Managing Family Business Chapter 3

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. A set of terms governing what happens to family shares when there is a death or divorce without a will or prenuptial agreement d. An agreement that controls the amount of nonfamily control of a family-owned company as it goes public

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

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 the family's strategies and priorities. d. Define and set expectations for returns on equity or assets.

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 focus on profitability and overall company strategy, but leave the details of the capital structure to trained managers. d. They should receive regular top-level reports, but nothing that requires financial literacy.

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.

Shareholder liquidity is important for all of the following except: a. It gives non-active family members a way to engage in opportunities that are more important to them. b. 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. c. It often encourages family engagement as family members feel they have a choice in their participation in the business. d. It allows the company to maintain concentrated and nimble ownership, a key aspect of family companies' competitive advantage.

b. 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.

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

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

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

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

Read the article provided and answer the following questions. "Family-Owned Businesses Lack Proper Governance." Accounting Today [web content] 5 Jun. 2013. Business Insights: Essentials. Web. 6 Jan. 2017. http://bi.galegroup.com/essentials/article/GALE%7CA332764706/499ebea0b9dce2bf7be89d14bc5ab936?u=tlearn_trl According the survey conducted by Deloitte, _____ of family-owned businesses do not have a board of directors. a. 46% b. 82% c. 28% d. 31%

c. 28%

Why do later generations of a family business tend to lose their competitive advantages of speed and agility? a. Because ownership structures rarely change to adapt to new business environments b. 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 d. Because later owner-managers do not have the commitment of the founder

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

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 want more input in business decisions than managers can allow c. Because shareholders who aren't involved in management often do not have the financial literacy to understand the business decisions that affect their returns d. Because managers must put financial choices ahead of family values

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

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

All of the following are reasons why having a diverse board of directors is important except: a. a board of directors should reflect the changing demographics of the world. b. a diverse board can bring varied experiences and opinions to the family business. c. having a diverse board can produce long-term operational advantages. d. a diverse board is less likely to challenge the opinions of family members regarding business matters.

d. a diverse board is less likely to challenge the opinions of family members regarding business matters.

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

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