The Family Business as a systemFamily complexityCompany complexityStructural developmentStructural risk Structural dimensions of the family businessInstitutionalisation Family-Business Management practices Communication Succession differentiationExistence of institutions Work differentiation Professionalisation of Differences Entrepreneurial management practices management capabilitiesFamily Council Recognition ofeffectiveness ownership Information structuring Explicitation of Non CEO rules dependenceBoard of Directors Familyeffectiveness accountability Succession planningExecutive Committeeeffectiveness
Family complexityA family will be more complex if it has more members. A larger groupof people means a larger number of differences, of diverserelationships, of resources of a varied nature. In a family with 20members there will be more internal differences: differences of age,interests, life situations, etc. It is likely that there will be groups withaffinities (age, tastes, interests) and more than likely that there will bethe occasional disagreement between some of its members orbetween groups of them. time
Company complexityThe concept of complexity is also applied to the business. A companywill be more complex if it contains more elements and relationshipswithin it, and if these elements are more closely related to moreelements outside it. The history of business is one of increasingcomplexity. Independently of the general trend towards complexity,there are notable differences between the levels of complexity ofsome family businesses and others.
Structural developmentThe structure of family-business relations is the set of habits, norms,processes, forums and so on through which the family orders itsrelations with the company. This structure always exists, whethercreated explicitly or implicitly over the years. The more complex afamily and a company, the more highly-developed the structure ofrelations needed between the two to create order out of the chaosarising from complexity. Thus a city has a more highly-developedstructure than a village.
Structural dimensions of the family businessMain dimensions: Institutionalisation Family-Business differentiation Management practices Communication Succession
Dimensions of the structureInstitutionalisation: sections of this dimension Existence of institutions Family Council effectiveness Board of Directors effectiveness Executive Committee effectiveness
Existence of institutionsWhen the firm and family group grow beyond a certain size, adirect relationship between the two systems (family andbusiness) becomes insufficient. In order to regulate therelationship it will be necessary to create properly differentiatedspaces for decision-making and to establish rules for action.This concern to what extent bodies and formal rules have beencreated to regulate relationships. Thus, a high level ofinstitutionalisation means that there is a decision-making bodyfor the business family (Family Council), a body for corporategovernance (Board of Directors), a management body(Management Committee) and a set of formal rules (FamilyConstitution).
Family Council effectivenessWe make a distinction between the institution itself and itsfunctioning. The important thing for the system is not theexistence of the institution but the performance of its function.Therefore, the Family Council Effectiveness will depend on theextent to which it fulfils its task.Among other things, The Family Council’s purpose is to:maintain and/or develop a business family’s identity; buildsystems for providing cohesion and legitimising roles; definingspheres for decision-making and taking action; establish therules; decide the Board of Directors’ mandate.
Board of Directors effectivenessThe main function of the Board of Directors is to govern thecompany in accordance with the mandate previously negotiatedwith the Family Council. However, its specific functions are:• To lend support to senior management• To monitor senior management• To develop, maintain and control distinctive resources and capabilities• To guarantee succession• To impose restrictions on the familyIt constitutes a forum for professional management of thecompany, which should ensure the firm has the right competitivestrategy, develop the firm’s resources and capabilities andmaintain family control over the business.
Executive Committee effectivenessThe company’s Executive Committee is a collectivemanagement body. Depending on its characteristics, itsexecutive scope will be greater or lesser.The Executive Committee has direct effects on the functioningof the organisation. It enables executives who have acentralised and intuitive approach to management to introducemore analytical elements into their decision-makingprocesses. This makes it possible for the knowledgepossessed by these executives to be stated explicitly, and formanagement talent to be nurtured with the organisation. Dreyfus & Dreyfus, (1986)
Dimensions of the structureFamily-Business differentiation: sections of this dimension Work differentiation Recognition of ownership Family accountability
Work differentiationWork differentiation refers to the extent to which those familymembers who are actively involved in the management of thebusiness are so because they belong to the family or becauseof their professional ability. The greater the presence of familycriteria in decisions affecting the working life of the family in thebusiness, the poorer the differentiation will be.This is manifested in aspects such as criteria for access tomanagement posts, the hierarchies that exist, and criteriaregarding remuneration and promotion of family membersoccupying executive posts.
Recognition of ownershipRecognition of ownership is related to the degree ofacceptance of the rights of the owners as the highest power inthe firm. • The right to have information about the progress of the company (right to information) • The right to be taken into account in important decisions that may affect the owners’ property (right of decision) • The right to have economic returns and a certain amount of liquidity of their property (economic rights)Ownership is so often identified with management in the familyfirm that the role – and therefore the rights – of the owner maynot always be recognised.
Family accountabilityTo talk of exigency is to talk of the extent to which the fact of afamily member occupying a post in the company merelyimplies the exercise of power or also includes the exigency of acertain level of performance.Founders are subject to exigency from outside the company(competitors, customers, etc.), but not internally from companyhierarchies or owners. Nevertheless, they are highly self-demanding, and this brings them to develop their companybeyond their own levels of comfort.Here we are not concerned with whether a family member iscapable of being more or less self-demanding; rather, we wantto evaluate to what extent the organisation itself is exigent withall those working in it, whether they are family members or not.
Dimensions of the structureManagement practices: sections of this dimension Professionalisation of management practices Information structuring
Professionalisation of management practicesThis dimension is concerned with managerial practices that are triedand tested in the world of management. There is a body of practicalknowledge of proven instrumental quality in multiple aspects ofmanagement such as the design of explicit strategies, coordination ofteams, organisation of internal processes, development of economicand financial controls and practices, construction of informationsystems and quality systems, and so on.The development of this dimension involves the construction ofdecision-making processes that combine intuition, analysis and(insofar as it is possible) quantitative support. Professionalisation alsoentails the creation of management structures capable of makingdecisions that are decentralised yet in line with overall strategy,without this meaning loss of control by senior management.
Information structuringIn this dimension we refer to both the quantity of informationthat an organisation can encode (data) and the order andmeaning it establishes within this data in order to be able touse it (information).Structuring affects economical and financial information,management indicators, working protocols, definition ofprocesses, patents, technical specifications, market surveys,performance assessment systems, etc. Jackson (1965)
Dimensions of the structureCommunication: sections of this dimension Differences management Explicitation of rules
Differences managementHere we are concerned with how a family manages differencesamong its members in order to create cohesion around aproject. When we talk of differences we mean differences ofinterests, skill profiles, personal situations, roles played, etc.Handling differences correctly involves recognising that themembers of the family can be ‘equal’ (they are all siblings, theyare all linked to the business family, etc.) but at the same time‘different’: they all have their own characteristics and their ownnuclear family, and they can make different contributions andbonds.Increasing family and business complexity will require thefamily to develop its difference-managing skills. Otherwise riskwill grow, as in the other dimensions of structure.
Explicitation of rulesAll social behaviour is governed by implicit or explicit rules, andtherefore so is the family business. The rules of a social system arebehavioural guidelines and limits for its members as a whole. Thehighway code may impose a speed limit of 120 kph, but that will onlybe a rule until such time as drivers take it on board as a behaviourpattern.The explicitation of rules is about a family’s ability to state thebehavioural rules existing between the family and the business in itsfamily business system. This makes it possible to discuss theappropriateness of these rules, and if necessary to change them.The rules fixed (in the form of family constitutions) are oftenexpressions of wishes, as the family is unable to accept the rulesthat are really governing their behaviour.Thus, the family must cultivate its ability to state the rules, as this iswhat will enable it to change them if they are inappropriate. Jackson (1965)
Dimensions of the structureSuccession: sections of this dimension Entrepreneurial capabilities Non CEO dependence Succession planning
Entrepreneurial capabilitiesThe development of companies requires vitality, the ability toundertake ventures. The creation of a business is the development ofan entrepreneurial project. One generation’s project is unlikely to beviable during the next generation. This is a mistake that has beenmade all too often in the family firm: to think that one generation cancarry on the project of the previous generation by simply increasingthe efficiency. In other words, doing the same, but better. This is whyentrepreneurship is the foundation on which succession must rest.Entrepreneurship can be manifested through the ability to generate astrategic renewal of the family group, but also through the ability toundertake new ventures within the group.The company has to be capable of maintaining entrepreneurship,which does not necessarily mean that members of the next generationhave to lead the projects. The whole enterprise has to behave as anentrepreneurial organisation.
Non CEO dependenceThe top executive is taken to mean the person in charge of theorganisation, regardless of the name used to designate the post(those most commonly used are CEO and General Manager). The topexecutive is a basic resource of many companies’ competitive ability,for his or her knowledge, skills, relationships or leadership capacity.Developing Non Ceo dependence is closely linked to the whole rangeof dimensions of structure that we have dealt with above, especiallythe creation of an institutional structure, the development ofmanagement and the development of entrepreneurship.The importance of this dimension does not lie in its manageability butin its assessability; that is, business families should be able toevaluate to what extent their company depends on the top executive,and if this dependence is high, work towards reducing it.
Succession planningSo far we have dealt with aspect relating to managementsuccession, and now we will turn our attention to those relatingto ownership succession.Succession planning has a strategic dimension and also alegal and administrative one, mainly related with thetransmission of ownership.From the strategic viewpoint, succession decisions have adirect impact on family complexity, and should therefore betackled from that perspective. The legal and administrativecomponent calls for several aspects to be taken into account:tax issues, wills, and agreements on property, corporate andeconomic matters.
Structural riskThis is a family business’ propensity to become chaotic because it hasnot been possible to order its affairs through its structure. The risktherefore increases when the structure is insufficiently developed tocope with the existing complexity. Structural risk (like many otherrisks, such as those of avalanche, fire, etc.) is hard to identifybeforehand but becomes clear once it has been identified by anexpert (or in this case, by an expert system).