Consequences of Long-Term Family Ownership - Admission/Application Essay Example

Consequences of Long Term Family Ownership al Affiliation Family ownership refers to the ownership of an entity by a family. Family members are the decision makers and they make policies. Family business is one of the oldest and common methods of economic organization. Today, family business ownership is acknowledged as the most important and distinct participate of the world’s economy. Their ownership structure gives them a long-term orientation that traditional and public owned businesses often lack. A good number of family shareholders increase gradually from generation to generation, with a few working in the business, as they commit to carry on as owners. For the family owned business to grow and build a strong foundation, two challenges must be tackled; achieving strong business performance and keeping the family committed to and capable of carrying on as owners. Family tends to hold on to their family because of the benefits they get from the business over a long period of time. This paper lists and discusses the consequences of long term family ownership in businesses. Keywords: family ownership, business, family, generation, Europe, Sweden Introduction This paper discusses family ownership in a family business and its long-term consequences. A family business can be defined as commercial organization where decision-making is influenced or done from generation to generations of a family. Family business is one of the oldest and common methods of economic organization. The most important element in a family business is that the family has a significant ownership stake (Bennedsen & Fan, 2014).In the case of small or medium businesses, one member or a group will own the entire business. In some of the companies, the majority ownership can be diminished to a minority stake as the firm continues to grow. Family delivers little or no enhancement in the management value beyond the level that the non-family management can achieve, but there is no objection threatening its ownership. In this case, a need to hire professional management from outside the family arises, but the family still remains on the ownership side. A Swedish company IKEA is an example of this category; the owners hired management from outside the family circle, but the family still retained the ownership of the company (Bennedsen & Fan, 2014). When the founder Ingmar Kampvad retired, the leadership that had for decades been held by family members wasn’t passed on to the next generation. With the absence of the strong management skills from the family once he retired, it was natural that the family stayed out of the top management level. In the case of Europe, family companies are still controlled by the owners, but they are not involved in the day-to-day management activities. Instead, they prefer hiring non-family members. Family driven firms where the founding family gains a strong management team from outside usually experience growth. In this scenario, it is important for the family to continue being involved in the management, even if its ownership has been reduced to minority. This kind of family business goes to the public to finance its outrageous growth plans. An example is Samsung. Sometimes family businesses can grow so big that the ownership shrinks in comparison to other investors. Examples are Suzuki and Canon; they are large businesses where the families hold the top management levels, but are not the largest owners. Family businesses have many goals and objectives. However, their main difference from other types of business ownership is that the family business has noneconomic goals. Family owned business can be unique as the family owns and controls it. Today, family ownership is acknowledged as the most important and distinct participate of the world’s economy. But their ownership structure gives them a long-term orientation that traditional public ownership often lacks. This could make them chose long-term goals over short-term goals. A running family business can be a high-wire act. This means that approximately one third of the family businesses survive into the second generation, with just a small percentage remaining for the third generation. This is caused by disputes over profits, business goals, transparency, legacy and succession. Family businesses may include family members, like husband, wife and extended family and also the role of stakeholders and board members. Conflict occurs due to overlapping of roles. Communication among family members may be inappropriate in a business situation and personal conflicts maybe carried over to the workplace and damage the business. In order to be successful in the family business, lines of communication should be opened and strategic planning tools should be used. Family businesses expand from the entrepreneurial beginning, get good performance and meet management challenges just like other businesses. The generation that follows the founders, may demand on running the business even if they are not in a good position. Some family shareholders increase gradually from generation to generation, with a few working in the business as they commit to continue as owners. For a family owned business to grow and build a strong foundation the company must fact two challenges. These are striving to achieve strong business performance and ensuring the family is committed to and capable of carrying on as owners. There are five key elements that a family should have for harmonious relation among the family members and an understanding of how the family should get involved in the business. These include an ownership structure that ensures there is sufficient capital for growth while giving the family members control over the parts of the business, a strong governance of the business and aggressive business portfolio, experienced management of the family assets and a charitable foundation to promote family values over generations. Consequences of Long Term Family Ownership Advantage to the family: Charles worked actively to give a chance to the best and brightest graduates from the school of business. For several years the firm has seen a nursery of financial elites in Sweden. Despite this, the family ownership has made it difficult to maintain and keep the talented people who want to become partners and co-owners of the firm. The family members in general were for the idea that non-family management was critical for the firm’s success. At the end of it, the family members desired to keep ownership within the family and they described it as an advantage for the long-term goal. Family management points out the independence from other companies that gives them freedom to act as they want. This is seen as an advantage because they don’t have to follow the short-term goals in their financial industry. This kind of autonomy is manifested in Charles principles to ensure they maintain a high ratio at whatever cost. Passing the business from generation to generation: Finding a successor for the family business is important for the long-term growth of the business. Apparently, the long-term goal of a family’s firm is to keep the business in the family for generations to come. The family businesses have significant long time goals compared to the non-family businesses. A recent study done in Sweden reported that family businesses have a longer life span than the non-family businesses (Alderson, 2011). Families remain the owners of the businesses for over 30 years as compared to non-family who remain as owners for approximately 12-13 years (Alderson, 2011). The family business doesn’t need to maximize the short-terms goals at the expense of the long-term goals. They make decisions that will affect the business for years to come. Due to the inefficient CEO dynasty in the non-family businesses, they often emphasize on the short-term goals. Build of trust: A major issue of the family business competitive advantage is the high level of trust among the family members. This kind of trust is rational and interpersonal and is founded on connections that are important than just sheer economic ideas of the business. The foundation of trust includes common experience, family characteristics, family identity and history. The trust is much greater among the family members as compared to non-family members. When trust is not built over time, conflict arises and management cost rises. Risky: Family business may not be affected by the short-term and the market pressure than non-family businesses with the circulation of ownership; there is evidence that clearly suggests that it can be highly risky to encourage family control to improve the economic stability, especially during the declines. Family control may be able, but it doesn’t mean that their investment policies are not sensitive to the business cycle compared to those of the non-family business. The family business may worsen during crisis in the short-term because they tend to quickly adjust to the investment policies. This may have a negative effect in the short-term, but will benefit the business in the long-term because the crisis allowed the family business to expel unproductive assets, for better performance of family business. Stability of control in a family may be the reason behind investment policies. Credit crisis: In Europe, there is evidence that family businesses used the current credit crisis to reduce the workforce and wages. Family businesses pay lower wages to their employees as compared to non-family businesses. They even reduce the wages during the credit crisis. As a result, the layoff of employees could be a signal that the break-up is in the long-term, especially when the contracts with employees are completed. These contracts are based on trade-offs between low wages and higher job security which could be negative to the firms long-term growth and profits. This means that they are wealth transfers from labour to shareholders during the crisis. With few outsiders being available, employees are willing to agree a downward cut in the revision of their wages to secure their jobs. However, this redistribution doesn’t take place during all the crisis, as family businesses do not reduce wages and workforce during the dotcom crisis. It only occurs during the credit crisis. Not expropriating minority investors: This is a long-term consequence. Recent research shows that family-owned businesses don’t use the periods of crisis to expropriate the minority investors. In fact, the decrease in the value of the family business during the crisis is similar to that of a non-family business, which shows that there is assign that the market doesn’t have few investment opportunities that will lead to controlling the family to increase the expropriation of the minority investors. In some cases, analysis shows that investment suggests that family controlling the shareholders don’t entirely inject cash onto their business (Belcredi & Ferrarini, 2013). Family-owned businesses tend to shed assets more than non-family business during any crisis. As a result, there is better performance of family businesses in the long-term as a result of more efficient invest policies that are adopted by the family businesses. Business size: Increasing the size of a business is a long term goal. Every business hopes to increase its size in one way or the other. The increase size in the family businesses is detected by several factors such as tax policy and inheritance regulation. Most family businesses are small with many fitting into small and medium enterprises. Some countries don’t have many family businesses because of taxation and inheritance; a good example is the United Kingdom. CEO entrenchment: A negative consequence associated with long-term ownership is the CEO entrenchment. In some businesses, a long-serving CEO is considered to be conservative and struck in his ways and this may be considered to cause missing of opportunities for growth and expansion. For this reason, a professional or a highly functioning family businesses may utilize the available good governance procedures such as the board of directors to guard the business. Tax aggressiveness: If a CEO gets high ownership shares, he carries many costs and gets many benefits for his actions that include tax aggressiveness. An owner with high ownership shares mostly worries about reserving good reputation and passing the business to his children. They give less attention to involve themselves in extraction because this may harm the business. Parental altruism gives control to the owner to take any action that may be beneficial to the nuclear family. The emotional attachment and self-identification with the business and the utility can been derived from the ability to exercise authority in a strong manner (Despres, 2011). A CEO with low or no ownership shares is more inclined to engage in tax aggressive activities. This arises due to succession of the firm from generation to generation which weakens the attachment of the family from the firm. This focuses the shift from family goals to a combination of family and business goals. Foundation: Charity is an important virtue of ensuring the family stays committed to the business, by ensuring it provides a meaningful job for its family members in the future. Sharing the company’s wealth and benefit generates good will towards the business. Families must ensure a philanthropic activity from one generation to another. Family members are often given a chance to serve on the board of the foundation through onsite visits and volunteering projects. This kind of an incentive is a way of ensuring the next generation carries it on early. Many companies begin as family businesses, but only those that master the challenge form ownership over generations. A long-term portfolio view: Successful family business seeks long-term growth and performance to avoid risking the family’s wealth and control of the business. This kind of approach shields the family from temptation, which has currently brought businesses on their knees by pursing short-term performances at the expense of the long-term growth. The long perspective makes family business less successful during booms, but increases its chances of staying alive during the periods of crisis and achieving healthy returns over time. Healthy returns overtime: The long-term goal focuses on relative conservative portfolio plans based on competencies built over time, together with average diversification around the basis and in many cases, a natural preference for organic growth. Family owners who have a significant part of their wealth associated to the business face challenges of preventing risks from influencing company decisions (Grisoni et al., 2012 ). Diversification is important for long-term performances but also control because it helps make it hard for family members to take out money from the company and diversify the assets themselves. Family business seeks a stable cash flow. Wealth management: Families require a strong capability for managing their wealth; this is seen especially in liquid assets. By diversifying risks and getting a means to get cash to the family and manage wealth, harmony is maintained. Families around the globe lose a lot of money during the financial crisis. Family businesses often have a good wealth management that focuses on the income and the expenditure in the business. This helps prevent bankruptcy and retains family wealth for years. Conclusion Family owned businesses are passed from generation to generations. The main advantage and defining characteristic of family businesses is that their goals are long term. These are usually beneficial to the business and the family linage in the long term. The consequences of long term family ownership in businesses have been elaborated in this paper. Reference List Alderson, K. (2011).Understanding The Family Business. New York: Business Expert Express. Belcredi, M. & Ferrarini, G. (2013). Boards and Shareholders in European Listed Companies: Facts, Context and post crisis reforms. New York: Cambridge University Press. Bennedsen, M. & Fan, J. (2014). The Family Business Map: Assets and Roadblocks in Long Term Planning. New York: Palgrave Macmillan. Despres, C. (2011). Proceedings of the 7th European Conference on Management, Leadership and Governance. London: Academic Publishing Limited. Grisoni, L. et al. (2012). The Modern Family Business: Relationships, Succession and Transition. New York: Palgrave Macmillan.   Read More