Do family firms pay more attention to CSR?

Key insights

  • Overall, the management of family firms pays more attention to CSR
  • But not all family firms are equal: founder and family foundation ownership both do have a significantly positive effect on the attention of management to CSR, whereas latter generation ownership does not.
  • The attention to CSR is driven by the desire to increase socioemotional wealth, a desire less apparent in latter-generation owners. 

There is an ongoing debate in academia about whether family firms are more socially responsible than others. So far, research has not been conclusive. In order to further the discussion, professor Kerstin Fehre, together with a colleague from the Institute of Management at the Karlsruhe Institute of Technology, rephrased the question: “Does the management of family firms pay more attention to corporate social responsibility (CSR)?”

What’s in a name?

It is actually not surprising that previous studies have shown ambiguous results, as Kerstin explains: “First of all, there are several different types and definitions of family firms. In terms of ownership structure, they are a heterogeneous group: founder-owned, second or later generation owned, family foundation-owned. So, the question is how these studies have defined ‘family firm’. Second, corporate socially responsible behaviour means different things to different people. Is it about paying attention to social issues, donating to a good cause, or about being particularly environmentally conscious? Obviously, definitions have an impact on the outcome of a study.”

The intention-behaviour gap

“But that’s not all”, she says. “What firms actually do is not always what they intended to do. So, ideally you take a step back and instead of analysing corporate socially responsible behaviour per se, you analyse whether management pays attention to it. After all, attitude drives behaviour. That’s why we decided to analyse whether the management of family firms pays relatively more attention to CSR. In addition, we distinguished between the three types of family firms I already mentioned, in order to assess whether the ownership formula affects management’s attitude.”

Kerstin and her colleague studied a sample comprising 110 German listed firms, i.e. 30 DAX companies, 50 companies listed on the MDAX and another 30 TecDAX firms for the period 2003-2012. Ownership structure was derived from the Hoppenstedt database, which lists the voting interests of each shareholder, while attention to CSR was determined using computer-aided text analysis of letters to shareholders in annual reports.

Not all family firms are equal

“As we expected, family ownership proved to be positively related to management’s attention to CRS. But, in line with what we assumed based on existing literature, we also saw a difference according to the type of family firm. The management of firms with founder ownership and that of family foundation-owned firms put CSR higher on the agenda than their counterparts in other firms. Latter generation ownership did not have a significant effect on management’s attention to CSR, and neither did the presence of family members in the firm’s management seem to be relevant.

How can these results be explained? “Every firm aims to be financially profitable”, says Kerstin, “but the socioemotional wealth theory posits that family firms generally also try to increase their socioemotional wealth, i.e. they seek non-financial, social and affective rewards. Founders identify with their firm, which they have established according to their values. Paying attention to CSR enhances the firm’s reputation, which is inextricably linked to that of its founders. Latter generation owners, however, often feel much less connected to the firm, financially as well as emotionally. Instead, they may feel pressured to continue the family firm against their will, considering it a business investment at best. As a result, they will care little about management’s attention to CSR.”

Keep it in the family

Rather surprisingly, family foundation ownership, much like founder ownership, has a strong, significantly positive effect on the attention of management to CSR. So, while family foundations are usually set up with either a focus on business shareholding or a focus on philanthropy and welfare, the study saw the CSR effect also reflected in the business-focused family foundation. The advice Kerstin has for family firms facing succession challenges is therefore the following: “If you want to perpetuate the firm according to its founder’s vision and interests, i.e. to maintain the same approach and attention to CSR issues, you should consider setting up a family foundation. As different family generations become involved in the firm, the latter generation finds it increasingly difficult to identify with the original goals and vision. Given the results of our study, family foundation ownership could promote responsible entrepreneurship and reconcile the potentially conflicting financial and social goals.”

As an aside Kerstin points out that, in addition, their study found that founders of family companies also manage to put CSR higher on the agenda of firms in which they participate as mere shareholders. “Which seems to indicate that these founders don’t see CSR as window dressing, but something they genuinely care about.”

Lead by example

In Germany half of all listed companies are family firms, e.g. BMW, Henkel and Merck. And herein lies the practical significance of the results of this study: “Needless to say, these family firms play an important role in the socioeconomic fabric and can therefore have an impact on society and the way in which business is done. If family firms pay attention to CSR, others will have to follow suit.”

While the German context of a social market economy is characterised by a generally high level of CSR awareness, Kerstin believes their findings are also relevant for other economies. Moreover, the study makes significant contributions to the literature and provides interesting avenues for further research. “As a next step I’d like to analyse whether, or under what conditions, management’s increased attention to CSR actually leads to more corporate socially responsible behaviour in family firms.”

Source: The paper “Why some are more equal: Family firm heterogeneity and the effect on management’s attention to CSR” is published by Business Ethics: A European Review. You can also request a copy from the authors.

About the authors
Kerstin Fehre is a Professor of Strategy at Vlerick Business School. Florian Weber (PhD, Karlsruhe Institute of Technology) is research fellow at the Institute of Management at the Karlsruhe Institute of Technology (KIT), Germany.

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