Understanding Family Business Influence

 

Q. What are the basic ways in which families influence their business?

Answer:

To answer the above question we will examine various dimensions along which families may be involved in their firms. Families come in different shapes, sizes and generations.

Astrachan, Klein and Smyrnios have given the F-PEC Model to capture the essential dimensions of family business in 2002[1]. This model gives a three dimension criterion to find out family involvement or family influence in their firms / business.

(1) Power Dimension: It captures the degree of ownership control in family hands, the extent of management control in family hands and the degree to which the family has control in their firms/ industry or their voting rights in the governing body or the Board.

(2) Experience Dimension: This dimension is represented mainly by the number of generations for which the firm has been under family control.

(3) Cultural Dimension: Third dimension accommodates the degree of cultural overlap between the family and business systems, that is, the degree of overlap between family and business values.

In addition to F-PEC model some researchers[2] have identified the following five dimensions in recent years called Family Business Assessment tool: Self assessment will result in a spider diagram the   one below, and an indication of the typical strength and weaknesses depending on the score on these dimensions by a firm. Zellweger has developed a family business navigator to judge the strengths and weaknesses of a firm.

 Figure Business Assessment Tool

1.       the amount of family control

2.       the complexity of family control

3.       the setup of the family activities

4.       the family owner’s philosophy and goals, and

5.       the stage of control in terms of the family’s history with the firm.

The family business assessment tool does not suggest an optimal positioning along the five dimensions. The benefit of assessing family involvement according to these dimensions should be two fold. First, they shed light on the sources of family firm heterogeneity and in particular the opportunities and challenges that come with various types and levels of family involvement. Second, the tool allows the family business to open a discussion not only about the current state of family involvement, but also about the family’s future involvement, and opportunities and challenges that the firm will likely face when altering its positioning along the various dimensions of influence.  

1. Amount of Family Control: Family control means the degree to which the family is able to exercise power and influence on important strategic decisions which affect the performance. The size of business also matters e.g. in a small firm a family-dominated ownership and management  team may help performance as it represents a very efficient and lean governance form. In a large firm, however, it may be necessary to open up ownership and management to outsiders to finance growth and drive performance. In large firms family members remain present on the governance board to control the non-family managers. Depending upon various types and the degree of the family control over business firms face different opportunities and threats.

2. Complexity of family control: Complexity in family business management arises with the number of family owners and managers. The simple governance model is one person serving as the sole owner and manager which helps efficient and speed in decision making, as well as the absence of owner –manager agency problem. The challenges are the lack of external advice and external capital to finance growth and also succession problem. But if the number of family owners and managers increases the problem of communication and coordination arises and conflict may grow. Thus complexity increases with more persons start looking after the family business.

3. Business Set-up: Some family enterprise s are more complex than others. Some families may run a single firm while others may run several. Firms also vary in their approach to conducting business. Family following Entrepreneurial Approach always work for nurturing and developing its business. When this firm is continuously successful the family often changes its mindset from a family business to a Business Family and from a single business the family develops a significant portfolio of businesses (a family business group) that is typically controlled via a holding company or family office.

Some other business families follow Investors’ Approach rather than entrepreneurial approach and deploy its funds in multiple businesses. Such an investment approach is unique in that the business family tries to buy, build and eventually exit business over long cycles. It simply differs from  entrepreneurial family  which derives its identity partly from its involvement in a particular firm, the business families derives its identity from the entrepreneurial activities and thus is less dependent on a particular type of firm or industry.

The family’s self-understanding and its approach to doing business are both related to the number of firms the family controls. While many family firms are ‘single business operations’ over time the family may opt invest in several businesses. For a single business family the business expertise is essential but for families managing multiple businesses no such expertise is essential, only the capacity to take financial risk matters.

Degree of Business Diversification is the third element that captures the variance in family’s approach. There is always a core activity, product and industry for family firms in which they have specialization and are market reputation. The owners are attached to their business which may be called their socio emotional wealth but such families also face significant financial risk because of their undiversified business activities.

4. Philosophy of Family Control: Another feature of many family firms is that the nonfinancial priorities of the owners. Firms’ Socioeconomic set of goals i.e.  family’s (noneconomic) goals  along with business (economic) motives. There may be synergies between economic and noneconomic goals but family firms struggle with the question of prioritising between these two. There is a trade off between the economic and non economic goals. The family first approach gives priority to noneconomic goals also called socio-emotional wealth and business first approach gives priority to innovation, growth and profit over such nonfinancial goals.

A prominent element of socio-emotional wealth is the level of identity overlap between the family and the business. For them firm’s image and reputation is very important. A bad firm reputation reflects poorly on the owners while a good reputation may give them a good reputation in the society. Such firms give at most importance to family loyalty and personal relationships in jobs and promotions rather than hiring new talents.

5. Stage of Control: This dimension distinguishes family owners from other types of blockholders, such as private equity investors. The time horizon of the stage of control extends in two directions: it riches back into the past (duration) and projects forward into the future (vision). The longer the duration the higher will be the attachment to the firm. In some cases when the family is not involved in operations the owners may experience less attachment. The owner’s vision for the future is also very important .If the future of the firm looks grim, the family may seek to sell or liquidate the firm even if it has a long history of successful business. On the other hand if the future of the firm looks bright the family will be interested in handing over it to the next generation.

We have discussed the business assessment tool and family involvement dimensions not for the purpose of identifying the optimal positioning or involvement in the family business but to identify the managerial opportunities and challenges at each level of family influence or involvement. The discussion above seeks to capture the heterogeneity of family influence in a firm. Understanding the sources of this heterogeneity is important as the family-involvement dimensions give rise to particular opportunities and challenges for the firm and its owners. The family assessment tool and the associated framework will be most useful to family business to identify the interdependencies and managerial challenges that are associated with each position in the framework.

Reference:

Zellweger, Thomas, Managing the Family Business: Theory & Practice, Edward Elgar, 2017, Chapter 2

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[1] Astrachan, J. H., S.B. Klein and K.X. Smyrnios(2002), The F-PEC scale of family influence: A proposal for solving the family business definition problem, Family Business Review. 15 (1), 45-58.

[2] Thomas Zellweger(Jan 2020) Understand Your Family Firm's Core Strengths and Weaknesses

 

Family Business

 

Family Business

 Research Gate DOI: 10.13140/RG.2.2.28214.45127

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, or 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 of Family Business:

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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