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Research Matters: The Resilient Family Firm

Top Firms in Tough Times: Can the unique characteristics of family businesses make them distinctively resilient in time of financial crisis?


Vanessa StrikeFinancial crisis and potential market collapse in China. The disintegration of the banking system in Greece. Recession in Canada succeeding the oil price decline. Following the onset of these recent economic shocks, are family businesses more resilient than other types of firms in their capacity to sustain performance? If so, does family business resilience come at the expense of the interests of investors and employees? Does the quality of the legal institutions protecting stakeholders help or hinder family business resilience?

In our recent study, The Resilient Family Firm: Stakeholder Outcomes and Institutional Effects, co-authors Marc van Essen (Moore School of Business), Michael Carney (Concordia University) and Stephen Sapp (Ivey School of Business) and I tackled these questions. We found that family businesses' unique characteristics provide advantages that make them resilient to the effects of economic shocks.

Studying 2,949 firms across 27 European countries during the most recent global financial crisis, we sought to explain the relationship between family business and stakeholder outcomes before and during the global financial crisis. We focused on outcomes for two types of stakeholders, investors and employees, whose interests are likely to be impacted by the onset of a crisis.

Family owners’ desires to pass on control of the firm to their children provide the business with expanded decision-making time horizons. Family businesses therefore give much greater emphasis to balancing short and long-term outcomes and may forgo profitable opportunities during rapid growth conditions in order to conserve resources and increase the probability of survival during hard times.

Furthermore, as family businesses are known for long-lasting ties between owners, executives and employees, self-interest and information asymmetry that are common in non-family firm counterparts may not hold in family businesses. Owners and employees in family businesses are often highly interdependent, work closely with each other, and are more likely to be emotionally attached. Such attachments tend to diminish opportunistic behavior as family businesses come to develop and value relationships with key stakeholders such as employees, customers, suppliers, and minority investors. Family businesses are therefore more likely to engage in benevolence and stewardship toward stakeholders.

What do the results show?

We found that family businesses financially outperformed non-family firms during the financial crisis, beginning in 2007 and reaching its lowest point in 2009, suggesting increased resilience during economic shocks. Our study also showed family businesses are more resilient with favorable employee outcomes. Family businesses were less likely to downsize their workforce or cut wages in both pre-crisis and crisis conditions. These favorable employee outcomes are therefore not crisis-specific but are common to both stable growth and crisis conditions, suggesting that family businesses typically demonstrate greater stewardship toward their employees regardless of economic conditions.

Drawing our data from 27 European countries allowed us to also study how the varying quality of legal institutions affect both minority investors and employees. Interestingly, we found that investors and employees of family businesses achieve more favorable outcomes for their interests when the rules pertaining to investor protection and their enforcement are poorly developed. These results suggest that in addition to resilience to economic crises, family businesses are also resilient to weak institutional conditions as family business performance and some stakeholder outcomes are better in environments where there is little legal protection.

What are the implications for family businesses?

Develop Long-Lasting Relationships: Because family owners are better able to develop long-lasting relationships, they are more likely to engender trust and reciprocity amongst firm stakeholders. With the expectation of extended time horizons, both owners and stakeholders will be more likely to eschew opportunism and exercise patience in their relationships with one another resulting in a more resilient organizational culture.

Incorporate Employee Voice: Family businesses are more likely to consider the interests of their employees and are less likely to engage in employee downsizing or wage reductions. Instead, family owners and managers involve employees in decision making. Incorporating employee voice in decision making during a crisis may lead to greater flexibility, affording more opportunity to develop productive responses to difficult conditions. Thus a resilient organizational culture may enable mutually beneficial outcomes that preserve or enhance returns to investors and employees.

Preserve Organizational Slack: In emphasizing long-term goals family businesses operate with more organizational slack. Organizational slack, such as excess cash flow, manufacturing capacity, or debt capacity, provides a cushion of resources that allow a firm to adapt to internal or external changes. While potentially inefficient, slack increases the robustness of the firm with respect to unanticipated shocks such as a severe decline in revenue. Preserving organizational slack also provides the basis for sustaining long-term investment projects across boom-and-bust economic cycles. While family businesses are known to pursue fewer new projects, they persevere longer with their chosen ventures.

Develop Alternative Sources of Competitive Advantage: Family businesses should consider other means of accomplishing equivalent financial performance. Our findings that family businesses demonstrate greater commitment to their employees suggests that they develop alternative sources of competitive advantage, perhaps based upon a more cooperative and trusting employer-employee relationship that provides incentives to employees to invest in valuable firm-specific assets.

Cultivate a Reputation for Honesty: In a regime of weak commercial law, long-lived family businesses who actively cultivate a reputation for honesty in their transactions with business partners will gain a competitive advantage over opportunistic firms whose behavior will be detected and penalized in a market for corporate reputation.

Overall, in periods of stable economic growth stakeholders can more readily accommodate one another’s interests, but with the onset of economic contraction both investor and employee interests may be threatened. How the relative outcomes for minority investors and employees actually play out depend upon both family ownership and the quality of legal institutions protecting investor and employee rights.

In family businesses where the owners and managers are by definition ‘on the same team’, and where family businesses are driven by lasting firm value as opposed to the drive for short-term profit, they seek to build strong ‘institutions’ – internal and external norms that lead to good firm reputation, trust and strong relationships. Because of reputational concerns, family businesses are also driven to cooperate with external institutions, for example national and international governance bodies. Opportunism is therefore less likely to occur in family businesses; they are more likely to develop strong relationships through positive interactions with key stakeholders such as employees, customers, suppliers, and government officials.

Dr. Vanessa M. Strike holds the CIBC Professorship in Applied Business Family Studies and oversees the strategic, research, and academic direction of the Business Families Centre. She is an Assistant Professor in Sauder’s Organizational Behaviour and Human Resources Division.

 

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