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Group Assignment

On

Book Review of The Family Business

Its Governance for Sustainability

By Fred Neubauer & Alden G. Lank

Forwarded by Prof. John L. Ward

Submitted to: Prof. Satish Nair.

Submitted by:

MBA (FB&E)

Aashil-094101- Part 4 ch. 7 & epilog

Harsh-094104- Part 4 ch. 6

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Dhiraj-094110- Part 3

Nidhi-094130 Part 2 & 5

Ankit-094207 Prologue, part 1 & 6

PROLOGUE

Through gale or calm, now swift, now slack, yet steadily careering;

Type of modern- emblem of motion and power- pulse of the continent

Walt Whitman (1819-1892), To a Locomotive Winter

It seems to us that these words capture beautifully the role of family controlled

enterprise and their significance in our economies: they have been and still are true locomotives.

This line is true for the family businesses in the globe which steadily support the economic

development. A century and half ago in Berlin, on 1st October 1847, Werner von Siemens and his

partners Johann Georg Halske, formed the Telegraphenbauanstalt Siemens & Halske. The

forebear of todays vast Siemens Empire, a group of firms that for all practical purposes is still

largely influenced by the Siemens family. The original partnership had only ten employees,

today it employs almost 400000 people. It also helped to drive the industrialization process in

almost two hundred countries all over the globe.

Siemens is the only example of a telling observation: throughout our economic history no

institution has driven economic development the way the family-based enterprise has. And this

role dates back to the beginning the western civilization. Found among the writings of Aristotle

was a short document on economic activities during Hellenic Age, which states that during the

Hellenic period, private individuals dominated agriculture, banking, production. This situation

did not change greatly during the time of the Roman Empire the subsequent Middle Ages,

remaining more or less the same until well after the discovery of the New World. Even during

the early stages of industrialization, family controlled enterprise drove an economic development

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process. E.g. Rock feller, Ford, Carnegie were all controlled by strong personalities who in turn

were firmly rooted in their respective family clans.

Even after the separation of capital and management in the nineteenth century, the

owning families continued to call the shots when it came to directing the enterprise at the

highest levels. The far reaching influence of family-controlled enterprise has become quite

visible in recent decades. In Asia, family controlled enterprises, with all their vitality, elasticity

and tenacity, have driven the much admired, thriving economies of that part of the world.

The governance of family businesses has been studies in recent decades. Even in the

century old family controlled businesses the governance is untouched part. This book tires to fill

that gap.

The foundation of this book is based on authors consulting and teaching experience in

the family enterprises, research on corporate governance in family controlled enterprises and

literature research.

The target audience for this book is the managers and family members who are involved

in directing and controlling relatively large, family controlled enterprises. Small family

businesses are not the prime target for this book. Consultants, researchers and academics will

find considerable insights in this field.

This book is divided in six parts, moving step by step from relatively general concepts

and approaches to more specific ones that sharpen the focus on discussion.

Part 1 the world of family business.

Part 2 The concept of corporate governance and a classical governance in a family business.

Part 3 Family institutions and Board of Directors.

Part 4 The directing task of corporate governance: key measures.

Part 5 Handling and measuring the task of corporate governance.

Part 6 Putting Governance Insights into practical use.

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Part 1 The World of Family Business

NATURE AND SIGNIFICANCE OF FAMILY BUSINESS

In this chapter the author provides the framework for the clear definition of family

business. According to author the term family business is any form of business association

where the voting control is in the hand of a given family. There are various factors by which

we can define the family business like percentage of share owning by a family, number of

generation currently active in business, the ownership and control of the business etc. but the

simplified model provided by the author is the best way to define any family business in a better

way than any of the above mentioned.

This chapter has confronted the challenge of trying to define family enterprise. Any form

of business has strengths and weaknesses. Family controlled firms, however, have their own

distinctive qualities both positive and negative in terms of their ability to survive. However, that

despite certain important fragilities, family businesses are here to stay and will remain the

locomotive of our economies throughout the non-communist world.

The simplified model is very useful and appropriate for defining the family businesses in

the management and ownership context. The model also indicates about how the cultural

heritage can be retained in businesses after the quitting the ownership of family. The model

ownership and management matrix touch the total control, landlord, cultural heritage and exit of

family from the ownership of any business.

The significance of family enterprises in macro economic impact and strengths and

weaknesses context is also provides some good and bad insights of family controlled businesses.

This research provides some more insights about the economic impact by the family businesses.

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By using the best available information Shanker and Astrachan developed three

definitions of family businesses-broad, middle, narrow. These definitions are based on the

strategic direction, voting control and involvement of multiple generations in family businesses.

Also the statistic data provide us clear insights about contribution of family businesses in GDP,

workforce and job creation criteria in the context of broad, middle and narrow family businesses.

Another research of 325 very large UK family controlled firms in1980 provide more

insights about how family businesses outperformed than other businesses. This study is based on

the valuation ratios, profit margins, returns on share holder capital, growth of sales and growth of

net assets. The study tells us that family businesses are the more efficient and effective than non

family businesses even in the downturn of economy.

In addition, authors numerous interviews with participants in IMDs leading family business

program suggest that successful family firms manifest characteristics that are often lacking in

large publicly owned companies. The most common thing are

Excellent management development systems.

Training family members in ownership rights and responsibilities

Treating employees fairly and with loyalty that is usually reciprocated

Having strong sense of responsibility to society.

Emphases value for money and quality.

Taking long term strategic perspective

Remaining innovative and entrepreneurial.

It would be seriously misleading to convey the impression that all is well in the world of

family businesses. There is plenty of bad news also. At the top of the list, the short life of family

businesses. During the first generation period one third of family businesses are closed or sold.

Only 5-15 percent family businesses continue into third generation in the hand of the

descendants of the founder. This chapter also provides insights of complexities of family

controlled businesses which reduces the synergy of businesses and end up with vicious cycle.

The some of the issues are

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The opportunity to sell at an attractive price.

Rigidness towards changes and adoption.

Insufficient investment in R&D.

Inadequate control of costs.

Lack of access to affordable capital.

Other poor management practices.

Also this chapter gives a hint about the unique issues facing by family businesses. These

issues are

Failure to find capital growth without diluting familys equity.

An inability to balance financial needs of family and business.

Poor estate planning.

Unwillingness on the part of the older generation to let go of ownership and management

power at an appropriate moment.

An inability to attract and retain motivated family successors.

Unchecked sibling rivalry.

Unmanaged conflict between the culture of family, the board and the business and an

inability to develop appropriate governance in business.

Despite of these the researchers are quite optimistic for the future of family businesses and

their contribution to economical development. The better educated successors, introducing

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professionalism and sharing and capturing the knowledge from the family business network will

help them to be a major player in the development of economic growth in future.

STAGES OF EVOLUTION OF FAMILY ENTERPRISES

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Maturity

Aristocracy

Early bureaucracy

Bureaucracy

The model is Greiners Evolution and revolution as organization grow. By this model we can

understand how the evolution of organizational growth take place and which kind of changes are

required to grow smoothly. This model talks about five growth phases and five crises during the

transformation to one to another phase.

The family business life cycle model shows us how the role and responsibilities should be at

various stages. This model is developed by Mc Givern. This model shows us the changing of the

managerial role during the each stage of organizational life cycle.

Hershons two dimensional graphs link the progress of family through three generations and

suggest appropriate management styles for each stage in the evolution of the family businesses.

The three dimensional model developed by Gersick et al provides better understanding about

the relationship between business, ownership and family. This model presents various scenarios

of the development of all these three factors.

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Part 2 The Concept of Corporate Governance and a Classical

Governance Structure in a Family Business

The concept of corporate governance in a Family Business

The book defines the concept of corporate governance as a system of processes and

structures to direct, control and account for the business at the highest level.

Directing means being involved in decisions that are strategic in nature.

Controlling means oversight of management performance and monitoring the progress

towards objectives.

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Accounting for means responsibilities towards those legitimately demanding

accountability on the part of the firm.

Controlling and accounting for are different activities, but they are nevertheless highly

complementary and discuss with the framework of The governance portfolio and Movement

of tasks from management to board from Demb and Neubauer.

The above said framework is helping the corporate governance by floating border lines that

whose task? Like is it family the owners or top management?

It is also well define that job of corporate governance is shared between the board and top

management and borderline between the involvement of the board and management shifts as per

requirement of situation.

The corporate system may be capered to constitution of states because it is vary from

company to company as par their values, family size, culture, size of the company etc...

There are three key elements of a family company constitution like:

The family itself and its constitution

The board of directors

Top management

Part 3 Family Institution and its Board of Directors

4. KEY ELEMENTS OF GOVERNANCE STRUCTURE

The given chapter discusses the various facets of the family businesses from governance

point of view. A family like any other organization must have an efficient governance structure

so as to continue to function as an entity successfully. Values, ideals and a sense of purpose are

the things that hold primary importance for the organization and also form vast source of

strength and energy for any family owned enterprise. According to R. Skynner extremely healthy

families have six major rubrics:

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3. THE FAMILY COUNCIL: When family assembly reaches a critical mass then

council is formed. Here again the composition, structure, roles and procedures vary a

lot. The suggested number of members can be five to eight and should be elected on

the basis of ability to do the job.

4. OTHERS: There can be other institutions like family shareholder committee, family

offices, and employment committee and so on.

These family institutions decide what the family stands for, the rules of the game, the

acceptable boundaries within which the enterprise must operate and the way it should be

managed. These are called family statement and it is preferred that this family statement is a

written one. Some titles of family statements are family constitution, family vision, family

strategic plan, family mission, family policies, culture, objectives, family charter, family values

and so on. The lines between these labels are blurring. Family has an important role in preparing

appropriate questions, debate potential answers; gather input from top management and all of

these are helpful in making it consolidate its family statement. But these written documents

should not be rigid and should be open to verification.

Bergemans values and policies can serve as a guideline for how a family institution

should be handled. These are:

Recognize the values of the institution

Recognize family institutions to handle family matters

Clarify authority and responsibilities

Set the boundaries within which the strategies should be formulated and

implemented.

Clarify the policies regarding the Governance of the company, CEO

succession, family policies and transfer of shares

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5. KEY ELEMENTS OF A GOVERNAQNCE STRUCTURE IN A

FAMILY BUSINESS: THE BOARD OF DIRECTORS

The given chapter discusses the importance of board of directors in a family business, the

reason for their prominence, how to choose them, the pros and cons of having them and various

precautions that should be kept in mind while dealing with them. The author says that there are

legal as well as managerial reasons for having the board of directors. For businesses that are

incorporated board of directors is required by law and it can be adopted in two ways- one tier

system and two tier system. In two tier system there exists a supervisory board and a different

board of management. I n businesses that is not incorporated the board of directors is important

for managerial purposes. It often helps in more systematic, efficient and long term effective

sustainability of the business entity. The role and clout of the board of directors can vary

substantially in different organizations. And it is of primary importance that these roles and

responsibilities should be agreed upon by the board and the family owning the business together.

These roles and level of involvement that a borad demonstrates can broadly be classifies

in to four categories.

1. board has little or more influences in the functioning of the entity. Example of

this can be an advisory board. Their influence is only on the factors such asexpert knowledge.

2. Board protects family and shareholders. it is like having fiduciary role with

respect to shareholders, family, mission & culture.

3. Board plays role in strategy, control & hiring top executives.

4. Board has an executive role in conducting affairs of business and also governing

the leadership and direction of the business

It is imperative that the board of directors should be cleared about their agenda. The

chapter agrees upon asset of key tasks that include essence, culture & core values of the firm,

providing strategic directions, securing top management succession, insuring availability of the

financial resources and monitoring all facets of operations and reporting to owners and interested

parties.

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The chapter goes on to discuss the size and composition of the board which generally

varies from 6 to 12, thou the more advisable number is 6 or 7. In general there are 3 options of

composing the board.

The family members can compose it.

Outsider only.

Mixers of family members and outsiders

The board of directors should be selected keeping in view the agenda that is be assigned to

the board. These can be :-

1. Access of experience & knowledge

2. Access to open & honest opinion of experts.

3. Trust worthy but confidential advice.

4. Valuable business connection.

Professional consultants, very close family friends, retired managers and large number of

individuals should NOT be there on the borad. Board members with good general business sense

rather than highly specialized expertise should be look for, for constituting the board.

Evaluation of performance of individual board members is important thou it is not so

welcomed by all. One of the ways of evaluation is peer and self-evaluation where a questionnaire

is developed and needs to be objectively filled by the peers and oneself as well.

The chapter also discusses few guidelines that helps the boards in functioning well. These

are:-

1. Keeping the board informed about the important development in the firm

2. Holding a reasonable number of board meeting each year.

3. There should be clarity in whose sets the agenda, the owner or the board of

directors so that the conflict of interest and ambiguity can be curtailed.

The chapter ends giving the example of Campell Soup Company which won the America

best board award in 1996.

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Part 4 The Directing Task of Corporate Governance: Key Measures

6. CEO Succession- Key Governance in Family Business

CEO succession is one of the most important issues that a firm faces. One of a key

important figure in a family enterprise is the CEO. The appointment of the CEO is a key strategic

decision and that should be made once every generation. For the benefit of the family and the

firm, a well thought out management succession process is very important. A well thought out

management succession process will ensure a smooth transition of power between the

generations.

The successee is mainly responsible for ensuring a viable management succession process

and guaranteeing that the actual handling over of power is well conducted. The successe could

follow certain basic rules which can facilitate the smooth transition of power. Some of theimportant points are:-

Start early.

Create career development systems

Seek Advice

Build Consensus.

Clarify the Phasing-out process

Plan for Retirement

Stick to Plans.

The successor is equally responsible for the transition of the business. The advice that can be

offered to a successor is :-

Maximise educational opportunities

Acquire Outside Experience

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Examine Motivation for Entry

Anticipate Special Hurdles

Infuence Career Development

Call for Honest Feedback

Become Acquainted with Successee

Build Alliances

Make A deal with the Successee

A good succession can provide continuity and a deeply felt sense of corporate purpose- both

which are essential to a business enterprise.

The family should be kept in the business whenever possible and when desired by the family

unconditionally. The final decision of the successor should be based on competence and not

blood.

Selecting a non-family member CEO is usually complex and difficult particularly the first

time. The problems are further compounded if the candidate comes from outside the firm. A

well-functioned board csan be of invaluable help to the company. The board must work closely

with the family to select the most competent person as CEO.

7. Vision and Strategy as Key governance measure in family

business.

This chapter talks about how family members should get together and involving

themselves in visioning of the family business. It is very difficult for a non-family member to do

this, so it is of utmost necessity that in the leadership of top management, family member should

decide the course.

When the company goes large the role of family members in strategy setting is similar to

that of that of non-executive board member. They lack expertise and resource to make decisions

and strategy this is the disadvantage which needs to be overcome. This could be overcomes by

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the process of visioning. Visioning defines where the company would like to see itself in the

future, what is final destination. This would bring the entire organisation and family members

work towards the same goal. The building blocks of vision are core ideology that includes values

and purpose and envisioned future. This chapter is a sure guidebook in developing the

meaningful vision for the organisation.

Part 5 Handling the Controlling Task of Corporate Governance

Control as a Key Governance Measure

Control as key governance element for the firm to do business effectively and efficiently.

Some common feature related to control due to which company fail are as under:

There was lack of supervision at the operational management level.

No one in the management accepts the responsibilities of mistakes and failures.

In some cases there were breakdown of controls and supervision.

There was inadequate board oversight.

The auditing and regulations by thirds parties were inadequate.

These features are come from detail case studies like Baring Brothers Limited etc...

Here, are some contributing factors of failure due to improper control system like;

There was widespread complacency and ignorance about the underlying business.

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Enormous performance pressure.

Star system.

The effect of remuneration packages.

Conceptual Framework of Controlling

Controlling is a formidable task for any board as well as family, particularly in the light

of the growing diversity in the activities of firms and their increasing geographic spread, both of

which tend to lead to a loosening of the boards or familys grip on the organization.

But despite of all the measure of control we have to accept the fact the no control system

is absolutely watertight.

A First Class Control System

A first-class control system have dual task as under:

To monitor and judge the performance of management

To fulfil the boards fiduciary duty vis-a-vis the family.

This kind of first class controlling system designed by board, family members and top

management together according to company and is business.

Two Means of Judging

Many outcome controls are analytical and/or financial in nature, which mean they can be

quantified. Their biggest drawback is that they are produce after the fact only. So the time to

recover had been gone.

Control system and managerial behaviour together makes behaviour control. The

characteristics of behaviour control are ongoing process, judgemental in nature; require

information that is not produced by conventional reporting system.

Overall Control System the Wheel with For Spokes

The four spokes of the wheel represent the means by which the virtuous spiral from vision

to strategy to action and result is achieved.

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Diagnostic/Analytical Control System

These are feedback systems that monitor the outcomes of organizational processes and

correct deviations from present performance standard. These yardsticks are essentially efficiency

oriented and do not address customer perception.

Interactive Control System

These are control systems that board members use to involve themselves regularly and

personally in the life of organization. Familiarity with the different parts of the organization is of

great importance.

Boundary system

Boundary system represents formally stated policies, rules, limits and proscription tied to

defined sanctions and the threat of punishment. Such boundaries also allow individual creativity

within defined limits of freedom. Boundaries are a subtle but rather powerful control mechanism.

Belief System

The atmospheres and work ethics that beliefs systems create in a company tell members of

the organization that certain things are not done around here. They set a particular tone,

represent a major element of the culture of the firm, and have an ethical dimension.

The real accountability of an owner managed business is to a philosophy or a code. After

this as a member of the organization move away from the centre-physically and/or emotionally-

the power of belief system may start fed away.

Reporting/Accounting for

The central issue in family controlled enterprises is perceived fairness vis-a-vis all

family members. A well designed approach to regular reporting on a board can help here. The

family council also can play a significant role.

Transparency vis-a-vis the outside is something that family businesses have even greater

difficulty accepting, although this probably unwise. The role of comprehensive reporting

should not be underestimated in a family business.

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Part 6 Putting Governance Insight into Practical Use

PUTTING IT ALL TO WORK: CREATING A GOVERNANCE

STRUCTURE FOR A FAMILY BUSINESS

This chapter has outlined a process of developing a governance structure for a family

business. It is based on simple logic and it has been used successfully in many well known

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companies, both family and non family. Strengthening the vitality of a family business by

creating meaningful family constitution is a demand of the time. Creating governance in

businesses is require time and passion. It will not produce PAT answers and second rigid

implementation sometimes is causes harm to creativity process in organization.

The several groups of participants are involved in such a process.

The family.

Top management.

Process consultants.

This process can be described in two stages. The stage 1 is the determining of the overall

governance structure. In this stage the requirement for implementation is searched and also the

key area are decided in which this structure is useful. The 1st stage is also divided into four steps.

Step 1 will be the identification of the governance issue, where the requirement for this process

is evaluated. Step 2 is the establishing the reference points, where the participants create the role

and responsibilities for the handling such issues. Step 3 is the comparison step where the

comparison is made between the current system and proposing system for handling such issues.

Step 4 is the step where the possible actions are defined. In this step participants create the

actions for handling such issues.

In stage 2 of the development of governance system the priorities are setup. According to the

priority of any issue the implementation of governance is done. The CEO succession, creating a

vision and strategy, securing a financial resources, ensuring the effective and efficient control

and accountability is taken care as these are the critical issues.

Epilogue: Enlightened ownership of family enterprises

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It is very difficult to separate ownership from management due to family members

having majority of shares and total control of the family business. The head of the family has

total power in the business. This is the scenario in Stage 1 of a family enterprise. When the

enterprise reaches stage 2 which is the sibling partnership unitary management and ownership by

definition does not exists. Now when the enterprise enters stage 3 the problems of

ownership/control are compounded by cousins coming into the picture. In later stages with so

many shareholders there is no single person in control of the enterprise.

Family institutions play a key-role in the later stages.

They create a sense of involvement of family into the business. They explicitly express

family values and communicate it to the family. They provide family to socialize amongst

themselves.

Roles are clearly divided.

The guiding parameters are Return on equity targets, capital build up, dividend pay our

targets, amount leverage and portfolio balance. The CEO is appointed and an independent board

comes up into existence

Keeping Informed:

Having a proper balance between family inputs and CEOs outputs. Family must keep on

informing board about their decisions which might impact the business.

Understanding Legal Rights and responsibilities:

It is very important for family members to be aware of their legal rights and duties due to

increased interest of stakeholders in the management of the business.

Realistic but demanding expectations:

Owners should convey a very realistic expectation from the board. Demands must also

comply with the values of the family.

Spread the news:

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