Family Business Review

Does Family Involvement in Management Reduce the Risk of Business Failure? The Moderating Role of Entrepreneurial Orientation

(Authors: Antonio J. Revilla, Ana Perez-Luno, and Maria Jesus Nieto)

Research Applied précis prepared by Kim Schneider Malek, Family Enterprise Alliance, LLC

Family firms aim to survive, thrive, and outperform the competition. While a goal for family firms is sustaining success throughout the generations, the journey, regardless of who is in control, is often laced with economic interruption and disruption which, if left unattended, can lead to failure. Failure of family businesses involves substantial costs for the controlling family and its members in terms of economic and non-economic goals.

In this article, the authors share research they conducted to look further at the potential influences on family business failure. They posed a dual research question: Does family involvement in management reduce a firm’s likelihood of failure? And, is this relationship affected by a firm’s entrepreneurial orientation (EO)?

They tested their theoretical arguments on a sample of 369 Spanish manufacturing firms operating in medium- and high-technology industries. They surveyed the firms in November 2006 and subsequently tracked their survival or failure status through December 2013 to identify any events considered indicative of business failure.

Their findings included two hypotheses. The first is that family involvement in management decreases the probability of business failure. The second hypothesis is that EO negatively moderates the relationship between family involvement in management and the risk of business failure so that family involvement reduces failure rates to a greater extent for firms with lower levels of entrepreneurial orientation. The authors suggest that entrepreneurially-oriented family managers strive to achieve a delicate balance, one that often entails tradeoffs between business performance and family goals.

While the research indicates family management combined with lower levels of EO has a more positive impact on survival, an absence of EO is not a viable possibility given the unavoidable nuances, market pressures, and paces of change in the external environment.

As practitioners, our focus is to help family, ownership, and management understand the situation, differentiate between family ownership and family management, design and integrate strategies for turnaround, and create the environment and culture in which the delicate balance can be achieved and sustained. Some possible ways to do that follow:

  1. Help families understand the tradeoffs between family-centered goals and the realistic demands placed on business performance. Family members first need to know what this means in order to understand the tradeoffs. Achieving the balance of the two not only includes increasing family involvement in management but also blending in some new and revised innovation, risk-tolerant decision making, and management strategies that align with ownership values. This might be a good time to conduct a values exercise for the family, addressing individual and collective commitments to unity, survival, legacy, sustainability, involvement, risk, innovation, discovery, initiative, resourcefulness, failure, wealth, collaboration, and outside involvement from other non-family experts who can make contributions to advancing family, management, and ownership goals.
  1. Create a clear distinction among family, ownership, and management roles. The owners’ group also should hold a planning retreat or meeting focused exclusively on ownership (versus including family and management) during which definitions, values, vision, goals, needs, resources, and, as importantly, functional roles are clearly identified. A resulting deliverable from this meeting should be an owners’ plan which then becomes a planning guide for the management team. A briefing of the results should be shared with management in an open forum to inspire understanding and participation.
  1. Have management create a turnaround strategy using the owners’ plan to establish direction. This should integrate existing practices that serve a purpose and eliminate those that exacerbate the disruptions. During this planning retreat, management should clarify intended goals, plans for mobilization of resources, ways in which progress will be measured, ways in which culture shifts will be incrementally made, and the roles of each manager. Be sure to discuss why and how each management role and its functions will impact the turnaround and reversal of negative trends. Determine what information and data points each manager will need to know to track how they are supporting the owners’ goals. Encourage the managers to agree on a one-page information dashboard or control sheet that is commonly referenced by all decision makers.
  1. Create a perspective-diverse experience-shifting culture council (or new practice team). This will help cultivate an environment that allows the merits of family management to co-evolve together with the beneficial refinements introduced by some, albeit, lower level of controlled entrepreneurial orientation. This might inspire participants to productively shift their mindsets away from the comforts and confines of the status quo and move toward new or enhanced practices that reflect the family-centered and ownership values, respect the family ownership thresholds for risk-taking, and honor the unique factors influencing the delicate balance being created. Representatives from family, ownership, management, the employee base, customers, industry, and a bellwether confidant with keen insight into the possibilities the future might present all make great candidates for participation on this council.

While these suggestions are not exhaustive, they do represent some ways in which family firms experiencing economic disruption have reversed negative economic trends, created positive shifts in performance, and simultaneously reinforced family unity.

About the contributor

Kim Schneider Malek, FFI Fellow, is founder of Family Enterprise Alliance, LLC. She specializes in helping families, businesses, and boards navigate unity, succession, governance, culture shifts, new practices such as Awepreneurship, and collaborative educational experiences. Kim is a Global Education Network (GEN) faculty member teaching GEN 201, Family Enterprise Advising and Consulting: The action research model as applied to family enterprise. She was the founding co-editor of The Practitioner and also served for 15 years as adjunct graduate-level faculty teaching family enterprise sustainability at the University of Denver’s Daniels College of Business. Kim can be reached at kim@advancingfamilyenterprise.com.

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