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Socio-emotion

Anxiety about money and fear for their image can drive families to take risks and to diversify like crazy. Outsourcing control is a good idea.

Family businesses are conservative, they look to the long-term at the expense of short-term opportunities, lack dynamism and are risk-averse. Right? Wrong. That might be the conventional wisdom, but in fact family businesses can take just as many risky decisions as the most red-blooded, profit-hungry private firm. They just do so for different reasons.

Take the example of the recent accounting scandal with the listed Spanish family-controlled firm Pescanova, one of the world’s largest fishing groups. It recently emerged that the family had been hiding its true financial position for years. The reason they did this is very telling. It wasn’t only for financial reasons, but because the family feared that if the truth became known, they might lose control of the business. Control and identity are very important to family businesses, and it’s important to recognise that because it accounts for many of the decisions they make.

I like to talk about the concept of “socio-emotional wealth”, which is a very different thing to financial wealth. When families make decisions they are trying to maximise the financial side, of course they care about that, but the most important thing for them is to protect the socio-emotional wealth of the family, and that is about control and identity. Families are often entwined with their businesses, they feel very profoundly linked to what they do as a family firm. The family’s wealth and reputation are tangled up with the business’s. And for that reason control is important. 

What is fascinating about this deep, visceral need to hold on to their socio-emotional wealth is that it often drives families to make very risky, radical decisions to protect it. Family firms might well be conservative when times are good, but the moment they get into trouble they can do wild things to protect their family endowment. For example, the received wisdom is that family firms diversify less than private ones, but when they see that profits are declining they can diversify like crazy. You see this especially in a downturn.

There’s another pressure that leads family firms to take risks, and that’s the need to – so to speak – feed the family, or to produce enough jobs and/or wealth for them. I spoke to one family recently which has a rule that they have to double growth every four years. When I asked them why, they told me, “Because the family is growing at that rate”. I once asked the head of a family firm which was in the fashion business why it had bought a hotel, and the answer was, “Because I need to find employment for my grandkids.”

That way of doing things is not bad. It’s just the way family firms behave, they have far more dimensions to consider than a non-family business. Family firms have to accept that socio-emotional wealth is part of the equation, and that feeding the family is part and parcel of what they do. They need to grow and that entails some risk. What is absolutely vital for them is that they control those risks as much as possible.

And the way to do that is to professionalise the firm. If you need to grow and diversify rapidly, then you need people who know what they are doing to run that process. Which means that if you want to feed the family then that means giving more jobs to non-family experts. It might seem paradoxical, but the best people to protect the family’s emotional assets are not the family members.  

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