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The ‘moral superiority’ of family businesses

Guido Corbetta is Professor of Strategic Management at Bocconi University, Milan, Italy and a founding partner of the Family Business Consulting Group International.

Good and bad people can be found in both public and private companies the world over. But family businesses offer many advantages over other models of capitalism – and can even be argued to be morally superior

Following the scandals surrounding many large public companies in North America, some family entrepreneurs and opinion makers have claimed that family businesses have a 'moral superiority' over large businesses run by professional managers. Long gone are the times when many people, mainly academics, predicted that the family model would disappear, especially among medium- and large-sized businesses. Data on the diffusion and persistence of family businesses worldwide have convinced almost everybody that these are stable and vital players in every advanced economic system. Therefore, today we can speak more freely about the advantages and disadvantages of family businesses in comparison with other models of capitalism.

'Moral superiority'
I believe that family businesses are morally superior to public companies. However, my statement needs to be clarified. I am not saying that owners and managers of family businesses have a higher degree of morality than owners and managers of public companies. Good people and bad people can be found in both types of companies. Nevertheless, there are some structural factors that make owners and managers of family businesses behave better, abide by the law more and show greater concern for the interests of other stakeholders and individuals.

One of the main reasons behind recent scandals, Enron for example, has been the strong desire of some managers to become very rich in a short period of time. In order to reach this goal, these managers have:

- undertaken very risky business strategies, both in strategic and in financial terms;
- removed from the business those who were interfering with their strategies, even if they were merely raising doubts over the chances of success;
- obtained outside consensus over these strategies from weak owners and other parties, such as accounting firms, analysts, consultants, journalists, and even some academics, who were willing to 'sell' their professionalism in exchange for financial benefits; and
- misappropriated financial resources belonging to the business in various ways, some even bizarre (for example claiming thousands of dollars of expenses while the money was being spent on their pets' clothes).

What happened in businesses such as Enron could never have happened in family businesses for many reasons.

First, in well established family businesses there is a lower risk propensity. Individuals leading a business do not want to destroy what previous generations have created and go down in history as the generation that destroyed the business. Often the business is the main source of wealth for the family. Therefore, owners and managers adopt less risky strategies than those developed by managers in public companies.

Second, there is often a strong dialectic relationship between owners and managers in family businesses because the financial success of the owners, and the reputation of their family, largely depends on business results. Therefore, in family businesses it is harder for managers to undertake unwise strategies without the owners noticing and intervening.

Third, owners and managers of well established family businesses are often wealthy and do not need to undertake aggressive strategies in order to grow their personal wealth quickly. Thus, predatory behaviours that have characterised public companies in recent years are less likely to be found in family businesses.

Fourth, family business owners are forced to think about the medium- and long-term consequences of their strategic choices because they generally hand down tangible and intangible goods to their heirs. Therefore, in family businesses there is a strong push towards adopting a long-term perspective, unlike in public companies.

Fifth, owners and managers of family businesses often feel a sense of responsibility towards their employees, suppliers, customers. They also tend to have links with the local community, through long-term relationships and geographic vicinity. This is another powerful force that obliges them to consider the medium- to long-term consequences of their strategic decisions.

Last, in family businesses, funds spent on consultants, analysts, journalists and other external parties are taken directly from the owners' pockets and, therefore, there is careful monitoring of how these resources are spent. This is a disincentive for external parties that may want to behave in an unprofessional way, as they would have a much lower financial ­benefit.

Moral risks in family businesses
Although I have argued that, in theory, family businesses are morally superior, this does not mean that they may not also adopt immoral behaviours – behaviours that break the law, do not respect the dignity of other people or deter the proper development of the business.

In family businesses moral risks are basically linked to a mistaken idea of ownership. Owning a business does not mean that the business is at one's disposal. Firms may be private goods but they have a public utility. They belong to few people who have to consider the interests of all the other people who receive benefits from the firm itself. In recent months many entrepreneurs have asked European governments to protect their businesses from non-regulated competition from Asia. This request is legitimate and is based on the public utility of firms. But, as well as acting as a public utility, businesses also carry responsibilities. Owners have to enable the development of the business so as to benefit all relevant stakeholders and not just shareholders. In practice, some owner families adopt immoral behaviours, as illustrated in the following examples.

Lack of professionalism
This occurs when family members do not clearly distinguish among ownership, governance and management. It is important to realise that these roles are different and that they require specific structures and skills. They should also be transmitted according to different rules. If this is not the case, succession processes are likely to be complicated, especially in businesses with multiple family owners. This can damage both the business and family relationships. A business owner does not automatically have good governance and management skills. The danger is that business results can worsen and, in the long run, this can damage both the survival of the business and the unity of the family.

Lack of maturity
This occurs when there are furious fights among family members. It is normal for family members to argue with each other for various reasons, for example over business strategy, leadership, lack of trust in other family members' skills, or divergent interests. Sometimes family members decide to leave the business because of these arguments. However, it becomes a problem when family members leave without showing concern for other people's dignity and the survival of the ­business.

Lack of goodwill
This occurs when family members behave as if the business were a 'cash cow'. In this case, the family does not invest in the business, with the main focus shifting to increasing the resources that can be taken from the business in the form of salaries, fees, dividends and the like. This reduces the wealth of the business and forces good managers to leave because there are no longer growth prospects. Sooner or later the business is likely to enter a downward spiral of crisis.

Lack of interest
This occurs when family members maintain control of the business but spend their time on other activities. Management finds itself without any guidance. Development plans are postponed indefinitely until the business starts finding itself in troubled waters. It is not unusual for owners not to care about the future development of their business. However, in these cases, it would be more appropriate to sell the business to other entrepreneurs and realise the investment.

An owner family that does not invest in the long-term development of its business behaves in an immoral way. Sometimes there may be good intentions behind immoral behaviour. However, the degree of morality of people's behaviour depends not only on their intentions but also on the consequences of their actions. This is particularly true in family businesses where family members will often justify their actions by saying they had good intentions.

The aging entrepreneur
Many family businesses find themselves in trouble because the entrepreneur does not deal with the natural aging process in a reasonable way. There are instances in which entrepreneurs hold on to their power even though there are grown up heirs who are able and willing to take over. This behaviour can have the following effects:

- the business can suffer from strategic and organisational delays that endanger its competitive and financial success. This delay can occur because the person normally taking final decisions has less energy than in the past; or because the entrepreneur is unable to manage a changing business; or because the entrepreneur finds it difficult to start long-term projects;
- sons and daughters sometimes fall into a competence trap. This can occur because the know-how developed by the entrepreneur is old fashioned and, at the same time, it is hard to learn new skills while working in an aging business;
- if sons and daughters are unable to take on full entrepreneurial responsibility, they may lose their motivation and accept the current situation, or they may decide to leave the business. In either case there are negative consequences, both for the people involved and for the business; and
- new managers that are hired into the business (sometimes by the entrepreneur's children) may leave if they realize that their role is limited by the conservative behaviour of the entrepreneur or of other people who have been in the business for a long time.

In these cases the good intentions of the aging entrepreneur, who wants to hold on to the business, can produce negative consequences for other people and the business itself.

The unsuitable family member
Sometimes unsuitable family members are placed into family businesses. This may occur because the entrepreneur wants to help a family member who would otherwise have trouble finding a job. This is another example of a good intention that may lead to negative consequences, such as:

- for the family member: if he or she is unable to contribute to the business, sooner or later this will cause problems with colleagues as well as lead to a loss of self esteem. This is likely to have negative consequences both for the family member and for the family;
- for the other employees: other employees, dealing with or reporting to the unsuitable family member, will have to take on some of his or her responsibilities or find themselves in the embarrassing situation of having to complain about him or her;
- for the business: the unsuitable family member is a cost although he or she does not produce any value. There is also the risk that the best employees will decide to leave the business in order to avoid the situations described above.

The presence of an unsuitable family member can also produce different results than those described above. Some family members may insist that an unsuitable family member not be hired into the business. If the family member is clearly not suitable, then he or she should not be asked to join the business. However, the family should also help the unsuitable family member understand why this is the case and find an alternative job that is more suitable.

If this does not happen, the business itself may suffer. For example, if the unsuitable family member is the son or daughter of a major shareholder, the shareholder could decide to leave to business and this could have negative consequences in financial and emotional terms.

In summary, immoral behaviour in family businesses depends on treating people like objects that can be taken or set aside without any long-term commitment and treating a business as a personal good and believing that the owner can destroy the business if they so wish.

Such immoral behaviour also has negative consequences on a financial level. Lack of respect for other people can create mistrust among owners and have negative effects on ownership unity and business continuity.

Adopting morally responsible behaviour
Nobody is born knowing what moral rules should be followed. People acquire their moral conscience and spend their lives learning. Moral education should teach people how to distinguish what is good from what is bad in different contexts; make balanced decisions, considering all factors and people involved; pursue good things with vigour even in adverse conditions; and remain detached from material goods and passions.  

Every family transmits values from one generation to the next. Parents transmit values to their children by setting the example. However they should also explain why their family has adopted certain values, otherwise children will not really absorb family values.

There is no doubt that families that are able to transmit positive values, such as respect for the family business, search for unity, professional behaviour, dedication and humility, have greater chances of success in handing down moral behaviour.

Such values need to be codified in written documents (for example, family protocols). Protocols are valid not only from a legal point of view, but also if the people who subscribe to them are morally ­committed. The process of writing family protocols can also help consolidate and spread values.

Family boards or boards of directors can also contribute to the moral education of family members, especially if members include outside people who have undisputed moral qualities.

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