.Initiated by an entrepreneurial vigour, a Family Owned Business (FOB) finds its founder as the only embodiment of governing paradigm. However, it engages the siblings as its operations stretch beyond the capacity and capability of the founder-entrepreneur; triggering thereby the 'kitchen table' period.
At this point, the founder through its 'family council', in fact engenders the rudiments of mutual governance; or inadvertently the Corporate Governance (CG).
Expansion being one of the pivotal signs of a running concern, the FOB calls for involvement of some additional weather-beaten comrades, most likely the relatives, backed by a trust which is substantiated by the emotional bond that inhibits history of age-old time-proven kinship.
Now since a body of governance is functioning, there emerges a need to document larger than a simple statement of a family's values; to include business participation policies dealing with family participation in management and on the board, and ownership agreements, buy-sell agreements, and estate plan provisions. This document is typically called a family constitution.
Thus the business requires crystallised role-definitions of family members and relatives; a stratification of the governing structure into management, the board and ownership.
Commensurate with respective business acumen and stake of its members, the governing agency adds more sophistication to itself; so there arises an increasing need for training and development. In that, new business courses may be pursued and training modules opted. The next stride of FOB would manifest necessitation of involving advisory, consultancy or expertise at a higher level, co-centric with the previous management strata- CG gets further refined!
'The weight of academic opinion is skeptical' assert Carney & Gedajlovic (2003) 'that factors such as altruism, nepotism and weak risk-bearing attributes tend to harm the longevity and efficiency of the family enterprise....[and] organisational value-creating (and value-destroying) attributes are embedded in the firms' system of corporate governance.' Hence, since non-family members also serve on the Board, the chances of non-professional undertakings, including nepotism or altruism, are automatically reduced to minimum. What only is strategized is the profit maximisation or increasing stakeholders' worth.
Professor John L. Ward, an international expert on family businesses at the Kellogg School of Management, argues that family businesses with 'effective governance practices are more likely to do strategic planning and to do succession planning. On an average, they grow faster and live longer'.
This is analogous with human life vis-à-vis human health; healthy living habits ensure long and prosperous life. So here, by dint of a cultivated corporate culture the strategic planning takes place through which scattered operations are streamlined and timed; and responsibilities formalised as part of CG.
CG is in vogue in international institutional governance policy milieu. According to OECD (Organization of Economic Co-operation and Development) a well governed company takes care of equitable treatment of shareholders, non-financial stakeholders, disclosure and transparency and fulfilment of responsibilities of directors. Although beset with challenges like: 1) Accessing Capital; growing finance and balancing debt / equity, 2) Diversifying wealth; managing risk and providing liquidity and 3) managing succession; appointing competent directors / managers and balancing jobs / compensation for family employees with returns to family shareholders, an FOB gets a substantial boost in terms of both intrinsic and extrinsic values; especially the former if the enterprise is CG-compliant.
Thereby, it redoubles chances for exploring additional venues and modes of attracting capital flow from domestic and later on from global sources. Historically, the oldest FOB in operation is the Japanese construction company Kongo Gumi, founded in 578 ad., and currently managed by the 40th generation. There are more than 100 other FOBs that are more than 200 years old.
Some have attained considerable size like the largest company in the world, Wal-Mart, is a family business. World-wide, there are around 200 family businesses with annual revenues of at least $2 billion each.. In the United States, 24 million family businesses employ 62 per cent of the workforce and account for 64 per cent of the GDP. Similarly, in India, it is estimated that 95 per cent of the registered firms are family businesses.
How CG embraces FOB? an OECD-study in Sweden revealed that 64 percent firms were motivated to improve upon better CG practices only due to potentially increased financial growth prospects; 59 percent with an objective to raise the firm's profile, 48 percent to finance acquisitions, 37 percent to equitize employees and shareholders and only 24 percent to attract better personnel. So is the case with an average FOB in global scenario.
This, seen in DFIs perspective, develops a corporate image thus companies practising CG particularly, transparency and disclosure preempt any corporate scandals. Thus, additional capital rich in quantity and quality becomes accessible. By quality we mean funds coming from a quality fund maker with softer terms, which would potentially warrant a 'demonstration effect' and foster a movement of cash flow all around.
Ownership structures; according to the OECD study, show that over 85 percent UK / US businesses are family run, the family-run premium ranges from 30 percent - 80 percent, the highest percentage goes to Italy, 99 percent. Amazingly, the large FOB is 30 percent smaller than its listed counterpart and highest percentage goes to manufacturing (40 percent) then to retail business (38 percent) and lowest to natural resources (08 percent) and then to real estate (02 percent). The presence of 3 percent of conglomerates of large FOBs indicates preference for portfolio diversification as opposed to operational diversification.
Ownership norms in FOBs also vary, like in Brazil only 5 percent of large firms and 33 percent of medium firms are FOBs.
THIS IS DUE TO THREE MAIN REASONS: 1) Agency conflict, which can be bifurcated into succession issues and bank relationship issues, 2) Pyramid Structures: firms controlled by families holding small number of controlling shares, and 3) Dual class shares: that is minority shareholders don't have same rights as majority shareholders.
On the other hand, in Colombia 68 percent are FOBs and out of this 59 percent are still managed by the founders. This is mainly due to: 1) Poor survival rate; that is, only 8.5 percent have proper procedures for succession and only 13 percent survive to third generation. These FOBs have insignificant access to markets and only 124 out of 148,000 (0.084 percent) legal enterprises are listed.
Robert Zafft in an OECD-OCDE seminar (India-2002) revealed; 'large FOBs play major role in OECD economies' and to excel they need to meet three challenges ' (a) grow, (b) diversity and (c) pass on their wealth' which is 'hard where governance is poor'. For example Robert Zafft found that: 1) in accessing capital it was hard to start, grow or sell a firm; 2) in diversifying, portfolio diversification became less attractive while firm was overcapitalised and 3) in managing succession it was hard to pass on their wealth.
It is quite evident, that with minimal capital accessibility it is hard to start, grow or eventually sell a firm. The selling calls for strong intrinsic and extrinsic values attached with the selling enterprise. Again to diversity, an FOB needs a solid footing, which not only ensures capital adequacy but also practising of good CG.
Finally, managing succession has been one of the most ticklish tasks and many a FOBs have declined in the hands of this very predicament. In UK for example, succession has been a major challenge, where one out of six survives to third generation and one out of eighth survives to fourth generation.
What boils down is; CG is emerging as a dominant phenomenon in the FOB arena. Seen in overall profiteering or 'goodness' perspective, its advantages certainly outnumber its inhibitions. Now, those FOBs which still aspire to amuse themselves assuming conventional management styles; would be increasingly awed when they would find themselves journeyed if they look back; but if they look forward they would see their tunnel of destination moving further away from them, 'for fools rush in where angels fear to tread'.
-(Shakespeare)
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