Could The Family Hurt The Family Business

Sometimes in life, things do not quite work out the way we want them to. Evidence of this is in the fact that family businesses may sometimes have fall outs.

Globally, family businesses comprise 75% of all firms and contribute 65% to GDP. However, evidence of whether families improve or impair their companies’ performance remains mixed and is ardently debated.

Family businesses are best distinguished based on family’s involvement as owners, managers, or both. The distinction is important: while prior studies from around the world have established that family owners, on average, improve firm performance, the effect of family managers is less clear.

In some countries, the importance of and trust in family is primary.

On one end of the spectrum, if family and business needs conflict, family managers tend to prioritize the former over the latter. Families in these countries are more likely to hire less qualified siblings, children, nieces, nephews, and cousins into management roles and are more likely to use firm resources for personal matters.

Conversely, in countries where family managers place only moderate trust in the family and draw a clearer line between its needs and those of the family business, family-managed businesses perform much better. Corporate resources are more strictly used for professional purposes and firms face less pressure to employ relatives.

The second key factor relates to citizens’ confidence in the efficacy of their country’s formal procedures and laws and their belief that police, public officials, and courts will uphold them.If institutional trust is high in a country, families are likely to employ impartial processes to hire qualified individuals for each management position regardless of family ties.

Conversely, if citizens lack confidence in government institutions and doubt that public officials will act with integrity, family businesses are more likely to turn inwards and employ more family members. By definition, this limits them to a smaller talent pool, increasing the possibility that they will make poor decisions.

Perhaps the most interesting finding was that in countries with strong faith in both institutions and families, family-managed firms performed the best.

The lesson we draw is that a well-regulated environment pushes families to implement best practices while sanctioning misbehavior. At the same time, the social relevance of families may imply more well-functioning ones with good bench strength. However, challenges, can also arise in such countries — especially when mobilized families compete to advance their own interests at the expense of the public good — by, for instance, lobbying for the government to give them tax breaks financed by reduced expenditure on less privileged groups. Taken to excess, this behavior can undermine public trust in formal institutions, thereby increasing the risks associated with family business management.

To conclude, positive or negative prejudices regarding family-managed firms in one country do not automatically translate to others. Although the debate around the role of family managers as stewards or nepotists is likely to continue, this study’s results suggest that family-managed firms work well when stable, trusted institutions limit the downsides arising from favoritism and self-serving behavior by family managers without canceling the upside from having their commitment as long-term owners of their businesses.

 

 

(All factual and statistical information presented in this blog has been obtained from an extract of an article from the harvardbusinessreview.com) Follow us on our Facebook page and Family Business Office website at www.familybusiness.org.mt

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