Corporate Governance and Family business

Family BusinessCorporate Governance

THE AGENDA FOR TODAY
Family Businesses Importance
Corporate Governance Issues
Wallenberg Business
Dealing with challenges
1
Ownership And Control

3
Indicators
What is a family business?
A firm of any size is a family business if:
• The majority of decision making rights are the
possession of the natural person(s) who:
• Establish the firm
• Acquired the share capital of the firm
• Are family members of the above (spouses,
parents or direct heirs)
• The majority of decision-making rights are direct
or indirect
• At least one representative of the family or kin is
formally involved in the governance of the firm
• Listed companies meet the decision-making
rights mandated by their share capital
Source: Expert report on Family Businesses, European Commission, Nov 2009

4
• Family businesses constitute the world’s oldest
and most dominant form of business
organizations
• Family firms account for 2/3 of all businesses
around the world (HBS);
• An estimated 70%-90% of global GDP annually
is created by family businesses;
• In Portugal family business have a share of
60% to 70% of the GDP
• Between 50-80% jobs of the majority of
countries worldwide are created by family
businesses (European family businesses, 2012).
The Family Business Importance
Examples of family businesses: Salvatore Ferragamo, Benetton, and Fiat Group in Italy; L’Oreal, Carrefour Group,
LVMH, and Michelin in France; Samsung, Hyundai Motor, and LG Group in South Korea; BMW, and Siemens in Germany;
Kikkoman, and Ito-Yokado in Japan; and Ford Motors Co, and Wal-Mart Stores in the United States

5The Family Business Importance
1. More profitable over the long term;
2. Family business generally take a long term view
and thus balance short-term rewards with long-term
sustainability and prosperity;
3. Generally, they are better for the communities in
which they live and invest more in their communities
both for business investment and in terms of
philanthropic activities;
4. People trust family businesses more than other
kinds of companies;
5. Score significantly higher on things like worker
motivation and leadership, though they lag slightly
on innovation
This form of enterprise has significant benefits to the economy and society at large:
The long-term view of family busniesses performance
Source: Harvard Business Review “What you can learn from family businesses”

6The Family Business Strengths and Weaknesses
+
Commitment – family usually shows high levels of
dedication to the business grow, prosperity and to
get passed to other generations
Knowledge continuity – Families make it a priority
to pass their knowledge, experience and skills to
the next generations
Reliability and pride –as family name is usually
associated with the business they do their best to
increase quality of the output of their business
(product, service,…)
Partnership – families usually try to maintain a
good and close relationship with their customers,
suppliers, community, employees,…)
Survival– Many family business fail to be
sustainable in the long term. Only 30% survive into
the second generation, 12% into the third and 3%
make it into the fourth and beyond
Complexity - Family businesses are usually more
complex in terms of governance due to the addition
of the family emotions and issues
Informality – as families usually run the business
themselves there is little adoption of business
practices and procedures
Lack of discipline - many family businesses do not
pay attention to succession planning, family
member employment, and attracting and retaining
talent outside family members
-

Ownership
Family Ownership And Control 8
Principal:
Shareholders
Control
Agents:
Board of
Directors
Senior
Management
Control Mechanisms:
Pressure from Markets
Regular Meeting with
ShareHolders
Financial Press Scrutiny
Performance related pay
• Separating ownership from management not a
natural in family business. In the beginning ownership
and management are closely linked
• Family business leaders soon become the
bottlenecks for the development of the business and
risk narrowness and weakening the business they
created
• Over time, family business leaders can start stepping back from
operational responsibilities and assume fully their role as owners
(setting the strategic vision which guides investment decisions).
• It is helpful to create a professional board with a few independent
members to bring new perspective and expertise.
• Family business leaders should then be fully-engaged owners of the
business, no longer managers.

9Stages of Growth in a Family Business
Ownership
Family
This model views family businesses as a complex
system comprised of three overlapping
subsystems: Ownership, Family and Business.
It is a useful tool to understand the different
Dynamics at work in any family businessBusiness

10Stages of Growth in a Family Business

11Notes slide 9
• In the developmental theory, family business ownership moves from a Controlling Owner stage
(stage 1) to Sibling Partnership (stage 2), Cousin Consortium (stage 3) and then distant relatives
(stage 4):
• Stage 1: This is the initial step of the family business. The business is entirely owned
• and managed by the founder(s) who usually take the majority of key decisions. This stage is
characterized by a simple governance structure, the control and ownership are in the hands of
the same person.
• Stage 2: This is the stage where management and ownership have been transferred to the
• children of the founder(s). As more family members are now involved in the company,
• governance issues tend to become relatively more complex,
• Stage 3: At this stage, the business governance becomes more complex as more family
members are directly or indirectly involved in the business.
• In the long run (stage 3 and 4) it becomes necessary for the family business to set up the right
governance structures and mechanisms that will allow for efficient communication and a clear
definition of the roles and expectations of every person involved.
Source: IFC Family Business Governance Handbook

Corporate Governance
Issues
12

01 Succession & Survival
Often the successor is not the fittest choice.
The stock market reacts negatively to the
appointment of family heirs as managers.
Follow the family vision and mission. 30%
survive into the 2nd generation, 12% into the
3rd and 3% make it into the 4th and beyond
02 Conflicts and communication
Managing internal conflicts within the family.
Maintaining teamwork and harmony. Keeping
family members informed about major business
accomplishments, challenges and strategic
directions. Keeping focus on same objectives
and interests.
03 Market capitalization
Family businesses have lower stock market
capitalization (lower market value) mostly
due to control issues – whereas markets
downgrade prices due to higher risks for
business (e.g. Tunneling)
04 Professionalization
Few adopt professionalized business practices
and procedures and control mechanisms,
maintaining improper procedures and lack of
internal controls
05 Interconnections
The existence of an additional layer of
relationship that the owning/controlling family
brings to the business. Family participation and
role
06 Capital allocation and
growth
Allocation of corporate capital: dividends,
debt, and profit. Family-controlled firms
often face a difficult choice as they confront
the need to fund growth by attracting equity
Six Keys for the SuccessCorporate Governance Issues 13

Wallenberg Business
• Separate return (income) from how the company is
run (control)
• Use a Trust or foundation
• Cash-Flow Right differs from Voting/Control Rights
• Dual-class shares (eg. voting caps, cross-
shareholdings, golden shares, staggered boards)
15
The biggest challenge for family companies is
how to preserve family control while competing
with public companies that can draw on capital
markets
Wallenberg have the dual-class commons
structure already called as the “Swedish
capital structure.”

17
Wallenberg Pyramid
• The Wallenberg family owns 40% of the value
of the Swedish Stock Exchange – 30% of GDP
• Through dual-class shares exercise control
over many companies e.g. 4% by value but
39% by votes
• Wallenberg ownership is exercised through the
Wallenberg foundation
• Companies dominated by investor are run by
professional managers with their own board of
directors
Source: Reproduced from Sundin and Sundqvist (1996).

Wallenberg Business 18
Why are Wallenberg traded at discount?
• The reason for discount is the use of dual-class shares. They give the family more control, but tend
to diminish the value because other shareholders suspect the controlling family will take special
benefits for themselves or start strategic changes to help their own interests rather than the other
investors interests (e.g. tunneling or overinvestment costs)
• Sweden has resisted to end this use of dual-class shares because it helps keep companies under
Swedish ownership under an open economy
• The family claim that they deserve their special rights because of the family´s role in successfully
founding and developing Swedish companies over the years and their tradition of strong and
involved ownership. Also due to social responsibility and natural integration in the Swedish market.

Dealing with challenges 20
Develop a family governance structure to bring discipline among family members,
prevent potential conflicts, and ensure the sustainability of the business.
The main components of a family governance structure are:
• A family constitution that clearly states the family vision, mission, values, and
policies regulating family member´s relationship with the business.
• Family institutions, to deal with conflicts and communication issues, e.g. family
assembly, family council, and other family committees.
CORPORATE GOVERNANCE

SUCCESSION
Handling the succession issue: Marrying
intelligent partners who can help them
run their companies, and put efforts in
the education of the next generations.
More exotic Asian-based concepts
include adopting.
CONFLICTS & COMMUNICATION
Develop strong family cultures that not
only serve the companies (eg.
storytelling) but also to handle internal
family conflicts. Family meeting and
retreats
PERFORMANCE
Developing high-performance teams,
including managers outside the family
circle, that stick together for years;
PROFISSIONALIZATION
Adopt business practices that oblige collateral,
information transparency and defined procedures.
That can be done by growing through stock market
capital – that due to covenants and obligations
oblige companies to have procedures in place
(e.g. Sarbanes and Oxley Act)
CAPITAL GROWTH MAINTAINING CONTROL
Trough some concepts already
discussed: pyramiding, dual-class
shares, Trusts Foundation, cross
sharing.
CONTROL MECHANISMS
Performance related pay
willingness to integrate outside individuals in
the Boards
Dealing with challenges 21

Corporate Governance and Family business

More Related Content

What's hot

What's hot (20)

Viewers also liked

Viewers also liked (16)

Similar to Corporate Governance and Family business

Similar to Corporate Governance and Family business (20)

Recently uploaded

Recently uploaded (20)

Corporate Governance and Family business