28 April 2021

Green Innovation: Good or Bad For Family-Owned Businesses?

Dr FeranitaSenior lecturer, Faculty of Business & Law, Taylor’s Business School. Taylor’s Business School is the leading private business school in Malaysia, based on the QS Subject Ranking 2021 edition

Family-owned businesses are one of the biggest economic contributors in many countries across the globe. An article in Tharawat Magazine shows that family businesses around the world contribute more than 70% to global GDP and employ more than 65% of the world’s workforce. The numbers are more pronounced in Asia, where small and medium enterprises (SMEs) are commonly family-owned and dominate the stock markets in the region.

Other than their economic dominance, family businesses are among the world’s oldest firms. A classic example of one of the world’s oldest family firms is Merck — a 350-year-old firm founded by Friedrich Jacob Merck in 1668 that has survived two world wars — which is still standing strong in the market today with strong values of green initiatives and sustainability to help reach the UN’s Sustainable Development Goals. In Malaysia, Royal Selangor is among the Asian family-owned powerhouses in the pewter space, with continuous innovation since its inception in 1885.

In recent years, family business legacies have attracted much attention from investors, governments, multinational corporations (MNCs) and academic institutions. But how do so many family businesses last so long in an increasingly competitive market? According to a report by Accenture, there are two characteristics that help family-owned enterprises grow.

The first is the aim to create a legacy for future generations, where family leaders adopt a long-term view in protecting their business. They can do this as they are not shackled to stakeholder pressure, giving them room to think and act long term — also, no generation wants to be the one that kills the business. Second, a long-standing presence in the market allows them to build solid relationships with employees, customers, suppliers and partners over time, thus gaining a competitive advantage.

More importantly, these relationships have endured because they were built on trust and family values, which are defining features when working with a family business. Other characteristics have also helped, where the most original form of an economic unit is that of family members who share family ties and affection, working together for the welfare of the overall family.

However, in the ever-evolving world, demographics and digital technologies are developing at a dizzying rate. The public, especially the newer generations, is getting more conscious of protecting our Mother Earth. In order to thrive and maintain relevance, family firms need to look further into how they can adapt and satisfy social needs as well as reduce environmental impact while meeting their family’s needs.

“Going green” has become an important ecological issue for contemporary business practice worldwide. Unlike non-family firms, family businesses have different considerations when it comes to adopting green innovation to reduce environmental impact. This is due to their unique characteristics and traits, and while vast evidence points to the direct and indirect positive impact of going green on firm performance, these favourable outcomes may not be high on the list of family business priorities.

Green innovation generally requires more technological know-how, more resources, higher cost and, most importantly, radical innovation that may bring disruption to current business operations. In fact, there are existing discussions on the “ability and willingness paradox” of family firms’ behaviour in innovation, arguing that although there is plenty of room to innovate, family-owned businesses may be unwilling to do so due to their risk-averse attitude. Family firms tend to make decisions based more on protecting their socio-emotional wealth (SEW), where they are willing to let go of economic benefit when there is a threat.

However, the long-term mindset makes family-owned businesses even more suitable candidates for adopting green innovation to achieve sustainability for generations to come. Adopting green innovation is superior and less risky in the long run, compared with the alternative — especially in being left behind — given their long-standing success in the market, community-centric attitude and value-driven mindset.

Leaders in family-owned businesses need to assess the current trends carefully as consumers’ changing behaviours are tough to navigate, with social media and a 24-hour news cycle bringing a new level of scrutiny. Family businesses, and their family members, have strong brand reputations where even slight events can result in immediate adverse reactions on social media, jeopardising trust and impacting their reputations.

More needs to be done for family firms to explore sustainability through adopting green innovation. Corporate social responsibility has become increasingly important to consumers — especially the younger ones — and family businesses can leverage their legacy by aligning their family values with social and environmental needs. This measure is crucial for family-owned businesses to continue earning their stakeholders’ trust and ensuring their legacies for generations to come.

Dr Feranita
Senior lecturer, Faculty of Business & Law, Taylor’s Business School.