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FAMILY BUSINESS

FAMILY Firms have been crucial features of the business landscape for centuries and remain important today. They can be small, medium, or large and have appeared in all sectors and in all three industrial revolutions. Throughout they have played an important role in employment, income generation, and wealth accumulation. This makes them remarkably hard to describe as they are multidimensional, and no single definition fully captures their intrinsic diversity. However, a broad general definition of the family firm is one where a family owns enough of the equity to be able to exert control over strategy and is involved in top management positions. This definition does transfer through time and space, is one of the most used today, and so can be considered a useful benchmark. However, the international range of institutional, cultural, and governance arrangements means that it must remain a starting point against which to explore variety, rather than an endpoint on which a rigid taxonomy can be built.

THE FAMILY FIRM AND PROBLEMS OF THE GENERIC FAMILY FIRM

Historians and management specialists have found it remarkably hard to pin down and this is well reflected in the literature. Between shifting disclosure regulations and varying currency exchange rates, pinning down precise numbers and owners are challenging. Many Asian and European companies operate behind intricate holdingcompany structures that make ownership and even management difficult to define. It is no surprise, therefore, that there is no general consensus among scholars as to what constitutes a family business in quantitative, qualitative terms, or historical terms.

However, by taking the benchmark definition provided in the introduction, it becomes possible, using history, to explore the subtleties and differences in family business behavior and performance. lt can be shown, for example, that although family firms may be evident, they are not efficient per se as much depends on the specific national context and surrounding conditions.

In the nineteenth century, and indeed well into the twentieth, economic activity was so heavily dominated by a family business that there was no need to give it a specific name to distinguish it from other legal and organizational forms. It is only since the interwar period, with growing interest in the divorce of ownership from control, that historians and management specialists have differentiated family firms from other business categories. Differences partly relate to variations in the proportion of family-owned shares and especially to those with voting rights. But they go beyond this, to embrace elements of intergenerational succession and aspects of management.

All have been developed for analyzing specific issues i.e. intergenerational transition, financial commitment, strategic control, and so on. lt is abundantly clear, however, that ownership is only a part of the story. For instance, the family ownership of large corporations has been maintained during almost all the industrial history of the country through to the present day. This has been achieved through the use of holding companies, agreements, cross-shareholdings, and the issuing of stocks carrying multiple voting powers. This has allowed the founders and their families to raise resources on financial markets, while also controlling the company through ownership of only a small fraction of the share capital. This example is not unique among the industrialized countries in Continental Europe. It shows that the crucial feature is the extent to which a family is able to mold company decisions, through personal influence on leadership succession, often unfettered by any formal institutional regulation of governance. Whilst financial leverage may be critical, power may also be linked to attitudes to the family within society as much as to the present level of a family’s stake in a company.

Family Business Act

The Family Business Act is enabling legislation created to assist family businesses to achieve continuity between generations, provide legal form and clarity to the sector, provide a legal and administrative framework against which family businesses can finally have a method to guide and facilitate their transition to ensure growth and continuity.

Some of its keys features include a formal definition of what constitutes a family business, who should be considered a family member, how its governance is regulated, how foreign-owned family businesses can avail themselves of the Act, and incentives and schemes created to assist fami­ly businesses and their members when transferring and running the business and its wealth to the next generation.

Why was the legislation sought?

The Family Business Act is crea­ted specifically to encourage the regulation of family businesses, their governance, and the transfer of the family business from one generation to the next. The Act seeks to encourage and assist fami­ly businesses to enhance their internal organization and structure with the aim of effectively operating the business and working towards a successful succession of the family business.

Fiscal and Government incentives of the Family Business Act

There are considerable benefits and attractions for registered fami­ly businesses of governance and fiscal nature. First and foremost, family businesses are for the first time given an identity and platform. Having an identity through a definition will allow family businesses to develop further in the sector, lobby, and grow to achieve their aim. Furthermore, the legislation is intended to act as a complement to present legal and financial structures to a local and foreign family business considering making their jurisdiction of choice.

Diversity in Governing Family Enterprises

Typically, the low-hanging fruit in terms of creating the most harmonious decision-making group is simply to seek out like-minded individuals. And why not? When you are sitting around the table with people who think as you do, idea generation is easy, discussions are not typically drawn-out, and decisions get made. It is efficient. That said, is it optimal? Does it represent the diverse opinions you witness across the large family? Will your decisions reflect multiple opinions and preferences? Will you be able to defend your decisions?

Strength in Diversity

Any important decision made by a governing body must be vetted based on input from a representative group that asks the right questions, investigates the assumptions made in data gathering, and embraces the challenges associated with distinct viewpoints.

Diversity builds strength and increases effectiveness within governing bodies that are composed of either all family members or some family members (corporate boards). Hopefully, something here will help you to consider ways in which the composition of those decision-making groups will sustain and strengthen stewardship among your family, key non-family management, suppliers, and financial partners.

Expanding the Meaning of Diversity

It is helpful to clarify what diversity entails and to consider the recent data regarding diversity when giving suggestions for how diversity can improve the performance of family business governance systems. We define diversity more broadly than gender or racial lines: while a diverse board should include female members (countries such as Norway, Spain, and Iceland all require that women comprise 40% of the board), the concept of diversity should be expanded to include racial, sexual, educational, and generational diversity.

Valuing Diversity of Thought

Directors on a board can bring not just a diversity of opinions and perspectives, but a diversity of behavior—a willingness to openly challenge management and other directors, which was missing from the boardroom. By having more open debate, it creates an environment where others see it as good and healthy to have frank discussions regarding important decisions. When members of the board begin challenging each other—and listening to each other’s viewpoints—it leads to positive outcomes.

Embracing Family Diversity

It is recommended that boards recruit racially, ethnically, and gender-diverse directors who can bring new professional backgrounds, skills, and experiences in areas relevant to the company’s strategic and operating needs, and who can introduce new views, perspectives, and approaches to problem-solving. In a family-owned business, this definition needs to include a multigenerational, and multi-branch board that can represent the many generations dedicated to preserving the family legacy.

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