Corporate Governance and Family Business Dynamics

Governance

Structures, rights, obligations of the corporation that controls them, specifies distribution of responsibilities and rules for decision-making, sets goals, monitors policies, and makes sure actions align with the shareholders.

Internal

Board of directors who advise managers.

Concentrated ownership

Ensure efficient management.

Performance based pay

Align management and owner's interests.

External

Product competition, underperforming products outcompeted.

Managerial labor

Underperforming managers and replaced with competent ones.

Takeover threat

Underperforming firms easy targets for takeovers.

Owner-manager

Single family member, 1 gen typically, cost efficient.

Sibling-partnership

Shared among siblings, 2nd gen, common values shared.

Cousin consortium

2 or more branches, 3rd gen, dedicated to firm.

Family enterprise

Extended family controls, entrepreneurs and investors.

Goals of governance

Competence, cohesion, and control.

Corporate governance

Efficient shareholder cooperation, board of directors, managers, advising and guidelines as topics.

Ownership governance

Cooperation among family members, entry and exit of shareholders discussed.

Family governance

Cooperation of family in commitment and identity of firm, involvement of board of directors, ownership, and new activities all discussed.

Wealth governance

Efficient administration of wealth, organization of wealth and diverging preferences.

One Tier

Board members allowed to be executive directors.

Two Tier

Executive board, separate governance board.

Board of Directors

Appoint, monitor, discuss, invoke assembly, set dividend policies, review strategies, and set guidelines.

Ownership Governance

1. execution of voting rights, 2. stalemates, 3. transfer of shares.

Values and Goals

mission, who we are

Back holder costs

dispute over business wealth

Double agency costs

uncontrolled delegation of authority

Uncoordinated family

wealth of business controlled by family, unmediated access to assets, minimal expenses and an increase in privacy

Embedded

convenient, cost effective for wealth solutions

Single

intermediary for members interests and assets, privacy, independent, and asset control

Trust

for tax reasons, protect the firm from conflict, has tax benefits, control, coordination, administration costs, lack of loyalty, and unwillingness to take risks

Assembly

compromises all members of family, often shareholders

Council

manages business and finances, often a governance group

Socioemotional wealth

total stock of affect family has vested

Dimensions

transgenerational control, benevolent social ties, identity and reputation, and emotions and effects

Transgenerational control

utility had, controls firm with intent to pass down to gens

Benevolent social ties

degree to which members value relationships

Identity and reputation

degree to which family extracts value from identity of the firm

VRIN

Valuable, Rare, Inimitable, and Nonsubstituteable

Financial Capital

money may have complications, may provide capital at a lower rate, large investment horizons

Human Capital

acquired knowledge of employees, lack of talent in family, hard to retain talent that is not in the family

Social Capital

network ties and configuration based (structural) shared languages and narratives (relational)

Physical Capital

property, plant and equipment, unique assets, valuable real estate

Reputational Capital

image reliable and trustworthy

Resources

Selecting- making sure ones selected are efficient, Deploying- implementation of new resources, Bundling- creative (re)combination, inside of the firm, Leveraging- built on established competences, Shedding- emotional ties, built on nostalgia

Strategies

Trusted Brand- identities intertwined, concern for reputation, desire for transgenerational control, undiversified investment; Innovation Champion- tact knowledge, long-term innovation investment, resource constraints, risk aversion; Efficiency perfectionist- strong control, dividends and reinvestment

Recognition

"screen" the environments on regular basis, aware of upcoming changes, can be a liability due to lack of information

Interpretation

slander upcoming trends, assesses changes as occurring in the future, feel emotionally attached

Decision Making

quick decisions, undisturbed decision making, adaption to change and requires investment

Strategic education

firm successors pursue studies valuable to the firm

Entreprenurial Bridging

incumbent mentor successors

Strategic Transition

older generations supports younger generations

Transgenerational Value Creation

captures, processes, structures and resources through which a family creates economic/social value across generations

Ownership Governance

1. Execution of voting rights 2. Stalemates 3. Transfer of shares 4. Dissolution of shareholder agreements.

Values and Goals

Mission, who we are.

Back holder costs

Dispute over business wealth.

Double agency costs

Uncontrolled delegation of authority.

Uncoordinated family

Wealth of business controlled by family, unmediated access to assets, minimal expenses and an increase in privacy.

Embedded

Convenient, cost effective for wealth solutions.

Single

Intermediary for members interests and assets, privacy, independent, and asset control.

Trust

For tax reasons, protect the firm from conflict, has tax benefits, control, coordination, administration costs, lack of loyalty, and unwillingness to take risks.

Assembly

Compromises all members of family, often shareholders.

Council

Manages business and finances, often a governance group.

Socioemotional wealth

Total stock of affect family has vested.

Dimensions

Transgenerational control, benevolent social ties, identity and reputation, and emotions and effects.

Transgenerational control

Utility had, controls firm with intent to pass down to gens.

Benevolent social ties

Degree to which members value relationships.

Identity and reputation

Degree to which family extracts value from identity of the firm.

VRIN

Valuable, Rare, Inimitable, and Nonsubstitutable.

Financial Capital

Money may have complications, may provide capital at a lower rate, large investment horizons.

Human Capital

Acquired knowledge of employees, lack of talent in family, hard to retain talent that is not in the family.

Social Capital

Network ties and configuration based (structural) shared languages and narratives (relational).

Physical Capital

Property, plant and equipment, unique assets, valuable real estate.

Reputational Capital

Image reliable and trustworthy.

Resources

Selecting- making sure ones selected are efficient, Deploying- implementation of new resources, Bundling- creative (re)combination, inside of the firm, Leveraging- built on established competences, Shedding- emotional ties, built on nostalgia.

Strategies

Trusted Brand- identities intertwined, concern for reputation, desire for transgenerational control, undiversified investment; Innovation Champion- tact knowledge, long-term innovation investment, resource constraints, risk aversion; Efficiency perfectionist- strong control, dividends and reinvestment.

Recognition

"Screen" the environments on regular basis, aware of upcoming changes, can be a liability due to lack of information.

Interpretation

Slander upcoming trends, assesses changes as occurring in the future, feel emotionally attached.

Decision Making

Quick decisions, undisturbed decision making, adaption to change and requires investment.

Strategic education

Firm successors pursue studies valuable to the firm.

Entrepreneurial Bridging

Incumbent mentor successors.

Strategic Transition

Older generations supports younger generations.

Transgenerational Value Creation

Captures, processes, structures and resources through which a family creates economic/social value across generations.

Investment cycle

1. Buy.

Execution of voting rights

The process of implementing the rights of shareholders to vote on important company matters.

Stalemates

Situations where no progress can be made due to opposing forces or interests.

Transfer of shares

The process of changing ownership of shares from one party to another.

Dissolution of shareholder agreements

The termination of agreements that outline the rights and responsibilities of shareholders.

Values and Goals

The mission and identity of an organization.

Back holder costs

Disputes over business wealth among shareholders.

Double agency costs

Costs arising from uncontrolled delegation of authority within an organization.

Uncoordinated family

A situation where family members control business wealth with minimal expenses and increased privacy.

Embedded

Convenient and cost-effective solutions for managing wealth.

Single

An intermediary that manages members' interests and assets with privacy and independent control.

Trust

An arrangement for tax benefits and protection from conflicts, with associated administration costs.

Assembly

A group that includes all family members, often shareholders.

Council

A governance group that manages business and finances.

Socioemotional wealth

The total stock of affect that a family has vested in their business.

Dimensions of socioemotional wealth

Includes transgenerational control, benevolent social ties, identity and reputation, and emotional effects.

Transgenerational control

The intent to control a firm with the purpose of passing it down to future generations.

Benevolent social ties

The degree to which family members value their relationships.

Identity and reputation

The extent to which a family derives value from the firm's identity.

VRIN

An acronym for Valuable, Rare, Inimitable, and Nonsubstitutable resources.

Financial Capital

Money that may provide capital at a lower rate but can have complications.