Navigating the delicate balance between tradition and sustainability, family-based firms face unique challenges in their journey towards adopting environmental, social, and governance (ESG) strategies. From their capability for innovation to corporate governance and external pressures, these challenges arise from a combination of internal and external factors. Read this to uncover the keys to unlocking the potential of family-based firms to lead the way in responsible and sustainable business practices.
Family-based firms are unique entities that have their own set of challenges when it comes to adopting climate action and environmental, social, and governance (ESG) strategies. These challenges arise from a combination of internal and external factors that affect the governance of the firm and its ability to pursue sustainable practices.
One of the internal factors that affects the ability of family-based firms to adopt ESG strategies is the capability for innovation. According to Christmann (2000), innovative firms are more likely to adopt new technologies and practices that are more environmentally friendly and socially responsible. This, in turn, enhances the firm’s reputation and increases its competitiveness. There is significant theoretical evidence that suggests that family businesses may face more challenges in adopting innovation (König et al. 2013).
The proactive or reactive nature of a firm’s strategic approach is another internal factor that affects its ability to adopt ESG strategies. Endrikat et al. (2014) found that proactive firms are more likely to adopt ESG strategies before they are required to do so, while reactive firms only do so when it is mandated by external forces such as regulations or public pressure. Studies have shown that family businesses with reduced levels of conflict among members of the controlling family are more likely to successfully implement proactive actions by allocating the necessary resources.
The organizational design of a family-based firm also plays a crucial role in its ability to adopt ESG strategies. Rivera-Torres et al. (2015) found that firms with a more centralized structure are less likely to adopt ESG strategies, as these strategies require a more decentralized approach that empowers employees to take the initiative in promoting sustainable practices.
Finally, corporate governance characteristics are another internal factor that affects the ability of family-based firms to adopt ESG strategies. Pekovic and Vogt (2020) found that firms with strong corporate governance systems, such as those with independent directors and effective board structures, are more likely to adopt ESG strategies, as these systems ensure that the interests of allstakeholders are considered when making decisions.
External factors, such as the uncertainty, complexity and munificence of the general business environment, also play a role in shaping the ability of family-based firms to adopt ESG strategies. Aragón-Correa and Sharma (2003) found that firms operating in uncertain and complex environments are less likely to adopt ESG strategies, as they prefer to focus on short-term goals and profits.
The strictness of environmental requirements also affects the ability of family-based firms to adopt ESG strategies. Filbeck and Gorman (2004) found that firms operating in industries that are subject to strict environmental requirements are more likely to adopt ESG strategies, as these firms must comply with these requirements to remain competitive.
Customers’ sensitivity to environmental issues also plays a role in shaping the ability of family-based firms to adopt ESG strategies. Menguc and Ozanne (2005) found that firms that serve customers who are sensitive to environmental issues are more likely to adopt ESG strategies, as these firms must respond to their customers’ concerns to remain competitive.
Finally, the extent to which the type of industry generates pollution is another external factor that affects the ability of family-based firms to adopt ESG strategies. Lucas and Noordwier (2016) found that firms operating in industries that generate high levels of pollution are less likely to adopt ESG strategies, as these firms must balance the costs of reducing their environmental impact with the benefits of maintaining their competitiveness.
To summarise, the ability of family-based firms to adopt ESG strategies is shaped by a complex interplay of internal and external factors. To ensure that these firms are able to pursue sustainable practices, it is important to consider the role of both family and outside directors in shaping corporate governance, and to create an environment that supports the adoption of ESG strategies.