Accounting Chapter 04 What are common challenges to governing the family business

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22 Section 2 Chapter and Lecture Notes

Chapter 4 The Governance and Professionalization

Challenge

Learning Objectives

1. To highlight the unique governance needs of the family business that result from

the overlap between management, family, and ownership.

Chapter 4 Essence

Family governance, then, is an essential discipline for the long-term well-being of the

It ability to optimally

discipline and control the nature of the relationship between family members,

shareholders, and professional managers in such a way that the business prospers and the

Discussion Questions

1. What are common challenges to governing the family business relationship?

Nepotism While nepotism is arguably the most widely stereotyped feature of

family business and as stereotypes often do probably exaggerates its impact, there is no

question that a family-first attitude in selecting managers and employees for the family

Section 2 Chapter and Lecture Notes 23

Current l unwillingness to let go – The critical and urgent need to build

institutions of family governance is often lost on the family CEO. In a study conducted

by the author, the most statistically significant finding was that CEOs of family

businesses perceive both the business and the family much more favorably than do the

rest of the family and nonfamily managers. In the absence of expressed dissatisfaction

with the status quo, the CEO/parent may be the last to recognize the urgency of leading

change efforts and creating the institutions that will effectively govern the family

business and family-wealth relationship in their absence. (See the Cousins Tournament

case.)

Entitlement culture– Another significant challenge from wealth and enterprise to

multigenerational families is the entitlement culture, an unsustainable culture of

Dilution of wealth Besides the erosion that may result from unnecessary expenses,

taxes and a culture of entitlement, distributions and the break-up of the business or the

pool of family capi

the financial resources needed to take advantage of a wide range of business

opportunities. A smaller capital base is also offered fewer and often less promising

investment opportunities.

The erosion of the entrepreneurial culture – The entrepreneurial stage is widely

recognized as one that endows the business with the capacity to be nimble and

opportunistic. But it does not take long for successful family businesses to be expected to

24 Section 2 Chapter and Lecture Notes

or the country home for the holidays, both administered by a nonfamily staff member), in

which case, the family begins to represent a cost to the enterprise rather than the resource

that a family member in a combined owner-manager role represented during the

entrepreneurial stage.

enterprises While rampant nepotism often precludes professionalization, even without

nepotism, family firms can suffer from the inability to change, delegate and

Lack of transparency – Neither boards of directors nor professional managers can

make their value-adding contributions to family business without good metrics and clear

scorecards. Shareholders themselves can seldom act as responsible shareholders in the

Lack of oversight – Lack of oversight, by for example an independent board of

directors, often breeds complacency and resistance to change. It may also lead to self–

in the case of Adelphia Communications in the U.S. and Gome Electrical Appliances

Holdings in China. (See the Gome Electrical Appliances case on page 417.)

Altruism Research has found that altruism, or attending to the welfare of a relative,

is a prominent feature of many family enterprises. Some scholars have argued that

Confusion regarding what is a family, a management, and an ownership issue

Given the very nature of a family business as depicted in Figure 4.1, it should not be

surprising to see infractions across boundaries of family business subsystems occurring

Section 2 Chapter and Lecture Notes 25

Wanting to keep it all in the family – Publicly traded firms, through their capacity to

create a market for corporate control, hold management accountable. The market for

2. What institutions or bodies are best qualified to govern the owner firm

interaction in later generations of a family firm?

Governance of the shareholder firm relationship is essential. The tools for governing

that relationship are the board, shareholder meetings, and family meetings.

The role of the board is prominent in the governance of the relationship between a

family and its business when the owner family business interaction is preserved as a

The board is not the only institution with significant influence on the effective

governance of the owner firm relationship. Most of the absolutely essential

communication, education, and sharing of financial and strategic information takes

place in regularly scheduled shareholder meetings, family meetings, and meetings of

the family council. This keeps the shareholders involved and fulfills the legal

requirement to recognize the rights of minority shareholders

3. What is a family council?

A family council is all of the following:

The family forum that provides an opportunity to educate family members not

active in the business about management, strategy, and the competitive dynamics

of the family business.

26 Section 2 Chapter and Lecture Notes

4. What can a family council do to help a family in business?

communication and problem solving in family council meetings, extended

families can build a stronger family.

5. What is a family office and how can it benefit a family in business?

Larger multigenerational business families often have a family office, whose duties

are primarily to provide and organize a series of services for family shareholders.

These services include providing legal and financial assistance with estate and tax

issues; managing the investment portfolios of the family; providing information of

Section 2 Chapter and Lecture Notes 27

6. What policies are families encouraged to develop, before the urgent need arises

during succession, in order to beat the low odds of family-business continuity?

A family constitution that may be the umbrella for all policies governing the

relationship between a family and its business.

Relevant Case Resources

The Ferré Media Group (A and B) cases highlight governance practices that enterprising

family members have used across several generations. The Gome Electric case and

Chapter 5 Diagnosing the Family Business and Creating

Conditions for the Continued Spirit of Enterprise

Learning Objectives

1. To get acquainted with a number of prominent family enterprises that have beat the

odds by surviving and thriving for more than a century.

2. To explore several diagnostic models and discuss the 12 S model of family business