The Family Business

&

Professionalism

The Family Business

&

Professionalism

Poornima M Charantimath, Entrepreneurship Development, Pearson Education, 2006

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1. Professionalism and A Professional

2. Factors that make a family business unique

3. Cultural environment in a family business

4. Complex roles and relationships

5. Management practices in a family business

6. Managerial succession in a family business

7. Problems and pitfalls of a family business

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ProfessionalismProfessionally Managed Co. or Professionals

ProfessionalismProfessionally Managed Co. or Professionals

Everyone wants to become a "professional" these days or to work in a professionally managed organisation.

While being professional may be a virtue, what exactly is implied by being a professional is often found lacking in individuals and companies.

In fact, some family owned companies have higher professional standards than the so-called professionally managed companies.

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A ProfessionalA Professional

To be a professional, it implies that a person is good in his job and can be depended upon putting in his best effort.

A professional or a company needs to be evaluated against the following yardsticks. A professional therefore means:Highly educated person (or a company employing) engaged in challenging work providing considerable autonomy of working

Highly competent and conscientious and Trustworthy – following strict ethical and moral standards.

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Family Business DefinedFamily Business Defined

Family Business is :

A company in whose ownership and/or functioning two or more members of the same family are directly involved

A firm whose ownership passes from one generation of a family to another (succession)

A company where voting majority is in the hands of the controlling family; including the founder who wants to pass on the business to his descendents. (IFC)

Importance of Family BusinessImportance of Family Business

Over 75% businesses in developed world are family businesses (OECD)• 99% in Italy• 90% in USA• 85% in EU• 75% in UK

In India, 95% of registered firms are family businesses.

Family businesses are the key drivers of the economy.

Companies with founding family participation performed better than non-family businesses. (Standards & Poor’s 500)

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Largest Family Firms WorldwideLargest Family Firms Worldwide

Wal-mart, USA – Revenues $245b, Sam Walton family

Fiat group, Italy – Revenues $54.7b, Agnelli family

IKEA, Sweden – Revenues $10.4b, Kamprad family

Tata group, India – Revenues $7.9b, Tata family

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Strenghths of Family BusinessStrenghths of Family Business

They outperform non-family owned businesses in sales, profits and growth indicators.

Strengths are: High commitment/ dedication from family Family members willingness to work harder

and reinvest profits into the business Willingness to pass on knowledge and

experience Family name and pride is associated with the

business.

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Weaknesses of Family BusinessesWeaknesses of Family Businesses

60-70% businesses are sold or collapse in 1st Generation.

Family businesses have short life spans. 95% don’t survive third generation of ownership.

Weaknesses: Poor management, inefficient funds growth Lack of procedures and practices (articulated) Lack of discipline

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Model of Family Business SystemModel of Family Business System

Family Business System comprises of three separate but overlapping domains:

Family

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3

7

5

1

Business

Ownership

4

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The 3-Circle Model of Family BusinessThe 3-Circle Model of Family Business

The 3-circle model is the established model for a family business.

1. The Ownership system: Ownership is based on another set of rules. Success of owners is measured in terms of return on investment; protection of ownership rights and owners’ values and philosophy of business.

2. The Family system: Families exist to care and nurture their members. Succession is measured in terms of harmony, unity and development of individuals with self esteem.

3. The Business system: Business however are economic entities where success is measured in terms of productivity, profitability, expansion, mergers and acquisitions.

HARMONYUNITY

SELF ESTEEM

PRODUCTPROFIT

PRODUCTIVITY

R O IVALUES

OWNERSHIPOWNER

SHIP

FAMILY

BUSINESS

Developed by Tagiuri and Davis at Harvard (1982) that incorporates Family, Business, and Ownership in the definition of family business.

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Ability to resolve conflicts with mutual support and trust

Boundaries between family and work are respected.

Unresolved relationship problems are not neglected for long periods

Communications are open and clear Family is clear about goals and has ability to

take decisions in that direction. Intergeneration boundaries are respected.

Healthy Family Business is the one that has… …

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Institutions of Family BusinessInstitutions of Family Business

Each of these 3-systems interacts with each other and influences their membership, goal and dynamics through family institutions. These institutions can have different forms or purposes:

Family assembly: to discuss all business and family issues

Family council: a governance body to coordinate family members’ interests in the business.

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A family constitution: helps codification of family governance structures. It defines:

• Family values, philosophy, vision and mission statement.

• Family institutions like family assembly, family council, family office, education and other social committees, etc

• Board of Directors (and Board of Advisors)• Senior Management• Organisation structure with authority/ responsibility relationships among the board, family and senior management

• Key family governance policies

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1. Family Meetings: where the family stakeholders meet, peers discuss issues of common interest for family business success. Lines of communication are established and opened on a regular basis at least once a year.

Family Council: Many families establish a Family Council – a family executive board – to act between family meetings. If the family is to own and manage a business for generations then all stakeholders need a place to be heard as equals…individuals need to move from family relationships to business partners.

2. Advisory Boards bring a challenge and objectivity to business management. Real outsiders as advisors are a requirement for the board to work and a true board of directors is even better. This group can help separate the family from the business issues. They can mediate big issues. They can add vision and wisdom. And, they can make management accountable.

3. Family Constitutions are nothing more than an assembly of written policies and agreements – both legal and informal. Families that can identify issues, both current and future, and debate their resolution to a consensus, then put it in writing, are highly likely to run a successful business.

Best Business Practices for Enhancing Effectiveness(John L. Ward, Faculty - Kellogg School of Management,

North-Western University)

Best Business Practices for Enhancing Effectiveness(John L. Ward, Faculty - Kellogg School of Management,

North-Western University)

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Key Family Governance PoliciesKey Family Governance Policies

Employment policy: fair without discrimination among employees / family members

Shareholding policy: rules for ownership and transfer within family

Dividend policy: Director nomination policy: electing family members

to the boardFamily education policy: for generating higher

education facilities for family membersConflict resolution committee (policy): measures to

resolve conflicts among family members.

Family First vs.Business First ModelsFamily First vs.Business First Models

Sample Issues

Family First Cos.

Family Employment

Open-Door Policy for all family members, regardless of qualifications

Compensation Equal pay for all, regardless of their experience or performance

Leadership Leadership based on Seniority in Family, regardless of merit or qualifications

Resource Allocation

Business Resources used for personal needs (e.g., loans, grants)

Decision-Making

Unilateral & Concentrated with Senior Family Member (e.g., Chairman/CEO)

Business First Cos.

Qualification-Based Employment, as for any other new hire

Merit-Based pay, based on experience, performance

Leadership granted to the right person (family or non-family), based on merit and qualifications

Business resources only used for business purposes – separate family reserve fund utilized for family needs.

Mulit-lateral, based on Defined Governance Structure (e.g., Executive Committee)

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Family and Business Concerns OverlapFamily and Business Concerns Overlap

Family Concern Care and nurturing of

family members Employment and

advancement in the firm Loyalty to the family

Business Concern Production and distribution of goods and/or services Need for professional management Need for effective and efficient operation of the firm

1 3

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Advantages of a Family BusinessAdvantages of a Family Business

Strength of family relationships during challenging periods of business change

Financial sacrifices that family members make for the good of the firm

Operation as a family business distinguishes the firm from its competitors

Higher levels of concern for its community and non-family employees

Capability to plan and prepare for the long-term Emphasis on quality and values

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Advantages of a Family BusinessAdvantages of a Family Business

Strong motivation of family members to see business succeed.

Developing firm specific knowledge among family members

Focus in the long term of the business Reduced cost of control Ability to used family theme in promotions Shared social networks among family members Perception of the firm’s reputation based on

maintenance of high standards.

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The Culture of a Family BusinessThe Culture of a Family Business

The Founder’s Imprint on the Culture The founder’s core values become a transmitted part of the

culture. The founders vision and mission gets transmitted. Organizational Culture

Patterns of behaviors and beliefs that characterize a particular firm. Honouring long term employees and thanking customers and vendors.

Cultural Configuration The total culture of a family firm, consisting of the firm’s

business, family, and governance patterns need to be documented

• People in the company, industry, and the community at large, all benefit from a deeper knowledge and understanding of company’s heritage.

• Family shareholders generally maintain their loyalty to the family business.

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Assignment Assignment

Q – DESCRIBE THE 3-CIRCLE MODEL OF FAMILY BUSINESS AND DISCUSS THE CONTRIBUTIONS MADE BY Indian FAMILY BUSINESSES WITH EXAMPLES FROM THE HOUSE OF :

• TATA 1-10 61-70• AMBANI 11-20 71-80• SINGHANIA 21-30 81-90• BIRLA 31-40 91-100• SHRIRAM 41-50 101-110• MODIS 51-60 111-120, 59• JINDAL• Date of submission: 4/3/1112/3/11

E-mail ID: sudhir.skgrover@gmail.com

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Business PatternPaternalistic

Laissez-faire

Participative

Professional

Governance PatternPaper Board

Rubber-Stamp Board

Advisory Board

Overseer Board

Family PatternPatriarchal

Collaborative

Conflicted

Cultural Configuration

of a Family Firm

Cultural Configuration

of a Family Firm

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Succession Planning – Family Roles and Relationships

Succession Planning – Family Roles and Relationships

Parental Concerns in succession of business: Does the child possess the temperament and ability

necessary for business leadership? Can the founder, motivate my child to take an interest in the

business? Type of education and expertise most helpful in preparing

my child for leadership Timetable for promoting my child How to avoid favoritism in managing and developing my

child? How to prevent the business relationship from damaging or

destroying the parent–child relationship?

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Role of Professional Managementin a Family Business

Role of Professional Managementin a Family Business

1. Stimulates new thinking and fresh strategic insights.

2. Attracts and retains excellent managers.

3. Creates a flexible, creative organization.

4. Creates and conserves capital.

5. Prepares successors for leadership.

6. Exploits the unique advantages of family ownership.

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A ProfessionalA Professional

To be a professional, it implies that a person is good in his job and can be depended upon putting in his best effort.

A professional or a company needs to be evaluated against the following yardsticks. A professional therefore means:Highly educated person (or a company employing) engaged in challenging work providing considerable autonomy of working

Highly competent and conscientious and Trustworthy – following strict ethical and moral standards.

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Elements of ProfessionalismElements of Professionalism

Accountability: towards whatever job is performed by him.

Concern for others: without any expectation in return Excellence: Knowledge, competency, skillful,

communicative. Integrity: honesty, morality, values, undivided loyalty. Dutiful and Respectful: duty bound, comradeship,

etiquettes, manners shown towards colleagues and others.

Receptive: to new ideas, ready to experiment and take calculated risk

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Professional Management (cont’d.)

Dealing with Non-Family Employees

Professional Management (cont’d.)

Dealing with Non-Family Employees

Hazards:• Competition with family members for

advancement• Getting caught in the crossfire and politics

of family competition within the firm

Solution:• Identify family-only reserved positions in

advance.• Treat both family and nonfamily employees

fairly in matters of reward and promotion.

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Successful Leadership Succession Successful Leadership Succession

A sound, profitable business Stable, healthy family relationships Advance planning for leadership succession Positive family leadership and a team-oriented

management structure Presentation of career opportunities without

pressure Open communication on family business issues

Conditions favouring successful succession:

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1. Family vs. Working Relationships

2. Full Family Employment

3. Lack of Professionalism

4. No Succession Plan leading to Rivalry

5. Input from Younger Generations

Pitfalls of A Family BusinessPitfalls of A Family Business

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Family Feuds: whether they start in the family and spill into the business; or start in the business and spill into the family. Every business, how so ever successful, has it.

Family vs. Working RelationshipsFamily vs. Working Relationships

Indian Family Businesses’ Historic Weaknesses:

Four most common weaknesses are:

1. Inability to separate family’s interest from interest of the business

1. Favoritism shown to family member by promoting him/her to a position of authority disregarding recruiting or retaining talent

2. They need to learn to separate interests of family from the business

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2. Lack of focus and business strategyIndian cos. want to do everything in-house. Reasons were lack of infrastructure, outsourcing avenues, etc

3. Absence of investment in product and employee development (short-term focus)

1. Rampant ad-hocism in business policy and strategies

2. Indian cos. don’t invest in R&D, skill development or employee development

Indian Family Businesses’ Historic Weaknesses:

Family vs. Working RelationshipsFamily vs. Working Relationships

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4. Weak marketing skills, insensitivity to customer satisfaction

Uncompetitive markets were the cause; globalization is going to change their perception

Indian Family Businesses’ Historic Weaknesses:

Family vs. Working RelationshipsFamily vs. Working Relationships

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No Succession PlanNo Succession Plan

Lack of succession plan or otherwise are the causes of continuous sibling rivalry within the family

Sibling rivalry can’t be avoided but can be minimized.

Don’t use arbitrary approach to these issues; use management approach instead.

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Dealing Sibling RivalryDealing Sibling Rivalry

Steps to deal:

1. Create time to understand points of view of those who are low profile or disagreeing members

2. Family’s values are a shared bond and represent shared commitment to common good

3. Create rules of behaviour for family meetings

4. Avoid ridicule or sarcasm while dealing with siblings

5. As a normal rule for such meetings, fix time limits; put the topic for further research and provide agenda time at next meeting.

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Input from Younger GenerationInput from Younger Generation

Improving Family Business Performance Most companies are in transition today and need to

professionalize fast. One of the important ways to deal with sibling rivalry

as well as providing opportunity to them to provide input to the business policy making

This helps the family business to get business input from young minds and provide them a platform to develop their professional approach

Familial capitalism is not a weakness in the global environment; there is a need only to professionalize the family environment.