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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