Roberto Flören is the Berk Accountants and Tax Advisors chair for Family Business and Business Transfer at Nyenrode Business University.
Jurgen Geerlings is a managing partner with MESA Family Business Consultants in the Netherlands and a research associate at Nyenrode Business University.
A solid ownership structure and flexible governance are the foundations for the longevity of a family business. Roberto Flören and Jurgen Geerlings discuss how three basic principles can be helpful in the ownership planning process
Today it seems to be generally accepted that family businesses are different from non-family businesses. This difference is especially relevant with regard to the ownership structure, which, within a family business, is an important determinant for its governance. As the family advances through its life-cycle, the ownership structure will change depending on the strategic choices of the family members (apart from the strategic needs of the business). In other words, the governance structure is highly family driven. At the same time, different interests are at stake from the business's, the family's and the owner's point of view. The ongoing anticipation to change requires a carefully balanced process of ownership planning, during which far reaching choices have to be made.
Every business family would like to formulate their own starting points with regard to the management of their ownership of (and relationship with) their business. Experience has shown that dilemmas are useful starting points. As soon as dilemmas are identified and translated into key questions, the starting points relevant to the family and their business may provide – or may well be – the answer to these questions. In order to cope with all kinds of dilemmas in an effective way, it is wise to choose a more generic approach while designing a framework for the different starting points before focusing on the various organisational, legal and tax aspects. Flexible governance is also needed to regulate the way answers can be found and executed.
A family framework
Recently, we have been studying what framework business families would need to enhance their ownership planning process. We found three basic principles to be useful: righteousness within the family; commitment from the owners; and manageability of the business – each of which may be related to the direct stakeholders' domains of the family, the owners and the business.
Although these principles are generally accepted, it is necessary that they be translated into the specific belief system of the family before applying them to an individual setting. Ideally, this would happen via a series of plenary family sessions resulting in an explicit and family-bound interpretation of the principles. During these sessions important factors, such as the cohesion of the family and the degree to which family members identify themselves with the business, can be assessed.
Sooner or later, these sessions will reach a point where the family will be confronted with the following questions:
- What interpretation and significance do we give to these principles?
- How do these principles relate to each other?
- How do we manage the inter-relation of these principles?
Many conflicts occur because of a feeling of being treated unfairly. Once this feeling has settled, solving the conflict can be difficult and, in some cases, painful. A clear and broadly accepted interpretation of the principle of righteousness is critical when (often inevitable) dilemmas arise and strategic, both family- and business-related, choices have to be made. Is it right to allot ownership exclusively to those family members who reach the board and not to those who "get stuck" in the middle management?
What really matters is the perception of righteousness. To a certain extent, the perception is dependent on the cultural characteristics of certain national, regional, religious and other environments. Within these more general environments, however, a big difference between the separate business families can be observed. The principle of righteousness is profoundly embedded within a family's culture and should not be underestimated by the family itself, the external managers and board members or the different advisers, who are either generalists (eg, legal counsellors or accountants) or specialists (eg, tax consultants or estate planners). An uniquivocal interpretation of righteousness can be reached when all family members feel engaged in a continuous process where they can test each others' opinions, expectations and ambitions. A clear explanation of the business and family settings and equal sharing and understanding of information are the foundation of such a process, which, in turn, will enhance a solid and stable ownership structure.
The commitment of the owners is found to be the second basic principle of ownership planning. The outcome of family business research in general makes one feel convinced that the active and constructive commitment of the family can be considered a key success factor for the longevity of a family business. As was the case with the discussion about the principle of righteousness, the degree to which family members feel committed to the business is highly relevant to the ownership structure and, therefore, to its governance. The less committed the family, the less the need to "deal" with the impact of a family strategy. On the other hand, a distant family increases the risk of agency conflicts, or the like.
Another point of view relates to the different developmental stages of a family business. These stages have their own specific impact on ownership commitment. Within this context, the distinction between a first generation owner/founder and later generation settings, such as the family-owned and family-managed business (FOMB) and the family-owned business (FOB), or even the multi-asset entrepreneurial family can be relevant. Again, the process leading from one setting to the other, or in other cases leading to maintain and consolidate an identical setting, is critical to the "quality" of commitment after the transition period. Every new generation has to make its own decision about their commitment to the business. The same applies to "occurrences with an impact from the outside world" such as a partial private placement or the public flotation of shares. Thus, the commitment of the family has its own dynamics and requires continuous managerial effort and anticipation.
The third basic principle is the manageability of the business. Within the context of ownership planning, this principle has everything to do with the number of family shareholders. Families generally tend to grow faster than their business. From the point of view of the business, it is important to make sure that with a growing number of family shareholders, there is no "uncontrolled" interference with the business's strategic decision-making process. Different kinds of conflicts of interest might play a role. With a growing number of family members, the risk of "role confusion" might also grow. In order to monitor and channel the influence of the family on the business, it becomes ever more important to make and manage a clear distinction between the roles and interests of family membership, ownership and business involvement (either through being a director, manager or employee). This becomes critical in situations where, for example, not all owners are working with the business or where family owners work together in the business at different levels of the hierarchy.
Another aspect of the manageability of the business is related to the so-called informal control of the business. Informal control is the influence of family members who stand outside the formal governance structure (including the family counsel) and that can, actually have a stimulating and supportive effect on the business. Within the context of ownership planning, special attention has to be given to senior family members who have transferred their ownership to the next generation. Their "psychological ownership" will still be very alive in many cases and the challenge is to make sure that their commitment works in favour of the business. In general, the manageability of the business will benefit from a governance structure where the interests of all direct stakeholders are balanced. This applies especially to a family business, simply because of the family's influence on (and commitment to) the business.
A critical success factor
Ownership planning is a critical success factor for the longevity of a family business, simply because many crucial dilemmas are ownership related. A well-designed governance structure and process is needed to make sure that the different interests from the family's, the owner's and the business's point of view are constantly balanced. Changes in circumstances of (the environments of) the family and the business have their effect on the ownership structure and constantly challenge this delicate balance. However, a timely anticipation may help turn these challenges into opportunities to strengthen the relationship between the family and the business, strengthening the family and the business themselves at the same time.