BUSINESS DISCUSSION 2

CHAPTER

5 The Family Business

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LEARNING OBJECTIVES

By studying this chapter, you should be able to… 5-1 Define the terms family and family business. 5-2 Explain the forces that can keep a family business

moving forward. 5-3 Describe the complex roles and relationships

involved in a family business. 5-4 Identify management practices that enable a family

business to function effectively. 5-5 Describe the process of managerial succession in a

family business.

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5-1 WHAT IS A FAMILY BUSINESS? (slide 1 of 2)

• Family – A group of people bound by a shared history and a commitment to share a future together, while supporting the development and well-being of individual members.

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5-1 WHAT IS A FAMILY BUSINESS? (slide 2 of 2)

• Family business – An organization in which either the individuals who established or acquired the firm or their descendants significantly influence the strategic decisions and life course of the firm. • A family business can be described as an owner-managed

business, a sibling partnership, or a cousin consortium. • Owner-managed business – A venture operated by a founding

entrepreneur. • Sibling partnership – A business in which children of the

founder become owners and managers. • Cousin consortium – A business in third and subsequent

generations, when children of the siblings take ownership and management positions.

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5-1a Family and Business Overlap

• Families and businesses exist for fundamentally different reasons. • The family’s primary function is the care and nurturing of family

members, while the business is concerned with the production and distribution of goods and/or services.

• The family’s focus is on creating value for family members and emphasizing cooperation, unity, and stability, while the business’s goal is to create value for customers and emphasize competition, diversity, and flexibility.

• Individuals involved in a family business have interests and perspectives that differ according to their particular situations. • Competing interests can complicate the management process,

creating tension and sometimes leading to conflict. • Relationships among family members in a business are more

sensitive than relationships among unrelated employees.

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5.1 The Three-Circle Model of Family Firms

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5-1b Advantages and Disadvantages of a Family Business

• There are a number of advantages of working in a family business. • Businesses that are family owned may promote their family

values to set themselves apart from competitors. • Family businesses can convey a sense of tradition and

achievement to relatives who are considering joining the firm and to nonfamily employees who have become part of the story.

• There are also disadvantages as well. • Conflict may arise among family members. • Employees and executives may show favoritism toward their

relatives, regardless of competence or performance. • Nepotism – The practice of employing relatives.

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5.2 Positives and Negatives of Family Businesses

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5-2 DYNAMIC FAMILY BUSINESS

• On average, family businesses survive longer than nonfamily firms.

• Recent research findings suggest that companies that are successful in transferring ownership and management from one generation to the next are characterized by entrepreneurial behavior. • For family businesses, a key issue in the transfer of ownership

and management is the retention or modification of the organizational culture.

• Organizational culture – A pattern of behaviors and beliefs that characterize a particular firm.

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5-2a The Imprint of Founders on the Family Business Culture

• The founder often leaves a deep imprint on the culture of a family firm. • The distinctive values that motivate and guide an

entrepreneur in the founding of a company may help create a competitive advantage for the new business.

• However, an overly controlling founder who won’t listen to others, share information, or allow others to make decisions fails to prepare others for leadership.

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5-2b The Commitment of Family Members (slide 1 of 4)

• The long-term survival of the business is dependent on the commitment of family members. • They may be committed to the family business for different

reasons, and these reasons will likely determine the nature and strength of that commitment.

• Founders have to balance their obvious interest in the business, their personal aspirations, and the needs of their family and employees. • Next-generation family members who choose to pursue a

career in the business must also deal with these challenges, and their commitment to the company will likely determine the value of their contributions, the financial benefits they create for the family, and their personal satisfaction in work-related roles.

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5-2b The Commitment of Family Members (slide 2 of 4)

SOCIOEMOTIONAL WEALTH • Socioemotional wealth – Nonfinancial factors in a

family firm that affect the commitment of family members to the business.

• The socioemotional commitment of family members to the firm occurs along five dimensions (FIBER): 1. Family control. 2. Identification with the firm. 3. Binding social ties. 4. Emotional attachment. 5. Renewal of family bonds through dynastic succession.

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5.3 Dimensions in Socioemotional Commitment

Family control and influence. Specifically, family members exert control over strategic decisions. Identification of family members with the firm. The firm may be seen as an extension of the family itself. Binding social ties. Family members feel closeness and solidarity. Emotional attachment of family members. The history and knowledge of past events influence and shape current activities. Renewal of family bonds to the firm through dynastic succession. There is an intention to hand the business down to future generations. Source: Based on Pascual Berrone, Cristina Cruz, and Luis Gomez-Mejia, “Socioemotional Wealth in Family Firms: Theoretical Dimensions, Assessment Approaches, and Agenda for Future Research,” Family Business Review, Vol. 25, No. 3 (2012): pp. 258–279.

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5-2b The Commitment of Family Members (slide 3 of 4)

THE FEAR OF COMMITMENT • Members of the succeeding generation in family firms

may have emotional resistance to joining the firm. • Typical fears include the following:

• Fear of failure. • Fear of success. • Fear of commitment. • Fear of disappointing your parents. • Fear of disappointing others.

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5-2b The Commitment of Family Members (slide 4 of 4)

COMMITMENT TO CONTINUITY • Studies have shown that only a little over half of

current owners of family businesses are optimistic about their companies remaining in the hands of family members. • The biggest concern expressed about retaining family

management was the fear there would be a lack of innovation on the part of successors.

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5-3 FAMILY ROLES AND RELATIONSHIPS

• There are many possible family roles and relationships that can contribute to managerial complexity in a family business.

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5-3a Co-Preneurs

• Co-preneurs – Couples who own and manage businesses.

• Advantage: • There is the opportunity to work with someone you really trust

and to share more of your lives together. • Disadvantages:

• Differences of opinion about business matters can carry over into family life.

• The energy of both parties may be so spent by working long hours in a struggling company that little zest remains for a strong family life.

• There can be too much togetherness.

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5-3b Mom or Dad, the Founder

• Entrepreneurs with children think naturally in terms of handing the business on to the next generation.

• Some of the approaches taken to prepare prospective successors for ownership and leadership include the following: • Demonstrating the founders’ commitment to both the business and

the family through both actions and words. • Permitting and supporting entrepreneurial behavior by the children;

letting them take calculated risks, and encouraging them to learn from failure.

• Supporting educational efforts that contribute to skills for leading the business while helping the children to develop their own special talents.

• Helping the children recognize that rules and responsibilities have their place in both business and life.

• Of all the relationships in a family business, the parent–child relationship has been recognized for generations as the most troublesome.

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5-3c Sons and Daughters

• Experts recommend introducing children to the family firm at an early age.

• In the entrepreneurial family, the natural tendency is to think in terms of a family business career and to push a child, either openly or subtly, in that direction with little thought given to the child’s talent, aptitude, and temperament. • However, our society values the right of the individual to choose his

or her own career and way of life, and if this value is embraced by the child, then he or she must be granted the freedom to select a career of his or her own choosing.

• A son or daughter may feel a need to work outside the family business, for a time at least, to prove that he or she can make it without the help from the family. • Grown children who find they can succeed on their own are likely to

have more self-confidence in their abilities if they choose to join the family firm at a later date.

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5-3d Sibling Cooperation, Sibling Rivalry

• At best, siblings work as a smoothly functioning team, each contributing according to his or her respective abilities.

• However, business issues tend to generate competition, and conflicts between siblings often occur. • One sibling dilemma has been labeled the predator/parasite

conflict. • Family members working in the firm are sometimes seen by

relatives who work outside the company as predators—extracting money from the business that the outsiders believe is rightfully theirs.

• From the inside, family members external to the firm are seen, in turn, to be parasites—that is, they have ownership rights, receive dividends, or make other claims on the business without contributing to its success.

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5-3e In-Laws In and Out of the Business

• In-laws play a crucial role in the family business, either as direct participants or as sideline observers.

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5-3f The Entrepreneur’s Spouse

• The role of the founder’s spouse is especially important, as he or she often serves as a mediator in family disputes and helps prepare the children for possible careers in the family business.

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5-4 GOOD GOVERNANCE IN THE FAMILY FIRM

• Good management practices are as important as good family relationships in the successful functioning of a family business.

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5-4a Nonfamily Employees in a Family Firm (slide 1 of 2)

• Nonfamily members often discover that they have limited opportunities in family firms. • Few parents will promote an outsider over a competent daughter or

son who is being groomed for future leadership. • Those outside the family are sometimes caught in the crossfire

between family members who are competing with each other. • It is difficult for outsiders to maintain strict neutrality in family feuds.

• The extent of limitations on nonfamily employees depends on: • The number of family members active in the business. • The number of managerial or professional positions in the business

to which nonfamily employees might aspire. • The extent to which the owner demands competence in

management. • The extent to which the owner maintains an atmosphere of fairness

in supervision.

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5-4a Nonfamily Employees in a Family Firm (slide 2 of 2)

• The leader of a family-owned enterprise might decide to bring in a nonfamily member as an executive with the firm for the following reasons: • To bridge the gap between generations. • To set a new direction for the firm. • To deal with change. • To provide new skills and expertise.

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5-4b Family Retreats (slide 1 of 2)

• Family retreat – An informal gathering of family members, usually at a remote location, to discuss family business matters.

• Family retreats provide a formal framework for the family’s ongoing discussion of family and business issues.

• Because honest and candid discussion can be difficult, it is standard for family leaders to invite an outside expert or facilitator to coordinate early sessions. • The facilitator can help develop an agenda, set ground rules

for discussion, and establish a positive, nonthreatening tone that emphasizes family achievements and encourages rational consideration of sensitive issues.

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5-4b Family Retreats (slide 2 of 2)

• To ensure the success of a family business retreat, David Lansky, CEO of a family business consulting firm, suggests that these guidelines be followed: 1. Be clear about the purpose of the retreat. 2. Set small, attainable goals.

• Don’t look at the retreat as having to accomplish all possible goals.

3. Use an agenda, and stick to it. 4. Give everyone a chance to participate. 5. Know the difference between consensus and agreement.

• Participants don’t have to see things the same way (agreement) in order to concur on a course of action (consensus).

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5-4c Family Councils (slide 1 of 2)

• Family council – An organized group of family members who gather periodically to discuss family-related business issues.

• A family council is the organizational and strategic planning arm of a family.

• It provides a forum for listening to ideas of all members and discovering what they believe in and want from the business.

• A family council formalizes participation of the family in the business to a greater extent than a family retreat does.

• It can also be a focal point for planning the future of the individual family members, the family as a whole, and the business, as well as how each relates to the others.

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5-4c Family Councils (slide 2 of 2)

• A family council should be a formal organization that provides governance for family members in their relationship with the business.

• Council members are normally elected by the extended adult family members.

• The representatives hold regular meetings, keep minutes, and make suggestions to the firm’s board of directors.

• During the first several meetings, an acceptable mission statement is usually generated, as well as a family constitution.

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5-4d Family Business Constitutions

• Family business constitution – A statement of principles intended to guide a family firm through times of crisis and change.

• A family business constitution is not usually a legally binding document, but it helps preserve the intentions of the founder and ensures that the business survives periods of change largely intact.

• A family business constitution, sometimes called a family creed, provides the framework for a family’s system of governance of the firm and may include the following topics: • The core values that all family members should follow. • A process for decision making. • The benefits that family members may receive from the business. • A mechanism for introducing younger members to the family

business and its governance structures. • A dispute resolution procedure. • The philanthropic ambitions of the family.

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5-5 THE PROCESS OF LEADERSHIP SUCCESSION

• The task of preparing family members for careers, leadership, and ownership within the business is difficult and sometimes frustrating.

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5-5a Available Family Talent (slide 1 of 2)

• The quality of leadership talent available in the family determines the extent to which outside managers are needed.

• A family firm should not accept the existing level of family talent as unchangeable. • Using development programs to teach younger

family members and improve their skills is imperative.

• Some firms include mentoring as part of such programs. • Mentoring is a process by which an experienced person

guides and supports the work, progress, and professional relationships of a new or less-experienced employee.

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5-5a Available Family Talent (slide 2 of 2)

• Perhaps the fairest and most practical approach to leadership development is to recognize the right of family members to prove themselves.

• A period of development and testing may occur either in the family business or, preferably, in another organization.

• If children show themselves to be capable, they earn the right to increased leadership responsibility.

• If potential successors are found to have inadequate leadership abilities, preservation of the family business and the welfare of family members demand that they be passed over for promotion.

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5-5b Preparing for Succession (slide 1 of 6)

• Sons or daughters do not typically assume leadership of a family firm at a particular moment in time. • Instead, a long, drawn-out process is involved.

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5-5b Preparing for Succession (slide 2 of 6)

RESPONSIBILITIES OF THE CURRENT GENERATION • Listed below are some topics that the current

generation should consider and some steps it should take: 1. Communication.

• Parents need to listen and ask questions. • Providing support and feedback are important, but not just in a

one-way direction. 2. Planning.

• Not only should the company’s vision be articulated, but also the family’s values and even the plan for settling the estate of the current generation.

• Planning should encompass family members, employees, and owners.

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5-5b Preparing for Succession (slide 3 of 6)

3. Accountability. • The next generation should be held accountable for their actions,

especially those that relate to credibility and integrity. 4. Owner development.

• To prepare the next generation to participate in the governance of the firm, the current generation should be specific about the job structure of an active owner-manager or board member.

5. Long-term planning. • When asking the next generation to develop long-term plans that

will prepare them for leadership, the current generation of leaders must simultaneously prepare their own plans that take into account future business development, boards of directors and advisers, family councils, and other structures.

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5-5b Preparing for Succession (slide 4 of 6)

RESPONSIBILITIES OF THE NEXT GENERATION • If prospective future leaders of the family

enterprise expect to advance to executive positions, they must proactively engage in their preparation by doing the following: 1. Be open to communication.

• The succeeding generation should understand the values that led to the creation and growth of the family enterprise and to its current mission.

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5-5b Preparing for Succession (slide 5 of 6)

2. Develop a personal action plan. • At this stage, prospective successors should seriously

assess whether they have addressed the following questions:

• Who am I? • What are my core values? • What are the most important areas of my personal and

professional life that I should work on?

3. Implement the personal action plan. • This involves pursuing relevant education, training, and

experience.

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5-5b Preparing for Succession (slide 6 of 6)

4. Prepare for ownership. • Future leaders need to develop basic management skills,

such as the ability to comprehend financial statements and to effectively supervise employees.

• They must grasp the role of a board of directors in terms of its relationship to the management team of the firm.

• They need to understand the relationship between the business and the family.

5. Design life plans. • Life plans are for both the individual and the business and

should address the following question: • What should the résumé of the family company CEO look

like in 5 or 10 years?

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5-5c Transfer of Ownership

• Transfer of ownership – Passing ownership of a family business to the next generation.

• Transferring ownership includes: • Changing the ownership structure. • Addressing tax considerations. • Considering government regulations that protect

minority shareholders. • Arranging personal holdings to create wealth

outside the business as well as within it. • Reflecting seriously on family talents and interests

as they relate to the future of the firm.

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Key Terms co-preneurs cousin consortium family family business family business constitution family council family retreat

nepotism organizational culture owner-managed business sibling partnership socioemotional wealth transfer of ownership