Family Business Midterm
The 11th topic covered in the Family Constitution
XI. Family council meetings. Their purpose, primary functions, and relation to the board and shareholder meetings are discussed. Membership and its stand-ing and operating procedures are discussed.
The 12th topic covered in the Family Constitution
XII. Shareholder meetings. Their role is discussed, as is their authority and legal standing. Their relation to the board and the family council is also discussed.
Be able to explain the three primary responsibilities of shareholders towards the corporation they own?
(1) to define and then demand reasonable returns on shareholder equity or invested assets; (2) to pro-vide the values and principles of doing business and ensure they remain instilled in the company; and (3) to define the owning family's strategy and communicate owning-family priorities.
The 1st policy that stand out in their usefulness to families in business
1. An employment policy that outlines the levels of education and experience required for employment in the business. It should be based on merit and company need, not membership in the business family.
1/4 primary motivations (or basis of commitment) for successors to join the family enterprise
1. Challenging the status quo by asking fundamental questions and collecting exter-nal data, including customer, competitive, social, or demographic data. Leaders need to create dissatisfaction with the status quo.
The 2nd policy that stand out in their usefulness to families in business
2. A subcontractor policy that offers guidelines for arm's-length transactions in an open competitive marketplace. The bidding processes should create a level playing field for relatives and nonfamily alike
2/4 primary motivations (or basis of commitment) for successors to join the family enterprise
2. Having an external (customer/competition) perspective. The desire for this type of perspective led IBM to tap as its new CEO Lou Gerstner, who had been run-ning American Express, a major customer of IBM. IBM, a slumbering giant in the 1980s, clearly was in need of fundamental change when he assumed the com-pany's leadership. None of the key managers who had been with IBM for many years seemed capable of leading the change effort with the dispassionate drive that Lou Gerstner demonstrated. This finding has implications for what may con-stitute appropriate early developmental career opportunities for next-generation members who will be called on to rejuvenate their family-owned businesses. Early experiences working in sales or in industries that represent current or potential customers can be a valuable asset. If the family business is in the food production or distribution industry, for example, a career stint with a supermar-ket or restaurant chain may represent a particularly valuable developmental opportunity.
The 3rd policy that stand out in their usefulness to families in business
3. A board service policy that includes criteria for the selection of family members to serve on the board as at-large representatives of the owning family. The system should provide a link between family strategy and company strategy without giving undue influence to family members
3/4 primary motivations (or basis of commitment) for successors to join the family enterprise
3. Having the capacity to forge a new direction—to articulate a vision of where the company should be headed—that is rooted in meeting customer needs and cre-ating value for customers.
The 4th policy that stand out in their usefulness to families in business
4. A family council service policy that states the criteria for selecting family members to serve as group coordinators of the family council and other committees that may be formed. Among possible goals of other committees are a family newsletter, a family history project, and philanthropic activity.
4/4 primary motivations (or basis of commitment) for successors to join the family enterprise
4. Being able to generate a sense of urgency. After all, need and speed are friends of change. Jack Welch, reflecting on his fundamental reshaping of GE during the 1990s, said, "If I could begin the fundamental change effort at GE again today, based on what I have learned in the last decade, I would insist on greater speed. I would accelerate the change process and avoid a lot of the resistance, confusion, and loss of motivation that was part of a slower process."
The 5th policy that stand out in their usefulness to families in business
5. A prenuptial policy that states the family's desire to keep the ownership of the business within the family and the steps required of every family member when they marry.
The 6th policy that stand out in their usefulness to families in business
6. A dividend policy, not to specify the amount of dividends to be paid (which is a company decision), but rather, to discuss family needs, balance them against reinvestment in the business for growth needs, and then inform management of the general sentiments of family members.
The 7th policy that stand out in their usefulness to families in business
7. A liquidity policy that includes principles supporting the desired relationship between the controlling family and the company in the future and recognizing that individuals or particular family branches may have cash-flow needs. This policy usually differentiates between small transactions and the sale of large blocks of stock within the family or back to the company and references the legal documents in effect (such as buy-sell agreements).
The 8th policy that stand out in their usefulness to families in business
8. An owners' plan that conveys to the board of directors the vision, values, mis-sion, goals, and needs of the shareholders. This will promote better alignment between the interests of the family shareholders and those of the company and its management.
The 9th policy that stand out in their usefulness to families in business
9. A family constitution, used primarily in older and larger multigenerational family businesses. This document is a collection of the established policies and a state-ment of family history, family commitment, and the desired relationship between the company and the owning family.
Be able to explain the purpose of a family council and what it can do to help a family in business
A family and its business when the family-business interaction is preserved as a positive-sum dynamic. Because of the board's importance, these next-generation lea-ders frequently undertake a critical review, and often restructuring, of their board. They all come back to the idea that because of the family's legacy on the board, a lot of communication and education needs to take place beyond what is deemed tra-ditional board work and strategic-planning processes. The family's identity remains attached to the company's, so if the company is going to change in order to adapt and grow, the board composition has to change
The Ambassador
Allows others to learn the business first-hand and then eventually manage it, holds on to diplomatic or representational duties on behalf of the corporation
What are the 12S Family Enterprise Model?
Although the 12S Model may appear overly complex for the first-generation or entrepreneurial family business, only two elements—shareholder structure, and shareholder wealth management and information systems—represent what would be extraneous considerations for young firms. First-generation entrepreneurial fam-ily businesses are more often than not composed of a single operating entity with financial resources, and the tracking of these, the responsibility of that entity's con-troller, chief financial officer, or founding owner. It is often only in later generations, as liquidity measures enable wealth to be present in other ventures or asset classes, that wealth management and wealth-management information systems become rele-vant at all. In still later stages, many of these are overseen by a family office reporting to the family's council or a holding company's board of directors.
Define Buy - Sell Agreements
Buy-sell agreements are contractual arrangements between shareholders and the company. They are typically used by family-business owners to facilitate an orderly exchange of stock in the corporation for cash
Stewardship perspective
Claims that founding-family members view the firm as an extension of themselves and therefore view the continuing health of the enterprise as connected with their own well-being (Act in the best interests of the company)
The Inventor
Builds systems to help next generation lead, takes a key position in another enterprise
The Monarch
Doesn't leave until forced out, imagines no one could ever replace him/her
Explain the economic impact of family business
Family-owned and family-controlled firms account for approximately 70% of all incorporated businesses in the U.S. where approximately 17 million family firms operate, in the U.S., family firms account for 49% of the GDP or approximately $7.5 trillion, 85% of private-sector employment, and about 86% of all jobs created between 1999 and 2009
List the 7 Family Rules of Conduct
Focus on the future, not the past, be a good listener, put yourself in the other's shoes, stay focused on principles, not personalities, make "I" not "You" statements, say "Got it" whenever speech-making blocks progress, disagreements are okay, as long as we are committed to arriving at an improved final decision
The 1st topic covered in the Family Constitution
I. Mission and vision. The family's vision and the nature of its commitment to the firm and its continuity are presented in the first article
The 2nd topic covered in the Family Constitution
II. Values. The family values that have successfully guided the firm in its relations with customers, employees, suppliers, partners, competitors, and the commu-nity are detailed next.
The 3rd topic covered in the Family Constitution
III. Family brand. This article guides family members in its owner-firm visibility, the use of the family name, and relations with the government, oward its enterprises and their management is spelled out—what behavior is expected of family members who are in management and what family mem-bers need to be aware of in order to protect the company's and the family's reputation.
The 4th topic covered in the Family Constitution
IV. Employment policy. The requirements family members need to meet in order to be considered for employment are enumerated. These are often segmented into requirements for employment in management posts, requirements for internships, and requirements for lower- level positions. Requirements for man-agement posts often include an undergraduate degree plus five years of work experience outside the family business or three years plus an MBA. This policy may also spell out whether in-laws qualify for employment or are prohibited from becoming company employees.
The 9th topic covered in the Family Constitution
IX. Liquidity policy. This article discusses business valuation, buy-sell agree-ments in force, redemption funds, if any, and their use in wealth-creating events.
What are critical developmental experiences for successors?
The family firm will be facing different systemic alignments and misalign-ments as the earlier generation ages, the next generation joins the firm, and the firm experiences a new period of accelerated growth resulting from product or service innovation, for instance. Interestingly though, some research has found no significant difference in many of the dynamics or practices present in first-, second-, and third-generation family firms, except that a greater number of second-and third-generation firms have engaged in succession planning than did their first- generation counterparts.
The Transition Czar
Leads during the succession process, often assisted by CEO spouse
The Governor
Leads for a limited term, then moves on, ensures the successor will be trained and ready
The General
Leaves the office reluctantly and plots a return, hopes the next-generation leader proves inadequate
What are the common challenges to governing the family-business relationship?
Nepotism, Loss of family identity and values, family conflicts, belief that fair means equal, current leader's unwillingness to let go, entitlement culture, dilution of wealth, erosion of entrepreneurial culture, insufficient professionalization, lack of transparency, lack of oversight, altruism, confusion regarding what is a family, and wanting to keep it all in the family
Define Family Business
Ownership control (15%+) by two or more members of a family or a partnership of families, strategic influence by family members on the management of the firm, concern for family relationships, the dream (or possibility) of continuity across generations
Strategic perspective
Resource-based view highlights unique resources that family firms convert into competitive advantage (These resources are often referred to as organizational competencies)
Systems theory perspective
The family firm is modeled as comprising the three overlapping, interacting, and interdependent subsystems of family, management, and ownership, maintains boundaries that separate it from the other subsystems and the general external environment within which the family firm operates (the family as a whole is more than the sum of its parts)
The 4 Primary theoretical perspectives on family business
Systems theory perspective, Agency theory perspective, Strategic perspective, Stewardship perspective
List the CEO spouse role types, and what are the implications of each role type for succession and continuity
The CEO spouse often has a unique role as steward of the family legacy, facilitator of communication, and touchstone of emotional intelligence in family relations. CEO spouses often play a determining role in successful generational transitions, but not without facing tensions and dilemmas.
What are the 3 characteristics for the Family Unity Index? Family Unity is correlated to effective management practices. What 5 attributes are associated with it?
The Family Unity index characterizes the family system and is the sum of the Family Harmony, Tolerance of Differences, and Participation and Succession scales. Based on scores on this index, firms were divided into two groups. Results of difference testing between these groups indicated that firms with significantly different scores on the Family Unity, Business Opportunity, and Family-Business Interaction indices also had significantly different Management Practices scores.
What are the 6 most common CEO exit styles
The monarch, The General, The Ambassador, The Governor, The Inventor, and the Transition Czar
Define Nepotism
The practice among those with power or influence of favoring relatives, friends, or associates, especially by giving them jobs
Describe the features that make family business unique
The presence of the family, the overlap of family, management, and ownership, the unique source of competitive advantage derived from the interaction of family, management, and ownership, especially when family unity is high, the owner's dream of keeping the business in the family, the strategic influence of noneconomic family goals and values
Define familiness
The systemic overlap between the family, ownership, and management subsystems that make up a family enterprise as the potential source of invisible crossovers that endow a family company with the ability to enjoy unique, idiosyncratic, and hard-to-replicate competitive advantages.
Agency theory perspective
Traditionally, the natural alignment of owners and managers decreases need for formal supervision and governance (Reduces agency costs of ownership in family firms)
The 5th topic covered in the Family Constitution
V. Next-generation family-member development. This policy sets out the commitment and procedures guiding the education and professional develop-ment of next-generation members. It often also defines the level of financial support available for the college and graduate education of next-generation family members.
The 6th topic covered in the Family Constitution
VI. Ownership policy. Stock ownership, classes of stock, and ownership transfer policies are defined. Business-valuation processes are often spelled out. Buy-sell agreements in existence are discussed. Voting and shareholder representa-tion on the board and other entities may be acknowledged. Legal documents governing transactions of any kind are listed and their authority recognized
The 7th topic covered in the Family Constitution
VII. Family-bank and/or family-venture capital fund. Special funds allocated to sponsor the development of new ventures or new initiatives by members of the family are discussed and the overall terms of use of these funds are explained.
The 8th topic covered in the Family Constitution
VIII. Dividends and family-benefits policy. This section of the constitution edu-cates and guides shareholders on the expectations for returns on invested cap-ital. It discloses reinvestment requirements. It may also, if the family has agreed to it, set a ratio of reinvestment to distribution of shareholder returns. Policies related to risk and risk management, including debt-to-capital ratios, may also be discussed here
The 10th topic covered in the Family Constitution
X. The board of directors or advisory board. Its make-up, standing, authority, and relation to management, shareholders, and other entities are discussed. Its primary functions and operating procedures are disclosed
Explain what a Genogram is versus traditional Family Tree
a diagram showing the members of a family (like a family tree). It's useful because, not only does it inform us of family names, relationships, ages, and descendants, but also it captures any critical events (such as a divorce), the quality of relationships (such as conflictual or close), and other important messages transmitted across generations (ex. "education and hard work are equally important")
Define Family Emotional Intelligence
emotional intelligence refers to the capacity for recognizing our own feelings and those of others and the ability to manage our emotions and our relationships with others. It's important to family businesses since it improves the ability of individual family members to know their feelings in order to use them appropriately when making key decisions. An example would be active listening in meetings and freedom of creativity at work
Explain the Zero-Sum Dynamics in Relationships
involves multigenerational families where the dynamics in relationships are characterized by exchanges in which one party's perceived gain is the other party's perceived loss. It can be triggered by any perceived difference such as: male-female, active-inactive, richer-poorer, well educated-not educated, older-younger. Becomes rooted in reality when the family wealth stops growing or declines