Founders and their families often exert extraordinary power over public companies, even when they own only a minority of the shares.

Read this article from the Economist and share in this post about how families and especially founders in your nations use the legal framework and its nuances to continue to exert considerable control over the business decisions in companies in which they only own a minority stake in the company! See my sample below…build on it by contributing to this post

An old school British merchant banker, now living happily in retirement in the English countryside, listed, after dinner the other night, his basic stock picking formula. Never invest in family-controlled companies…..

The above extract is taken from a 2010 FT article that highlights the issues facing professional investors and capital markets when working with FBs- even larger ones- in this case VW.

Use this space to submit your arguments for why capital market investors should work and fund FBs. Make the case from both the investors’ and FBs’ perspective

There are 2 indexes tracking publicly held family firms:

• the Family Business Stock Index (FBSI) (follows more than 200 of the largest family-controlled companies nationwide)
• the Loyola University Chicago Family Firm Stock Index (LUCFFSI) (tracks 38 publicly traded, family-controlled firms headquartered in the Chicago area)

From the investor’s point of view:

• A study of the 20-year performance of FBSI companies showed average annual returns of 16.6 percent, compared with 14 percent for the Standard & Poor’s 500-stock index.
• The second study compared the performance of the LUCFFSI with the Dow Jones industrial average and Crain’s Chicago Stock Index from Sept. 28, 1990, to July 28, 1995. The LUCFFSI increased 94 percent during that period, compared with 92 percent for the Dow and 65 percent for Crain’s.

The reasons

• According to Oakland University’s Kleiman, “the families have capital tied up in the companies-vs. being absentee owners-and therefore work aggressively to maximize the stock value as it benefits them.”
• The Chicago researchers point out that an index of family-controlled companies can serve as a benchmark by which other family businesses can measure their own performances, and that such an index provides “the best way to judge the performance of portfolio managers who follow a strategy of investing in family controlled firms.”

For more information please refer here.

According to a research conducted in Britain: Family ties make more profitable publicly quoted businesses.

Amongst the reasons:

· During the past five years the share prices of UK quoted companies where families held a significant stake outperformed the FTSE all-share index of firms listed on the London Stock Exchange by 50 per cent, according to a survey by Manchester Business School.

· Family businesses had a higher average profit margin, return on capital employed and return on equity( Randall D., (2009) Forbes 2009 –>

(http://www.forbes.com/2009/03/10/investing-family-martin-personal-finance-martin.html)

than their peers, though growth in sales and assets tended to be lower.

· Family businesses were more stable performers when markets were down. They don’t tend to zoom up and zoom down.

The article does highlight, though, that the most important challenge for Family Businesses is to plan for succession as research by the Institute for Family Business and the London Business School in 2003 found that 57 per cent of family businesses had no defined succession plans, although 39 per cent expected chief executives to retire or leave within five years.

(Moules, J. UK quoted companies see profit of family ties, Financial Times, 2005)

Investing in a family-owned business

Hey guys

this is summary of the article - main points; “The family business owner is looking to sell. The private equity firm is looking to buy and wants to get a foot in the door.  They need to tread carefully.  While family-owned businesses are fertile ground for dealmaking, land mines abound. One false step and”…

According to the author family owned firms and private equity are “hardly strangers”. Moreover, according to a research more private equity firms will decide to invest in family owned business in the near future. Concerns of family business owners that want to sell their business or let other companies to invest in the family business:

By Stephen McGee, Executive Director, Grant Thornton Corporate Finance LLC

Source: http://www.grantthornton.com/portal/site/gtcom/menuitem.8f5399f6096d695263012d28633841ca/?vgnextoid=f4b858c2133cb110VgnVCM1000003a8314acRCRD

http://www.oecd.org/dataoecd/1/26/43654301.pdf

Family ownership may be seen as an opportunity or a threat, depending on a variety of factors. The family ownership and commitment to the business may be understood as adding value, provided that the company and the controlling family can respond to the concerns of the investor community.

Investors—both shareholders and creditors—may look with distrust on family-controlled companies, because of the risk that the controlling family may abuse the rights of other shareholders. So investors likely will scrutinize such companies with care before taking the plunge and investing.

From an investor perspective, the key is to establish the right corporate governance conditions so that the positive aspects of family ownership are coupled with assurances that investor interests will be recognized and addressed. Investor perception on ownership concentration, and the value associated with it, is revealed in a report of emerging market firms published at the beginning of 2007 by Citigroup Global Markets. The analysis suggests that investors place a three percent valuation premium on firms in which family insiders wield significant, but not absolute, control. Conversely, for emerging market firms where families are majority owners, investors assign a valuation discount of 5-20 percent.

A reason for which it is risky to invest in a family firms which undertook an IPO, is that initially, you may experience Underpriced value.

According to this article, this happens mainly because of: Information Asymmetry, Agency Costs, Institutional Settings and Investors - over optimism.

Usually the older and larger the firm, the lower the uncertainty and information asymmetry and, therefore, lower underpricing.

Another reason as to why investors need to be careful, is that many often consider IPO’s as a speculative opportunity. This may lead to a short.run underpricing with negative initial returns.

Source:

Roberto Arosio, Giancarlo Giudici and Stefano Paleari (2000), What Drives the initial market performance of italian IPO’s? An empirical investigation on underpricing and price support, 2000.

I found this source “Family Business Ownership: How To Be An Effective Shareholder”

it identified the aspects of family business ownership.

Owners Versus Investors:
Investor are people who are simply risking their money in hopes of a good financial return. They are not relly personally or emotionally involved with the company in which they are investing.
Being an effective businees owner is a more intimate matter.

The types of family business owners:
1.Majority and minority owners: more half shares vs less than half shares
2.Voting and non-voting owners
3.General partners and linited partners

The interests and goals of family shareholders are different from those of public shareholders. Serving both groups is usually a considerable challenge.

source: http://books.google.co.uk/books?id=KMo3Wfv6jnEC&pg=PA4&lpg=PA4&dq=investor+in++family+business&source=bl&ots=zMjlRI0TpS&sig=u8UQ8wp1h7fAIZ3J_xvRsAXIqFI&hl=zh-CN&ei=HmfHS-qbGtHB-QaLnP3bCg&sa=X&oi=book_result&ct=result&resnum=2&ved=0CA4Q6AEwATgK#v=onepage&q=investor%20in%20%20family%20business&f=false

Colin Mayer, the dean of Saïd Business School at Oxford University believes that somehow the British have lost the secret of keeping family firms going as such for more than two generations

(http://executive-magazine.com/getarticle.php?article=12655) Executive Issue 126, January (2010)

The biggest loss to the business, he believes, is the disappearance of a long-term vision, with the emphasis switching to short-term financial results.

Read this Economist article (Small Island For Sale) , Professor Mayer’s paper and a Harvard Business Review working paper on the matter. Here’s another piece that looks at FBs within the national context:  Our Company Right or Wrong

Contribute here by making a comparison between the British FB experience over the last 100 years and your home country’s experience and tradition of managing corporate control in FBs.

1. Are there many FBs for example coming to the markets now as your home economies internationalize and seek to take advantage of growth opportunities?
2. What is the legal framework in your country regarding corporate control and how does it protect FB interests in maintaining corporate control?
3. Do you think the UK’s approach to creating environments that do not sustain multi-generational FBs are beneficial or detrimental to the national economy?

WARNING: In responding to all of the above questions please provide evidence, facts and qualitatively sound research-based arguments with sources. Do not provide anecdotal, personal opinion and jingoistic journalism. If you want to offer these then please do so in the in-line remarks adjacent to your editing of this post

Here’s a series of FT Articles on Family Dynasties from various nations that highlight the tension between corporate control and sustaining Multi-G FBs to stimulate your research into your nation’s institutional frameworks for Corporate Control.

Here’s the Abstract to Mayer’s arguments:
Family ownership was rapidly diluted in the twentieth century in Britain. Issuance of equity in the process of acquisitions was the main cause. In the first half of the century, it occurred in the absence of minority investor protection and relied on directors of target firms protecting the interests of shareholders. Families were able to retain control by occupying a disproportionate number of seats on the boards of firms. However, in the absence of large stakes, the rise of hostile takeovers and institutional shareholders made it increasingly difficult for families to maintain control without challenge. The result was a regulated market in corporate control and a capital market that looked very different from its European counterparts. Thus, while acquisitions facilitated the growth of family controlled firms in the first half of the century, they also diluted their ownership and ultimately their control in the second half. (Franks, J., Mayer, C., and Rossi, S. (2004), Spending Less Time with the Family: The Decline of Family Ownership in the UK, ECGI )

The World Economic´s Forum describes Venezuela as ranking last in Latin America for the attractiveness of its environment for private investment in infrastructure. Some reasons for this:

· Venezuela is the worst performer in the General Investment Environmental Factors sub-index.

· Quite predictably, given the Chavez administration’s ideological stance, it displays a rather high risk of expropriation.

· The banking system is not perceived as being particularly sound

· Venezuela ranks a very low 10th in financial market enablers. Expensive lending rates (17%), limited availability of long-term credit and an insufficiently developed bond market add to the difficulty of funding projects.

· The government’s readiness to deal with private investment is particularly poor as witnessed by the 11th rank in this pillar. In particular, the survey of experts reveals that little effort is put into developing public-private partnerships.

Because of the above explained facts many Venezuelans are moving to Colombia in order to invest a have a more stable life. Specifically the Colombian city of Cucuta, which is on right after crossing the Venezuelan border, saw an increase of 85% in investments made by Venezuelans.

“We’re seeing a growing number of Venezuelans coming to Cúcuta to start up small and medium-sized business, like fast-food outlets, bakeries and textile shops. They’re attracted to Colombia’s legal and economic stability and many say it’s easier to open a business and make money here than in Venezuela,” says Pedro Sayago of the Cúcuta chamber of commerce.

Neptalí Barrios, an electrical engineer, left Venezuela at the beginning of Mr Chávez’s tenure in 2001 and relocated to Bogotá, where he works for a multinational company.

“I was forced to leave Venezuela because of the devaluation of the local currency, inflation and the high cost of living,” he says. “Increasing political and economic instability meant it was difficult to plan for the future and because I didn’t have pro-Chávez friends in high places, I couldn’t develop my career.”(Moloney, Venezuela migrants go in search of the Stable life in Colombia, 2008, The Financial Times Limited 2010)

Colombia is ranking amongst the 3 more stable countries for private investment in Latin America, according to the World Economics’ Forum report above mentioned.

The exodus of middle and upper-class Venezuelans is a trend not just apparent in Colombia but across the world. The article also mentions that Venezuela was not a migratory country, however today every Venezuelan has a relative living abroad.

After analysing these two readings we can conclude that although there is a trend for internationalising markets Venezuela is not particularly offering a stable position for FB to be started o for private capital investment.

On the contrary we see many FB being sold in Venezuela order to raise capital that will be invested abroad.

Hi guys,

I found a very interesting powerpoint presentation which has made use of an indepth study of family businesses in Europe and their transition phases. Unfortunately, I was not able to copy the slides out which concern Germany and would be of interest here, hence I will paste the whole link which will enable you guys to read for yourself. Furthermore, it also talks about Italy, France and the UK. Franks, J., et. al (2010) Vienna, The Cycle of Family Ownership.

www.ihs.ac.at/vienna/resources/…/20100128_Mayer_Presentation.ppt

http://209.85.129.132/search?q=cache:43kebPqK4LcJ:www.ihs.ac.at/vienna/resources/Economics/Papers/20100128_Mayer_Presentation.ppt+transition+from+family+to+public+companies+in+germany&cd=3&hl=de&ct=clnk&gl=de&client=firefox-a

An article which I found interesting as it describes a very successful family business Haniel in Germany.

Germany itself has a long history of family firms. Many have been around for decades. Others, like multi-billion-euro earner Haniel, are hundreds of years old. It stands to reason that since these companies have been around for so long, their leaders have been doing something right, but not without making a few mistakes as well.

In Germany, 75% of the workforce are employed by family businesses, who contribute 66% of the GDP. Reidel (1994) categorizes 80% (about two million companies) of all Germany’s companies as family controlled and concludes that they are the “backbone” of the German economy.

Over 100 years ago, Haniel, now involved in everything from pharmaceuticals to recycling, was run by three brothers who did not get along. They decided to fix the problem by allowing each brother to run the business for four months of the year. This was disastrous, says Dietze. After realizing they were running the business into the ground, the brothers decided no member of the Haniel family would be allowed to hold a day-to-day operational job ever again.

The declaration holds true to this day: There are about 650 shareholders who are family members and not a single one works within the company.

Amereller sees the major advantage in how German businesses are organized. “The Germans are particularly known for their structures. Frankly, I have seen no other countries which have had such a great focus on family structuring,” he says.

DW-World, a website dedicated to doing business in Germany, reports that family businesses account for 41% of all sales in Germany and provide some 57% of the nation’s jobs. According to the site, Germany’s 500 biggest family businesses increased their staff by 10% between 2003 and 2005 to 2.2 million, whereas the number of jobs decreased by an average of 3% nationwide during the same period.

….

“I met a man running one of the largest German family businesses. He told me: ‘I don’t see myself as running a company; I see myself as keeping it for my children and grandchildren. It’s not my company, it’s my children’s and grandchildren’s company,’” says Dietze. “This can be a definite strength for family businesses.” bt

Grazy J., (2008), Making it Big in Family Businesses

http://www.businesstodayegypt.com/article.aspx?ArticleID=8202

“A family-owned business thinks in generational terms,” he said. “They’re not only concerned about making as much cash as quickly as possible or surviving the next shareholders meeting.”

The term “family owned” does not have to mean a mom and pop operation — the study looked at companies employing from 20 to 256,915 workers – and included big players such as Würth, a maker of fixing and assembly materials which operates in 83 countries, Sennheiser, which makes audio equipment, and Trumpf, a leader in laser technology. Many have found success in specializing in high-quality products for niche markets and have become export champions

While these firms are all active internationally, many still have ties to the region where they are based. Many owner-families have run the companies for generations, and have closer links with employees. That can result in a greater sense of responsibility for their well-being unlike at the giants, where increasing shareholder value often trumps any other concern.

Other advantages family-owned business can enjoy are increased flexibility, and with owners and managers being either the same person or enjoying a close relationship, they can make business decisions responding to market developments often much faster than large concerns, where decisions often have to work their way through committees and boards.

Despite the good performance, Heidbreder says family-owned firms still face hurdles that others do not, particularly in the areas of international accounting standards and inheritance taxes.

When the owner of a family-owned business dies, the firm can be faced with a tax bill of up to 50 percent of the value of the company. That has led to many, he said, having to sell the business or simply shut their doors.

Kyle J., Deutsche Welle, German Family Owned Businesses often upstage the big guys

http://www.dw-world.de/dw/article/0,,2516814,00.html

China family businesses, which are run by ethnic Chinese and be headquarter anywhere, are said to make up the world’s fourth economic power after North America, Japan, and Eurpo.

Arctually, in the mainland of China, majority of business style is state-owned style.
The percentage of FB is very low. But in Hong Kong, Taiwan, the Family-owned business is opposite.

More interesting place is in oversea, the chinese firm is very general.

here is two acticles talk about chinese firms:

Corporate governance and the global reach of chinese family firms in singapore

http://econ.snu.ac.kr/~ecores/activity/00sympo/yeung_soh.pdf

Internationalizing the family firm: a case study of a chinese family business

http://www3.interscience.wiley.com/journal/119016136/abstract?CRETRY=1&SRETRY=0

Hi guys,

Background:

I am opening this Blog because I think it would be interesting to see what can happen if too much trust is placed into managers steering a family or business with a long lasting tradition. The example I want to bring up is a company called Karstadt Quelle in Germany which was until 2007 the largest mail order firm in Europe with 20.000 employees and a turnover of 4.2 billion Euros. It had a long family history which began 82 years ago. The company declared bancruptcy in 2009 since managers have completely burned all cash resources as well as have given wrong advice to the CEO Madeleine Schickedanz which has because of that lost 5 billion Euros. To only winners of this were managers which have made millions and millions on the downfall of the company.

Problems identified:

Founder died- successor was not able to lead company and therefore placed all trust and power into external managers.

Trust in wrong management by femal successor Schickedanz- constantly received wrong and lacking information about current company issues.

What do you guys think how much trust can be placed into external managers? How could this problem have been prevented? Why was the old business model not been updated? DO you know any similar cases where too much trust has led to a disaster and the erasement of a extraordinary famous and successful business? i.e. Woolworth in the UK.

Do you think that the business model was not innovative enough anymore?

http://www.spiegel.de/international/business/0,1518,656490,00.html

giving an external, the management of the business might be very risky. even though if it is a matter of long term tradition. Even on contract basis, too much involvement is risky. i found an article on succession failure in family business.

have a look

http://www.summitadvisory.org/id20.html

I think that what happened to Karstadt Quelle in Germany is a situation that has a combination of bad luck but also a mix of unethical managers. It is very disturbing that the article says that few people were surprised, so clearly there were underlying issues that were not unknown to owners.

Also, in spite of the bad  publicity of having external, non-family managers, the truth is that if there is a certain level of trust; including trust in their capabilities, as well as their “loyalty” in the company, the advantages of having them are very big. I think that loyalty to the firm will be easier to achieve through proper compensation and fairness.

Below are extracts of an article and the key learning points summarized at the end:

Journal article by James J. Chrisman, Jess H. Chua, Reginald A. Litz; Entrepreneurship: Theory and Practice, Vol. 28, 2004

http://www.questia.com/googleScholar.qst;jsessionid=LpJTnbRqqQnyGGMSmd78mF7s6pTT7zxb3rJpvZGtBlvlsK9vFFXG!677243816!-1828655400?docId=5006658582

“Although there is no consensus about the relationship between organizational performance and the ownership and control of a firm (James, 1999), most scholars agree that separation of ownership and management creates costs that may not exist if ownership and management were combined. Agency theory is based on the idea that managers who are not owners will not watch over the affairs of a firm as diligently as owner-managers. Ross (1973) formalized this conflict of interest arising from the separation of ownership and management as a principal-agent problem and Jensen and Meckling (1976) coined the phrase “agency costs” to represent the costs of all activities and operating systems designed to align the interests and/or actions of managers (agents) with the interests of owners (principals). Myers (1977) and Smith and Warner (1979) showed that agency costs also exist in the owner-lender relationship while Morck, Shleifer, and Vishny (1988) documented the potential agency costs to minority shareholders from having an entrenched dominant shareholder. Traditionally, researchers have assumed that owner-managed firms will have either zero or insignificant agency costs (Jensen & Meckling, 1976; Fama & Jensen, 1983; Ang, Cole, & Lin, 2000). There is a tendency to extend this to family firms because family members are expected to be altruistic toward each other as a result of kinship obligations that are part of the axiomatically binding normative moral order in most cultures (Stewart, 2003). (1) Altruism could mitigate some agency costs (Wu, 2001) but, unfortunately, altruism could also lead to other agency costs, for example, free riding by family members as in the “Samaritan’s dilemma” (Bruce & Waldman, 1990), entrenchment of ineffective managers (Morck et al., 1988), or even predatory managers (Morck & Yeung, 2003).

Since nepotism does exist (Ewing, 1965) and families find it difficult to replace ineffective family members (Handler & Kram, 1988), it is hard to deny that family involvement has the potential to lower economic performance, particularly in light of Schulze et al.’s (2001, 2003) research. But agency costs arise only when firm actions contravene owners’ interests or when resources must be expended to ensure that firm actions do not contravene owners’ interests. For example, if family business owners wish to provide a minimum standard of living for relatives, any decrease in economic performance due to nepotism cannot be considered an agency cost. Thus, the nature of agency costs in family firms deserves more careful consideration.”

Key points:

1. Agency theory is based on the idea that managers who are not owners will not watch over the affairs of a firm as diligently as owner-managers. This theory applies to the cases that are more the rule than the exception as commented by Ksenia below. Clearly putting all the power in the wrong hands will lead to catastrophe from a business perspective

2. separation of ownership and management creates costs that may not exist if ownership and management were combined.

3. According to Meckling (1976) “agency costs” are the costs of all activities and operating systems designed to align the interests and/or actions of managers (agents) with the interests of owners (principals)

http://blog.business-model-innovation.com/2009/06/karstadt-death-of-a-legend-business-model/

i think sofia makes an excellent point. but i also think that along with trust between employees, amnagers and loyalty to the business, trust between family members is also equally important to give rise to a successful family business and it is the key point that provides a competitive edge to successful family businesses over unseccessful family businesses and non-family businesses.

1) trust mitigates the moral hazard problem between the principal and teh agent and raises leevl of effort and output. consequently leading to higher expected profits.

2) it obviates the need to rely on costly state-contingent wages as a mechanism to induce high effort from agent.

3) it induces the agent to internalize the cost of his actions on the principal’s welfare, thus refraining from actions that hurt the owner.

this argument is also ebenficial fromt he owner/pricipal’s point of view as:

1) a trustign parent/owner will avoid relying on monitoring or using performance based wages to induce high efforts from the child/agent.

linking this agument to Sofia’s ‘agency theory’, when trust is low or altruism is one-sided, the agency problem is excaberated.

in family firms, agency problems arise not only due to asymmetry of information, but also due to asymmetry in altruism.

thus in the absence of mitigating factors such as trust, teh agency problem may interfere with the survival of the family business.

What is different about family businesses?, issues 2001-2070, by Ralph Chami, International Monetary Fund, IMF Institute.

http://books.google.co.uk/books?hl=en&lr=&id=_SMer1UUKFkC&oi=fnd&pg=PA3&dq=non+family+manager+in+family+run+businesses&ots=vEHohDO9W7&sig=n6WHcOQnbiDu3lil9xVDmbp-PpI#v=onepage&q=non%20family%20manager%20in%20family%20run%20businesses&f=false

This kind of issue is more an exception than a rule. Family member managers could destroy the firm as well as (if not more) non-family managers.

In the situation described by Max, managers really had a strong purpose to do that thing, but where were the family members? Were they following the business? Or they completely relyed on someone? If there was fraud- than these managers could be judged.

Anyways, when the company is big and has a big turnover - family should treat it more seriously.

I found a study (based on US family firms), called “A comparison of family-member and non-family-member managers in American family businesses“. In this study “statistically-derived data indicate that the inclusion of non-family-members in the management of family firms has a . significant positive relationship with the use of sophisticated financial management methods”.

 here is chinese academic article which i found ,”The transfer of power in Family business“, i translate the main point:

“When the family business from generation to pass another generation, the management of the transition is full of all kinds of “pain”: enterprise management because of disagreements, indecision and anxiety become unbearable; heirs, successors, backbone employees and directors to resign to protest the way; the whole family disintegration; as president of his father may have been ousted; originally planned acquisition of corporate buyers have also changed their minds. Finally, the company is not closed down, is stagnant.

In general, the family perspective in which managers and internal within the family, their concern is the power management control and family selection, accession or succession. The professional manager, employees, competitors, outside directors, brokers, bankers, wives, friends, etc. in a different perspective because of its focus and role vary.”

http://www.ebusinessreview.cn/c/article-layoutId-12-contentId-3532.html

From my Oriental point of view:

The essence of Chinese thought is “balance.” Enterprises in the succession of the main problems is because uneven distribution of power and interests arising from internal family members. The intention of the introduction of external managers is to prevent internal loss. But if the transfer too much  power to external manager, the Family members will afraid of his company’s loyalty is not enough to harm the company’s affairs. So in choosing an external successor, the company should consider that external and family members within the enterprise relationship between the balance of power. Not only external successor but also family members will both have a constraint, it will reduce the incidence of problems to enterprises damage. (As described in the case)

Hey guys,

most entrepreneurs would love to see their business go public and expect that to be the next step. However, there are several reasons for a business to stay as a family business.

Accoring to a NY investment banking and straegic consultancy firm, one in five private companies in the $5 million to $50 million annual sales range that go public regrets it later on.

Owners of family businesses often get caught up in the financial rewards or ego gratification that may result from a successful stock offering and fail to see the difficult realities of becoming and succeeding as a public company.

The ramifications of going public may be difficult to handle for an individual or family that previously had a much freer hand. “It is a big step and the decision depends on the owners’ goals and objectives. If they want to raise capital to expand the business, going public can be a less expensive means than long-term borrowing. But they’ll have the Securities and Exchange Commission and so many other people looking over their shoulders now. For someone who started a business years ago and is used to running it his or her way, it can be very difficult.”

As a public company, the stock is being analyzed, as well as bought and sold, by stockholders who are independent of the company. The price no longer can be controlled. Frequently a few well-organized outside shareholders owning only a minority of the stock can effectively control the company. And going public almost always means some family members lose or must change jobs because of SEC disclosure requirements and the added responsibility of answering to the public about costs.” He said that 8 out of 10 family businesses that go public end up restructuring compensation arrangements.

Family businesses often want to provide liquidity to family stockholders, obtain capital for growth or acquisitions or do estate planning. Owners should explore other means to achieve these goals, such as setting up an employee stock ownership plan; creating joint ventures; turning to the private market, insurance companies or banks for capital; or selling the business. Before deciding which is the right move, the owners should meet or consult people who have already experience in this field.

Before taking their business public, the owners should professionalize it. “They should establish an outside advisory board or a board of directors, which should not include family members, suppliers, customers or the business’s CPA, lawyer or other professional advisers.

Professionalizing the business also means developing a business plan and budget, setting up a compensation plan and rules of entry into the company (with definite education and work experience requirements for family members) and building a management team

Family Businesses Cautioned about going public. Journal article; Journal of Accountancy, Vol. 179, 1995

http://www.questia.com/googleScholar.qst?docId=5000301515

What do you guys think? Would be nice if you could add more sources or information to the Blog.

“Going public has potential benefits and costs for the business, the family, and the family owners.   The business gains more capital for growth and all employees—family and non-family—can benefit from greater opportunities. The higher status of public firms can improve the visibility and reputation of the company and help it find better customers, suppliers, bankers, and employees. The presence of public owners (and their representatives on the company’s board) can help steer the company toward activities and practices that increase the company’s profitability and value. It could very well be that public companies implement more professional management practices. In a public company, family owners will see their wealth increase and have access to greater liquidity and a way to exit the ownership group; conversely, the ownership group can shed owners who don’t support the goals of the business. Diversifying the family’s assets (by selling shares in the public family company and investing in other assets) allows family members to lower their investment risk and increases inheritance options within a family (not all heirs need to receive shares of the family business). Greater wealth and liquidity and the means to reconfigure the business family can strengthen family unity, increase the opportunities and resources available to family members, and improve family performance.

On the other hand, public ownership is suspected of distracting companies from long-term goals and investments, and ultimately of lowering the performance of the family business. The ultimate report card on public companies suggests that they are necessary to exploit certain market conditions but that they are inferior performers (on a number of dimensions) to their private counterparts. By going public, family control over the business is at least diluted; non-family board members join them at the board table and in some cases, the family is in the minority. Experience shows that a family’s identification with a publicly traded business and its commitment to it is more likely to wane over time, resulting in the family eventually losing ownership control of it. This generally occurs because the business grows (in part because of the infusion of the public’s money) beyond the abilities of family members to lead it, family involvement in the business decreases, and the family loses its business leadership roles. We don’t know enough about the impact to a family of losing control of its business; both positive and negative examples abound.

We do know, however, that if their business goes public, the family business leaders, the family owners, and family members must treat the family business in a different way. Family owners, family board members, and business leaders must learn about the standards and regulations of the public market and respect the rights of public owners. Family owners can know more about what is happening in the business than do the public owners, but they cannot act on this information or otherwise manage the business for personal gain, as happened in Adelphia in the US and Parmalat in Italy. Benefits flowing to family members from the business need to be scrupulously monitored to ensure that public owners are treated fairly. To improve the chances that the family owners will be disciplined in their holding of family company shares, and that sales of shares will be orderly and not threaten family control of the business, shareholders agreements are needed. The business family needs to strengthen its unity and develop pride in and stewardship of the business, to counter the ease of exit and the lure of liquidity. Family employees must step up to a higher level of professionalism in the business if they expect to keep up with the growing, financial-performance oriented business, let alone lead it. This entire scenario cries out for strong governance of the business, ownership group, and family.

Going Global

Going global is not always a choice. Sometimes, if a family company wants to stay in business, it must expand its business in this way. But choice or not, going global carries certain benefits and costs, and imposes certain standards on the family and business.

When a family business becomes a global player in its industry, the “game” of the business changes and the requirements facing the management of the business increase.  Global family companies must be skilled at global sourcing of talent and resources, producing for and selling in different cultures, administering across languages and time zones, navigating through different regulatory and legal systems, and managing currency effects on their business—just to name a few of the challenges. These companies generally require more professional management (family and non-family), more sophisticated management systems (planning, budgeting, IT, management development, logistics, etc.) and a capital base often many times what the family business needed before the global move. These higher standards for the family business can both inspire and challenge the family behind the business.

Going Global and Public

These two moves are generally motivated by the desire to keep the family business strong and achieving its potential, with little understanding of their benefits and costs or the requirements they will impose on the business family. A family should go into the new game with its eyes wide open and prepared for its new existence. This new game isn’t for all business families. To successfully implement these competitive moves family employees, family owners, and other family members must step up to new requirements. The family must renew its commitments and efforts concerning governance, family education and family unity. This requires considerable time and effort, and the same commitment to invest in the family as in the business. Some family businesses and business families would be better off if the business remained private and smaller, or was sold if that was necessary to keep the business healthy. But for those families that do make the commitment and investment, the rewards are many. A global business can open up the world to the business family”

To make it more trasparent, look at following advantages and disadvantages for family business going public.

hey this is a very interesting topic.

in my opinion, it depends on the scope of the business. it may or may not improve the companys financial position. GOING PUBLIC MEANS LOSS OF PRIVACY.

and in family business, privacy is ver important.

Also, it will increase the liablity, and competitors can even take with the option of buying shares.

i found an article on family businesses cautioned about going public

please go through

http://www.questia.com/googleScholar.qst;jsessionid=LyJSlk7D2HF622pbr9qJ2TZ1ZhF8gPrhtHhWJh2DD3F3DrntmkNT!-990368196!-1828655400?docId=5000301515

I found the following publication:

Challenges in Managing a Family Business http://www.sba.gov/idc/groups/public/documents/sba_homepage/pub_mp-3.pdf

It is a short and simple guide produced by the U.S. Small Business Administration and gives some practical real life examples of the various problems and solutions such as Succession Planning in a down to earth easy to read manner.

One aspect I thought was interesting is the section titled “How Is The Pie Divided?”

“Paying family, members and dividing profits among them can also be a difficult affair. Many persons feel that they are underpaid, but what about relatives who comment as follows:

“Uncle Jack sits around and gets more than I do.”

“Aunt Sue goes to Europe on the returns of money her husband put into the business before he died ten years ago.”

“Your brother goofs off and rakes in more than you do.”

How do you resolve such complaints? You don’t entirely. But if the business is a small corporation, certain equalizing factors can be accomplished by stock dividends. By recapitalizing the company, some stockholders can take preferred stock with dividends.

Salaries are best handled by being competitive with those paid in the area. Find out what local salary ranges are for various management jobs and use these ranges as a guide for paying both family and nonfamily personnel. When you tie pay to the type of work that the individual does, you can show disgruntled relatives the value that the industry puts on their jobs.

Fringe benefits can also be useful in dividing profits equitably among family members. Benefits, such as deferred profit sharing plans, pension plans, insurance programs, and stock purchase programs, offer excellent ways to placate disgruntled members of the family and at the same time help them to build their personal assets.

How the pie is divided is vital to growth in a small business. Profits are the seedbed for expansion, and lenders are influenced by what is done with profits. What banker wants to lend a company a substantial amount when its earned surplus is drained off by relatives?”

The section discussing ‘Fringe Benefits’ is one which from both my own observations and from discussions with other members of the class seems to have little emphasis on yet it could be a major area and stumbling block for research into family business.

When comparing the perfomance of family businesses vs non family businesses or family CEO vs professional CEO - it may appear at first that the professional/non family has better performance.  However, in reality the opposite is true yet much of the profits a spent on fringe benefits for the family/extended family in a tax efficient way.

It would be unlikely that this would be recorded or declared in the company reports due to it perhaps being a ‘grey area’ in the various jurisdictions and the researcher may be left with a false result/conclusion.

lelecosti

Hello Everyone!

I found some really interesting articles regarding this argument, which we didn’t fully discuss in class (the only case study that took this into consideration was the Harilela Enterprise)

I was wondering what you all thought about this or if you maybe have some documents sustaining your theories on issues such as:

- when should a family firm go public? 

http://www.questia.com/googleScholar.qst;jsessionid=LmMbhXJyR2hJv5D285F1jV4Lsbl1ybDWVFMbT2HYNJDMhxsG4hpJ!144947719!-2000885492?docId=5000301515)

- what benefits can it experience?

- what are the setbacks of this?

- any examples of family firms that went public and increased/decreased their performance?

The Article I found is:

Gaia Marchisio and Davide Ravasi, FAMILY FIRMS AND THE DECISION TO GO PUBLIC: A

STUDY OF ITALIAN IPOS.

This article focuses mainly on italian family firms going public, analyzing the effects of this transitions.

The keys ideas that we can see are:

–> Go Public if: family assets have no longer financial growth; when there are succession issues; when there aren’t any more resources.

–> Improves: reputational and social capital; new venture opportunities; consolidate position; new competitive advantage.

Let me know what all of you guys find!!

Hey Guys

Family Business Going Public - Why Go Public? Why Not?

“Many family businesses take the decision of going public at some stage in their life to be able to secure financial resources for the business expansion or to give its shareholders a way of selling their shares in case they prefer to cash them in. Going public is a complex process that requires careful consideration of the alternatives, plenty of preparation from the board and the management, and extensive outside specialists’ advice. Going public is also a decision that presents many advantages and disadvantages to the family business.

Advantages of Going Public for a Family Business

Going public may offer several advantages to family businesses and their shareholders, including:

- Improved Marketability of Shares: This makes it possible for family shareholders to sell their shares at the prevailing stock price in the open market. It also makes it easier for shareholders to use their shares as collateral to obtain loans. As a result, the improved marketability of the company’s shares helps reduce family issues as it solves the liquidity needs for shareholders who prefer to hold their wealth in assets other than their interest in the company.

- Improvement of the Company’s Financial Position: This is a direct result from selling the company’s shares to the public. The stronger financial position makes it easier for the company to seek loans and to negotiate the terms of these loans.

- Potential Increase in the Value of the Shares: Many family-owned companies that went public saw their stock price rise above the initial estimation made by the investment banking firm. This increase in value is partly due to the willingness of investors to pay a higher price for the company’s stock because of its greater credibility as a public company, the improved marketability of the shares, and the increased transparency of accounts.

- Greater Visibility: Going public gives family businesses increased prestige and visibility in the market. Markets tend to perceive public companies as professionally managed and more transparent (audited accounts and periodic publication of financial statements and performance data). As a result, a family business that goes public might increase its visibility in the market.

Disadvantages of Going Public for a Family Business

Going public may also present potential disadvantages to family businesses. Some of these disadvantages are:

- Loss of Privacy: This is probably the most unwelcome outcome of going public for family businesses. Indeed, once public, the family business will have to reveal more information than before, including: detailed financial statements and other performance measures, and any advantages given to family members.

- Loss of Autonomy: This is a consequence of the arrival of new shareholders after the family business goes public. Even in cases where the family remains a controlling shareholder, minority shareholders have rights that will make it difficult for the original family members to operate unfettered.

- Increased Liability: Public companies have a higher liability than their counterparts. For example, public companies have to make sure that all the information that they provide to their shareholders and to the market is accurate.

- Possibility of a Takeover: If enough shares have been issued to outsiders during the process of going public, it could be possible for competitors or other investors to gain control over the family business.

- Additional Costs: The initial cost of going public can be quite substantial. Some of the potential components of this cost are: underwriter’s commission, auditing fees, legal fees, and any registration costs. In addition, once public, the company will incur additional costs such as audit fees, periodic disclosure of financial information costs, and any other compliance requirements’ fees for public companies.”

Provided by IFC Corporate Governance

Source: http://www.smetoolkit.org/smetoolkit/en/content/en/6754/Family-Business-Going-Public-Why-Go-Public-Why-Not-

Here is a recent case from India, about a well-known family owned business in the IT sector, the Satyam Computer Systems.

It was the biggest Fraud in the nation and also in the corporate world. It was hard to believe that one of the largest IT companies, Satyam Computer Systems, had undergone such a huge fraud case. Two brothers, Raju and B. Ramalinga Raju, who were the founder of Satyam Computer Systems were arrested in the Satyam fraud case. do u think these fraudulent activities in family busiensses are made easier due to some characteristics of the business itself? if yes and why and maybe someone could contribute articles about it.

A background into how this family business was setup can be viewed in the link to the article given below: http://blogs.hbr.org/cs/2009/01/satyam_and_indian_family_busin.html

The Satyam Computer Systems was considered to be one of the leading outsourcing companies in India and it was among the top five IT companies in India. Ramalinga Raju, who was the Chairman of his company, resigned after revealing that he had systematically falsified accounts as the company expanded from a handful of employees into a back-office giant with a work force of 53,000 and operations in 66 countries. The company listed about 50.4 billion rupees in cash and bank loans as assets, that ended in September and were nonexistent. Revenue for the quarter was 20 percent lower than the 27 billion rupees reported, and the company’s operating margin was a fraction of what it declared.

The revelations from this case caused a major shake-up in India’s enormous outsourcing industry and many large companies were investigated and they had to revamp their back offices.

“This development is going to have a major impact on Satyam’s business with its clients,” said analysts with Religare Hichens Harrison.

In the four-and-a-half page letter distributed by the Bombay stock exchange, Raju had described a small discrepancy that grew beyond his control. “What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years. It has attained unmanageable proportions as the size of company operations grew,” he wrote. “It was like riding a tiger, not knowing how to get off without being eaten.”

Speaking of a “deep regret” and a “tremendous burden,” he sincerely apologized to shareholders and employees and asked them to stand by the company. “I am now prepared to subject myself to the laws of the land and face consequences thereof.”

Learning Points:

· As seen in this case, producing fake records by one member of the family not only caused a major loss to the business but also affected the reputation of the entire family and their business.

· The consequences of using such wrong measures in family business also affect the next generation of the family. As in this case, Raju’s son who was into the estate business, had to go through a series of problems in managing his own business and making up for the financial loss caused to the family.

· Since Satyam Computers was such a big business in India, this fraud case had affected the other IT companies in India as well, as their records were being investigated and countries were being cautious when dealing with the IT companies in India.

Therefore, it is always advisable to do the right thing in the family business or it can have long term consequences for both the business and the family’s reputation.

Pawan, Shaan, Sofia and some of you were considering the possibilities of how you might encourage the establishment of useful CG practice in your FBs during my lecture on the subject this week.

Here’s an article that demonstrates how one FB implemented a new IAD (Internal Audit Department) as part of its general review of CG issues. Note the effect of legislation (in this case US-based Sarbanes-Oxley Act) forcing FBs to consider changes to their management and ways of doing business!

Bring your opinions (through your in-line remarks box) and resources to the table…ie this post!

Since our topic for this week is Family Firm Governance, here is an article about how governance and management help in successful running of family businesses. It talks about how governance is developed over time by family discussions and family visions, as its development is very important for proper functioning of the business.

The article also highlights the importance of having a family creed or constitution and how it can be framed according to the family business requirements. In order to  review the proper functioning of the business and the constitution, the article talks about having regular family meetings and councils. these meetings can be helpful for many other reasons, such as, involving the younger generation into the business, providing for interactions among the various governance departments.

Here is the link for a full access to this article

http://www.slideshare.net/guestd224927/governance-and-management-3476757

If there are any other aspects of governance and management that can aid in successful family business do add them here..!

http://hbswk.hbs.edu/item/2630.html

John Davis in his article points out three components of Family governance:

According to the article, basic governance structure of the family business system is illustrated by the following scheme:

Also Davis gives his vision of the coordination of the family council and family assembly with management and the board on some key plans affecting family companies:

Structures and Plans to Govern a Family Business System

The article “When corporate governance is a family affair” by Robert Zafft, which you can find here recognizes the difficulties in trying to introduce CG into a family firm. Zafft explains that most people try to sell CG in order to gain more capital sources, but this should not be the driving force. In my FB, it is true that it seems the owner and the managers are sitting on opposite sides of the table - as explained in this article. But what happens when the owner is the manager? CG is of paramount importance when trying to impose tight controls on management, however the other important reason for CG is that external shareholders would not invest in a company with bad governance, so the price of capital for many FB’s goes up, making them less competitive. Finally, the most important reason why CG does sell to FB’s is not a matter of capital, but for management succession. The founder will die, as hard as it is to accept sometimes. And whether he can formulate a functioning succession plan is difficult to say, however a structured CG can solve this problem, and keep the family harmony. So mixing CG with the family is necessary!

Finally, to show how firms do not always follow the table above - I have highlighted 2 boxes, which I know my FB does not follow the same way. The top management do not make the strategic plans, the CEO and founder (both family) do. The CEO does and will not make the succession plan, he may counsel and support it - but the founder will generate it.

I found an article about How to manage effective family business meetings. I decided to attach it to this post, since it’s related to the management topic.

http://www.kansasruralcenter.org/publications/FamBusMMG.pdf - here you can find the full article. It considers the example of agricultural business, but the findings could be implemented in any kind of family business meetings.

The major rules of providing effective family business meeting are the following:

1. Choose a meeting facilitator. Begin with someone, either outside or within the family, who naturally has the respect of the family. Later this role can be rotated among family members to broaden the leadership. The facilitator makes sure discussions stay on topic, the meeting keeps flowing, everyone gets to participate and individuals listen to each other. This person helps the family separate business from family issues and problem solving from making decisions.

The facilitator must help the group constructively resolve conflicts.

2. Set an agenda. The purpose of family meetings is to improve communication and understanding about the business. These meetings also can develop the values and policies that will guide the business. Family meetings need to create a safe environment to have conversations about the crucial issues. Meetings can also organize activities to share family news, family history, family memories, and enhance relational skills. Set realistic time allotments with each agenda item. Make sure everyone gets the agenda in advance so they can adequately prepare for the meeting.

3. Invite the right people. Depending on the agenda of the meeting, invite family members who are old enough to participate, in-laws and family members who have a stake in the business. Sometimes it helps to have an outside facilitator, a business advisor or key employees.

4. Plan family retreats. Retreats should balance discussion about the firm with activities that build relationships. Include fun activities such as games, plays, tournaments, talent shows, exercise, music, recognition of achievements, family rituals, and food. Family retreats should happen away from the distractions of the firm.

5. Set ground rules. These help maintain healthy interactions. Some examples are suggested below.

• Be on time and come prepared.

• Listen to understand and then speak to be understood.

• All relevant information should be shared openly with each other.

• Accept and support group decisions.

• Issues should not be shared beyond the family except by common agreement.

6. Keep a record. Delegate someone to record important decisions and discussions. This documentation should be filed so that your family remembers what was decided and why.

7. Organize the next meeting. Ask for suggested discussion topics for the next family meeting. Set a date, time and place. Rotate meeting roles and responsibilities among family members to build leadership and teamwork.

So, on the one hand, this article points out obvious things, but, on the other hand, we can see, that it mentions some important issues that we discussed in class: such as the necessity of involving non-family members in meetings or the importance of written documentation.

Based on Davis, J. 1996. Bivalent attributes of the family firm. Family Business Review, 9(2)

Some thing else I stubbled upon when reading on this topic:

“In the context of this work, corporate governance refers to the organization of strategic leadership and control of the business and the family. It aims at balancing the interests between the involved stakeholder groups. By means of extension of the business system around the family system, the business system becomes spotlighted by the corporate governance regulations. One of the involved stakeholder groups is explicitly the family of the business in its peculiarity as a family. The internal distribution of and the essential structures aiming to assure the predictability and responsibility of the acting persons need to be equally  applied to the family members as for others that take over special tasks within the context of management. Therefore, corporate governance in family businesses comprises in addition to the classical business-governance also the family-governance as an integral part.” (Klein S.B, 2010)

to discuss Governance and Management in Family Business, especially small family firm, the categries of small family business around world is different, it based on culture environment.

from the article,Entrepreneurial management and governance in family firms: an introduction. author try to describ the categries of the Governance and Mangement in FB, here is the key three question need to think about:

1. What are the contingencies and contexts wherein family-based approaches to organizing have an advantage over non-family firms?

2. What are the succession processes and procedures that enable family firms to survive in the long term?

3. Given the advantages some family groups are able to establish and maintain over time in rent-seeking societies, which institutional contexts nurture the creative destruction necessary for innovation and entrepreneurship?

http://www.entrepreneur.com/tradejournals/article/118107663.html

You have now been engaged with learning about Family Businesses and related concepts for 9 weeks.

Below please embed 1 concept map which captures the essence of Family Business for you. Capture all your learning about the various themes, issues, topics and their respective sub-categories into ONE MAP…not multiple Maps

That is 1map/individual...make sure you identify yourself as the map creator- by including your name in the central bubble. This is not optional as it will be considered by Azam Ali and myself as part of your Individual learning portfolio.

Below is sample of a concept map that I have derived from my lecture slides about FB..ie from the lecture on ‘Definitions’ and the lecture on ’succession’…this is just the start.

Ψ Yours needs to look more like the second Concept Map on the subject of Innovation.

You are required to provide comprehensive and rich (pictures, colours, etc) maps such as the second sample that depicts your understanding of the weekly themes and sub-themes. The key themes could form your initial parental branches and then sub-themes branch outwards, etc, etc. Please make sure you embed the images here….this map will also be included in your individual learning portfolio submission.

Below the maps I have provided links to MindMapping sources (free software)- do not feel obliged to construct your maps by using the software- feel free to hand draw, scan and embed:

Useful Concept Mapping Freeware- you do need to sign on for some:

1. Freemind

2. Mind42

3. You also have a great mapping tool called Inspiration available through the college’s Citrix applications resource.

Hello! I have created a hand-made, colorful map that depicts the key learning I have gathered during the semester. I tried to cover as many relevant concepts, since my main goal was to create something useful, practical and fun to look at. I hope you will like it as much as I do. Enjoy!

Hi Guys, here are some mindmaps that I made for the articles used in class. One is about the strategic process in family firms and the other outlines the effects of family and unrelated CEO on firm performance:

Hi, Mindmap

NO idea why its in black, should be in white.

Hey all, here is my mind map….. hope you like it… :

Hey Guys this is my mind-map

here is the mind map…

this is my mindmap:

Here is my mindmap:

 Hi,

Pls click on the link to view. I had problems uploading because it was in pdf format. Thanks

familybusinessbymonique12

Founders and their families often exert extraordinary power over public companies, even when they own only a minority of the shares.

Read this article from the Economist and share in this post about how families and especially founders in your nations use the legal framework and its nuances to continue to exert considerable control over the business decisions in companies in which they only own a minority stake in the company! See my sample below…build on it by contributing to this post

Colin Mayer, the dean of Saïd Business School at Oxford University believes that somehow the British have lost the secret of keeping family firms going as such for more than two generations

(http://executive-magazine.com/getarticle.php?article=12655) Executive Issue 126, January (2010)

The biggest loss to the business, he believes, is the disappearance of a long-term vision, with the emphasis switching to short-term financial results.

Read this Economist article (Small Island For Sale) , Professor Mayer’s paper and a Harvard Business Review working paper on the matter. Here’s another piece that looks at FBs within the national context:  Our Company Right or Wrong

Contribute here by making a comparison between the British FB experience over the last 100 years and your home country’s experience and tradition of managing corporate control in FBs.

1. Are there many FBs for example coming to the markets now as your home economies internationalize and seek to take advantage of growth opportunities?
2. What is the legal framework in your country regarding corporate control and how does it protect FB interests in maintaining corporate control?
3. Do you think the UK’s approach to creating environments that do not sustain multi-generational FBs are beneficial or detrimental to the national economy?

WARNING: In responding to all of the above questions please provide evidence, facts and qualitatively sound research-based arguments with sources. Do not provide anecdotal, personal opinion and jingoistic journalism. If you want to offer these then please do so in the in-line remarks adjacent to your editing of this post

Here’s a series of FT Articles on Family Dynasties from various nations that highlight the tension between corporate control and sustaining Multi-G FBs to stimulate your research into your nation’s institutional frameworks for Corporate Control.

Here’s the Abstract to Mayer’s arguments:
Family ownership was rapidly diluted in the twentieth century in Britain. Issuance of equity in the process of acquisitions was the main cause. In the first half of the century, it occurred in the absence of minority investor protection and relied on directors of target firms protecting the interests of shareholders. Families were able to retain control by occupying a disproportionate number of seats on the boards of firms. However, in the absence of large stakes, the rise of hostile takeovers and institutional shareholders made it increasingly difficult for families to maintain control without challenge. The result was a regulated market in corporate control and a capital market that looked very different from its European counterparts. Thus, while acquisitions facilitated the growth of family controlled firms in the first half of the century, they also diluted their ownership and ultimately their control in the second half. (Franks, J., Mayer, C., and Rossi, S. (2004), Spending Less Time with the Family: The Decline of Family Ownership in the UK, ECGI )

The World Economic´s Forum describes Venezuela as ranking last in Latin America for the attractiveness of its environment for private investment in infrastructure. Some reasons for this:

· Venezuela is the worst performer in the General Investment Environmental Factors sub-index.

· Quite predictably, given the Chavez administration’s ideological stance, it displays a rather high risk of expropriation.

· The banking system is not perceived as being particularly sound

· Venezuela ranks a very low 10th in financial market enablers. Expensive lending rates (17%), limited availability of long-term credit and an insufficiently developed bond market add to the difficulty of funding projects.

· The government’s readiness to deal with private investment is particularly poor as witnessed by the 11th rank in this pillar. In particular, the survey of experts reveals that little effort is put into developing public-private partnerships.

Because of the above explained facts many Venezuelans are moving to Colombia in order to invest a have a more stable life. Specifically the Colombian city of Cucuta, which is on right after crossing the Venezuelan border, saw an increase of 85% in investments made by Venezuelans.

“We’re seeing a growing number of Venezuelans coming to Cúcuta to start up small and medium-sized business, like fast-food outlets, bakeries and textile shops. They’re attracted to Colombia’s legal and economic stability and many say it’s easier to open a business and make money here than in Venezuela,” says Pedro Sayago of the Cúcuta chamber of commerce.

Neptalí Barrios, an electrical engineer, left Venezuela at the beginning of Mr Chávez’s tenure in 2001 and relocated to Bogotá, where he works for a multinational company.

“I was forced to leave Venezuela because of the devaluation of the local currency, inflation and the high cost of living,” he says. “Increasing political and economic instability meant it was difficult to plan for the future and because I didn’t have pro-Chávez friends in high places, I couldn’t develop my career.”(Moloney, Venezuela migrants go in search of the Stable life in Colombia, 2008, The Financial Times Limited 2010)

Colombia is ranking amongst the 3 more stable countries for private investment in Latin America, according to the World Economics’ Forum report above mentioned.

The exodus of middle and upper-class Venezuelans is a trend not just apparent in Colombia but across the world. The article also mentions that Venezuela was not a migratory country, however today every Venezuelan has a relative living abroad.

After analysing these two readings we can conclude that although there is a trend for internationalising markets Venezuela is not particularly offering a stable position for FB to be started o for private capital investment.

On the contrary we see many FB being sold in Venezuela order to raise capital that will be invested abroad.

Hi guys,

I found a very interesting powerpoint presentation which has made use of an indepth study of family businesses in Europe and their transition phases. Unfortunately, I was not able to copy the slides out which concern Germany and would be of interest here, hence I will paste the whole link which will enable you guys to read for yourself. Furthermore, it also talks about Italy, France and the UK. Franks, J., et. al (2010) Vienna, The Cycle of Family Ownership.

www.ihs.ac.at/vienna/resources/…/20100128_Mayer_Presentation.ppt

http://209.85.129.132/search?q=cache:43kebPqK4LcJ:www.ihs.ac.at/vienna/resources/Economics/Papers/20100128_Mayer_Presentation.ppt+transition+from+family+to+public+companies+in+germany&cd=3&hl=de&ct=clnk&gl=de&client=firefox-a

An article which I found interesting as it describes a very successful family business Haniel in Germany.

Germany itself has a long history of family firms. Many have been around for decades. Others, like multi-billion-euro earner Haniel, are hundreds of years old. It stands to reason that since these companies have been around for so long, their leaders have been doing something right, but not without making a few mistakes as well.

In Germany, 75% of the workforce are employed by family businesses, who contribute 66% of the GDP. Reidel (1994) categorizes 80% (about two million companies) of all Germany’s companies as family controlled and concludes that they are the “backbone” of the German economy.

Over 100 years ago, Haniel, now involved in everything from pharmaceuticals to recycling, was run by three brothers who did not get along. They decided to fix the problem by allowing each brother to run the business for four months of the year. This was disastrous, says Dietze. After realizing they were running the business into the ground, the brothers decided no member of the Haniel family would be allowed to hold a day-to-day operational job ever again.

The declaration holds true to this day: There are about 650 shareholders who are family members and not a single one works within the company.

Amereller sees the major advantage in how German businesses are organized. “The Germans are particularly known for their structures. Frankly, I have seen no other countries which have had such a great focus on family structuring,” he says.

DW-World, a website dedicated to doing business in Germany, reports that family businesses account for 41% of all sales in Germany and provide some 57% of the nation’s jobs. According to the site, Germany’s 500 biggest family businesses increased their staff by 10% between 2003 and 2005 to 2.2 million, whereas the number of jobs decreased by an average of 3% nationwide during the same period.

….

“I met a man running one of the largest German family businesses. He told me: ‘I don’t see myself as running a company; I see myself as keeping it for my children and grandchildren. It’s not my company, it’s my children’s and grandchildren’s company,’” says Dietze. “This can be a definite strength for family businesses.” bt

Grazy J., (2008), Making it Big in Family Businesses

http://www.businesstodayegypt.com/article.aspx?ArticleID=8202

“A family-owned business thinks in generational terms,” he said. “They’re not only concerned about making as much cash as quickly as possible or surviving the next shareholders meeting.”

The term “family owned” does not have to mean a mom and pop operation — the study looked at companies employing from 20 to 256,915 workers – and included big players such as Würth, a maker of fixing and assembly materials which operates in 83 countries, Sennheiser, which makes audio equipment, and Trumpf, a leader in laser technology. Many have found success in specializing in high-quality products for niche markets and have become export champions

While these firms are all active internationally, many still have ties to the region where they are based. Many owner-families have run the companies for generations, and have closer links with employees. That can result in a greater sense of responsibility for their well-being unlike at the giants, where increasing shareholder value often trumps any other concern.

Other advantages family-owned business can enjoy are increased flexibility, and with owners and managers being either the same person or enjoying a close relationship, they can make business decisions responding to market developments often much faster than large concerns, where decisions often have to work their way through committees and boards.

Despite the good performance, Heidbreder says family-owned firms still face hurdles that others do not, particularly in the areas of international accounting standards and inheritance taxes.

When the owner of a family-owned business dies, the firm can be faced with a tax bill of up to 50 percent of the value of the company. That has led to many, he said, having to sell the business or simply shut their doors.

Kyle J., Deutsche Welle, German Family Owned Businesses often upstage the big guys

http://www.dw-world.de/dw/article/0,,2516814,00.html

China family businesses, which are run by ethnic Chinese and be headquarter anywhere, are said to make up the world’s fourth economic power after North America, Japan, and Eurpo.

Arctually, in the mainland of China, majority of business style is state-owned style.
The percentage of FB is very low. But in Hong Kong, Taiwan, the Family-owned business is opposite.

More interesting place is in oversea, the chinese firm is very general.

here is two acticles talk about chinese firms:

Corporate governance and the global reach of chinese family firms in singapore

http://econ.snu.ac.kr/~ecores/activity/00sympo/yeung_soh.pdf

Internationalizing the family firm: a case study of a chinese family business

http://www3.interscience.wiley.com/journal/119016136/abstract?CRETRY=1&SRETRY=0

An old school British merchant banker, now living happily in retirement in the English countryside, listed, after dinner the other night, his basic stock picking formula. Never invest in family-controlled companies…..

The above extract is taken from a 2010 FT article that highlights the issues facing professional investors and capital markets when working with FBs- even larger ones- in this case VW.

Use this space to submit your arguments for why capital market investors should work and fund FBs. Make the case from both the investors’ and FBs’ perspective

There are 2 indexes tracking publicly held family firms:

• the Family Business Stock Index (FBSI) (follows more than 200 of the largest family-controlled companies nationwide)
• the Loyola University Chicago Family Firm Stock Index (LUCFFSI) (tracks 38 publicly traded, family-controlled firms headquartered in the Chicago area)

From the investor’s point of view:

• A study of the 20-year performance of FBSI companies showed average annual returns of 16.6 percent, compared with 14 percent for the Standard & Poor’s 500-stock index.
• The second study compared the performance of the LUCFFSI with the Dow Jones industrial average and Crain’s Chicago Stock Index from Sept. 28, 1990, to July 28, 1995. The LUCFFSI increased 94 percent during that period, compared with 92 percent for the Dow and 65 percent for Crain’s.

The reasons

• According to Oakland University’s Kleiman, “the families have capital tied up in the companies-vs. being absentee owners-and therefore work aggressively to maximize the stock value as it benefits them.”
• The Chicago researchers point out that an index of family-controlled companies can serve as a benchmark by which other family businesses can measure their own performances, and that such an index provides “the best way to judge the performance of portfolio managers who follow a strategy of investing in family controlled firms.”

For more information please refer here.

According to a research conducted in Britain: Family ties make more profitable publicly quoted businesses.

Amongst the reasons:

· During the past five years the share prices of UK quoted companies where families held a significant stake outperformed the FTSE all-share index of firms listed on the London Stock Exchange by 50 per cent, according to a survey by Manchester Business School.

· Family businesses had a higher average profit margin, return on capital employed and return on equity( Randall D., (2009) Forbes 2009 –>

(http://www.forbes.com/2009/03/10/investing-family-martin-personal-finance-martin.html)

than their peers, though growth in sales and assets tended to be lower.

· Family businesses were more stable performers when markets were down. They don’t tend to zoom up and zoom down.

The article does highlight, though, that the most important challenge for Family Businesses is to plan for succession as research by the Institute for Family Business and the London Business School in 2003 found that 57 per cent of family businesses had no defined succession plans, although 39 per cent expected chief executives to retire or leave within five years.

(Moules, J. UK quoted companies see profit of family ties, Financial Times, 2005)

Investing in a family-owned business

Hey guys

this is summary of the article - main points; “The family business owner is looking to sell. The private equity firm is looking to buy and wants to get a foot in the door.  They need to tread carefully.  While family-owned businesses are fertile ground for dealmaking, land mines abound. One false step and”…

According to the author family owned firms and private equity are “hardly strangers”. Moreover, according to a research more private equity firms will decide to invest in family owned business in the near future. Concerns of family business owners that want to sell their business or let other companies to invest in the family business:

By Stephen McGee, Executive Director, Grant Thornton Corporate Finance LLC

Source: http://www.grantthornton.com/portal/site/gtcom/menuitem.8f5399f6096d695263012d28633841ca/?vgnextoid=f4b858c2133cb110VgnVCM1000003a8314acRCRD

http://www.oecd.org/dataoecd/1/26/43654301.pdf

Family ownership may be seen as an opportunity or a threat, depending on a variety of factors. The family ownership and commitment to the business may be understood as adding value, provided that the company and the controlling family can respond to the concerns of the investor community.

Investors—both shareholders and creditors—may look with distrust on family-controlled companies, because of the risk that the controlling family may abuse the rights of other shareholders. So investors likely will scrutinize such companies with care before taking the plunge and investing.

From an investor perspective, the key is to establish the right corporate governance conditions so that the positive aspects of family ownership are coupled with assurances that investor interests will be recognized and addressed. Investor perception on ownership concentration, and the value associated with it, is revealed in a report of emerging market firms published at the beginning of 2007 by Citigroup Global Markets. The analysis suggests that investors place a three percent valuation premium on firms in which family insiders wield significant, but not absolute, control. Conversely, for emerging market firms where families are majority owners, investors assign a valuation discount of 5-20 percent.

A reason for which it is risky to invest in a family firms which undertook an IPO, is that initially, you may experience Underpriced value.

According to this article, this happens mainly because of: Information Asymmetry, Agency Costs, Institutional Settings and Investors - over optimism.

Usually the older and larger the firm, the lower the uncertainty and information asymmetry and, therefore, lower underpricing.

Another reason as to why investors need to be careful, is that many often consider IPO’s as a speculative opportunity. This may lead to a short.run underpricing with negative initial returns.

Source:

Roberto Arosio, Giancarlo Giudici and Stefano Paleari (2000), What Drives the initial market performance of italian IPO’s? An empirical investigation on underpricing and price support, 2000.

I found this source “Family Business Ownership: How To Be An Effective Shareholder”

it identified the aspects of family business ownership.

Owners Versus Investors:
Investor are people who are simply risking their money in hopes of a good financial return. They are not relly personally or emotionally involved with the company in which they are investing.
Being an effective businees owner is a more intimate matter.

The types of family business owners:
1.Majority and minority owners: more half shares vs less than half shares
2.Voting and non-voting owners
3.General partners and linited partners

The interests and goals of family shareholders are different from those of public shareholders. Serving both groups is usually a considerable challenge.

source: http://books.google.co.uk/books?id=KMo3Wfv6jnEC&pg=PA4&lpg=PA4&dq=investor+in++family+business&source=bl&ots=zMjlRI0TpS&sig=u8UQ8wp1h7fAIZ3J_xvRsAXIqFI&hl=zh-CN&ei=HmfHS-qbGtHB-QaLnP3bCg&sa=X&oi=book_result&ct=result&resnum=2&ved=0CA4Q6AEwATgK#v=onepage&q=investor%20in%20%20family%20business&f=false

Hey guys,

most entrepreneurs would love to see their business go public and expect that to be the next step. However, there are several reasons for a business to stay as a family business.

Accoring to a NY investment banking and straegic consultancy firm, one in five private companies in the $5 million to $50 million annual sales range that go public regrets it later on.

Owners of family businesses often get caught up in the financial rewards or ego gratification that may result from a successful stock offering and fail to see the difficult realities of becoming and succeeding as a public company.

The ramifications of going public may be difficult to handle for an individual or family that previously had a much freer hand. “It is a big step and the decision depends on the owners’ goals and objectives. If they want to raise capital to expand the business, going public can be a less expensive means than long-term borrowing. But they’ll have the Securities and Exchange Commission and so many other people looking over their shoulders now. For someone who started a business years ago and is used to running it his or her way, it can be very difficult.”

As a public company, the stock is being analyzed, as well as bought and sold, by stockholders who are independent of the company. The price no longer can be controlled. Frequently a few well-organized outside shareholders owning only a minority of the stock can effectively control the company. And going public almost always means some family members lose or must change jobs because of SEC disclosure requirements and the added responsibility of answering to the public about costs.” He said that 8 out of 10 family businesses that go public end up restructuring compensation arrangements.

Family businesses often want to provide liquidity to family stockholders, obtain capital for growth or acquisitions or do estate planning. Owners should explore other means to achieve these goals, such as setting up an employee stock ownership plan; creating joint ventures; turning to the private market, insurance companies or banks for capital; or selling the business. Before deciding which is the right move, the owners should meet or consult people who have already experience in this field.

Before taking their business public, the owners should professionalize it. “They should establish an outside advisory board or a board of directors, which should not include family members, suppliers, customers or the business’s CPA, lawyer or other professional advisers.

Professionalizing the business also means developing a business plan and budget, setting up a compensation plan and rules of entry into the company (with definite education and work experience requirements for family members) and building a management team

Family Businesses Cautioned about going public. Journal article; Journal of Accountancy, Vol. 179, 1995

http://www.questia.com/googleScholar.qst?docId=5000301515

What do you guys think? Would be nice if you could add more sources or information to the Blog.

“Going public has potential benefits and costs for the business, the family, and the family owners.   The business gains more capital for growth and all employees—family and non-family—can benefit from greater opportunities. The higher status of public firms can improve the visibility and reputation of the company and help it find better customers, suppliers, bankers, and employees. The presence of public owners (and their representatives on the company’s board) can help steer the company toward activities and practices that increase the company’s profitability and value. It could very well be that public companies implement more professional management practices. In a public company, family owners will see their wealth increase and have access to greater liquidity and a way to exit the ownership group; conversely, the ownership group can shed owners who don’t support the goals of the business. Diversifying the family’s assets (by selling shares in the public family company and investing in other assets) allows family members to lower their investment risk and increases inheritance options within a family (not all heirs need to receive shares of the family business). Greater wealth and liquidity and the means to reconfigure the business family can strengthen family unity, increase the opportunities and resources available to family members, and improve family performance.

On the other hand, public ownership is suspected of distracting companies from long-term goals and investments, and ultimately of lowering the performance of the family business. The ultimate report card on public companies suggests that they are necessary to exploit certain market conditions but that they are inferior performers (on a number of dimensions) to their private counterparts. By going public, family control over the business is at least diluted; non-family board members join them at the board table and in some cases, the family is in the minority. Experience shows that a family’s identification with a publicly traded business and its commitment to it is more likely to wane over time, resulting in the family eventually losing ownership control of it. This generally occurs because the business grows (in part because of the infusion of the public’s money) beyond the abilities of family members to lead it, family involvement in the business decreases, and the family loses its business leadership roles. We don’t know enough about the impact to a family of losing control of its business; both positive and negative examples abound.

We do know, however, that if their business goes public, the family business leaders, the family owners, and family members must treat the family business in a different way. Family owners, family board members, and business leaders must learn about the standards and regulations of the public market and respect the rights of public owners. Family owners can know more about what is happening in the business than do the public owners, but they cannot act on this information or otherwise manage the business for personal gain, as happened in Adelphia in the US and Parmalat in Italy. Benefits flowing to family members from the business need to be scrupulously monitored to ensure that public owners are treated fairly. To improve the chances that the family owners will be disciplined in their holding of family company shares, and that sales of shares will be orderly and not threaten family control of the business, shareholders agreements are needed. The business family needs to strengthen its unity and develop pride in and stewardship of the business, to counter the ease of exit and the lure of liquidity. Family employees must step up to a higher level of professionalism in the business if they expect to keep up with the growing, financial-performance oriented business, let alone lead it. This entire scenario cries out for strong governance of the business, ownership group, and family.

Going Global

Going global is not always a choice. Sometimes, if a family company wants to stay in business, it must expand its business in this way. But choice or not, going global carries certain benefits and costs, and imposes certain standards on the family and business.

When a family business becomes a global player in its industry, the “game” of the business changes and the requirements facing the management of the business increase.  Global family companies must be skilled at global sourcing of talent and resources, producing for and selling in different cultures, administering across languages and time zones, navigating through different regulatory and legal systems, and managing currency effects on their business—just to name a few of the challenges. These companies generally require more professional management (family and non-family), more sophisticated management systems (planning, budgeting, IT, management development, logistics, etc.) and a capital base often many times what the family business needed before the global move. These higher standards for the family business can both inspire and challenge the family behind the business.

Going Global and Public

These two moves are generally motivated by the desire to keep the family business strong and achieving its potential, with little understanding of their benefits and costs or the requirements they will impose on the business family. A family should go into the new game with its eyes wide open and prepared for its new existence. This new game isn’t for all business families. To successfully implement these competitive moves family employees, family owners, and other family members must step up to new requirements. The family must renew its commitments and efforts concerning governance, family education and family unity. This requires considerable time and effort, and the same commitment to invest in the family as in the business. Some family businesses and business families would be better off if the business remained private and smaller, or was sold if that was necessary to keep the business healthy. But for those families that do make the commitment and investment, the rewards are many. A global business can open up the world to the business family”

To make it more trasparent, look at following advantages and disadvantages for family business going public.

hey this is a very interesting topic.

in my opinion, it depends on the scope of the business. it may or may not improve the companys financial position. GOING PUBLIC MEANS LOSS OF PRIVACY.

and in family business, privacy is ver important.

Also, it will increase the liablity, and competitors can even take with the option of buying shares.

i found an article on family businesses cautioned about going public

please go through

http://www.questia.com/googleScholar.qst;jsessionid=LyJSlk7D2HF622pbr9qJ2TZ1ZhF8gPrhtHhWJh2DD3F3DrntmkNT!-990368196!-1828655400?docId=5000301515

Hi guys,

Background:

I am opening this Blog because I think it would be interesting to see what can happen if too much trust is placed into managers steering a family or business with a long lasting tradition. The example I want to bring up is a company called Karstadt Quelle in Germany which was until 2007 the largest mail order firm in Europe with 20.000 employees and a turnover of 4.2 billion Euros. It had a long family history which began 82 years ago. The company declared bancruptcy in 2009 since managers have completely burned all cash resources as well as have given wrong advice to the CEO Madeleine Schickedanz which has because of that lost 5 billion Euros. To only winners of this were managers which have made millions and millions on the downfall of the company.

Problems identified:

Founder died- successor was not able to lead company and therefore placed all trust and power into external managers.

Trust in wrong management by femal successor Schickedanz- constantly received wrong and lacking information about current company issues.

What do you guys think how much trust can be placed into external managers? How could this problem have been prevented? Why was the old business model not been updated? DO you know any similar cases where too much trust has led to a disaster and the erasement of a extraordinary famous and successful business? i.e. Woolworth in the UK.

Do you think that the business model was not innovative enough anymore?

http://www.spiegel.de/international/business/0,1518,656490,00.html

giving an external, the management of the business might be very risky. even though if it is a matter of long term tradition. Even on contract basis, too much involvement is risky. i found an article on succession failure in family business.

have a look

http://www.summitadvisory.org/id20.html

I think that what happened to Karstadt Quelle in Germany is a situation that has a combination of bad luck but also a mix of unethical managers. It is very disturbing that the article says that few people were surprised, so clearly there were underlying issues that were not unknown to owners.

Also, in spite of the bad  publicity of having external, non-family managers, the truth is that if there is a certain level of trust; including trust in their capabilities, as well as their “loyalty” in the company, the advantages of having them are very big. I think that loyalty to the firm will be easier to achieve through proper compensation and fairness.

Below are extracts of an article and the key learning points summarized at the end:

Journal article by James J. Chrisman, Jess H. Chua, Reginald A. Litz; Entrepreneurship: Theory and Practice, Vol. 28, 2004

http://www.questia.com/googleScholar.qst;jsessionid=LpJTnbRqqQnyGGMSmd78mF7s6pTT7zxb3rJpvZGtBlvlsK9vFFXG!677243816!-1828655400?docId=5006658582

“Although there is no consensus about the relationship between organizational performance and the ownership and control of a firm (James, 1999), most scholars agree that separation of ownership and management creates costs that may not exist if ownership and management were combined. Agency theory is based on the idea that managers who are not owners will not watch over the affairs of a firm as diligently as owner-managers. Ross (1973) formalized this conflict of interest arising from the separation of ownership and management as a principal-agent problem and Jensen and Meckling (1976) coined the phrase “agency costs” to represent the costs of all activities and operating systems designed to align the interests and/or actions of managers (agents) with the interests of owners (principals). Myers (1977) and Smith and Warner (1979) showed that agency costs also exist in the owner-lender relationship while Morck, Shleifer, and Vishny (1988) documented the potential agency costs to minority shareholders from having an entrenched dominant shareholder. Traditionally, researchers have assumed that owner-managed firms will have either zero or insignificant agency costs (Jensen & Meckling, 1976; Fama & Jensen, 1983; Ang, Cole, & Lin, 2000). There is a tendency to extend this to family firms because family members are expected to be altruistic toward each other as a result of kinship obligations that are part of the axiomatically binding normative moral order in most cultures (Stewart, 2003). (1) Altruism could mitigate some agency costs (Wu, 2001) but, unfortunately, altruism could also lead to other agency costs, for example, free riding by family members as in the “Samaritan’s dilemma” (Bruce & Waldman, 1990), entrenchment of ineffective managers (Morck et al., 1988), or even predatory managers (Morck & Yeung, 2003).

Since nepotism does exist (Ewing, 1965) and families find it difficult to replace ineffective family members (Handler & Kram, 1988), it is hard to deny that family involvement has the potential to lower economic performance, particularly in light of Schulze et al.’s (2001, 2003) research. But agency costs arise only when firm actions contravene owners’ interests or when resources must be expended to ensure that firm actions do not contravene owners’ interests. For example, if family business owners wish to provide a minimum standard of living for relatives, any decrease in economic performance due to nepotism cannot be considered an agency cost. Thus, the nature of agency costs in family firms deserves more careful consideration.”

Key points:

1. Agency theory is based on the idea that managers who are not owners will not watch over the affairs of a firm as diligently as owner-managers. This theory applies to the cases that are more the rule than the exception as commented by Ksenia below. Clearly putting all the power in the wrong hands will lead to catastrophe from a business perspective

2. separation of ownership and management creates costs that may not exist if ownership and management were combined.

3. According to Meckling (1976) “agency costs” are the costs of all activities and operating systems designed to align the interests and/or actions of managers (agents) with the interests of owners (principals)

http://blog.business-model-innovation.com/2009/06/karstadt-death-of-a-legend-business-model/

i think sofia makes an excellent point. but i also think that along with trust between employees, amnagers and loyalty to the business, trust between family members is also equally important to give rise to a successful family business and it is the key point that provides a competitive edge to successful family businesses over unseccessful family businesses and non-family businesses.

1) trust mitigates the moral hazard problem between the principal and teh agent and raises leevl of effort and output. consequently leading to higher expected profits.

2) it obviates the need to rely on costly state-contingent wages as a mechanism to induce high effort from agent.

3) it induces the agent to internalize the cost of his actions on the principal’s welfare, thus refraining from actions that hurt the owner.

this argument is also ebenficial fromt he owner/pricipal’s point of view as:

1) a trustign parent/owner will avoid relying on monitoring or using performance based wages to induce high efforts from the child/agent.

linking this agument to Sofia’s ‘agency theory’, when trust is low or altruism is one-sided, the agency problem is excaberated.

in family firms, agency problems arise not only due to asymmetry of information, but also due to asymmetry in altruism.

thus in the absence of mitigating factors such as trust, teh agency problem may interfere with the survival of the family business.

What is different about family businesses?, issues 2001-2070, by Ralph Chami, International Monetary Fund, IMF Institute.

http://books.google.co.uk/books?hl=en&lr=&id=_SMer1UUKFkC&oi=fnd&pg=PA3&dq=non+family+manager+in+family+run+businesses&ots=vEHohDO9W7&sig=n6WHcOQnbiDu3lil9xVDmbp-PpI#v=onepage&q=non%20family%20manager%20in%20family%20run%20businesses&f=false

This kind of issue is more an exception than a rule. Family member managers could destroy the firm as well as (if not more) non-family managers.

In the situation described by Max, managers really had a strong purpose to do that thing, but where were the family members? Were they following the business? Or they completely relyed on someone? If there was fraud- than these managers could be judged.

Anyways, when the company is big and has a big turnover - family should treat it more seriously.

I found a study (based on US family firms), called “A comparison of family-member and non-family-member managers in American family businesses“. In this study “statistically-derived data indicate that the inclusion of non-family-members in the management of family firms has a . significant positive relationship with the use of sophisticated financial management methods”.

 here is chinese academic article which i found ,”The transfer of power in Family business“, i translate the main point:

“When the family business from generation to pass another generation, the management of the transition is full of all kinds of “pain”: enterprise management because of disagreements, indecision and anxiety become unbearable; heirs, successors, backbone employees and directors to resign to protest the way; the whole family disintegration; as president of his father may have been ousted; originally planned acquisition of corporate buyers have also changed their minds. Finally, the company is not closed down, is stagnant.

In general, the family perspective in which managers and internal within the family, their concern is the power management control and family selection, accession or succession. The professional manager, employees, competitors, outside directors, brokers, bankers, wives, friends, etc. in a different perspective because of its focus and role vary.”

http://www.ebusinessreview.cn/c/article-layoutId-12-contentId-3532.html

From my Oriental point of view:

The essence of Chinese thought is “balance.” Enterprises in the succession of the main problems is because uneven distribution of power and interests arising from internal family members. The intention of the introduction of external managers is to prevent internal loss. But if the transfer too much  power to external manager, the Family members will afraid of his company’s loyalty is not enough to harm the company’s affairs. So in choosing an external successor, the company should consider that external and family members within the enterprise relationship between the balance of power. Not only external successor but also family members will both have a constraint, it will reduce the incidence of problems to enterprises damage. (As described in the case)

So far we have concentrated our learning about managerial and related lessons FOR FBs.

Some of these inputs have come from other well established field of management thinking

….the Family Generational/Succession Life-Cycle for example, and

….some of the models drawn upon from ‘Strategy’ thinking.

Have a read of this article and then contribute to the idea that:

“although FB as a field of study and formal practice is in its embryonic phase, FBs have many lessons to teach other types of businesses and inform ‘received wisdoms’ in mainstream business school thought.”

The article provides one with many useful insights which make one realize that FBs have a lot to contribute to the mainstream business school thought:

1) long-term strategy- widely held public companies see a dramatic rise in CEO turnover, this is often because there is no single institution guding them to focus on the long term strategy even though short term turnover may suffer, where the instituition will back them up. FB like ayala in the article on the other hand structure partnerships that can agree on long-term vision and provide stability at the board level.

2) Market volatility: FB with controlling shares have better chances of riding out a financial crisis. The article provides us with an example of the Asian financial crisis, where Globe, The FB was able to insulate the company from the volatility of the markets, due to a stable and supportive board and put I equity for some aggressive expansion plans.

3) Foreign-debt pressures- the article provides an example of Ayala, the FB based in the Philippines which had accumulated debt of nearly $1 billion. Even thought he company’s revenues were mostly in pesos, it went offshore for funds. Had the business been under pressure to deliver on quarterly earnings targets like public companies, it might’ve hesitated on its leveraging decisions, and great opportunities for value creation wouldve slipped by.

e.g. this Interview argues the case that the conglomerate form of FB is highly valuable, relevant and robust despite most economic, investor and business school thinking suggesting that the conglomerate structure of business strategy (ie unrelated, diversified firms) destroy value, dislocate resources and diversify risks inefficiently.

What other examples can you find of lessons FROM FBs TO other types of organizations AND theory/thinking?

Edit and post here…use your inline remarks box to give opinion and the main body to provide linked resources and references.

According to this article (http://www.bi-me.com/main.php?id=40748&t=1&c=34&cg=4) ”Some 95% of businesses in Asia, the Middle East, Italy and Spain are family-controlled. So are over 80% of companies in France and Germany, and between 60%-70% of those in the US.”

For this reason, research about family businesses is increasing rapidly. Lessons that can be learned, always according to the article, are:

- Long-term prespective (as shaloo pointed out)

- Value driven decision making

Another important characteristic of family firms is stewardship, which comes as a natural thing for family firms.

Source: Shellie Karabell (2009) What makes family businesses unique, and what can we learn from them?

________________________________________________________________________________________________

10 Lessons Learned in 22 Years of Bootstrapping

The author, who runs a family owned business, shares what he learned from his business. In the following way.

1) We made lots of mistakes – View mistakes as learning experiences, Always document mistakes so that they can be referred to in the future.

2) We built it around ourselves – Build business around values capabilities etc.

3) We offered something other people wanted – Don’t follow your passion unless your passion produced something other people will pay for.

4) We planned – Keep a developing business plan, don’t set everything in stone

5) We spent our own money. We never spent money we didn’t have – Don’t take on debt unless you need it cash injection

6) We used service revenues to invest in products – Money should be kept revolving and reinvested into other offerings or businesses

7) We minded cash flow first, before growth – We rejected ways we might have spurred growth by spending first to generate sales later

We put growth ahead of profits – Traded profits for growth

9) We hired people slowly and carefully

10) We did for employees’ families what we did for ourselves

Berry, T., 2009. 10 lessons learned in 22 years of bootstrapping. [Online] Available at: http://smallbiztrends.com/2009/06/10-lessons-learned-in-22-years-of-bootstrapping.html [Accessed 5 April 2010]

Contributing to the main idea of this post, I would like to say that, in my opinion, the link between family business and theories related to other types of business is the following: lessons from mainstreem business studies could be implemented in family business, but not vice versa. Family business has its very specific implications. these lessons often do not fit other types of business.

As example I can provide the article “Family Business: Lessons from 100-Year-Old Family Enterprises” written by Arnold Aitken and Stephen Bray. http://thefamilybusinessschool.com/node/75

Lessons pointed out by this article are the following:

1. Remain small: small family businesses have a greater chance of passing the test of time than large ones. Of the

2. Avoid going public
Offering the company’s stocks to the public may be a tried and tested way of raising capital, but it also tempts takeover artists into pouncing on the business. On the other hand, keeping ownership of the company strictly within the confines of the family can help the family business last for over 100 years.

3. Stay away from major cities
Of the 102 oldest family businesses, only 27 companies were located in large metropolitan areas that had at least one major professional sports team. That’s just a little over 26%. Meanwhile, of the 50 oldest family businesses, only seven were based in major urban areas (14%).

4. Let a family member run the business
In general, family businesses that had a family member at the helm outlasted those businesses that were run by non-family members.

All these recommendations are based on successful family business experience, but, as you can see, they are not appropriate for other types of bysiness.

You have now been engaged with learning about Family Businesses and related concepts for 9 weeks.

Below please embed 1 concept map which captures the essence of Family Business for you. Capture all your learning about the various themes, issues, topics and their respective sub-categories into ONE MAP…not multiple Maps

That is 1map/individual...make sure you identify yourself as the map creator- by including your name in the central bubble. This is not optional as it will be considered by Azam Ali and myself as part of your Individual learning portfolio.

Below is sample of a concept map that I have derived from my lecture slides about FB..ie from the lecture on ‘Definitions’ and the lecture on ’succession’…this is just the start.

Ψ Yours needs to look more like the second Concept Map on the subject of Innovation.

You are required to provide comprehensive and rich (pictures, colours, etc) maps such as the second sample that depicts your understanding of the weekly themes and sub-themes. The key themes could form your initial parental branches and then sub-themes branch outwards, etc, etc. Please make sure you embed the images here….this map will also be included in your individual learning portfolio submission.

Below the maps I have provided links to MindMapping sources (free software)- do not feel obliged to construct your maps by using the software- feel free to hand draw, scan and embed:

Useful Concept Mapping Freeware- you do need to sign on for some:

1. Freemind

2. Mind42

3. You also have a great mapping tool called Inspiration available through the college’s Citrix applications resource.

Hello! I have created a hand-made, colorful map that depicts the key learning I have gathered during the semester. I tried to cover as many relevant concepts, since my main goal was to create something useful, practical and fun to look at. I hope you will like it as much as I do. Enjoy!

Hi Guys, here are some mindmaps that I made for the articles used in class. One is about the strategic process in family firms and the other outlines the effects of family and unrelated CEO on firm performance:

Hi, Mindmap

NO idea why its in black, should be in white.

Hey all, here is my mind map….. hope you like it… :

Hey Guys this is my mind-map

here is the mind map…

this is my mindmap:

Here is my mindmap:

 Hi,

Pls click on the link to view. I had problems uploading because it was in pdf format. Thanks

familybusinessbymonique12

Here is a recent case from India, about a well-known family owned business in the IT sector, the Satyam Computer Systems.

It was the biggest Fraud in the nation and also in the corporate world. It was hard to believe that one of the largest IT companies, Satyam Computer Systems, had undergone such a huge fraud case. Two brothers, Raju and B. Ramalinga Raju, who were the founder of Satyam Computer Systems were arrested in the Satyam fraud case. do u think these fraudulent activities in family busiensses are made easier due to some characteristics of the business itself? if yes and why and maybe someone could contribute articles about it.

A background into how this family business was setup can be viewed in the link to the article given below: http://blogs.hbr.org/cs/2009/01/satyam_and_indian_family_busin.html

The Satyam Computer Systems was considered to be one of the leading outsourcing companies in India and it was among the top five IT companies in India. Ramalinga Raju, who was the Chairman of his company, resigned after revealing that he had systematically falsified accounts as the company expanded from a handful of employees into a back-office giant with a work force of 53,000 and operations in 66 countries. The company listed about 50.4 billion rupees in cash and bank loans as assets, that ended in September and were nonexistent. Revenue for the quarter was 20 percent lower than the 27 billion rupees reported, and the company’s operating margin was a fraction of what it declared.

The revelations from this case caused a major shake-up in India’s enormous outsourcing industry and many large companies were investigated and they had to revamp their back offices.

“This development is going to have a major impact on Satyam’s business with its clients,” said analysts with Religare Hichens Harrison.

In the four-and-a-half page letter distributed by the Bombay stock exchange, Raju had described a small discrepancy that grew beyond his control. “What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years. It has attained unmanageable proportions as the size of company operations grew,” he wrote. “It was like riding a tiger, not knowing how to get off without being eaten.”

Speaking of a “deep regret” and a “tremendous burden,” he sincerely apologized to shareholders and employees and asked them to stand by the company. “I am now prepared to subject myself to the laws of the land and face consequences thereof.”

Learning Points:

· As seen in this case, producing fake records by one member of the family not only caused a major loss to the business but also affected the reputation of the entire family and their business.

· The consequences of using such wrong measures in family business also affect the next generation of the family. As in this case, Raju’s son who was into the estate business, had to go through a series of problems in managing his own business and making up for the financial loss caused to the family.

· Since Satyam Computers was such a big business in India, this fraud case had affected the other IT companies in India as well, as their records were being investigated and countries were being cautious when dealing with the IT companies in India.

Therefore, it is always advisable to do the right thing in the family business or it can have long term consequences for both the business and the family’s reputation.

Pawan, Shaan, Sofia and some of you were considering the possibilities of how you might encourage the establishment of useful CG practice in your FBs during my lecture on the subject this week.

Here’s an article that demonstrates how one FB implemented a new IAD (Internal Audit Department) as part of its general review of CG issues. Note the effect of legislation (in this case US-based Sarbanes-Oxley Act) forcing FBs to consider changes to their management and ways of doing business!

Bring your opinions (through your in-line remarks box) and resources to the table…ie this post!

Since our topic for this week is Family Firm Governance, here is an article about how governance and management help in successful running of family businesses. It talks about how governance is developed over time by family discussions and family visions, as its development is very important for proper functioning of the business.

The article also highlights the importance of having a family creed or constitution and how it can be framed according to the family business requirements. In order to  review the proper functioning of the business and the constitution, the article talks about having regular family meetings and councils. these meetings can be helpful for many other reasons, such as, involving the younger generation into the business, providing for interactions among the various governance departments.

Here is the link for a full access to this article

http://www.slideshare.net/guestd224927/governance-and-management-3476757

If there are any other aspects of governance and management that can aid in successful family business do add them here..!

http://hbswk.hbs.edu/item/2630.html

John Davis in his article points out three components of Family governance:

According to the article, basic governance structure of the family business system is illustrated by the following scheme:

Also Davis gives his vision of the coordination of the family council and family assembly with management and the board on some key plans affecting family companies:

Structures and Plans to Govern a Family Business System

The article “When corporate governance is a family affair” by Robert Zafft, which you can find here recognizes the difficulties in trying to introduce CG into a family firm. Zafft explains that most people try to sell CG in order to gain more capital sources, but this should not be the driving force. In my FB, it is true that it seems the owner and the managers are sitting on opposite sides of the table - as explained in this article. But what happens when the owner is the manager? CG is of paramount importance when trying to impose tight controls on management, however the other important reason for CG is that external shareholders would not invest in a company with bad governance, so the price of capital for many FB’s goes up, making them less competitive. Finally, the most important reason why CG does sell to FB’s is not a matter of capital, but for management succession. The founder will die, as hard as it is to accept sometimes. And whether he can formulate a functioning succession plan is difficult to say, however a structured CG can solve this problem, and keep the family harmony. So mixing CG with the family is necessary!

Finally, to show how firms do not always follow the table above - I have highlighted 2 boxes, which I know my FB does not follow the same way. The top management do not make the strategic plans, the CEO and founder (both family) do. The CEO does and will not make the succession plan, he may counsel and support it - but the founder will generate it.

I found an article about How to manage effective family business meetings. I decided to attach it to this post, since it’s related to the management topic.

http://www.kansasruralcenter.org/publications/FamBusMMG.pdf - here you can find the full article. It considers the example of agricultural business, but the findings could be implemented in any kind of family business meetings.

The major rules of providing effective family business meeting are the following:

1. Choose a meeting facilitator. Begin with someone, either outside or within the family, who naturally has the respect of the family. Later this role can be rotated among family members to broaden the leadership. The facilitator makes sure discussions stay on topic, the meeting keeps flowing, everyone gets to participate and individuals listen to each other. This person helps the family separate business from family issues and problem solving from making decisions.

The facilitator must help the group constructively resolve conflicts.

2. Set an agenda. The purpose of family meetings is to improve communication and understanding about the business. These meetings also can develop the values and policies that will guide the business. Family meetings need to create a safe environment to have conversations about the crucial issues. Meetings can also organize activities to share family news, family history, family memories, and enhance relational skills. Set realistic time allotments with each agenda item. Make sure everyone gets the agenda in advance so they can adequately prepare for the meeting.

3. Invite the right people. Depending on the agenda of the meeting, invite family members who are old enough to participate, in-laws and family members who have a stake in the business. Sometimes it helps to have an outside facilitator, a business advisor or key employees.

4. Plan family retreats. Retreats should balance discussion about the firm with activities that build relationships. Include fun activities such as games, plays, tournaments, talent shows, exercise, music, recognition of achievements, family rituals, and food. Family retreats should happen away from the distractions of the firm.

5. Set ground rules. These help maintain healthy interactions. Some examples are suggested below.

• Be on time and come prepared.

• Listen to understand and then speak to be understood.

• All relevant information should be shared openly with each other.

• Accept and support group decisions.

• Issues should not be shared beyond the family except by common agreement.

6. Keep a record. Delegate someone to record important decisions and discussions. This documentation should be filed so that your family remembers what was decided and why.

7. Organize the next meeting. Ask for suggested discussion topics for the next family meeting. Set a date, time and place. Rotate meeting roles and responsibilities among family members to build leadership and teamwork.

So, on the one hand, this article points out obvious things, but, on the other hand, we can see, that it mentions some important issues that we discussed in class: such as the necessity of involving non-family members in meetings or the importance of written documentation.

Based on Davis, J. 1996. Bivalent attributes of the family firm. Family Business Review, 9(2)

Some thing else I stubbled upon when reading on this topic:

“In the context of this work, corporate governance refers to the organization of strategic leadership and control of the business and the family. It aims at balancing the interests between the involved stakeholder groups. By means of extension of the business system around the family system, the business system becomes spotlighted by the corporate governance regulations. One of the involved stakeholder groups is explicitly the family of the business in its peculiarity as a family. The internal distribution of and the essential structures aiming to assure the predictability and responsibility of the acting persons need to be equally  applied to the family members as for others that take over special tasks within the context of management. Therefore, corporate governance in family businesses comprises in addition to the classical business-governance also the family-governance as an integral part.” (Klein S.B, 2010)

to discuss Governance and Management in Family Business, especially small family firm, the categries of small family business around world is different, it based on culture environment.

from the article,Entrepreneurial management and governance in family firms: an introduction. author try to describ the categries of the Governance and Mangement in FB, here is the key three question need to think about:

1. What are the contingencies and contexts wherein family-based approaches to organizing have an advantage over non-family firms?

2. What are the succession processes and procedures that enable family firms to survive in the long term?

3. Given the advantages some family groups are able to establish and maintain over time in rent-seeking societies, which institutional contexts nurture the creative destruction necessary for innovation and entrepreneurship?

http://www.entrepreneur.com/tradejournals/article/118107663.html

Being the eldest son in my family I found this McKinsey article totally offensive and true.

Source: Dorgan, Dowdy, and Thomas (2006), ‘Who should and who should not run a Family Business?’, McKinsey Quarterly; 2006, Issue 3, p13-15

Not only does it establish a case for outside management and leadership of the FB, it also suggests that I am totally inadequate when it comes to taking over from my parents!!!!!

What do you think?

Ladies, have a field day.

Gents, especially, the eldest sons amongst you, start eating humble pie….businesses suffer under our leadership according to this evidence.

 the decision of an adult child to join the family business impacts the parents relationships with their daughters and sons.

this article is very interesting as it points out that father-son relationships generally perceived to be more profitable than a father-daughter family business, is actually not the case. this is because:

1)      while men in theory think ownership and control are best left to them, when women are involved in decision making and control, it might actually be greater benefit.

2)      By including a female member in the family in the management and ownership of family firms, most employees feel more included, collaborate better, and to some extent, experience greater loyalty.

3)      Often sons are forced to join the business and not given the freedom to dispute their involvement, women are given more freedom and option to choose. Hence when a female family member, like the daughter decides on joining the family business, there is far lesser degree of hostility and resentment within and among other family memebers.

this article is called ‘when adult children join the family business’ by Christine Cadina, 2007.

can be accessed here:

 http://www.associatedcontent.com/article/434691/when_adult_children_join_the_family_pg2.html?cat=25

The two articles used were Kongo Glumi and Meritocracy

Please use inline remarks for opinions and credible argument, data, examples and sources for your position about who should/shouldn’t run FBs.

Hyperlink back to previous articles and posts if they serve your argument better.

_________________________________________________________________________________________________

Examples of a billion dollar firms being handed down to eldest son:

Formosa Group Taiwan

Common guys, add on some more example!!!

[ Kuratko et al., 1993. Family Business Succession in Korean and U.S. Firms. Journal of Small Business Management, Apr93, Vol. 31 Issue 2, p132-136, 5p ]