C Corporate Governance G in the Family Business in the Family - - PowerPoint PPT Presentation

C G Corporate Governance in the Family Business in the Family Business

JUSTIN CRAIG PhD JUSTIN CRAIG PhD Co-Director Australian Centre for Family Business Bond University Australia

New Zealand Governance Centre Inaugural Conference Friday 15 Saturday 16 August 2008

Bond University, Australia

Friday 15 – Saturday 16 August 2008

Agenda Agenda

Family Business Family Business

Significance & Academic Legitimacy Differences System perspective System perspective

Family Business Corporate Governance

Typical questions and responses Forums (Family Councils/Family Charter) Forums (Family Councils/Family Charter) Triggers

ACFB research projects

Agency Agency Stewardship Insights from case families AGES integrated framework AGES integrated framework

Conclusion

Significance: Top Tier Journals g p

Legitimacy: Leading Institutions Legitimacy: Leading Institutions

Business Families are Significant Business Families are Significant

Family Businesses are Significant Family Businesses are Significant

Family Businesses are Significant

N f il

Family Businesses are Significant

Listed (# 2130) Non-family (85%) Non-rural business (# 2130) Family (15%) B i i Non-rural business (# 1.82Mn) Non-listed Family (67%) Businesses in Australia (# 1.96Mn) Non listed (# 1.81Mn) Non-family (33%) Rural business (# 0.10Mn) (33%)

Sources : 1. Australian Bureau of Statistics (ABS), Cat nos. 8165.0 & 7106.0

• 2. Australian Security Exchange (AXE)
• 3. Australian Centre for Family Businesses (ACFB)

Corporate Governance: Key Elements Corporate Governance: Key Elements

Integrity, understanding of roles and

responsibilities, honesty & fairness, transparency… Jane Diplock AO

What is different about family businesses?

Or Or…

What is different about business families?

Family Businesses are Different Family Businesses are Different

The goal structure within a family business is

inherently conflicted.

The need to balance between

a family's personal goals (e.g., the accumulation of

y p g ( g personal and family wealth),

the well-being of family participants, and to satisfy multiple commercial stakeholder

• bjectives (e.g., profits and sales growth) (Steier,

Chrisman & Chua, 2004; Randøy & Goel, 2003).

Family Businesses are Different

Potential to be more efficient as decision

Family Businesses are Different

Potential to be more efficient as decision-

making and ownership functions are shared C t ti f hi d t l

Concentration of ownership and control

provides an advantageous position of monitoring the firm (Lee, 2004).

Firms controlled and managed by family

Firms controlled and managed by family

• wners will generate more resources due to

lower agency costs (L

B t Mill & Mill 2006)

lower agency costs (Le-Breton Miller & Miller, 2006)

Family Businesses are Different Family Businesses are Different

In family firms that are publicly traded, there is

evidence that founding-family ownership benefits outweigh the cost, i.e., they

• utperform firms without founding firm owners

(A d & R b 2003 2003b) (Anderson & Reeb, 2003a, 2003b).

Conflicts arise when the power wielded by the

influencing family enables them to pursue the influencing family enables them to pursue the family’s interest to the detriment of the firm or

• ther shareholders
• ther shareholders (Demsetz & Lehn, 1985).

Family Businesses are Different

I th it ti f di f ili

Family Businesses are Different

In these situations, founding families are

in an exceptional position to pursue their interests through: interests through:

control of cash within the firm (Ditmar, Mahrt-Smith, &

Servaes, 2003), )

distribution of profits (Anderson & Reeb, 2003a), workplace inefficiencies due to family

nepotism (Burkhart, Gromb, & Panunzi, 1997; Burkhart, Panunzi, &

Shleifer, 2003),

decisions regarding resource allocation

decisions regarding resource allocation

(Densetz & Lehn, 1985).

Two Opposite Systems pp y

Family System Business System Family System Business System

Socialistic Culture Capitalistic Culture Born into psychological By choice professional Born into – psychological contract By choice – professional contract Emotion based – Task based – love/affirmative achievement/results Goals – harmony/love Goals – profits/wealth Strategy – Incremental/adaptive Strategy – Radical/Transformative Informal seniority & Formal qualifications/merit Informal – seniority & equality Formal – qualifications/merit Inward looking Outward looking

Three Dimensional Model Three Dimensional Model

BUSINESS AXIS

Expansion/formalization Maturity Young business Entering the Working Passing the Start-up Expansion/formalization business family the business

• g

together the baton Controlling owner

FAMILY AXIS

g Sibling partnership Cousin consortium

OWNERSHIP AXIS

Source: Gersick 1 9 9 7

Family Business Systems Family Business Systems

Ownership Family Management

Governance Structures Governance Structures

Board

• f Directors

F il E ti

• f Directors

Family Council Executive Management

Family Businesses/Business Families

Governance related comments & appropriate

Family Businesses/Business Families

Governance-related comments & appropriate

responses

We are too small

But you are intending to grow!

We don’t want to tell outsiders our family issues

They need to understand family in order to direct your

b i ! business!

How much does it cost?

How much will it benefit?!

Wh t ill B d l k lik ?

What will a Board look like?

Match it to your current and/or future needs.

How will this benefit?

St t i f fi i fid i l it

Strategic focus; financier confidence; succession clarity;

• wnership conflict averted; supplier confidence; JV partners

likely; next generation involvement expectations clarified.

Best Practice Governance Forums Best Practice Governance Forums

Move in the direction of a real Board of

Directors

Family Council

F il C tit ti /Ch t

Family Constitution/Charter Family Retreat

a y et eat

Family Council Family Council

A governance body focusing on family

affairs It i t th f il h t th b d f

It is to the family what the board of

directors is to the business

Family Council: Forms Family Council: Forms

Direct descendants only All adult family members, including

spouses Child f d i ll

Children often attend, especially

young adults young adults

Family Council: Role Family Council: Role

Promote communication

P id f f l ti f f il

Provide forum for resolution of family

conflicts conflicts

Support education of next-generation Support education of next-generation

family members y

Develop family participation policies

p y p p p

Family Council: Benefits Family Council: Benefits

Build stronger families by preserving family Build stronger families by preserving family

values, traditions, and history

Re-commit the family to the business, which

Re commit the family to the business, which builds a stronger business

Provide a family forum so members won’t all

y want to sit on board of directors

Allow planning of future family participation,

p g y p p ,

• wnership, and control of business

Allow ongoing problem solving and conflict

g g p g resolution

Help the next generation develop wealth

Family Charter/Constitution Family Charter/Constitution

Family Charter with clear policies

Formalization of informal practices and

p conventions

The clarity is often more important than the rule The clarity is often more important than the rule

itself

Family Charter/Constitution y

Typical Components:

• Rights and Obligations of the Individual
• Family Vision - Core Purpose & Values

y p

• Family Code of Conduct
• Business Vision - Core Purpose & Values
• Business Code of Conduct

Business Code of Conduct

• Shareholders Agreement/Ownership Succession/Longevity
• Management - Roles, Structure/Decision Making and Succession
• Conflict of Interest
• Conflict of Interest
• Family Education and Mentoring Policy
• Employment Policy (Family & Non Family Members)
• Compensation/Performance Evaluation Policy

Compensation/Performance Evaluation Policy

• Media Policy
• Philanthropy

Governance Triggers Governance Triggers

• Financier requests
• Owners not working in

Ownership

Owners not working in business request

Family Management

• Generational transfer
• Marriages
• Professional managers
• Growth/JV partners
• Marriages
• Growth/JV partners

Richard Owens Richard Owens

“The best thing I have ever done was constitute an Advisory Board” constitute an Advisory Board “I should have done it a lot earlier” “We meet three times a year formally but we “We meet three times a year formally…but we meet informally and communicate often” “I used to have an informal structure but since formalizing we haven’t looked back”

Richard Owens OAM, Chairman ROI Pty. Ltd.

Grant Dennis Grant Dennis

“…there is an awful lot of emotion that surrounds a

family business and I learnt that you cannot afford to be too emotional about it be too emotional about it… …You have to deal with your emotion but you have to look at it very very objectively because once you look at it very, very objectively because once you start to get caught up in your emotion and you lose sight of what is it you want to achieve, there is the g y prospect that you will not see it through. It will become too hard and you will want to give up, and j t t ff d t d th t b th you just cannot afford to do that because the benefits far outweigh the short term costs.”

Grant Dennis, Executive Director, Dennis Family Corporation Pty. Ltd. Grant Dennis, Executive Director, Dennis Family Corporation Pty. Ltd.

Grant Dennis Grant Dennis

“ W ll t k B d t i i tt di B d “…We all took Board training, attending Board meetings etc. as family members on the family business Board So we did go through numerous business Board. So we did go through numerous challenging periods, but basically two challenges had to be overcome:

the family understanding the changes that the family

business was going through and what the implications were, and

management going through the changes that the

f il b i i th h d h t th family business was going through and what the implications were for them.”

Grant Dennis, Executive Director, Dennis Family Corporation Pty. Ltd. Grant Dennis, Executive Director, Dennis Family Corporation Pty. Ltd.

Non-family Director Non family Director

“Independent non executives bring several Independent non-executives bring several benefits, including:

O t id i

Outside experience Ability to view without emotion Regarded as honest brokers by the rest of the Regarded as honest brokers by the rest of the

family

Command more respect with family members

Command more respect with family members

Have frank talks with family members and not risk

burning family bridges

Perception of the business by outsiders is usually

enhanced.”

Independent Company Director various private companies Independent Company Director, various private companies

ACFB Research ACFB Research

ACFB Research: Agency Related Qs ACFB Research: Agency Related Qs

CEO t h t ?

CEO entrenchment > ? Information asymmetry < ? Opportunistic behavior < ? Managerial discretion > ?

g

Monitoring costs < ? Formal strategic planning < ?

Formal strategic planning ?

Nepotism > ? Clan controls > ? Clan controls > ? CEO remuneration < ?

ACFB Research: Agency ACFB Research: Agency

F il CEO l d i l

Family CEOs earn less and receive less

incentive pay than non-family CEOs after t lli f i d t controlling for size and tenure (McConaughy, Matthews &

Fialko 2001).

Yupitin, M. (2008)

Hypothesis 4a: Family firms have lower CEO

ti th f il fi compensation than non-family firms.

Hypothesis 4b: Owner-managed family firms have

lower CEO compensation than other family firms lower CEO compensation than other family firms.

Markets as Governance Monitor Markets as Governance Monitor

In less competitive industries, family

leadership has a positive effect on firm p p value and profitability (Randoy, Dibrell, & Craig, 2007).

ACFB Research ACFB Research

O ACFB h i di t th t f i l

Our ACFB research indicates that professional

managers may be better agents for shareholders in highly competitive markets shareholders in highly competitive markets that are rapidly changing than members of the family (see Moores & Mula 2000) family (see, Moores & Mula, 2000).

This notion is also consistent with the

• bservation that the competitive edge of
• bservation that the competitive edge of

founding family firms tends to decrease as a new generation takes control (e.g., Anderson g ( g , & Reeb, 2003a).

ACFB Research ACFB Research

In an early ACFB research project,

Moores and Mula (2000) determined that ( ) there are salient controls for each stage

• f the development life cycle
• f the development life cycle.

Specifically,

l t l d t i i th lif l

clan controls are used twice in the life cycle

but are most prominent in mature firms.

ACFB Research ACFB Research

A common thread that runs through ACFB

projects is that agency problems can be addressed through more professional corporate governance initiatives, management and measurement of strategy, and understanding that control mechanisms need to be paralleled with the changing needs of the firm.

Adding and integrating “familiness” to BSC

Planning as Governance Control Planning as Governance Control

Strategic Firm Strategic Planning Financial Performance Strategic Flexibility Flexibility

Planning as Governance Control

Implications

Planning as Governance Control

Implications

Managers of family firms can have a

structured, formalized strategic planning process in place and simultaneously incorporate strategic flexibility into their planning processes to have greater financial performance success.

Agency vs Stewardship Theory Agency vs Stewardship Theory

A

Agency

narrow emphasis on the economic

rationality of agents,

ignores equally important non-economic

motivations.

Stewardship

argue individuals possess a wide variety of

motivations and desires, and their personal , p utility can be maximized through non- economic means

Stewardship Stewardship

St d hi th d i d f

Stewardship theory was designed for

researchers to examine situations in which executives as stewards are motivated to act in the best interests of their principals (e.g., Davis, Schoorman, & Donaldson, 1997;

Donaldson & Davis, 1989, 1991).

St d i hi h tilit f

Stewards gain higher utility from pro-

• rganizational and collectivistic

b h i th i i di id li ti behaviors than economic, individualistic and self-serving behaviors.

Stewardship Stewardship

When faced with a self-serving decision

versus a more cooperative, pro- p , p

• rganizational behavior, stewards will

pursue the latter because of the higher pursue the latter because of the higher utility they assign to such behaviors.

t l th i t t f i i l

not only are the interests of principals

protected, but also the stewards own utility i i i d hi h k h d i i is maximized, which makes such decisions wholly rational.

ACFB Research: Stewardship ACFB Research: Stewardship

Dimension Sample Question Individual/Psychological To what extent….. Intrinsic Motivation …do you see yourself as someone who is motivated by individual goals Organisational Identification …do you see yourself as an integral part of the business Personal Power …do you see yourself as someone who uses personal power to influence others O i ti l/Sit ti l T h t t t Organisational/Situational To what extent….. Involvement Orientation …do you see yourself as one who maximizes potential Power Distance …does your business delegate your authority on its behalf Collectivism …does your business pay higher than industry average wages

ACFB Research: Stewardship ACFB Research: Stewardship

Items Factor 1 Factor 2 Factor 3 Items Factor 1 (Stewardship Motivation) Factor 2 (Stewardship Identification) Factor 3 (Stewardship Culture) Make you feel self-actualized 0.88 0.23 0.12 Satisfy your need for achievement 0.84 0.29 0.27 Satisfy your personal needs 0.82 0.16 0.17 Satisfy your opportunities for growth 0.77 0.11 0.38 C t ib t t i di id l lf i 0 72 0 14 0 10 Contribute to your individual self-image 0.72 0.14

• 0.10

An integral part of the business 0.07 0.78 0.08 Accepting the goals of the company 0.28 0.77 0.23 Believing in the goals of the company 0 23 0 73 0 30 Believing in the goals of the company 0.23 0.73 0.30 Pay higher than industry average wages 0.07 0.10 0.80 Allow employees to reach their full potential 0.28 0.17 0.79 Allow employees to reach their full potential 0.28 0.17 0.79 Inspire employees care and loyalty 0.10 0.25 0.75 Eigen Values 3.59 2.57 2.26 Percent of Variance Explained 29.9 21.4 18.8

ACFB Research: Stewardship ACFB Research: Stewardship

Family leaders who design their

• rganisational environments with

g stewardship-rooted dimensions of motivation identification and culture are motivation, identification and culture are likely to see benefit through innovation and improved financial performance and improved financial performance.

Cases: Triggers for Governance Cases: Triggers for Governance

“My parents were working really hard but were doing the same things they were doing essentially in 1970” doing essentially in 1970 “My brother and I wanted to start our

• wn subsidiaries”
• wn subsidiaries

“W t t k l f it” “We want to make a real go of it” “We’ve always had it to an extent but We ve always had it to an extent..but after going public in ‘86 we just kept it going”

Cases: Role of Board Cases: Role of Board

“Started as planning meetings, now essential to decision making in new projects, finance and strategy” p j , gy “We have lunch or play golf..they’re my advisors, my mentors” advisors, my mentors “They ensure all the necessary checks and balances are in place” “they’re view is paramount to us, they y p , y make sure everything you do, you cross the t’s and dot the i’s”

Cases: Non-Family CEO Cases

• a

y C O

“Must be empathetic to the business, the founders and to the family....have a business brain, can mediate, mentor and nurture people if need be.” , p p “Always hire someone better than yourself” “If you’re concentrating working in the business its h d t t t ki th b i very hard to concentrate working on the business. So we just kept pushing the decision back.” “He was my mentor growing up, he has a very high moral fibre.”

Cases: Family Compensation Cases a y Co pe sat o

“We pay a dividend to all family members.” “My Salary is industry benchmarked as well” “My father has always let us make it happen for ourselves” happen for ourselves “We wanted clarity and transparency” We wanted clarity and transparency “If the ownership transitions through p g mine I think there might be some difficulties.”

Cases: Stewardship Role Cases Ste a ds p

• e

“I'm part of something else” “I’m just part of the family, its my job to fulfil it for the next” it for the next “Our mission is to have a long term, sustainable and profitable business for the sustainable and profitable business for the benefit of current and future generations.” “my mantra is to get it on, my ultimate y a t a s to get t o , y u t ate baton to hand it across to the 3rd generation”

Cases: Lessons Learnt Cases esso s ea t

“It’s like buying insurance, seems a complete waste of time until you need it, then its really important when you do.” y p y “Be open and clear about everyone's responsibilities, where everyone fits and h t ' d i I thi k th t th k what everyone's doing. I think that the key. “Don’t underestimate how challenging it will be but the benefits that we are getting now be..but the benefits that we are getting now are immeasurable.” “never stop learning” ”stick to your “never stop learning”...”stick to your knitting” and “go with the change”

Elements Elements

F ( h F il C il d

Forums (such as Family Councils and

Advisory Boards) that facilitate multi- generational: generational:

integrity, understanding of roles and responsibilities understanding of roles and responsibilities, honesty & fairness, transparency transparency.

Move in the direction of a real Board of Move in the direction of a real Board of

Directors

From Grant Dennis From Grant Dennis

“B i h i th t t d “Because in having that transparency, and having the structure and forums in place in which to deal with things, and I think as I which to deal with things, and I think as I mentioned before, you have to take all the emotion out of it, but when an issue arises now it’s not that you don’t have to deal with the now it’s not that you don’t have to deal with the issue but it’s a hell of a lot easier to deal with when you know that you can deal with it in an when you know that you can deal with it in an appropriate forum, with the appropriate

• people. You don’t make decisions in one

forum that you don’t tell others about that forum that you don’t tell others about…that comes back to bite you and this new system definitely makes life easier.” definitely makes life easier.

What do Good Family Firms Do? y

Understand the dynamics of family

y y business

Develop strategies to build family firm Develop strategies to build family firm

competitive advantage

Design appropriate governance Design appropriate governance

structures to facilitate strategy implementation and comm nication implementation and communication processes

FAMILY INDIVIDUAL LEADERSHIP STRUCTURE STRATEGY BUSINESS BUSINESS SYSTEMS

Acknowledgements Acknowledgements

f h

Professor John Farrar Professor Ken Moores Dr Clay Dibrell Professor Trond Randoy Professor Trond Randoy Mark Yupitin Anthony Deague Shane O’Reilly Mick Battaglia Peter Fox Shane O Reilly, Mick Battaglia, Peter Fox,

Grant Dennis

Sample ACFB Research Sample ACFB Research

• Zahra, S., Hayton, T., Neubaum, D., Dibrell, C., & Craig, J. B. (2008) Culture of family

commitment and strategic flexibility: The moderating effect of stewardship In Press commitment and strategic flexibility: The moderating effect of stewardship. In Press Entrepreneurship Theory and Practice.

• Craig, J. B., Dibrell, C., & Davis, P. S. (2008) Leveraging family-based brand identity to

enhance firm competitiveness and performance. Journal of Small Business Management, 46(3), 351-371. R d T Dib ll C & C i J B (2008) F di f il l d hi d k

• Randoy, T., Dibrell, C., & Craig, J. B. (2008) Founding family leadership, product market

competition, and firm performance among publicly traded firms. Small Business Economics, 20, 335–344.

• Dibrell, C., & Craig, J. B. (2006) The natural environment, innovation, and firm

performance: A comparative study of family and non-family firms. Family Business Review, p p y y y y , 21(4), 275-287.

• Moores, K. J., & Craig, J. B. (2006) From vision to variables: A scorecard to continue the

professionalisation of a family firm. Family Business Research Handbook. Elgar Publications, 196-214.

• Craig J B

Cassar G & Moores K J (2006) A ten year investigation of strategy

• Craig, J. B., Cassar, G., & Moores, K. J. (2006) A ten year investigation of strategy,

systems and environment upon innovation in family firms. Family Business Review, 19(1), 1-10.

• Craig, J. B., & Moores, K. J. (2005) Balanced scorecards to drive the strategic planning of

family firms. Family Business Review, XVIII(2), 105-122.

• Craig, J. B., & Bergmuller, J. (2005) Dummy boards or bored dummies: Changes needed

at Bauer Holdings. Management Case Study Journal, 5(1).

• Craig, J. B., & Moores, K. J. (2004) The professionalization process: The Dennis Family

Corporation case. Family Business Case Journal, (Eds. Joe Astrachan, Panikkos Poutziouris and Khaled Soufani) ISBN: 0-9753893-0-0 91-121 Poutziouris and Khaled Soufani) ISBN: 0 9753893 0 0, 91 121.

Current ACFB Research Current ACFB Research

• Craig, J. B., Dibrell, C., & Neubaum, D. Stewardship

i f il fi U d id ti t F il governance in family firms. Under consideration at Family Business Review. (Submitted July 2008)

• Dibrell, C., & Craig, J. B., & Neubaum, D. O. Moderating

effects of strategic flexibility in the strategic planning to effects of strategic flexibility in the strategic planning to innovation relationship: A two-study comparison of family and non-family firms. Target journal: Strategic Organization. (To be Submitted August 2008) g )

• Dibrell, C., Craig, J. B., & Neubaum, D. Responding to a

changing business landscape: the mediating role of innovation in strategic planning capabilities. Target journal: Academy of M t J l (T b S b itt d A t 2008) Management Journal. (To be Submitted August 2008)

• Craig, J. B., Dibrell, C., & Neubaum, D. Stewardship

propensity scale: Construction, validation and testing. Target journal: Organizational Psychology (To be Submitted October journal: Organizational Psychology. (To be Submitted October 2008)