Professor L. R. Gomez-Mejia Texas A&M University

1. INNOVATION AND THE PRESERVATION OF SOCIOEMOTIONALWEALTH IN FAMILY CONTROLLED HIGH TECHNOLOGY FIRMS Professor L. R. Gomez-Mejia Texas A&M University

2. RESEARCH STREAM ON FAMILY FIRMS:A HISTORICAL PERSPECTIVE Influence of Values And Subjective Framing In Decision Making Ownership Structure Managerial Practices Of Family Firms TEXAS A&M UNIVERSITY MAYS BUSINESS SCHOOL

3. ROLE of VALUES and SUBJECTIVE FRAMING: Value System Makes a Difference in • Terms of How Individuals View Situations, Evaluate Information, and Arrive at Decisions • Gómez-Mejia, Page, Tornow (AMJ, 1982): Importance of jobs and how they are compensated • depends on managerial values. • Gómez-Mejia, (AMJ, 1983): Managerial values differ according to organization, national culture, • individual characteristics. • Gómez-Mejia, (AMJ, 1984): Occupational socialization reduces gender differences in values • (what employees want from organizations). • Gómez-Mejia & Balkin (SMJ, 1987): Managerial values (such as risk sharing, uncertainty avoidance, and long-term orientation) as reflected in compensation system depend on organizational and environmental characteristics (such as life cycle, firm size, firm age, presence of venture capital, Technological intensity) (Research done mostly with start up high-tech firms in Boston 128 Route). • Gómez-Mejia & Balkin (SMJ, 1990): Compensation strategy (e.g., pay at risk, decentralization, broadbanding etc.) is a reflection of corporate and business unit managerial values (for instance, a prospector orientation associated with more pay at risk). • Gómez-Mejia (SMJ, 1992): Compensation patterns (algorithmic vs. experiential) of firms are consistent and reflect broad managerial values. • Gómez-Mejia & Palich (JIBS, 1997): Cultural dispersion and performance consequences for multinational firms. Found no cultural dispersion effects on foreign investment.

4. Palich & Gómez-Mejia (JOM, 1998): Theoretical model of effect of cultural similarity and how some firms are more attracted to it than others when internationalize (e.g., family firms). • Wiseman & Gómez-Mejia (AMR, 1998): Framing of problems and managerial decisions depend on the subjective valuation of individuals of what is more or less important to them and whether they are gaining or losing ground on important dimensions. Hybrid Agency-Behavioral Model. • Gómez-Mejia, Welbourne & Wiseman (AMR, 2000): Under gainsharing, risks taken by employees in providing and implementing suggestions depends on how they frame problems. • Balkin & Gómez-Mejia (AMJ, 2000): Innovation drives executive pay in technology intensive firms (where it is highly valued) independent of financial outcomes. • Miller, Gómez-Mejia, & Wiseman (AMJ, 2002): The firm’s systematic risk influences managerial perception of control over decision consequences and this is reflected in pay-performance relations. • Makri, Lane & Gómez-Mejia (SMJ, 2006): In technology-intensive industries evidence of “pure • science” activities is used by boards to set CEO pay independent of observed financial outcomes. • Berrone & Gómez-Mejia (AMJ, 2009): Hybrid agency-institutional explanation for how legitimization and organizational values influence linkage of CEO pay-pollution independent of and financial • gains. TEXAS A&M UNIVERSITY MAYS BUSINESS SCHOOL

5. OWNERSHIP STRUCTURE • Gómez-Mejia, Tosi & Hinkin (AMJ, 1987): Impact of ownership structure on executive compensation. • Tosi & Gómez-Mejia (ASQ, 1989): Managerial power and legitimization of executive behaviors. • Gómez-Mejia & Tosi (AMJ, 1994): Ownership structure and firm performance. • Werner, Gómez-Mejia, Tosi (SMJ, 2005): Ownership and aggregate employee compensation. • Larraza-Kintana, Wiseman, & Gómez-Mejia (SMJ, 2007): Perceptions of risk by executives in new ventures and IPO firms does not follow conventional pattern in corporate strategy literature (for instance, high R and D expenditures is seen as a low risk choice). • FAMILY OWNERSHIP AND ENTREPRENEURSHIP RELATED RESEARCH • Gómez-Mejia & Milkovich (AMJ, 1976): How family values influence decisions • to offer child care benefits in a consortia setting, mostly small firms in inner city serving African Americans. TEXAS A&M UNIVERSITY MAYS BUSINESS SCHOOL

6. Gómez-Mejia (SMJ, 1988): Small (non-publicly traded) firms and exporting behaviors, mostly Miami-based family owned Hispanic firms. How they use networks in Latin America and human resource policies to foster exporting efforts. • Gómez-Mejia, Nunez-Nickel & Gutierrez (AMJ, 2001): Family ownership and managerial entrenchment (longitudinal study of 100 plus years of entire population of Spanish newspaper, mostly very small). • Miller, Hom, & Gómez-Mejia (JIBS, 2001): Family ties, pecuniary rewards and employee turnover in border town (Mexico-USA) firms (combination of survey, archival data fielded research). Family ties among employees a far more important predictor of employee turnover (negative) than compensation and benefits (not significant). • Gómez-Mejia, Larraza-Kintana, & Makri (AMJ, 2003): Family Ownership and executive compensation. Broad cross-section firms. Family CEOs get paid less but incurr little risk. • Gómez-Mejia, Haynes, Nunez-Nickel, & Moyano (ASQ, 2007): Family’s socioemotional wealth and risk taking (longitudinal study of 100 plus years of entire population of family owned oil mills in Southern Spain, mostly with under 20 employees). Preservation of family’s control and “socioemotional wealth” more important than financial gains. • Jones, Makri, & Gómez-Mejia (ETP, 2008): Family ownership, board composition and diversification (broad cross-section of firms). Specifically, affiliate directors stimulate family firms to pursue diversification strategies by sharing their knowledge and experience with family executives, and hence reducing the perceived risk that may be associated with grown strategies. Affiliates can play this advisory role without reducing the control of family owners, and this facilitates the firm’s willingness to adopt growth-oriented strategies. TEXAS A&M UNIVERSITY MAYS BUSINESS SCHOOL

7. Cruz, Gómez-Mejia, & Becerra (AMJ, 2010): Managerial trust as a function of family ties and its effect on agency contract. (Combination of archival and survey measures for 122 small family firms in Spain). • Berrone, Cruz, Gómez-Mejia & Larraza (ASQ, 2010): Saving face: Why family firms pollute less. Broad cross-section of family/non-family firms in polluting sectors. • Gómez-Mejia, Larraza, & Makri (JMS, 2010): Family ownership and diversification (broad cross-section of firms). • Gómez-Mejia, Cruz & Berrone (Annals of Academy of Management,2011). Family business governance. What we know and what we have yet to learn (80 plus pages providing critical review of family business literature). • Family firms and supply chain integration (with Elena Revilla and Veronica Villena: Decision Science, 2012. • Gomez-Mejia, L. R., & Martin, G., Stakeholder Management in Family Controlled Firms (Organization Science, 2012). • Berrone, Gomez-Mejia, Gelabert, Fosfuri. Environmental innovation, institutional pressures and firm ownership (Strategic Management Journal, in press). • Martin, G., Gomez-Mejia & Wiseman (2012): Strategic Implications of CEO compensation design: Re-visiting the behavioral agency model in family and non-family controlled firms. Academy of Management Journal.

8. Socio-emotional Wealth (SEW) SEW refers to the non-economic utilitya family receives from ongoing firm ownership and control. SEW captures the “affective endowment”of family owners, including the family’s desire to exercise authority, enjoyment of family influence, maintenance of clan membership within the firm, the appointment of trusted family members to important posts, retention of a strong family identity, the continuation of family dynasty etc. In family firms, SEW preservation is a key non-economic reference point for decision making. TEXAS A&M UNIVERSITY MAYS BUSINESS SCHOOL

9. Figure 1. Family Firm Research from a Socioemotional Wealth Preservation Perspective • Management Processes • Succession • Professionalization • Human Resource • Strategic Choices • Risk Taking • Corporate Diversification • International Diversification • Acquisition Behavior • Debt • Accounting Choices • Contingency Variables • Family Stage • Firm Size • Firm Hazard • Presence of Non Family Shareholders Financial Performance • Organizational Governance • Role of the Board • Incentive Alignment • Agency Contract Socioemotional Wealth Preservation Family Firm • Stakeholder Relationships • Stakeholder Management • Corporate Social Responsibility • Business Venturing • Role of Families in New Ventures • Corporate Entrepreneurship TEXAS A&M UNIVERSITY MAYS BUSINESS SCHOOL

10. Current Study In family controlled firms, SEW preservation is a key non-economic reference point for decision making which may drive the firm into high financial risk mode. IN HIGH TECHNOLOGY FIRMS THIS TRANSLATES INTO LOWER R&D AND LOWER TECHNOLOGICAL DIVERSIFICATION TEXAS A&M UNIVERSITY MAYS BUSINESS SCHOOL

11. INNOVATION AND THE PRESERVATION OF SEW IN FAMILY CONTROLLED HIGH TECHNOLOGY FIRMS Agency Theory Perspective & Paradox: Family owners in high technology industries would (should) tend to actively support innovation because the family normally has most of its wealth tied to oneparticular firm andlower innovation poses greater riskin these industries where product life cycles are sometimes measured in months. Hence, according to agency theory greater levels of R&Dinvestment provide the conservative family owners the least risk. TEXAS A&M UNIVERSITY MAYS BUSINESS SCHOOL

12. INNOVATION AND THE PRESERVATION OF SEW IN FAMILY CONTROLLED HIGH TECHNOLOGY FIRMS High technology, family controlled firms are less likely to pursue an active innovation strategy even when the context favors such a strategy from an economic perspective. Why this paradox? Behavioral Agency Model TEXAS A&M UNIVERSITY MAYS BUSINESS SCHOOL

13. BEHAVIORAL AGENCY MODEL BAM predicts that decision makers are willing to make risky decisions when the situation is framed in negative terms because they are‘loss averse’. Hence, “loss aversion”explains a preference forriskier actionsin order to prevent losses to accumulated endowment. TEXAS A&M UNIVERSITY MAYS BUSINESS SCHOOL

14. MAINASSUMPTION For family firms the most important reference point when framing major decision choices is the loss of SEW. Family owners are more inclined to accept greater probabilities of financial losses (for instance, losing potential market share by not pursuing an aggressive innovation strategy) if that means preservation of SEW. Families resist the economic incentive for high R&D investment because such a strategy may jeopardize the family’s socio- emotional wealth (SEW). TEXAS A&M UNIVERSITY MAYS BUSINESS SCHOOL

15. Family Ownership and R&D Investments How/ why R&D investments threaten the family’s SEW endowment? 1.The decision to aggressively expand R&D is likely to uncover existingdeficiencies in human capital(as most R&D effort is highly specialized and complex), thus requiring greater use of outsiders – loss of control. TEXAS A&M UNIVERSITY MAYS BUSINESS SCHOOL

16. Family Ownership and R&D Investments 2.R&D investments usually require willingness to experimentand the introduction of new routinesand modus operandi that move away from the firm’s “true and tried” methods of operation. A family controlled high technology firm is more likely to stay closer to the “core” because it is a choice that provokesless anxietyand one that given prior success (particularly if family founders are still active) feels more comfortable to the family. TEXAS A&M UNIVERSITY MAYS BUSINESS SCHOOL

17. Family Ownership and R&D Investments 3.High technology firms usually financeR&D expansion by securingexternal investments,either in the form of debt or by ceding ownership to parties outside the firm (such as venture capitalists or institutional investors) in exchange for much needed funding. Hypothesis 1: Family controlled high technology firms invest less in R&D than their non-family controlled counterparts- Supported TEXAS A&M UNIVERSITY MAYS BUSINESS SCHOOL

18. Family Ownership and Technological Diversification Technological diversification refers to the extent to which a firm draws from many different areas of technological knowledge. Consistent with the arguments for H1, technological diversification would tend to dilute the family’s SEW because this demands a much larger and complex knowledge base and a more diverse set of skills. Also, family firms tend to diversify less (product –wise)because of a fear of loss of control (Gomez-Mejia, Makri & Larraza-Kintana, 2010). As such, they would have a more narrow scope in terms of products / technological knowledgeand they would be less likely to have a mind set of exploration into diverse terrains. Hypothesis 2: Family controlled high technology firms diversify less technologically than their non-family controlled counterparts –Strong Support TEXAS A&M UNIVERSITY MAYS BUSINESS SCHOOL

19. Increasing the Family Owners’ Influence: Family Member-CEO Family member-CEOs are more likely to be aligned with the desires of the family when they are a member of that family. The family CEO will make strategic decisions that are closely aligned with the SEW preservation objectives of family owners. Hypothesis 3: The negative relationship between family ownership in high technology firms and R&D investment is moderated by the CEO’s affiliation, such that when the CEO is a family member the firm invests less in R&D than when theCEO is not a family member. - Strong Support TEXAS A&M UNIVERSITY MAYS BUSINESS SCHOOL

20. Factors Decreasing the Family Owners’ Influence: Declining Performance As performance declines, the pivotal reference point for family owners may shift from SEW preservation to firm survival and this wouldincreasethe family’s willingness to invest in R&D. After all, if the firm fails to survive, the family would lose both SEW and its financial welfare. Hypothesis 4: The negative relationship between family ownership in high technology firms and R&D investment is moderated by declining performance, such that family firms invest more in R&D than their non family controlled counterparts as firm performance deteriorates. Supported TEXAS A&M UNIVERSITY MAYS BUSINESS SCHOOL

21. Factors Decreasing the Family Owners’ Influence: Institutional Ownership The family may need to compromise on the pursuit of its particularistic motives when it has to contend with the presence ofinstitutional investors. Family firms are more likelyto invest in R&Dwhen they are constrained by external investors. Hypothesis 5: The negative relationship between family ownership in high technology firms and R&D investment is moderated by institutional investor ownership, such that increasing institutional investor ownership weakens the relationship.– Moderate support TEXAS A&M UNIVERSITY MAYS BUSINESS SCHOOL

22. Sample and Data Years 1994-2002 (402 firms over 9 years). 402 firms, 201 of them being family controlled and the rest (201) non- family controlled. Family firm. A firm is considered “family-owned” if bothof the following conditions are met: two or more directorsmust have a family relationship, and family members must hold a substantial block of voting stock (5%). We adopted the more conservative cut-off point of10%to determine if a firm should be included in the sample of family firms. ─ Eligible relationships included father, mother, sister, brother, son, daughter, spouse, in- laws, aunt, uncle, niece, nephew, and cousin. TEXAS A&M UNIVERSITY MAYS BUSINESS UNIVERSITY

23. Dependent Variables R&D investments.R&D expenditures / sales Technological diversification.The U.S. Patent and Trademark Office (USPTO) classifies technologies into 417 main (3-digit) patent classes.Hall et al. (2001)constructed a measure that reflects the extent to which a firm's patent cites previous patents that belong to a wide set of technologies.This measure reflects the technology breadth of a firm's patent portfolio. For each equation, the dependent variables were measured two years afterthe independent and control variables. TEXAS A&M UNIVERSITY MAYS BUSINESS SCHOOL

24. Moderator Variables Performance hazard.We use the interaction term of ROA and family control to determine if family owners are more prone than non-family shareholders to invest in R&D at lower (when the performance threat increases) rather than higher (when the performance threat decreases) levels of ROA. Institutional ownership. % of equity ownership by mutual and pension funds (the two largest groups of institutional investors), calculated as the sum of their ownership divided by common shares outstanding. Family CEO. This variable was coded as 1 if the CEO was also a family member and 0 otherwise. TEXAS A&M UNIVERSITY MAYS BUSINESS SCHOOL

25. Controls Available slackwas measured using a firm’s assets to liabilities ratio and it has been found to influence the amount of funds available for R&D (Baysinger &Hoskisson, 1989). Potential slackwas measured using the debt-to- equity ratio of the firm (Geiger & Makri, 2006). Firm riskwasoperationalized as volatility, or the log of the variance of the firm’s stock returnduring the year. TEXAS A&M UNIVERSITY MAYS BUSINESS SCHOOL

26. Descriptive Statistics – Full Sample TEXAS A&M UNIVERSITY MAYS BUSINESS SCHOOL

27. Results of Tobit Random-Effects Regression Models – Full Sample + p < 0.10 * P < 0.05 ** p < 0.01 *** p < 0.001 TEXAS A&M UNIVERSITY MAYS BUSINESS SCHOOL

28. Results of Tobit Random-Effects Regression Models for Family Member-CEO – Family Firm Sample + p < 0.10 * P < 0.05 ** p < 0.01 *** p < 0.001 TEXAS A&M UNIVERSITY MAYS BUSINESS SCHOOL

29. Results of Tobit Random-Effects Regression Models for Declining Performance & Institutional Owners – Full Sample TEXAS A&M UNIVERSITY MAYS BUSINESS SCHOOL

30. INNOVATION AND THE PRESERVATION OF SEW IN FAMILY CONTROLLED HIGH TECHNOLOGY FIRMS When families are in control of the high technology firm, innovative efforts would be weakerboth in terms of input(investments in R&D) and output(patent diversification into a broad set of technology classes) in spite of the potential economic downside of this strategic choice. The family’s negative influence is expected to be more salient when theCEO is also a family member. However, family owners do not want to failthereby fully jeopardizing SEW, and thus are willing to increase innovation investments, whenfirm performance is declining(thus threatening firm survival)andwhen other influential owners (i.e.institutional owners) demand such investments. TEXAS A&M UNIVERSITY MAYS BUSINESS SCHOOL

31. THE PURSUIT OF SOCIOEMOTIONAL WEALTH IN FAMILY CONTROLLED FIRMS PROF. LUIS R. GOMEZ-MEJIA BENTON COCANOUGHER CHAIR IN BUSINESS MAYS BUSINESS SCHOOL TEXAS A&M UNIVERSITY TEXAS A&M UNIVERSITY MAYS BUSINESS SCHOOL

32. WHY SHOULD WE CARE ABOUT FAMILY FIRMS 95% of firms start out as family firms At least 70% of firms in U.S.A. are controlled by families, including one third of Fortune 500 (e.g., Cargill, Motorola, Ford, Microsoft etc.) At least 85% of firms in Southern European countries are controlled by families and 70% in northern countries Around the world there is no doubt that families represent the predominant organizational form TEXAS A&M UNIVERSITY MAYS BUSINESS SCHOOL

33. STREAM OF RESEARCH SHOWING THAT FAMILY CONTROLLED FIRMS ARE UNIQUE IN THEIR MANAGEMENT PRACTICES Gomez-Mejia, L. R. & Milkoveb, G. (Academy of Management Journal, 1976) Population: Day Care Consortium in Minneapolis, MN. Gomez-Mejia, L., Nunez-Nickel, N., & Gutierrez, I. (Academy of Management Journal, 2001). Population: All Spanish newspaper starting in 1948. Gomez-Mejia, L., Makri, M. & Larraza-Kintana, M (Academy of Management Journal, 2003). Population: All Fortune 1,000 Firms Gomez-Mejia, L., Haynes, K., Nunez-Nickel, N., Moyana, J. (Administrative Science Quarterly, 2007). Population: Olive Oil Mills in Jaen(Spain), during 50 year period Cruz, C., Gomez-Mejia, L. & Becerra, M. (Academy of Management Journal, 2010) Population: 122 Spanish firms TEXAS A&M UNIVERSITY MAYS BUSINESS SCHOOL

34. Gomez-Mejia, L., Larraza-Kintana, M., and Makri, M. Population: Fortune 1000 firms (Journal of Management Studies, 2010 • Berrone, M., Cruz, C., Gomez-Mejia, L., Larraza-Kintana (Administrative Science Quarterly, 2010) Population: All firms reporting pollution levels to Environmental Protection Agency • Gomez-Mejia, Hoskisson, Makri, Sirmon & Campbell (Forthcoming, 2012). Socioemotional Wealth And Innovation In Family Controlled Firms. Academy of Management Journal. Population: Two Samples Of 2,000 High Technology Firms TEXAS A&M UNIVERSITY MAYS BUSINESS SCHOOL

35. KEY ARGUMENTFAMILY FIRMS ARE MOTIVATED BY MORE THAN THE MONETARY OUTCOME OF ORGANIZATIONAL ACTIVITY The family’s desire to exercise authority Enjoyment of family influence Maintenance of clan membership within the firm The appointment of trusted family member to important posts Retention of a favorable family and firm reputation The continuation of family dynasty SOCIOEMOTIONAL WEALTH is an umbrella term that accommodates all socioemotional elements of a family’s utility function that directly relate to the family’s involvement in the firm. As such, defined as “the stock of affect-related value that the family has invested in the firm.”