MODULE – 4

FAMILY BUSINESS
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Meaning of Family Business
A family business is a commercial organization in which decision-making is influenced by multiple
generations of a family — related by blood or marriage or adoption — who has both the ability to
influence the vision of the business and the willingness to use this ability to pursue distinctive goals
They are closely identified with the firm through leadership or ownership. Owner-manager
entrepreneurial firms are not considered to be family businesses because they lack the multi-
generational dimension and family influence that create the unique dynamics and relationships of
family businesses.

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Definition of Family Business
Family business is one which two or more extended family members influence the business through
the exercise of kinship ties, management roles, and ownership rights, and/or, which the owner
intends to pass to a family heir.

A family business is a business in which one or more members of one or more families have a
significant ownership interest and significant commitments toward the business’ overall well-being.
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Structural Definition of Family Business
Ownership control by the member of a single family – Barry 1975 A small or closely held business –
Beaker and Tilman 1978
Legal control over business by family business – Lancer 1988
Single family effectively controls firm through the ownership of greater than 50% of the voting

Prof. Ningambika G Meti. Department of MBA, SVIT

 shares.

Hindu Undivided Family-Defined

The meaning of Hindu Undivided family is defined under the Hindu law. According to this law it is a
family that consists of persons lineally descended from a common ancestor. HUF consists of father,
sons and daughters and wives. Under the Income tax, a Hindu Undivided family is treated as separate
tax entity for the purpose of assessment under income tax act. The meaning of HUF (Hindu
Undivided Family) has not been defined under the Income act.

Examples of Family Business

Sun Pharmaceutical – Shanghvi – India Reliance Industries – Ambani – India Tata Group – Tata –
India
Samsung Group – Lee – South Korea
Wal-Mart (USA) ,SAM Walton family
Flat group (Italy) – Agelli family
Loreal (france) – Bettencourt family

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ADVANTAGES OF FAMILY BUSINESS:

 Stability: Family position typically determines who leads the business and as a result there is usually
longevity in leadership, which results in overall stability within the organization. Leaders usually
stay in the position for many years, until a life event such as illness, retirement, or death results in
change.

 Commitment: Since the needs of the family are at stake, there is a greater sense of commitment and
accountability. This level of commitment is almost impossible to generate in non-family firms. This
long term commitment leads to additional benefits, such as a better understanding of the industry,
organization and job, stronger customer relationships and more effective sales and marketing.

Hoshi Ryokan, a Japanese inn keeping business founded in 718, is said to be one of the oldest family
businesses in world. Family members have operated the business for 46 that’s right, 46 generations.
That level of family commitment has led to an understanding of the business that outsiders, or those
relatively new to the business, simply wouldn’t be able to replicate.

 Flexibility: You won’t hear, “Sorry, but that’s not in my job description” in a family business.
Family members are willing to wear several different hats and to take on tasks outside of their formal
jobs in order to ensure success. Estee Lauder, who led one of the world’s most famous family
businesses and was the only woman on Time magazine’s list of the century’s business geniuses in
1998, said of her company’s success, “I have never worked a day in my life without selling. If I
believe in something I sell it, and I sell it hard.” Lauder did everything from cooking up pots of face

Prof. Ningambika G Meti. Department of MBA, SVIT

 cream to personally giving free demonstrations, from designing the packaging of her products to
training the saleswomen who will sell them

 Long-term Outlook: Non‐family firms think about hitting goals this quarter, while family firms
think years, and sometimes decades, ahead. This “patience” and long- term perspective allows for
good strategy and decision-making. In describing his reasons why he didn’t want to take his
company public, Michael Otto, second- generation CEO of Hamburg, Germany’s $18.5 billion
retailer Otto Group, said, “We don’t have to come up with a good story every quarter for the
investors and the press.”

 Decreased Cost: Unlike typical workers, family members working at family firms are willing to
contribute their own finances to ensure the long‐term success of the organization. This could mean
contributing capital, or taking a pay cut. This advantage comes in particularly handy during
challenging times, such as during economic downturns, where it’s necessary to tighten the belt or
personally suffer in order for the business to survive.

Pitfalls of Family Business:

Causes of pitfalls of family business are as follows

 Lack of focus and strategy

 Nepotism in family
 Lack of professionalism
 Inability to separate family’s interest from the interest of the business
 Sibling rivalry in the family business

What makes the difference is that in healthy family businesses, the dialogue are aimed at creating
"positive tension" whereas in dysfunctional family businesses, the "tension" created by the dialogue
is destructive and results in family feuds. The reason may be:

a) A difference in age and experience, as is typical between father and son.

b) Differences in educational levels.
c) Sibling rivalries or rivalries between cousins which usually end in a separation
d) Differences of attitude towards employees
e) Differences in the way each would like to define the business or restructure it.
f) Differences in value systems, which may affect ethical practices or corporate governance
g) Difficulty in keeping a professional distance among family members. Emotions often tend to cloud
rationality and judgment. Often, the same argument by an outsider is more acceptable than when
made by a family member.
h) Different promoters are not equally gifted in all aspects of business.

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Prof. Ningambika G Meti. Department of MBA, SVIT
 Indian family businesses have clear and numerous weaknesses. The important ones are as follows:

 An inability to separate the family's interest from the interest of the business
 A lack of focus and business strategy
 A short-term approach to business, leading to an absence of investment in employees and in
product development
 Insensitivity to the customer, largely because of uncompetitive markets, but resulting in weak
marketing skills
 Nepotism (favoritism shown to members of the family) in family firms is a normal occurrence. This
can leave a negative impact. It limits drastically the available pool of potential leaders to draw from.
 Non-family members who are highly motivated by position and rank will be dissatisfied to work in
family firms for very long as they perceive their chances of "moving up" are limited at best. It has
significant impact upon the recruitment, training, reward system, and career development
programmers for non-family members of the family firm
 Hatred among family members.
 They do not entertain subordinate ideas.
 Chaos usually arises when the monarchy dies.
 Family business may face destruction due to poor operations after his death.

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Importance of Family Business

Family businesses make up more than 90% of the world’s companies. Many of them are small corner
shops. Family companies are among the world’s oldest. The Hoshi Ryokan, an inn in Japan, has been
in the same family since 718. Kongo Gumi, a Japanese family construction firm, was founded even
earlier, in 578,but went bust in 2006. The Antinori family has been producing wine in Tuscany since
1385 and the Berettashave been making guns since 1526. Family companies played a starring role in
the development of capitalism: think of the Barings or the Rothschild’s in banking or the Fords and
Benzes in carmaking. The majority of the world’s most successful medium-sized companies are also
family firms. In India the majority of businesses are in the dominant control of the families. It is
estimated that 90% of the business in India is controlled by families. From 'Mom and Pop' Kirana
stores to large conglomerates and SME's one finds family run businesses. Most of the big corporate
business houses like Tatas, Ambanis, Birlas, Godrej, Wadias, Munjals, Mahindra, Thapars, Mittals,
Shaparji Paollonji, Jindals, Adanis, Anil Aggarwal – Vedanta, Bajaj, Ruias, Ranbaxy, Times of India
and many more are all controlled by families. The role of family and the family patriarch is quite
important in India. Family businesses from every trade imaginable have been around for centuries
from shoemakers to confectioners to farmer.

 Over 75 per cent of all registered companies in the industrialized world are family
Prof. Ningambika G Meti. Department of MBA, SVIT
 businesses(OECD).
 One-third of Fortune 500 has families at their helm.
 Seventy per cent of firms in the United Kingdom are family owned. Italy's 100 top companies 43 are
family owned.
 Family companies employ about 50-60 per cent of the workforce in the industrialized world.

Family-owned businesses play a crucial role in the economy of most countries, much of the retail
trade, the small-scale industry, and the service sector are run by family businesses. Worldwide,
family-managed businesses employ half the world's workforce and generate well over half the
world's GDP. In the United States, 24 million family businesses employ 62 per cent of the workforce
and account for 64 per cent of the GDP. In India, it is estimated that 95 per cent of the registered
firms are family businesses.

TYPES OF FAMILY BUSINESS

1. A Family owned business is a for-profit enterprise in which a controlling number of voting shares
(or other form of ownership), typically by not necessarily a majority of the shares, are owned by
members of a single extended family, are owned by one family member but significantly influence
by other members influenced by other members of the family.
Examples: Walmart Inc.,USA
Bajaji

2. A family owned and managed business - is a for-profit enterprise in which a controlling number of
voting shares (or other form of ownership) typically but not necessarily a majority of the shares, are
owned by members of a single extended family, or are owned by one family member but
significantly influenced by other members of the family. The authority conferred by this controlling
interest permits the family to determine objectives, methods for achieving them, and policies for
implementing such methods. And this business has the active participation by at least one family
member in the top management of the company so that one or more family members have ultimate
management control.
Examples: DB Corp (Bhaskar Group), TATA

3. A family owned and led business - is a for-profit enterprise owned by members of a single
extended family. The business also has the participation of at least one family member in the top
management as well as on the board of directors of the company. This enables family members to set
the company’s direction, culture, and strategies.

It is a for-profit enterprise in which a controlling number of voting shares (or other form of
ownership),typically but not necessarily a majority of the shares, are owned by members of a single
extended family, or are owned by one family member but significantly influenced by other members
of the family. The authority conferred by this controlling interest permits the family to determine

Prof. Ningambika G Meti. Department of MBA, SVIT

 objectives, methods for achieving them, and policies for implementing such methods. And, this
business has the active participation by at least one family member in the board of directors of
the company so that one or more family members have at least a high level of influence over
the company’s direction, culture, and strategies.

Examples: Samsung, Reliance, Tatas, Nike, Foxconn, Oracle and Volkswagen.

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HUF – Hindu Undivided Family
Is an extended family arrangement prevalent throughout the Indian subcontinent, particularly in
India, consisting of many generations living in the same household, all bound by the common
relationship

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History of Family Business

How your company came into being, the vision of the founder(s), how the company overcame
inevitable changes and challenges through the years, the contributions the company has made to the
community… all add up to a great story. And not just a story for your children. People in your
company, others in your industry, and the community at large all benefit from a deeper knowledge
and understanding of your company‟s heritage.
There are many reasons to create a formal history. A few of the more important are as follows.
Founder’s vision and mission: Why was the company founded in the first place? Over time, as
the company‟s leadership changes hands, families often lose the founder‟s original vision and send of
mission.
Historical accuracy: Without a formal history, people will rely on hearsay or someone‟s biased
or misinformed perception. The company‟s early history and its role in the community can be lost or
misunderstood, if it is not documented and preserved.
Honoring longtime employees: Often, longtime or retired employees feel as if their contributions
to the company have been forgotten. Family business owners may want to honor their efforts and
their faithfulness in some meaningful way beyond the traditional “gold watch”.
Thanking customers and vendors”: In any business, maintaining good relationships with
customers and vendors is critical, especially when the relationships have stood the test of time.
Owners need a way to document and publicity thanks them for their partnership over the years.
Background for the uninformed: New hires, potential clients, bankers, and investors may not
know the company‟s background and may not be aware of the company‟s inherent strengths and its
future potential.

The values of the family are often instrumental in creating a strong sense of identity for family
businesses. These values are regularly foundational to running family firms. Strong family values
can prove extremely productive in business. They can stabilize the structure and dynamics in the
Prof. Ningambika G Meti. Department of MBA, SVIT
 family. As such they can substantially influence the way the family business is organized as well as
the way both family members working in the firm and those who are not interact with each other
around company decisions. The decision- making at most family business is predicated on the values
of the family. They are seen as critical to the success and future of these companies.

Family business is the oldest and most common model of economic organization. The vast majority
of businesses throughout the world—from corner shops to multinational publicly listed organizations
with hundreds of thousands of employees—can be considered family businesses. Based on research
of the Forbes 400 richest Americans, 44% of the Forbes 400 member fortunes were derived by being
a member of or in association with a family business

The economic prevalence and importance of this kind of business are often underestimated.
Throughout most of the 20th century, academics and economists were intrigued by a newer,
“improved” model: large publicly traded companies run in an apparently rational, bureaucratic
manner by well trained “organization men.” Entrepreneurial and family firms, with their specific
management models and complicated psychological processes, often fell short by comparison.

Privately-owned or family-controlled enterprises are not always easy to study. In many cases, they
are not subject to financial reporting requirements, and little information is made public about
financial performance. Ownership may be distributed through trusts or holding companies, and
family members themselves may not be fully informed about the ownership structure of their
enterprise. However, as the 21st-century global economic model replaces the old industrial model,
government policy makers, economists, and academics turn to entrepreneurial and family enterprises
as a prime source of wealth creation and employment.

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The 3 Circle model of Family Business

The “3-Circle” model was developed by Taguiri and Davis at Harvard. It incorporates family,
business and ownership system into the definition of family business system.
Each of these systems interacts with the others and influence their membership, goal and dynamics

Prof. Ningambika G Meti. Department of MBA, SVIT

 This 3 circle model has 3 systems, they are as follows:
The Business system: start-up, growth and formalization, maturity, direction Business, however are
economic entities where success is measured in terms of productivity and profitability
The Family system: entering the family business, working together, passing the baton
Families exist to care for and nurture their members and provide safety and refuge in an impersonal
world. Success in family is measured in terms of harmony, unity and the development of happy
individuals with solid and positive self esteem.
The Ownership system: controlling owner, sibling partnership, intervention, cousin consortium
Ownership is based on yet another set of rules. Success for owners is measured in terms of return on
investment, protection of ownership interests and in terms of owners values and philosophy of
business.
With the Three-Circle Model, one can depict seven distinct interest groups (or stakeholders) with a
connection to the family business:
1. Family members not involved in the business, but who are descendants or spouses/partners of
owners
2. Family owners not employed in the business
3. Non-family owners who do not work in the business
4. Non-family owners who work in the business
5. Non-family employees
6. Family members who work in the business but are not owners
7. Family owners who work in the business
There are three components to family governance:
 Periodic Assemblies: Based on the convenient of the family members and further development of the
business periodic assemblies need to be conducted.
Prof. Ningambika G Meti. Department of MBA, SVIT
  Family Council Meeting: If the size of the family is small in size than members of family can meet
on frequent basis, when the operation of the family business expands geographically

each team has to choose in representative for every unit who on behalf of every area can meet on
regular basis to decode on plans, create policies, and strengthen family business communication.
 A Family Constitution: family policies and guiding vision and values that regulate members
relationship in business. Developed plan may be detailed or simple in nature but every family is
benefited by the same.

People in the company, industry, and the community at large all benefit from a deeper knowledge
and understanding of company’s heritage. Family shareholders generally maintain their loyalty to the
family business if they feel adequate pride in the enterprise and in their family, if they feel respected
in the shareholder group and family, and if they feel adequately rewarded through distributions of
cash and growth of equity.
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Responsibilities and Rights of shareholders of a family business
Family shareholders generally maintain the loyalty to family business if they feel adequate pride in
the enterprise and in their family, if they feel respected in the shareholder group and family, and if
they feel adequately rewarded through distributions of cash and growth of equity Family business
leaders or family leaders rarely clarify the responsibilities of a family shareholder of family business.
Shareholder rights are better understood. The responsibilities of family shareholders include the
following

1. Be knowledgeable about company operations (products, services, locations, top managers, industry,
competition, measures of performance).

2. Be knowledgeable about basic company finances and be able to read and ask questions about the
income statement and balance sheet of their company.

3. Attend shareholder meetings.

4. Understand board member qualifications and participate, when useful, in the screening of board
members

5. Constructively question management and offer suggestions to management in appropriate settings,

while not interfering with the management.

6. Be a positive representative for the company.

7. Publicly support management decisions.

8. Keep appropriate company information in strict confidence and recognize that shareholders are not
Prof. Ningambika G Meti. Department of MBA, SVIT
 entitled to all company information on demand.

9. Where possible and useful, generate business leads.

10. Where possible and useful, provide additional investment capital

Family Shareholders should expect the following from the managers of the Company (Rights):-

i. Timely information on company strategy, important organizational changes and the company’s basic
financial status (especially before this information is released to the public)

ii. Openness by the company’s board and the management to shareholder‟s views (constructively
expressed in appropriate settings) on the above information.

iii. The ability to participate in the election of board members (who oversee management)

iv. Fair Policies that protect shareholder’s interests but also require their cooperation and risk taking.

v. Acceptable economic performance by the company, including reasonable dividends and capital
gains.
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Succession in Family Business
How best to pass on the business to the next generation is the greatest challenge. There is a need to
make the right decisions for the family and business.
The succession plan should include the following.

First Family Succession plan, Then Business Plan

The family succession plan must recognize and accommodate the needs, goals, and objectives of
each member of the family. The family‟s goals and objectives then become the basic building blocks
for the development of the business succession plan.
It is extremely important to first develop the family succession plan and then the business plan.
Otherwise the business owner will spend a lot of time and money developing a succession plan that
will almost always fail. Sometimes the failure is recognized only after the death of the parents when
the “plan” is sprung upon the family during the reading of the will; and the legacy the parents were
trying to create for their children and grandchildren is destroyed because of greed,
misunderstandings, and lack of involvement in the family succession planning process. The family
succession plan should include the following:

le of the owner in the transition stage- will he or she continue to work full time,
part time, or retire?
- are some family members unable to work together?
Prof. Ningambika G Meti. Department of MBA, SVIT
 Family-first Business or Business-first Family
Another important issue that needs to be determined prior to beginning the family succession plan is
whether yours is a family-first business or a business-first family. The answer will significantly
affect the succession planning process.
Succession Management
Family businesses which use the advisory board as part of their succession management process tend
to be businesses that are still alive, still growing in size, and profitability. And, not surprisingly, they
also tend to have healthy family relationships. They successfully transition from one generation of
family ownership to the next. As part of the succession management process, the advisory board acts
as a safety net for both the family and the business.

SUCCESSION- THREE WAYS TO EASE TRANSITION

I. Hire the most competent advisors (attorneys, accountants, financial planners, and business
consultants) you can fine and afford. Succession planning is a complicated process and required
different kinds of expertise. Not every professional service advisor ahs the special training and
experience necessary.
For instance, few lawyers, accountants, family therapists, and psychologists are specially trained or
experienced in this field. You may wish to consider using family business consultants to act as a
quarterback for the succession planning process. All too frequently, different advisors to the family
business owner develop costly and ineffective sequential solutions to the complexities of succession.
If someone is selling elevators, escalators are usually never recommended as a means of transporting
people, within a building.
II. Business valuation is a critical element of succession planning. There are many reasons to
value a business. Unlike socks where one size fits all, one valuation does not fit all situations. A
valuation for sale to the next generation of family has different formulas than a valuation for sale to
someone outside the family. Yet a different formula would be used for estate tax planning purposes.
Depending on the purpose of the valuation, costs can vary significantly. Less complicated valuations
done for planning purposes can be very affordable. Some family business owners value the business
every year as part of their strategic planning process. Others use the valuation as a means for
determing performance-based compensation for key executives (phantom stock) rather than choosing
to dilute the ownership of the stock to a non-family key executive.
III. Funding is often a hidden or non-recognized cost of succession planning. It is important to
understand that the business may need to grow significantly in order to pay the transition costs which
include taxes, insurance, professional advisors, setting up trusts, and purchasing business stock. Or,
Prof. Ningambika G Meti. Department of MBA, SVIT
 funds that would be available for expansion or to pay out to the family will have to be retained in the
business for the transition. Either way, planning for this cash flow requirement will ease the
transition.
A good rule of thumb is that the business needs to grow by at least 20 percent more than the normal
growth pattern to offset the costs of succession without disrupting the profitability and cash flow of
the business.
Business Valuation
A business valuation is a general process of determining the economic value of a
whole business or company unit. Business valuation can be used to determine the fair value of
a business for a variety of reasons, including sale value, establishing partner ownership, taxation,
and even divorce proceedings.
Business valuation is important to the family succession plan. Many family business owners consider
business valuation an expensive exercise. Many also have the perception that it can be used for
multiple purposes. Both perceptions are incorrect.
Business Valuation is a process that does not always result in a formal written report. To be a
valuable planning tool, it should be considered a part of the annual strategic planning process, not
merely the result of an event requiring it.
The reasons for valuing a business are as follows:

progress of business plans towards achievement of

results family management (phantom stock plans)
A phantom stock plan is an employee benefit plan that gives selected employees (senior
management) many of the benefits of stock ownership without actually giving them any
company stock. This is sometimes referred to as shadow stock. Rather than getting physical stock,
Succession in Family Business
How best to pass on the business to the next generation is the greatest challenge for a family
business. There is a need to make the right decisions for the family and the business. The succession
process involves
 preparing a succession plan,
 choosing a successor,
 grooming the successor, and
 handing over the business.

Prof. Ningambika G Meti. Department of MBA, SVIT

 ■ preparing a succession plan: Every succession plan is different. It is essential to hire the most
competent advisors to facilitate the succession planning process. The succession planning should
include key goals for the succession process, a schedule of the transition stage, and contingency
plans (strategies to counter the death or incapacitation of key managers from the family). The
schedule should furnish the details of when a succession may occur. It is important that the family
members know the succession plan. Over a period of time, the successor will begin to make business
decisions and may have to take the business in different directions due to
Changes in the business environment

■ Choosing a successor: It is essential to evaluate a competent successor who can fulfill the family
and business mission. The family council can help in the choosing of a successor. The succession
process does not happen quickly and may take several years to complete. It is important, while the
person heading the company is still alive, to spell out succession plans as family quarrels over
succession may have several adverse consequences for the company.

■ grooming the successor: Grooming primarily involves passing on leadership skills, business
secrets, and various skills required to run the business. During the grooming stage, some authority
must be granted to the successor to enable on-the-job learning before the actual passing on of the
baton. At this stage, the successor should become familiar with the nature of the business and should
be introduced to the various stakeholders and business associates. The successor's progress in
developing skills and
competencies should be extensively measured and documented by advisors on a regular and
continuous basis.

■ Deciding on the role of the founder: The role of the former founder after stepping down from
the business should be clearly stated. The company also should make sure that the retiring business
founder will have everything necessary to live a comfortable life. The founder should work with
advisors to ensure that the business is transferred to the successor in as tax-efficient a manner as
possible. For this, it is essential to carry out business valuation. Business valuation also enables
buying shares from and selling shares to family members and tracking the progress of business plans
toward the achievement of results. It is essential to agree upon future boundaries for the founder
before the succession is formalized. Clear documentation of all agreements among constituents will
lead to clear ideas of rights and responsibilities. A very important document is the will of the
founder, which determines the shares of the family members.

Key Points for Succession Plan

 Family quarrels over succession can have several adverse consequences for the company.
 It is important, while the person heading the company is still alive, to spell out the
succession plans.
 Family councils can discuss the business issues and draw up a family constitution.
Prof. Ningambika G Meti. Department of MBA, SVIT
  It is important that the family members know the succession plan.
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STRATEGIES FOR IMPROVING THE CAPABILITY OF FAMILY BUSINESS

I. Family firms must be able to professionalise:

The success of the Italian, French, and Chinese small enterprises suggests that being a family firm
per se is not necessarily a disadvantage. A successful family firm must be capable of recruiting and
retaining outside professional talent. In a competitive world, it must be able to get the best person to
run the company. If a member of the family is not the best person, they it must be willing to hand
over the management to an outsider.
To professionalise means that the family must make the mental leap and separate ownership and
management, and distinguish between the family‟s interest and the company‟s interest. Most Indian
companies are in transaction today. They are painfully coping with the problem of incompetent
family members at the top of many businesses. Rahul Bajaj says, “It is easy to get rid of an outside
manager, but how do you get rid of a family member? You must either do what is right for the
business or the family. Either way, you will end up with an unhappy family or a weak company.

II. The demise of the joint-family: A more unique characteristic of Indian business, at least
until recently, was that it was managed as a joint family and derived a competitive advantage from
this fact. A famous example as stated earlier, is of the Palampuri Jains of Western India, who have
established commercial colonies in such diamond centers as Tel Aviv, Antwerp, Mumbai, London,
and New York and who today accountant for roughly 50 per cent of all purchase of rough diamonds
in the world. Owing to the inherent trust in a joint family, the Jain diamond merchants rely on
interethnic ties to keep this highly scattered, specialized, and intrinsically high-risk business
together.

III. Replenishing Entrepreneurship: The number of family businesses is increasing day by day.
Almost all companies, all over the world, start off as a family concern. In India in 2003, the number
of companies registered in the private sector was 54, 0026 and collectively they had an authorized
capital of almost Rs.9, 00,000 crore.

IV. Good Management: In USA, over 65 per cent of business- and the more profitable sector of
USA Inc. is family business. This little fact is not much in the news because most of these family-
run businesses are privately held.

V. Ability to Change: The issue is how can Indian Management improve and how can it speed
up the pace of improvement. It may be that when push comes to shove, family firms are more
nimble than their more bureaucratic “professional” brethren.

VI. Have a Strategic Plan: If a family business does not have a sense of its future, it cannot
know the knowledge, skills and expertise that will be required of the next generation leaders. And

Prof. Ningambika G Meti. Department of MBA, SVIT

 the next generation of leaders must work hard to acquire their leadership skills.

VII. Have an active Board of Directors: The board will help assess four key foundations for the
business‟s healthy state of affairs: the CEO‟s readiness for succession, critical family relations,
ownership structures and management structures. The board plays a number of other roles as well:
 A board must stimulate, provoke, challenge and support leaders.
 Experts contend that an advisory board should include outsiders.
 Advisors must focus on the company‟s macro, long term issues.
 Some scholars says that friends, former employees or paid advisors such as accountants and
attorneys should not be put on the board.
 Hold frequent family meetings. It‟s important to create a mechanism that reinforces the family
community and solves family conflicts.
 Formal family meetings should occur at off-site locations on a quarterly of semi-annual basis.

VIII. Improving Family Business Performance

Some family-owned businesses have a long-term history of consistent profitability. Others, however,
have a similarly long-term history of weak performance. The obvious question is why.
There are a small number of salient factors, which are critical. Ultimately, these factors coalesce into
a series of “core business values” which can substantially determine the FOB‟s performance
throughout the entire course of its existence.
a) Concept of “Core Business Values”
The management of every family business requires that decisions be made about myriad issues. The
totality of these decisions becomes, in effect, the family‟s core business values. Of particular
importance are the family‟s core values regarding the training of the members of the family entering
the business; the future; finances, and the accountability of these members? Depending on the
circumstances, the family may adopt these values consciously or unconsciously, or for thatmatter,
willingly or unwillingly. Regardless, the functionality of the family‟s core business values is crucial
to its performance, both short and long term.
b) Critical Core Business Values Impacting Family Business Performance
Given that every family business has its own dynamics, it would be impossible to definitively
„identify a list of core business values in order to their importance to all family-owned businesses.
Nonetheless, it has been held that four dysfunctional core values tend to be particularly common to
under-performing companies. Specifically these involve; the training of the successor generation, the
family‟s outlook on the future, accountability, and finances.
c) Training
For some reason, the need for sound training is often overlooked on a regular basis in family- owned
businesses. In part, this because of a surprisingly common belief that a college education and a little
bit of exposure to the busyness should be enough to prepare an incoming member of the family
business it typically underrated.
The second are that is typically overlooked is the training that should take place once a member of
the family joins the business. In particular, the benefit; of substantial exposure to every critical aspect
of the business is not recognized. Additionally, there is generally no formal effort to continue with
Prof. Ningambika G Meti. Department of MBA, SVIT
 outside training, be it through additional course work, workshops, industry-based programmes, and
so on. In today‟s fast moving and competitive environment, the need for consistent training
experiences is particularly vital.

WAYS TO SAVE FAMILY BUSINESS

If a family managed business is to survive, let alone prosper, it must stringently observe the
following rules:
1. Formulate Policy Framework and Rules
2. Families must serve the business
3. There should be a future outlook.
4. Family members should be accountable
5. Issues should be addressed
6. Creating Shared Vision.
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IMPROVING FAMILY BUSINESS PERFORMANCE –
Some family businesses are successful, having a long-term history of consistent profitability, while
others are less successful. Let's discuss some common characteristics that professionally managed
successful family businesses share
■ Promoting family values across the organization: The family's core business values are crucial
to its performance. In a well-managed family business, family values are reflected in the way family-
owned enterprises are run. These values are considered to be the foundation of major business
decisions. The family should establish charitable foundations to promote the concretization of family
values across generations.

■ Shared vision: Conflicting visions about the direction of the business among family members
involved in the business may lead to internal conflicts and adverse effects on the performance

■ Professionalism: Family firms should be run .professionally. Family members should participate
actively and serve the business. For that it is essential to train both family and nonfamily members in
the organization. It is also essential to encourage family members involved in the business to work in
a different company for some time in order to gain experience and exposure. The family firm should
hire external talent and retain them as per requirements. There should be career development plans
and management development plans for family and nonfamily members in the family business.

■ Good governance: Family-owned businesses should develop an ownership structure that

provides sufficient capital for growth while allowing the family to control key parts of the business.
The top management in a family business comprises the family council, advisory board, board of
directors, and management team. The board of directors and management team should develop the
vision, mission, and strategy of the company and strive to implement it. The top management should
stimulate, provoke, and challenge leaders. The advisory board should include outsiders and must
focus on the company's long-term plans. There should be good governance by family members
through the involvement of the family council.

Prof. Ningambika G Meti. Department of MBA, SVIT

 ■ Communication: There should be formal and informal communication channels for the
facilitation of free and frank communication among family members. All issues should be
discussed so that any potential conflict may be identified. There should also be an established
conflict resolution mechanism involving senior advisors. Clear documentation of rights, roles, and
re-possibilities of the members in the family business is essential to avoid conflicts. Documented
strategic plans, the succession plan, and the will of the founder reduce the scope for conflict among
family members.
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Study Questions:
1. Meaning of Family Business and HUF
2. Importance – Rights and Responsibilities of family business
3. Types of family business
4. Succession of family business
5. Strategies to improve the capability family business
6. Meaning of succession and in family business
7. How to improve family business
8. Advantages and disadvantages if family business
9. Importance of family business
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Prof. Ningambika G Meti. Department of MBA, SVIT