Balancing socioemotional wealth and financial goals in family business

Family firms are integral to the global economy, driving positive change by pursuing both financial objectives and the generation of socioemotional wealth (SEW).

Developed by Prof. Luis Gómez-Mejía, socioemotional wealth in family firms encompasses a number of non-economic factors including family control, values, legacy, transgenerational vision, pride of belonging and emotional connection.

The dual role of family businesses as economic and social drivers has sparked global debate in terms of their capaciity to effectively balance SEW with financial goals.

In my recent meta-analytical investigation, I explore this issue in depth in order to shed light on the complex impacts of SEW on firm performance.

SEW: a double-edged sword

SEW is often perceived as a double-edged sword. While it promotes deep commitment and a positive family legacy, it can also lead to less than optimal financial decisions.

Despite this possibility, our study suggests that financial objectives and SEW goals can be mutually compatible.

The role of SEW in strategic decisions

SEW influences the decision-making process in family firms, sometimes leading to limited diversification, risk aversion and other conservative approaches.

On the positive side, SEW-oriented strategies can also promote loyalty, sustainable growth and the development of niche markets.

For the leaders of family businesses, the first step entails a careful consideration of how SEW impacts their decisions and finding a balance that doesn’t undermine long-term organizational performance.

Corporate governance

Based on our findings, family firms that prioritize SEW might bypass conventional corporate governance best practices, favoring family control over external management expertise. That said, our study found that non-conventional governance systems did not necessarily lead to poor financial outcomes.

To maximize their performance, family businesses should build governance systems that support both SEW and financial goals, ensuring family members possess the necessary expertise and hiring external professionals when needed.

Stakeholders beyond the family sphere

We found a positive correlation between SEW and stakeholder engagement: family firms that actively contribute to their communities, treat non-family employees as part of the extended family and lead socially responsible initiatives tend to perform better.

In this sense, practitioners should view stakeholder engagement not as a cost but as an investment in the firm’s socioemotional and financial wealth.

Navigating SEW dimensions for performance

Different dimensions of SEW impact firm performance in varying ways. While family control and identity can boost performance by enhancing stakeholder relationships, others such as a focus on dynastic succession might yield mixed results.

Family-owned firms should identify the SEW dimensions most relevant to their business strategies and operations and integrate those most closely aligned with their values and long-term objectives.

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