Family firms are not merely engines of the economy; they are extensions of the family itself. In many countries, they represent more than 80% of all firms and, on average, grow faster than nonfamily firms (Miroshnychenko et al., 2021). To understand decisions that may at times appear “irrational” to external investors, it is necessary to look beyond the numbers. This is where socioemotional wealth theory, commonly referred to as SEW, becomes relevant.
When protecting the family name matters more than making money
The central idea of SEW, introduced by Luis R. Gómez Mejía and colleagues, is straightforward. Business owning families value more than profits alone. They also care deeply about identity, control, and the continuity of the family name within the firm (Gómez Mejía et al., 2007, 2011; Cabrera Suárez et al., 2014). This socioemotional endowment functions as a highly valued asset, and when it is threatened, families may even be willing to accept financial losses to protect it, provided that the firm’s survival is not at risk. SEW assumes that family identity is, to a large extent, the identity of the firm itself. Being “from Company X” becomes part of the family’s self-concept (Tajfel, 1982; Ashforth and Mael, 1989). Keeping the business within the family, even at the cost of lower efficiency or reduced returns for external shareholders, generates symbolic benefits that are actively weighed in decision making processes (Kets de Vries, 1993; Gómez Mejía et al., 2019; Neacsu et al., 2018). Moreover, SEW theory suggests that family decision makers are not necessarily wealth maximizers. Instead, they are primarily concerned with avoiding losses to their socioemotional wealth. When they perceive threats to control, reputation, or continuity, they may adopt strategies that lead to suboptimal financial outcomes, reject diversification, or avoid risky investments (Gómez Mejía et al., 2007, 2010; Chrisman and Patel, 2012). Conversely, in other contexts, they may accept substantial financial risk, such as maintaining ownership despite strong pressure to sell, if doing so prevents the loss of name, legacy, or control (Chirico et al., 2020; Leitterstorf and Rau, 2014; Souder et al., 2016; Strike et al., 2015).
From founders to cousins: how generations shape decisions
The relevance of SEW also evolves across generations. In the founder generation, emotional attachment is at its strongest, and families tend to protect socioemotional wealth even at significant economic cost (Gersick et al., 1997; Morgan and Gómez Mejía, 2014). As ownership becomes dispersed among siblings, cousins, and different family branches, identification with the firm weakens. More financially oriented practices then become more likely, including appointing nonfamily CEOs, taking on higher levels of debt, or collaborating with external partners (Gómez Mejía et al., 2007; Minichilli et al., 2014; Pongelli et al., 2016; Baixauli Soler et al., 2021).
In sum, SEW helps explain why so many family firms appear simultaneously cautious and stubbornly attached to the past. They operate with two currencies, financial and socioemotional, and rarely make decisions with a calculator alone.
Liliana Dinis, Professor at CATÓLICA-LISBON