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Family Business

Family Business


The family business has arrived into its own as a distinct enterprise with unique concerns and issues. In the broadest sense, a family business is an enterprise where family members have influence over strategy and major policies, maintain the intention of keeping the business in the family, own significant portions of stock, and sit on the board (Shanker and Astrachan 1996). Other criteria for a family business include that the founder, or the descendants of the founder, still run the company on a daily basis, and where multiple generations participate in daily operations, and have significant management responsibilities (Holland and Boulton 1984).

Employee-owned businesses vary in their size and type. Sole proprietorships as family businesses represent upwards of 17 million organizations in the United States, 10 percent of which are family farms (Shanker and Astrachan 1996). A sole proprietorship is owned by a single person with other family members likely to help out. Partnerships owned by two or more people represent 1.5 million organizations in the United States (Neubauer and Lank 1998). Private corporations owned by three or more people in the family represent 3.8 million organizations in the U.S., and employ numerous family members with multiple generations (Shanker and Astrachan 1996). Of more than 21 million family-operated companies, over 11,300 have publicly traded stock (Shanker and Astrachan 1996). Examples of family-owned international businesses abound: Tetra Laval, the Wallenberg group, and H&M (Sweden), Hermès, Michelin, Bic, Marie Brizard, and L'Oréal (France), Tata (India), Kuok Group (Hong Kong), Seagram and Bata (Canada), Fiat, Ferrero, Barillo, Beretta and Benetton (Italy), Lego (Denmark), Caran d'Ache, SGS, and André (Switzerland), C&A (Netherlands), Bahlesen (Germany), Kikkoman ( Japan), Claroen Pokphmd (Thailand), and the Rothschild banking family. Estimates of contribution to the global Gross Domestic Product (GDP) from international family businesses is up to 70 percent throughout the non-communist world (Neubauer and Lank 1998). Thus, family businesses can range from a "mom and pop" enterprise with fewer than twenty employees to one that is significantly larger, such as the Coors Brewing Company, to even larger multinational corporations. Perhaps more importantly, these businesses also have a significant impact on the global economy.

Among the most emotionally wrought issues in a family enterprise is who will be the successor to the business. Succession is the transfer of ownership and control to the next generation (Churchill and Hatten 1987; Ward 1987; Goldberg 1991). Succession planning involves efficiently and fairly distributing assets from older to younger generations, passing control of the business in a way that will ensure effective business leadership, and maintaining and promoting family harmony. An assumption of succession is that all parties to the process are satisfied with the outcomes of the process itself (Stempler 1988). Because the rate of succession for family businesses is low—30 percent of family firms are passed from the first generation to the second and 10 percent survive to be passed onto the third generation—it is important to understand how the family business works and what will determine whether or not the business will be successfully passed onto the next generation. Of particular interest to those who study family business succession is how family members who have a business manage conflict, as this is considered to be a key to surviving the succession process.

Because continuity is a unifying concern among all members, succession is considered the ultimate test of a family business (Gersick et al. 1997; Le Van 1999). Thus, conflict can be perceived either as the ultimate threat or ultimate opportunity for a family enterprise. Conflict is a disagreement between two or more interdependent parties who perceive incompatible goals, scarce resources, and interference from others in achieving their goals. Therefore, as part of the succession process, family businesses need to be aware of the five points in which conflict is most likely to occur: (1) the mutual acceptance of roles; (2) the agreement to continue the business; (3) the propensity of a successor to take over; (4) the propensity of an incumbent to step aside; and (5) succession planning.


Mutual Acceptance of Roles

The mutual acceptance of roles is the extent to which family members accept their own and others' relative levels of involvement (Barach 1984; Crane 1982; Post 1993; Sharma 1997; Ward 1988). Involvement means mutual acceptance of the amount of control associated with each family member's role. Research has shown that the family members' mutual acceptance of individual roles is positively related to perceived family harmony (Handler, 1989). Roles can be defined by the number of heirs in line for succession (Bork 1986; Rutigliano 1986; Scranton 1992), the relative position of each heir in the family and the business (Barnes 1988; Kaye 1992), and the clarification of roles and responsibilities of family members in the context of the business (Handler 1989; Rosenberg 1991). For example, due to birth order older siblings with more experience in the family business may hold managerial positions in the firm expecting to be in line as successor to the enterprise, while younger siblings who have gone to college to obtain knowledge badly needed by the enterprise may expect to take over the business. If family members do not mutually accept their and others' roles within the business, they may attempt to undermine the efforts of others in order to achieve what they perceive to be a more equitable distribution of power. This in turn may slow decision making regarding the succession process (Dyer 1986). Thus, managing perception during conflict regarding the mutual acceptance of roles is of key importance to each family business member's satisfaction.

Conflict over the mutual acceptance of roles is also an opportunity to enhance mutual respect, trust, and understanding among family members. In the conflict between the younger and older siblings vying for the role of successor, the incumbent can view disagreements as opportunities for siblings to learn from one another (developing their relationships), exchange information that will enhance the business for all (everyone brings necessary knowledge, skills, and abilities to the table), and create respect for what each sibling has to offer the family business without privileging one experience over the other. Thus, managing conflict effectively means viewing disagreements as opportunities rather than threats, and seeing conflict as an opportunity to learn rather than the destruction of important family relationships. Opportunity is an important view of conflict because when the aforementioned relational features are present in the family business (e.g. mutual respect, trust, and understanding) the level of satisfaction with decision outcomes increases (Dyer 1986; Sharma 1997). Family business members need to be sensitive to the mutual acceptance of roles during the succession process, and utilize disagreements and conflict as a means to clarify perceptions of incompatibility, negotiate the amount of influence each family member has in the business relationship, and promote win-win, mutually satisfying relationships.

Agreement to Continue the Business

Agreement to continue the business occurs when family members are committed to the perpetuation of the business and are willing to work together to ensure its future (Handler 1989). Research has shown that the agreement to continue the business is positively related to perceived family harmony (Babicky 1987) and payoffs from the business (e.g. financial gains, increased market share and growth) (Alexrod 1984). Although the agreement to continue the business is not correlated with any negative aspects, the decision to continue the family business is not a simple one. Family members must unanimously agree regarding the future of the business, what constitutes continuity, and what opportunities for the future are possible. Thus, the decision to continue the business must be one of consensus with clear gains for those involved in the agreement. Additionally, each member of the family business must be willing to put forth what is necessary to perpetuate the enterprise.


Propensity of a Successor to Take Over

Propensity of a successor to take over is the inclination of a successor to take over the leadership of a business (Christensen 1953). Taking over the leadership of the business entails influence, authority, and control. Research has shown that the propensity of a successor to take over is positively related to the acceptance of individual roles, career interests (Handler 1992), and payoffs from the business (Malone 1989). Conflict may occur when anyone voices or displays the interest in taking over the business. This display of interest may lead to resentment from other family members who feel they are being forced to accept roles among family members. Such is the case from the earlier example where both the older siblings who worked in the family business "learning the ropes" as managers and the younger siblings who went to college express interest in becoming successor. Will siblings who expect to become the successor mutually accept another as successor and their (unexpected) subordinated role?

Other family members may also be upset because there is a perceived lack of financial reward for the potential successor. If the enterprise itself has matured or if there is the perception that profits cannot be enhanced or sustained or the market share cannot grow, then a potential successor may not come forward. Thus, without the perception of monetary financial gains, the family enterprise may not succeed to the next generation. Other family members may also believe the potential successor lacks continuity between his or her career interests and the opportunities available in the family enterprise or that the potential successor does not have the type of leadership style needed. Managed effectively, conflict can serve to define terms and clarify needs, expectations, and goals, leading to productive and positive outcomes.


Propensity of an Incumbent to Step Aside

Propensity of an incumbent to step aside is the ability of the present family member manager to let go of the leadership of a family business and hand it over to a successor (Davis 1992). Thorelli (1986) has shown that the propensity of an incumbent to step aside is positively related to how much the incumbent trusts the successor's abilities to run the business and how much faith the incumbent has in the successor's intentions, as well as the incumbent's own interests outside the business. Thus it is important not only that the successor have a high desire to take over and a high level of confidence in his or her own ability to take over the business, but also that the present manager be involved in activities outside the enterprise and look forward to pursuing new activity outside the business.

Conflict can arise when the incumbent endangers the long-term vitality or existence of the enterprise by not adequately addressing continuity issues in turning over the business. If the older and younger siblings cannot reach an agreement regarding their roles following a selection of the new successor, the incumbent may not step down or choose to dissolve the enterprise, and the business will not succeed to the next generation. Without a smooth transition, the incumbent may continue to work as long as possible and then end the family business with retirement and/or death.

Additionally, issues of trust in the successor's capabilities and intentions, and what the incumbent will do next, are often the crux of conflict perceptions. Conflict regarding the propensity of an incumbent to step aside provides the opportunity to make expectations explicit regarding the work, and prepare both the incumbent and successor for a satisfying personal life in the family itself. However, if the incumbent perceives that the older and younger siblings will not work effectively together for the good of the business, or if their family relationships will erode, leading to family members no longer speaking to one another, then the incumbent may choose to not have the business succeed.


Succession Planning

Succession planning is the process for the transfer of management control from one family member to the next (Christensen 1953). Research has shown that succession planning is positively related to the propensity of the incumbent to step aside, the presence of an active advisory board (Christensen 1953), and the agreement to continue the business (Wong, McReynolds, and Wong 1992). Conflict during succession planning can arise when no written plan exists, and when the stockholders connected with the enterprise, including the founder, the family members, the managers, suppliers, and customers, are uncertain of the significant changes associated with the impending shift in power and authority. Additionally, conflict in succession planning may involve disagreements about the knowledge, skills, and abilities of the successor, the educational level, experience, and background of the successor, and the level of trust, faith, and goodwill the successor can generate. Conflict during succession planning can also include disputes over whether family members should take over the enterprise or not, whether the incumbent has accomplished everything desired and possible during his or her reign of the enterprise, whether the incumbent was ready to give up power, what criteria would be used to identify the successor, and how decision outcomes are communicated.


International Family Business Succession

Research on international family business and conflict is incomplete because most studies focus on United States–based family enterprises. There are, however, studies that may shed light on conflict and family business succession in an international context. Differences in ethnic background may influence the expectations of family business members in a succession process (Sharma, 1997). For example, Chau (1991), McGoldrick and Troast (1993), and Wong (1993) suggest that there are differences in the basic philosophy and underlying assumptions of the family members of different ethnic backgrounds with regards to the way succession is handled. For example, while Chinese family enterprises divide the family assets equally among the male members, Japanese family enterprises often have one male heir who is the successor and receives all the assets. Other succession issues that vary across cultures are patterns of communication (e.g. face-saving/confrontation), modes of conflict resolution (e.g. direct/indirect), value given to education, and the position of women in the culture (Chau 1991; Fruin 1980; Lansberg and Perrow 1991; Rothstein 1992; McGoldrick and Troast 1993; Dean 1992; Stallings 1992). For example, in Japan, succession is viewed as a foundation for the professionalism of the children and not a priority, and in China, succession is viewed as a family legacy and a top priority (Dean 1992; Wong, McReynolds, and Wong 1992). Additionally, in Japan women have been denied a visibly prominent role in the family business; however, recent findings have reported that women own 23 percent of all family businesses in Japan (Wild, Wild, and Han 2000). In Australia women own 33 percent of the family businesses, in Canada 31 percent, in Mexico 16 percent, and in the Netherlands women own 15 percent of the family businesses (Wild, Wild, and Han 2000).


Conclusion

The family enterprise continues to be an important element of the world economy and a location for understanding conflict in family relationships internationally. Managing conflict effectively in the process of succession is crucial to preserving the impact family enterprise has on our economy and families themselves. Therefore, whether the family business is based in the United States or across the world, one needs to be aware of the five points in which conflict is most likely to occur: (1) the mutual acceptance of roles; (2) the agreement to continue the business; (3) the propensity of a successor to take over; (4) the propensity of an incumbent to step aside; and (5) succession planning because conflict in family succession is universal.

See also:Communication: Family Relationships; Conflict: Family Relationships; Conflict: Parent-Child Relationships; Decision Making; Rich/Wealthy Families; Sibling Relationships; Work and Family


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michael a. gross

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