2.3.1. The Business Family as a Resource
A family in peace is the best a firm can have; a family quarrel the worst. One of the biggest threats is mentioned to be the estrangement; a phenomenon that appears when family businesses have been handed over to the next generations. Whenever companies grow and shares fragment, interests within the family and towards the business grow apart. In the case of the Hanoverian cookie manufacturing company for instance, a 15 year long fight led to Bahlsen’s split into two separate firms.
Family members of family firms are repeatedly reported to have a high impact on shaping the organization’s culture and strategy (Zahra 2003; Chrisman et. al. 2004; Zellweger et. al. 2010). The family owner usually consists of only a few and well known people – compared to anonymous shareholders in public companies – who are typically committed to corporate social responsibility in addition to having a sole capitalistic value orientation; a fact, that influences the organization’s culture once again. Pastoriza and Arino (2008) provide further theoretical evidence in regards to such an influence by adding the “learning aspect” within the field of the agency-stewardship-debate. They argue that – through a chain of interactions –the relationship between two parties is forged by actions followed by reactions. The authors state that “if one party, the principal, does not pay attention to the transcendental result, it makes
the other party, the manager, less likely to pay attention to the transcendental results too, resulting in a lack of trust, a need to monitor both parties, and a situation in which agency theory will explain their behavior. On the contrary, if one of the parties, the principal, pays attention to the transcendental results of his decisions, he is helping the other party, the manager, to pay attention to the transcendental results of his decisions too”. Following the
Pérez-López theory about dynamics between two parties (Pérez-López 1991, 1993 in: Pastoriza and Arino 2008), Pastoriza and Arino describe three outcomes that arise from the
interaction between the two parties: extrinsic results36, intrinsic results37 and transcendental results38. Hence, transcendental results are the learnings that the interaction produces within the reactive agent. Following this theory, it is assumed that the specific behavior of the family business manager shapes the organization culture and the behavior of the organization’s employees.
Simon and Hitt (2003) provide a “resource based” view on family firm performance. They investigate the positive potentials of the so called “familiness” (unique resources that are inherent in family firms created by the interaction of family and business). The authors examine how these resources affect the purpose of creating a competitive advantage and wealth. They conclude that family business have distinguishing advantages and concurrent drawbacks in trying to gain a competitive improvement. However, they suggest in the conclusion that effective management of resources “can lead to value creation for the business and the family as owners” (Simon and Hitt, 2003, p. 353)
2.3.2. The Business Family as a Threat
Family businesses can be a valuable resource as they can provide valuable, rare, inimitable and non-substitutable resources to the firm. At the same time, the family can easily and rapidly become a threat to the business. This is the case, when divided and financially dependent family members consume value rather than create value to the business. Davis has provided a structured figure that points out the “playing fields” a family firm can find itself in.
United Orderly and Dependent United and Industrious Divided Divided and Dependent Divided and Industrious
Consume value Create Value
Figure 2-1: Business family types39
36
The actions of both parties, observable outcomes
37
Results that occur within the principal (active agent), not observable, inferable from future decisions
38
Results that occur within the agent (reactive agent) as a consequence of the active agent’s action, not observable,
39
Ostensibly and publicly interesting, family disputes are the cause for struggling family businesses. Depending on the firms’ development (size, professionalization etc.) the influence can be of smaller or bigger impact. However, family disputes can lead to the demise of the family firm. Additionally, researchers hypothesize more basic societal changes for the demise of family firms.
Ajay Bhalla (cf. 2011) argues that the demise of the family firm in Western societies is rooted in two factors: First, there is a declining role of the family as an institution, that is, the family as an entity and living entity is increasingly becoming a subordinated function of society. It appears that individualism is stronger than the collective and collaborative concept of a family. Secondly, as Bhalla argues, the greater emphasis on creating corporate governance structures and aligning the interests of the owners and management has led to more exits of families (provided that the business is in particular development stage).
Wimmer et al. (R. Wimmer et al., 2009, p. 107) assert that the family is no stabilizing element of the family business. It is more likely the case that the family business experiences multiple family constellations during an individual life cycle. High divorce rates, interim singled and long-term partners lead to flexible family forms which do not provide the business with a stable, grounded and supportive family.
Furthermore, the change of values in the western world since the golden economic years has reversed the relationships of individual and community interests. As May (2007) argues, commitment and cohesion of the business family are not automatically in existence, they need to be worked out. It is thus imperative that the business families are managed professionally as well. Many authors therefore suggest developing and formulating both business and family strategies (Marsano et al., 2007; Carlock & Ward, 2001; J. Ward, 1987).
Disputes within a family or between related families can both escalate to highest levels and outlive generations. In his book, Hennerkes recalls a dispute in which two brothers where working successfully together for decades. Both the brothers had reached retirement age when one of the siblings began a new liaison after his spouse died. Consequently, both partners grew apart from each other. Soon a destructive fight evolved (Hennerkes, 2004). In addition to a number of authors (see i.a. Prince, 1990; BEEHR, DREXLER Jr, & FAULKNER, 1997; Hennerkes, 2004; Braun, 2009), the media and stories argue that the business family is the biggest threat for family firms. Families can have deep emotional dynamics that overbear
business considerations. Disunity concerning essential issues such as business strategy, involvement of the family in the business and profit distribution block a firm’s decision pace. There are famous and well known stories, and there are infamous and unknown tragedies, which are unrecognized. Sometimes, business families reach an escalated level, where no point of return is possible and both parties are fighting into the abyss. There are several stories that can be reported from the media; some are exemplarily and shortened here:
DuMont share owners fighting publicly about culture and power within the owning families. Because of a 50 : 50 distribution of the shares of the two families, decisions can not be felt without the other family (Grabitz, 2009).
Between father and son of the worldwide operating cable car producer Doppelmayr exists a 10 year-old fight. However, the business’s performance is still extraordinary (medienhaus. com GmbH, 2009).
The related Herz families have been fighting for decades (it started in 1965), after the founder left an unclear succession regulation that stated “the two most capable off springs may have the controlling majority” (wiwo.de, 2011).
Founders and owners of the regional operating airline InterSky have just recently re- inherited operational management after having handed over management to their son five years ago. Although not clearly stated, the family was not able to agree on essential strategic issues (Payer, 2011).
The famous beer brewery Gaffel located in Cologne is teetering on the brink of collapse – due the bitter fight dispute that the two families are fighting for years. The firm - rich in tradition - faces increasing competitive environment and its owners appear unable to agree on vital investment necessities (Brambusch, 2011).
Power conflicts are typical for family businesses, especially when two siblings inherited 50 % of the shares each. In such cases, decisions have to be made principally with the other party in order to have majority. Sustainable dissonances between the controlling owners can then lead to the inability to steer a company in a stand-off.
2.3.3. Family Business Constitutions
Family business constitutions are a chance to overcome the dilemma of conflicting interests between the business and the family. Usually they are the written result of family meetings. Generally, disputes in family businesses can either be prevented or solved (cf. Baus, 2010). Whereas measures of prevention try to establish norms and cultures that lead to understanding, community and agreement, solving conflicts are very concrete measures that try to handle one specific issue.
Depending on the life cycle of the business and consequently on the complexity of the interaction of systems business and family to each other, the impact of threats and chances of business family are assumed to increase. Literature, family offices and private bankers suggest to develop a family business constitution in such cases. The major goal of a family business constitution is to establish a shared understanding of all the family members. This includes how the family is bound over the business, which values principally are shared, how control is managed, how the family acts within their environment, or how communication between each other is organized. At the end, an interconnected feeling of community and responsibility shall be developed; preconditions for an essential cohesion when the business suffers or undergoes critical times. The following figure is an example for the structure of a family constitution. A family constitution hence involves rules for both the business and the family and is based on overall values, goals and role perception.
Rules for the business Values, Goals, Role, Perception Rules for the family Governance Control Information Participation Compensation Earnings distribution Investments of Shares Termination FAMILY CONSTITUTION (Family Mission Statement)
Shareholder Agreement Syndicate Agreement (in accordance with family constitution)
Principles and Values Information
Control
Assignment of governing and management bodies
Communication
Interaction with each other Handling conflicts
Behavior of family outwards Contigency plan
Figure 2-2: Business family constitutions as a tool for conflict prevention40
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Translated from Website Bankhaus Spaengler, retrieved from http://www.spaengler.at/011/cms.nsf/ch7_3_5.html [27.11.2012]
2.3.4. Conclusion and core questions to empirism:
As the literature suggests, family councils/meetings and family constitutions can contribute to the perception of unity of the family as they prevent conflicts in early stage rather than solve conflicts. The above mentioned leads to the following core questions for empiricism: How
does the family system affect succession and what are important attributes, values and perceptions that supported effective succession? How did the level unity and the industrious behavior influence succession? Were there conflicts and, if so, how did they influence succession? Have conflict prevention tools been applied and how did they influence succession process? Does they family have a specific mission, vision and are there values that supported the overall succession process?