Socioemotional Wealth and Its Effect on Family Firm Performance

Socioemotional Wealth and Its Effect on Family Firm Performance

Juili Milind Ballal (Indian Institute of Technology, Bombay, India) and Varadraj Bapat (Indian Institute of Technology, Bombay, India)
DOI: 10.4018/978-1-7998-2269-1.ch010

Abstract

Family firm is the oldest and the most prevalent type of business entity in the world. A unique feature that sets apart a family business from its non-family counterparts is the Socioemotional Wealth (SEW). Preservation of SEW among family firms is of paramount importance. Various strategic choices including need for innovation and internationalization are influenced by SEW. Studies also show that a family firm's SEW plays an influential role in the firm performance. The This chapter outlines the different scales used to measure SEW, checks the reliability and internal consistency of the existing REI scale in Indian context, investigates the heterogeneity of family firms and understands the effect of different SEW dimensions on firm performance. The findings reveal that SEW has a significant positive effect on firm performance. Contributions of the study and scope for future research are also discussed.
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Introduction

The family business is the leading and the most prevalent type of entity in the world (Saiz-Álvarez, Leitão, Palma-Ruiz, 2019; Sharma, Chrisman, & Gersick, 2012). Family firms contribute to two-thirds of all businesses across the globe, generate around 70-90 percent of annual global GDP, and create 50-80 percent of jobs in the majority of countries worldwide (Saiz-Álvarez, Leitão, & Palma-Ruiz, 2019; Saiz-Álvarez & Palma-Ruiz, 2019). In the United States, one-third of S&P 500 firms are owned/controlled and managed by the founding family, accounting for 89 percent of total tax returns, 64 percent of GDP, and employing 62 percent of the total workforce (Anderson & Reeb, 2003; Astrachan & Shanker, 2003). While the importance of family firms is even higher in Europe (Botero, Cruz, De Massis, & Nordqvist, 2015), they also significantly contribute to the growth of economies in South and East Asia, Latin America, and Africa. More than 60 percent of the companies in Europe and the Americas are family firms (Ernst & Young, 2013). In Southeast Asia, around 85 percent of the businesses are either founders or family-run. These statistics reveal the sheer dominance enjoyed by family firms in the world.

Family business, just like any other phenomenon in management studies, is governed by several theories. One of the most influential theories since 2007 that govern family business (Odom, Chang, Chrisman, Sharma, & Steler, 2019) is the socioemotional wealth theory (SEW). The distinguishing factor between family firms and non-family firms is the concept of socioemotional wealth. The SEW theory was conceptualized in 2007 by Gomez-Mejia, Takacs, Nunez-Nickel, and Jacobson. They defined SEW as “non-financial aspects of the firm that meet the family's affective needs, such as identity, the ability to exercise family influence, and the perpetuation of the family dynasty” (Gomez-Mejia et al., 2007, p. 2).

The concept of SEW has garnered tremendous interest from the researchers working in the area of the family business, albeit the concept is just more than a decade old. Socioemotional wealth is a construct formed by five dimensions. Berrone, Cruz, and Gomez-Mejia (2012) identified five major dimensions of SEW and proposed a set of items to measure such dimensions, which they labeled as FIBER (Martínez Romero & Rojo Ramírez, 2017). FIBER is an acronym which can be expanded as Family control and influence (F), Identification of family members with the firm (I), Binding social ties (B), Emotional attachment of family members with the firm (E), and Renewal of family bond to the firm through dynastic succession (R).

The extant literature on SEW emphasizes the significance of this non-economic factor in strategic decision making (Cennamo, Berrone, Cruz, & Gomez-Mejia 2012; Naldi, Cennamo, Corbetta, & Gomez-Mejia, 2013). The use of emotions over rationality typically characterizes the decision-making process in a family firm. Family firms tend to protect their SEW, even if the opportunity cost of preserving this wealth is high.

Key Terms in this Chapter

Successor: A person who is next in line to take over the reins of the business.

Socioemotional Wealth: Socioemotional wealth is a non-financial goal of a family firm that deals with the affective endowment of family members working in the family business.

Firm Performance: Firm performance can be measured either by sales growth or return on assets.

Succession: Succession is the process of transfer of business (ownership and management) from one generation to the other.

Fiber: The acronym FIBER is used to measure Socioemotional Wealth. It is expanded as Family control and influence (F), Identification of family members with the firm (I), Binding social ties (B), Emotional attachment (E), and Renewal of family bond to the firm through dynastic succession (R).

Family Business: A business in which two or more members of the founding family are actively involved in the ownership and management of the firm.

Predecessor: A person who has retired and passed on the reins of the business to the current leader.

Return on Assets: Return on assets is the ratio of profits to total assets.

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