Innovation and Family Wealth

Special Topics

“The arrogance of success is to think that what you did yesterday will be sufficient for tomorrow.”

We don’t know whether 19th century English clergyman William Pollard had family business in mind when he penned those words, but their application to successful family businesses is undeniable.

If everyone recognizes that innovation is a desirable trait for family businesses, what family and business attributes are most conducive to fostering an innovative culture? Recently published academic research from Vasiliki Kosmidou and Manju K. Ahuja highlights the relationship between innovation and family wealth. Their article, “A Configurational Approach to Family Firm Innovation” appears in the June 2019 issue of the Family Business Review. Our goal in this post is to introduce some of the authors’ most relevant findings to family business directors, translating, as we do, into a less academic idiom.

What is Innovation?

In order to draw statistical conclusions regarding a concept as potentially nebulous as “innovation,” the researchers asked the following question of the family business owners in their sample:

To what extent has your company placed emphasis on the following activities over the past 3 years?

a – Developing radically new products
b – Introducing radically new products
c – Incrementally upgrading existing products
d – Leading the industry in introducing breakthrough products to the market

What about your family business? If you were responding to the authors’ survey, how would they assess your family business’s innovation? As a director, what are you doing to foster an innovation culture at your family business?

From a more quantitative perspective, many of our clients measure and track their vitality index. When measured over time, the vitality index, calculated as the ratio of new product revenue to total revenue, provides a gauge of how successful prior innovation efforts have been. Current innovation efforts can be measured by calculating research & development expense as a percentage of revenue.

For all but the sleepiest industries, the question is not whether innovation will occur, but rather whether your family business will be leading – or reacting to – trends in innovation. Your family business’s overall strategy should determine its posture toward innovation. Do your family shareholders understand how innovation fits in with your corporate strategy? Do your innovation priorities align with what the business means to the family?

What is Family Wealth?

Not all forms of family wealth can be measured in dollar terms. Recognizing this reality, academic researchers emphasize the concept of socioemotional wealth (SEW). In this study, the authors evaluated SEW along three separate dimensions: family continuity, family enrichment, and family prominence. The diagnostic questions used to measure SEW are fascinating, and family business directors would do well to think about how they would respond along the various dimensions.

Family Continuity Dimension

a – How important is it that the business gives the members of your family an opportunity to work as a unit?
b – How important is it that the business gives the members of your family an opportunity to make decisions together?
c – How important is it that the business gives the members of your family an opportunity to work toward agreement?
d – How important is it that the firm remains in the hands of the family and that the business decisions are directed at developing and motivating future generations toward taking over control of the firm?
e – How important is it that the company serves as a vessel through which your family values are maintained and promoted to younger generations of family members?

Is your family business a unifying force for your family? For non-enterprising families, there is often very little connection to relatives beyond the range of first cousins. In contrast, multi-generation enterprising families often maintain robust connections at the level of second cousins and beyond. How much value does your family ascribe to continuity?

Family Enrichment Dimension

a – How important is it that through operating a business enterprise, you can ensure the enhancement of happiness of your family not directly involved in the business?
b – How important is improving the family life and the relationships among family members through operating your business?
c – To what extent do the needs of your family, such as the need for employment, affect the business-related decisions?
d – To what extent do the needs of your family, such as the need for financial stability, affect the business-related decisions?
e – To what extent do the needs of your family, such as the need for belonging, affect the business-related decisions?
f – To what extend do the needs of your family, such as the need for intimacy, affect the business-related decisions?

What constitutes success for your family business? Do you and your fellow directors identify success in the same way as your family shareholders? If you are an independent director, to what extent do you consider the non-financial perspectives on success implied by the family enrichment questions? Or should you even attempt to do so?

Family Prominence Dimension

a – If it is important that the family gain recognition and appreciation in your community, as a company you will engage in actions that have the greatest potential to benefit the family in this regard.
b – How important is it that the family can benefit from social relationships developed through your business?
c – How important is it that the business can benefit from your family relationships?
d – If family reputation is important, as a family you will strive to conduct business in ways that do not jeopardize the family’s reputation (i.e., ethically, honestly, respectfully)

How closely is your family identified with your family business? Are family members visible in marketing and promotion efforts? Or, does your family prefer to remain “out of the spotlight?” Are your family members aware of/accept the potential link between personal behavior and business performance?

The SEW factors are a great reminder to family business directors that family wealth is broader than simply the size of the family checkbook or investment account.

Family Wealth as a Predictor of Innovation

The heart of the research paper is an attempt to correlate innovation in family businesses to family wealth and other potentially explanatory attributes (generational involvement, presence of non-family senior executives, and the operating and competitive environment).

The researchers identified six “causal configurations,” or unique factor combinations, that characterized high innovation family businesses. We can summarize their results as follows:

  • When SEW is not present in any of its forms, innovation is high only when the operating environment is adverse. In other words, in the absence of SEW, family businesses pursue innovation only when “forced to” by the external environment.
  • When SEW is high, family businesses are innovative in favorable external environments. In other words, “wealthy” families appear to be motivated/willing to pursue innovation proactively, even when it does not appear that there is any immediate “need” to do so.
  • For family businesses that score high on the family prominence dimension, innovation seems to follow even when the family continuity and family enrichment dimensions are weak and the environment is adverse. In other words, securing and maintaining reputation is a powerful motivator for corporate innovation.
  • When the family prominence dimension is weak, but the family continuity and enrichment dimensions are strong, innovation can actually be impaired, especially if senior, non-family managers are not present. In other words, an emphasis on the internal dimensions of family wealth and a desire to keep management of the business in the family can actually inhibit innovation.

Conclusion

Well, so what? Why should family business directors care about the link between family wealth and innovation? We think the paper is noteworthy for a few reasons. First, it reminds directors of the importance of innovation in sustaining the family business. Second, the broader definition of family wealth, and the diagnostic questions regarding SEW provide thoughtful directors with plenty to chew on. Finally, the findings help directors critically evaluate how perceptions of family wealth and other factors may be influencing the innovation culture of the family business.