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Ideas for Leaders #797

Family Firms Innovate Less But Better: Their Boards Make a Difference

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Key Concept

While family firms develop fewer innovations and inventions than non-family firms, those innovations tend to be more relevant to the market. In addition, a tightly knit, well-connected board will encourage more innovation.

Idea Summary

We expect start-ups and high technology companies in general to be innovators. We know, in contrast, that large incumbents are likely to want to continue to exploit their past innovations rather than venture into new innovations that may cannibalize current products and/or ultimately fail.

How do family businesses fit into the innovation picture? A study from a team of researchers in Germany reveal that while family businesses in which family members are active participants tend to be cautious innovators, they also tend to be better innovators. That is, active family members push the family firm to introduce fewer technological innovations than non-family businesses; these innovations, however, are more relevant to the market.

To study the relationship between family involvement in family firms and innovation, the researchers first used data on family member board voting rights to identify firms in which family members were actively involved. They then analysed 1.85 million global patents successfully filed by 258 S&P 500 firms between 2006 and 2013. 

To measure market relevance, the research team enlisted three experts to individually evaluate proxy statements and 1774 product announcements made by 124 manufacturing firms from 2008 to 2013. The experts scored the new products for market relevance on a scale of 1 to 9. 

The researchers also analysed the boards of these family companies, focusing on the internal bonds among board members (measured by the average tenure of the board that would indicate how long board members had worked together) and the external networks of each board member. The strength of external networks was measured by “board interlock”—the extent to which a board member was affiliated with other firms either as a board member or as an executive.

The results of the study showed the following:

  • Family member involvement in family companies led to less new inventions from the company.
  • The market relevance of R&D innovations emerging from family companies was higher than for non-family companies. 
  • The internal bonds or external networks of board members in family companies reduce the negative impact of family member involvement on the number of innovations. 
  • If a family firm board has both strong internal networks and strong external networks, the change is radical: family involvement now increases the number of innovations above the level of non-family firms. 
  • The strength of the networks, either internal or external, had no impact on the level of market relevance.
     

Business Application

The research reveals that family involvement in innovation strategy can be both a challenge and an opportunity—and offers lessons for family members as well as board members. 

Family members should be aware of their tendency to push for fewer technological innovations. They might want to monitor their decision-making processes to uncover the decision biases that lead to this result. Another option is to get knowledgeable third-party advice on technological innovations. 

Family members and family company managers may also want to appoint technology-friendly boards to counter the technological innovation reticence of family members. 

A special effort should be made to encourage the internal bonds and external networks of board members—two factors that, especially in combination, will balance the hesitancy of family involvement.

Finally, and in contrast to the previous conclusions, the results of the study in relation to market relevance help family members argue for their continued involvement in R&D decisions. Non-family members must recognize that giving family members — emotionally tied to the success of the firm and perhaps more knowledgeable about its customers — the opportunity to be influenced and change the firm’s R&D and innovation processes can lead to new products that are more attuned to the needs of the market.

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Authors

Institutions

Source

Idea conceived

  • March 2020

Idea posted

  • July 2021

DOI number

10.13007/797

Subject

Real Time Analytics