Family Social Capital in Family Businesses: A Stocks and Flows Investigation

• Author: Sharon M. Danes,Clinton G. Gudmunson
• DOI: http://doi.org/10.1111/fare.12017
• Published date: 01 July 2013
• Date: 01 July 2013

CLINTON G. GUDMUNSON Iowa State University

SHARON M. DANES University of Minnesota∗

Family Social Capital in Family Businesses:

A Stocks and Flows Investigation

This study investigates family social capital

‘‘stock and flow’’ processes defined by social

capital access and use at the family-firm

nexus over time. We examined direction of

effects in associations between family functional

strength and business-related tension moderated

by firm continuation status using National

Family Business Panel data, grounded in the

Sustainable Family Business Theory (SFBT).

Families continuing ownership experienced

greater family functional continuity, which was

associated with less business-related tension

over time. Families discontinuing ownership

exhibited less functional continuity with a

family and business disengagement pattern.

Regarding bridging of family capital resources,

differences were found in human, social, and

financial capital that were associated with

family functional strength and business-related

tension for each ownership group. For both

groups, however, making family a priority

over firm was associated with stronger family

functionality. Contributions include theoretical

and methodological distinctions between family

capital stocks and flows and support for SFBT

theoretical propositions.

Human Development and Family Studies, Iowa State

University, 4380 Palmer, Suite 2313, Ames, IA 50011

(cgudmuns@iastate.edu).

∗Family Social Science, University of Minnesota, 290

McNeal Hall, 1985 Buford Avenue, St. Paul, MN 55108.

Key Words: business tension, family business, family capital,

family functioning, social capital.

Family capital is defined by Danes, Stafford,

Haynes, and Amarapurkar (2009) as the bridging

of financial, human, and social capital. Of those

three components, family social capital has

received the least attention in the family firm

literature. It is a complex construct with bonding

and bridging characteristics that traverse family

and firm (Adler & Kwon, 2002; Coleman,

1988; Davidsson & Honig, 2003). This study

focuses on internal family capital. It contributes

to Eddleston and Kellermans’ (2006) call for

research on complex family interactions that

creates a greater understanding of how family

capital contributes to or hinders, or both, family

firm sustainability. It also contributes to Danes

and colleagues’ (2009) call for theoretical and

empirical work on the distinctions between

family capital stocks and flows.

Important work on family social capital has

been accomplished by Pearson, Carr, and Shaw

(2008), describing internal social capital, and

Arregle, Hitt, Sirmon, and Very (2007), outlin-

ing propositions about family and organizational

social capital connections. These theories are in

keeping with the theory introduced in this study.

We investigated family processes around social

capital access and use at the family-firm nexus

over time by striving to unravel the direction

of effects in associations between family

functional strength (FFS) and business-related

tension (BRT) moderated by firm continuation

status. These theories recognize that family

social capital influences the family and the

business.

Family Relations 62 (July 2013): 399 – 414 399

DOI:10.1111/fare.12017

400 Family Relations

Bonding is one way social capital impacts

the family. When accessing and using bonding

social capital, those actions can solidify owning

family relationships that can build trust, internal

cohesiveness, and solidarity in shared goal

commitment. The use of bonding social capital

builds family resilience capacity epitomized

by functional strength, which assists owning

families in tackling problems that cause tension

at the family-firm intersection (Danes &

Stafford, 2011). Bonding social capital assists

in problem solving by providing secure and

consistent access to resources, creating increased

efficiency in the use of resources (Davidsson &

Honig, 2003).

Much existing family firm research, however,

uses indicators of structures such as presence

of family councils rather than indicators of

family processes to assess bonding social capital

flows. The assumption is widely made in this

research that if family capital stocks exist, that

they can be readily accessed and used for the

firm’s good. We know little, however, about

family capital flows and processes generating

these flows. Furthermore, when investigating

flows of bonding social capital, it is critically

important to distinguish concepts of resilience

capacity (a stock) and taking actions that draw

on that capacity (a flow).

Decision-making processes leading to a draw

on a family’s resilience capacity include sense

making (Shepherd, 2009). Sense making is

an interpretive process where people assign

meaning to occurrences and involves continuing

interpretations over time. Shepherd described

family sense making for those who experienced

a family firm failure. Sense making, however,

around firm sustainability is not just about

the potential of financial failure or business

mismanagement, especially for small family

firms (Danes et al., 2009). It is about expectations

and goals of owners and owning families. For

example, Stafford, Bhargava, Danes, Haynes,

and Brewton (2010) found that viewing business

as a way of life was associated with increased

duration of firm survival. Further, when studying

firm demise, Winter, Danes, Koh, Fredericks,

and Paul (2004) found the most frequent reason

for firm closure was desiring a change followed

by resource issues, retiring or selling the firm,

and health problems. This study contributes

to understanding how family processes differ

under firm continuation and discontinuation

contexts.

Understanding these owning-family pro-

cesses at the nexus of family and firm is just

as vital to understanding family firm sustainabil-

ity as understanding management and financial

dynamics of their business systems (Dyer &

Dyer, 2009). As identified by Dyer and Dyer,

family processes are largely unseen patterns cre-

ated, sustained, and modified by the family.

Those authors discuss two key challenges of

studying such processes: (a) identifying observ-

able family characteristics that are indicators of

the underlying family processes of interest and

(b) once those characteristics are identified, com-

bining in such a way as to measure the size and

shape of the underlying process of interest. This

study incorporates their methodological sugges-

tions by utilizing longitudinal data, utilizing

latent variables of the underlying family pro-

cesses, investigating cross-lagged effects, and

controlling for prior levels of outcome vari-

ables. Longitudinal studies capture compound-

ing effects of capital flows over time via family

processes and the family-firm interface.

Theoretical Grounding and Literature Review

Sustainable Family Business Theory (SFBT)

is a systems-based theory whose foundation is

grounded in parallel family capital stocks in

family and firm and the resource and interper-

sonal processes utilized to achieve long-term

family firm sustainability (Danes & Brewton,

2012; Danes et al., 2008; Stafford, Duncan,

Danes, & Winter, 1999). Family sustainability

is the outcome of multiple years of viability

and should be evaluated multidimensionally.

For members of a family business, the firm

may be not only a source of income, but also a

context for family activity and the embodiment

of family pride and identity (Shepherd, 2003).

A basic SFBT premise is that short-term

achievements and long-term sustainability

depend on the support of functionally strong

families. Resilience capacity is embodied in

family functional strength. The model defines

family capital as the total resource bundle of

owning families composed of human, social,

and financial capital (Danes et al., 2009). Family

capital is more than the sum of individual

capital endowments because it can be combined

in different ways in varying circumstances

(Oughton & Wheelock, 2003).

SFBT recognizes the potential for family

capital to have simultaneous positive or negative