Making the case for family business education

July 20, 2009
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Why make such a fuss about family businesses being different from “normal” businesses? Aren’t they similar enough to “professional” firms that one can simply borrow established best practices in order to make the right decisions?

Unfortunately the answer is no, and here are a few examples why.

Consider diversification. It is well known that individual investors can better achieve their desired risk preference through portfolio investments in the marketplace. Therefore, general best practice suggests that firms should not undertake their own diversification strategies, but rather invest only in assets where they possess a comparative advantage and niche.

Yet, in the case of most family firms, the opposite strategy is most often correct. This is because most family firms face additional considerations that dramatically alter the payoff. 

For example, in most family firms, by necessity the family holds almost all the assets, and therefore the primary opportunity for achieving the benefits of diversification is through that made by the firm itself. Further, a key strategy for preparing for an unpredictable liquidity event such as the unplanned retirement/death of the founder is to have a liquidity reserve in the form of some non-core assets that could be sold easily and would not affect the core of the family business. In addition, taxes always enter the picture. In the case of distributions to family members, the type and breadth of assets owned will often vary depending on the tax strategy being followed.

For these and other reasons, blindly following the financial best practices taught in traditional business programs could result in the wrong diversification decisions for family firms. Generally, the family firm must consider a diversification strategy as a best practice for its family members. 

Consider vertical integration. Conventional best practice suggests that firms should outsource all but scarce or precious functions and achieve best pricing through a competitive bidding process that assures best value. This practice, however, can be second best, in that it generally requires that its own additional bureaucracy be set up to handle the purchasing, transfer pricing and other implementation issues associated with outsourcing. Further, its recommendation as a best practice is often due to the failure of the firm to reap the benefits of having these processes in house — more coordination, control and profits.

Family firms, through their effectiveness in permeating an operative company culture, common goals and an owner’s perspective, often have shown a competency in implementing vertical integration, thereby avoiding an over-reliance on outsourcing, and helping secure a more complete range of opportunity in a dynamic marketplace. 

From a different perspective, consider fair or due process. The stability of most societal and governmental structures is, to a great degree, dependent upon the fairness of governance perceived by the constituents. For example, the relatively smooth transition of power in most democracies lies in the belief that we have a voice in the process and the voting process is relatively fair. We may not always like the outcome, but to the extent we believe the process is fair, we are willing to live with the results. These same principles apply to organizations of all types, including for-profit businesses, and in all areas of governance: strategy formulation, dispute resolution, compensation, layoffs and a host of other issues. In this dimension, “professional” firms have evolved to recognize the value of perceived fairness and therefore have developed a host of policies and even organizational cultures to ensure that all within an organization feel that any violation of fairness has a opportunity for regress.

In the area of perceived fairness, family businesses face special challenges. Family firms are usually dominated by the senior generation — the parents, uncles and aunts — who have usually followed an authoritarian form of leadership style within the family unit that often carries over in to the business unit. This often creates an environment where perceptions are anything but fair and leads to extensive conflict. There are an endless number of issues that almost always arise: the right of a minority family shareholder to have a different viewpoint than the majority; compensation equality among family members; the sharing of financial information with family members; the choice of leadership; the employment of family members and spouses; the involvement, alienation and opportunity of non-family employees; and so on. In this arena,  a set of best family businesses practices have evolved that are being shared via numerous educational opportunities and through those service providers who have educated themselves about the special nature of family businesses.

These represent only a few of the issues that highlight how special family firm decision-making is, and how knowledge of these issues is critical for family firms to make correct decisions. Unfortunately, this knowledge is generally lacking within standard business education programs, which are primarily targeted to large public firms with dispersed ownership. To this extent, it serves to present a case for specialized education in family business management for all family members, as well as their cadre of service providers: the legal, accounting and managerial consultants. Helping these individuals achieve the knowledge that leads to correct decision-making within the practicality of family businesses is the mission of the Family Owned Business Institute at Grand Valley State University. By encouraging faculty to become engaged in family business research, we help broaden their ability to consider the issues highlighted herein and facilitate learning that leads to the best decisions and longevity for West Michigan family firms.

Author’s note: This article has benefited greatly from John L. Ward’s “The Family Business Advantage: Unconventional Strategy” (Families in Business, April 2002) and from Ludo Van der Heyden, Chrisine Blondel and Randel S. Carlock’s “Fair Process: Striving for Justice in Family Business” (Family Business Review, March 2005).

Thomas V. Schwarz is director of the Family Owned Business Institute, Grand Valley State University.

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