Commentary: "family firms and social responsibility: preliminary evidence from the S&P 500".

This commentary focuses on four themes: (1) empirical relevance of corporate social responsibility (CSR) in family firms; (2) complementary theoretical explanations to CSR behavior in family firms; (3) the need for stringent definitions in family business research; and (4) the potential for dual

Introduction

As family business research is expanding and maturing, we are seeing a wider range of topics explored and theories applied. The article "Family firms and social responsibility: Preliminary evidence from the S&P 500" by Dyer and Whetten (2005) represents an effort in this direction. These authors explore if corporate social responsibility (CSR) is approached differently in family vs. nonfamily firms using theories on organizational identity, image, and identification. CSR is a well-researched area, and theories on organization identity have been used to explain organizational phenomena in the past. However, as far as I am aware, this is the first time that these issues are approached in a family business context. Analyzing the 500 largest U.S. companies using data from Standard & Poor's S&P 500, they examine whether or not those companies controlled by families exhibit greater CSR than other companies. In a clever way, they draw on previous studies of the S&P 500 for definitions of family and nonfamily firms and for measures of CSR.

Central to their argument is that there are spillover effects between the family and their firm. Family values spill over on corporate values, bad publicity spills over from the firm to the family, and so on. Family businesses, therefore, are more likely to be more concerned about CSR and to exhibit a more positive CSR behavior. In the following discussions, I will offer comments on the article and suggestions for future research in the spirit of Dyer and Whetten along four themes. The themes are as follows: (1) empirical relevance of CSR in family firms; (2) complementary theoretical explanations to CSR behavior in family firms; (3) the need for stringent definitions in family business research; and (4) the potential for dual causality between family ownership and more generous CSR policies.

Relevance of CSR Research in Family vs. Nonfamily Firms

The topic is nontraditional in the family business context. An obvious question is if it is important and adds value. My own country, Sweden, provides a case in point, suggesting that the article is highly relevant and linked to a wider debate on the consequences of corporate ownership structures. In the 1970s, Swedish capitalist families were under a lot of pressure. Following the left-wing movement that swept across Europe, claims were made that these families made excessive financial gains at the expense of their workers. In particular, the Wallenberg family, which controlled companies such as Electrolux, Saab, ASEA (later ABB), and Ericsson, was criticized. Some people became so engaged that they even wrote songs about it! The social democrats were seriously discussing the socialization of the commercial banks, the largest one of which is controlled by the Wallenberg family.

Since then, much has changed. Apart from changes in political views, ownership of the stock exchange has shifted dramatically. Institutional investors now dominate the stock exchange, including a rapid increase of international institutional capital. Currently, worries are quite different. In the media, institutional owners are viewed as ruthless short-term investors, only interested in the next quarterly report, ready to shift their investments or close plants at a whim. The major problem is that these investors are faceless so it is impossible to hold them accountable for the consequences of their decisions. Industrial families, including Wallenberg, on the other hand, are now viewed as responsible owners interested in the long-term viability of the firms they control. If they engage in a behavior that is not considered socially desirable, they are pressed to defend their actions in the media. Taken together, this should guarantee that they not only act in their best interest but also in the interest of their workers and society at large. Although the term CSR is rarely used explicitly in the general debate, clearly, it is a case of assuming greater CSR from family-controlled firms than from firms controlled by institutional investors.

Complementary Theoretical Explanations to CSR in Family Firms

With this background, the article by Dyer and Whetten (2006) is very timely. In developing the conceptual argument, they rely on several theories that address family ownership as well as family management and their relationship with CSR. While these theories indeed offer plausible explanations as to why family firms should exhibit greater CSR, they do not directly address what has been the major concern in the Swedish debate, namely the possibility of holding owners accountable for the outcomes of their decisions and how this influences CSR.

In many ways, the Swedish discussion is in line with the logic of agency theory (cf. Jensen & Meckling, 1976). According to this theory, monitoring and the possibility of enforcing sanctions are used as means of restricting opportunistic behavior. If either of these elements is missing so that behavior is not monitored, or if it is impossible to enforce sanctions in case of unwanted behavior, opportunism will result. Institutional owners are faceless, represented by hired company officials, and their investments are liquid. Attempts to enforce sanctions against them is difficult and somewhat like squeezing a wet bar of soap. Once you start squeezing, it will escape your grip and end up elsewhere. Owners of family firms, on the other hand, have their wealth tied to particular firms for the long term and are represented by easily identifiable, and often well-known, family members. Here, public sanctions can be more easily enforced. In particular, it is possible to influence the reputation of the family. As Dyer and Whetten (2006) explain, reputation is important to family firms, and family firms are likely to invest resources in areas such as CSR to build and maintain a good reputation. Therefore, according to agency theory logic, the threat of public sanctions influencing the reputation of family owners may serve as a mechanism for ensuring that their firms do not behave opportunistically but invest more into CSR than firms controlled by institutional owners do.

Indeed, it cannot be the task of Dyer and Whetten to conduct research aimed at informing the Swedish debate on the pros and cons of institutional vs. family ownership, but I suspect that: (1) this debate is valid to a wide variety of countries including the United States and (2) that the theoretical logic of agency theory is applicable irrespective of national context. Therefore, I believe that it provides an alternative and valuable lens for formulating hypotheses and interpreting findings concerning differences between family owners and institutional owners relating to socially desirable vs. opportunistic behavior, including investments into CSR. More importantly, to a large extent, the findings by Dyer and Whetten (2005) are consistent with the agency theory logic. They find indications that family firms do not engage more in positive social initiatives but to a greater extent refrain from actions that could be regarded as socially irresponsible. Agency theory would predict exactly this--the risk of sanctions would curtail behavior that could lead to sanctions but would not necessarily affect behavior that could lead to more positive evaluations. Agency relationships within family firms have indeed been a popular topic in family business research (e.g., Schulze, Lubatkin, Dino, & Buchholtz, 2001), but not in relation to external stakeholders. This could provide an interesting avenue for extending the application of agency theory in future family business research.

Definitions and Effects on Results

Based on the previous discussions, we would expect the authors to find substantial differences between family and nonfamily firms. Well, did they? The empirical results seem to show that to some extent, family firms exhibit greater concerns for CSR, but the differences are not very substantial. Specifically, they find that family firms have fewer social concerns than nonfamily firms, but there are no differences between the two groups concerning positive initiatives. Let me speculate on why results may be weak. First, family business research has yet to come up with a robust and generally agreed-upon definition of what constitutes a family business. These authors have chosen an inclusive definition. If the founding family has any ownership left in the company, or if members of the founding family are still present on the board of directors, they qualify as family businesses. It would be interesting to know how a stricter definition of family business would influence the findings. For example, if a combination of the two criteria were used so that both ownership and board representation were required in order to qualify as a family business, I suspect that results would have been stronger.

Second, there is also a question about the nonfamily business category. As I previously argued, the main dividing line may run between firms controlled by institutional owners and closely held firms controlled by families and single individuals. Much of the literature that the authors draw upon (e.g., Dyer, 1992; Kets de Vries, 1977; Schein, 1983) is concerned with the uniqueness of owner-managed firms. The nonfamily category ascribed by Dyer and Whetten (2005) may include firms with a very varied ownership structure. For example, the nonfamily category may include firms controlled by one or a few families, but these families did not start the company in question. Thus, if both categories contain some apples and some oranges, the difference between two types of apples will be difficult to discover.

To some extent, I can trace a parallel to entrepreneurship research. In its early days, this research was concerned with grouping entrepreneurs and nonentrepreneurs, trying to find differences between the two groups (e.g., Carland, Hoy, Boyton, & Carland, 1984). This research was not very successful, largely because it was difficult to clearly define either of the categories. Later, agreement has evolved around seeing entrepreneurship as a matter of degree, and that it is relevant to explicitly measure the degree of entrepreneurship and how it relates to other characteristics of firms and individuals. For example, at the firm level, a firm's degree of entrepreneurial orientation has emerged as a useful construct (e.g., Covin & Slevin, 1991). At the individual level, examination of the degree of entrepreneurial experience and thus entrepreneurial expertise has led to valuable insights (Davidsson & Honig, 2003).

Implicit in the argument by Dyer and Whetten (2006) are three aspects of family business thought to be particularly important in enhancing or reducing CSR. Firms can vary in their degree of family business along these dimensions. The first relates to the degree of unification of ownership and management, i.e., the degree of family government (Carney, 2005). The higher the degree of unification between ownership and management, the more the family is likely to instill values, identity, and identification in the firms and the greater its ability to enforce CSR policies. The second dimension relates to the share of the family' s wealth tied to the performance of the firm in question, and the third relates to the ability of the family to liquidate its investment in the firm. The two latter dimensions affect the severity of the penalties that can be enforced against the family by society, thus generating the reasons why family firms should be more concerned than other firms about CSR. Explication of such assumptions and an explicit measurement of the dimensions would benefit family business research.

The Dual Causality between CSR and Family Ownership

The argument that Dyer and Whetten (2006) present regarding positive moral capital as an insurance against social sanctions is particularly interesting and has consequences for how we view the causality between CSR and family ownership. They argue, quite convincingly, that families having a substantial share of their wealth tied to a particular firm are more likely to invest in building a positive moral capital. Sooner or later, the firm is likely to become involved in activities that are not viewed as socially desirable, possibly for reasons outside of their control: "[A]n accountant might embezzle large sums of money, a subcontractor may engage in sweatshop activities in a remote corner of Asia, or a technological failure may cause an ecological disaster" (p. 791). The moral capital that the company has accumulated can then help safeguard against serious consequences of such unaccepted behavior, such as consumer boycott.

If such harmful consequences are possibly due to a socially undesirable behavior and if this can occur for reasons outside of the family business' control, then an alternative to building positive moral capital can be to liquidate part of the investment in the firm instead. This would create an alternative form of insurance and is consistent with agency theory. This can be done by floating the company on the stock exchange. In other words, the family firms floated on the stock exchange (and potentially included in the S&P 500) may represent the CSR "lemons" (cf. Akerlof, 1970) of family firms--those that fail to develop a sufficient positive moral capital in terms of CSR. This selection could be an additional reason for the small differences found between family and nonfamily firms in the study. Similar arguments have been presented in the new venture funding literature. The firms turning to outside debt or equity funding are the "lemons" where founders do not believe in the viability of the company to generate a sufficient cash flow.

Therefore, if the theoretical arguments presented by Dyer and Whetten (2005) and by myself hold, there will be a selection away from family control based on CSR. CSR activities leading to positive moral capital may keep enforcing family control. The financial value of positive moral capital goes hand-in-hand with the softer qualities of identity and pride derived from positive views held by the surrounding society. This provides reinforcement for the company to remain under strict family control. The opposite development is also possible. Family businesses generating negative moral capital are likely to lose identity and pride, thus deteriorating the incentives for a strict family control, encouraging the family to liquidate part or all of their investments in the firm. This suggests that we should view the causality between CSR and family control as dual so that family ownership fosters CSR and CSR enforces family ownership concentration. There are several very large family firms around the world that remain under strict family control, remaining outside the stock exchanges. Could generous CSR policies be an explanation for this? If so, family business researchers will gain an additional legitimacy.

REFERENCES

Akerlof, G. (1970). The market for lemons. Quarterly Journal of Economics, 84, 488-500.

Carland, J.W., Hoy, E, Boyton, W., & Carland, J. (1984). Differentiating entrepreneurs from small business owners: A conceptualisation. Academy of Management Review, 9, 354-359.

Carney, M. (2005). Corporate governance and competitive advantage in family-controlled firms. Entrepreneurship Theory and Practice, 29, 249-265.

Covin, J.G. & Slevin, D.P. (1991). A conceptual model of entrepreneurship as firm behaviour. Entrepreneurship Theory and Practice, 15, 7-25.

Davidsson, P. & Honig, B. (2003). The role of social and human capital among nascent entrepreneurs. Journal of Business Venturing, 18, 301-331.

Dyer, W.G., Jr. (1992). The entrepreneurial experience: Confronting career dilemmas of the start-up executive. San Francisco: Jossey-Bass.

Dyer, W.G., Jr. & Whetten, D.A. (2006). Family firms and social responsibility: Preliminary evidence from the S&P 500. Entrepreneurship Theory and Practice, 30, 785-802.

Jensen, M.C. & Meckling, W.H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Management, 3, 305-360.

Kets de Vries, M.F.R. (1977). The entrepreneurial personality: A person at the crossroads. Journal of Management Studies, 14, 34-57.

Schein, E.H. (1983). The role of the founder in creating organization cultures. Organizational Dynamics, 12(1), 39-46.

Schulze, W.S., Lubatkin, M.H., Dino, R.N., & Buchholtz, A.K. (2001). Agency relationships in family firms: Theory and evidence. Organization Science, 12, 99-116.

Please send correspondence to: Johan Wiklund, tel.: +4636101000; e-mail: johan.wiklund@ihh.hj.se.

Johan Wiklund is Professor of Entrepreneurship at Jonkoping International Business School, Sweden. His research interests include: small business growth; the decision to be self-employed; new venture creation; and corporate entrepreneurship. He is chairman of the International Award for Entrepreneurship and Small Business Research. He is also Associate Editor for Small Business Economics, Editorial Board member of Journal of Business Venturing, Journal of Management Studies, Entrepreneurship Theory and Practice, and International Entrepreneurship and Management Journal. His research appears in the Strategic Management Journal, Journal of Management, Journal of Management Studies, Journal of Business Venturing, and Entrepreneurship Theory and Practice, among other journals.