Family Business Audiocast | Episode 45 | Luis Gomez-Mejia AND Ignacio Requejo

Available to Listen Now On: Amazon Music, Spotify, Apple Podcasts, Pandora, iHeart, YouTube

New Episodes Live: Subscribe to receive exclusive invitations to upcoming episodes of the Family Business Audiocast. Join us as we explore the pivotal strategies and stories behind successful family enterprises. Click to Follow on LinkedIn.

—————————————————

R. Adam Smith: Welcome to the Family Business Audiocast on LinkedIn. I'm R. Adam Smith, creator of this Audiocast series as an entrepreneur, investor, founder, investment banker, and board leader the last 25 years. I'm fortunate for my many experiences within the family firm industry. A warm thank you to our live audience on LinkedIn today, and for those listening in the future, a brief comment on why I created this broadcast.

Private companies are a passion of mine. Having grown up in a family of entrepreneurs and having engaged for two decades in deals, strategic transformations, investments, and boards, with an array of fascinating family enterprises, family firms, and family offices, I founded this series to offer a useful platform for listeners to hear from veterans, academics, and leaders in the vast family firm ecosystem.

Whether you're a family business owner, building, running, or advising a family office, or just expanding your family office activities, I hope these conversations are useful and enlightening. Now it's time to turn our attention to our accomplished guests on today's episode. I'm very pleased today to host my friends Luis Gomez-Mejia and Ignacio Requejo.

Luis Gomez-Mejia: Yeah, thanks for inviting us.

Ignacio Requejo: Of course. Thank you very much for having us today.

R. Adam Smith: Okay, lovely. Wonderful to have you and I say a few words on you. Luis Gomez-Mejia, one of the world's most highly cited scholars in business and economics, widely known for pioneering research on family business behavior, executive decision making, and socioemotional wealth.

He is a Regents Professor and the Weatherup/Overby Chair at Arizona State University's W. P. Carey School of Business, where he has published over 350 works in top-tier journals and received international honors from Carlos III, Oxford, Notre Dame, and other academic institutions. His empirical work has shaped how we understand the tension between family control and firm performance, and has helped families and researchers alike navigate the complex trade-offs between legacy, risk, and growth.

Also, Ignacio Requejo is an award-winning scholar as well, specializing in the intersection of finance, governance, and family firms. He is a professor of finance at the University of Salamanca — a wonderful city, by the way. His research focuses on the mechanisms through which family control impacts firm behavior, ranging from dividend policy and cash flow to long-term governance.

His dissertation earned top recognition from the Family Firm Institute (FFI), and his work has been published in leading academic journals and presented at institutions such as Oxford, IFERA, and London Business School. He brings a very rigorous approach and lens to the challenges facing multi-generational families.

I'm very delighted to have you both here today. Also, a mutual friend and professor, Fernando Muñoz-Bullón, and María José Sánchez-Bueno, were not able to join, but they were kind enough to help set up this conversation. I want to acknowledge their important contributions as co-authors of published research on family ownership and institutional investors, which informs much of the decisions made today in the market.

So thank you for making this episode possible. Luis, let's start with you — just one minute on your background, please, and then we'll go over to Ignacio.

Luis Gomez-Mejia: I've been working in the family business area for 20-some years, although I've been publishing in academia going back, gosh, about 40 years.

The question that came to my mind when I started doing this was: how does ownership structure influence firm decisions? When I started out in the early 2000s and looked at the statistics in the good journals, I was surprised that not a single paper in those journals had been published on family firms — not even one. Then I was even more surprised when I looked at some statistics showing that 95% of firms around the world are family firms. 85% of firms in the United States are controlled by families, and 33% of the Fortune 500 firms are controlled by families. That was shocking to me — that top-tier journals in management had completely ignored family firms when in fact they are the predominant ownership form in the world.

That's what got me going on this curiosity, and the first real paper where we looked at how family firms behave differently — where the idea of socioemotional wealth first came up — was a paper analyzing olive oil mills in Jaén, in southern Spain.

Now, that might sound strange — olive oil. How does that fit into family firms? José Moyano, one of the co-authors of that piece, had access to data on olive oil mill co-ops. It turns out Spain is one of the only countries in the world where, if a firm wants to join a co-op, the co-op cannot deny you. One of the arguments we made in the paper is that by joining the co-op, you get all kinds of benefits — tax benefits, technological support, marketing support, guaranteed pricing on the olive oil. So the obvious question was: why would any firm be foolish enough not to join the co-op when you get all these benefits?

As I began talking to people, it turned out that most of these olive oil producers were family firms, and the family producers were the ones more reluctant to join the co-op — even though the data showed that joining brought financial benefits and greater survival. So the question became: why would these family olive oil farmers be reluctant to join?

That's where the idea of socioemotional wealth came in. The family farmers would tell you: if you join the co-op, you lose control. The co-op has a CEO elected by board members, they impose rules and regulations on you, they control the technology you use, they do auditing, etc. So the families preferred to remain independent rather than join — even though remaining independent meant risking financial loss or non-survival.

So that's where the whole idea of socioemotional wealth came in — that some set of factors beyond economics or finance was driving these family farmers to behave differently. That was really the first paper we published on this, and since then we've looked at a whole range of variables.

R. Adam Smith: I love that story. Thank you for that introduction. Ignacio, maybe another minute on you, and then we'll dig in.

Ignacio Requejo: Thank you, Adam. As you mentioned, I'm based at the University of Salamanca in Spain. During my PhD, I started working on and analyzing family firms, mainly in Europe — specifically publicly listed family firms in the logistics sector.

Since then, although I've always been based in Spain, I've had the opportunity to visit other institutions, mainly in the UK and Germany, where I've presented my work, targeting both finance and management journals. That's given me the chance to get familiar with the theories and methods used in both disciplines, and in my view they complement each other very well: management scholars are very insightful and go deep into theory, while finance scholars place great emphasis on methods. Combining both allows for rigorous research in the family business field.

By working with colleagues from different disciplines — including María José and Fernando, whom you mentioned, and also Luis, on a recent project — I've been able to learn a lot. These collaborations are what help us make new contributions to the family business area.

R. Adam Smith: Wonderful. Okay, that's great. Luis, credited with shaping some of the socioemotional wealth framework — walk us through this premise, and how it challenges conventional economic logic.

Luis Gomez-Mejia: Yes — I graduated in economics myself, so I do have an economic bias. Let me back up a bit. Before socioemotional wealth, we developed the behavioral agency model, combining prospect theory with agency theory. According to that model, published in 1998, decision-makers are loss-averse — you're not always trying to maximize something; you're more concerned with losing what you have.

In the case of family firms, we extended that model and argued that family firms are loss-averse with respect to socioemotional wealth when they make decisions. That was really the theoretical breakthrough — because they're loss-averse to socioemotional wealth, family firms make decisions that differ from non-family firms.

So what is socioemotional wealth? It has several components: the enjoyment of control and influence by the family; identification of the family with the firm — the firm becomes the family's vehicle, "this is my baby"; binding social ties between family members and employees; emotional attachment to the firm; and dynasty — wanting the firm to continue in the family's hands into the future.

Based on the loss-aversion argument, we published a number of empirical papers. On diversification: family firms diversify less, and when they do, they tend to stay in related areas and avoid international diversification — or when they do go international, they go into culturally related areas. When you diversify too much, you begin to lose socioemotional wealth — control, emotional attachment, binding ties.

We found a similar pattern with acquisitions — family firms are more reluctant to acquire other companies. We looked at employee care using a sample of 60,000 employees across 200 companies in Brazil, and employees in family firms report being better cared for compared to non-family firms — again a socioemotional wealth argument, since emotions, identity, and connection to employees matter to families.

The paper Ignacio mentioned, with María José and Fernando, looked at downsizing across 33 European countries, and we replicated it in the US — family firms are less likely to downsize even when facing financial problems. Again, a socioemotional wealth explanation.

R. Adam Smith: Wonderful. Ignacio, let's talk about the patterns you've uncovered with European family enterprises related to control mechanisms, governance, and business success.

Ignacio Requejo: Sure. I've worked on various projects examining how family ownership influences business performance. A priori, one might think family ownership is almost a market imperfection — if markets were efficient, you wouldn't need to own a large fraction of shares. But capital markets aren't fully efficient, which is why governance structures like family ownership exist.

What we find is that family ownership has real effects — both pros and cons — and the overall effect depends on factors internal and external to the business. For example, from my thesis: in countries with stronger investor protection, family ownership can sometimes be detrimental, particularly when families accumulate too much control. But in less-protective institutional settings, family ownership tends to be beneficial for publicly listed companies.

In a more recent paper, we found that the benefits of family ownership — in terms of lower reliance on internal funds for growth — are strongest when both investors and creditors are well protected by their country's institutions. This suggests family ownership and external regulation complement each other in facilitating business growth.

One more finding, from an ongoing project with two German colleagues, not yet published: we're exploring whether being a family firm helps counteract the negative impact of economic policy uncertainty. Our preliminary findings suggest that economic policy uncertainty destroys firm value in general, but family ownership partially counteracts that negative effect.

R. Adam Smith: What do each of you think remains the most misunderstood aspect of family enterprises? Ignacio, you first, then Luis.

Ignacio Requejo: I think the most common misunderstanding is that family firms are just small and medium-sized enterprises. While it's true many SMEs are family-owned, a large fraction of large, publicly listed companies are also family firms — Luis mentioned this earlier. Similarly, there's a common belief that family firms lack professionalization. In reality, once family firms reach a certain size, they typically put in place governance structures comparable to any other type of company.

Luis Gomez-Mejia: I totally agree — people, even in academia, think "family firm" means mom-and-pop shops. That's clearly not the case. Even owning just 5% of a large company gives you significant power. Look at the Fortune 1000: you'd be amazed how often families control 5% or more — companies like Microsoft, Motorola, U-Haul, Hewlett-Packard, Marriott, IKEA, and so on.

A second misunderstanding is the stereotype that family firms are less efficient and underperform compared to widely-held companies. Actually, across the statistics and studies, family firms in general outperform non-family firms — not by a huge margin, but consistently. So somehow families manage to balance socioemotional wealth while still outperforming on average.

R. Adam Smith: From your perspective, what distinguishes family firms that evolve into resilient, adaptive institutions from those that struggle through generational transfer?

Luis Gomez-Mejia: Again, I'd point to socioemotional wealth and the continuity it provides. In non-family firms, average CEO tenure is surprisingly low — about 3.8 years — and the employee-firm relationship tends to be transactional. In family firms, top managers stay much longer. One paper with my colleague Cristina Cruz found a typical family-firm CEO tenure of 17 years. That long-term perspective and continuity make family firms more resilient — they're less focused on next quarter and more oriented toward the long term, because the family intends to stay involved indefinitely.

Ignacio Requejo: A good European example is Inditex, the owner of the Zara brand — a large, publicly listed Spanish company that has survived across generations, now with the second generation involved in the business, operating across many countries.

R. Adam Smith: Let's talk about the multidisciplinary nature of family enterprises — bringing in external advisors, especially during major transactions, where trust can be a factor. Luis, then Ignacio.

Luis Gomez-Mejia: Family firms need a multidisciplinary approach — economics and finance still matter, but so do human resource and psychological factors, since enjoyment of control and emotions are central. Culture matters too. We published a paper in the Journal of International Business Studies on "constitutive legitimacy" — in some cultures, notably Catholic countries, family firms enjoy more social legitimacy, while Anglo-Saxon countries like the UK, Australia, and the US show a smaller percentage of family firms. So culture affects how much support family firms receive, which is another reason a multidisciplinary lens is essential.

Ignacio Requejo: I agree — because family firms are more complex due to the emotional factor, it's important to bring different perspectives to decisions that satisfy both the family and external stakeholders. External experts can help bring objectivity, for example when establishing a family protocol or designing a succession plan. Finding the right balance between the emotional and financial aspects is key to both survival and financial success.

R. Adam Smith: Ignacio, your dissertation won an FFI award. Looking back a decade later, what's different in the field today?

Ignacio Requejo: My thesis, finished in 2010, examined how family control affects a firm's main financial decisions. Since then, there's been real improvement in theoretical framing — the socioemotional wealth paradigm Luis developed is now much more established — and in empirical tools, with far more data available today, enabling more rigorous comparisons between family and non-family firms.

R. Adam Smith: Luis, what's changed in the broader market over the last decade?

Luis Gomez-Mejia: Clearly, internationalization and globalization have changed the market a great deal, along with the growing importance of innovation and adapting to rapid change. Another shift is the idea that how a firm treats stakeholders matters in itself, apart from profit maximization. Most studies show family firms manage stakeholders more favorably than non-family firms — better employee care, more job security in downsizing situations, lower pollution levels within the same industry, and better employee pension plans. Stakeholder management is one of the biggest shifts of the last 40 years.

R. Adam Smith: Let's close on legacy. Ignacio, what do you think defines legacy most for larger families?

Ignacio Requejo: The founder's vision is vital to legacy, along with a clear plan for transferring the business to future generations. Legacy has both a financial and a non-economic dimension — family firms aren't just about creating value for investors, but about creating value for other stakeholders: society, customers, suppliers, and more. It's a broader footprint than economics alone.

Luis Gomez-Mejia: I'd add that the continuity in family firms — longer executive tenure, the importance of dynasty to owners — is exactly what allows legacy to matter so much. Caring about what you leave behind, not just what happens this year, comes from that long-term relationship, and I think that's what makes the biggest difference when it comes to legacy.

R. Adam Smith: Thank you both. I'll close by saying that balancing entrepreneurial, innovative thinking with a strong founder mindset and traditional legacy is genuinely difficult — there's no single right answer, but I'd encourage larger families to keep that balance in mind and consider external consultants and advisors to help navigate it. With that, thank you to our attendees today, and to our guests, Luis Gomez-Mejia and Ignacio Requejo.

Luis Gomez-Mejia: Same to you.

Ignacio Requejo: Thank you very much for having us.

R. Adam Smith: This is R. Adam Smith, signing off. Stay tuned for the next episode of The Family Business Audiocast on LinkedIn.

—————————————————

Explore the strategic intricacies of family business success with the RAS Family Business Audiocast. Join R. Adam Smith as he delves into exclusive discussions with global leaders shaping the future of private wealth and enterprise. Each episode offers a rare glimpse into the core decisions driving prosperity in high-stakes markets. Tune in to gain expert insights and innovative strategies that empower family businesses to thrive across generations.

Available On : Amazon Music, Spotify, Apple Podcasts, Pandora, iHeart, YouTube

Disclaimer:
Opinions presented are personal and do not represent the positions of speakers’, sponsors’, or guests’ organizations.

Family Business Audiocast™