CHAPTER 3: FAMILY ENTERPRISE
CHAPTER 3: FAMILY ENTERPRISE Family Business – a company that has two or more members of the same family own or operate together or in succession. Ownership passes through one generation of the family, to the next. FAMILY AND BUSINESS OVERLAP Family Concerns:
Care and nurturing of family members Employment and advancement in the firm Loyalty to the family
Business Concerns:
Production and distribution of goods and/or services Need for professional management Effective & efficient operation of the business
ADVANTAGES OF A FAMILY BUSINESS
1. Firm-specific knowledge: These companies are in a unique position to pass this knowledge along from generation to generation. 2. Shared Social Networks: Family members bring valuable social capital to the business when they share their networks with younger members of the family and thus help to ensure the firm’s future performance. 3. A focus on the long run: Most family managers tend to take a long-range perspective of the business.
4. Preservation of the firm’s reputation: Because they have a stake in preserving the family’s reputation, members of the family are likely to maintain higher standards when it comes to business ethics and ideology. 5. Reduced Cost of Control: Because key employees in a family business are related and trust one another, the firm can spend less on systems designed to reduce theft and to monitor employees’ work habits. DISADVANTAGES OF A FAMILY BUSINESS
Families tend to be stable, while businesses, especially those competing in the global economy, often face instability Family seeks to perpetuate traditions, while the business must innovate to prosper A business must deal with differences in competence and merit A family is characterized by unity and cooperation, but a business grows through diversity and competition For families, loyalty usually trumps opportunity, but businesses are regularly challenged by opportunities that arise for both the company and its employees
FAMILY BUSINESS MOMENTUM Organizational culture – patterns of behaviours and beliefs that characterize a specific firm. Cultural Configuration - total culture of a family firm, consisting of the firm’s business, family, and governance patterns The culture of a family firm may be a strategic resource that promotes learning, risk taking, and innovation. FOUNDER’S IMPRINT ON CULTURE Distinctive values that motivate, guide, and help to create a competitive advantage
A special way of delivering customer service Core values and business ethics permeate the growth
There is also the risk of a negative imprint on culture. For example, narcissism, selfimportance, fixation with success THE COMMITMENT OF FAMILY MEMBERS 1. Desire-based commitment – commitment based on a belief in the purpose of a business and a desire to contribute to the firm. 2. Obligation-based commitment – commitment that results from sense of duty or expectation. 3. Cost-based commitment – commitment based on the belief that the opportunity for gain from joining a business is too great to pass up. 4. Need-based commitment – commitment based on an individual’s self-doubt and belief that he or she lacks career options outside the current business.
FAMILY ROLES AND RELATIONSHIPS
Mom or dad, the founder Co-preneurs (husband-wife teams) Sons and daughters (cooperation and rivalry) In-laws Entrepreneur’s spouse
THE NEED FOR GOOD MANAGEMENT IN FAMILY FIRM The best practices for a family business:
Promotes learning to stimulate new thinking and fresh strategic insights Solicit input from outsiders to keep things in perspective Establish constructive communication, and use them often Build a continuous change culture Promote family members according to the skill level Attract and employ excellent non-family managers Ensure fair compensation Establish a solid leadership succession plan
NONFAMILY EMPLOYEES IN A FAMILY FIRM Nonfamily employees in a family firm may experience limits on potential for promotion, and experience frustration and sense of unfairness. Hazards:
Competition with family members for advancement Getting caught in crossfire and politics of family competition
Solution:
Identify family-only reserved positions in advance Treat both family and nonfamily employees fairly in matters of reward and promotion
Family Retreat – a gathering of family members, usually at an isolated location, to discuss family business matters.
Designed to open lines of communication and bring about agreement on issues Guidelines includes: planning and preparation, give everyone a chance to participate, and keep it professional
Family Council – an organized group of family members who gather periodically to discuss family-related business issues.
Function as the organization and strategic planning arm of a family Family members discuss values and policies and directions for the future
CAFÉ – the Canadian Association of Family Enterprise. National not-for-profit association dedicated to research, education, and assistance for family businesses. Helps members through its Personal Advisory Groups (PAGs) Family Business Constitutions – a statement of principles intended to guide a family firm through times of crisis and change.
Reduces conflict concerning ownership, performance and compensation Living, breathing document that can be amended as needed
THE PROCESS OF LEADERSHIP SUCCESSION
60% do not have succession plans in their family business 70 % of family-owned businesses fail to make the transition from founder to second generation 90 % don’t reach the 3rd generation
Mentoring – guiding and supporting the work and development of a new or lessexperienced organization member. Allowing only qualified competent family members to assume leadership roles in firm increases value of the firm for all who have an ownership interest in it
TRANSFER OF OWNERSHIP Transfer of Ownership – passing ownership of family business to the next generation. This activity always incurs complexities such as:
The amount of shares each child receives as a result of transfer of the family business Voting or non-voting shares? Who will be the leader successor of the firm? Tax considerations
In order to avoid these complexities, it is recommended to have an early succession planning.
Care and nurturing of family members Employment and advancement in the firm Loyalty to the family
Business Concerns:
Production and distribution of goods and/or services Need for professional management Effective & efficient operation of the business
ADVANTAGES OF A FAMILY BUSINESS
1. Firm-specific knowledge: These companies are in a unique position to pass this knowledge along from generation to generation. 2. Shared Social Networks: Family members bring valuable social capital to the business when they share their networks with younger members of the family and thus help to ensure the firm’s future performance. 3. A focus on the long run: Most family managers tend to take a long-range perspective of the business.
4. Preservation of the firm’s reputation: Because they have a stake in preserving the family’s reputation, members of the family are likely to maintain higher standards when it comes to business ethics and ideology. 5. Reduced Cost of Control: Because key employees in a family business are related and trust one another, the firm can spend less on systems designed to reduce theft and to monitor employees’ work habits. DISADVANTAGES OF A FAMILY BUSINESS
Families tend to be stable, while businesses, especially those competing in the global economy, often face instability Family seeks to perpetuate traditions, while the business must innovate to prosper A business must deal with differences in competence and merit A family is characterized by unity and cooperation, but a business grows through diversity and competition For families, loyalty usually trumps opportunity, but businesses are regularly challenged by opportunities that arise for both the company and its employees
FAMILY BUSINESS MOMENTUM Organizational culture – patterns of behaviours and beliefs that characterize a specific firm. Cultural Configuration - total culture of a family firm, consisting of the firm’s business, family, and governance patterns The culture of a family firm may be a strategic resource that promotes learning, risk taking, and innovation. FOUNDER’S IMPRINT ON CULTURE Distinctive values that motivate, guide, and help to create a competitive advantage
A special way of delivering customer service Core values and business ethics permeate the growth
There is also the risk of a negative imprint on culture. For example, narcissism, selfimportance, fixation with success THE COMMITMENT OF FAMILY MEMBERS 1. Desire-based commitment – commitment based on a belief in the purpose of a business and a desire to contribute to the firm. 2. Obligation-based commitment – commitment that results from sense of duty or expectation. 3. Cost-based commitment – commitment based on the belief that the opportunity for gain from joining a business is too great to pass up. 4. Need-based commitment – commitment based on an individual’s self-doubt and belief that he or she lacks career options outside the current business.
FAMILY ROLES AND RELATIONSHIPS
Mom or dad, the founder Co-preneurs (husband-wife teams) Sons and daughters (cooperation and rivalry) In-laws Entrepreneur’s spouse
THE NEED FOR GOOD MANAGEMENT IN FAMILY FIRM The best practices for a family business:
Promotes learning to stimulate new thinking and fresh strategic insights Solicit input from outsiders to keep things in perspective Establish constructive communication, and use them often Build a continuous change culture Promote family members according to the skill level Attract and employ excellent non-family managers Ensure fair compensation Establish a solid leadership succession plan
NONFAMILY EMPLOYEES IN A FAMILY FIRM Nonfamily employees in a family firm may experience limits on potential for promotion, and experience frustration and sense of unfairness. Hazards:
Competition with family members for advancement Getting caught in crossfire and politics of family competition
Solution:
Identify family-only reserved positions in advance Treat both family and nonfamily employees fairly in matters of reward and promotion
Family Retreat – a gathering of family members, usually at an isolated location, to discuss family business matters.
Designed to open lines of communication and bring about agreement on issues Guidelines includes: planning and preparation, give everyone a chance to participate, and keep it professional
Family Council – an organized group of family members who gather periodically to discuss family-related business issues.
Function as the organization and strategic planning arm of a family Family members discuss values and policies and directions for the future
CAFÉ – the Canadian Association of Family Enterprise. National not-for-profit association dedicated to research, education, and assistance for family businesses. Helps members through its Personal Advisory Groups (PAGs) Family Business Constitutions – a statement of principles intended to guide a family firm through times of crisis and change.
Reduces conflict concerning ownership, performance and compensation Living, breathing document that can be amended as needed
THE PROCESS OF LEADERSHIP SUCCESSION
60% do not have succession plans in their family business 70 % of family-owned businesses fail to make the transition from founder to second generation 90 % don’t reach the 3rd generation
Mentoring – guiding and supporting the work and development of a new or lessexperienced organization member. Allowing only qualified competent family members to assume leadership roles in firm increases value of the firm for all who have an ownership interest in it
TRANSFER OF OWNERSHIP Transfer of Ownership – passing ownership of family business to the next generation. This activity always incurs complexities such as:
The amount of shares each child receives as a result of transfer of the family business Voting or non-voting shares? Who will be the leader successor of the firm? Tax considerations
In order to avoid these complexities, it is recommended to have an early succession planning.
