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Separating Myth from the Reality of Family Business. 717. 1797. Joseph H. Astrachan, Ph.D. Executive Director, Cox Family Enterprise Center Research Fellow, Loyola University Chicago Wachovia Eminent Scholar Chair of Family Business. 1526. 1637. Definition.

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Separating Myth from the Reality of Family Business

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Separating Myth from the Reality of Family Business

717

1797

Joseph H. Astrachan, Ph.D.

Executive Director, Cox Family Enterprise Center

Research Fellow, Loyola University Chicago

Wachovia Eminent Scholar Chair of Family Business

1526

1637

Distribution and replication of this material is strictly forbidden

© Joe Astrachan, 2010


Definition

  • Any business where the family has effective control over the strategic direction of the business;

    and where

  • The business contributes significantly to the family’s wealth, income, or identity

Distribution and replication of this material is strictly forbidden

© Joe Astrachan, 2010


Best practices research ain’t!

  • Bad methods

  • Bad samples

  • Follow at your own risk

  • Use as a source of ideas, not more

    • As valid as a source of ideas as worst practices research

Distribution and replication of this material is strictly forbidden

© Joe Astrachan, 2008


The world: Some basic stats

  • 60 to 96% of all businesses around the world

  • 45 to 85% of GDP world-wide

  • 45 to 80% of employment

  • No data on any North African country

Distribution and replication of this material is strictly forbidden

© Joe Astrachan, 2010


What are your chances?

  • 30% Survive per generation

  • Fewer than 3% survive into the fourth generation

Distribution and replication of this material is strictly forbidden

© Joe Astrachan, 2010


When to worry

Post- Succession ROA

0 14 28 years

CEO Tenure

Distribution and replication of this material is strictly forbidden

© Joe Astrachan, 2010


A premise

Family members are almost never fighting about what they say they are.

Distribution and replication of this material is strictly forbidden

© Joe Astrachan, 2010


Virtuous or vicious cycle

Ownership Unity

Business Returns

Distribution and replication of this material is strictly forbidden

© Joe Astrachan, 2010


Myth

  • Manage your family like of family and your business like a business

  • Don’t mix family and business

  • Nepotism is always bad

  • A succession plan assures successful succession

  • To date, no research supports these assertions!

  • However, the importance of family harmony as a succession moderator has been found

Distribution and replication of this material is strictly forbidden

© Joe Astrachan, 2010


The science of succession: Three keys

Research on more than 18,000 companies says:

  • Board of Directors

  • Strategic Planning

  • Family Meetings

Diet

Exercise

Don’t Smoke

Distribution and replication of this material is strictly forbidden

© Joe Astrachan, 2010


Board research

  • 3-6 meetings per year is optimal

  • Boards in less than 50% cases meet more than once or twice a year

  • 85% of CEO’s who put a board in place said it was their single best management decision

  • Lack of CEO chairman duality increases performance

  • Two outsiders to each family member improves performance

  • Outsides increase financial value (but occupation of board member has no effect)

  • Board diversity reduces likelihood of strategic change

  • Outside directors decrease risk of internal fraud

Distribution and replication of this material is strictly forbidden

© Joe Astrachan, 2010


Culture and governance

  • History and culture determine what governance will work

    • Internal legitimacy (must conform to internal expectations, may not work if it violates those too much)

    • When internal culture is violated the board will have little or no real influence or power

Distribution and replication of this material is strictly forbidden

© Joe Astrachan, 2010


Myth

  • Family should spend three years outside before joining the business

  • The classic successor development and selection model works

  • Neither are supported, the is research that says the second can be quite wrong

  • However, a close relationship does enhance successor preparation

Distribution and replication of this material is strictly forbidden

© Joe Astrachan, 2010


Adult development research

Distribution and replication of this material is strictly forbidden

© Joe Astrachan, 2010


Myth

  • Rigid structures are essential

  • Family councils

  • Committees

  • Constitutions

  • Legal structures

  • Any inflexible plan

  • Non are fully supported, for performance or survival

Distribution and replication of this material is strictly forbidden

© Joe Astrachan, 2010


Earthquake proofing

  • A family business is like a complex building

  • Planning for shocks only works if shock absorbers are in place

  • Systems, mechanisms, and a culture that promotes appropriate flexibility is key

  • Rapid evolution is enhanced by communication, commitment, and deep, strong, healthy family relationships

Distribution and replication of this material is strictly forbidden

© Joe Astrachan, 2010


Strategic planning research

  • Planning is more important than plan

  • Unambiguous goals are important

  • Clear measure of success is essential

  • Culture of commitment to business increases strategic flexibility

    • ability to pursue new opportunities and respond to threats

  • Stewardship-oriented organizational culture is best

Distribution and replication of this material is strictly forbidden

© Joe Astrachan, 2010


Cohesion mechanisms


Family emotional

  • Regular meetings

  • Family vacations

  • Family name and history

  • Interesting personalities

  • Philanthropic activities

  • Shared non-financial assets with intrinsic meaning

    • Homestead, farm, vacation homes, etc.

  • Birthday calendars

  • Family newsletter and intranet

Distribution and replication of this material is strictly forbidden

© Joe Astrachan, 2010


Family financial

  • Money

    • Trust and other family distributions, allowances, gifts

  • Shared or individually provided non-financial assets with nominal non-financial value

    • Cars, boats, etc

  • Inheritances

  • Intra-family lending

  • Other rules about money in the family

  • Elevated life style

  • Educational funds

  • Healthcare safety net

Distribution and replication of this material is strictly forbidden

© Joe Astrachan, 2010


Business financial

  • Dividends

  • Shareholder agreements

  • Board of directors

  • Investing opportunities

  • Business opportunities

  • Salaries in excess of market wages

  • Perks in excess of market

Distribution and replication of this material is strictly forbidden

© Joe Astrachan, 2010


Business emotional

  • Quality products

  • Business and other education

  • Business meetings

    • shareholder, informational, strategic planning

  • Archives, museums, and other artifacts

  • Written or video history

  • Plant tours and internships

  • Corporate Social Responsibility

  • Philanthropy

  • Name enhancement in community

Distribution and replication of this material is strictly forbidden

© Joe Astrachan, 2010


Fair process

  • Why policies don’t often work

  • Family constitution research

  • Attributes needed for decisions to be considered “fair” (Blondel & van der Hayden)

    • Culture

    • History

    • Communication

    • Voice and involvement

Distribution and replication of this material is strictly forbidden

© Joe Astrachan, 2010


IPO research

  • Performance (Astrachan & McConaughy)

  • Debt as accountability (McConaughy)

  • Importance of ancillary benefits (Marchisio, Ravasi & Mazzola)

    • Credibility, continuity, networks

Distribution and replication of this material is strictly forbidden

© Joe Astrachan, 2010


Stewardship

  • Ownership is U-shaped for expansion

  • Family involvement predicts more international expansion

    • Collective action more important than self-interested behavior

    • Maximize family wealth

    • Psychological ownership

    • Protect competitive positions

    • Balance with family conflict from risk based decisions

Distribution and replication of this material is strictly forbidden

© Joe Astrachan, 2010


Serial business families

  • Families can often organize themselves to have different businesses over many generations (Kenyon-Rouvinez)

  • Family unity becomes an important family value

  • Enterprise becomes a second important family value

  • The transmission of these and other family values are crucial

Distribution and replication of this material is strictly forbidden

© Joe Astrachan, 2010


Non-family CEOs

  • Key findings:

    • Cultural fit

    • Statesmanship, build family unity do not divide and conquer

    • Integrated into company thoughtfully

    • Great communication skills or someone in that role

    • Appropriate governance and boundaries in place

    • Has clear authority and goals

    • Accept “non-family”

    • Low ego needs

Distribution and replication of this material is strictly forbidden

© Joe Astrachan, 2010


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