The Family Business Bulletin
A Quarterly Report from the Center of Family Enterprise Research
Mississippi State University
Family Firm Innovation
In this issue of The Family Business Bulletin, we present information about innovation in family firms. Here you’ll find global observations as well as practical advice derived from research. This information will provide useful insights into 1) the paradox of family firm willingness and ability to innovate, 2) the types of cooperative partnerships that lead to successful family firm innovation, 3) how leadership style can influence innovation, 4) how MSU’s new entrepreneurship major supports family entrepreneurship and innovation, and 5) open-access resources to bolster family entrepreneurship.
INFORMATION – Ability + Willingness = Family Firm Innovation
The Ability and Willingness Paradox in Family Firm Innovation
by Dr. James J. Chrisman, Julia Bennett Rouse Endowed Professor of Management
Family firms face many challenges owing to the involvement of family members in their ownership and management. One such challenge is how to attract committed and competent workers from outside the family to improve productivity and performance. My colleagues and I investigated the labor productivity of family and non-family firms and how family firms can improve. The study was based on three key assumptions.
- When the interests of owners and employees are aligned, both are more likely to achieve their objectives because they will be more inclined to cooperate. If employees believe they will benefit from being more productive, then chances are they will be.
- Productivity is dependent upon the abilities and efforts of the individuals in the labor force. Higher-ability workers tend to be more productive than lower-ability workers, given the same effort. This is generally understood. What is not as well recognized is that those with higher ability usually put out more effort because the payoffs are larger for them.
- Firms that provide inducements that are particularly attractive to higher-ability workers will benefit more than those whose inducements are equally attractive to all because they will end up with more higher-ability employees.
Incentives and productivity
We propose that firms that offer incentive compensation will usually experience higher labor productivity than firms that do not. Because family owners often want to keep the firm in the family, non-family managers and employees typically have limited opportunities to buy into the firm, achieve positions of leadership, and/or obtain higher pay. However, because individuals with higher ability are most concerned with those opportunities, incentive pay structures can enhance the productivity of these members.
In addition, family firms are known to offer greater security and a paternalistic atmosphere to employees. However, such inducements do not encourage large numbers of higher-ability individuals to seek employment in family firms. Indeed, family firms that offer, or are thought to offer, a combination of lower opportunities and secure work environments virtually ensure that their employees – particularly at the managerial level – will be less capable and energetic than those found in non-family firms.
Incentives as Signals
Given these assumptions, we propose that providing incentive compensation will result in greater gains in labor productivity for family firms than for non-family firms. This is because it not only rewards higher productivity, but it also signals to potential employees that productivity will be rewarded, the upshot being that the firm will attract, hire, and retain more higher-ability employees. Because family firms tend to favor family employees, this signal is more important for them than for non-family firms.
Keys to Attracting and Retaining
Higher Ability Workers
Align Owner and Employee Interests
Signal to Potential Employees that
Productivity Will Be Rewarded
Use Incentive Pay to
Reward High Performance
Study Summary
We studied approximately 108,000 small and medium-size family firms and 108,000 matched non-family firms drawn from the U.S. Census Survey of Small Business Owners. We found that the productivity of firms that use incentive compensation was 9.3 percent higher than that of firms that did not. Among family firms, the difference was 11.3 percent. We also found that incentive compensation decreased the productivity gap between non-family and family firms by 88 percent.
Providing higher pay and/or better benefits packages (retirement programs, health insurance, and paid holidays) also positively affects the relative productivity gains of family firms. Individuals usually associate higher paying jobs with greater demands for ability and effort, thus discouraging to some extent workers who are less competent and/or industrious. However, the effects were not as strong as they were for incentive compensation, which fits with the idea that inducements that are more accessible to higher-ability than lower-ability workers are more valuable to firms, particularly family firms.
Practical Implications
For family business owners and managers, the obvious implication is that the more powerful the signal that ability and effort are rewarded, the better the quality of the employees attracted. This will lead to better outcomes for both the firm and its employees.
In a broader context, to get the kinds of employees desired it is important to signal what the culture and values of the organization are, what is expected of employees, and what is in it for them. After that, family owners and managers need to follow through on their explicit and implicit promises as well as monitor the behavior of employees to ensure they follow through on theirs. Indeed, monitoring (if not taken to extremes) and the fulfillment of commitments are other potentially effective signaling devices for attracting high-ability workers.
Adapted from: Chrisman, J.J., Devaraj, S., and Patel, P.C. (2017). The impact of incentive compensation on labor productivity in family and nonfamily firms. Family Business Review, 30, 119-136.
INFORMATION – Safer Gambles on Innovation
How Cooperation Can Help Family Firms Innovate
by Dr. Jennifer Sexton, Associate Professor of Management
Family businesses face a tough challenge: they often have the resources, the long-term mindset, and the motivation to innovate, yet they tend to invest in new products, processes, and technologies less than their non-family counterparts. Researchers call this the “family firm innovation dilemma,” and it is rooted in something called socioemotional wealth: the deeply personal, non-financial value that family owners have tied up in their business – their identity, their legacy, their sense of control, and the traditions they’ve built over generations.
Innovation is risky. It requires outside capital and expertise, which can dilute family control, and it can upend cherished traditions and ways of doing things. For family business owners, these aren’t just financial risks. They can feel like a threat to the entire foundation of the firm. So even when innovation makes good business sense, the emotional cost can feel too high.
But the study also uncovered something encouraging: family businesses that partnered with external organizations were significantly more willing to innovate. Partnering with others changed the calculus. It reduced risk, spread costs, brought in outside expertise, and limited any loss of family control to just the specific project at hand, rather than threatening the business as a whole.
The type of partner matters, too. Family businesses that partnered with non-commercial organizations, universities, government agencies, and research institutions were significantly more likely to pursue innovation. Partnerships with commercially oriented organizations, such as suppliers, competitors, or foreign companies, showed no significant effect.
Why the difference? Non-commercial partners operate under different rules and incentives. They are less likely to engage in opportunistic behavior, less likely to misuse proprietary knowledge, and are often restricted by law in how they can use shared information. For family businesses that are particularly protective of their accumulated know-how and trade secrets, this matters greatly. Partnering with a university or government research body simply feels less threatening to the family legacy than partnering with a commercial competitor.
If your family business has been hesitant to invest in innovation, this research points to a safer path forward: seek out non-commercial partners. The bottom line is that innovation doesn’t have to mean betting the family legacy. The right partnership can make it a much safer and smarter gamble.
This article is adapted and summarized from Kim, T., Sexton, J.C., and Marler, L.E. (2023) Innovation as a mixed gamble in family firms: The moderating effect of inter-organizational cooperation. Small Business Economics, 60, 1389-1408.
INFORMATION & TIPS – Leadership Style and Innovation
How Authoritarian Leadership in Family Firms Can Fuel Innovation
by Chelsea Sherlock, Assistant Professor of Management
In a recent study published in the Journal of Small Business Management, my colleagues and I tackled a leadership-innovation “paradox” that many advisors see in the field: authoritarian leadership (a leader who keeps tight control over decisions and expects compliance) is usually assumed to reduce creativity – yet some family firms with these very directive leaders are highly innovative. In family firms, this authority often comes not only from a role title, but also from the leader’s family position (e.g., founder/parent), and that context can change how employees interpret directive behavior. Therefore, the study asks the question: when can a strict, top-down leadership style actually help family-firm innovativeness?
Using data from the Successful Transgenerational Entrepreneurship Project, the authors analyzed 1,267 family firms with fewer than 500 employees across 56 countries, comparing patterns across emerging versus advanced economies. Findings indicated that authoritarian leadership can be associated with more innovativeness in family firms under the right conditions. First, when emotional attachment is high, family members are more likely to interpret strict leadership as protective and mission-driven, rather than controlling. That shared commitment reduces resistance and helps the firm move quickly on innovation priorities. Second, authoritarian leadership was more beneficial for innovation in the context of emerging economies where institutional support is weaker. Here, centralized leadership can help family firms navigate uncertainty.
- Don’t copy-and-paste leadership styles. An authoritarian leadership approach is most likely to support innovation when the leader is widely seen as a steward of the family legacy and when the family system is aligned around the firm’s future.
- It is important to build the family’s emotional infrastructure. Family members should work to actively reinforce their shared purpose (why the business matters). They should invest in next-generation engagement and in clarifying what the family wants to preserve and what it is willing to change..
- Put guardrails around authority. Even if centralized control speeds decisions, innovation still needs information flow. High-performing family firms often succeed because the leaders set clear strategic boundaries, then ensure resources (time, capital, talent) are mobilized toward implementation.
Sherlock, C., Marshall, D. R., Dibrell, C., & Clinton, E. (2025). The bright side of authoritarian leadership in family firms: An emotional attachment perspective on innovativeness. Journal of Small Business Management, 1-35.
FAMILY ENTERPRISE SPOTLIGHT
Altex Tube
Where the Team Makes the Place
by Laura Marler, Jim and Pat Coggin Endowed Professor of Management
Turning into the Altex Tube parking lot, I saw a pristine building. Upon entry, an open lobby and open floor plan were very welcoming. Walking through the office space, I had the feeling that offices with glass windows and open glass doors were no mistake. From the breakroom to the factory floor, every detail of design reflects the company culture: open doors indicating open communication; modern workspaces created with valued employees in mind; safe inventory stacking, contributing to the number of days without injury; magnetized cranes epitomizing efficiency through continuous improvement.
In a commoditized industry, Altex Tube is quickly growing its reputation as an agile steel tube producer committed to meeting customer needs. The company founder, MSU management alumnus Zach Smith, makes being both an entrepreneur and a leader seem effortless. However, hearing about his journey quickly lets you know that hard work built Altex Tube from the ground up and that it has been years in the making.
In an established industry, Altex Tube stands out as a modern workplace. Zach was proud to show the company kitchen and breakroom for employees. Although quartz countertops are not the norm in the steel industry, Zach emphasized that Altex Tube is committed to creating a good environment including top notch facilities for every worker. He has found that the effort is reciprocated in the commitment of company team members.
Zach grew up in a family embedded in the steel industry. His father and uncle, both role models, founded a steel business later purchased by Nucor; dad Alan is now Altex’s Chief Commercial Officer. During his college days and early career outside Mississippi, Zach established a relationship with a steel manufacturer in the state’s Golden Triangle area. Building on that relationship, he returned years later in 2020 to found Altex Tube, breaking ground in 2022 on property adjacent to the steel mill. Today, Altex purchases the rolled steel made next door and forms it into tubes. Having spent considerable time growing up in Alabama and starting his career in Texas, Zach chose his company name in homage to two states that gave root to his becoming a business leader and an entrepreneur.
The notion of home is as central to the company’s culture as its name. Altex Tube has figured out the key to attracting and retaining team members who treat the place like it’s their home: Employees are team members not only in name, but also in their roles. This is unsurprising given that Zach’s leadership paradigm is team-focused. They say there is no “I” in team, and in our conversation, there was no “I” in Zach’s language. Rather, there was a noticeable use of “us,” “we,” and “our.” When asked about the success of Altex Tube, Zach emphasized the importance of every single team member having a shared vision and seeing opportunity ahead. “Pulling the rope in the same direction” is a must for every team member, according to Zach.
In an industry where the market can determine your fate, Zach knows how to work within the narrow margins of efficiency to meet the nuanced needs of customers. Altex Tube has achieved differentiation by creating a team-based culture built on a shared vision and values, commitment to each team member, and empowerment that brings forth input from employees.
Zach noted, “Every good idea offered up by a team member contributes to Altex Tube’s success. In fact, the best ideas have been from team members.”
Success at Altex Tube lies at the intersection of a team mentality coupled with a clear vision for the future and a commitment to continuous improvement in production.
On the subject of continuous improvement, my visit to the plant happened to coincide with the inaugural run of steel on a newly constructed mill. Zach’s enthusiasm and vision were apparent when he shared that this second line has increased the capacity of Altex Tube and enabled them to adapt to customer needs for small runs of specific products. Perhaps even more telling was the pride in a team member’s eyes when he told Zach the new mill was up and running. Zach paused our tour to speak to the team member, taking time to acknowledge a job well done.
The value placed on selecting, training, and motivating team members translates to business outcomes. Altex Tube has had no turnover in the past year. In terms of recruitment, employee referrals have been very effective for the company. Altex Tube employees experience living out a first class vision each day as trusted team members in an environment where positive energy permeates every level of the company. The suggestions of empowered employees translate into next steps for the company. It is not surprising that employees are eager to have friends and family join in their work environment. After all, Altex Tube is a company defined by teamwork.
Learn more at Altex Tube’s WEBSITE.
INFORMATION – Hiring Family
Hiring the Next Gen After Graduation
by Chelsea Sherlock, Assistant Professor of Management
One important tool that can help to alleviate these concerns is a family constitution. Created by the family, a constitution is a written document to communicate family and next-gen expectations, especially for employment. By outlining clear hiring criteria for all family members (e.g., required degrees, years of external work experience, performance standards, etc.), the constitution can reduce role ambiguity by ensuring that every next-gen family member joins the business under the same merit-based guidelines. Families can also refer to the constitution when questions arise about who qualifies for which roles and under what conditions. The use of a constitution in recruitment helps to maintain fairness and keeps family relationships from spilling into business decisions. Ultimately, effective recruitment in family firms should balance tradition with professionalism, to ensure that the business persists across generations.
Mississippi SBDC
America’s SBDC
Mississippi State University is an equal opportunity institution.
Editor: Dr. Laura Marler
Head, Department of Management & Information Systems & Jim and Pat Coggin Endowed Professor of Management