Contextualizing Performances of Family Firms

Introduction

The existing literature in the field of family business research has clearly shown (e.g., Zellweger & Nason, 2008) that financial performance is not the sole objective of family firms and that “family firms often display a strong preference toward noneconomic outcomes” (p. 203). This is particularly true when a stakeholder perspective, which takes into consideration both the presence of many actors and the multiple roles for family members within the same family firm, is adopted. Nonfinancial measures go from cohesion to continuity, and even to reputation, all valuable elements both for the family members and for the family firm itself. Recently, specific research that addresses accounting measures in family firms has also stressed the necessity to take into account the specificities of this particular “economic entity,” which can influence the way in which information is collected, reported, and made available to both insiders and outsiders (Salvato & Moores, 2010). Furthermore, the available empirical research shows how family firms both incorporate and communicate the various goals in public narratives (McKenny, Short, Zachary, & Tyge Payne, 2012), whereas the multiplicity of objectives appears to be evident when a “holistic approach” is adopted in the analysis of family firms (Basco & Rodriguez, 2009).

As stated above, however, when detached from pure financial and accounting measurement, the concept of performance itself becomes incredibly complex, even more so when the chronological dimension is taken into account. From time to time and from place to place, the idea of performance may change, even in a relevant way. It may seem trivial, but if one thinks of the classic Buddenbrook stereotype of the family firm, the meaning of performance intuitively changes across the famous three generations: the first generation being inclined to growth and market expansion; the second generation inclined to profits, consolidation, and, maybe, diversification; and the third generation presumably more inclined toward classic performance measurement in terms of returns and value, maybe for external shareholders. If, in the space of a few generations, the ultimate measure of performance may vary in a significant way, this is even more true when different places and cultures are considered.

This article aims to address the issue of different kinds of performance in family firms through the lens of a particular field of study, namely, business history, thus taking the three main conceptual areas into account: performance measurement, family business studies, and business history. Given the fact that this article is written by a business historian by training, and is going to be read by somebody who may not be familiar with the field of business history, the next section will provide some insights into business history and its methodology.

The rest of the article will deal with historical perspectives on the performances of family firms and will also provide some suggestions about the way in which business historians have dealt with the issue, also from a methodological point of view. The aim is to provide not only further evidence using the time frame for a longitudinal approach but also to offer some hints that are useful for theory building.

What is Business History and Why—and How—It Matters?

Recent definitions of business history (e.g., Jones & Zeitlin, 2008) emphasize the idea of business history as a discipline that combines pure historical methodology (the use of archival—or primary—sources, together with other secondary data, to reconstruct the history of business) with theory building. Even though the gap between business history and management studies is still wide (O’Sullivan & Graham, 2010), business history is increasingly considered to be relevant not only because it provides longitudinal evidence but also because the interpretation of data proves to be useful both for testing existing theories and for suggesting new ones. As suggested by two Harvard Business School scholars, Geoffrey Jones and Tarun Khanna (2006), historical research provides longitudinal evidence that is equivalent to cross-sectional variation by adding evidence to theory and concepts; it helps us go beyond path dependence and thus to deepen the concept of resource stratification; and it allows us to address “structural” issues that are understandable only in the long run. Peter Buckley, a leading expert in the field of international business, has recently added to the considerations of the two Harvard Business School scholars mentioned above the point of view of a theorist who is “sensitive” to history (Buckley, 2009). According to him, “business historians have the potential to develop and extend existing theory and to produce new or improved theory,” (p. 326) thanks to their mastering of “two key comparators (time and space).”

The field of family business seems to be another promising field in which a fruitful contribution can be derived from business history in the directions stressed by Jones, Khanna, and Buckley. For instance, the historical, longitudinal approach proves to be particularly useful and relevant in some critical areas of family business studies that explicitly deal with the “long run,” such as leadership succession, knowledge transmission, and corporate culture (Litz, Pearson, & Litchfield, 2012). History is equally relevant when the accumulation and exploitation of resources is considered (Chrisman, Kellermanns, Chan, & Liano, 2010) and not just in family firms. The use that historians make of primary sources means that histories of family firms are frequently written on the basis of the family archives, more than on those of the company. Family archives, when present, allow an analysis to be made of aspects of the business that are conditioned and influenced by the personal relations among family members. On the other hand, writing a business history of a family firm without any access to family archives may, unfortunately, lead to wrong interpretations of the top management’s decisions, which are constrained by family-related motives.

Writing good business histories, which are useful for theory challenging or theory building, is, however, not an easy task. One challenge, maybe the challenge, in the work of a historian is to manage sources, which are often far from being abundant, in order to address problems and draw generalizations, thereby providing stylized evidence and avoiding senseless narratives: in a word, explaining, not simply telling.

At a first glance, historical research can be considered useful as a provider of longitudinal evidence. This is, for instance, the use that some economists make of historical sources and data: history is considered as a case in which long-term data series can be found, data which can be treated through statistical tools to address problems that are familiar to economists—from gender inequality to human capital development. However, there is something more in historical analysis. What historians do is not only dig into the past to recover data but also frame the evidence collected into the proper context, which may be extremely different from the present. Claiming that historical analysis can be useful in theory building means that theories tend, by their very nature, to skip the time and space dimensions, which are essential in historical research and can help make conceptual frameworks more flexible and inclusive. It is not by chance that some strong theoretical frameworks have been developed by historians or scholars with a pronounced historical sensibility, for instance, in management studies (Chandler) or international business (Dunning). In the case of family business research, a historical approach can add value to theory building in many ways, avoiding, for instance, definitions and boundaries that are too rigid. One telling example concerns the definition itself of the family firm, which, in turn, depends on the prevailing notion of the family at a given point of time and in a given point of space, which is different from that existing in other cultures. The current concept of the nuclear family in Western culture (which, in turn, is at the basis of the general definition of the family firm proposed by the European Commission ¹ ) has evolved over time and during the process of industrialization. A better knowledge of this process of evolution—which is a typical historical process—can help not only to ground the theoretical foundations of the definition proposed better but also to push for more flexible definitions that could include the notion of the family present in other cultural traditions. As the notion of the family itself has evolved over time, family values and goals—including the economic ones—have also been subject to a process of transformation. Here, too, historical research based on primary sources can help highlight not only the role of family values in driving entrepreneurial choices but also the transformations in ideological frameworks caused by changes in the prevailing culture.

In this regard, performance analysis seems to be another promising field in which historical analysis can provide useful insights.

Starting from the available evidence, the historical perspective can first help in better defining what to measure. As this article will demonstrate, goals, and the measures of their achievement, namely, performance, come in different kinds. As anticipated above, for instance, their relevance changes not only in different contexts and cultures but also over time and in the long run. A longitudinal approach provides much inspiration in this regard.

Second, once what to measure has been defined, the historian’s goal becomes one of finding out how to measure it, that is to say, the right measure of the performance. This, in the presence of research contexts, which are characterized by high levels of imprecision and lack of information, proves to be no easy task.

In the following sections, I will address the relationship between historical evidence and theoretical issues in the case of business performance and value creation in family firms, explicitly referring to the contribution that business history can give to a broad reflection on this topic.

Business Performance: The Perspective of Business History

Quite surprisingly, business historians have only recently started to focus on performances and performance measurement in their research. Some international research groups have recently started research projects in an endeavor to provide some insights at least into the performance of the largest firms in a long-term perspective, basically in the last century. In these cases—which are still in progress—it is basically the financial measures of performances that are taken into consideration to investigate the relationship between performance and other structural characteristics, such as ownership, governance, and organizational structures. Despite these efforts, however, the issue of the historical measurement of performances remains largely unknown and has only been superficially analyzed to date. Business historians tend not to be enthusiastic about performance measurement, for many reasons that are perfectly understandable. One quite obvious reason lies in the quality of the data available, especially in the long run and in their comparability across space and time, something that is a real problem even today—and even more so than in the past, in the absence of proper regulations and disclosure requirements. As far as financial measures of performance are concerned, a simple ratio analysis was very often neither possible, nor reliable, for the vast majority of the large firms until relatively recent times, not to mention the more sophisticated indicators. Anybody familiar with the structure of balance sheets and of financial information in general—even for the largest, listed, and most influential companies—knows how many flaws and uncertainties there are. Clearly, the situation differs from place to place and among different companies and periods. It is, however, sometimes possible to find detailed histories that benefit from the availability of archival sources, which allow the use of relatively sophisticated accounting techniques.

Unfortunately, these attempts cannot go further back in time. Primary (archival) sources themselves are so synthetic that performance measurement is possible only for a very reduced number of indicators. The problem is, however, comparison between companies or with an industry’s standard average, which is almost impossible to calculate before the Second World War—at least in the majority of the industrialized countries. In general, however, the bad quality and the lack of the reliability of the data available have contributed to keep historians relatively far away from the difficult, time-consuming, and risky field of long-term financial performance measurement, and for almost every kind of firm—including family-owned firms. Looking at financial performances from the business history point of view, thus, proves to be relatively frustrating: evidence is far from being homogeneous, is dispersed and fragmented, and, until now, has not been systematically addressed and is still lacking a general synthesis.

To say, however, that business historians have not been interested at all in performances is not true. Measures of performance that are different from purely financial ones have been, and still are, strongly preferred. A good example comes from the writings of the most influential of the “founding fathers” of business history as an academic discipline, namely, Alfred Chandler. In his analysis of the development of managerial capitalism in the United States and of its diffusion in Europe (Chandler, 1990), Chandler never deepens any aspect of the financial performances of the corporations that he examines in the long run. He was concerned with other measures of performance. The one that he considered to be the most important was—undoubtedly more than returns, profits, and other financial indicators—survival. Chandler was mainly interested in those companies that were able to persist in the long run, especially those that were able to couple survival with the control of a growing and consistent share of the market both at home and abroad. Market dominance (measured by market share—as alternative information—is not easy to find on an extensive basis) and longevity/survival are, thus, in Chandler’s framework, the ultimate measure of performance. Incidentally, it is important to emphasize that longevity and market dominance are, according to Chandler, in turn, the consequence of the adoption of the “right” policies in terms of the strategies and organizational structures imposed by the technological shifts of the second and third industrial revolutions. The ability of entrepreneurs to give their companies the correct “binomial” of strategy and structure thus resulted in superior performance not only of the firms but also of industries and ultimately of countries—which also achieved market dominance in terms of their share of the world’s total industrial output. It may also be noted that one of the relevant components of this process was the transformation in the ownership and control patterns of the companies, from privately owned and family-owned and controlled to public companies run by cohorts of skilled managers.

On this line, business historians frequently deal with the concept of performance when analyzing the strategies and forms of behavior of companies in different environments or of different typologies of firms within the same environment. As is widely known, goals—and thus the concept itself of performance—may vary according to the ownership structure of a company. Public companies, state-owned enterprises, and family firms may have, and actually do have, different goals and strategies, respectively related to value creation for shareholders, employment preservation and infrastructural policies, and long-term orientation.

Scholars analyzing the history of family firms are used to entrepreneurial forms of behavior that clearly stress the subjective nature and “multiple meaning” of performances as well as the influence exerted by the context in driving their choices, as the following four examples, taken from the huge population of Italian family firms, clearly show. ²

Until the Second World War, Montecatini was a family-owned, publicly traded “national champion” in the Italian chemical industry. As it was the owner of the patented process to produce synthetic fertilizers, and a monopolist in the internal market, it was one of the most profitable companies in the country. Its bonds and stocks were considered as “strongboxes” for small investors, so reliable that tutors invested in this company the money that people under legal age had inherited. Under the perspective of “shareholder’s value,” however, there were some problems: Despite these good results, Montecatini distributed very few or no dividends at all, preferring to use the money for further investments, and gains were derived by the appreciation of stocks and bonds. Growth, as a way of gaining weight with regard to political powers, was thus Montecatini’s main goal, and that of its uncontested leader, Guido Donegani. The willingness to establish a monopolistic position on the internal market in order to strengthen the company’s, and the family’s, position and power in the domestic chemical industry led the Donegani family to establish a sort of do-ut-des with the Fascist authorities, which, in turn, pushed the company to make low (or zero) return investments purely for social reasons. For Montecatini and the Donegani family, in sum, the prevailing notion of performance, that of market share in chemicals, was the complex outcome both of the family desire to consolidate the company’s market power and of the opportunities provided by the political context.

Lancia became one of the most renowned and appreciated car manufacturers during the interwar period. Founded and headed by the charismatic Vincenzo Lancia, the company was famous for the high quality of its products, each one proudly tested by the founder as a kind of guarantee of quality for the customers. A high share of the company’s investments was directed to finance Lancia’s motor racing team, given the positive effect that successful racing activity had on the company’s image. When Vincenzo died, and his son, Gianni, succeeded him in running the company after the war, he did very little to change his father’s business strategy. Mass production in the booming Italian market was carefully avoided, while technical standards and product quality were maintained at maximum level. Despite poor financial performance—which actually led the family to sell the company at the end of the 1950s—Lancia continued to invest in its racing team, and in its reputation as a top-quality producer of cars with high technical standards. Retrospectively, one must say that, at Lancia, returns and financial performances were perceived as secondary goals after those of high-quality standards and reputation. Lancia behaved differently from its main competitors, Fiat and Alfa Romeo, which successfully pointed at the mass production of cars following the growing demand that characterized postwar Italian society. Given the evolution in market trends, the Lancia family was convinced that the company would be able to survive as a niche independent producer, and that, to achieve this goal, it was necessary to adhere to consolidated strategies that aimed to improve the brand image as being technically top standard. In this case, the performance standard for the company was set by the adoption of a conscious strategy undertaken to strengthen the position of the company and guarantee its independence. In this framework, niche-oriented strategies were valued by family managers as being more effective than merely increasing the scale of production.

During the 1960s, La Rinascente—the largest Italian chain of department stores—was one of the top 10 companies in Italy, under the strong leadership of two kindred families—Brustio and Borletti—the former representing the ownership and the latter the management team. Starting from the 1920s, the two families had successfully managed to create the first and most important Italian department store chain, which boomed both in terms of relevance and in dimensions during the 1950s, when Italy finally gained the consumption standards of a modern society. To manage the process of growth, however, some strategic choices had to be undertaken, which would put both the company’s autonomy and the harmonious relationships between the two families at risk. This tension—see, below, in greater depth—is witnessed by the records, letters, and minutes available in the archive of the company, which clearly show that the main goal of the two managing families was twofold: to preserve the independence of the company and to strengthen the unity of the two families. Increasingly, the efforts of the managing team was directed toward the creation of a governance structure that was able to cope with the requirements of the growth process, which meant profits and a stronger market position, but, at the same time, safeguarding both the harmony and the spheres of influence that existed between the Brustio and Borletti families. In the end, profits came after.

Adriano Olivetti was the CEO of Olivetti, a family company and the Italian main leader in business machines during the 1950s. Olivetti could count on an enviable rent position derived from a couple of cash cow products, the Lettura 22 typewriter and the Divisumma electromechanical calculator. However, from Olivetti history and from the biographies of its charismatic leaders, it becomes absolutely clear that financial well-being was a secondary concern. The Olivetti family had a close relationship with the area, the city of Ivrea, in Northwestern Italy where the business had started, and had built up relationships which had strengthened over time, especially under the leadership of Adriano Olivetti, the second-generation leader of the company. The main goal of the company was to establish a good, strong, and deep embeddedness with the local communities where the plants were located, a kind of ante-litteram corporate social responsibility program. A large section of the annexes to the company’s balance sheets was devoted to the description of the company’s social activities and were beautifully illustrated with photographs of modern, ergonomic buildings blending into the landscape, and by exclusive paintings of famous artists. “Social performance” had, at Olivetti at least, the same relevance that returns and financial performances had. In the Italian social context of the 1950s and early 1960s, characterized by a growing relevance of big business, Olivetti’s strategy was to strengthen the relationships with the family, the company, and the local context as a sort of immaterial capital that at the same time reduced the risk of tensions in industrial relations and enhanced workers’ commitment and participation.

The examples and cases cited above clearly show the difficulty of providing a real assessment of what precisely performance and value are, especially in the case of private firms that do not have to deal with the claims of shareholders and other stakeholders. In many of the companies mentioned above, for instance, value creation had to do with other things, which ranged from reputation to harmony and cohesion and from long-term orientation to social embeddedness rather than money and returns.

As stated in the introduction, one of the advantages of history is that it provides contextualization: over space—the meanings and measures of performance can change across different cultures—and over time—performance meaning mutates both in the long run and during the life cycle of the firm. The four examples introduced above clearly illustrate how noneconomic goals and measures of performance can prevail over the emphasis on financial returns. Historical analysis shows how the context and its transformations played a role in influencing entrepreneurial decisions and choices in terms of both goals and the measures of their achievement, goals that are retrievable through a careful analysis of primary archival documentation, as in the four cases presented.

Another relevant contribution of historical analysis concerns the continuities in the motivations for the establishment of non-merely financial goals in different situations. The four examples show a recurring form of behavior across time: family firms tend to pursue nonfinancial goals and, accordingly, to adhere to performance concepts and measures that are different from purely financial ones, particularly in situations in which the context is changing or particularly challenging or when uncertainty arises. To strengthen the internal cohesion, reputation and embeddedness are considered to be the most important goals to pursue. The historical analytic approach, which is, by its very nature, concerned with both the continuities and the discontinuities in the long run proves to be particularly promising in this regard. Reviewing the available business history literature dealing with family firms, a number of strategies that aim to pursue nonfinancial goals appear to be recurrent, especially in phases of crisis, change, and transformation in the external framework. The following sections will be dedicated to exploring this issue in greater depth through the discussion of several examples drawn from the available business history research.

Measuring Family Firms’ Success in Historical Perspective

The historical approach sheds light on the issue of performance measurement both generically and in family firms, basically because it provides a longitudinal perspective about different concepts—and, hence, measures—of performance. Longitudinal evidence is precious because it is extremely “sensitive” to variations in the common, or social, perception of values and expectations—including performances and value. To be even clearer, history makes it clear that not only is performance a multiple-meaning concept at a given point of time but that it also changes over time and space. It makes clear, in sum, the fact that performances are a changing cultural artifact. For business historians, it is thus extremely important to handle the issue of different kinds of performance with care, especially when comparisons are made between companies with different ownership structures or across time.

Not infrequently, the structural changes at micro-level are reflected in the level of performance requirements, or even in the very nature of the goals to be measured. This is quite common in the process of the growth of companies, something very familiar to business historians. In approaching family firms, one significant example is when public ownership substitutes family or individual ownership, whereas in the case of listed family firms, it is interesting to see how the issue of performance lies at the heart of the complex corporate governance relationships that bind the majority and the minority shareholders.

In highlighting some of the historical meanings of performance, history connects itself to other research areas that are related to family business studies. As stated above, corporate social responsibility (CSR) and corporate governance are just two cases in point. In the rest of this article, I will try to present some examples in which business history is useful to highlight issues relating to the meanings and measurement of performance and value creation in family firms, at the same time demonstrating the variable nature of the concept of performance itself. In so doing, I will give some examples drawn from my personal research experience and provide some insights into the methodological issues that the historical research practice and method implies. In the following paragraphs, four alternative “performance meanings” will be discussed, survival, embeddedness, reputation, and sustainability. These four meanings are certainly not the only ones to be taken into consideration; however, there are those that do emerge more clearly even from a superficial analysis of the available historical narratives about family firms. From the methodological point of view, the implication of moving away from financial (e.g., returns) or physical (e.g., employment) measures of performance means that it is necessary to develop new and proper indicators for performance measurement, which is, at the moment, something that business historians interested in family firms have not addressed to date—basically leaving the field to management scholars who have made some seminal and successful attempts in this direction (e.g., Ward, 1987). In the following sections, I will add some suggestions and considerations in this regard.

Like those mentioned above, most of the examples to which I will refer are taken from Italian business history. On the one hand, this may not be considered a relevant bias, since the considerations derived from them are largely general and valid beyond the single country case. On the other hand, as underlined above, geography, culture, and local institutions do matter when it comes to defining the intrinsic goals of an enterprise, its role in society, and the “good and fair” measure of its entrepreneurial success. The role and status of family firms in Italy makes it easier to highlight this point.

Survival

As stated above, survival is, beyond any doubt, the most significant manifestation of success for a firm, especially for a family firm. Survival and longevity are, from the point of view of business history, quite easy to “measure,” even though there are some caveats in this regard. It is, in fact, necessary to distinguish between survival and longevity in general when family firms are considered. Here, I distinguish between survival as a family-owned firm, to wit, the persistence of control by the same family over time, and longevity in terms of the age of the enterprise, independently of its ownership structure. Notwithstanding the fact that it seems to be quite trivial, the difference between the two concepts is relevant, since longevity is an attribute that is independent of the nature of ownership. The ability to transmit the firm’s ownership and control inside the same family can be—and actually was considered to be—a relevant indicator of success, even when it implied a permanent downsizing or a reduction of the chances of expansion, growth, and financial success, as recognized by the recent literature on family business research (Salvato & Melin, 2008). The above-mentioned case of La Rinascente, for instance, provides an extremely telling example. During the 1950s, the family had the opportunity to expand the business, thereby consolidating its position in the Italian market; however, this would imply at least a merger-of-equals with another family-run department store chain, Standa. On this occasion, Aldo Borletti, who actually rejected the opportunity, wrote in his diary that he would have considered the act of giving up the control of the company that his family had run for generations to be his greatest personal failure (Amatori, 1989). The issue of maintaining control is so relevant that it is not difficult to find examples in which the persistence of family control is granted by committed individuals who “bridge generations” instead of selling the enterprise. This is often the task of widows—in charge of simply transmitting the business to the following generation, or of committed “managers,” who are available to act as the personal “trainers” of heirs who are too young, until they come of age. Two different cases can illustrate this point. The first is provided by one of the oldest Italian family firm, Falck, once a national leader in the steel industry, and now, after a long process of downsizing and reorientation, active in other businesses, such as green energy. The company was founded during the first half of the 19th century by an Alsatian engineer, and after two generations, it faced the first crucial step in its history when the founder, Enrico, died, when his first son, Giorgio Enrico, was only 14 years of age. The widow managed to run the enterprise for the years during the period of the training and of the apprenticeship of the heir, thus granting continuity to the business. The second example comes from the history of what is, maybe, the most important—and well-known—Italian family firm, Fiat. During the 1930s, Fiat faced a difficult generational gap. In this case, the founder, Giovanni Agnelli, survived his son, Edoardo, who died in a plane crash in 1935. The third generation was, however, too young. When the founder died, in 1945, he left the company in the hands of a faithful and capable manager, Vittorio Valletta, who used to say that he was running Fiat without owning a share of it and that he was “in loco parentis”—that is, “in the place of the father”—meaning he was going to transfer the control to the third generation, which actually occurred successfully in 1966.

As is well known, however, survival as a family-run company can imply a transformation in the role of the family members, who might no longer be involved in the direct management of the business. If the enduring competitiveness of the enterprise is associated with good performance and value creation, the successful transformation of the ownership and control patterns are to be considered as proper measures of performance. Some recent historical research exploring the aggregates of family firms in the long run shows that both the survival and the persistence of family ownership is associated with the ability of families to select the most capable managers both inside the family and thus to introduce proper processes of training and selection as well as outside it. Analyzing “long survivors” among large Spanish family firms, Paloma Fernandez and Nuria Puig (2007) stress the ability of these firms to seek able managers and directors both inside and outside the family. Stéphanie Ginalski (2010) examines a sample of Swiss family firms during the 20th century and concludes that the successful survivors were those who were able to change the training patterns of the new generations and/or involve skilled “outsiders” in the top management positions, thereby transforming themselves from “closed” to “open” family firms—to use Mark Casson’s terminology. Similar conclusions are drawn by another young researcher, Maria Fernandez Moya, in a comprehensive history of a Spanish publishing house, Salvat, over more than a century (Fernandez Moya, 2010). The Salvat company was able to survive over one century by progressively adapting the quality of its family management and by giving support to the creation of the IESE business school with programs designed for family business executives.

Finally, another component of survival and longevity concerns strategies and policies. In principle, this is true not only for family firms, even though, in this case, path dependencies are probably stronger and more difficult to challenge, given the “thickness” of a corporate culture that is often closely attached both to the origins and to past generations. This is, for instance, one of the main outcomes of an extensive piece of research undertaken by another economic and business historian, Harold James, in the book Family Capitalism, in which he compares the long history of three family dynasties in the iron and steel industry: the German Haniels, the French Wendels, and the Italian Falcks (James, 2006). After having dominated the domestic markets in their own respective countries, the three family firms, which still exist to this day, have experienced different destinies, which were more successful in the German and French cases than in the Italian one. According to James, one of the reasons for this is that, in the case of the Falcks, path dependency prevailed, and they decided to remain in the increasingly nonprofitable steel industry, instead of diversifying into other activities as their counterparts did.

The survival, and, above all, the persistence, of family control during the various stages of the growth of the firm is thus to be considered to be an extremely relevant measure of nonfinancial performance, particularly in phases in which discontinuities in the process of growth and expansion of the business, or in the leadership succession, severely challenge the continuity of the business activity.

As far as analytical measurement aspects are concerned, the distinction between survival and longevity suggested above brings into the framework the necessity to look more at the capability of the family to stay in business also thanks to and through the co-optation of outsiders, more than to the mere age of the enterprise. An ideal index of survival should thus combine the intergenerational transmission, the presence of family members in management positions, with the degree of openness of the family firms measured by the presence of outsiders in managing roles. The strong assumption, here, is clearly that there is a positive relationship between the degree of openness of the family firm and its chances of surviving as a family firm as well.

Embeddedness

Maybe more than other organizations, family firms enjoy a deep embeddedness with the local community in which they develop and grow. The local community is not only the seedbed in which the founder finds the support to create his or her activity but is quite often the place in which he or she and his or her family lives and is educated. Generally speaking, today, and even more so in the past when business life was much less detached from private and civil life, it is not possible to separate the value creation inside the family firm from the value that the same family firm is able to create “outside” its boundaries. A serious measure of the success, that is, of the performance, of these kinds of firms is the capability to “fit” into the local community, as current research also emphasizes (e.g., Niehm, Swinney, & Miller, 2008). This has, at first glance, to do with something in the past that is often labeled—with a negative flavor—paternalism, which has a lot in common with the much more positive, contemporary concept of CSR, as a component of corporate social performance, or CSP (Wood, 1991).

Despite the fact that the concept of CSR has come into use only quite recently (first in the United States and post–Second World War—Carroll & Sabana, 2010), entrepreneurs in the early days of industrialization learnt almost immediately that it was necessary to share some of the benefits and values created by their industrial activity with the local community in which the same activity was taking place. Especially in backward and agricultural societies, the tensions created by the industrialization process could constitute a serious threat. The sharing of some benefits with the local community was thus seen as a safeguard to the survival of the company as well as a way of enhancing the standing of the family inside the community within which it dwelt. Examples of family firms making efforts and dedicating resources to strengthen their role and position within the local community are abundant almost everywhere in Europe and in the industrialized world in general. The quality of local embeddedness was considered a relevant indicator of the standing and performance of entrepreneurs and something that had much to do with the “reputation” of their company, of their name, in a word, of their “house.” It must be noted how CSR and the largest conceptual category of CSP has picked up many of the intrinsic aspects of the social embeddedness of entrepreneurial families, explicitly incorporating it into its performance goals and often made explicit in “social” balance sheets and balanced scorecards. Looking through the filter of history at the most authoritative definition of CSR as

the social responsibility of business [which] encompasses the economic, legal, ethical, and discretionary [later referred to as philanthropic] expectations that society has of organizations at a given point in time. (Carroll & Sabana, 2010, p. 89, extensively referring to Carroll, 1979)

and of CSP as

a set of descriptive categorizations of business activity, focusing on the impacts and outcomes for society, stakeholders and the firm. (Wood, 2010, p. 54, quoting extensively Wood, 1991)

it becomes apparent how the promotion of public interest and welfare in search of some kind of return for the company itself is based on the same values that entrepreneurial dynasties historically endeavored to build on in their local contexts.

Local embeddedness as a measure of corporate value was extremely clear to those who were trying to break these linkages, that is, to trade unions and leftist movements that thought it necessary to weaken the paternalist grip over the workforce. There are a multitude of examples: one very effective example is provided by the early history of Michelin, the French tire producer (Tesi, 2010). The Michelin family was so intertwined with the local community in Clermont-Ferrand through a number of social initiatives that the first goal that Communist organizations immediately, albeit unsuccessfully, undertook was to remove this grip on the workers after the Second World War. The Michelin case shows that the social embeddedness of family companies worked extremely well even in the case of large companies. The main point was to “enlarge” the family concept sufficiently, so that it also embraced the workers, who often lived together with the owners in the same “factory villages” so diffused throughout Europe during the first stages of the industrialization.

Another meaning of this embeddedness is summarized by the concept of “unity” or “cohesion.” Value creation can, in fact, be seen as the ability of the family to preserve its unity, and the unity of its members, as well as the cohesion of the “enlarged family,” which also included the local community. In this case, as stressed by Johns (2006), the local context can act as a “bundle of stimuli” for family firms as well as a “shaper of meaning,” which may result in significant efficiency gains derived from successful embeddedness, historically measured by indicators going from low absenteeism, commitment, and loyalty on the part of their employees, a low rate of workforce turnover, the presence of family members in local institutions such as municipalities and governments, and similar information retrievable in local and corporate archives.

Historical research shows quite well how the pursuit of local embeddedness as a noneconomic primary goal has been one of the privileged strategies adopted by entrepreneurs trying to accumulate social capital, even through expensive investments financed with the company’s retained profits. One, maybe extreme, example is represented by the widespread practice of building company towns or villages in which workers were physically living together with the owners in a way that explicitly emphasized the concept of the enlarged family.

Reputation

The above-examined concept of “embeddedness” has much to do with that of “reputation,” equally relevant for business historians as well as for family business researchers interested in “immaterial” capital, resources, and competitive advantages: see, for instance, Craig, Dibrell, and Davis (2008), who elaborate on the relationship between family-based brand identity and performance, measured in terms of growth and profitability. Families build their own reputation not only inside the local community—something that was extremely relevant in the past, when, for instance, financing was largely linked to the standing of the borrower and of his or her family—but also outside it. Intuitively, reputation can be seen as a sort of immaterial capital that provides value to the family firm under basically two aspects and a significant part of the so-called family capital (Danes, Stafford, Haynes, & Amarapurkar, 2009). The first is that the identification between the family and the enterprise means that the creation of value for the enterprise coincides with the creation of value for the family, and vice-versa. Entrepreneurs and dynasties are extremely committed to preserving the reputation of the family through the reputation of their business and of the business through that of the family. I recently had the chance to interview the CEO of a private equity firm, a relatively small one, basically run by the members of a single family. The interview was given because I am writing a commissioned history of this family, now in its fourth generation; the purpose of the project is precisely to show this enduring presence in business. What clearly emerged from this interview was the fact that they target family firms, and their approach is, more or less, “we are a family company as well. We understand. And we want them to understand that we are a family firm just like they are.” Historically, the issue of reputation has been one of the most relevant for family firms. The already mentioned case of the Falck family provides some examples of this. In 1931—25 years after its foundation—the family decided to put its name in the name of the enterprise (James, 2006), in order to emphasize its family quality, while, at the same time, in the official speeches and documents, the leaders were speaking of “the large family of Acciaierie e Ferriere Lombarde Falck,” referring to their employees. The attachment to reputation as an invaluable capital for the enterprise, something to preserve and enhance, was made clear by the founder, Giorgio Enrico Falck, in his will, which was opened and read in 1942:

I do not know whether future events will allow the enterprise to be maintained and developed. Naturally, I hope so. In all things, act so as to create honor for its name and mine, which I tried to make esteemed. Above all, be honest, scrupulous and not be tempted by unclear dealings whose basis is speculation. (Cited in James, 2006, p. 258)

Another version of reputation—and another reason for considering it as a measure of performance—became clear to me during an interview with a third-generation CEO of a medium-sized Italian family company, now a fairly successful international player in the production of gases for industrial use. Discussing the process of leadership succession, I was told more or less as follows:

You know . . . the most important thing my father passed on to me was not the company in itself, nor its financial good shape, nor the money and capital, nor even the business idea, which we (my brother and I) have now completely changed. The most important thing he gave us was the reputation of the company, and with the reputation, contacts and personal relationships. In this kind of business, everything is customized, and good relationships, contacts and reputation are indispensable. I work with many customers that my father, or even my grandfather, served. We, the third generation, now serve their third generation. (Interview with Aldo Fumagalli, SOL GROUP, May 2008)

“Networks of reputation” is, maybe, an exaggerated neologism, but it gives a good image or idea of the relevance of this asset for firms in general and for family firms in particular. As in the case of embeddedness, reputation is a component of social capital on which family firms do continuously invest and place great emphasis, especially in phases of transition and “crisis,” that is to say, moments of change. Family business histories and archives obsessively refer to the necessity of preserving, strengthening, and enhancing the “house’s name” to ensure both the firm’s survival and guarantee the family’s honorability. In some cases, and especially in small local communities, family reputation was explicitly considered as a collateral that was indispensable to obtain access to credit from financial institutions, and to invest in enhancing family reputation was a way of strengthening the chances of obtaining access to important resources, such as credit or finance. Historically speaking, this was especially true when both the quality and the disclosure of the financial information available to lending institutions was structurally poor, as, for instance, in the early industrialization phase (Hudson, 1994).

In a recent, rather innovative for methodology and research questions, article published in the Business History Review, and based on primary sources and archival material as correspondence and letters over three generations in a British merchant family firm from the 1870s to the 1950s, Gordon Boyce (2010) clearly describes the role of the intergenerational transmission of family values and culture, showing how much reputation was considered as a sort of “immaterial asset,” which was difficult to accumulate, important to preserve, and extremely easy to damage or destroy.

Names do count, in many ways. The distinguished economic historian David Landes (2006) puts this in an extremely efficacious way in the “concluding thoughts” of his book, Dynasties. Fortunes and Misfortunes of the World’s Great Family Businesses:

In short, no attempt to understand the nature and methods of business enterprise while ignoring the family firm can be adequate to the task. Indeed, customers seem to understand this better than economists. They seek out the family firm as a token of personal success and prestige. Money is money, but (. . .) borrowing from or investing in a house such as Rothschilds is evidence of acceptability and taste; not everyone can do it. In many instances, the family name as brand name is an assurance to buyers; thus Ford cars way back when, or Toyota cars today. Indeed, family names are a saleable asset, as the heirs are only too well aware. (p. 293)

As an immaterial asset, reputation is intuitively a hard-to-measure advantage. Proxies of reputation vary from place to place and from time to time. They include, for instance, the ability to maintain the same business relationships over time, something that is easy to capture in business archives, when they are available, the strength and endurance of business and social networks—be measured through network analysis techniques—or even other hard-to-quantify measures. Although it may seem a bit naïve, one example is the level of reputation that family firms have inside their respective countries and in their relationships with governments. For instance, this can—even though it has not been possible until now—be measured through the analysis of the policies of privatization of former state-owned enterprises, which have been extensively carried out in Europe during the last decades. All things being equal, family firms could have been (and, actually, some qualitative evidence confirms this impression) preferred to nonfamily firms because of their reputation, for instance, in reliability, efficiency, long-term orientation, and their relationships with the workforce.

As a performance goal, the pursuit and preservation of reputation is a powerful driver in orientating entrepreneurial choices today, as it was in the past, especially in family firms where the two components, the family and the business, are confused and inextricable.

Sustainability

A fourth area that I would like to reflect on as a potential, as well as an unconventional, index of performance is something that can be labeled as the “sustainability” of the process of growth.

Referring back to the above-mentioned Alfred Chandler, the process of the evolution of a family firm was a way of testing its real performance, that is, its capability to grow in size and strengthen its market power. As stated above, family firms in the capital-intensive industries of the second industrial revolution were expected to grow up to a certain point under family ownership and control. Subsequently, to cope with expansion requirements, families had, progressively, to cede control to managers and then ownership to the public. At the end of the process, the caterpillar had become a butterfly. The enduring persistence of family firms over time and space has, however, partially challenged this perspective. The research question has become one of how was it possible for companies to balance growth, expansion, and family ownership, and often control successfully. In other words, caterpillars could not necessarily transform themselves into something else. Provided that there are advantages, and not just limitations, in remaining a caterpillar, it was the task of balancing growth and stability that became the real challenge, as well as one measure of performance. The successful balance between the two dimensions—growth and family ownership, and even control—can be seen as one of the most difficult challenges that a family business can face. Business history is the field in which it is possible to test some assumptions about the ineluctability of the managerial public company as the natural evolution of entrepreneurial ventures committed to growth. It is not difficult at all to find plenty of examples of family firms committed to maintaining their status of family firms during the process of growth, something that has to do with the already-mentioned concept of survival. Policies such as the constant reinvestment of profits and the moderate or zero distribution of dividends to finance investments, instead of opening the capital to external investors, can be seen as part of this strategy, as well as the introduction of control-enhancing mechanisms, such as, multiple-voting shares.

However, a key point in this regard is that sustainability does not mean the persistence of family ownership and control in any case or at any cost. Balancing growth and family ownership requires the ability of families to open the company to skilled external people and, at the same time, to promote skilled internal people, as was stressed above, concerning the professionalization of family executives (Casson, 1999). Clearly, one may ask oneself why sustainability—the ability to remain privately held and family run—should be so relevant for a firm; but this is not the place to illustrate what has for a long time been a commonplace for people interested in the virtues of family businesses. Apart from the usual claims about the flexibility, commitment, patient attitude, and the long-term thinking of family members—counterbalanced by several evils, such as familistic behavior and behavioral weaknesses—there are other reasons more closely linked to concepts such as value and immaterial capital. Writing about the history of German Mittelstand family firms, Hartmut Berghoff (2006) clearly points out the role of what he calls “social capital,” which is basically a mixture of family links, knowledge, and reputation transmitted from generation to generation. This capital proved to be extremely relevant after the Second World War with the division of Germany as many entrepreneurs resident in the Eastern part fled to the West.

In many cases, the expellees and refugees were only able to take with them what they could carry. Capital equipment and financial assets had to be left behind. Intellectual property, personal skills and social capital, however, accompanied them (. . .). These companies often managed to rehire their former staff and to re-enter relations with former clients. Social and human capital is mobile indeed and can even overcome the effects of dislocation and expropriation. (Berghoff, 2006, p. 279)

And again, discussing the case of Bock—a typical Mittelstand family firm that specializes in the production of orthopedic machinery—Berghoff demonstrates the relevance played by this “social capital” in the process of the relocation of the company in Western Germany.

The strong bond between the founder and his son-in-law was a pre-requisite for this delicate operation, which called for secrecy and depended on informal agreements. The intellectual property, the business model, customer contacts and some capital assets had to be transferred to the new company on the other side of the border (. . .). The family bond minimized the high risks involved (. . .). Thus, the family performed as a trust-generating framework. (Berghoff, 2006, p. 280)

Basically, the reproduction of family ties during the process of expansion and growth proves to be the most delicate step in the life of a family firm. Otto Bock successfully succeeded in transferring the immaterial assets to his son-in-law, a process that was even more difficult. The creation of immaterial capital in family firms is an extremely delicate process, which takes place only in the long run, and the transfer to relatives—and sometimes to nonrelatives—is also a very delicate issue. Sustainability in the process of growth is a measure of the efficiency of this process of transfer. Two famous, albeit contrasting, examples provide clear evidence of the delicacy of the issue. The first is a tale of failure, and comes from the history of Thyssen, the famous German steel maker. August Thyssen, the founder, broke off all relations with his wife and sons after his divorce in 1885. Consequently, while the young Thyssens remained the owners of the company, their father transmitted all his knowledge and skills to his managers, who he, personally, selected. By the year of his death in 1926, his sons were only marginally involved in the management (Fear, 1995). The history of Siemens is totally different, in which the solidity of the relationships among the four Siemens brothers was the basis for the international expansion of the firm during the last quarter of the 19th century.

If sustainability is defined, as it is above, as the capability to couple the process of growth and expansion of the company with the persistence of family control, then performance measures can be quite easily put forward and can be done so without any significant difference between business history research and that carried out in management studies, based on the presence of family members or—as in the case of Bock described above—of co-opted relatives, in the top management of the company, even in the case of the involvement of outsiders, in order for business historians to build indexes of openness in longitudinal perspective.

Conclusions

This article has tried to address the issue of the multiple meanings of the term performance in family firms. Historical research shows quite clearly that performance and value creation in family firms has to go beyond the measurement of financials, also because the available empirical and econometric evidence and research is extremely ambiguous in this regard—correlation between family ownership and “classic” measures of performance as returns, or Tobin’s Q being positive or negative according to the size of the sample, the age of the enterprise, the industries concerned, the countries considered, and other variables (see, e.g., the article by Favero, Giglio, Honorati, & Panunzi, 2006). Besides this, given the sometimes awful quality of the data available, historians have often preferred to refer to other measures of performance and value creation, more suitable for family firms, even though they are inevitably less precise and less objective than financials. In doing this, however, business historians have not been resorting to a second-best option. To pursue noneconomic goals and hence the identification of performance meanings other than income and financial-related ones has been, historically, common among family firms, especially when changes in the context emphasize the relevance of social capital and its preservation, instead of the accumulation of pure financial wealth (Sorenson, Goodpaster, Hedberg, & Yu, 2009). Given its emphasis on the time dimension, and on the continuity and change, business history provides, in this regard, invaluable insights into the influence of the context in the definition of noneconomic goals. Business history research provides further examples of noneconomic goals in family firms, frames the reasons of their prominence, and, through its particular research tools, documents how family firms try to pursue them. In the previous sections, I have tried to provide some examples of elements that can be considered as forms of value, and have analyzed the dynamics of their creation, and discussed the problem of their measurement.

In detaching themselves from “objective” measures of performance or, rather, in adding other concepts of value creation, enhancement, and transmission to them, historians have, however, taken the risk of “relativity.” Performance as value creation and transmission thus becomes a “mobile,” or multiple, concept, which varies across time and space, according to prevalent values, which are, in their turn, the production of culture and institutions. To be honest, the contribution that historians give is not the definition of new measures of performance, nor do they share with other social scientists a particular, in-house built methodology for performance measurement. Historians normally borrow techniques developed by others, from ratio analysis to market share calculation, and adapt them as best they can to their poor and weak data sources. What good business histories do is to point out the variability of the goals and thus of the performance measures in the life of a single enterprise and put forward the proper identification of these goals and of their measures.

Unfortunately, this means a transformation of the idea of performance and value creation into something that is “loose,” maybe too much so. But this is it. Bringing history into the framework also means bringing complexity, rather than simplification—and it is the business of historians to remember that reality is complex, and not easy to simplify. (Business) history is there to remind us that, basically, no analytical dimension that can avoid the need of contextualization across space and time exists and that, consequently, very rarely do single-dimension concepts allow social scientists to take an easy path. Multidimensionality (kinds of performance instead of performance) is a very good example of this; it imposes that adequate measures be found, which must be respectful of the real nature of what is under scrutiny. History, in sum, does not provide sophisticated analysis techniques, nor does it offer the magical power to foresee the future. Much more simply, it provides a unique training in inductiveness, instead of deductive analysis, in the appreciation of variety, but, at the same time, in the research of stylized facts that are able to interpret it.

On the other hand, business historians very often tend to interpret their job as solely comprising serious research on primary (archival) sources and documentation and the translation of the vast array of information provided by the records of the past into a more or less acceptable narrative, and nothing more. The need for business historians to imbue their research with solid theoretical frameworks and to put problems before sources has been invoked by many scholars, even recently (see, e.g., O’Sullivan & Graham, 2010). Business historians can benefit a great deal from a closer relationship with the rigorousness of the theoretical approaches proper to management studies. Hopefully, similar benefits could also be perceived the other way round.