Emotions and Family Business Creation: An Extension and Implications

In their article “Experiencing Family Business Creation: Differences Between Founders, Nonfamily Managers, and Founders of Nonfamily Firms,”Morris, Allen, Kuratko, and Brannon (2010) examine how family founders, nonfamily managers working in family firms, and nonfamily founders experience the establishment of a new business during the first 4 years. Their study identifies differences in the affective states and ways in which these three groups process events. Investigating differences in family founders‘ and nonfamily founders‘ emotional experiences may provide additional insight into how the entrepreneurial process in family firms is different from that in nonfamily firms and help build an overarching theory of the family firm (e.g., Chrisman, Steier, & Chua, 2008).

In highly uncertain and ambiguous situations such as establishing a new firm, emotions strongly influence individuals‘ strategic judgment (Forgas, 1995). Emotions shape information processing, including risk assessment and strategy formulation (Mittal & Ross, 1998). In fact, emotions “can sometimes outweigh rational considerations in decision making and other cognitive processes” (Baron, 2008, p. 331). In uncertain situations, emotions may push an individual toward one action (e.g., deciding to pursue an opportunity) vs. another (e.g., waiting for more information). Extending Morris et al.'s (2010) findings that family founders and nonfamily founders experience venture creation differently, I suggest that because family and nonfamily founders feel different emotions during the early stages of the venture creation process, they will hold different risk–taking preferences (i.e., willingness to invest resources in order to reach an outcome; Sitkin & Pablo, 1992) and therefore will exhibit different levels of risk–taking behavior. Furthermore, I suggest that early emotional experiences may have an imprinting effect on the firm, setting the firm's course for the remainder of its life cycle.

While this commentary focuses predominantly on differences between family founders and nonfamily founders, it also addresses differences between family founders and nonfamily managers within family firms. Morris et al.'s (2010) findings that family founders and nonfamily managers experience venture creation differently contribute to a growing body of literature that addresses cognitive differences between family founders and nonfamily managers (e.g., Mitchell, Morse, & Sharma, 2003). Due to the important role that nonfamily managers may play in family firms during the start–up process, gaining additional insight into their perspective should be a high priority for family businesses (Mitchell et al.). I extend Morris et al.'s findings by suggesting that because family founders and nonfamily managers experience the early stages of the firm differently, they will have different risk–taking preferences. Thus, family firms employing nonfamily managers may benefit from these diverse strategic perspectives through unbiased and informed decision making.

Literature Review

Morris et al.'s (2010) findings suggest that although family founders, nonfamily founders, and nonfamily managers experience a similar range of emotions, the pattern of emotions for these three groups is different. Researchers conceptualize emotions as being positive or negative (Watson & Tellegen, 1985). Positive emotions are pleasant and include happiness and satisfaction; negative emotions include sadness and hostility (Watson & Tellegen, 1985). Overall, family founders describe the start–up experience as more positive than nonfamily founders and nonfamily managers. Nonfamily founders find the experience to be more stressful, exhausting, terrifying, demanding, and all–consuming than family founders. Furthermore, nonfamily managers describe the feeling that there are “no rules” as a negative experience, while family founders describe it as a positive experience.

The three groups also differ in terms of the intensity of their emotional experiences. Family founders experience the emotion of having to outwork others more intensely than nonfamily founders. Furthermore, family founders experience the emotions “no rules” and “ambiguous” more intensely than nonfamily managers. However, nonfamily managers experience the emotions of “outworking others” and “tedious” more intensely than family founders. The observed differences in family founders‘, nonfamily founders‘, and nonfamily managers‘ emotional experiences may have important consequences for their strategic judgment during the early stages of the business. The next section discusses the consequences of family founders‘, nonfamily founders‘, and nonfamily managers‘ early divergent emotional experiences for risk–taking behavior. Long–term consequences for the firm's culture, strategies, and decision making are also discussed.

Proposition Development

Venture creation is rife with affective experiences—emotions are an integral part of the process. However, how do emotions influence strategic decisions involving risk during the start–up process? Findings from the emotions literature suggest that individuals‘ emotions influence their judgment by serving as a source of information about their environment (Schwarz & Clore, 1983). Emotions influence individuals‘ judgment more strongly when the situation is ambiguous, information is limited, and decision making is intuitive rather than analytical (Forgas, 1995). Therefore, emotions may influence one's strategic judgment more strongly during the start–up process as decisions are made using heuristics or rules of thumb, rather than systematic thinking during this stage (Miller & Friesen, 1984). That is, family founders and nonfamily founders attempting to build a new firm are strongly influenced by their emotions due to the unpredictable nature of venture creation (Shane & Khurana, 2003). As such, emotions may influence individuals‘ decision making more strongly during venture creation than during latter phases when decision making is more analytical.

One important strategic decision that family founders and nonfamily founders must make during early stages is the level of risk that the firm is willing to assume. Failing to take risks (e.g., deciding not to pursue an opportunity) or taking imprudent risks (e.g., investing too much in R&D) during this time may determine the success or failure of the firm. Risk taking is an individual's or a firm's tendency to take on high–risk projects, aggressively pursue the firm's objectives, and boldly exploit potential opportunities (Naldi, Nordqvist, Sjoberg, & Wiklund, 2007). While venture creation is characterized by substantial risk taking (Miller & Friesen, 1984), family founders and nonfamily founders may hold different beliefs regarding the overall level of risk the firm should assume. Their different preferences toward risk taking may be due to differences in their emotional experiences during venture creation. Individuals experiencing positive emotions are more risk averse, particularly when much is at stake (Isen, Nygren, & Ashby, 1988). They are motivated to maintain their positive moods and thus are very sensitive to the possibility of loss (Isen et al.; Nygren, 1998). Consequently, they may perceive the utility of taking risks to be lower. On the other hand, individuals experiencing negative emotions are more willing to take risks (Mittal & Ross, 1998) due to their desire to change their circumstances and minimize their negative emotions (Isen & Patrick, 1983). When making important strategic decisions, individuals experiencing negative affect are more willing to invest resources in order to achieve a desired outcome (Mittal & Ross). Extending this logic to family founders and nonfamily managers, I offer the following proposition:

Venture creation requires both family and nonfamily founders to take risks, yet empirical evidence suggests that family firms tend to be more risk averse than nonfamily firms (Naldi et al., 2007). Indeed, the literature suggests that family firms are unwilling or unable to take risks due to the desire to protect family wealth (Schulze, Lubatkin, & Dino, 2002). However, while the desire to preserve family wealth may explain family firms‘ risk aversion during latter stages of the firm's life cycle, their positive emotional experiences may provide additional insight into family founders‘ unwillingness to take risks during early stages. Even though family founders must take risks during venture creation, they may focus on avoiding losses rather than maximizing innovation. Extending Morris et al.'s (2010) findings that family founders experience more positive emotions than nonfamily founders, I suggest that family founders will take fewer risks than nonfamily founders during venture creation.

However, despite the assumption that family firms are risk averse, evidence suggests that some family firms embrace risk (e.g., Zahra, 2005). In fact, family firms are very aggressive when facing the possibility of the loss of family control (Gómez–Mejía, Haynes, Núñez–Nickel, Jacobson, & Moyano–Fuentes, 2007). One factor that may differentiate family firms with respect to risk taking during early stages is the presence of nonfamily managers. Nonfamily managers and family founders have very different thought patterns (Mitchell et al., 2003). These differences may be even more pronounced in the start–up process, as family founder and nonfamily managers experience very different emotions during this stage (Morris et al., 2010). Because nonfamily managers find the start–up process to be more negative than family founders, it is likely that they are more willing to take risks. These divergent risk–taking preferences may have consequences for the firm's strategic decision making and ultimately its actual risk–taking behavior. Because nonfamily managers and family founders hold different perspectives, nonfamily managers may bring to light additional information about the competitive environment (e.g., benefits of investing in R&D) that family founders may overlook. By providing alternate perspectives, nonfamily managers may prompt family founders to examine factors not previously considered, thereby encouraging a more thoughtful and informed decision–making process with respect to risk. Indeed, first generation family firms benefit from taking multiple perspectives into account when making important strategic decisions (Eddleston, Otondo, & Kellermanns, 2008). Family founders‘ cognitive biases may be minimized if nonfamily managers‘ perspectives are considered during risk–related decision making. As such, nonfamily managers may influence the decision–making process in family firms such that the family firm is more willing to accept risk. Thus:

While early emotional experiences may influence family founders‘ and nonfamily founders‘ strategic orientation toward risk during early stages, they may also have more long–term effects. Differences in family founders‘ and nonfamily founders‘ early emotional experiences may explain enduring differences between family firms and nonfamily firms in terms of culture, organizational routines, and strategic paths. This is because family founders‘ and nonfamily founders‘ early experiences, feelings, and emotions may be imprinted on the firm, establishing its course. Early events in an organization's history often explain strategic choices and organizational outcomes well into the future (i.e., path dependence; Sydow, Schreyögg, & Koch, 2009). Indeed, research shows that family firms are more likely than nonfamily firms to become path–dependent (Priem & Cycyota, 2001). This is due in part to the family firm's reliance on family members, who share similar perspectives, knowledge, and experiences (Sirmon & Hitt, 2003). Early positive emotional experiences may drive initial decision making such that prudent options (e.g., safe and reliable products, technologies, and vendors) are preferred to riskier but potentially more innovative alternatives. Over time, perceptual biases and preferences often become locked–in such that they dominate organizational strategies, mental models, routines, and actions (Sydow et al.). Formally stated:

Conclusion

This commentary contributes to the family firm and entrepreneurship literatures (1) by linking differences in emotional experiences of family founders, nonfamily founders, and nonfamily managers during the start–up process to differences in risk–taking behavior, and (2) by illustrating how family founders‘ early emotional experiences may evolve into dominant organizational patterns. Much of the research on new venture creation in family firms omits emotions, despite theoretical evidence that emotions influence individuals‘ ability to respond to dynamic environments, recognize opportunities, and acquire important resources (Baron, 2008). This commentary argues that research on venture creation should address family founders‘, nonfamily founders‘, and nonfamily managers‘ emotional experiences. Family founders‘ emotional reactions to early events may develop into dominant cognitive patterns which become embedded in the firm's culture and norms, and are replicated over time. While the self–reinforcing effects of early experiences may potentially result in rigidity, structural inertia, escalation of commitment, and other inefficiencies (Sydow et al., 2009), path dependence may also have positive effects—experiencing positive emotions during venture creation may lead the family founder to adopt conservative strategies, which in turn may develop into a culture that emphasizes sustainable growth and long–term viability.

Evidence suggests that over time family firms are often more successful than nonfamily firms (Anderson & Reeb, 2003; Miller & Le–Breton–Miller, 2005). However, the mechanisms by which family firms outperform nonfamily firms are still unknown. A number of studies citing “the founder effect” suggest that the family founder's influence on the firm often translates into a competitive advantage (Dyer, 2006) perhaps due to the founder's long–term orientation and emphasis on growing and preserving the firm for future generations. Early positive emotional experiences of the family founders may be one causal mechanism by which family firms achieve higher levels of performance. A stock of positive experiences may serve as a competitive advantage for family firms and increase survival, sustainability, and, ultimately, performance. Individuals experiencing positive affect are: better able to acquire valuable human resources, more creative, and better able to tolerate stress (Baron, 2008). Accordingly, future research should address the relationship between family founders‘ early emotional experiences and firm capabilities relative to nonfamily firms. Specifically, longitudinal research that examines the relationship between early affective experiences and both proximal outcomes, such as the family's commitment to the business, and distal outcomes, such as financial performance and growth, is needed. I hope that this commentary along with Morris et al.'s (2010) findings that family founders, nonfamily founders, and nonfamily managers experience venture creation differently will inspire future research.