Managing Family Business Exam #1 (Chapters 1-4)

What is a buy-sell agreement? a. A contract between shareholders and the company to balance the distribution of liquid cash and company shares b. A contract to maintain the value of shares owned by family members who do not have voting rights c. An agreement that controls the amount of nonfamily control of a family-owned company as it goes public d. A set of terms governing what happens to family shares when there is a death or divorce without a will or prenuptial agreement

a. A contract between shareholders and the company to balance the distribution of liquid cash and company shares

Why is a conservative pattern of succession for a family business often ineffective? a. Because the firm's failure to adapt to new business environments prevents effective changes to strategy. b. Because the new leader can never actually emulate the founder's abilities no matter how well prepared they are. c. It's not; this is the best way for a family-run business to ensure a stable transition. d. Because the new leaders will usually rebel and discard the company's previously successful strategy.

a. Because the firm's failure to adapt to new business environments prevents effective changes to strategy.

Why are boundary problems so common in family businesses? a. Because there is often confusion over whether something is a family, ownership, or management issue b. Because nonfamily employees are not trusted to be loyal c. Because family members will always prioritize social ties over economic benefits d. Because earlier generations resist handing over control to their children

a. Because there is often confusion over whether something is a family, ownership, or management issue

What is the best way to ensure that family goals and visions are carried forward to later generations? a. Develop a sense of the family legacy through regular discussion and family history projects b. Ensure that family shareholders who aren't involved in day-to-day management see regular returns to remind them of the family's business value c. Choose and train a successor early and raise them believing in the vision d. Create a trust that provides clear guidelines and limitations based on the founder's wishes

a. Develop a sense of the family legacy through regular discussion and family history projects

Which of the following is not a shareholder responsibility? a. Provide support for creative adaptations in business management. b. Maintain awareness of the company's values and principles. c. Define and set expectations for returns on equity or assets. d. Define the family's strategies and priorities.

a. Provide support for creative adaptations in business management.

How much should family shareholders be aware of the financial details of the family company? a. They should be provided with detailed financial reports, as well as the tools and explanations needed to understand them. b. They should make every effort to educate themselves on the company's finances through their own engagement with the company and family council meetings. c. They should receive regular top-level reports, but nothing that requires financial literacy. d. They should focus on profitability and overall company strategy, but leave the details of the capital structure to trained managers.

a. They should be provided with detailed financial reports, as well as the tools and explanations needed to understand them.

According to the article, good governance is imperative because: a. a family-owned business is more likely to sustain the founder's long-term vision for the company. b. managers and family members will be able to focus on productivity and profits instead of family issues. c. it will ensure that members of the older generation of the business retire and make way for younger generations. d. it guarantees that executive and non-executive family members remain in agreement on shareholder issues.

a. a family-owned business is more likely to sustain the founder's long-term vision for the company.

The strength of the family constitution is due to it being: a. an emotionally-binding document. b. an agreement reached by consensus. c. generationally neutral. d. a legally-binding document.

a. an emotionally-binding document.

While family-owned firms are not free of conflict, personal conflict can be avoided by: a. good governance. b. employing the use of a family mediator. c. a commitment to the company mission. d. a strong company culture.

a. good governance.

Unique competitive advantages of the family firm may include all of the following, except: a. minimal turnover as both family and nonfamily employees tend to stay in positions longer. b. longer time horizons for measuring outcomes. c. company structures that allow rapid speed to market. d. maintenance of high quality in order to protect the family reputation.

a. minimal turnover as both family and nonfamily employees tend to stay in positions longer.

Family businesses are a. more likely than nonfamily businesses to engage in strategic philanthropy. b. more likely than nonfamily businesses to engage in tax evasion. c. more likely than nonfamily companies to manage earnings using income-increasing accruals. d. more likely to engage in positive social initiatives than nonfamily companies.

a. more likely than nonfamily businesses to engage in strategic philanthropy.

Which of the following are tools in managing the shareholder-firm relationships? a. Clear annual reports, CEO meetings with family shareholders, and a well-guided family council b. A board balanced between family and independent members, regular shareholder meetings, and family meetings c. CEO engagement with individual shareholders, regular family meetings, and clear annual reports d. A board that is balanced between family and independent members, clear annual reports, and an engaged CEO

b. A board balanced between family and independent members, regular shareholder meetings, and family meetings

What feature is not typically part of a system of effective family governance? a. Nonfamily managers b. An organizational structure based on family relationships c. A board of directors d. Rules for employment of family members

b. An organizational structure based on family relationships

Why is it common for shareholder priorities to be out of sync with manager priorities? a. Because nonfamily managers are often perceived as indifferent to family goals b. Because shareholders who aren't involved in management often do not have the financial literacy to understand the business decisions that affect their returns c. Because shareholders want more input in business decisions than managers can allow d. Because managers must put financial choices ahead of family values

b. Because shareholders who aren't involved in management often do not have the financial literacy to understand the business decisions that affect their returns

Which of the following is not a weakness of an ownership-first family business model? a. Short time frames for return-on-investment eliminate the family business advantage of patient capital. b. Family members are actively discouraged from working in the business and business matters take precedence over family relationships. c. Family continuity and family vision are undervalued in the attempt to provide economic returns. d. Family shareholders who are not active in the business second-guess management decisions.

b. Family members are actively discouraged from working in the business and business matters take precedence over family relationships.

Which of the following is not a feature of the theory of family systems? a. Individuals may react to tension by following behaviors learned from their family of origin. b. Family systems theory applies to one generation at a time and focuses on the dynamics in a single generation. c. Nonfamily members need to understand family dynamics. d. Individuals can create new patterns of behavior that are different from the influences of their family of origin.

b. Family systems theory applies to one generation at a time and focuses on the dynamics in a single generation.

How can a family business help its members stay committed to stewarding the family business? a. Being scrupulously fair because of the zero-sum dynamic b. Keeping family members, even inactive ones, engaged in the decisions and goals of the business c. Make sure that the business stays liquid and provides individual gain for members d. Pay the family management less than market value to maintain high dividends for all family members

b. Keeping family members, even inactive ones, engaged in the decisions and goals of the business

According to the article, what is the number one thing that determines if a family-owned business will succeed generation after generation? a. There is a succession plan in place that determines who, in the next generation, will run the business. b. Someone in the next generation shares the passion for the business and has the appropriate skill set. c. The family discusses all aspects of the business every day. d. There is some level of innovation that occurs in the company.

b. Someone in the next generation shares the passion for the business and has the appropriate skill set.

A family business includes all of the following, except: a. Concern for family relationships in addition to business needs. b. The board is controlled by one or more family members. c. Two or more family members, or a partnership of families, own at least 15 percent of the shares. d. The expectation of continuity across generations.

b. The board is controlled by one or more family members.

What is the most important feature of a family employment policy? a. To ensure that family members stay engaged and active in the company as the company grows and moves away from its roots b. To assure family members and nonfamily managers that employment decisions will be made fairly, transparently, and with the best interests of the company in mind c. To manage the entry of relatives by marriage into the family business through prenuptial agreements and training in the family ethos d. To provide second- and later-generation leaders with a clear mandate for taking over control from the founder

b. To assure family members and nonfamily managers that employment decisions will be made fairly, transparently, and with the best interests of the company in mind

Why is it important for the CEO to lead the shareholder group actively? a. To keep control centralized as more family members gain influence b. To maintain unity and engagement in later-generation shareholders c. To coordinate family and nonfamily needs d. To be aware of family conflict before it grows unmanageable

b. To maintain unity and engagement in later-generation shareholders

Ideally, a board of directors for a family business should a. include no family members. b. be made up of mostly independent, non-affiliate directors. c. be made up mostly of affiliate directors, nonfamily members who already have a relationship with the company. d. include an equal balance of family and independently acting members.

b. be made up of mostly independent, non-affiliate directors.

According to the joint optimization system of managing a family business, family employees in the same generation should a. receive the same salary and benefits to avoid resentment. b. be paid based on performance and level of responsibility, even if the salaries are then different. c. be paid and trained exactly the same way as nonfamily employees. d. be compensated depending on how long they have been contributing to the family business.

b. be paid based on performance and level of responsibility, even if the salaries are then different.

A family constitution a. has binding legal status. b. should outline the policies and guidelines used between family members and family/nonfamily shareholders. c. is only seen by the family members and the board of directors. d. is unnecessary in well-established family businesses.

b. should outline the policies and guidelines used between family members and family/nonfamily shareholders.

Warren Buffett and Berkshire Hathaway are considered exemplary in this chapter because a. they have ensured continuity in leadership to maintain shareholder confidence. b. they educate minority shareholders about the values and principles of the company's leaders. c. they provide detailed financial reports to all investors, family and nonfamily. d. they have maintained shareholder liquidity, ensuring continued family control.

b. they educate minority shareholders about the values and principles of the company's leaders.

Why do later generations of a family business tend to lose their competitive advantages of speed and agility? a. Because later owner-managers do not have the commitment of the founder b. Because ownership structures rarely change to adapt to new business environments c. Because expectations or policies of equal treatment of family members erode the manager's leadership d. Because nonfamily managers have less confidence in the business vision than the founder

c. Because expectations or policies of equal treatment of family members erode the manager's leadership

What is an example of how a family business could apply the ECI-U model? a. Recognizing that family businesses will have less objective decision making than other businesses b. Emphasizing the importance of charisma and inspirational leadership in choosing a second-generation leader c. Creating governance rules that acknowledge the need to take emotional responses into account d. Avoiding having family members with personal disagreements working on the same project

c. Creating governance rules that acknowledge the need to take emotional responses into account

How is a genogram helpful for running family businesses? a. It isn't; it is primarily helpful for outsiders who want to understand the dynamics of the family as the members already know everything in it. b. It documents family relationships to help identify instances of nepotism. c. It helps family members understand how important family events affect business and family relationships. d. It helps identify a line of succession to provide the business with stability.

c. It helps family members understand how important family events affect business and family relationships.

All of the following are unique resources family businesses often have, except: a. Close social ties b. Strong networks c. Large amounts of liquid capital d. Continuous reinvestment

c. Large amounts of liquid capital

Should ownership structures stay the same from generation to generation? a. No, because the family needs to adapt to changing business environments. b. Yes, because this enables the continuity and stability that provide family businesses with a competitive advantage. c. No, because family growth tends to change the balance of influence between active and inactive shareholders. d. Yes, because fairness is especially important to maintain unity in later generations.

c. No, because family growth tends to change the balance of influence between active and inactive shareholders.

What happens in a business where family needs take precedence in decision making? a. The original family mission stays at the center of the business, which can be positive or negative depending on the effectiveness of the original strategy. b. Nonfamily managers resent family members and shut them out of day-to-day processes where possible. c. There is often nepotism, which not only promotes people who may be unfit for their positions, but also leads to the loss of qualified nonfamily managers. d. There is an increased amount of continuity.

c. There is often nepotism, which not only promotes people who may be unfit for their positions, but also leads to the loss of qualified nonfamily managers.

Compared to nonfamily firms, family businesses a. are more likely to engage in corporate diversification. b. employ fewer people. c. are more likely to have a focused strategy. d. have slightly lower return on assets.

c. are more likely to have a focused strategy.

Owners of family-run businesses credited their ability to succeed over many generations to a. hiring mostly family members. b. keeping the business ownership in a direct line of inheritance. c. excluding family members who were incompetent. d. innovating constantly.

c. excluding family members who were incompetent.

Family philanthropic efforts a. have a minimal impact on total charitable giving in the United States. b. should be kept fully separate from family businesses. c. help achieve goals like avoiding entitlement that can be a problem in family businesses. d. are generally less focused on impact than other types of charitable giving.

c. help achieve goals like avoiding entitlement that can be a problem in family businesses.

All of the following should be addressed in a family constitution except: a. a conflict resolution procedure. b. procedures for distribution of income and wealth among family members. c. legally enforceable information such as shareholder agreements. d. procedures for choosing individuals for appointment to the board of directors.

c. legally enforceable information such as shareholder agreements.

A good way to maintain unity and continuity in a family business is a. regularly publicizing the family's guiding mission and purpose. b. making sure the board chairman is always a close family member. c. using a family council to pass on family identity and values. d. creating a restrictive trust to keep the family vision the same between generations.

c. using a family council to pass on family identity and values.

What is the most important practice in using family meetings to resolve internal conflicts? a. Avoiding secrecy to make sure that conflict doesn't arise from lack of information b. Maintaining equality among later generations of family members in hiring, promotions, benefits, and other opportunities c. Reminding all family members to manage their emotions and act objectively for the good of the whole d. Active, two-way communication to address the sources of conflict

d. Active, two-way communication to address the sources of conflict

What are the subsystems that are part of the systems theory approach? a. Family, other management, and external environment b. Family, external advisors, and employers c. Management, operations, and outreach d. Family, management, and ownership

d. Family, management, and ownership

Shareholder liquidity is important for all of the following except: a. It often encourages family engagement as family members feel they have a choice in their participation in the business. b. It allows the company to maintain concentrated and nimble ownership, a key aspect of family companies' competitive advantage. c. It gives non-active family members a way to engage in opportunities that are more important to them. d. It gives family shareholders the ability to respond to decisions they don't like by withdrawing from the company, providing an important counter to a controlling family CEO.

d. It gives family shareholders the ability to respond to decisions they don't like by withdrawing from the company, providing an important counter to a controlling family CEO.

Which of the following is not a challenge to family unity regularly faced by family businesses? a. Geographically-separated family members b. Failure to provide constructive discussion of sensitive issues c. Infrequent family councils or meetings d. The presence of outside board members or managers

d. The presence of outside board members or managers

According to the agency theory, a. as more nonfamily managers enter the business, overall total costs will increase. b. family managers cost the company more than nonfamily managers even though their salaries are lower. c. family members must have a mechanism to monitor the decision-making process of executives to control costs. d. agency costs can be controlled through specific managerial practices.

d. agency costs can be controlled through specific managerial practices.

Problems of succession in family businesses can be mitigated by a. having an independent advisor make the decision without family interference. b. making a decision quickly and announcing it early to give family members time to adjust. c. dividing leadership among multiple immediate family members to reduce resentment. d. combining tools like independent advice, trial periods, and family interviews.

d. combining tools like independent advice, trial periods, and family interviews.

The stewardship perspective on family businesses argues that a. second- and later-generation family members cannot be effective managers of the company and must that the company is primarily run by independent managers. b. the natural alignment of owners and managers (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. c. family companies are most successful when family members use their wealth primarily for philanthropy. d. responsible family ownership is characterized by a generation's commitment to the larger family goals and the desire to pass a healthy company to the next generation.

d. responsible family ownership is characterized by a generation's commitment to the larger family goals and the desire to pass a healthy company to the next generation.

According to the article, the only sustainable source of competitive advantage in any firm is _________. a. the product or service that is offered b. the company's share of the market. c. the knowledge of key decision makers. d. the company's corporate culture.

d. the company's corporate culture.

Both the story of the Bingham family and the story of the Blethen family show a. why family businesses must continue to grow to provide opportunities for family members to stay involved. b. how family-run newspapers have responded to the change in the newspaper industry. c. the role of the board in family firm management. d. the importance of conveying family responsibility between generations.

d. the importance of conveying family responsibility between generations.