Family business


A family business is a commercial organization in which management decisions are made or influenced by multiple generations of a family, related by blood, marriage or adoption, who have both the ability to influence the vision of the business and the willingness to use this ability to pursue distinctive goals. They are closely identified with the firm through leadership or ownership. Owner-manager entrepreneurial firms are not considered to be family businesses because they lack the multi-generational dimension and family influence that create the unique dynamics and relationships of family businesses.

Overview

A family business is the oldest and most common model of economic organization. The vast majority of businesses throughout the world—from corner shops to multinational publicly listed organizations with hundreds of thousands of employees—can be considered as family businesses.
Based on research of the Forbes 400 richest Americans, 44% of the Forbes 400 member fortunes were derived by being a member of or in association with a family business. The economic prevalence and importance of this kind of business are often underestimated. Throughout most of the 20th century, academics and economists were intrigued by a newer, "improved" model: large publicly traded companies run in an apparently rational, bureaucratic manner by well trained "organization men". Entrepreneurial and family firms, with their specific management models and complicated psychological processes, often fell short by comparison.
Privately owned or family-controlled enterprises are not always easy to study. In many cases, they are not subject to financial reporting requirements, and little information is made public about financial performance. Ownership may be distributed through trusts or holding companies, and family members themselves may not be fully informed about the ownership structure of their enterprise. However, as the 21st-century global economic model replaces the old industrial model, government policy makers, economists, and academics turn to entrepreneurial and family enterprises as a prime source of wealth creation and employment.
In some countries, many of the largest publicly listed firms are family-owned. A firm is said to be family-owned if a person is the controlling shareholder; that is, a person can garner enough shares to assure at least 20% of the voting rights and the highest percentage of voting rights in comparison to other shareholders.
Some of the world's largest family-run businesses are Walmart, Volkswagen Group, Samsung Group and Tata Group.
File:Touring a Family-Owned Business in San Francisco.jpg|thumb|300px|right|alt=Congresswoman Pelosi greets employees of McRoskey Mattress Company, a family-owned, San Francisco mattress manufacturer founded in 1899.|Congresswoman Pelosi greets employees of McRoskey Mattress Company, a family-owned, San Francisco mattress manufacturer founded in 1899.
The "Global Family Business Index" comprises the largest 500 family firms around the globe. In this index—published for a first time in 2015 by Center for Family Business University of St. Gallen and EY—for a privately held firm, a firm is classified as a family firm in case a family controls more than 50% of the voting rights. For a publicly listed firm, a firm is classified as a family firm in case the family holds at least 32% of the voting rights.
Family owned businesses account for over 30% of companies with sales over $1 billion.
In a family business, two or more members within the management team are drawn from the owning family. Family businesses can have owners who are not family members. Family businesses may also be managed by individuals who are not members of the family. However, family members are often involved in the operations of their family business in some capacity and, in smaller companies, usually one or more family members are the senior officers and managers. In India, many businesses that are now public companies were once family businesses.
Family participation as managers and/or owners of a business can strengthen the company because family members are often loyal and dedicated to the family enterprise. However, such participation may present unique problems because the dynamics of the family system and the dynamics of the business systems are often not in balance.

Problems

The interests of the entire family may not be balanced with the interests of their business. For example, if a family needs its business to distribute funds for living expenses and retirement, but the business requires those to stay competitive, the interests of the entire family and the business are not aligned.
Nepotism has been listed as a problem with family businesses. Forbes writes that "nepotism in family businesses is a phenomenon that has been present for centuries" and that it is "prevalent" in such businesses. Nepotism-based favouritism contributes to a poorer workplace atmosphere and tension, which can impact worker contributions to the organisation.
The interest of one family member may not be aligned with another family member. For example, a family member who is an owner may want to sell the business to maximize their return, but a family member who is an owner and also a manager may want to keep the company because it represents their career and they want their children to have the opportunity to work in the company. Children may not share this interest in managing or continuing the family business: the European Commission noted in 2008 that a "lack of appreciation of the traditional role of family business" could have an impact on the European economy as older business owners retire.

Three circles model

The challenge for business families is that family, ownership, and business roles involve different and sometimes conflicting values, goals, and actions. For example, family members put a high priority on emotional capital—the family success that unites them through consecutive generations. Executives in the business are concerned about strategy and social capital—the reputation of their firm in the marketplace. Owners are interested in financial capital—performance in terms of wealth creation.
A three-circles model is often used to show the three principal roles in a family-owned or -controlled organization: Family, Ownership and Management. This model shows how the roles may overlap.
Everyone in the family clearly belongs to the family circle, but some family members will never own shares in the family business, or ever work there. A family member is concerned with social capital, dividends, and family unity.
The Ownership circle may include family members, investors and/or employee-owners. An owner is concerned with financial capital.
The Management circle typically includes non-family members who are employed by the family business. Family members may also be employees. An employee is concerned with social capital, emotional capital.
A few people—for example, the founder or a senior family member—may hold all three roles: family member, owner and employee. These individuals are intensely connected to the family business, and concerned with any or all of the above sources of value creation.

Genogram

A genogram is an organization chart for the family. It is an enhanced family tree that shows not only family events like births and deaths, but also indicates the relationships among individuals in the family. It is a useful tool for spotting relationship patterns across generations, and decrypting seemingly irrational behavior.
Family myths—sets of beliefs that are shared by the family members—can play important defensive and protective roles in families. Myths help people cope with stress and anxiety and, by prescribing ritualistic behavior patterns, will enable them to establish a common front against the outside world. They provide a rationale for the way people behave, but because much of what makes up a family myth takes place deep beneath the surface, they also conceal the true issues, problems, and conflicts. Although these family myths can turn into a blueprint for family action, they can also turn into straitjackets, reducing a family's flexibility and capacity to respond to new situations.

Parallel planning processes

All businesses require planning, but business families face the additional planning task of balancing family and business demands. There are five critical issues where the needs of the family and the demands of the business overlap—and require parallel planning action to ensure that business success does not create a family or business disaster.
  1. Capital How are the firm’s financial resources allocated between different and family demands?
  2. Control Who has decision-making power in the family and firm?
  3. Careers How are individuals selected for senior leadership and governance positions in the firm or family?
  4. Conflict How do we prevent this natural element of human relationships from becoming the default pattern of interaction?
  5. Culture How are the family and business values sustained and transmitted to owners, employees and younger family members?

    Emotional dimension

The challenge faced by family businesses and their stakeholders, is to recognise the issues that they face, understand how to develop strategies to address them and more importantly, to create narratives, or family stories that explain the emotional dimension of the issues to the family.
The most intractable family business issues are not the business problems the organisation faces, but the emotional issues that compound them. Many years of achievement through generations can be destroyed by the next, if the family fails to address the psychological issues they face. Applying psychodynamic concepts will help to explain behaviour and will enable the family to prepare for life cycle transitions and other issues that may arise. Family-run organisations need a new understanding and a broader perspective on the human dynamics of family firms with two complementary frameworks, psychodynamic and family systematic.