The Ownership Dimension

On his study, Ward (1987, 1991) identified three stages of ownership: controlling

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owner companies, sibling partnerships and cousin consortium companies (Srisomburananont, 1999).

3.1.1. Controlling Owner

At this initial stage, ownership is controlled by one owner or a married couple.

All decisions are made solely by the founder-owner and the existence of the firm relies entirely on the ability, knowledge and expertise of this one owner or married couple (Srisomburananont, 1999; Andrews, 2010). The board of directors, if existent, acts as a formality to endorse what the owner-manager has already decided to do (Srisomburananont, 1999). This stage is characterized by ownership control consolidated in one individual or couple. If other owners are present, they only have holdings and do not exercise significant ownership authority (Srisomburananont, 1999).

Gersick et al (1997) identify three key challenges during this stage: capitalization, balancing unitary control with input from key stakeholders and choosing an ownership structure for the next generation. For a first generation firm, securing adequate capital for future business expansion is critical. Usually, the primary sources of capital come from the owner-manager’s own “sweaty equity”, family or even close friends (Srisomburananont, 1999). Another challenge present at this stage is the ability to balance unitary control with input from key stakeholders.

Although a business may enjoy the simplicity and efficiency of a single leader, a risk is that owner-managers may be reluctant to seek the advice and assistance of family members and others for the fear of losing independence. Dependency on a single leader may become risky as the business grows and develops, requiring more

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insights and skills that are beyond a single leader’s capacity (Srisomburananont, 1999). As the first generation ages, another challenge is choosing an adequate ownership structure for the next generation. This decision involves whether to continue the ownership control in one individual or to divide it among a group of heirs (Srisomburananont, 1999).

3.1.2. Sibling Partnership

At the sibling partnership stage, control of the firm is shared by two or more brothers and sisters, who may or may not be active in the business. Other owners may also be present, such as family members from different generations; however, they do not actively participate as owners of the business (Srisomburananont, 1999).

This stage is characterized by ownership control between two or more siblings and effective control of the firm in the hands of one sibling generation.

Gersick et al (1997) identifies four key challenges at this stage: developing a process for shared control among owners, defining the role of non-employed owners, retaining capital and controlling the factional orientation of family branches.

A form of shared control among owners is that one of the siblings adopts the role of quasi-parental leader. This happens when that sibling has been given ownership control, when there is a significant age gap between the oldest and the younger siblings or when there is a history of a very close relationship between the parents and the selected offspring which began long before the leadership transition (Srisomburananont, 1999). One other form of shared control is the “first among equals”. With this form, one sibling acts as the leader but stops short of the quasi-parental role. This form is likely to take place when minority shareholders

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wish to exercise some rights but do not want the responsibility of equal involvement.

The leading sibling must have well-established credentials as the strongest visionary for the firm and a leadership style that conveys respect and openness to the other siblings. The last form of shared ownership control is the egalitarian arrangement, where ownership is equally divided among siblings (Srisomburananont, 1999).

A second challenge in the sibling partnership stage is how to define the role of non-employed owners. These owners might or might not provide input to the firm, thus, families may limit ownership to only those working and reward them with financial incentives accordingly. Another challenge at this stage is the ability to retain capital. Capital problems at this stage shift to managing funds and balancing the priorities between reinvestment and dividends due to an increase in the number of non-employees (Srisomburananont, 1999; Andrews, 2010). Lastly, this stage faces the challenge of controlling the factional orientation of family branches, meaning that as the sibling partnership ages and the next generation approaches adulthood, siblings may begin to act as if their responsibilities represent their own family branches as opposed to that of the company (Srisomburananont, 1999).

3.1.3. Cousin Consortium

The third and final stage in the ownership dimension is the cousin consortium, where ownership is exercised by many cousins from different sibling branches, but no single branch has enough voting shares to control all the decisions. A hybrid mode between sibling partnership and cousin consortium may exist because of the small size of the family firms or small number of generations, making this stage more complex than the previous two stages (Srisomburananont, 1999). This stage is

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characterized by ownership control under many cousin shareholders and the firm is now composed of a large mixture of employed and non-employed owners.

Gersick et al (1997) identify two key challenges at this stage: managing the complexity of the family and the shareholder group and creating a family business capital market. As each generation ages and the next begins adulthood, the number of family members increases. Family relationships become more complex and personal connections that have been strong in the first two ownership stages become more dilute in this last stage. Usually, different career paths in the sibling generation have led to a concentration of cousin managers from one branch. As this branch becomes dominant in the management of the firm in the second generation, other branches begin to withdraw their involvement in the firm. Additionally, previous family conflicts can be transmitted to current generations of cousins, polarizing them into camps (Srisomburananont, 1999). The challenges in the sibling partnership seem to magnify in the cousin consortium stage, where non-employee owners focus more on dividends rather than reinvestment for the profit of the firm, which, on the other hand, is the focus of the employed owners. There is a conflict between employed owners feeling the need to control decision making concerning risk and strategy because they are vulnerable to the outcomes and non-employed owners may worry that the insiders may take a risk with the family investment (Srisomburananont, 1999). At this stage, although the board of directors may become more professional, there is still a tendency to focus more on the personal interests of the family branches rather than discussing strategic issues solely on a professional basis. Gersick et al (1997) suggest that there is a need to clarify the distinction between membership in the family and membership in the business. The

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family should work to create a shared family identity outside of the business, through extracurricular activities and communication that emphasize family but not business (Srisomburananont, 1999).

The second challenge in the cousin consortium stage is the ability to create a family business capital market. At this stage, some owners may want to withdraw their investment for other purposes and others, who do not have enough shares to influence management action, may lead to increased costs in management, family argument and even legal fees. The challenge is to provide an objective and fair internal market for family shareholders so they may have options to sell their interests and thus minimizing negative consequences to the firm (Srisomburananont, 1999). One issue which is common but not limited to this stage is the option of going public and exposing the firm to non-family investors. Some may resist due to their appreciation of a private company’s ability to make faster decisions and more control over the organization’s culture and the advantage to operate more secretively with respect to its competition (Srisomburananont, 1999).

It is important to note that although all family firms may not transition through all three stages sequentially, or some may never even go through a particular stage, these three developmental stages still explain most of the variance across the widest range of companies (Srisomburananont, 1999). Gersick et al (1997) suggest three fundamental guidelines to ease the transition between these stages of development within the Ownership dimension (Andrews, 2010). First, the establishment of shareholder meetings is crucial in creating an environment for discussing specific issues regarding ownership. Developing a board of directors and advisers is also a

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key to providing a long-term strategy that helps the president by broadening their perspective. Lastly, planning in the firm should take the form of strategic plan, management development team, contingency plan and continuity plan (Gersick et al, 1997).

3.2. The Family Dimension

Gersick et al (1997) classified four stages of change which family firms transition through in the family dimension. These stages are young business family, entering the business, working together and passing the baton.

3.2.1. Young Business Family

Most family firms begin at this stage, where the adult generation is usually under forty and if with children, they are under the age of eighteen. During this stage, the married couple work together to develop a marriage enterprise that accommodates each other’s dreams (Andrews, 2010). This is a period where fundamental relationships and major decisions are made. Examples of these include defining a marital partnership and deciding whether to have children or forming a new relationship with aging parents (Srisomburananont, 1999).

The key challenges the young business family faces include creating a workable marriage enterprise, making initial decisions about the relationship between work and family, working out relationships with the extended family and raising children (Gersick et al, 1997). Creating a workable marriage enterprise involves the couple developing implicit and explicit agreements and habits about money, work,

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affection, sex, children, social behavior, relationship with in-laws and goals for the future. Conflicts rising from these agreements and habits may impact the success of the business itself (Srisomburananont, 1999). After setting up agreements and habits, the young business family must face the challenge of how to manage or balance work and family simultaneously. The family must be ready to sacrifice family time with late hours, seven-day work weeks, social obligations with customers and suppliers and business discussions that may takeover family social events (Srisomburananont, 1999). The challenge with working out relationships with the extended family is how to find a place for the new family and keep a balance between sides of both spouses in the extended family. It can become more complex if one spouse’s family is involved in the business while the others’ is not. Lastly, issues related to the raising of children include whether to have children, when to have them, how many to have and most importantly how to raise them (Srisomburananont, 1999). Since the next generation may become successors of the family business, how to raise the children becomes a crucial decision.

3.2.2. Entering the Business

As the younger generation moves into adulthood, the family firm must begin to design entry criteria and seek out the career paths for the young adult generation.

The founding generation must learn to redefine their role as the middle of three adult generations, between elderly surviving parents and children who are now teenagers and young adults. At this stage, the younger generation is just beginning their work lives and making their initial decisions about whether to join the family firm or not. Therefore, this stage is characterized by having a senior generation between thirty-five and fifty-five and a junior generation in their teens or twenties

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(Srisomburananont, 1999).

Gersick et al (1997) identify three key challenges at this stage: managing the midlife transition, separation and individuation of the younger generation and facilitating a good process for initial career decisions. The midlife transition involves the parental generation performing a self-assessment of whether the path they have been on in early adulthood is still in the right direction to achieve the goal they had set for themselves (Srisomburananont, 1999; Andrews, 2010). The conflict between separation and individuation of the younger generation involves the young adults’ need to differentiate themselves from the other siblings or even from the family but still desire to be part of the family. A critical concept at this stage is the birth order of the children. Birth order is particularly important in business families because of the traditions of primogeniture. Additionally, while differentiation is the centrifugal force which pulls the siblings apart, sibling identification is the centripetal force which holds them together (Srisomburananont, 1999). Although the younger generation may want to differentiate themselves, they come together to defend one another against parental criticism (Srisomburananont, 1999). The balance of these opposing forces may collaborate to the development of the family firm. A last challenge during this stage is how to facilitate a good process for initial career decisions. This challenge involves the younger generation questioning their identities and goals and they learn to weigh their individual goals with business and family goals. The question here is whether the business will continue for another generation and what the roles of the younger generation will be – whether they will actually manage it or just participate as owners and if so the number of individuals from the next generation to run the firm and when to take over the family business

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(Srisomburananont, 1999).

3.2.3. Working Together

A senior generation between fifty and sixty-five and a junior generation between twenty and forty-five are characteristic of the working together stage. At this point, families need to manage the complex relations of parents, siblings, cousins and children of their own and their siblings’ of various ages.

Gersick et al (1997) identify three key challenges at this stage: fostering cross-generational cooperation and communication, encouraging productive conflict management and managing the three-generation working together family. At this stage, the family and the business has grown to a certain size where communication is vital to linking mechanisms that will allow the family system to continue integrated operation in the face of dramatic decentralization and diversification (Srisomburananont, 1999). In order for communication to be effective, Gersick et al (1997) identify three characteristics that can enhance good communication: honesty, openness and consistency. In tune with effective communication, any conflict that may emerge during this stage must be managed and made productive. The family needs to try to diagnose the sources of family conflicts and improve the process of conflict resolution (Srisomburananont, 1999). Maintaining conflict under control will allow the family firm to save up on costs since these are higher at this stage than they were in the earlier stages due to its highly complex family and business structure. Conflict at this stage may also be seen as an opportunity to develop some of the most innovative ideas of the family firm (Andrews, 2010). Lastly, the family firm must learn to manage the three-generation family through utilizing each

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member of the family in the organization and provide new opportunities through the form of new positions (Andrews, 2010).

3.2.4. Passing the Baton

At the last stage of the family dimension, passing the baton involves the issue of succession. As the first generation moves into late adulthood, there are major issues concerning transition of control and ownership of the family business. At this stage, the senior generation is around sixty years of age and above while the junior generation is between twenty and forty-five.

Gersick et al (1997) identify two key challenges at the passing the baton stage:

senior generation disengagement from the business and generational transfer of family leadership. According to Lansberg’s (1988) analysis of succession conspiracy, there are four elements which hinder or slow down the senior generation’s disengagement from the family business, these are: the fear of differentiation among the siblings, the offspring’s fear of being perceived as greedy, the spouse’s fear of loss identity and activities and the family’s fear of the leader’s death. Disengagement of the senior generation may be done gradually or quickly.

Difficulty in giving up control will initially come in the form of dissatisfaction with the younger generations’ leadership and thus the senior generation may push a final heroic leadership stand (Andrews, 2010).

In order to ease the transition between the four stages of the family dimension, Gersick et al (1997) suggest that a family council must be developed. This will provide the appropriate setting for educating family members, setting boundaries

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between business and family and creating shared values. The purpose of the family council is to develop a family plan that represents a shared vision based on the family’s history and a longer-term plan of action. This will connect the family through a common mission, philosophy and represent clear objectives which will serve as a guide for their actions to achieve a future goal.

3.3. The Business Dimension

Based on the works of a number of business life cycle theorists (Greiner, 1972;

Kimberly, 1979; Kimberly et al, 1980; Jossey-Bass et al, 1983; Flamholtz, 1986), the business dimension can be divided into three stages: start-up, expansion/formalization and maturity.

3.3.1. Start-Up

The formation of this stage is based on the founder’s high aspirations and is characterized by little organizational structure. As a start-up company, it will commonly focus on one product which will most likely be a market niche in order to survive the intense competition (Srisomburananont, 1999; Andrews, 2010).

Gersick et al (1997) identify two key challenges at the start-up stage: survival (market entry, business planning and financing) and rational analysis versus the dream. In order to survive the competitive arena, the firm must gather adequate liquidity to set up basic operations, purchase materials, manufacture the product and actually sell it to the market. Having a clear understanding of the product, price and operations, the firm must quickly form a competitive advantage and have adequate

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internal planning and funding (Srisomburananont, 1999; Andrews, 2010). At this stage, although the business began to fulfill a dream of the founder, he/she must balance between rationality and passion. An honest assessment of the likelihood of success must be done while still maintaining the dream alive (Srisomburananont, 1999; Andrews, 2010).

3.3.2. Expansion/Formalization

The expansion/formalization stage may take many forms and may sometimes go unnoticed. At this point, the family firm has established a presence in the market, whether through expansion or organizational complexity. This stage also involves the period of growth and when organizational changes slow down significantly.

Small changes such as establishment of new manufacturing facilities, service offices, hiring professional management or introducing new products or services are all part of the expansion/formalization stage. Therefore, this stage is characterized by increasingly functional structure and the existence of multiple products or business lines (Srisomburananont, 1999).

Gersick et al (1997) identify four key challenges at this stage: evolving the owner-manager role and professionalizing the business, strategic planning, organizational systems and policies and cash management. As the organizational structure develops into a more formal hierarchy with various business units and functions, the owner-manager must begin to delegate responsibilities and authorities to non-family members. As the number of non-family professionals increases, decision procedures must be formalized and family members must be hired based on skill and not relation (Srisomburananont, 1999; Andrews, 2010). The challenge