The relationship between human capital and FFs’ innovativeness: A resource-based view approach
The unique features of FFs have been widely debated in the family business research field. However, the “so what?” questions that tended to surface when unique features of FFs were discussed (Habbershon and Williams
1999), have recently started to be addressed in FF research. The RBV (Barney
1991,
2001) has been used as a theoretical perspective to explain whether the uniqueness of FFs may lead to certain advantages and disadvantages. This special bundle of resources may in turn explain performance differences between FFs and NFFs (Arregle et al.
2007; Basco et al. 2019a; De Massis et al.
2015; Habbershon and Williams
1999; Pearson et al.
2008; Salvato and Melin
2008; Sirmon and Hitt
2003). This study places familiness at its centre in examining the link between human capital and innovativeness in FFs as well as the moderation effect of board strategic leadership in managing resources.
According to the RBV, returns achieved by firms are largely attributable to their resources (Barney
1991). The resources a firm possesses are used to generate capabilities and those capabilities result in a competitive advantage for the firm that in turn leads to better firm performance (Habbershon and Williams
1999). The RBV considers knowledge as the most critical competitive asset that a firm possesses and it resides in human capital (Grant
1996; Hitt et al.
2001). Knowledge can be articulable and tacit (Lane and Lubatkin
1998). Articulable knowledge can be written and easily transferred because it is partially embedded in individual skills and partially embedded in collaborative working relationships within the firm. On the other hand, tacit knowledge is often unique and difficult to imitate and therefore has a higher probability of creating strategic value (Lane and Lubatkin
1998). Professionals gain knowledge through formal education (articulable) and through learning on the job (tacit). Accordingly, much of an organization’s knowledge (articulable and tacit) resides in its human capital.
Research into NFF contexts suggests that human capital attributes (e.g., education, skills and experience) affect a firm’s outcomes. For instance, employees with higher education may contribute to business development, innovation and R&D investments. Moreover, board research in a NFF context emphasizes the positive link between human capital (board) and strategic decisions. However, the distinctive features of FFs means that these NFF results cannot be transferred to the FF context (Sirmon and Hitt
2003). Recent calls for research stress the importance of understanding the link between FFs’ resources and innovativeness (Calabrò et al.
2019).
An FF is defined as a public or private company in which a family (or related families) controls the largest block of shares or votes, has one or more of its members in a key management position, and members of more than one generation are actively involved within the business (Miller and Le Breton-Miller
2005, p. 2). Based on this definition, a common feature of FFs is the relevant involvement of controlling family members in ownership, management as well as governance (e.g., board membership), shaping both strategic and daily activities. Family members’ involvement in both business and family relationships in their personal and professional lives may create advantages as well as disadvantages with respect to resources (Arregle et al.
2007; Habbershon and Williams
1999; Pearson et al.
2008; Sirmon and Hitt
2003). Familiness is used as an umbrella concept referring to outcomes relating to family involvement and interactions (Chrisman et al.
2004; Habbershon and Williams
1999 Basco et al,
2019a, Basco et al,
2019b).
Family control and influence may have both positive and negative effects on FFs’ human capital. Positive effects can be explained through certain conditions created on the stock of human capital (Gómez-Mejía et al.
2007). FFs pursue non-financial goals such as creating and maintaining trust-based, long-term relationships with firm-internal stakeholders (e.g., employees, managers) (Berrone et al.
2012). Due to such relationships, FFs’ human capital can be thought to have positive attributes like commitment to business, motivation, firm-specific tacit-knowledge. For instance, De Massis et al. (
2015) have emphasized that higher motivation, cohesiveness and commitment in FFs may enable FFs to “mitigate the drawbacks that characterize the use of functional organizations (e.g., communication problems, conflicts between the functional heads) and to manage the complexity of product innovation projects...” (p. 14). Moreover, the characteristics of a member of a FF (employees, managers) create strong identification with the firm and motivation to collectively pursue goals. This enables innovation activities to be administered with a high level of decision autonomy (De Massis et al.
2015).
On the other hand, the goal of control and influence can lead FFs to rely exclusively on family members. This can lead to a shortage of qualified personnel (Karra et al.
2006). The dark side of altruism may even result in hiring and promoting more and more family members beyond their capabilities (Schulze et al.
2003). Moreover, qualified managers may avoid FFs due certain barriers (e.g., exclusive succession, limitations on wealth transfer). In addition, unfair human resource management practices may reduce employees’ incentive to invest in firm-specific knowledge (Miller et al.
2008).
Research on the relationship between FFs’ human capital and FFs’ innovation is scarce (Calabrò et al.
2019). We are aware of only one study which rejects the idea that FFs cannot attract and retain qualified employees (Llach and Nordqvist
2010). Llach and Nordqvist (
2010) indicate that FFs have a stronger human capital base to enhance innovation than NFFs. Moreover, Salvato and Melin (
2008) indicate that it might not be the access to resources that causes problems for FFs, but the social interactions between family members in management. Chrisman et al. (
2015) emphasize that a FF’s decision to innovate or not may be related to willingness, family control and influence, rather than ability and access to critical resources. In addition, several studies indicate that when FFs are willing to innovate, they can be more innovative than NFFs (Calabrò et al.
2019; Chrisman et al.
2015).
Building up long-term, trust-based relationships with employees and managers may have a positive impact on FFs’ human capital (Miller and Le Breton-Miller
2005). Due to these relationships, tenure appears to be substantially longer in FFs than NFFs (Lansberg
1999), leading to high levels of experience as well as firm-specific tacit knowledge. Long tenure provides managers and employees with experience and deep tacit knowledge of the business, clients, markets and technologies. This knowledge can help them to continually introduce incremental improvements to their products and processes. Employees and managers with higher firm specific tacit knowledge and technical skills, as well as managerial talents, can be expected to positively influence innovation in FFs (Nordqvist
2005). High levels of human capital within a firm are beneficial within the innovation process (Hadjimanolis 2000) since “a firm’s innovative performance is at least partially a function of the value of its human capital” (Rothaermel and Hess
2007, p. 899). The interaction of experienced and skilled employees leads to further accumulation of tacit knowledge, which in turn fosters the development of new technologies (Dosi
1982). Employees are a potentially important source of creativity and innovation in organizations. Informal interactions between employees are good facilitators of tacit-knowledge utilization. The innovation process can be facilitated by interactions and by the effective sharing of tacit knowledge (Koskinen and Vanharanta
2002).
We therefore expect that the high level of commitment and tacit knowledge among employees (Sirmon and Hitt
2003) in FFs will foster the transfer of valuable ideas across hierarchies and departments (Bammens et al.
2015). This will contribute to the introduction of new products, services and processes. Thus, we formulate:
Hypothesis 1:
There is a positive relationship between human capital and FFs’ innovativeness.
Board strategic leadership to manage FFs’ resources
Several FF scholars have emphasized the importance of exploring the contingency effects associated with the understanding of RBV in the context of FFs by keeping in mind that resources need to be strategically deployed and leveraged (Chrisman et al. 2003; Habbershon and Williams
1999; Sirmon and Hitt
2003). Sirmon et al. (
2007) also support this view and note that “heterogeneity in firm outcomes under similar initial conditions may result from choices made in the structuring, bundling, and leveraging of resources” (p. 275).
Human capital is a FF’s repository of valuable knowledge and skills with certain attributes (e.g., tacit knowledge, commitment, motivation due to familiness). However, fully benefiting from this important resource requires strategic management (Sirmon and Hitt
2003). Strategic leadership helps firms assess how resources should be allocated for greater innovation and risk-taking (Thomke and Kuemmerle
2002). For example, research into FFs demonstrates that strategic planning of innovation processes by top management teams has positive effects on innovative capacity (Eddleston et al.
2008) and corporate entrepreneurship (Kellersmans and Eddleston 2006). Corporate entrepreneurship refers to the entrepreneurial activities within an organization that are designed to revitalize the company’s business by changing its competitive profile or by emphasizing innovation (Zahra
1995; Ferreira et al.
2019).
We argue that boards of FFs can play a strategic leadership role in managing FF resources. Strategic leadership in managing resources is composed of four actions: evaluating and changing resource stocks, configuring and leveraging resources (Sirmon et al.
2007). The first step is evaluating current human capital and making necessary changes. Effective strategic leaders should know the skills and capabilities of the people with whom they work. It is equally important to identify whether those employees have the ability to learn and develop new capabilities. These two evaluations can be key in assigning a job to the right person. If qualified people are scarce, the initiative must be taken in order to change human capital resources (bringing in new employees or managers). Once human capital resources are secured, configuring begins which can be seen as the leaders’ coordination in matching task requirements to employees’ skills and capabilities. The last step involves leveraging activities of qualified employees who are assigned to particular work groups to accomplish certain tasks and goals. To this end, a strategic leader (a manager of the R&D team) should manage group activities by providing the direction, facilitation and empowerment to enable group members to realize their potential.
However, to display such an important role at the group level, strategic leaders need to have the required social capital. Social capital is the goodwill and resources made available to an individual and organization via reciprocal, trusting relationships that facilitate action and create value (Adler and Kwon
2002; Hitt et al.
2002). While internal-social capital involves the relationships between individuals or groups working in the organization, external social capital involves relationships between the organization and external parties (Adler and Kwon
2002).
Formation of internal social capital, (social capital formed by family members in FFs), can be as critical an aspect of strategic leadership as managing resources (Sirmon et al.
2007). Familiness might turn internal social capital into a resource which is valuable, rare, costly to imitate and without substitutes (Arregle et al.
2007; Salvato and Melin
2008). Thus, familiness, a distinctive feature of FFs, can turn strategic leadership of boards of FFs into a competitive advantage. This explains how FFs are different from other organizational forms.
Formation of internal social capital requires some conditions. This leads to the accumulation of capabilities such as access to efficient information and exchange, accumulation of social capital and collective actions that might benefit FFs. Stability and time, closer interdependence and interaction are conditions that lead to structural aspects (e.g., network ties), relational aspects (e.g., trust, norms, obligation), and cognitive aspects (e.g., shared vision and goals) of internal social capital.
Social capital is built on lasting investments in social relationships (Bourdieu, 1986) and requires a significant amount of time to develop and grow (Coleman 1988). Continuity in social structures increases the clarity and visibility of mutual obligations (Misztal 1996), as well as the development of trust and norms of cooperation (Hitt et al.
2002). The long-term goals of the family are survival of the business and control over the firm. These help to build the lasting relationships and stability necessary to generate social capital (Arregle et al.
2007).
Developing and protecting social capital requires substantial mutual interdependence (Nahapiet and Ghoshal 1998). Conversely, when individuals are less dependent upon one another, social capital erodes (Coleman, 1988). Interdependence is largely a function of joint and shared interests and an agreement toward shared goals (Gersick et al.
1997). As mentioned before, the founders’ goal of keeping control of family business within the family is likely to result in family members being appointed to key managerial positions. While family managers may need to get advice from the founders when managing the firm, they often possess task-department-market related tacit knowledge which is key in making critical decisions. Leana III and Van Buren (
1999) argue that for social capital to contribute to organizational capabilities of collective action, it has to be jointly owned by interdependent actions of members.
Interaction is required to develop and maintain social capital (Adler and Kwon
2002). Indeed, “while interdependence shapes the degree to which vision and goals are developed and shared among group members, interaction reflects the quantity, quality, and strength of those relationships among group members. Social ties and relationships tend to be strengthened with interaction and weakened without it” (Arregle et al.
2007, p. 962). Family members, may continue to interact and facilitate ties and relationships during working hours, performing overlapping roles as manager and board member. These interactions may produce more social capital as actors have the opportunity to get to know each other, share important information and create a common point of view (Tsai and Ghoshal 1998).
Finally, closure may lead to the development of social capital (Nahapiet and Ghoshal 1998). In fact, it “can be interpreted loosely as the degree to which boundaries exist, which prevent external influences and enhance internal focus on such management activities as information sharing and decision making” (Arregle et al.
2007, p.961). For example, the possibility of opportunistic behaviour within a social group is minimized by a high density of ties among members and the accompanying threat of group sanctions against violators (Portes 1998, p. 6). It facilitates the development of trust, norms, identity (Coleman, 1988; Ibarra, 1992), and unique codes or language (Boland and Tenkasi, 1995). Arregle et al. (
2007) argue that closure is particularly strong in FFs. In turn, internal social capital may generate certain capabilities. The capabilities derived from internal social capital are identified as efficient access to information, tacit knowledge, professional experience as well as collective action in accomplishment of shared goals (Arregle et al.
2007). Internal social capital may contribute to innovation by motivating the cooperation, communication and coordination among different members in a firm (Adler and Kwon
2002; Nahapiet and Ghoshal 1998). Research demonstrates that internal social capital is positively associated to FFs’ innovativeness (Sanchez-Famosa et al. 2014). We argue that these capabilities may contribute to successful implementation of strategic leadership in managing FFs resources (Sirmon et al.
2007). Therefore, family involvement in boards can provide important leadership advantages that are unlikely occur in boards of NFFs.
Moderating effects of board strategic leadership: Increasing family involvement in boards
Because of the strong socioemotional ties to their firms, founders attempt to introduce children to the business at a young age, gear their education toward the business, create succession plans based on promoting family members, keep the founder or older generations active in the firm, and keep ownership within bloodlines (Birley et al. 1999; Calabrò et al.
2018). Such ties also shape FFs’ board composition, such that boards are dominated by family members of different generations (Basco et al. 2019; Voordeckers et al.
2007). Moreover, familiness means that “role overlap” is common in FFs (Anderson and Reeb
2004). From this perspective, a family board member and manager may possess firm-department related tacit knowledge and develop social relationships with employees. These together may help him/her to evaluate employees’ skills and capabilities, assign them to the right tasks and facilitate group activities to achieve goals. Hence, a family board member can be more effective than a non-family board member in evaluating and changing resource stocks and configuring and leveraging resources.
However, it is possible that no single family board member has all the information on the bundle of human capital. As family board members share a common goal (introducing new products and services) each may individually share information about the existing human capital stock and together evaluate whether qualified employees or talented managers are available in the FF to achieve the shared goal. Because of familiness, family directors may influence how the available human capital is bundled and leveraged (Sirmon et al.
2007). Benefiting from family directors’ social capital can facilitate the coordination of activities and projects across various functional units, increase the effectiveness of board decision-making processes and support the implementation of decisions (Hitt et al.
2002). Developing and managing resources may contribute to building FFs’ innovative capacity which has been shown to be positively related to performance (Eddleston et al.
2008). Therefore, an increasing number of family directors may enrich the pool of relevant information and perspectives within the board as well as the stock of available firm-related tacit knowledge. Furthermore, such boards display a stronger strategic leadership in managing and leveraging FFs’ human capital which fosters the generation and transfer of valuable ideas across hierarchies and departments (Bammens et al.
2015). Thus, we hypothesize that:
Hypothesis 2:
The relationship between human capital and FFs’ innovativeness is moderated by the family board ratio in such a way that the relationship is stronger with increasing levels of family board ratio.