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The Strategic Management Collection

Mason A. Carpenter, Editor

The Family in Business
The Dynamics of the Family Owned Firm

Bernard Liebowitz

www.businessexpertpress.com

Contents
Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 What Is a Family Business? . . . . . . . . . . . . . . . . . . . . . . 1 Planning for Transition . . . . . . . . . . . . . . . . . . . . . . . . 21 Family Dynamics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 When Consultants Are Called . . . . . . . . . . . . . . . . . . . 59 Succession . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

Epilogue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 Appendix A: A Workbook on Transition Planning for the Family Business . . . . . . . . . . . . . . . . . . . . . . . . . 111 Appendix B: Case Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137 Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139

Preface
This book has had a long gestation period—from my teenage years until now. My father started several businesses simultaneously (scrap metal, barrels and drums, and sanitary rags for manufacturing use) in Cincinnati, Ohio, during the early 1930s and brought my older brother into the business after World War II. They gradually sold off the businesses, leaving only the scrap metal business. About 20 years later, my younger brother entered the business. Because of a serious disagreement that never was resolved, he left the business 8 years later to start his own scrap metal firm in Dayton, Ohio. Although I worked in the business for several summers during my high school days driving a tractor-trailer (I was big for my age and got away with it), I knew that I couldn’t work there. My need for independence would have been too upsetting for all concerned. I decided to become a clinical psychologist. And of course I often wondered about the connection between my unfinished business with my parents and my becoming a psychologist. After several years of graduate school and clinical experience, I began to focus on the subspecialty of family therapy, and with three other kindred spirits, we founded the Family Institute of Chicago. My reputation as a family therapist brought me into contact with family businesses, one of which proved a turning point for me and my career. A family had been in therapy for a year or so. Their therapist felt that little progress was being made and that my experience with family businesses might be effective in helping them. It turned out that one of the major issues was the father’s refusal to appoint his son as successor. In response to my question as to why, the father responded that his son wasn’t ready. “Well, how will you know when he is ready?” I asked. “When he shows me he can sell…he would have to open up a new territory and manage it.” I turned to the son and asked him if he could do that. The son said he could and would. We met once more to review their agreement and scheduled a third meeting in three months, by which time the son felt he could accomplish the task.

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We met at the appointed time, but the tension in the family was as high as ever. The son had indeed succeeded even beyond the goals we had established, but the father had nevertheless persisted in insisting that the son was still not ready. The remainder of that session was devoted to exploring the father’s position. What was revealed was his fear of relinquishing control and becoming a “nobody.” His view of succession was one in which he would be kicked out of the business he founded and shepherded through its history. We all agreed on a role the father would play were succession to occur, a role that played on his exceptional ability in finance and mergers. Within several months the son became president, the father began to work on several merger possibilities, and the need for continued therapy disappeared. Accomplishing this required four meetings in all. What dawned on me was that my background in therapy was standing in the way of conflict resolution in family businesses—that meetings with family members had to be structured around business issues, and psychology had to support that process rather than supplant it. This realization also prompted me to learn much more about business—strategic planning, organization design and development, process analysis, management development, and team building—which has stood me in good stead not only with family businesses but with the many nonfamily firms with whom I have consulted as well. I offer this personal background and my transition from being a therapist to a management consultant as a backdrop to the material in this book—in particular, to my emphasis on how the structure of the family firm can be diagnostic of family dynamics. Structure refers to such considerations as how a successor is chosen, how “sweat equity” issues are handled, the values governing the running of the business, the relationship of family members not in the business to the business, and how management succession is dealt with, among others. Psychology and interpersonal dynamics play a role in each of these issues, but their importance emerges around business issues. Many case studies are presented as a means of illustrating this position and bringing to life the various family business issues that have to be addressed and resolved. Generally the family businesses that I have seen have been founded and are being run by fathers. For that reason the founder is referred to in this text as a male. The second generation in these families may be male,

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female, or both—I alternate between referring to offspring as him and her. To preserve the anonymity of these businesses such items as gender, number of siblings, and type of business have been changed, but in a way that preserves the dynamics of the situation. The first chapter deals with what is a family business. The definition among scholars and practitioners is unclear, and consequently the relevance of some research results about family business is suspect. The importance of definition becomes clear in considering whether the family firm is as inefficient as portrayed in many newspapers or whether, as some researchers claim, it is even more productive and successful than nonfamily enterprises. The second chapter reviews the transition process that has to occur in a family firm if it is to remain in the family and under family control. Appendix A is a summary of the issues involved in transition and a map of how to conduct a family transition plan. Family dynamics occupies center stage in chapter 3. It deals with how marriage types influence the roles offspring play in the family and the coalitions that are formed between parents and children and how these can affect business decisions, and it introduces one explanation for why family firms can be a lure to family members despite the difficulties encountered. Consultation is the theme of chapter 4. If a family firm is experiencing problems, who can they call on, and what can they expect in the way of assistance? Succession planning is the main topic of chapter 5 and, in many important ways, the culmination of the transition process. The final chapter, the epilogue, brings the reader full circle to several of the basic themes underlying the book. I would like to thank the many family businesses that have sought my assistance over the years and express my gratitude for their trust in me. I dedicate this book to my wife, Adine, who has seen me through my own transition and has stood by me with love and loyalty when my transition was not always smooth.

CHAPTER 1

What Is a Family Business?
The family business is part of the fabric of the American work ethic. Threaded throughout are the traditions of entrepreneurship, providing for one’s own, and hard work. What could be more heartwarming than a picture of a three-generation farm family (if they still exist) around their computer as they develop a hedging program, with the early sun breaking the horizon over their shoulders? The photograph of a father and son working together in the family business can stir the emotions of those who have not had that opportunity. In addition to this history of the family business as a bulwark of our economy, they also share many of the same economic and psychological advantages all entrepreneurial businesses are thought to enjoy, including quick responsiveness to the marketplace, lack of bureaucracy, and close employee identification with the company and its products, among others. However, despite being woven into tradition and enjoying many advantages over large corporate undertakings, family businesses have more often over the years been condemned, blamed, cursed, and ridiculed. They can be sources of employment and financial security for otherwise unemployable offspring and relatives. They can be a battleground of constant criticism and tension between founders and their relatives in the business. Ambitious and talented outsiders avoid employment in family businesses. In general, the image of the family business is of an organization that is grossly inefficient and the fountainhead of unsolvable family disputes. In fact, some research has concluded that the longevity of family businesses is generally shortened because of inefficiency and mismanagement. Estimates of the number of family businesses that survive into the third generation range from 10% to 20%,1 with other research indicating that a “mere 30% of family businesses survive past the first generation,” with

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many failing soon after the second generation takes over.2 One research study whose results have been often quoted in the literature indicates that “only thirteen per cent of successful family businesses last through the third generation.…Less than two-thirds survive the second generation. And…fewer than five per cent of all businesses ever started actually become family businesses through appointment of a successor from the next generation.”3 Definitions serve an important function—they tell us not only what falls under their umbrellas but also what gets rained on. The usefulness of judging what a family business constitutes lies in being clear about the choice that will be made as to the specific type of family business under discussion. The contention here is that there is no clear definition of a family business in the literature and that the declaration that the business is indeed a family business resides in the “eye of the beholder”—namely, the business owner, who frequently is also the founder.4 In family firms there is always a founder (one or more), whether the business was created from scratch or purchased. The owner is the one doing the defining. Having family members in a business does not by itself suggest a family business—they may function as employees who are conveniently available for either a short period or longer. Their very presence in the business does not by itself justify it being called a family business. The business might just be an investment by the founder—passing it on to family members is not his intention nor his long-term goal. On the other hand, some businesses—for example, publicly traded firms that do not have family members working in them—have nevertheless been designated in the literature as family businesses.5 The basis for this is that the founder was the family patriarch who passed his ownership position on to his offspring, and in some cases, they in turn passed it on to their children. The family members have an equity stake in the business, but so do many nonfamily investors. Even if the family owns an equity stake and sits on the board, why should this alone justify the business being called a family business? Again, then, a family business is one if the business owner says it is and his descendants, by continuing their stake in it, signify it as such. What if family members as a group invest in a business that not one of them had a hand in creating and their equity holdings are the majority? Is

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this a family business? The contention here is that if the family, as owners, declares the business as a family business, it is in fact a family business. From this point of view, family members have a say in declaring the business a family business. Ownership suggests having an equity position, whether 100% or less. Family members who do have a stake in the business may be included among those who have a voice in deciding whether the business is to be labeled a family business. Curiously, businesses that have no family members employed and no family member (except the owner) as an equity holder have been labeled family businesses. In this instance the owner sees the business or the proceeds of a sale as funding family members in the lifestyle they seek, both during his lifetime and beyond. After the owner’s death the business is held in a family trust or by relatives and is managed by a nonfamily professional team. Why does our contention remain so indefinite despite many articles and books and a great deal of research on the subject? Doesn’t this literary deluge bespeak a more concrete definition than the one offered here? Consider the situation in which several offspring are working in a business owned by the founder and may or may not have equity in it. The intent of the founder is to sell the business when a certain financial goal is reached. There is no desire on the part of the owner to retain ownership of the business any longer than this arbitrary date. Is this a family business? Perhaps it is for the limited duration it is owned by a family member, but classifying it as a family business seems more like paying lip service to a definitional condition than describing its actual status. What about the situation mentioned earlier in which the owner has passed away, the business is being run by a nonfamily member, there is no family member working in the business, and the business is owned by a family trust. Is this a family business? Perhaps it is if so defined by the late owner and his descendants who retain an ownership position. Then of course the family may decide otherwise and, upon the death of the founder, sell the business or their shares to the highest bidder for any one of a host of reasons (e.g., to pay taxes, to distribute proceeds, to prevent continued disagreement about the way the business should be run). There are the many publicly traded businesses whose stock is owned by the families of the founders. Are these family businesses? Again, the definition depends on the owners’ perspectives. Notwithstanding what

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the family might decide about its status as a family business, the public may disagree either through ignorance of the stockholders’ family affiliation or by an unwillingness to ascribe “family” traits to “big business.” To return to its defining hallmarks, a family business is one that is designated as such by the owner(s). Generally speaking (but with many exceptions), this designation includes businesses that are meant to be kept in the family from one generation to the next, whether family members are working in them or not. Publicly traded firms are included in this grouping despite the fact that equity owned by family trusts or family members can be traded on the open market, family control over the business’s destiny is (often) diluted, or the business may no longer present itself as or be known as a family-owned business—in other words, it would depend on how the family members, the stockholders, see it. Fortunately, for our purposes a clearer definition for the entire range of possible family businesses is not necessary. What is required, however, is a clear delineation of that brand of family business to which we will be referring here. Much of the literature fails to make this delineation, and in not doing so, the results of research that are presumed to apply to all family businesses become suspect. Much of the current research literature is devoted to answering the question of whether family businesses are better or worse than nonfamily businesses in a variety of different ways (e.g., economic performance, loyalty, culture). This research, in part, has been in response to the critics of family businesses who held sway for a number of years and continue in some corners of the professional world in pointing to those flagrant family business disputes splashed on the pages of newspapers. Many research studies have utilized family businesses in their samples that either are publicly held6 or have outgrown the label of entrepreneurial.7 Anderson and Reeb’s article makes a good case for publicly held family firms performing better economically than nonfamily ones.8 Although family members have an equity stake in the business and may be in management positions, it isn’t clear in what generation they fall. If in the third or fourth generation, a plausible assumption for the research finding is that the firm’s management has accumulated considerable business knowledge and would be expected to perform better than a business without the backing of such experience. Further, that the firm has become publicly traded indicates a level of business sophistication on

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which public markets insist. Is this sample truly representative of all family businesses? The sample cited in Denison, Lief, and Ward’s article utilizes a combination of closely held and publicly held family firms to suggest “that the corporate cultures of family enterprises were more positive than the culture of firms without a family affiliation.”9 A criteria for inclusion was that the sample family businesses appreciated the concept of organizational culture,10 which by itself could be seen as evidence that the firm has grown beyond its entrepreneurial roots and become more sophisticated in the process. That this criteria borders on self-referential circular reasoning need not be stressed. In point of fact, there is a contradiction in the literature about the relative performance achievement of family and nonfamily firms. As indicated earlier, the longevity of family businesses in general is not an attractive statistic. What this might suggest is that those family businesses that do well and persist into future generations are a special subsample of family businesses—that is, they have developed a honed business sense. With some exceptions, nonfamily businesses live, die, or are sold in only one generation (i.e., during the life of the owner). Although many don’t live long, those that do accumulate the knowledge and experience that permits them to be well run. But have they had the time to develop the business acumen that successful family businesses have had through the first (with both owner and successor waiting in the wings, thereby extending the time in which to learn) and later generations? Again, the caution being raised is that these comparisons of relative success in different areas need to be taken with a grain of salt. These and other similar studies of the relative effectiveness of family businesses over nonfamily firms have provided many interesting and important theories and findings (some of which will inform this writing), but can they be applied to all types of family businesses? The point to be made here is that the family business label has been bandied about indiscriminately and conceals the different types of enterprises that comprise this category. Our focus is primarily on businesses in which the primary owner (often the founder and the father) and those second-generation members working in the business hold the major portion of equity; the owner intends to pass the business on to the second generation, who will

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succeed him; and the second generation works in the business with the understanding that generational succession is in the offing.

The Founder’s Values
As we have seen, the attempts to define what exactly constitutes a family business have been less than fully successful. This lack of definition specificity in turn has made it more difficult to define the virtues of the family business in contrast to nonfamily firms, although some very interesting theories have been proposed. Other research has delved into the personality of entrepreneurs to see if it is possible to predict success or failure in their endeavors, with the hope of eventually establishing personality features of family business founders.11 The lack of success in developing even a list of traits entrepreneurs exhibit does not hold out much promise for discovering the traits of a family business founder. Whether we can accurately define a family business or not, the fact remains that certain businesses are labeled as family businesses and employ family members. Given that the definition of whether the business is a family business or not lies in the eye of the beholder—the owner—what does he or she see? What might the business represent for the owner? What value does it hold for him or her? What determines the value the owner holds for the business? Given the owner’s value perspective, how does this affect family members? What family issues crop up? What problems can develop? In brief, can the value system of the founder of a business cast light on whether his or her business becomes a family business? The importance of the concept of value lies in its representing, embodying, and reflecting everything an individual believes; in its incorporation of the individual’s hierarchy of needs; in his absorption and understanding of the standards of his culture; and in the psychological sense the owner has made of his background and experience. A person’s values are explicit and demonstrated in his behavior and how he interacts with others. Values are also hierarchical in nature—that is, they subsume various subcategories that in some cases may conflict with each other. This is not surprising in view of the fact that we play different roles in different situations, each demanding a slight turn on our value scale.

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This notion of values is obviously very broad. In fact, there have been many attempts over the years to define a person’s set of values and to develop a test that reveals his or her basic value system. Precisely because values is such a broad term, testing for a person’s value system is limited in what it can reveal about a person. For the concept to be useful, then, it has to be contextualized and the context specifically defined. The context of interest here is the privately owned business that an owner has either founded or purchased, which he may or may not have as yet defined as a family business, even though other family members may already be employed. Further, even if the founder has defined the firm as a family business, the second or later generations can redefine it as something other than a family business (e.g., an investment to be sold). There are at least five types of value-laden business perspectives an entrepreneurial business owner might assume. To some extent they overlap, and in some cases, considerably so. Viewed on a continuum, they range from a focus exclusively on the business as such through to an underlining of the importance of family in the business. The overlap between the value categories lies in the notion that the success of the enterprise is itself a continuing goal, but, as we will see, in many situations that is not the only factor to be considered. Each value category reflects the behavior an owner in that category exhibits as an owner, the attitude he takes toward the business, and the intention he has about the future of the business. This includes how he treats employees, his vision of what the business can do and be, and how far into the future he looks. From our point of view, what makes the owner’s business value system so important is that it communicates whether his business is indeed a family business or not.

The Business as Investment
Generally all businesses are viewed as an investment by their owners. Time, money, planning, and energy are the constituents of the owner’s investment. What differentiates the business-as-investment value system from other types lies in its being considered only as an investment. Consider a business in which family members may be employed (with or without an equity stake in it) but that is sold when the price is right, a price level for which the owner had been waiting.

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This situation is to be differentiated from those where the business is not simply and only an investment, where the owner had intended to retain ownership for future generations, but where he is required to sell. In this case, other considerations motivating the sale might exist—a determination that declining sales cannot be reversed, the family talent pool may not be up to the task of running the business, illness is preventing adequate oversight, and so on. In other words, the sale of the firm was not part of the owner’s original intentions but had to be undertaken for a variety of reasons. To repeat, the primary value the business holds for the owner is as an investment. Family members might be employed in the business, but the owner’s intent is primarily to derive the most profit from his investment, and that happens to be its sale. The family may eventually benefit from the sale, but family employment doesn’t weigh on the owner’s value scale. Their employment may have been an essential ingredient in the success of the business and they may well have participated in the benefits of the sale, but the longevity of the business, its becoming a family asset, and its value as a business in which family members play an important role in its continuation exerts little weight. A significant exception is seen in a family business dedicated to buying and selling businesses as a matter of course. How frequently such family businesses appear in the marketplace is not known, but a firstblush impression is that it is not common. Firms dedicated to buying and selling enterprises often are made up of nonkin partners. Communicating this value—that is, business as strictly an investment—to the family usually doesn’t raise unfounded expectations. However, failure to underline this value and make it clear as basic to the owner’s motivation can and does lead to unfortunate outcomes. Two brothers had made a success of a scrap metal business. The son of one of the brothers was invited into the firm and accepted despite having a very viable career in another field. His acceptance of the invitation was motivated by several factors—the hope of closing the psychological gap between himself and his father, and the prospect of earning more in the business than in his current career. The son’s entry into the business was not accompanied by a thorough discussion of expectations and plans—what the owners had in mind in inviting

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the son into the business, the hopes the young man had for his future ownership participation, the management role the son would play and the attendant training that might be required, the salary that would be earned, the role the uncle’s children might play in the business. The young man simply assumed that at some point in the future he would inherit the business and that any unanticipated difficulties would be worked out peacefully. The brothers were ready to retire, both of them beset with serious medical problems that were alluded to when the invitation was offered, but not really probed as to their implications for the future of the business. Their invitation was an attempt to ensure the availability of a family member to take charge if one or both succumbed to illness or infirmity. Unbeknownst to the young man, the brothers had all along been seeking someone to purchase the business and had finally found that person after the son had been in the business for a year or so. The son discovered this during the week of the sale and, despite his pleadings and offer to borrow enough money to make a competitive offer, the sale went through. The predominant style of the family was to avoid conflict at all costs. Their fear was that any extensive discussion of expectations, desires, goals, and so on would lead to disagreement or, worse, conflict. That was to be avoided at all cost. In the absence of in-depth and upfront discussions, and given their desire to avoid any disagreeable confrontations, the brothers simply assumed that the son would be content to inherit some of the proceeds of the sale when and if it occurred. Their reasoning included the assumption that, after all, the business was an investment that would yield significant financial gain and security for family members at some point in time. They never even entertained the possibility that the son would be unhappy with their business decision. The net result was that the son became further estranged not only from his father but also from his immediate family, as well as the family of his uncle. His immediate family, particularly his sister, did not understand why her brother was upset and called him selfish for not being accepting of the sale of the business. His mother simply tried to assuage her son’s feelings, but she did not take a stand one way or the other.

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When a business is considered as an investment only, the owner is generally not concerned about the professional development of family members in the business. The training of employees, including family members, is usually just enough to keep the business in a growth mode. In the mind of the owner, any more of a financial commitment to employee development could exceed its contribution to the eventual sale price. Consequently, the commitment of family members, as well as employees, to the business is tenuous, since there is no commitment to the future prospects of the family members. If there is any special benefit that working in the business confers on family members, it is overly generous compensation and perks. This may lead to even less identification with the firm on the part of nonfamily employees, particularly if the level of competency shown by family members is less than that of nonfamily employees at the same hierarchical level.12 Not investing in management development and training often requires that established talent from outside be hired—this can easily raise the competency level of nonfamily employees higher than that of employed family members, exacerbating feelings on the part of both family and nonfamily members. Highly paid family members might feel guilty that they are not worth their compensation level and may become overly competitive in attempting to prove they are worth their salt. Nonfamily employees, witnessing the pay discrepancy, might act in a way that covertly mocks and diminishes the contribution of the family member. Further, depending on the unemployment situation in the economy, the probability of an exodus of nonfamily employees may increase, leaving behind employees who are satisfied with the status quo and who are unwilling to test their value in the marketplace. The culture of the typical business as investment is minimally oriented toward employee empowerment. When it does occur, it reflects the talent level of management—that is, the outside hires possess the skill and knowledge needed for the task at hand and do not require ownership oversight. They were initially retained precisely because they did not need supervision. Given a setting where family employment is not of high value, where in many instances the competency of nonfamily members exceeds that of family employees, where the benefits and compensation of family membership might not be justified, where employees might resent the

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inequality of compensation, and where talent may be more evident in nonfamily members, the motivation level of family members to work hard and grow in their positions may not be challenged. Similarly, the future of the nonfamily member in the business does not carry an attractive cachet about it either.

The Business as Business
An owner who values the business as a business and not simply as an investment opportunity would be interested in its efficient growth and development, utilizing up-to-date management practices. The owner realizes that management personnel are crucial to the success of the business and is invested in their professional development. Their opinions are solicited; their involvement in planning and strategizing is welcomed. Employees are treated as partners in success and their performance is measured against goals. If the business is to be sold, it is more often because of a lack of ability or interest on the part of potential successors. If it is sold, the premium garnered is due to the fact that the business was run as a business. Family members who want to enter the business are evaluated by the same standards as any other employee. The owner may choose not to view the firm as a family firm until he is sure that there are family members who have the talent or who can be trained to eventually take over the business. Becoming a family business may or may not be the owner’s intent, but this is secondary to maintaining the business as a business. If the owner recognizes that the family member cannot measure up, this is not hushed up; rather, it becomes the basis for a more realistic career discussion between parent and offspring. The scion may be hired for a nonmanagement position that suits his abilities, but it is made clear that although he is a family member, he is not a management decision maker. Although in many ways an ideal method of conducting business, there are some difficulties that can arise. The owner’s spouse may have something to say about why her favorite son or daughter has not been hired or has not been placed in a position more in line with those abilities the spouse “knows” are present. In addition, and irrespective of whether the family member is in a position commensurate with his abilities, just the fact of being part of the family erects a fence around him. Family

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members will be treated differently by staff, and it is up to them (i.e., the family member) to learn how to lower those barriers and mitigate the perception of them sucking on a “silver spoon.” In fact, this is one of those important tasks that family members have to learn in order to succeed in their role in a business as business. Similar to the business as investment, the family member has to confront the fact that many employees have been hired because of their expertise, talent, and experience, and he or she may be deficient in comparison. The difference in this type of business is that the family member’s level of talent is being impartially evaluated and compensated accordingly. The opportunities for training are part of business strategy, since well-trained staff can be a major contributor to the firm’s success. The task confronting the family member is whether he or she is willing to learn from the more experienced and talented employees. Being open to this kind of mentoring may well be one of the criteria for whether the family member has what it takes to become the successor—specifically, can he or she learn from whatever source is available?

The Business as Status Symbol
The value of a business to an owner and family can reside in many different qualities—its success, contribution to the community, support for different causes, and so on. One value that has not been investigated to any great extent in the literature is how much of a status symbol the firm represents to its owner and family. The business as a status symbol can become a determinant of business decisions. The family, in becoming identified with the business and the status it confers on them, can utilize it as a basis for their public persona. In doing so, business decisions can be made to augment and support this persona rather than to serve the best interests of the business, much less the community. For example, a family committed to the business as a status symbol ensured that the public and the industry were made aware of how the firm’s recent success was due to executive-level family members, not to nonfamily managers, even though this latter group was instrumental, if not the creative source, behind its success. Another family insisted that only family members were in the C suite, even though several were really supported in their responsibilities by nonfamily employees who

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took the helm when significant decisions had to be made. Another family firm went to extremes to conceal the fact that serious mistakes had been made in marketing and production—both departments being run by family members. Another firm refused to deal with falling sales—to have admitted that would have embarrassed the family, particularly when they went to their country club; in the aftermath of the business going bankrupt, the last family perk that was relinquished was family membership in the country club. Another firm extolled itself as a status symbol in a different way. It insisted that sales be made solely to a particular (high-end) customer segment and no one else, despite market research supporting the notion that broadening its customer base could prove very profitable without any decrease in its target audience. The firm feared losing its cachet and did not want to tempt what it considered to be its place in the status hierarchy. There is no doubt that other motives have played a role in these situations, but glorifying the business as a status symbol was important to these families, as they imagined the status the community conferred on them. Their conception of community included both the public eye as well as the industry in which the business existed. The need to claim status had its deleterious effects on these businesses. These behaviors frequently led to low morale, turnover among senior nonfamily managers, and an inability to attract competent managers from the outside. More pertinent was the failure of owners to acknowledge that treating the business as a status symbol was detrimental to the development and growth of the firm—maintaining status in the community took precedence. Family members in this type of business suffer without being consciously aware of it. Their missteps in decision making and in managing do not get explored but rather are excused away or blamed on others. Status is as important to them as it is to the family at large that they preserve the image of the family business as a community and industry success story. For family members, this carries over into their daily lives. The energy and money that is needed to maintain this facade in daily life can be excessive; but in the opinion of the family, it is necessary and worthwhile. What the family member takes away in the form of learning is that maintaining a good mask is worth the effort.

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There is another dimension to the family business publicizing its status to the world—namely, as a way of wielding power in the wider community while disregarding any semblance of adherence to accepted norms. A Social Policy article13 recounts the doings of two large family businesses, both having extended the usual boundaries of the family business as status symbol. As the article stated, one family hid, under the guise of philanthropic donations, its contributions to groups supporting environmental deregulation and global warming denial, two policies that directly impacted their business interests. The firm had flaunted the fact that its plants were among the country’s most polluting and greenhouse gas-generating operations. A family sitting on top of an egg empire was deeply involved in the salmonella outbreak in the summer of 2010. It had historically disregarded a variety of state and federal regulations pertaining to health and safety rules, immigration policies, and wage and hour standards, among a host of other violations. Much like the other family, this one had used philanthropic donations as a curtain behind which it had hidden its dark side. Both families had essentially announced that their status as highly successful family businesses made them impervious to the responsibilities and obligations to which businesses in general are expected to adhere. Their status conferred on them the power to do as they pleased.

The Business as a Refuge
The business as investment doesn’t invest in development of talent beyond what is necessary to preserve its value when sold. The business as status symbol is similar, in that talent development is not a priority. The business as refuge takes this attitude to its limits, along with a smart salute to its status as a family business. In effect, it takes its family business membership as the reason for being a business as refuge or an employment agency. Emblazoned on their shield is the motto, “Family comes first!” Parents with this value system find it easier to carve a path through life for their offspring than to give them the tools to do it by themselves. The son or daughter may not be able to hold a job or may need more income than their present position provides. It may be the brother or

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sister of the owner who is in the position of not being competent enough to stand on his or her own feet. The family business too frequently serves as a refuge for these family members. Their inclusion in the business eats up resources, antagonizes nonfamily employees, maintains and nurtures family conflict, and exasperates the owner. Not only are the family members shielded from learning and growing, but the “work-arounds” necessary to maintain them prove onerous and self-defeating.

The owner of a very large family firm acquired a business that augmented, complemented, and expanded both its product line and its appeal to a broader customer base. In addition, it introduced updated manufacturing processes that considerably improved its cost basis. Whether what the owner did after the purchase was necessary or even required for the growth of the enterprise remains moot. He had three sons, none of whom was in any way capable of running a business, much less occupying a management position. They also failed to get along among themselves and took any occasion to fight over insignificant issues in an endless competitive struggle that had existed among them for many years. Each had entered the family enterprise immediately after spending some time in college—only one of the brothers received a degree. Their mother insisted that the business employ them. The owner divided the business into four units—the main enterprise and three adjunct subsidiaries that were “managed” by each of the sons. The real decision maker, however, in each subsidiary was the executive vice president of manufacturing. The sons functioned as figureheads, pretending and claiming to be the president of their respective units. A period of several years had shown how very unworkable this was. One son’s anger would boil over, particularly when his judgment was questioned. During the course of these several years, his anger became a constant. Another son became very depressed. The family feared that he was suicidal. He realized that his employment as president was a pretext, which embarrassed and shamed him no end. Employees did no more than pay lip service to him. The third son, the most passive

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of the three, simply accepted the situation and no doubt felt lucky to be able to draw a very handsome salary for doing practically nothing. If the creation of the three subsidiaries was an experiment, it soon proved to be, if not a failure, then at least an unsuccessful business venture. The units were eventually reintegrated into the main business. Two sons remained employed in the firm—the one who wore his anger like a cloak and the son whose passivity inured him to his ineffectiveness as a manager. Both were placed in positions where it was felt they could do no harm. The third son left the business and found employment elsewhere. His embarrassment at being cast as a token president drove him to seek counseling to regain his sense of pride. The unfortunate aspect of this arrangement was that the father never met each son personally to review their qualifications, talents, abilities, career ambitions, and personality styles. A heart-to-heart discussion with each son never took place.

The family members in this type of family business never really have an opportunity to grow, and in some instances have been discouraged from doing so. They are forced to live the lie and suffer the embarrassment that comes with the lie. This path shelters parents from having to relinquish their ties to their offspring and provides family members an excuse not to face the world on their own. Underlying this position is the fear that the offspring cannot cope, and cutting the cord unleashes the guilt of a parent should the son or daughter stumble; and stumble they will, given that everyone stumbles at some point in their lives.

The Business as a Heritage
This type of business is the most common among family businesses, or at least it is proclaimed by owners as such. Their intent is to keep the business in the family as a source of pride and wealth. The pride the owner experiences is that of someone who has personally created a structure, an enduring edifice into which he has poured his heart and soul. Having the business continue in the family confirms his pride. The emphasis on pride often dictates retention of the family name on the door and family members in management and ownership

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positions. Being a source of wealth and financial support for the family underlines the owner’s pride being inclusive and not egocentric. There are two major concerns when the business is assumed to be a heritage. One is that the selection of a successor and the family members in the business may not be objective. Successors and family members may not be capable of the tasks for which they are being considered. What overshadows all else is that family members must be in the business. Second, family members may feel that the business has to be owned equally by offspring, whether they are in the business or not. The feeling is that this declares the business to be family owned or ensures that it remains so. A consequence is that the nonemployed offspring, since they are partners, may feel it is their right to look over the shoulders of those relatives in the business.

The Business as an Inheritance
Similar to the heritage version of the firm, the business as inheritance is seen not only as a financial instrument and investment but also as a family possession. A business as inheritance differs from a business as heritage in that family members in the former may not be employed in the business, nor does the family feel it is necessary to have a family member employed; if one is, it is because that person displays an ability or experience the business requires and he or she is prepared to provide it. A heritage, in contrast, deems it essential that family members be active in the business. Nonfamily professionals are frequently hired in an inheritance to steer the ship and run it. Its board of directors usually includes family members or their proxies. In many instances the business becomes publicly traded. This situation can elicit either a proactive and enlightened measure of business acumen or a self-indulgent response to the fortunes of the business. The former is evidenced in the willingness to invest in the firm in positive ways (e.g., reinvestment of capital, management development, support of the management team). The self-indulgent response is evidenced by a reluctance of the family members to vote for reinvestment of profit in order to grow the business—instead, they opt to derive as much financial benefit as possible regardless of the impact on the firm.

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Which outcome prevails can almost be predicted by how the contract between the board and the outside president is negotiated. If the reins are tight (e.g., the new president is not given final authority about hiring and firing) and his range of authority is limited, the odds are the self-indulgent outcome is probable. If the president is free to operate but within clear boundaries (e.g., where profit goals, loss limits, and time periods are negotiated), the enlightened outcome is more probable. If a prospective president agrees to a tight set of reins, he is probably not the best candidate for the position but is nevertheless selected precisely because of his willingness to live by the demands of the family. The family members on the board no doubt see the business as a valuable asset to be protected. The understanding of what it means “to be protected,” however, can be understood in different ways by the family members on the board, and in the process of defining the term, they may have campaigned among the nonfamily board members to take their side when decisions have to be made.

Differences Between Family and Nonfamily Businesses
In the early days of the focus on family businesses (during the 1960s and 1970s) many differences were cited as distinguishing family from nonfamily businesses. These included family members feeling freer to trust and depend on each other, family members working harder (usually for less pay) than others in comparable positions in nonfamily businesses, employees feeling more loyalty and job security in family firms, and family dynamics in the form of irrational behavior intruding into purely business considerations, among others. Most of these early findings were based on personal stories about family businesses rather than on research. No doubt many of the vignettes describing the virtues of family businesses were presented as counterexamples to those dramatizing their horrors. This early period was an awakening to the realization that most businesses in the United States have been or are family owned and operated and that, as a substantial part of our economy, understanding their functioning is important in supporting their existence. Business schools began developing programs devoted to family business research, journals on entrepreneurship and the

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family firm started publishing, and articles on the subject appeared in other types of journals devoted to business. Recent research has clarified the differences in a more scientific way, but as pointed out earlier in the discussion about the disregard for the different types of family businesses that exist, the findings may not be applicable to all family businesses. Chrisman, Chua, and Sharma recognize this problem as well but limit their doubts to whether the findings based on large family businesses apply to smaller ones as well.14 However limited in applicability, what the findings do suggest is that the early perception of the family firm as being simply a basket full of problems ready to explode was grossly overblown. Thus, for example, Anderson and Reeb15 reported that the family firms that constitute one-third of the S&P 500 and “using profitabilitybased measures of firm performance (return on assets)…are significantly better performers than non-family firms” and “that the greater profitability in family firms, relative to non-family, stems from those firms in which a family member serves as the CEO.” Research has also indicated that the organizational culture (involving adaptability, involvement, consistency, and mission) of family businesses is more positive than that of nonfamily firms.16 This is accompanied by the finding that family businesses make a substantially greater investment in their people than nonfamily firms.17 In particular, the culture of commitment to the business by family members makes the family business more strategically flexible—their identification with the firm supports their being more sensitive to competition, threats, and opportunities.18 Other findings suggest that family and nonfamily firms differ in terms of how they manage their systems, organizational structures, and strategies, the implication being that the former benefit more from their management processes.19 This occurs for a variety of reasons: Family firms have a longer time horizon that provides time for decisions to flourish; family members have more of an investment in knowing the inner workings of their business since their intentions are to pass it onto the next generation; and continuity motivation and the ability to make changes and decisions quickly without outside interference work to the benefit of the family firm. One account20 for the success of the family business is what has been called stewardship, “which highlights the possibility of goal congruence

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between owners and managers” such that problems often attributed to nonfamily employees do not appear. Instead of a standoff between family owners and nonfamily employees over opposing interests and emotional investment, the identification of both groups with the long-term success of the firm is uppermost. The family members are highly identified with the business and its employees, and employees respond reciprocally. Given that everyone in the stewardship family business is heading in the same direction, one conclusion Zahra et al.21 draw is that the family business is more strategically flexible than the nonfamily business. This description can be applied to the business-as-business as well as to the business-as-inheritance and business-as-heritage value systems. Given the doubts expressed here about the assumption of family business homogeneity in many of the research studies cited, it would seem prudent to apply the stewardship label to those firms that function as well-run businesses, whether they are designated as a family business or not. Reviewing the various value systems of businesses makes it clear which family businesses may be seen as stewardships and which do not deserve this label.