Succession: How family firms balance conflicting goals

A new study published in the Journal of Management Studies has analysed several real-life family firms to see how they balance conflicting goals, and how this can sometimes lead to idiosyncratic company behaviour.

Decision-makers in all firms ­– and family firms in particular – face temporary goal tensions which cannot be solved, only managed. For instance, family firm decision-makers often emphasise non-economic goals that are significant to the family such as trans-generational succession, preservation of family harmony, family reputation and identity, and the perpetuation of family values.

“As a family member after 110 years, I see a lot more value in the business than an outsider could offer,” said a fourth-generation managing director of a family business interviewed for the report. “How do I bridge the gap in my own value and in my own history and my own family growing up, and being a serious, successful business? How can I see that I would sell it for eight years’ profit, for instance?”

While economic and non-economic goals might converge in the long term, they often lead to decision-making tensions in the short term. Investigating the precise mechanisms through which family firms manage perceived tensions between economic and non-economic goals is important, as goals affect decision-making, which in turn determine the strategies that family firms pursue and, ultimately, their performance.

Sensemaking and sense-giving
There is an extensive body of research exploring how decision-makers make sense of situations and how that sensemaking influences their organisational process. Organisational members endeavour to clarify novel, ambiguous, confusing, or unexpected situations by interpreting cues from their environment and trying to make sense of what has occurred through the creation of meaning.

While sensemaking is concerned with how managers interpret and make sense of information, sense-giving is another important step in the sensemaking process. It refers to how decision-makers attempt to communicate their thoughts to others. In this regard, sensemaking and sense-giving cannot exist without each other.

A sensemaking-sense-giving perspective
In a recent study published in the Journal of Management Studies, researchers Vanessa Diaz-Moriana, Eric Clinton and Nadine Kammerlander used a sensemaking and sense-giving perspective to understand how family firms manage the tensions that can manifest between economic and non-economic goals when making decisions. To answer this question, they analysed eight private Irish family firms, comprising 59 interviews, 501 items of archival data and 39 observations.

They identified three sensemaking mechanisms – ensuring continuity in the family firm, preserving family cohesion, and delegating responsibilities to trusted advisors – that assist family firm decision-makers in managing these goal tensions. 

Moreover, they found that sense-giving, based on three different values – sense of commitment, community embeddedness, and family firm identity – helps family firm decision-makers to justify and communicate their decisions. 

“I understand where we have come from and the desires of the previous generation to offer family members employment opportunities… but we could not give everyone a job; sometimes the best person for the job was not always a family member,” said a deputy managing director and second-generation family member from a farming legacy interviewed for the report.

Their results reveal that when family firm decision-makers perceive a temporary goal tension, they attempt to reconcile their economic and non-economic goals by adopting a sensemaking mechanism related to the specific goal tensions, and thereafter, they use a sense-giving mechanism to justify and communicate their decision.

“I'm not going to lie, the process wasn't easy, and at times it often opened more wounds than it healed,” said a commercial director and sixth-generation family member. “Indeed, I would say it [their governance structure] is not perfect, but on the whole, it has been for the best.”

What does this mean for family firms?
The study provides a better understanding of the management of goal tensions in family firms. Prior research on family firm goals has acknowledged that these firms pursue both economic and non-economic targets, but this study moves the conversation beyond an ‘either/or’ approach. Instead, it shows how family firms aim to balance conflicting economic and non-economic goals, depending on the specific goal conflict. 

Furthermore, this research advances knowledge on sensemaking in family firms by revealing how sensemaking can explain idiosyncratic family firm behaviour and how family firm decision-makers use specific values when ‘giving sense’ to justify their decisions. 

“A lot of work has been undertaken on family governance,” said a managing director and sixth-generation family member. “We have a family constitution and shareholding agreement; they are used as means to balance family interests [connection to customers] and business aspirations [acquisitions]. Our shareholding agreement stipulates that shares are not allowed to be passed to those that are not family by blood [not in-laws].”

Lastly, the study can inform research on mixed gambles, as the trade-offs of non-economic versus economic goals go along with potential gains and losses that family business decision-makers need to consider in a complex sense- and decision-making process.

For case studies and more information, read the full paper here.