Are Family Firms Better Employers?

A question that has attracted considerable attention is whether family firms are better employers than non-family firms. This issue is critical because over 90% of firms world-wide are family owned and over 60% of employees globally rely on family firms for their livelihood.  One factor that has hindered resolution to this issue is that virtually all prior attempts to answer the question have been single country studies. 

In this research, published in the Journal of Management Studies, we draw data from 33 countries to determine whether family firms are better employers than non-family firms by considering whether family firms provide better employment security, something that should be of immense importance to employees particularly where labor markets are thin. In this study, we draw on socioemotional wealth theory to predict that family firms do a better job than non-family firms in sheltering employees from political risk where employment security is most vulnerable.  According to this theory family owners are guided by an affective logic that goes beyond maximizing financial returns and make business decisions that enhance the family’s image and the firm’s positive identity, reinforce emotional attachment to the firm, values the continuity of social ties , and maintain the firm’s family dynasty over an extended horizon. These elements of socioemotional wealth lead family firms to avoid layoffs at all cost even when the firm is in a challenging environment.

Employment Security Where It Is Needed Most

Our study finds that family firms do indeed provide more employment security than non-family firms, and more importantly this difference is greater when political risk is highest and employment security is most needed. The study extends socioemotional wealth theory by finding that protecting socioemotional wealth has positive spillover effects on those stakeholders critical to the firm’s success. In addition, the study suggests that by filling institutional voids created by political risk local governments benefit and therefore should give greater attention to supporting family firms in the local economy.

How Filling an Institutional Void Benefits Family Firms

Providing employment security has many benefits, especially where labor markets are weak. First, it encourages investment in firm-specific human capital. It limits the costs associated with employee turnover.  It also can compensate for paying below average wages, and ties employees to the firm in ways that increases their commitment to the business’ success. Thus, by not treating employees as a variable expense to be ratcheted up or down across economic cycles, family firms can enjoy benefits not available to non-family firms responsible to financially motivated investors.

In addition, by providing greater employment security, family firms can fill institutional voids that are created when governments lack the ability or the inclination to ensure economic stability.  The employment safety net that employment security provides gives family firms an opportunity to engage in political rent-seeking. That is, by filling the institutional void created by week institutions, family firms may derive political favors from the host government in the form of trade restrictions and other regulatory controls that favor family firms over non-family multi-national firms. Thus, by filling institutional gaps that if left unfilled could create dissatisfaction with the current political regime, host governments may be disposed to providing protection for the family firm’s market position from threats created by foreign direct investment. 

Lessons for Others

Non-family firms may learn from family firms about the importance of providing employment security to employees, and not treating employees as a disposable resource to meet financial goals. From a public policy perspective, our research suggests that governments should actively support family firms as they can be instrumental to enhancing the welfare of workers in what is probably the most critical benefit they can derive from their employer:  job security.  

Adam Smith Would Be Pleased

Overall, our research demonstrates that family firms provide a secure workplace, and they take care of their workforce! Based on data from more than 3,100 firms from 33 countries over a decade, we have found that family firms go the extra mile in ensuring job security for their employees, especially when compared to non-family firms. The positive impact of family business on employee welfare is therefore remarkable! But what makes it truly remarkable is that the positive effects of socioemotional wealth in the family business are even more pronounced when it is needed the most, namely in riskier institutional environments. That is, by valuing the business more than the financial wealth it produces, family owners appear to take pains to protect not only the business, but also everyone who contributes to the business’ longevity.  Thus, family firms avoid the agency costs that Adam Smith warned about and demonstrate how a stakeholder approach to managing a business can be successful.