With corporate responsibility gaining traction around the world, more and more business leaders are considering the ethical dimensions of management. Among global scholars, pension funding is one of the hot-button topics under review.
Employee pension schemes are common in the U.S. and might soon expand in Europe, where governments are considering hybrid models to solve the troubling tensions in public systems.
At its core, pension funding holds significant ethical weight – after all, how firms fund their pension schemes directly impacts the future well-being of their employees. My recent research delved deeper into this issue, especially as it relates to family firms as the primary driver of global economic wealth.
In light of their socioemotional ties, do family-owned businesses act more ethically vis-à-vis employee pension funds?
This is one question our study aimed to discover.
Pension underfunding and family firms
Beyond the end-all of financial profit, family businesses are staunch defenders of creating socioemotional wealth (SEW), encapsulated by non-financial values like reputation and enduring familial governance.
For family firms, the decision to underfund the employee pension scheme would pose an ethical dilemma, and potentially undermine their esteemed standing and deep-rooted affiliations with employees and the wider community.
Indeed, the short-term advantages of pension underfunding, such as low-cost financing by circumventing resources, pale in comparison with the resultant adverse repercussions.
Three potential mitigating factors
Within this framework, our study suggests that family-centric businesses are less inclined to underfund pensions in light of their reputational risks, while integrating three mitigating factors into the equation:
1 – Financial turbulence
Under financial duress, family firms perceive risks for both their emotional wealth and their long-term sustainability. These circumstances might increase the likelihood of pension underfunding, thus diluting the effect of our core hypothesis.
2 – Generational stage
Evidence suggests intergenerational differences in terms of family members’ management approach and personal identification with the firm, whereby first-generation members feel more personally exposed and connected to the firm compared to subsequent generations.
Under this construct, first-generation leaders might be more ethically inclined and attentive to ethical pension funding, with a tapering-off effect in later generations.
3 – Eponymous family firms: the power of a name
Names hold significant meaning in all social domains, and the business arena is no exception. In the realm of family business, companies that bear the name of their family owners create a direct association with the family and the brand, making eponymous family firms less likely to underfund pensions.
Driven by SEW, family firms generally align with employee interests, especially with regard to pension underfunding. Among the family firms included in our study, they prioritized preserving their family’s reputation and adhering to ethical standards.
Surprisingly, pension underfunding levels were not influenced by financial distress, implying that family firms continue to follow their ethical compass even in times of turbulence.
Lastly, as hypothesized, later-generation leaders and non-eponymous firms were found to be less cautious about pension underfunding, possibly because of weaker personal ties to the firm’s foundation and reputation.
Family firms have unique emotional ties to their business, yet our study shows, they are not immune to the common challenges and pressures faced by their non-family counterparts.
At the same time, our conclusions should serve as a reminder for family firms to ensure the ethical management of their employee pension schemes and their transcendence across generations.