The regenerative power of family businesses

It’s widely accepted that the enduring entrepreneurialism of family businesses not only keeps their vibrant culture of innovation alive, but it can also make a major contribution to superior financial, social and non-financial performance. For this reason, the strength of a company’s entrepreneurial orientation is one of the most important keys for unlocking the ability of family businesses to adapt, innovate and grow.

Entrepreneurial orientation

Amid uncertainty and disruption, family businesses continue to show their unrivaled resilience and ability to reinvent themselves in dynamic and unpredictable environments.

Throughout the COVID-19 pandemic, for example, Millennial leaders in particular have played essential roles in proactively accelerating the adoption of new technologies to respond quickly to changing market demands while also advancing their businesses into the future.

Many family businesses have recognized that to achieve high entrepreneurial performance, next-generation family members must be given opportunities to take risks and make judgments on their own — and not simply follow the lead of older generations forever.

Their staying power is fueled by a desire to keep the founders’ entrepreneurial spirit and personal ambition alive through a contemporary lens. And it’s also one of the secrets to their often enviable competitive advantage.

A strong entrepreneurial orientation alone isn’t always sufficient to support the continuous renewal and rejuvenation that’s needed to sustain a family business for multiple generations. It can also require an understanding of the impact that the family’s engagement has on the decisions and performance of the business.

Beyond the independence of owning and managing a family business — and the financial benefits and prominence it can bestow — the control and influence and emotional attachment to the business (in other words, its “socioemotional wealth” ) defines the idea of “wealth” in much broader terms compared to other business types.

Socioemotional wealth: The family’s control and influence, emotional attachment and identification with the family business

In fact, “socioemotional” wealth is often viewed as an endowment in family businesses, and it can influence the unique way they look at problems. If the endowment is threatened, for example, the family’s decisions may be driven more by the importance of preserving the status quo and less on the potential economic value of their actions.

At the same time, the family’s control and influence and identification with the business are major contributors to the company’s purpose, the drive for innovation and the impact that the business has on many different groups of stakeholders.

Given the need to balance business and family outcomes, discussions about performance in family businesses often include many different types of results that are important in the family business environment and make a traditional financial balance sheet approach inadequate. Traditional business performance metrics, such as growth in market share, profitability and return on equity, are of course important.

Equally important, however, is the entrepreneurial orientation exhibited in the firm’s technological leadership, the advancement of innovations, the engagement of next-generation family members in the business and family cohesiveness.

A holistic view of both business and family outcomes is essential for success in family businesses, and the combined strengths of the business and the family contribute directly to their regenerative power.

Leadership style is a factor that often impacts performance. No leader has only one style, and it often changes (as it should) with the economic and social circumstances of the time. It not only needs to be “fit for purpose”, but also fit for the time and circumstances. When survey respondents were asked to identify their “preferred or most prevalent” leadership style, transformational was the overall preference of CEOs in every region, followed by charismatic, both of which reflect the ability to inspire and motivate others.

Understandably, CEOs from the Silent Generation (those born between 1925-1945) generally showed low levels of transformational leadership and high authoritarian levels, which is often the case in first-generation businesses that are led forcefully by a founder’s vision and direction.

In a post-COVID-19 world, we believe that continuing to fuel the regenerative power of family businesses will require charismatic and transformational styles of leadership to help ensure that family businesses continue to evolve successfully. We also strongly believe that greater diversity of views and experiences and inclusivity in the C-suite can add even further to that power.

In our previous research, we have shown that the entrepreneurial orientation of family businesses is strongly related to their financial, social and non-financial performance. This is also true of the family’s level of socioemotional wealth as a contributing factor to its non-financial performance.

From the survey responses, we have been able to determine that when both the level of entrepreneurial orientation and socioemotional wealth are high, the company’s performance is also high in every aspect of the business and family. And, as might be expected, when the levels of entrepreneurial orientation and socioemotional wealth are low, performance is also low across every measurement.

Recognizing that there are many variations in performance between the highest and lowest levels of entrepreneurial orientation and socioemotional wealth, we have created four family business profiles: “Entrepreneurial families”, “Business-first families”, “Family-first businesses” and “Underperforming businesses”. Each profile illustrates the contributing factors to the performance of family businesses and the actions that can be taken to sustain and improve it.

The performance snapshots in each of the profiles show how the level of entrepreneurialism and socioemotional wealth can impact the financial, social and family performance of family businesses.

If some aspects of your family business are reflected in one or more of these profiles, you’ll find practical insights and suggested actions for helping to sustain or improve levels of performance that have been provided by family business leaders, advisers and academics across the world. Professional guidance can be found in the report “The regenerative power of family businesses – Transgenerational entrepreneurship”.