Family-Owned Businesses: In Perspective and Prospective

Family-owned firms are the backbone of the world’s economies, but only a third survive to the second generation. In much of the world, family and firms are perhaps the two most important institutions, and these are often intertwined. The creation, growth and longevity of family businesses are critical to the success of the global economy. Indeed the majority of businesses in the world are family controlled – and these range from unsung, modestly-sized firms to commercial giants such as Ford, Samsung and Hyundai.There are very particular advantages and challenges of family firms in a highly competitive global economy. It is thus important for Ethiopian entrepreneurs to have an understanding of family firms in general, and the development and evolution of their corporate governance structures in particular. Family firms have to strive to be well-managed as the best of their competitors. The need for a professional business approach is in fact greater in a family than in a non-family business. This would allow the entrepreneurs, and hence the economy, to create tomorrow’s firms today.

Family firms are very distinct from which they can drive a significant competitive advantage. The main advantage of a family-run business is that the ownership structure is built on lasting relationships of trust and commitment. These are usually essential to the successful running of a small business, and are often more easily achieved between members of the same family.

Many businesses gain their strength from family commitment and loyalty, resulting in high levels of trust, cooperation, and shared long-term goals. Getting the right mix of complementary temperaments and talents is important. Younger family members may, for instance, have a better grasp of technology and may be more comfortable with newer techniques for managing a business and adapting to changes. Older members could bring with them the experience and authority to ensure good contacts and business relationships are established with suppliers and customers.

A long-term perspective comes from building a business for future generations while the strength of most family firms’ founding values give them a clear identity in an increasing faceless corporate world.

Conversely, this kind of business can hit problems if irreconcilable disputes break out over the sharing of profits or the ownership of assets. Family ties can sometimes take precedence over the need to make objective and sometimes painful business decisions. The informal relationships and culture of family life will stand in stark contrast to the formal demands of managing a business. A family unit may find it difficult to adjust to working together in a businesslike way. For example, if you choose to embark on this route you’ll need to be able to discuss and develop ideas effectively with participating family members. This can be hard for some people to get used to and conflicts can build up. You’ll also need to be on guard against insular attitudes developing, a cultural resistance to change, and possibly inter-generational conflicts between older and younger family members.

Everyone involved should clearly understand that being in business requires a commitment in time, energy, and money. Your entire family’s way of life may be affected, so resentments and frustrations should be expected. There are also risks associated with dissension that may arise within families, particularly between family members who are actively working in the business versus those who are solely shareholders. As family businesses grow, the owner/manager equation shifts and complexity grows. More generations of an increasingly extended family and growing numbers of non-family managers require more formal systems.

Family firms are increasingly facing issues related to the recruitment and career management of both family and non-family managers for getting the talent needed to ensure a firm’s long-term success. Establishing a clear open door policy that allows willing family members to be employed should be balanced with a performance-based promotion that is resolutely the same for both family and non-family managers. In a similar note, fairness and transparency in financial and non-financial perks and reward systems, particularly within the family, are essential tools in avoiding tensions over perceived injustices. Most importantly, more formal organizational structures become necessary to clarify roles and separate the day-to-day management from the strategic direction of the business.

Successful family firms need to establish a board devoted to strategic business issues. The family needs to be involved and informed preferably through dedicated channels, such as a family council. The board allows a family firm to establish clear lines of authority for different areas of business. It ensures the stability and continuity of polices and values that distinguish the firm. It also makes necessary distinction between matters of day-to-day management and issues of strategy – enabling strategic issues to be properly and objectively addressed. Boards allow the infusion of new ideas and a broader range of experience from having outside directors included. These members held on several fronts, simultaneously assisting with contentious internal issues, having equal treatment between family and non-family executives and contributing external perspectives to strategic reflection. An effective board, a logical organization structure and fair and transparent recruitment and promotion polices are the key drivers to ensuring the longevity and success of family firms.

5th Year • April 2017 • No. 49

Johannes Kinfu (Prof.)

The late Johannes Kinfu (Prof.), winner of the 2013 Africa Education Leadership Award in the best Emeritus Professor category, had thought Accounting at AAU for 47 years. He was director of training and development at MIDROC Ethiopia until he died on March 14, 2017. EBR expresses its condolence to his families. This article, written with Netsanet Tsegaw, Country Head of the ACCA Office in Ethiopia, was published on February 2014, EBR No12.

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