Assistant Professor of Management Giacomo Laffranchini presented his research on how nonfinancial objectives shape the decisions of family firms that are trying to financially recover at noon Tuesday in the President’s Dining Room.
Laffranchini described the common methods businesses employ to stop financial decline, such as cutting both costs and assets and attempting to improve their sales.
He said that literature on the subject of decline-stemming strategies has overlooked the role stakeholders play, especially in the context of family-owned businesses. Decline-stemming strategies are methods businesses employ to save and earn more money when they are underperforming.
“Family owned businesses employ roughly 50 percent of the U.S. workforce, so it’s incontrovertible that we cannot neglect family-owned businesses as a form of organization,” Laffranchini said.
When making decisions in turnaround situations, family owned businesses will take into account family’s power, emotional attachment and desire to create a family legacy through the business.
Laffranchini introduced the concept of socioemotional wealth, or SEW, which he defined as “benefits that are non-economic, and yet critical for the family principal welfare.”
“Even those studies that acknowledge that there might be a difference between a family and a non-family business tend to overlook the fact that family businesses are a highly heterogenous group, meaning not all family businesses are alike,” Laffranchini said.
Laffranchini explained two theories surrounding decline-stemming strategies that businesses use.
The first is stakeholder theory, which says management needs to balance the wishes of both internal stakeholders, or entities within a business, and external stakeholders, or those affected by a business, such as investors and suppliers.
Laffranchini said the theory ignores the role of the owning family in management, and supplemented it with the “SEW preservation perspective,” which explains business strategies in terms of whether or not they will gain socioeconomic wealth.
In his research, Laffranchini made the distinction between extended socioemotional wealth and restricted socioemotional wealth.
Restricted socioeconomic wealth, or SEWr, benefits the immediate family, while extended socioemotional wealth, or SEWe, includes long term benefits, such as the survival of the business over several generations, the development of it’s reputation and standing and the maintenance of the relationship between internal and external stakeholders.
Laffranchini used accounting data to study 416 businesses with family involvement for two or more generations and significant family ownership. He split SEW in five dimensions: family control and influence, identification of family members with the firm, binding social ties, emotional attachment of family members and renewal of family bonds to the firm through dynastic succession.
“All in all, our results suggested that family owned businesses appear to frame their decisions in order to preserve the support of their stakeholders, which are critical for the family in order to keep deriving SEW, depending upon whether they chose SEWe or SEWr,” Laffranchini said.
He also said that the family owned businesses’ strategies change depending on which type of SEW the family prioritizes.
“If I am a family member and I am pursuing SEWr, I don’t care if my offspring are intellectually gifted or not, I want to give them employment opportunity, and therefore, regardless of that qualification, I will find a position for them in my own firm. That’s an example of SEWr,” Laffranchini said.
“An SEWe, on the contrary, or extended SEW, would be to provide particular benefits for my employee, because I believe that they are part of the family. Although they are not a family member, I see them as a long lasting stakeholder of the firm. From an SEWe standpoint, the family owned businesses are found to be more socially responsible than non-family counterparts because there are implications in terms of legitimacy and reputation of the firm.”
Assistant Professor of Finance William J. Hippler said that he was interested in the subject of conflicts between agencies within a business, which he called “agency conflicts.”
“What (Laffranchini’s) companies are, essentially, are companies that have a management team and an ownership structure where the company’s essentially controlled by one group of people who might be pursuing nonfinancial goals,” Hippler said.
“My question was about ‘what if I’m one of these small shareholders, and I don’t control the company? Might that affect me negatively if they’re able to use their influence to pursue some non financial goal that maybe I don’t agree with?’”
Associate Professor of Public Administration Marcia Godwin talked about Laffranchini’s conclusions on SEW’s applications on the business of sports teams, non-profits and public policy.
“Sometimes you have groups of people trying to solve a regional transportation issue, like who pays for the Goldline, so there’s a community identity issue that maybe socioemotional wealth plays out in different ways,” Godwin said.
Aryn Plax can be reached at email@example.com.