
Fact #2: The Cluster Model Helps Capture the Evolution of Your Family Business Over Time
Traditionally, family businesses are described as constituent of three overlapping circles, (1) the family, (2) the business and (3) the ownership (Gersick, Davis, McCollom Hampton, & Lansberg, 1997; Tagiuri & Davis, 1996). Recently, Michael-Tsabari, Labaki, & Zachary (2014) suggested the Cluster Model to update the two and three-circle models by providing a more detailed picture of the circles’ evolution over time. While the original bivalent two-circle model appropriately describes a family that owns a firm (Tagiuri & Davis, 1996), Michael-Tsabari et al. (2014)’s study addresses the inaccuracies of the circle models when it comes to describing a family that owns more than one firm and suggests a more detailed perspective allowing to include in the analysis the different firms that the family owns to different extents.
Lesson #2: Putting the lenses of the Cluster Model on might help you better capture the evolution of your family business over time both in terms of the descendants driving this evolution and its outcomes.
Fact #3: Family Businesses Entail both Financial and Socio-Emotional Wealth Perspectives
Unlike non-family businesses mainly oriented towards financial wealth creation, family businesses tend to incorporate socio-emotional wealth aspects in their objectives as well. Recent studies show that family businesses may seek for socio-emotional wealth (SEW), even when in some cases, the financial wealth is compromised (Gomez-Mejia, Haynes, Nunez-Nickel, Jacobson, & Moyano-Fuentes, 2007). In addition, the value of the family business is viewed far beyond the purely traditional financial value as it includes an additional component representing socio-emotional aspects (Astrachan & Jaskiewicz, 2008; Zellweger & Dehlen, 2011). The process of valuation of the family business by the owner-manager may therefore include a reasoning based on the value of emotions such as the expected regret that the family and business will incur in the case of sale of the business (Hirigoyen & Labaki, 2012).
Lesson #3: Reflecting on the wealth creation and valuation of your family business entails a reasoning based on both financial and socio-emotional dimensions.
Fact #4: Family Businesses are not an Emotionally Homogeneous Group
Family businesses have long been viewed as a homogeneous group of organizations heavily driven by emotions stemming from the family system. Recent research shows that emotions exist both in the family and business systems, flowing from one system to the other and mutually impacting systems outcomes. Labaki et al. (2013) identify three cogent archetypes of family businesses based on their emotional nexus between the family and the business, that is the way emotions bind the family and the business. Comparatively, each suggested archetype – “Enmeshed Family Business”, “Balanced Family Business” and “Disengaged Family Business” – captures differently emotional dimensions components (differentiation of self, boundaries, cohesion and adaptability) and characteristics (capital, norms, resources and rewards exchanges and culture).
Lesson #4: Based on the attributes of your family business, identify the relevant archetype to better understand the dynamics of the decision-making process, the way managerial behavior is shaped and the goals are structured.
Fact #5: Family Relationships are the Key to Family Business Sustainability
Family relationships are not constant but evolve over time as the family business moves from a founder’s ownership stage to a siblings’ partnership, and then to a cousins consortium’s ownership stage. Research shows that the family cohesion and adaptability, representing the quality of family relationships, tend to weaken over time (Labaki, 2011). Building on French listed family businesses, Labaki (2007) shows that family relationships strengthen when the business is successfully passed on from the founder to the siblings. However, when the business is in the hands of cousins and subsequent generations, the relationships significantly weaken, leading to conflicting interests, asymmetry of information and asymmetry of altruism among family members. This situation reflects a rather pessimistic outlook for future family business performance. These findings suggest the need for setting family governance structures at the cousins ownership stage to avoid a disruption in the family cohesion and adaptability that might threaten the family and business sustainability.
Lesson #5: Check the ownership stage at which your family business is at and work on the family governance structures if needed for a sustainable business in the hands of future generations.
Family Business Fact #6: The Family’s Identification to Peripheral Businesses Differs from Identification with its Core Business
Throughout their life span evolution, family businesses may move beyond the organic state based on the historical firm and develop into a portfolio of multiple businesses.
Building on a longitudinal case study of a multinational family business, Michael-Tsabari, Labaki, & Zachary (2014) show that that emotional connection that family members feel towards the different businesses that the family owns significantly differ. Higher levels of family identification (as part of socioemotional wealth) are more likely to be found in a core business than in a peripheral business given the existing history and personal meaning it has for the family members. In addition, the level of family identification to a core business may be perceived differently among generations.
Lesson #6: Your family “core” business has a special feature in the eyes of family members across generations. The levels of identification of the family members to peripheral businesses differ when comparing it to its “core” business. Accounting for this helps you better understand miscellaneous behaviors of the family members in terms of entrepreneurial or divestment activities.
Fact #7: Family Businesses Have the Unique Opportunity to Retain Talent via “the Family Gravity” Effect
“Family gravity” represents one critical factor that distinguishes family businesses from non-family businesses and contributes in achieving long-term success.
Based on a study of 50 leading family businesses, Fernández-Aráoz et al. (2015) show that those with sound family gravity have at least one key family member (up to three) standing at the center of the organization, like the sun in our solar system, drawing talented people – from within or outside the family – into their orbits and keeping them.
Lesson #7: Your family businesses should identify or build on its family gravity and strive to maintain it to retain talent and engage both its family and non-family executives towards sustainability.
Fact #8: Family Businesses Adopt More Long Term Strategies and Distribute Fewer Dividends
Family businesses tend to adopt more long-term oriented strategies than their non-family counterparts. They prefer to use the excess cash-flows to finance their investment projects rather than distributing them as dividends to family shareholders who would benefit from them on a short-term basis (Gallo, Tàpies, & Cappuyns, 2004). Research on French family businesses shows that the more the family is in control of the business, the less the dividends to be distributed to shareholders (Calvi Reveyron, 2000).
Lesson #8: Patient capital of your family business shareholders pays off on the long-term.
Fact #9: The Family Business Modes of Financing Follow a Hierarchy of Preferences
Family businesses tend to be less indebted than non family businesses (Lyagoubi, 2006) which makes them less dependent on outside stakeholders such as banks and institutional investors generally seeking more financially-oriented goals. The hierarchical financing theory (Myers & Majluf, 1984) applied to family businesses shows that they have a hierarchy of preferences when it comes to financing aimed at preserving the capital control : Self-financing, Debt and Capital markets.
Lesson #9: Your family business’s financial policies of investment, financing and dividends distribution are interconnected. Your investments for the long-term are preferably self-financed at the detriment of the dividends for shareholders.
Fact #10: The Women’s Power via Visible and Invisible Roles
Women in leadership positions are increasingly being acknowledged for their contribution to the performances of their businesses. In a family business, however, the role of women is not restricted to the official sphere of influence in terms of business executive or governance positions. Blondel (2005) identifies the invisible roles of women in each of the circles of the family business. Women contribute positively to the emotional and human capital in the family circle, to the financial capital in the ownership circle and to social and symbolic capital in the business circle. This being said, the negative invisible role that women may play in these circles is not to be ignored and yet still needs to be accounted for (Labaki, 2015).
Lesson #10: Identifying the women in your family business with both visible and invisible roles helps recognize and leverage their contributions for the benefit of the business and the family.
Rania Labaki – Bio
Rania Labaki has developed a unique mix of academic and practical knowledge throughout extensive experience with leading international organizations specializing in family business education, networking, advising and research.
Along with a Ph.D. in Management Sciences from the University of Bordeaux, Rania Labaki holds the Family Firm Institute’s (FFI) Certificates in Family Business and Family Wealth Advising. Currently an Associate Professor of Management at EDHEC Business School, she teaches and conducts research at the intersection of the fields of finance, entrepreneurship and family business. She also serves as Academic Director of the Family Business Global Executive MBA and member of the Family Business Centre. Her recent research interests revolve around the relationship between the family’s emotional dynamics and the entrepreneurial and financial behavior of family businesses.
Prior to joining EDHEC Business School, Dr Labaki was Associate Professor of Management and Director of the Finance and Wealth Management Master Program at the University of Bordeaux in France. She was also Visiting Scholar at Baruch College – The City University of New York and at Zeppelin University in Germany.
As academic expert of Family Business Network (FBN) International, Rania Labaki served as Chair of the International Family Enterprise Research Academy Conference in 2012 and as Program Committee Chair for the Family Business Network – Next Generation International Summits since 2012. She contributes to the Next Generation Committee in terms of program content development and facilitation for the international conferences and support for the strategic activities focused on education, research, networking and entrepreneurial initiatives.
Rania Labaki is an active member of several organizations, including Family Business International Foundation (FBIF), Family Business Network France Scientific Board (FBN), Women in Family Business Advisory Committee and Family Business Review (FBR), Journal of Family Business Management (JFBM) and Journal of Family Business Strategy (JFBS) Editorial Review Boards.
Author of many academic papers, book chapters and professionally-oriented articles on family business, Rania Labaki currently serves as Co-Editor of Entrepreneurship Research Journal, positioned as the premier new research journal within the field of entrepreneurship; She also was a Guest Editor of the Entrepreneurship Research Journal for a special issue on The Emotional Dimension of Organizations in 2013; Academic Chair of The International Family Enterprise Research Academy (IFERA) 2012 Conference (France), and Program Committee Chair of Family Business International Next Generation (FBN-NxG) International Events 2012 (Germany), 2013 (USA), 2014 (Spain), 2015 (Colombia).
Her 12 year teaching experience spreads across continents as guest or visiting professor in universities in China, Bulgaria, Germany, Morocco, Tunisia, USA and Brazil, in the same line than her academic advising experience with organizations such as Family Business Network (FBN) in Switzerland, Pacific Asia, Germany, North America, Colombia, India, Spain, France and Business Families Foundation (BFF) in Canada.
Learn More by Reviewing the Original References:
1. Astrachan, J. H., & Jaskiewicz, P. (2008). Emotional Returns and Emotional Costs in Privately Held Family Businesses: Advancing Traditional Business Valuation. Family Business Review, 21(2), 139-149
2. Blondel, C. (2005). Les femmes et l’entreprise familiale : Rôle et évolution.[Working Paper]. (2005/64/WICFE). INSEAD, Fontainebleau.
3. Calvi Reveyron, D. (2000). Le capitalisme familial dans un contexte français, induit-il moins de dividendes que les autres formes d’actionnariat ? Finance Contrôle Stratégie, 3(1), 81-116.
4. Denison, D., Leif, C., & Ward, J. L. (2004). Culture in family-owned enterprises: Recognizing and leveraging unique strengths. Family Business Review, 17(1 ), 61 – 70.
5. Fernández-Aráoz, C., Iqbal, S., & Ritter, J. (2015). Leadership Lessons from Great Family Businesses. Harvard Business Review, 93(4), 82-88.
6. Gallo, M. Á., Tàpies, J., & Cappuyns, K. (2004). Comparison of family and nonfamily business: Financial logic and personal preferences. Family Business Review, 17(4), 303-318.
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8. Gomez-Mejia, L. R., Haynes, K. T., Nunez-Nickel, M., Jacobson, K. J. L., & Moyano-Fuentes, J. (2007). Socioemotional Wealth and Business Risks in Family-controlled Firms: Evidence from Spanish Olive Oil Mills. Administrative Science Quarterly, 52(1), 106-137.
9. Hirigoyen, G., & Labaki, R. (2012). The role of regret in the owner-manager decision-making in the family business: A conceptual approach. Journal of Family Business Strategy, 3(2), 118-126.
10. Labaki, R. (2007). Contribution à la connaissance des liens familiaux dans les entreprises familiales françaises cotées: Renforcement versus atténuation. PhD in Management Sciences PhD Dissertation, University of Montesquieu Bordeaux IV, Bordeaux.
11. Labaki, R. (2011). The Nova Group case study: Family dynamics in a multigenerational French family business. International Journal of Management Cases, 13(1), 27-42.
12. Labaki, R. (2015). Succession in the family business: When the daughter takes over / Original Title: La transmission dans l’entreprise familiale : Quand la « fille » reprend les rênes… Regards au féminin. Paper presented at the MEDEF & IAE Bordeaux Workshop, Bordeaux.
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22. Zellweger, T. M., & Dehlen, T. (2011). Value is in the Eye of the Owner: Affect Infusion and Socioemotional Wealth among Family Firm Owners. Family Business Review, 25(3), 280-297