Understanding Family Business Groups and their Key Aspects - Essay Example

Reflective essay: family businesses Introduction Family businesses have always heightened my curiosity and recently I have developed a great deal of interest in understanding and accessing the framework of family-owned businesses. I have observed that these businesses share certain differences with non-family owned businesses in terms of their strategy, ownership, succession and practices. This essay is a reflection of my knowledge and experience that I have gained through practical and theoretical exploration. Understanding Family business Groups and their key aspects From my perspective, a family owned business is any business that involves multigenerational ownership and where at least two family members are held accountable for the business activities and majority of power and stake are exercised by the family. Studies show that family owned businesses are oldest form of business ownership and they are presently an important contributor to the global economy and commerce. In developed economies such as America, family-owned businesses are responsible for major share of employment generation and contribution in gross national product. It has been observed that in a number of countries, the dominance of family firms is unquestionable in their economic landscape. It also came across my observation that most firms across the globe express willingness towards being part of family owned business groups so that they are linked by common ownership and control by a single family. According to Pieper, Klein and Jaskiewicz, two types of governance techniques are exhibited in family owned businesses: formal control through contractual mechanism and informal control through relational mechanism. Arguments by Sharma and Astrachan state that family firms differ from one another in relation to the degree of family involvement and that from non-family firms with respect to involvement of family in ownership, governance and management. As I went through various journals I came across few contrasting and conflicting theories regarding family businesses. The stewardship theory suggest that managers and owners of family businesses are expected to act as visionary stewards of the organisations, aiming to enhance worth of shareholders through generous investment. On the contrary, agency and behavioural theory indicate that owners of family businesses avoid risk, invest less and utilize resources for self interest and benefits. I gathered from these two theories that with higher involvement family members the stewardship approach declines and agency behaviour increases and otherwise. The main dimensions of family businesses as recognised through these theories are nature, type, intensity and persistence. The nature of family-owned firms is different from that of other business group and it came to my notice that often these firms are confused with conglomerates. Family-owned businesses exert more control on the management through large shareholdings. Common ownership ensures conflicts are reduced and performance is improved through social control by family relations. The ownership structure of these firms is generally pyramidal in nature when an extensive network of firms involved. Another dimension that affects structure of family firms is type of inter-organisational relationship: formal and informal bonds. The third dimension, that is, intensity is related to the stewardship and agency theories. In this context, intensity represents cohesiveness and stability in relational network of family businesses. Lastly, persistence of certain factors is extremely important to maintain longevity and sustainability of generation-old family businesses. These factors include cohesion and commitment of family members, trust and entrepreneurial skills (Cited in Piana, Vecchi and Cacia, 2012). Ownership, strategy and governance perspectives on family business I selected Ownership, strategy, governance and other socio-psychological areas as a part of my research on family businesses because it came to my attention that different researchers have established relation of these factors with family business in their studies but few have identified their applications in this regard. Ownership In a firm, ownership illustrates distribution of control and power among the shareholders. Ownership forms one of the important yet complicated building blocks of family owned businesses as it involves familial ties as well as social position. Empirical evidence related to effect of family ownership on business exhibit mixed result; according to Wright and Zahra, family ownership has negative impact through expropriation while Le Breton-Miller and Miller indicated that ownership plays a positive role in developing stewardship and long-term goals. On the other hand, Coase and Wang explained family-owned businesses as a function of a progressive social process that involves various factors including families as the owners. Since a family business involves both family and business, thus, the governing factor in this regard is a combination of social system as well as business system. In this context, it is natural to expect the existence of internal governance structure within the owning family and its manifestation in the business system in the form of family patterns. It was observed by me that many a times individual family members struggle for control on business resources relevant to their position and power within the power dynamics of family system. Apart from power, it was also observed that ownership is also driven by emotional dynamics (Cited in Goel, et al., 2012). Strategy In family-owned businesses, the strategies are framed base on integration of business and family dynamics. Despite of its broadness, it was astonishing to me that the subject has been highly understudied. However, researches that were conducted in this regard suggest that features and characteristics of family businesses are very different from that of non-family businesses. For instance, family businesses are mainly driven by value and networking, long-term relationships based on trust and altruism, brand identification through family identity and long-term standpoints. The strategic thinking pattern of a family business is affected by the following factors: Long-term survival and sustainability The main aim of family owned business is to grow and survive beyond generations and in this regard, many authors added that above-average level of financial performance is necessary for survival of a firm in long run. However, Shepherd and De Castro suggested otherwise identifying certain low performing variables such as personal sunk cost, personal opportunities, perceived efficacy and environmental dynamism and complexity that contributed towards longevity of a firm. Leveraging resources and competitive capabilities of family members Moores argued that competitive advantage in family firms is achieved and managed through specific blend of tangible and intangible assets. However, these combinations differ in different economies. For instance in developing economy the combination is determined by the company with respect to prevailing regulations. Another study suggests that strong family relationships can result in competitive advantage as it adds to social capital of the firm. Moreover, owning family can develop competitive advantage by adding or shedding resources such as financial, intellectual, trust, cultural and labour capital. International expansion and growth It was disturbing that not many studies have been conducted to understand the growth strategies of family firms. The few studies that I came across provided a mixed feedback. Kellermanns, et al., suggested that growth is a function of entrepreneurial behaviour while entrepreneurial behaviour is fostered by increasing number of generations of business existence. Furthermore, a few researches suggest that family influence or ownership has a curvilinear impact on internationalisation of family firms. It was observed that extreme level of influence result in low level of internationalisation while moderate level of ownership supports high level of internationalisation. Development of human resource policies and practices In family-owned businesses, family members are usually employed as initial workforce based on their blood relations rather than merit or managerial skills. Bertrand, et al., exclaimed that nepotism can be damaging for family as well as business. However, some authors suggested that nepotism may have certain positive attributes such as increased communication, trust and continuity. As per my observation, there are several HR policies such as compensation, workplace policies, succession, incentives and benefits and employee relations that differentiate family-owned businesses from others (Cited in Astrachan, 2010). Governance As I studied researches done by authors such as Bammens, Voordeckers and Van Gils, it appealed me greatly that family involvement has significant impact on the structure and role of governance in the business. In these studies, I found that conventional owner-manager problems are almost non-existent in family owned businesses due to convergence of control and ownership. In these businesses, family owners have higher control than atomistic shareholders over monitoring managers’ performance because they are the primary investors in the firm and hold undiversified portfolios. However there are certain drawbacks of family’s impact on governance of the business, namely, often family owners pursue their personal economic and non-economic interests at the cost of non-family shareholders’ interests and intra-family interest conflicts. It has been observed that board independence has positive impact on corporate transparency and interest of minority shareholders. However, in family-owned firms, reluctance towards independent boards increases as role of socio-emotional family objectives increases. Although it is important to have external board members in the management so that business goals are given priorities over personal interest family members. Another positive aspect of having external board member is that they resolve and help in mitigating conflicts and emotionally charged situations. In my words, involvement of external non-family members in the governance system maintains a balance in the firm and helps in avoiding overlapping of family and business subsystems. Impact of culture and values on family business Keeping in view the dynamic and challenging nature of economic environment, I believe it is important to take in consideration certain distinct characteristics of a family in the family business to improve its stability and sustainability. In this regard, I would like to discuss about the construction, negotiation and enactment of values and notions of culture in the family businesses. Values have always been identified as a crucial role-player in understanding and resolving business crises. Cultural theories and practices can highly subjective in nature. Work culture differs from one family to other and one region to another. For example, business culture of American family-owned company will be different from that by Chinese and Islamic family. It was quite interesting for me to observe that different authors and researchers have viewed culture from different perspectives with respect to family-owned firms. For instance, Ainsworth and Cox addressed and defined culture from organisational perspective. They explained organisational culture as overlapping of business values and values related to family commitment. On the other hand, studies by Carr and Bateman related culture to the level of family firm. They also emphasised on role of corporate culture on family business. When I further studied regarding this, it came to my notice that Hofstede and Waterman have also explained that accomplishment and sustainability of family firms are deeply related to corporate culture. In addition to family culture, it is important to note that national and local cultures and values also have substantial effect on family businesses (Cited in Fletcher, Melin and Gimeno, 2012). Issues in family businesses From my perspective, a family business comprises two separate yet intertwined systems, the family and the business, that has undefined boundaries and complicated rules. It can be explained as an intersection of two imaginary circles. Family businesses combine various business roles and different family members performing those roles, such as parents, children, spouses and extended families playing role of stakeholders, advisors, board members, working partners and employees. There are situations when these roles overlap and give rise to conflicts explained as follows: Family to non-family employees Non-family employee often faces problems such as limited opportunities, nepotism, objective conflict and biasness of management towards family members, which induces feel of resentment. Moreover, family members may not approve involvement of external members and create unpleasant scenarios. In addition, there are several occasions where it has been observed that external employees hold better qualification than that of family members for a particular job, in such situation companies limit participation of such relatives or members to avoid potential conflict. Salaries and compensation According to me, salaries and compensation should be standardized in every industry and organisation as per the role played by an employee. In family-owned businesses, profit sharing or distribution among family and non-family employees is a major challenge. In a number of situations, non-employee family owners take a greater share of the profit leaving little incentives to be distributed among employees. In such conflicting situation, I believe management should develop strict rule regarding fair distribution of the earnings among all. Succession Succession is an important issue in family businesses where non-family employees are also involved. As per my observation, certain companies prefer promoting family members over non-family employees even if they equally deserving candidate for the role; this kind of biasness often result in resentment and negative feelings towards the organisation. It is therefore important for management to take sufficient steps towards implementation of fair practices (Morck and Yeung, 2003). Conclusion It was a pleasure for me to work on this paper as it was more of a learning session for me where I gathered knowledge about family businesses and impact of culture and values on them. Furthermore, I learned about the complications that exist in family-owned firms and the ways to meet these problems. Reference List Astrachan, J. H., 2010. Strategy in family business: Toward a multidimensional research agenda. Journal of family business strategy, 1, pp. 6-14. Fletcher, D., Melin, L. and Gimeno, A., 2012. Culture and values in family business—A review and suggestions for future research. Journal of family business strategy, 3, pp. 127-131. Goel, S., Mazzola, P., Phan, P. H., Pieper, T. M. and Zachary, R. K., 2012. Strategy, ownership, governance, and socio-psychological perspectives on family businesses from around the world. Journal of family business strategy, 3, pp. 54-65. Morck, R. and Yeung, B., 2003. Agency problems in large family business groups. Entrepreneurship Theory and Practice, 27(4), pp. 367-382. Piana, B. D., Vecchi, A. and Cacia, C., 2012. Towards a better understanding of Family Business Groups and their key dimensions. Journal of family business strategy, 3, pp. 174-192. Read More