Meaning:
What is unique
in family business or what distinguishes family firms from other types of
organisations is the influence of family on the firm. Note that the distinction
between family and non-family firm is not a matter of the size of the business
, nor whether it is privately or publically held.
Family business
has been as common in the Indian economy like elsewhere in the world, it is
perceived in a common sense. Various terms like ‘family-owned,’ family
controlled,’ ‘family managed,’ ‘business houses,’ and ‘industrial houses’ are
used to refer to family business. So what qualifies a family firm as such is
the degree to which and the ways through which a family controls its firms.
Thus, the term
family business conjures up different meanings to different people. While some
view it as traditional business, others consider it as community business, and
still others mean it as home-based business. Family firms deserve an approach
to management that takes into consideration what makes them unique: the fact
that they are influenced by a particular type of dominant coalition, a family
that has a particular goals, preferences, abilities and biases.
Types:
It is not easy
to distinguish between a family and non-family firms. Scholars have tried to
distinguish between the two on the basis of some cut-off level for family
involvement in a firm for example in the dimension of ownership or management.
.As such, there are various definitions of family business given looking at the
different aspects of family business. For the convenience of understanding, all
definitions have been broadly classified into two types based on the structure
and process involved in family business.
Structured
Definitions:
(i)
Ownership Control
These definitions are given based on ownership
and/ or management of family business. Majority stake is required to control
ownership or a decisive influence on a firm. But it is not a necessary
condition because control is possible even without a majority ownership stake.
In public limited companies a significant minority ownership may be enough to
control strategic decisions in a firm (such as appointment of Board Members and
top management, acquisition, disinvestment, restructuring etc.). An ownership
stake of 20 to 25% is sufficient for a share holder to have a decisive
influence on strategic decisions.
A few such
definitions are “Ownership control by the members of a single family.” — Barry
“Majority ownership by a single family and direct involvement by at least two
members in its operation.” — Rosenblatt, de Mik, Anderson, and Johnson.
(ii)
Family Management:
Some
researchers argue that a broad definition of a family business should
incorporate some degree of control over strategic decisions by the family and
the intention to leave the business in the family. Shankar and Astrachan
(1996) note that the criteria used to define a family business can include:
Percentage of ownership; Voting control; Power over strategic decisions;
Involvement of multiple generations; and Active management of family members.
Some
Scholars argue that firm only qualifies as a family business if it is family
managed as well as family owned. “Single family effectively controls firm
through the ownership of greater than 50 per cent of the voting shares; a
significant portion of the firm’s senior management is drawn from the same
family.” — Leach et al. The CEO position may be within the family in
small firms. But in large firms it is not the case the CEO may be from outside
the family members also.
(iii)
Transgenerational
Focus:
There
is a good deal of literature suggesting that what makes a family firm is its
transgenerational focus. That is, the wish to pass the firm on to future family
generations separated family firms from non family firms. The transgenerational
outlook is indeed important, as it represents a critical feature distinguishing
family firms from other types of closely held companies.
Some
argue that, regardless of the ownership or management structure, a business can
only qualify as a family firm if it has remained under family control beyond
the founding generation.
Process
Definitions:
These
definitions are based on how the family is involved in the business.
(iv)
Later generational
control
The
argument that firms held by the founding generation are not family firms is not
universally accepted. Many would argue that firms founded with the involvement
of family members or firms held by the founding generation with the intent of
passing control on to some future generation should qualify as family firms as
well.
“Family business
is a firm which has been closely identified with at least two generations of a
family and when this link has had a mutual influence on company policy and on
the interests and objectives of the family.” — R. G. Donnelley
“Family
businesses are those where policy and decision are subject to significant
influence by one or more family units. This influence is exercised through
ownership and sometime through the participation of family members in
management. It is the interaction between two sets of organizations, family and
business, that establishes the basic character of the family business and
defines its uniqueness.” — P. Davis
In an effort to
resolve the definitional ambiguity surrounding family business research, Litz
suggests that a business can be defined as a family business when its ownership
and management are concentrated within a family unit. Furthermore, he argues
that to be considered a family business; the business’ members must strive to
achieve, maintain, and/or increase intra-organizational family-based
relatedness.
In sum and
substance, a family business can simply be defined as a business one that
includes two or more members of a family with financial control of the company.
In other words, a family business is one actively owned and/or managed by more
than one member of the same family.
In fact the
simplification may cause some problems:
1. Overlooking
the heterogeneity of family firms
2. Simplifying
the definition of family
3. Underestimating
the value of studying family involvement along various dimensions.
Characteristics:
The definitions
of family business given above indicate the following characteristics of family
business:
a. A group of
people belonging to one or more families run one business enterprise.
b. Position in family business is influenced
by the relationship the family members enjoy among themselves.
c. Family
exercises control over business in the form of ownership or in the form of
management of the firm where family members are employed on key positions.
d. Family
exercises the influence on the firm’s policy direction in the mutual interest
of family and business.
e. The
succession of family business goes to the next generation.
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