3.4.5.1 Ownership
The ownership structure in family businesses may change with life-cycle and generational changes, becoming increasingly complex with shareholding becoming increasingly diffused, or ownership may remain unchanged or recycled (Gersick et al, 1997; Degadt, 2003; Lambrecht & Lievens, 2008).
The ownership position of a dominant coalition affords the coalition influence over decision-making in governance, succession, and strategic planning and implementation (Gersick et al, 1997; Zahra, 2005; Van den Heuvel, 2006; Lumpkin et al, 2008).
As the ownership complexity rises and shareholding becomes increasingly diffused, complications in governance and management arise, resulting in a loss of ownership cohesion, impaired decision-making efficiency and effectiveness, disrupting organisational culture, and resulting in conflicts; due to vast differences in individual and family branch goals and values; over managerial and leadership succession appointments, strategic decisions and profit distribution (Gersick et al, 1997; Dyer, 2006; Lambrecht & Lievens, 2008; Astrachan, 2010). This in turn will affect the performance of the organisation and may strain familial relations (Lambrecht & Lievens, 2008).
The size, age and nature of the business are also cited to have an influence on performance and succession (Degadt, 2003; Venter et al, 2003; Van den Heuvel, 2006; Farrington, 2009). Simplification of the ownership structure is recommended if decision- making is inefficient, due to ownership complexity, constraining operations and performance (Lambrecht & Lievens, 2008).
Maintaining an efficient and effective business requires efficient and effective flexible decision-making. The structures, policies and procedures that facilitate and control decision-making and strategy implementation are of the domain of business governance. A simpler ownership structure has a faster flow and greater efficiency, resulting in better performance and less principal-agent or familial conflict (Tsai et al, 2009), as well as eliminating the separation between owners and management, reducing free-rider agency costs and asymmetric altruism (Lambrecht & Lievens, 2008).
Pruning the family tree with regards to family business ownership structure complexity, pertains to the devolution of ownership dimensional development. It involves cutting back to the core family ownership group (Lambrecht & Lievens, 2008). Should a family member choose to dissolve their ownership stake, rigid rules as to who may purchase the shares, for how much and how they are evaluated, will most likely apply (Degadt, 2003; Jaffe & Lane, 2004; Pearl, 2010). Where there is no equity market for shares, free riding by minority disinterested shareholders may occur (Lambrecht & Lievens, 2008). It is suggested that an appropriate time to simplify and concentrate ownership is when succession occurs (Steier et al, 2004; Pearl, 2010). Succession planning then becomes even more critical in terms of governance structure change management, successor preparation and selection, professionalisation and conflict management (Pearl, 2010).
Share block allocation of voting rights in the business with formal structures, as chosen and legally ratified by members and or required by applicable national and or international legislation, is a means to controlling the excessive diffusion of shares (Lambrecht & Lievens, 2008).
Spousal in in-law inclusion and involvement in the family business and its ownership further complicates relationships and is cited as a source of destructive conflict. Research results are however mixed regarding spousal and in-law involvement in the business (Farrington, 2009) with some authors noting that they are potentially valuable resources (Van der Heyden, Blondel & Carlock, 2005).
Outsider or non-family member involvement is said to have a significant impact on the family business and its performance (Farrington, 2009), providing external perspectives, an objective view of familial relations and conflicts, contributing essential skills that may be deficient in the family, as well as network and financial resources (Gersick et al, 1997; Adendorff, 2004; Ruigrok et al, 2007).
3.4.5.2 Succession
Succession is cited as a central issue in the survival of family businesses (Lambrecht & Lievens, 2008; Van der Merwe et al, 2009). Studies revolve around the interconnectedness of family and business issues, family influence (Brun de Pontet et al, 2007), structural forms before and after succession and the succession process (Adendorff, 2004) and the concentration of ownership (Lambrecht & Lievens, 2008).
Succession is a strategic issue that is often neglected and left till too late in family businesses due to an unwillingness or reluctance of the current controlling owners or family leaders to relinquish power, show favouritism towards select individuals (Tsai et al, 2009) or accept their own mortality (Stavrou, 1999; Degadt, 2003; Carter & Justis, 2009; Brun de Pontet et al, 2009). Other reasons cited for the lack of successful succession and succession planning taking place are the absence of a suitable successor and a mismatch between the successor and the needs of the business (Cullen, 2007; Carter & Justis, 2009; Van der Merwe et al, 2009).
The majority of small and medium-sized family businesses have not made succession preparations whilst many have only devised informal or mental plans (Degadt, 2003; Adendorff, 2004; Van der Merwe et al, 2009).
Generational differences and cultural influences also impact on the successfulness of succession and can result in conflicts between opposing perspectives of the current controlling authorities and the successor (Stavrou, 1999; Klein, 2000; Degadt, 2003;
Brun de Pontet et al, 2009; Carter & Justis, 2009). This can result in rejuvenation and renewed innovation (Zahra, 2005) or business failure. Cultural influences can inhibit or promote the development and inclusion of women in the family business in employment, management and or ownership (Rowe & Hong, 2000; Arthur, 2007; Nicholson, 2008; Smith, 2009).
The succession process encompasses planning, selection, successor preparation and incumbent resistance (Brun de Pontet et al, 2007; Van der Merwe et al, 2009). Cultural differences are cited as additional influential factors impacting the choice and development of the successor (Wall et al, 2009), as well as ownership structures, leadership style and strategic planning and execution (Adendorff, 2004; Van der Merwe et al, 2009).
The size of families and inheritance tradition impact the structural form of the organisation in terms of complexity, ownership control and power, and member involvement and influence (Zahra, Hayton & Salvato, 2004; Steier et al, 2004; Bertrand & Schoar, 2006). The relative importance of the family and business and the shared or dominant ideology influences the degree to which the family and business are intertwined, impacting the levels of cohesion, conflict and understanding (Chrisman et al, 2002; Zahra et al, 2004; Lumpkin et al, 2008). The status of the retired and the attitude of elders influence the levels of founder resistance to succession and in turn, along with cognitive biases, influence planning (Steier et al, 2004). The relative value placed on education and experience, and traditions of in-firm training impact on successor preparation (Adendorff, 2004; Zahra et al, 2004). These factors ultimately influence the planning in terms of formalisation, tactics employed and levels of detail. This in turn impacts on the selection and preparation of successors and the outcome of succession (Adendorff, 2004).
Successful succession should include the planning of succession management, the clear delineation of family employment practices, establishing and maintaining family harmony and estate planning (Cullen, 2007). Succession planning should begin well in
advance of the intended hand-over time in order to identify, select and prepare a suitable individual. The passing on of tacit knowledge regarding business operations and network dynamics requires the communication of the founder’s vision, the candidate’s willingness to take over (Degadt, 2003), their socialisation into the business and appropriate training. The successor should also possess the appropriate technical skills, entrepreneurial vision and education in order to lead and manage proficiently (Chrisman et al, 2003; Cullen, 2007; Van der Merwe et al, 2009; Carter & Justis, 2009).
Chrisman et al (2003) cite four modes of succession and the transfer of social capital across generations are; unplanned sudden succession and rushed succession which are caused by unforeseen events; natural immersion which is the gradual assimilation of roles; and planned succession which is the deliberate transfer of social capital.
Chrisman, Chua, Sharma & Yoder (2009) recommend eight steps in succession planning. These are:
1. Preparing the family in terms of understanding the time, resources and commitment required in the process;
2. Defining broad ownership, governance and management goals that are agreed upon by all family members;
3. Organise a task group to select the successor;
4. Set the criteria for the successor in terms of the family’s goals, taking into account cultural factors and macro-economic conditions;
5. Develop the potential successors by socialising them in the business and training them to perform the required tasks;
6. Prepare the incumbent for departure;
7. Time the succession of the selected and groomed successor; and 8. Guide the process by managing the process with objectivity.
The elements to be included in a succession planning process are the identification of potential candidates, their willingness to take over, the assessment of candidate leadership abilities, the provision of growth opportunities, the designation of a successor
and their continued training (Adendorff, 2004; Farrington, 2009; Van der Merwe et al, 2009; Carter & Justis, 2009; Brun de Pontet et al, 2009).
Multiple successions can occur simultaneously; family leadership, business ownership and management successions are all influenced by generational age differences, business requirements, planning and sudden events. Multiple generations and succession processes influenced by culture, life-cycle changes and generational differences in the business can result in conflicts regarding business and governance structures, control mechanisms and measures, and strategic direction (Gersick et al, 1997; Adendorff, 2004; Farrington, 2009).
Nine basic types of succession are cited in the literature; recycled succession where the same business form and ownership structure is maintained whilst a new leader takes over; evolutionary succession involves new leadership with an increase in business form complexity; and devolutionary succession where the business form is simplified and there is a change of leader (Gersick et al, 1997; Farrington, 2009).
Management succession criteria should only be competence based, however, in families there are complications owing to family involvement and cultural attitudes (Van der Merwe et al, 2009; Astrachan, 2010). Leadership and leadership succession is important in that the leadership of human assets is critical in the effective implementation of strategy (Adendorff, 2004).
3.4.5.3 Leadership
Some leadership transitions involve only changes in personnel whilst others involve core changes in structure and culture (Gersick et al, 1997; Farrington, 2009). Leadership styles and structure, and governance structures must adjust to changing business circumstances and family needs (Cullen, 2007; Carter & Justis, 2009; Van der Merwe, 2009).
Weak successor leadership is cited as a major challenge to the continuity and growth of family businesses (Farrington, 2009), and as a result, the preparation of the successor, not only in terms of technical skills and tacit business knowledge but also in terms of leadership ability and skills, is critically important (Degadt, 2003; Chrisman et al, 2003; Farrington, 2009).
Whilst expert and referent leadership styles are cited as having a positive influence on performance, a participative leadership style is cited in the literature as being significantly positively related to employee satisfaction and commitment, as well as financial performance (Sorenson, 2000; Farrington, 2009).
Leaders in family businesses should create and articulate a clear vision for the business and family, as well as undertake planning with a long-term strategic perspective, which is cited as contributing towards family business success and longevity (Adendorff, 2004; Farrington, 2009; Tsai et al, 2009).
3.4.5.4 Strategy
Given the cited importance of strategic and business planning in promoting family business performance, growth and success (Farrington, 2009; Nordqvist & Melin, 2010), the lack of formal planning (business, strategic and succession) is a concern. Reasons cited for this reluctance to plan are; the founder being fixated on a previously successful strategy and a preference for privacy (Adendorff, 2004; Kellermanns & Eddleston, 2004) and the perception that it is considerable extra work and expenditure without providing much new strategic insight (Nordqvist & Melin, 2010).
Family businesses that involve board members in business and strategic planning are reported to perform better than the industry average (Adendorff, 2004). Owner-family values, interests and priorities influence strategic planning. For family businesses the challenge is managing the parallel family and business strategic planning; considering family and business interests, necessary to harness and create synergies and maintain
the health of both systems (Venter et al, 2003; Astrachan, 2010; Nordqvist & Melin, 2010).
Family business strategies that target opportunities with potential for long-term stable outcomes that focus on generational wealth attainment (Tsai et al, 2009); usually reflect the long-term and risk aversion perspective of the family (Lester & Cannella, 2006), the values of the founder and a focus on quality (Zahra et al, 2004; Jaffe & Lane, 2004; Nordqvist & Melin, 2010).
Small businesses using outsider experience in strategic planning are cited to be more effective than those that rely purely on their control group (Farrington, 2009; Astrachan, 2010).
3.4.5.5 Estate planning
Retirement and estate planning, and wealth management are cited as important aspects of family wealth creation that aids in ensuring family business success (Venter et al, 2003; Jaffe & Lane, 2004; Farrington, 2009). Inadequate estate planning can hamper the succession process as the incumbent needs to feel financially secure before letting go of control (Venter et al, 2003).
The gradual extraction of wealth from the business is recommended as a means to protect family assets from creditors and to minimise estate duties (Stanaland, 2008). Studies show that estate planning negatively influences business profitability and that it is not very important in ensuring satisfaction with the succession process (Farrington, 2009).