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Rich and Co.

What’s so special about family firms?

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What’s so special about family firms? by Alex Fradera  June 22, 2012

Family firms are a significant phenomena on the business landscape. Estimates suggest they account for approximately 90% of all firms. Yet their unique qualities are often ignored by organisational research, or otherwise ghettoised into specialist conversations. According to a new review article in the Journal of Management, this means missing out on insights that can inform organisations of every stripe.

Eric Gedajlovic and colleagues raise some of the unique features of a family firm.

  • The first is they are necessarily run by their owner, which has consequences for the motivations, intent and effort put in by leadership
  • Deep ties to personal reputation, the use of personal finances for investments, and obligations to future generations (literally, in the form of family descendents), make such owner-managers more likely to operate ethically, prudently, and for the long-term
  • Another feature is informality. Businesses that rely on formal governance can’t get away with handshake deals and overt, personal reciprocity, but family firms operate more personally, finding quicker ways to get things done that lower transaction costs, such as bypassing a laborious tender process. 
  • As a further edge, this is an effective way to cultivate strong, trust-based personal networks.
  • Finally, long-standing family members and other loyal lifers offer a wealth of tacit knowledge: things you know but don’t necessarily know you know, that makes things run more smoothly. Family firms can leverage such information, free to use gut and rules of thumb for rapid responses.

There are downsides too.

  • In general, the model is in some tension with meritocracy
  • there is evidence that CEOs who get their job through primogeniture tend to under-perform compared to the market
  • Dishonest or slack managers may be forgiven due to personal ties or outright nepotism
  • the strong in-group formed may carry a failure to trust outsiders, and make these firms slower in keeping up, particularly with fast-changing trends such as in technology.

These features of family firms are often magnifications of things present in any work organisation, which makes them worth exploring.

Take the tensions, so evident in family firms, between the decision that makes financial sense and the one that ‘feels right’. Owner-managers may want to cement power, crave a high status, risky deal, or be unwilling to deviate from the founder’s vision, and investigating them has been helpful to prospect theory, looking at the roots of seemingly irrational business decisions.

Another perspective looks at how these non-financially driven decisions can help organisations in the long run; such ‘mixed motives’ in businesses help encourage collaboration and the sense of a mission bigger than any bottom line.

As a result, the risks and benefits associated with the way business is done in family firms can be understood and used to develop ways of working for organisations in general.

ResearchBlogging.orgEric Gedajlovic, Michael Carney, James J. Chrisman, & Franz W. Kellermanns (2012). The Adolescence of Family Firm Research: Taking Stock and Planning for the Future Journal of Management , 38 (4), 1010-1037 DOI: 10.1177/0149206311429990

 

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Written by Rich and Co.

July 12, 2012 at 4:52 pm

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