Capital n Tax mgmt session 1&2.pptx

Session 1 & 2
BBA_FB
Prof. Surbhi Jain
Jindal Global Business School

Family businesses is defined as the whole gamut of enterprises in which an entrepreneur or
next-generation CEO and one or more family members significantly influence the firm. They
influence it via their managerial or board participation, their ownership control, the
strategic preferences of shareholders, and the culture and values family shareholders
impart to the enterprise.
 A working definition of a family business as a unique synthesis of the following:
1. Ownership control (15 percent or higher) by two or more members of a family or a partnership of
families
2. Strategic influence by family members on the management of the firm, whether by being active in
management, by continuing to shape the culture, by serving as advisors or board members, or by
being active shareholders
3. Concern for family relationships
4. The dream (or possibility) of continuity across generations
 The following characteristics define the essence of the distinctiveness of family firms:
1. The presence of the family
2. The overlap of family, management, and ownership, with its zero-sum (win–lose) propensities,
which in the absence of growth of the firm, render family businesses particularly vulnerable during
succession
3. The unique sources of competitive advantage (like a long-term investment horizon) derived from
the interaction of family, management, and ownership, especially when family unity is high
4. The owner’s dream of keeping the business in the family (the objective being business continuity
from generation to generation)

 Family businesses constitute 80%–98% of all businesses in the world's free economies.
 Family businesses generate 49% of the gross domestic product (GDP) in the United
States.
 Family businesses generate more than 75% of the GDP in most other countries.
 Family businesses employ 80% of the U.S. workforce.
 Family businesses employ more than 75% of the working population around the world.
 Family businesses create 86% of all new jobs in the United States.
 A total of 37% of Fortune 500 companies are family-controlled.
 A total of 60% of all publicly held U.S. companies are family controlled.
 Number of family-owned businesses in the United States: 17 million
 Number of U.S. family-owned businesses with annual revenues greater than $25 million: 35,000
 Family business outperformance of nonfamily businesses in the United States: 6.65% annually in (ROA) :10% in
market value
 Family business outperformance of nonfamily business in Europe: 8%–16% annually in ROE, depending on the
study.
 Family business outperformance of nonfamily business in Latin America (Chile): 8% annually in ROA and ROE.

SUCCESSION PLANNING
1. Conservative: Although the parent has exited the business, the parental shadow
remains, and the firm and its strategies are locked in the past.
2. Rebellious: In what is often an overreaction to the previous generation’s control of the
firm, the next generation launches a clean-slate approach to the organization. As a
result, traditions, legacies, and even the business model or its “secret to success” are
destroyed or discarded.
3. Wavering: The next generation is paralyzed by indecisiveness, unable to adapt the
business to current competitive conditions; it also fails to make its mark and assume
leadership effectively.

In the systems theory
approach, the family firm is
modeled as comprising the
three overlapping,
interacting, and
interdependent subsystems of
family, management, and
ownership.
In its more extreme forms,
this phenomenon leads to
categorization of family
businesses based on their
propensity to have 1)family-
first, 2) ownership-first, or 3)
management-first perspective
on issues.

1) Family-first Business:
 In family-first family businesses, employment in the business is a birthright. The
stereotype of nepotism, which still dominates most people’s views of family businesses,
derives from this not-so-infrequent sub-optimization of the family business system.
 Nonfamily managers with high career aspirations are often reluctant to join family
businesses out of concern for their future prospects.
 Well-managed and well-governed family businesses may have sound reasons for
paying all the members of the next generation in top management equal or nearly
equal salaries, family-first businesses tend to equalize compensation regardless of a
family member’s responsibility, results, and overall merit.
 The continuity of the business across generations depends on the agendas of
individual family members and the levels of conflict associated with running the
business.
 The absence of balance and clear boundaries between family, ownership, and
management is not always resolved by putting the family first.

2) Ownership-first Business:
 In ownership-first family businesses, investment time horizons and perceived risk are
the most significant issues.
 When shareholders come first, the priority is risk-adjusted economic returns or owner
rents—for instance, shareholder value, EBITDA, earnings growth rates, and
debt/equity and debt/asset ratios.
3) Management-first Business:
 Management-first family businesses are likely to actively discourage family members
from working in the business and/or to require work experience outside the business
as a prerequisite for employment.
 The performance of employed family members is reviewed in the same manner as the
performance of nonfamily managers, and human resource policies generally apply
equally to family and nonfamily employees.
 Compensation is based on responsibility and performance, not on position in the
family hierarchy. And the scorecard on business performance is all business; for
example, the focus is on profitability, return on assets, market share, revenue growth,
and return on equity

 Because of the complexity implicit in a system that is composed of three
subsystems, each potentially with different goals and operating principles, family
businesses are vulnerable to the consequences of blurred boundaries among the
family, ownership, and management subsystems.
 For instance, suppose a younger son insists on starting work after 10 A.M. every day,
despite the requirement that, as a customer service manager, he report to work by 7 A.M.
His father or aunt, to whom he reports, may choose to avoid the conflict and anxiety his
tardiness provokes by ignoring it and allowing it to go on. Avoiding resolution of this
disagreement out of fear or altruism only diminishes problem-solving ability; unchecked,
problems can grow for years. Succession hurls many of these unsettled issues to the
forefront of family business management, often at a very vulnerable time in the life of a
family business.

 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.
 Intuitively, reaching this state would seem akin to reaching nirvana, and it is
equally as difficult.
 They balance the goals and needs of each of the subsystems.
 Companies facilitate joint optimization of family, management, and ownership
subsystems by writing policies that guide the employment of family members in
the business.
 In these companies, the performance of employed family members is reviewed in
the same manner as that of nonfamily managers, with compensation decisions
based on both level of responsibility and performance. Siblings or cousins in the
same generation may, therefore, receive quite different salaries and benefits
packages.

Its culture and values statement says:
1)We are:
 Family-Owned, Professionally Managed. We are a family acting in the Company’s
best interest.
2)We believe in:
 Integrity: We do what we say we will do.
 No Walls: We have no barriers to communication.
 Tenacity: We have an unrelenting determination to reach objectives.
 Profitability: We are committed to performance and results.
 Improvement: We are never satisfied.
 Service: We are loyal to our customers and respect them

 Traditionally, agency theory has argued that the natural alignment of owners and
managers (the agents) in a family business decreases the need for formal
supervision of agents and for elaborate governance mechanisms, thus reducing
agency costs of ownership in family firms.
 According to agency theory, a firm’s board is an important mechanism for limiting
managers’ self-serving behaviour in situations in which a firm’s managers and its
owners have conflicting goals.
 Research suggests that agency costs may be controlled or avoided through the use
of certain managerial and governance practices.

 The competitive advantages inherent in family businesses are best explained by
the resource-based view of organizations. From this theoretical perspective, a firm
is examined for its unique, specific, complex, dynamic, and intangible resources.
These resources—often referred to as “organizational competencies”—embedded
in internal processes, human resources, or other intangible assets, can provide the
firm with competitive advantages in certain circumstances.
 Other resources unique to family firms may be customer-intense relationships,
which are supported by an organizational culture committed to high quality and
good customer service, and the transfer of knowledge and skills from one
generation to the next, which makes it easier to sustain and even improve firm
performance.

 This perspective claims 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 personal well-being.
 In this perspective, individual and self-serving goals will be met when the work is
done for the good of the organisation.

1) Parsimony refers to the propensity of family firms to be vigilant about their
financial resources, due to the fact that the family owns those resources.
2) Personalism refers to the unique power resulting from the combination of
ownership and control held by the same family.
This concentration of power frees family firms, relative to nonfamily firms, from the
need to account for their actions to other constituencies, giving them the discretion
to act as they see fit.
3) Particularism is the product of this concentration of power and its resulting
discretion. Family businesses, scholars argue, have the particular ability to use
idiosyncratic criteria and set goals that deviate from the typical profit-maximization
concerns of nonfamily firms.

Capital n Tax mgmt session 1&2.pptx

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