Aalto University - Mikkeli Week 2 ( Day 1) : 9-00am – 10-30pm Family firms

1. Aalto University - MikkeliWeek 2 (Day 1): 9-00am – 10-30pmFamily firms Lecture Slides

2. What are family owned businesses? There are different definitions……… Family owned businesses are companies … … where the dominant shareholder is a family member (broad view) … which are run by heirs of the people previously in charge, or by families that are clearly in the process of transferring control to heirs (narrow view)

3. Separating Ownership from Control

4. Non Listed Businesses “Family businesses constitute more than 85% of non listed businesses in the MENA region.” Pierce (2008) Corporate Governance in MENA “Family businesses constitute more than 85% of non listed businesses in the EU.” Pierce (2010) Corporate Governance in the European Union

5. The long-term success of family owned businesses in the UK are bleak Only 5% continue to create value beyond the 3rd generation* A study** of inherited family firms and management practices in the UK shows that choosing a CEO by “primogeniture” (selecting the eldest son to lead) tends to lead to extremely bad performance *Ward (2004). **Bloom (2006).

6. Key Success Factors for FOEs: Define Relationships and Structures within Family and with Outside Stakeholders Create clarity of roles within the family Create fair playing field for non-family members Fair treatment of outside financial stakeholders

7. Create fair playing field for non-family members Succession planning clear from the start Family employment policy Equality of opportunity in recruitment and promotion Incentives for non-family managers

8. Fair treatment of outside financial stakeholders • Shareholder agreements • Legal structures and tax planning • Disclosure of information • Rights to information • Voting rights at AGM • Control enhancing mechanisms

9. Benefits associated with growth generated through a public listing • Capital structure • Allows company to pursue acquisitions and strategic growth alternatives • Facilitates access to other financial instruments (debt, preferred shares) • Ability to pursue long term investment strategies • Monetization options • Creates a tool for monetization of members’ equity interest over time • Help secure sustainability • Public equity culture • Fosters ownership culture with employees • Creates long term employee incentives • Visibility • Further raise the public profile of the firm • Enhance credibility with counterparties

10. Disadvantages associated with growth generated through a public listing • Reduces family share ownership • Legal & regulatory compliance • Initial and ongoing compliance with disclosure regimes can be a burden • Increased public scrutiny • Financial and organizational details disclosed to the public • Public reaction may contribute to stock price volatility • Public shareholder base • Public shareholder base requires time, attention and information • Risk of adversarial shareholder base • Potentially less say over operation of the business and strategic goals

11. Specific Challenges for FOEs Need to distinguish family and company relationships • Dissensions between family members who are actively working and those who are not • Financial relationships Informality of governance policies • “Common” understandings not universally held or understood by outsider (or insiders!) Weakness of control environment • Founder is still is on top of everything … Managing growth: More complex with succeeding generation • Owner / manager equation shifts • Growing number of non-family managers require formal system • Incentivising non-family managers Succession • Who from the next generation is up for the challenge … do they have the same drive?

12. Challenges: Overlapping Roles andResponsibilities Familymember Manager Director Owner

13. Global significance • Many multinationals began or still are family businesses! • Entrepreneurial flair and innovation facilitated growth and global expansion • For example Bosch, BMW, Hyundai, Samsung, Fiat, Tata etc. • University of St. Gallen, Switzerland • Global Family Index – Largest 500 family businesses • Account for $U.S. 6.5 trillion in annual sales

14. Essential characteristics • Possess unique merits and disadvantages • Merits: • Family reliance when first established common • Business advice • Low or zero interest rates • Disadvantages: • Family interference • Most significant issues faced are family relationships, company culture and succession planning

15. Company culture • Common values and principles that positively guide management and employee behaviour • Endows family firms with key advantages • “Sense of future” • Judicious and long-term view • Often better prepared to survive downturns • Founder’s entrepreneurial flair inspires and motivates • Base of knowledge, skills and contacts • Reputation

16. Succession planning • Identifying and developing potential candidates to fill important positions • Increase the availability of experienced & skilled employees • Caused by retirement, death, ill-health or the pursuit of other opportunities • Critical to all businesses, not just family businesses

17. Succession planning • Succession difficulties • Next generation have different ambitions • No capable heir apparent exists within the family • Founder / owners does not want to relinquish control • Sibling rivalry (News Corporation) • Owners ignore the need for a successor • This is a widespread problem • Successor fails to make decisions or take responsibility