Resilience in family firms

The Italian business landscape is dominated by SMEs, most of which are family owned and operated. These enterprises enjoy more longevity than other organizations, and this characteristic is significantly impacted by superior resilience. In other words, family firms have the capacity to be proactive in challenging times.   

Family firms have very high survival rates after catastrophic events (earthquakes, fires, pandemics, etc.) because they are better at facing emergencies and turning threats into business opportunities. Factors such as social capital, the family’s emotional wealth, more solid social relationships, and a positioning in industries that align closely with public demand and politics: all these elements taken together make family firms better able to absorb, respond and capitalize on adversity, improving their performance, both in terms of business performance and financial results. 

A recent study provides the first rigorous empirical test demonstrating that family firms are more resilient. Our work is based on an analysis of the differences in performance of family and non-family firms located in the vicinity of L’Aquila, the epicenter of the 2009 earthquake that struck central Italy, causing economic damage estimated at 10.2 billion euro. This sample was compared to a group of companies located near Milan, an area which was not impacted by the earthquake.
Our sample counted a total of 145 companies, which we divided into two groups. The first consisted of 89 firms located in the earthquake zone that had reported sales exceeding three million euro in 2009. (Although these businesses were quite small, their size was sufficient to enjoy political visibility in the local community, to have articulated ownership structures, and to guarantee accurate reporting of accounting data). The second (control) group was made up of 56 companies located near Milan, in Lombardy. For all the companies in our study, we collected official data not only from the year of the earthquake, but also from the entire period from 2004 to 2012, to have a broad temporal window before and after the event in question.
We formulated three working hypotheses that served as the basis for our analysis of how internal and external ties impact the capacity of family firms to successfully contend with adversity. The first is that they have higher profitability after the disaster, proof of their greater degree of organizational resilience. In other words, they have a superior capacity to effectively absorb the shock and to formulate specific responses; they work to exploit to their advantage what potentially threatens their very survival. A unique characteristic of family firms is that their decision-making processes are shaped by the desire to hand down the business to future generations, and by intense, enduring interactions among family members. These relatives often share the same objectives; they play active roles in the business at various levels, and they give one another moral, social and emotional support, which helps them all deal with the traumatic event in question.
The second hypothesis is that the more family members involved in the business, the stronger the post-shock profitability of the firm. Indeed, the ability to seize opportunities and reorganize the business effectively in the aftermath of sudden traumatic events depends on the network of family relationships, which foster cohesion, encourage cooperation, facilitate coordination and promote reciprocal moral and psychological support. A higher number of family members involved in the business translates into sharper focus on human and financial resources in the company.
Lastly, based on the third hypothesis, family firms that do business in industries that rely heavily on public demand know how to best exploit entrepreneurial opportunities after a natural disaster, and they achieve better financial results. The myriad social ties that that family members engage in put them in a better position to leverage every possible advantage from the situation. People personally identify the family with the company as owners; moreover, the political and social community may well recognize the identity of the owners, making it easier for them to establish strong ties within the public sector.
To make an empirical comparison between the two groups of firms in our sample, as our dependent variable we used ROA (Return on Assets), the relationship between net income and total assets. This is a common parameter for assessing the impact of governance on company performance and for measuring profitability. Among the key independent variables, the fundamental one was the nature of firm ownership (family or non-family). We also built two additional variables: one to measure the level and the structure of the family social capital, and the other to ascertain how close the ties were between the firm and the economic activity of the public sector. The results of our model indicate that the family firms in our sample showed relatively superior performance after the earthquake in terms of profitability. For firms located in the earthquake zone, we evaluated the performance reaction relative to the number of family members involved in the business, and the political proximity of the firm. Our findings corroborate that the best performance was achieved by firms with a high number of family members working in key positions, and for firms that did business in industries closely tied to public demand, a context in which family resources are particularly valuable.

Admittedly, the validity of our findings is partially limited by the unique context we explored and by the lack of more granular data. However, our study is useful in the following ways:

• Our work offers conclusive empirical proof that family firms show greater resilience after a catastrophic event; the family provides social ties and affective resources that are necessary to face and overcome the emergency.
• This research demonstrates that in the face of a natural disaster, the strong industrial, social and political relationships in family firms complement family ties in determining the superior resilience of these enterprises. Specific, local contextual conditions (such as the structure of the family, the positioning in the industry, the political network) determine and shape recovery processes.
• Our study reveals that natural disasters can offer new entrepreneurial opportunities that family firms are better at taking advantage of than other firms. In fact, family firms prove to be less vulnerable in the face of adversity, which materializes in initiatives that support reconstruction and alleviate collective suffering. By capturing these opportunities, family firms can look ahead and engage in growth after the traumatic event, while bettering their entrepreneurial and financial performance.