By Prof. Enrique Soriano
In a Boston Consulting Group report, family businesses play a significant role in driving economic growth, contributing between 25% and 49% of GDP in countries as diverse as India and Germany and employing millions of people. In the Philippines, the number of family owned businesses is estimated to be close to a million, mostly MSME’s or Micro and Small and Medium size enterprises. Their importance as commercial enterprises does not change their essential character. At their core, they remain families, a fact that has implications for how these businesses are managed. All families are different, but each has a common bloodline. And even as bloodlines thin, their underly-ing nature often prevails. In a nutshell, a family enterprise is a business organization that is actively owned, operated, and managed by two or more members of the single family. It comprises family members related by blood or marriage or adoption and it owns a majority percentage of ownership including voting control. Shifts happen under a generational change. Especially when the family transitions and there are changes in leadership by way of succession, conflict, death, incapacity, misconduct, separation, and exit of some relatives. What really makes family firms different?
The answer lies in the unpredictable nature of the family component as the core of the enterprise ecosystem. The potential impact family dynamics can have on the management and ownership of the business is such that it needs to be thoroughly understood, embraced, addressed, and managed. Many of what are considered family business factors and benefits can quickly turn into liabilities or roadblocks. Ignoring them can create irreversible damage/conflict within the family. For context, what I referred to as roadblocks can be any or all of the following elements:
- A business managed with emotions
- The mindset that major decisions is the exclusive domain of family members
- Presence of entitled (mostly unqualified) family members
- Nepotism resulting to zero accountability translating to perceived unfairness that can cause infighting and rivalry
- Creation of silos or mini kingdoms managed by a family member (a breeding ground for isolated grouping of department that functions apart from other business units)
- Combustible blend of family members working and not working in the business wanting to have a say on how the business is run and managed
- For many families, there is the presence of extended family members (in-laws, illegitimate, adopted)
Some family businesses have successfully managed these issues and have done so by applying proven ‘family best practices’ but many have failed miserably resulting in acrimony and in some cases hostile and emotionally charged litigated disputes. The key is creating a powerful structure that has control and oversight over the family system interlinked with the business and ownership system. We refer to the structure as family governance (not to be confused with corporate governance) where the end goal is to promote alignment, provide clarity, lessen the drama and diffuse tension, embed a culture of stewardship and instill a sense of collective purpose. So in these challenging times, when family-owned businesses are faced with great economic uncertainties, the call for governance grows even stronger.
Furthermore, it is important to underscore that as the family business transitions from a simple owner/parent stage (where decisions are solely made by the founder) and moves along its generational timeline, more family members join and become actively involved in the business. With the presence of additional family members plus their spouses and children, you can expect an explosion of personal interests clouding business judgements. Being part of the family business offers many potential benefits, but also brings with it many inherent dangers and when ignored, can set off many disruptions and challenges.
To be continued
