Family Firms Teach Long-Term Survival

The voluntary actions taken by businesses to improve the social conditions of stakeholders, such as giving to charities or improving employee working conditions, are an increasingly important aspect of modern business. Engagement of a wide range of stakeholders improves brand reputation, helps avoid negative publicity and is crucial to managing important groups such as employees, suppliers, local communities and customers.

Family firms (i.e. those where founders or families are significant shareholders, hold positions in senior management or have seats on the board) such as Microsoft, Samsung or Wal-Mart perform better on these social aspects.

John Bingham and his colleagues Gibb Dyer Jr. and Gregory Adams, from Brigham Young University, and Isaac Smith from the University of Utah argue that family firms approach their stakeholder relationships differently, seeing their long-term success as dependent on creating close relationships and ties with their stakeholders. This contrasts with non-family firms, who are thought to place greater emphasis on short-term profit, often at the expense of stakeholders.

The researchers undertook an empirical study of S&P 500 companies in the US between 1991 and 2005 to test whether family firms do more for society than non-family firms. As well as testing for relative levels of socially responsible behaviour between family and non-family firms, they also examined the types of activity undertaken (i.e. whether targeted at employees, consumers or local communities) and how levels of founder versus family involvement affects social responsibility levels.

Family firms do more for their stakeholders. The research finds that family firms do undertake more social initiatives than non-family firms, and this increases with greater family involvement in the running of the business. Family firms, for example, were more likely to nurture their relationships with local communities through the establishment of local charities, or improve interactions with employees, through better pension plan provision.

Managers can learn from family firms’ long-term strategic focus. Family firms see stakeholders as partners who are essential to the long-term viability of the business. The attention family firms pay to stakeholders is a business strategy that enables them to perpetuate their businesses for future generations; in other words, stakeholder engagement is key to long-term success.

Managers wishing to enhance and protect their firm’s brand image and reputation should explicitly consider a wider group of stakeholders than just their customers, including local communities and their employees, and engage with them through initiatives such as enhanced retirement benefits, a diverse workforce and products that benefit the economically disadvantaged.

Bingham, J.B., Dyer Jr., W.G., Smith, I., Adams, G.L. (2011). A Stakeholder Identity Orientation Approach to Corporate Social Performance. Journal of Business Ethics, 99:565-585