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Ownership structure and different classes of stock
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Terms in this set (181)
Reviewing the financial status of the firm

Deliberating on company strategy

Looking out for shareholders interests

Ensuring the ethical management of the business

Being a respectful critic of management

Reviewing CEO performance and holding top management accountable

Advising the CEO on substantive subjects

Monitoring and mediating to reduce conflict between shareholders with divergent interests

Bringing a fresh perspective to the to issues

Assisting in the succession and continuity process

Independent directors perform a particularly valuable function for family firms, where their dominant role on boards has been shown to significantly improve the financial performance of the firm
Key nonfamily manager in the top-management team hep set high standards for professionalization, work ethic, accountability, dedication and expertiseBy doing so, they too help govern the family-business relationships in a family companyIn the absence of an effective board, family councils and family meetings can embolden shareholders to exercise their power beyond what is best for the management of the family enterpriseSecond guessing management decisions and reversing strategic initiatives have sometimes been the result the relationship between the family council and the board of directors, therefore, needs to be clearly established and the relative authority delineated to prevent an imbalance in the ownership-management family interaction that could have a negative impact on the firmCompensation should be given becauseit signifies a firm expectation of contribution and willingness on the part of the CEO to listen to and be influenced by a group of peers who are forward thinking and well prepared for board meetingsThe key difference in compensation between publicly traded and private family company boards is because direct reflection of the risk inherent in serving on a public versus private boardPrivate company members face less riskA per-diem for attendance at meeting and an annual retainerUsually $10,000 annually per board member (small family owned business) to about $300,000 in cash and long-term incentive plans (large family companies)CEO (salary/220/2)*4Another quick rule of thumb is to determine board member compensation is to divide their own salary by 220 (#working days in a year) divided by 2 (meetings usually last 1/2 day) then multiply by 4 (# board meetings a year)General expectationsThey ask challenging questions that open up the business to an outside perspective and help it adapt to changes sooner, given the high rate of change in the company's competitive, technological, social, and regulatory environment. They also insist on thorough and convincing answers to their challenging questions They hold top management accountable, everyone, especially a "lonely at the top" president/CEO can benefit from periodic reviews and feedback They have ample related experience Risk-taking peers who have been through it before can help guide the CEO Whether the "it" is seeking capital, strategic planning, growing the business, gaining market share, developing key managers or succession They bring with them a network of contacts that can help locate talent, financial resources, and new business opportunities They are management professionals A board is part of the corporate signaling process on professionalism, commitment to the long run, and part of developing a great reputationIntegrityThis is the core principle on which any leadership activity, including board service is built Being capable of acknowledging the brutal facts of the company's current situation is at the heart of board leadership Acting as a corporate conscience on ethical behavior, while recognizing multiple stakeholder interest is also essentialCourageEffective boards invite confrontation and debate. It is not personal Effective advisors on the board offer different perspective and challenge current or popular viewsTeam playerAdvisors need to be able to engage in confrontation, collaborative exploration, and complementary value-adding deliberations (from their different skill sets) they also need to give the CEO and key management feedback frequentlyExecutionAlthough raw intelligence and analytical ability can be a great asset to an advisory board, only those who have executed ideas understand what it takes to make great ideas grow and bear fruitA champion in the development of people- helping others succeedAdvisers need to be able to facilitate the achievement of others They must have the capability to get people to improve their results in the pursuit of goalsPersistent and proactiveAnd adviser has to follow up, take action, and making things happen, even between board meetings, in serving the mission of the board Advisers proactive stance on a variety of issues and activities will ultimately have an impact on the competitiveness, effectiveness, and long-term, performance of the companyFocus on the futureRehashing the past may promote learning from experience, but the primary responsibility of advisers on the board is to assist in creating a more effective future. The bulk of a boards agenda should focus on planning and strategizing, no on reviewing history One implication of this - the company has responsibility to provide financial and operational information to advisers by mail in advance of the meeting so that a minimal amount of board meeting time is spent on financial and operational reporting and reviewExpectations of Board members at the task or activity levelReview the financial status and future prospects of the corporation Assist in securing financing and launching marketing initiatives Review and collaborate on business strategy, including growth opportunities Promote objective dialogue on growth, financing, and ownership structures Assist in networking with other CEO's partnering with an benchmarking against other CEOs Assist in career planning and professional development of key management Assist if asked by the president/CEO, in reviewing and making recommendations regarding key managers' incentive and compensationSuggestions from a Panel of Experts on Advisory BoardsReasons for Having an Advisory Board I t's lonely at the top Outsiders with a commitment to the company can add perspective, problem-solving ability, expertise, strategic thinking, and a network of contacts that complement those of an able CEO and top-management team Different visions of the future between generations and predictable differences between family members who are active in management and those who are not can be positively influenced by facilitation, moderating, cajoling, and professionalism of a boardConditions Necessary for an Advisory Board to be EffectiveCEO/family must be willing to share information Financial information Business plan The CEO must make board members feel welcome, be willing to involve them in the business, be honest with them, and expect them to be loyal critics, not a rubber stamp board The CEO and board members must do their homework - they must be prepared for meetings and be available for follow up action and ongoing coachingWhat and Advisory Board can do for a family businessAssist in planning for the future Provide help with objective financial analysis, its review, and its implications Assist with strategy and product/service development Help the CEO establish and review goals (but not set or direct goals themselves) Suggest ideas on how to make processes, relationships, etc. better Assist in networking with other CEOs and partnering with an benchmarking against other companies Help in choosing a successorMeeting schedules and agendasTypically, meetings are scheduled quarterly. The board is convened more frequently during growth or conflict The focus is on planning for the future, not rehashing the past Factual history and financial information are provided in materials prepared for the meeting; the are not rehashed in long discussions or presentations and so play a minimal part in the agendaAdvisory Board membersMembers are independent outsiders- people with whom the CEO feels comfortable and who will be supportive of but not necessarily agree with the CEO. CEO's should not include on the advisory board those whom they are already paying for professional services (ex. Their own accountants or attorneys ). A minimum of three to four outside professionals/business people will provide a diversity of opinion and experience and enrich deliberation Suggestions for finding good advisors include networking through professionals and organizations, using relationships established with businesspeople in other situations, and framing a brief statement of the type of person being sought as a board memberBoard members should have experience inmanaging, hiring, and firing have acuity with finances Have a sense of human resource management Be ethical Be passionate about wanting to make a differenceThe first person engaged (when a board is first being established) is critical, as he or she sets the standard for recruiting othersThis individual should have experience on for-profit company advisory boardsFamily members (especially successors) may be invited to attend meetingsHowever they should not automatically be members on the board This eliminates family politics and allows family members to be excused during sensitive parts of the meetingsTerm limits should be clearly established and have staggered end datesHowever the terms of those making a significant contribution to the business should be renewedCompensation for board members will depend on the size of the businessGenerally a retainer fee, along with a per-meeting fee, is recommendedA family council is a governance body that focuses on family and ownership mattersfrequently developing family-participation policies and dealing with liquidity issues and estate planning.As the family moves to later generations, larger numbers of members, and greater ability to govern itself, assisted by a family councilthe family council often becomes a supra-board where what shareholders want leads to strategic decision making by the owning family.A family assembly creates participation opportunities forall members of larger multigenerational families at least once a year.Family meetings and family councils are a reliable forum for the education of family members about the business.In family meetings, family members learn about the rights and responsibilities that accompany being an owner-manager and about the important distinctions between ownership, management, and family membership. They also provide a forum to minimize the potential for conflict within the family.Family meetings are largelyabout education and communication, not decision making. Policies guiding the family's relationship to ownership and management can be developed in family meetings.these policies areemployment, consulting, subcontracting, board service, and philanthropy evaluation - desired balance between family and the business and between growth./reinvestment and higher dividends/current returns compensation and liquidity.Family meetings are best when they appreciate the past but focus on the future. This is one of the reasons why developing and following a detailed agenda is so important.Rehashing the past ad infinitum seldom helps a family in business create the kind of relationship with the family business it wants in the future.Family meetings or family councils should not be startedwhen the family is in serious conflict or there has been a relationship cutoff (the severing of the communication and relationship between two or more family members). The best time to initiate this best practice is when its need is not obvious and a meeting not urgent.Family meetings are a significant contributor to the unique resource that family firms enjoy: family unity.Family unity and commitment can be the source of strategies— such as managing for the long run—that differentiate family firms from other forms of enterprise and endow them with unique competitive advantages.Family-meeting facilitators, with their third-party neutrality and objectivity, are a wise investment in the effectiveness of family meetings.Although families prefer to "keep it in the family" the participants must remember that it is very challenging for a family member to maintain the role of facilitator when the topics of conversations are related to their own family.The family facilitator canremove barriers promote momentum provide the discipline for continued action required for multi year processes such as succession, ownership transfer, and continuity.A family council is a governance body that focuses on family mattersfrequently developing family-participation policies Strategic decision making, while less frequent, is also a function of a family council, usually in later generations. In these cases, the family council acts as a family supra-board, where owner goals influence the decision-making that takes place in business boards and top-management teams.A family office's primary duties are toprovide and organize a series of services for family shareholders, including legal and financial assistance with estate and tax issues management of the investment portfolios of the family providing information of relevance to shareholders through meetings, emails, and newsletters fairly and equitably making family or shareholder benefits available to family members.Some families in business create a separate policy called an owner or shareholder plan.This owners plan addresses dividend/distribution policies, liquidity issues, and capital structure. The drafting of the owners plan is usually done by a subcommittee of the family council. This plan is a working document that is shared with the board, as a way to help the board better understands the needs and wants of the shareholders.The MonarchKings and Queens rule for life have no retirement Many business owner still show up at work Read mail To make or receive a few calls Reverse or second-guess decisions made by next-generation or key nonfamily managers over the past 24 hours Effectively rule the company during 3-4 hour workday Hire and fire a whole series of aspiring general managers, presidents, chief operating officers Don't imagine anyone could ever replace them Don't talk about succession, planning never takes place Chaos follows after their death Greed and hidden agendas will show Destroying work that took a lifetime, generations, years to createThe GeneralDisplay self discipline Chief executives leave office reluctantly and plot a return Waiting for someone to slip up so they can step up again Lives 6 months out of the year in FL,CA,AZ If a general runs the family business, other officers and enlisted personnel need to know that their new responsibilities and authority will only be part time, because the general will be back to take overAmbassadorExit the business by delegating most of the operating responsibilities to next generation members and/or key nonfamily managers but hold on to their diplomatic or representational duties on behalf of the corporation Become marketing spokespersons, public images, reinforcing the power of the brand that they embodied Make room for top nonfamily managers and next-generation members Allow others to learn the business firsthand and to eventually take over responsibility for running the enterprise Proceed slowly with their exit to make sure take-over is ready for day to day operations Or else they will need to return to fix the problems of the corporationThe GovernorFewer than 5% of all family business owners exit after having set a deadline for the transfer of power Few public or private management controlled companies have CEO succession take place in such an orderly fashion that the company's sustainability or continuity is not threatened Set a departure date and announce it publicly, this committing themselves to the goal of transferring power within an establishing time frame By making the date public they lend a sense of urgency to planning for the transition and enlist other key managers, personnel, employees, suppliers, and customers in the processThe InventorA metaphor for an existing CEO who takes on a satisfying key position in another enterprise Inventors are creative people Build systems and institutions that will help the next generation lead successfully, they are usually ready to pursue their next dreamThe Transition CzarVery few CEOs choose to exit by becoming the lead agent in the multiyear transition known as succession CEOs may choose the role out of a desire to consult during the managerial and political processes that a complicated transition requires Need to be aware of the difficulties inherent in being at the center of changing what they created Helps to seek outside advise from both a board and family business consultants Carry out the secession and continuity responsibility with significant assistance from the CEO spouse Allows CEO to concentrate on codifying the institutional memory of both the business and the family and building the institutions that will ensure effective family-business governance Spouse works to create trust and family unity in such a way that visions about the firms future are furthers understood and agreed upon and the unique and complementary contributions of different family members and key non family managers are better appreciatedCEOs of family businesses perceive both the business and the family much more favorably than do the rest of the family and nonfamily managers.To ensure both the long-term ability to govern the family-business relationship and the promotion of continuity, CEOs must enlist competent people both in the top-management team and as the governors of the shareholder group; these individuals can be complemented by board members and outside advisers.The six most common CEO exit types are themonarch General Ambassador Governor Inventor transition czarCEOs who want their companies to continue to be successful beyond their lifetimes allow fora generational transition to be planned and eventually executed. They also provide for time to realistically assess the company's unique situation and evaluate successors' capabilities and developmental needs.The CEO spouse plays unique roles in the family businessincluding steward of the family legacy facilitator of communication touchstone of emotional intelligence in family relations co-architect of successful generational transitionsCEO spouses often play a critical role as interim CEOs because ofthe unexpected death or illness of the CEO. This is especially true for female CEO spouses, given their longer life expectancy.The six role types of the CEO spouse arebusiness partner chief trust officer senior adviser/keeper of family values free agent jealous spouse interim CEO Shifts may occur in the CEO spouse's role type across her or his own life cycle.Members of the next generation of family-business owners are taking over fromtheir predecessors in record numbers and are willing to make the sacrifices necessary to be responsible leaders.Early in their career development, many next-generation members work outside the family business, where results are moreobjectively and exclusively attributable to their personal performance, unbiased by family influences.The right fit between a next-generation member's capabilities and the firm's needs is essential.Crafting development plans and career paths that support the discovery process with regard to mutual fit in a feedback-rich environment is also critical. The process of deciding whether the potential successor is right for the job, for the company, and for the company's strategic needs involves many years of experience and assessment.Next-generation members are rewarded for joining the family business throughthe career opportunities they enjoy relative to the challenge faced by other career launchers whose families do not own firms. Another immediate reward is the speedier learning curve that results from the transfer of knowledge taking place over years of membership in the family in business.The shadow of the founder, incongruent hierarchies between family and firm, and questions aboutnext-generation members' capabilities (rooted in much more data than is ever available on a nonfamily candidate for a similar position) all represent challenges to next-generation leaders.Resistance to change and the frequent imperative to rejuvenate the family firm often challengesnext-generation members to perform the difficult and demanding role of change agents.Ownership education is becoming increasingly important in the successor-development process.Coaches and mentors, both inside and outside the family, are an important feature of the developmental journey. A board of directors, a committee of that board made up primarily of independent outsiders, or an advisory board can be extremely helpful in the development and eventual appointment of a successor.Heirs to the family business must learnearly in their lives that they will have to earn a position in the business rather than inherit it. They should also learn to manage their own money at an early age.When a team of siblings or cousins is chosen for the leadership position, the CEO mustestablish common goals, carefully create different posts with clearly differentiated roles, reflect those roles in an organizational chart, develop processes that support teamwork and disciplined communication, and transfer ownership with full recognition that the next-generation CEO needs to have the ability to lead.Next-generation members have toprove themselves capable of managing the firm, managing the money (shareholder value and returns), and managing the family relationship. Running the business successfully is not sufficient.GovernanceFamily governance is a system of joint decision making by family and business leaders that helps the owner family govern its relationship with its business and wealth (pg 60) The desired outcome is rational economic and socioemotional decision making that is not overwhelmed by traditional family dynamics Governance can be provided through ownership structure, different classes of voting and nonvoting stock, buy-sell agreements, and a family constitutionGovernance Tools - Topics ChapterBoard of directors Family council Family constitution that captures the family's vision and important family values Family employment policy setting requirements for employment of relatives Ownership structure for corporate control Capable nonfamily managers that set a standard for professional management Nepotism: No question that family first attitude can create problemsFamily Governance StructuresChallenges to Family GovernanceNepotism Loss of family identity and values First generation drives the company and the second generation may come on and change things or not have the same values Family conflicts Belief that fair means equal Current leader's unwillingness to let go Entitlement culture Unsustainable culture Warren Buffet Give each child enough money so they can do anything but not so much money that they can afford to do nothing Dilution of wealth Erosion of the entrepreneurial culture Insufficient professionalization and institutionalization of the family's enterprises Lack of transparency Lack of oversight Altruism (charity) Confusion regarding what is a family, a management, and an ownership issue Wanting to keep it all in the family SPEED IS ONE OF THE COMPETATIVE ADVANTAGES RESULTING IN THE OVERLAP OF Current leaders unwillingness to let goThe most statistically finding that CEO's perceives boththe business and the family more favorablyBlurred System BoundariesFamily businesses are vulnerable to the consequences of blurred boundaries among the family, ownership, and management subsystems Family patterns or dynamics, replete with emotional content, can override the logic of business management or ownership rentsJoint Optimization of Family and BusinessJoint optimization of family and business is an alternative to blurred system boundaries Implicit in systems theory is the capacity to jointly optimize interrelated subsystems in such a way that the larger system can be most effective and successful in the pursuit of its goals Companies facilitate joint optimization of family, management, and ownership subsystems Writing policies that guide the employment of family members in the business Hiring key nonfamily management to "raise the bar" on what constitutes professional management of the businessProfessionalization Challenge and Family GovernanceFamily businesses of any significant size depend on the quality and effectiveness of professional family managers and nonfamily managersProfessionalization requirementsProfessional managers (both family and nonfamily) Modern organization structure aligned with firm's strategy Information and control systems and policies and procedures that promote delegation and institutionalization, not ad-hoc or continued founder-dependent managementStrategy and Structure of Family GovernanceGlobally, leading families are pointing the way on approaches and best practices when it comes to governing the all-important family-enterprise or family-wealth relationship Strategy has to be tailored to each particular family Boards with independent advisors, family councils, family offices, family constitutions, estate and ownership control planning, and committees of the family are part of the structureBoard of Directors and Financial PerformanceResearch found that companies in which independent directors balanced the influence of founding families on the board performed better and created greater shareholder value Firms that retained founding-family ownership and had relatively few independent directors serving on the board performed significantly worse than nonfamily firms Research points to effective governance requiring active, caring oversight as well as independenceFamily Members on the BoardFamily members on the board often act as the conscience of founding-family values Presence of family members on the board signals that long-term capitalism, sponsored by patient family capital, is ready to support strategies that many management-controlled companies may simply be unable to deploy Helps family firms pursue niche and blue ocean strategies that others can't pursueThe Founder Exits, A Family Office Is LaunchedTasks Wealth management Risk management Client services Tax planning Administration Investment services It reports to the family council or family board through its nonfamily director/CEOContributions of Board and CouncilFamily Council's Contribution to GovernanceProvide a way to rediscover the intangible, value-based legacy of the founder and earlier generations Provide forum for family members Reduce the likelihood that family concerns will be ignored or inappropriately exported to a board of directors Integrate with board of directors by having family serve as at-large members of the board Add nonfamily, independent directors to hold a family board session as a separate part of the family council meetingThe Family ConstitutionHelps govern the relationship between family members, managers, and shareholders Makes explicit some of the principles and guidelines that shareholders will follow in their relations with each other Represents an important asset to family unity and the patient family capital starting with second-generation family firms Has no legal standing with regard to the issues covered, but does have a bearing on the legal documents, including articles of incorporation, buy-sell agreements, and so on, that support the family's intentions and goodwillFamily Constitution ContentMission and vision Values Family brand Employment policy Next-generation family-member development Ownership policy Family-bank and/or family-venture capital fund Dividends and family-benefits policy Liquidity policy Board of directors or advisory board Family council meetings Shareholder meetings Family office informationUnifying Power of Family PhilanthropyServes as a great catalyst for a family's dream of continuity and a great elixir for the prevention of affluenza and the development of an entitlement culture in the wealthier later-generation family High-impact philanthropic model forces donors to behave like social entrepreneurs Provides wealthy families with a mission of service to others Nurtures family unityManaging the Challenges of SuccessionTo avoid choosing one successor, CEO can turn succession question over to the board Board members may rely on many sources for information and recommendations A board can enhance the perceived quality and fairness of the decision It is a third-party stamp of approval that increases receptivity to the new leader18.5 billion incharitable grants a yearGoverning the relationship between family owners and the firm continues to bea unique challenge to family-owned and family-controlled firms.Vicious cycle takes hold in family firms beyond first generationwhen owners are not always owner-managers The cycle is precipitated by family members who are only shareholders and receive insufficient information and often lower economic returns from the firm than their relatives, who are employed as managers of the firm.Shareholders who are not sufficiently informed and involved can get suspicious and concerned. They can feel that the playing field is not even and that they are being taken advantage of by shareholders who work in the business.Of course, this sense of disparity is often exacerbated by the fact that those working in the business are receiving salaries and other compensation.Shareholders not active as employees in the business then harbor concerns about excessive executive compensation and benefits—the new BMW company car and the country club membership.Over time, these same shareholders become less willing to invest in business expansion, preferring profit distributions through a dividend, bonus, and/or board fee. When these shareholders become frustrated enough, they may consider filing a lawsuit against the company and the active or majority shareholders claiming they have been treated unfairly. Or they may sue the board and company officers for self-dealing or mismanagement.Shareholder disagreements regardingcompensation, dividends, liquidity, return on investment, business strategy, financial results, the estate plan, and management succession are often responsible for the implosion of otherwise successful family companies. This is not just a family dynamic issue, but an ownership issue, with precedents in finance, business management, and corporate and criminal law.If a family business is going to preserve one of its intangible yet well-documented competitive advantages—its propensity to manage with a long-term horizon—investments in the ownership subsystem are essential. That means investing in:The design and execution of an appropriate ownership and control structure. The education, access to information, and engagement of shareholders. The creation of institutions that govern the ownership-firm interactionAs pointed out in Chapter 1one recent study showed that during the past decade the 35 percent of the S&P 500 firms that were family-controlled outperformed management-controlled firms by 6.65 percent in return on invested assets.Similar results were found in terms of return on equity.Family-controlled firms were also responsible for creating an additional 10 percent in market value, compared with the S&P firms that are management-controlled.The evidence thereforesays that U.S. firms with founding-family ownership perform ,better, on average, than nonfamily firms.An earlier study on the effects of ownership structure and control on corporate productivity among Fortune 500 companies(35 percent of which were also family-controlled) revealed that ownership affects a firm's productivityConcentrated ownership was found to result in higher overall corporate productivity.This higher performance seemed to be related to the different posture taken by these firms toward diversification (concentrated ownership leads to less diversification) and investment in training and development, and research and development. .The firms with concentrated ownership invested moreand more consistently regardless of economic cycles in both people and innovation.Notwithstanding the established influence of ownership on firm performance it is not unusual tolisten to CEOs particularly of first- and second-generation entrepreneurial, and family firms comment if not outright brag about the fact that they held their last shareholder meeting on the way to their favorite vacation spot. Understanding and successfully leading the ownership of the family firm its shareholders, is an essential part of the CEO's job. This is certainly the case the minute the firm stops being owned by the single, founding entrepreneur.Family shareholders inactive in the businesswith little understanding of management and the time cycles involved in new strategies or new investments can hamper effective operation of a family-controlled business.The sensible priorities of shareholders includerisk-adjusted economic returns captured in shareholder value and dividends or distributions.Family members may also be interested in noneconomic outcomeslike identity, reputation, and the ability to carry out philanthropic initiatives.Family shareholders expecting to fulfill their responsibility of aligning management interests with shareholder priorities, and holding management accountable need a thorough understanding of financial statements.They need to be able to make sense of what the numbers say about the firm and its competitive condition.Financial literacy is, therefore, essential knowledge for every shareholder, not just the ones active in the management of the company. Without it:Without it, the desirable alignment of management and shareholders is at risk. Without it, family-business shareholders can easily become just as indifferent or impatient, fickle, and greedy as investors on Wall Street.As part of their financial literacy, owners should also be able tounderstand the capital structure of the firm, know debt levels in relation to owners' equity, and therefore be able to gauge their ability to operate independently or risk influence by banks and other sources of capital in how they run their business.Family members who are shareholders should be committed and responsible. Shareholders in the company have the following responsibilities:1. To define and then demand reasonable returns on shareholder equity or invested assets 2. To provide the values and principles of doing business and ensure they remain instilled in the company 3. To define the owning family's strategy and communicate owning-family priorities.The interaction between ownership family and management is the source of what may constitute a competitive advantage but it is simultaneously the source of the biggest challenge faced by family firms:the effective governance of the family shareholder-firm relationship. Governance of the shareholder-firm relationship is essential. The tools for governing that relationship are the board, shareholder meetings, and family meetings.The particularly appropriate measures of profitability for a company in a particular industry, plus measures of return on invested assets, return on shareholders' equity, return on sales, and the growth trajectory of these over time are essential to have and understand.How a particular company's results stack up against competitors' and others' in the industry is the ultimate arbiter of whether the firm is winning or losing in the hypercompetitive marketplace, and therefore whether the owners need to issue a wake-up call to management, replace management, or make different capital allocation decisions going forward. Holding these numbers close to the vest (whether the vest of the founding CEO or of family members who hold key jobs in management or of nonfamily CEOs or key managers who prefer not to be held accountable by the other shareholders) undermines the fundamental advantage that so many family firms enjoy—a long-term horizon on their investment decisions.Ownership structures do not transfer well across generations.They need to be analyzed, redesigned, and executed in response to the growth in the number of shareholders and the increasing diversity of shareholder goals.Providing shareholder liquidity throughdividends, buy-sell agreements, and redemption funds is essential to preserving concentrated ownership and family control as a source of competitive advantage.Unhealthy Family Culture Characterized by:Secrecy Lack of information Low levels of family emotional intelligence Little knowledge of the business among at least some family members A result of A founding culture that supported autocratic leadership The family's belief in benefits of privacyFamily culturesAbsence Commitment to family-business continuity A family "trust catalyst" A board with independent outsiders Family meetingsPresentCommitment to continuity (even in the face of a financially crippling strike) Individual responsibility to the group A sense of stewardship Family unity Frequent family meetings*Zero-Sum Dynamics and family cultureExchanges in which one party's perceived gain is the other party's perceived loss Absence of growth (increased wealth and career opportunities) in the family business is fertile ground for zero-sum dynamics Us-and-them dynamic can be triggered by any perceived difference: male-female, active in management-inactive in the firm, older-younger, richer-poorer, etc..The Family Systems PerspectiveConsiders the family to be the building block of emotional life Uses systems thinking to understand the complex interaction between individual members of the family Suggests that change in the family is more likely to cause sustainable change in individual family members Argues that the interdependence that is the source of social/physical/intellectual/emotional rewards in the family also gives rise to conflicting needs, desires, and priorities as the family grows and ages Argues that while families often blame individuals whenever there is trouble and tensions mount, sharing responsibility for the difficulty and its remediation is more effective than individual solutions Argues compellingly for the tremendous influence of an individual's family of origin Patterns and processes set in motion from two or three preceding generations still matter The analysis of earlier generations is essential to understanding what ails or distresses a family in the presentBowen's Family Systems TheoryA family is a system Family systems transfer rules, patterns, messages, or expectations about the behavior of its members Individuals and families can still learn behaviors and establish patterns different from those transferred by messages from the family of origin Tension and distress tend to make individuals go back to patterns and behaviors learned from their family of origin, unless by purposeful self-differentiation and maturation a different behavior is learned and used Because often very old emotions are still quite powerful in the context of a family's history, differentiation of self through thought and reflection can promote an individual functioning above historic patterns, even under conditions of stress Triangulation is the predictable emotional pattern among three people, with the third, the outsider, being "triangled" as a result of the emotional outpouring in the relationship between the other two family members For example, a husband and wife, in conflict over control of their relationship, may triangle a young son or daughter, who acts out and diffuses or distracts the couple from the original conflict and creates a new focus for family attention Cutoffs are unresolved emotional attachments to parents that lead family members to distance themselves from their family of origin, sometimes only to "repeat the sins of their past"Family GenogramsA cousin of the family tree that also identifies critical events in the family's history, the quality of relationships between family members, patterns of illness, and the role that second or later marriages can play in family life Critical incidents in family life recorded in a genogram can help better understand the implications of family on issues like business succession, estate plans and ownership transfer, likely alliances, and likely sources of conflictFamily Emotional IntelligenceRefers to the capacity to recognize our own feelings and those of others and the ability to manage our emotions and relationships with others Ultimately, emotional intelligence increases the ability to handle feelings with skill and harmony even when differences between family members exist, so that teamwork and family unity can thrive Emotional competence inventories with their 360-degree feedback process help all family members, particularly next-generation members of a family in businessFamily Rules of Conduct1. Focus on the future, not the past 2. Be a good listener 3. Put yourself in the other's shoes 4. Stay focused on principles, not personalities 5. Make "I" not "You" statements 6. Say "Got it" whenever speech-making blocks progress 7. Disagreements are okay, as long as we are committed to arriving at an improved final decisionHow Families Add Value: The Family-Business Interaction FactorHigh scores on family unity combined with high scores in career opportunities in the business produced a high score indicating a positive family-business interaction This positive family-business interaction factor was a great predictor of the number of best management/ governance practices implemented and the source of a hypothesized virtuous cycleThe Benefits of Family MeetingsProvide a reliable forum for delivering information about the state of the business, its financial performance, its strategy, and the competitive dynamics it faces Offers a safe haven in which to teach family members about the various rights and responsibilities that accompany being a business owner and managerFamily Unity and ContinuityFamily unity is a strong predictor of the successful use of a set of best managerial and family practices by family companies Family unity is also a defining element in the relationship between the owning family and the business It affects the firm's ability to capitalize on the unique capabilities and/or resources that family members bring to the company's business model It helps the company translate core competencies into a unique set of competitive advantagesPlanning and Policy MakingFamily councils foster open and safe processes for sharing information The focus of family councils should be conversations, deliberations, and policy making The council may suggest policies such as: Employment and subcontractor policies Board service and family council service policies Dividend and liquidity policies A family constitutionGuidelines for Policy MakingIdeally, involve as many family members as are relevant to the particular policy being developed Look at the big picture, and formulate a mission statement or outcome goal that defines what is best for the extended family and the business Focus on the future and let go of the past Use experienced facilitators who can play a significant role in helping a family business focus on the future Benchmark your drafts of policies against those of other successful family-owned or family-controlled companies Agree on the process you will follow to develop, review, edit, redraft, approve, and ultimately enact policies with the confidence that people will support them because, after all, they helped create themTrustsLegal Agreements, and Personal Responsibility, "Trying to force people you don't trust to do what you want them to do over generations is doomed to failure. No matter what you write in the trust instrument, there are no ironclad guarantees that the company won't be sold. You have to get the people who can make or influence the decision to keep the company to buy into your vision." - John P. C. Duncan, AttorneyConflict ManagementFamily meetings can provide a forum for minimizing the potential for conflict and addressing the troublesome problems that confront multigenerational families Family meetings can address existing problems such as: Frustration over alienation or lack of inclusion Anger over the unfairness of hiring practices, promotions, family benefits, etc. Frustration over dividends and lack of liquidity Many families rather than voting, will work overtime to get a consensus70% family owned businesses 49% of family firmsThe Systems Theory Model of Family BusinessWhen Does an Entrepreneurial Company Become a Family Business?When the children of the company founder join the business as employees The business may continue to be known as an entrepreneurial company Avoids the perception of nepotism Avoids the impression of a lack of professionalism often ascribed to family businessesOther StatisticsFamily-owned and family-controlled firms account for approximately 70% of all incorporated businesses in the U.S. where approximately 17 million family firms operate In the U.S., family firms account for 49% of the GDP or approximately $7.5 trillion, 85% of private-sector employment, and about 86% of all jobs created between 1999 and 2009 85% businesses fail within 5 yearsFamily Business: Working DefinitionDefinition of family business is a synthesis of: Ownership control (15%+) by two or more members of a family or a partnership of families (Privately held control is usually 50% - publicly traded is 10%) Strategic influence by family members on the management of the firm (advisors, board members, or active shareholders) Concern for family relationships The dream (or possibility) of continuity across generationsFamily Business CharacteristicsThe presence of the family The overlap of family, management, and ownership The unique source of competitive advantage derived from the interaction of family, management, and ownership, especially when family unity is high The owner's dream of keeping the business in the family The strategic influence of noneconomic family goals and values FAMILY FIRMS LIKE GOOD REPUTATION, COMMUNITY INVOLVEMENT,STEWARDSHIP, LEGACY, ETHICSSuccession and ContinuityThe most prevalent reason why family-owned and family-controlled companies fail relates to a failure in succession planning Three patterns of ineffective succession were identified in one study Conservative (Parental shadow remains-strategies locked in the past) Rebellious (Overcorrection - clean slate) Wavering (Paralyzed by indecisiveness, unable to adapt to current conditions)Building Family Businesses That LastWithout vision, boundaries among family membership, family management, and family ownership may become blurred Requires ongoing dialogue across generations of owner-managers about their vision for the company Requires recognition of the tension between preserving and protecting the core of what has made the business successful on the one hand and promoting growth and adaptation to changing competitive dynamics on the otherFamily Business TheoriesSystems theory perspective Agency theory perspective Strategic perspective Stewardship perspectiveSystems Theory PerspectiveThe family firm is modeled as comprising the three overlapping, interacting, and interdependent subsystems of family, management, and ownership Most-used theory in scholarly study of family business Individual perspectives of members of the family and the firm may differ, leading to overemphasis of one of the subsystemsFamily-First BusinessesEmployment in the business is a birthright Perks that transfer from the business to family members are often extensive Financial systems may be obtuse by design, and secrecy is often paramount Members of the same generation are paid equally Without commitment to continuity, business will most likely be sold at the end of a generationManagement-First BusinessesActively discourage family from working in the business and/or require outside experience Performance of employed family members is reviewed in the same manner as the performance of nonfamily managers Compensation is based on responsibility and performance Conversation between family members is often all businessOwnership-First BusinessesInvestment time horizons and perceived risk are the most, significant issues When shareholders come first, the priority is risk-adjusted economic returns or owner rents Often have shorter time frames within which financial results are evaluated Family members can cause the business to lose the founding culture, which valued the role of patient capital, or investing in the family business for the long termAgency Theory PerspectiveTraditionally, the natural alignment of owners and managers (Managers are known as Agents) decreases need for formal supervision and governance Reduces agency costs of ownership in family firms Recent research says family ties increase agency costs Agency costs can be controlled or avoided by the use of managerial and governance practices Outsiders on the board of directors limit family managers' self-serving behaviorStrategic Perspective: Resource-Based ViewResource-based view highlights unique resources that family firms convert into competitive advantage These resources are often referred to as organizational competenciesOrganizational CompetenciesOverlapping responsibilities of owners and managers, along with small company size, enable rapid speed to market Concentrated ownership structure leads to higher overall corporate productivity and longer-term commitment to investments in people and innovation A focus on customers and market niches results in higher returns on investment The desire to protect the family name and reputation often translates into high product/service quality, brand equity, and higher returns on investment The nature of the family-ownership-management interaction, family unity, and ownership commitment support patient capital, lower administrative costs, skills/knowledge transfer across generations, and agility in rapidly changing marketsCompetitive Advantages:Stock concentration is positively correlated with: Related diversification R&D expenses/employee Training expenses/employee Overall corporate productivityAgility and CustomizationThe greater flexibility of new manufacturing and distribution-retail-service technology makes smaller runs economically attractive Customization, changing consumer preferences, and shorter product life cycles reward agility Internet-based, value-added partnerships in supply chain make agility possible across value chainStewardship PerspectiveClaims that founding-family members view the firm as an extension of themselves and therefore view the continuing health of the enterprise as connected with their own well-being Owners inherit a responsibility to others, to stewardship, so that the enterprise they received from the earlier generation may successfully pass on to the next As stewards of the firm, family owners often place individuals on the board who have industry knowledge, can provide objective advice, and can advocate for a going concern The independence of the board has a positive impact on the financial performance of the firm through its advisory role more than through its monitoring or supervisory functionCompared to nonfamily firms family firms are:Less aggressive in tax-reduction efforts More likely to provide honest reporting to the public Less likely to use income-increasing accruals to manage earnings Exhibit higher levels of corporate social responsibility and greater citizenship in the community Care more about quality Care more about the environment Can be counted on to stand behind their products Exhibit stronger commitment to philanthropic initiativesWhat happens when CEO's hold on too long and don't prepare for succession?They weaken the company's ability to continue through generationsWhy is transferring power hard in family businesses?because there is so much at stake and power can be a life source for those with itWhat is it called when families transfer title without power?Title without sharesWhat role must CEO's assume if they want the business to outlive them?An architectWhat are the 6 CEO exit types?1. monarch, 2. general, 3. ambassador, 4, governor, 5. inventor, 6. transition czarDefine the Monarch CEO exitno succession plan because they believe they will die the king, usually succession comes after death, these usually end poorly after deathDefine the General CEO exitretire as a display of self-discipline but wait for the new leadership to mess up to return triumphantlyDefine the Ambassador CEO exitretires and delegates most responsibility to next generation but holds on to diplomatic or representational dutiesDefine the governor CEO exitset a departure date publicly and transfer power by that dateDefine the inventor CEO exita CEO who leaves and takes on a position with another company, after creating a succession plan and acting it out they will pursue their own dreams but will still help the new leadersDefine the Transition Czar CEO exitbecome the lead agent in a multiyear successionWhat are 3 factors that influence the role of the spouse?1. the perception of need, 2. the ability to perform the role, 3. the availability of others to perform functionsWhat are some characteristics of CEO spouses?stewards of the family legacy, keeping the "family" in the family business, instilling purpose and values in family members, and embodying cooperation and unconditional supportWhat are the roles of the CEO spouse?1. business partner 2. Chief Trust Officer 3. Senior Advisor 4. Free Agent 5. Jealous spouse 6. Interim CEO spouseDefine the business partner spouseresponsible for a variety of projects in the business, comes with a lot of room for conflictDefine the Chief Trust Officer spouse?act to heal the family when there is conflictDefine the Senior Advisor spousekeeper of family values, like a chief trust officer but also helps kids grow up knowing the businessDefine the free agent spousecreate themselves independently of their spouse and the businessDefine the jealous spousespouses jealous of the time their spouse spends with the businessDefine the "Interim CEO" spousesometimes must take on leadership during time of transition of powerWhat are the 2 worst types of successions?monarchs and generalsWhat is the formula for Change?Dissatisfaction with the status quo x Vision of the desired future x First steps in getting thereWhat are the 6 approaches to organizational development change?1. Individual consultation 2. dyadic consultation 3. group consultation 4. intergroup consultation 5. development of interpersonal skills in the next generation: teach to earn respect 6. o Designing and facilitating whole-family forums and appreciative-inquiry processes: give participation opportunities to a larger groupDefine individual consultationby the family business advisor with the CEO and successor candidates. Helps CEO let goDyadic sonsutationwith the CEO and successors. Establishes a timeline for transfer of powerGroup consultationwith the family or shareholder group. Develop policies to help smo0th family and non family relationsIntergroup consultationwith family and nonfamily management: increases stability of the firmWhat does commitment planning do?identifies all key persons in the organization and family and questions how they will react to changeWho should leaders of change use to implement the change desired?Their family council and a board of outsidersWhat are 7 things that family firms can create a competitive advantage with?1. physical assets, 2. financial resources, 3. product price/performance, 4. brand equity, 5. organizational capabilities, 6. customer-supplier integration, 7. the family-business relationship