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Identify and discuss the criteria that academics and others use to assess the relative success of a family business
Family Business - A Vital Part of the Economy
Family businesses are becoming an important part of many economies around the world. Their sustainability to the global economic growth, as today family businesses carry the weight of economic wealth creation in most of the countries around the globe. Alone in United Kingdom, over 65 percents of the business fall into this category or equivalent to 3 millions out of 4.6 private sector. In many ways, the family business is synonymous with the other entrepreneurial organization as a means of exploiting opportunity for wealth creation in order to provide for the financial well bring of the founder's family. Many large successful multinational organizations such as, Wal-Mart, Ford, Carrefour, BMW were started by founders who went on to build their own family empires. Therefore, family businesses are like a vital role in economic development not only through their business contributions but also creating an investment environment that is open, safe, secure and transparent. There are many ways in which the academic use to access the relative health of a family business. This includes corporate governance, family governance, business performance, philanthropy and social responsibility.
Corporate Governance in Family Business
"Corporate governance refers to the processes, structures, policies and laws that govern the management of a company." (1)
" The governance framework describes whom the organization is there to serve and how the purposes and priorities of the organization should be decided. This concerns how an organization should function and the distribution of power among different stakeholders." (2)
Corporate governance has become and increasingly important issue for organizations for two main reasons. First, the need to separate ownership and management control of organizations especially in family businesses as most of the firms operate within a hierarchy, or chain of governance. Second, there has been an increasing tendency to make organizations more visibly accountable , not only to those owners and managers in the governance chain but to a wider range of stakeholders, including the local community .
It also refers to the way the board oversees the operations of a company and about how board members are accountable to the company and its shareholders. The key purpose of corporate governance is to promote accountability, transparency, fairness, disclosure and responsibility. The core values which are relevant to the success of all business. The companies with sound corporate governance usually perform better than other companies. As greater accountability can provide a better access to external capital such as, Bank, which can lower financing cost and higher credit rating of the companies, therefore increase the investor's confidence over the company.
As growth is increasing in family owned firm as well as the impact on globalization, corporate governance become very crucial in family businesses. As it can help in managing growth, as family businesses expand, the relationship between owners, managers and employees become more complex. Corporate governance can help putting them in place and reducing the conflict between them. Regulate the right policies in order to manage the complexity. This helps the firm to create stronger organizational structure that has clarified roles, reporting lines, and delegating of responsibility. It also draws the line between ownership and management and separates policy direction from day-to-day basis of the company.
Corporate Governance also influence in the leadership succession by ensure that leadership transition does not disrupt the company's growth. Clear policies for recruiting and selection of the right family member is required in order to pass on the success to the next generation, corporate governance needs to be made part of the family firm's culture.
Family members usually have conflicts among themselves especially when working together in the family business. Corporate Government helps them resolve such conflicts therefore they can focus on other key areas such as boost up the sales etc.
The long-term success for family businesses is based on the right recruitment and a good human resource management. A governance system that provides clear guidelines for employing family or non-family members and impartial performance-based promotion is essential to the sustainability of the business.
Finally corporate governance help ensure the fairness as open decision making and procedure can ensure fairness in evaluating and rewarding both family and non-family employees are essential tools in avoiding tensions and increase the reputation of the company.
Many family-owned businesses are embracing corporate governance in order to secure their long-term future. Over the past, many firms have taken the initiative to formalize policy frameworks and structures for effective governance. Especially the firm that enter a new phase of growth and integrates more closely with the global economy, family businesses that ignore corporate governance often lose their competitive edge in the future.
It is an agreement that relate to the relationship between the family and the business. It focuses on ensuring that the wealth of the family continues and grows from one generation to another. It is also the distribution of power that already exist. (7)
" Family Governance is a multi-generational management techniques designed to ensure that the family's history, values and wealth extends well beyond the typical two generations"(7)
The Harvard Business School stated that "Family governance has three components which are as followed. Periodic (annual ) assembly of the family, family council meetings for those that benefit from a representative group of their members doing planning, creating policies and strengthening business family communication and bond. And lastly, a family constitution which are the family's policies and guiding vision and values that regulate members' relationship with the business." (7)
These help to ensure the development of clarity on roles, rights and responsibilities for the family members. It encourage family members, family employee , and family owners to act responsibly toward the business and the other family members . It regulate appropriate family and owner inclusion in business discussions. (7)
Another basic criteria to assess the relative success of the family business is the measure the business performance itself. Once the business is established and running well, the business might need to plan ahead instead of let things continue to run as they are. Progress should be review after the early stages and therefore identify how efficient it is for example, the market position that the firm has established and decide on the next step.
KPIs which stands for Key Performance Indicator is one of the tool in which many firms use to assess how well the business is performing, highlighting the strengths and areas that could be improved and suggesting the actions that need to take to implement the improvements.
It measure how does the business differentiate itself from the competition in the eyes of customers and suppliers. Which make the business better than the competition and the business main key strengths , the way in which the business performance are developed and monitored.
Financial KPIs are to measure the outputs not inputs analysis tool. They can be achieved if you get everything else right. Critical success factors in the areas of customer perspective, internal perspective and future perspective must have a measure and can be monitored. They are usually unpinned by the critical process which means that we have to do better than the competition in order to achieve the financial KPIs. It is vital to review the progress of the business.
Financial result can be use to evaluating the success of the business. Such as, the turnover, the margin , and some ratios i.e. gearing. Businesses that rely on investors who expect regular returns need to provide positive financial results on an ongoing basis. Financial results are a popular tool for evaluating success because they are readily available, easily understandable and unambiguous.
The customer acceptability result also can be measure in term of the number of customers, average spend per customer, number of new customers, level of customer satisfaction and feedback and percentage of business focused in particular group of customer.
Corporate Social Responsibility (CSR) and Charitable Giving
"Corporate Social Responsibility is concerned with the ways in which an organization exceeds the minimum obligations to stakeholder specified through regulation and corporate governance. This includes considerations as to how the conflicting demands of different stakeholders will be reconciled. The legal and regulatory frameworks pay uneven attention to the rights of different stakeholders such as customers, suppliers or employees. Who have a legal relationship with the organization, and community stakeholders, such as local communities, consumers and pressure groups who do not have the protection of the law to the same extent as the first group. Therefore the CSR policies of companies will be particularly important to these community stakeholders. " (2)
The way in which the company act toward the social and environmentally responsible however, also make sense commercially for the business and the company diversity of workforce, energy efficiency.
Measuring the effectiveness of CSR
CSR can help the firms to cut costs and boost sales, however, there are other significant benefits which businesses sometime forget about, as they are slightly harder to measure. Benefits such as improved reputation, stronger customer loyalty and motivated employees can be measured. For example, improved motivation could lead to reduced absenteeism and reduced staff turnover. Similarly, customer loyalty could increase levels of repeat purchasing.
The measurements will probably only show the immediate impact of CSR. The biggest benefit can be the long-term improvement in your reputation. (6)
The justification of the relative success criteria in my family business
My family business which I would make the justification of the relative success criteria to is Siam Gas and Petrochemicals Public Company Limited (SGP) whom Liquefied petroleum gas (LPG) distributor operating throughout Thailand.
In term of Corporate Governance
In my family business, there are regular board meeting carried out at least once each month where every members of the board in this case half of the room is filled with the family members are required to attend the meeting.
My father has a role of Chairman while my brother is working as a Managing Director. The roles of Chairman and Managing Director is very different. They might have some conflict over some of the issues as a chairman, he is decision makers, he plans things ahead over the expansion strategy of the company. While the managing director role is to focus on the areas inside the company such as, finance, marketing, personnel and production throughout the business and thus evaluate the decisions and reported to the chairman, therefore they have different perspective point of view towards things.
The non-family member directors who are selected to work inside the company usually have their outstanding performance in their management skills but their role is not as high as the family-member director.
SGP leadership style would be the democratic style as the company policy allowed everyone who working inside the company have their own sounds in the make the decisions or suggest the improvement in any specific area of the operation and pass on their thoughts to the line managers in the areas they are working in and they thus pass it on to the top management and the decision remain at the top to decide.
At SGP, they believe that to achieve substantial growth, prosperity, stability, sustainable development and dignity is through our strong commitment towards good corporate governance.
Corporate Governance provides transparency and monitoring system as well as fosters positive relationship between SGP and all stakeholders. Good corporate governance is regarded as a discipline that SGP directors and personnel at all levels are to maintain and practice strictly. As a result, we can increase long-term value, proportionally added benefits and satisfaction.
In term of Family Governance
Since my family is small in size with less than ten peoples managing in the business and most of us lived in the same house. It is easier for us to communicate and especially while we are all working together in the same company. Therefore we meet everyday even outside the office time and discuss the conflict or problem which may occur throughout the business over dining table.
The company continuity has been going on for over 40 years now and it will be passing on to the next generation and so on. My brother is now the second generation where I believe that his children will also continue to work in our family business in the future.
There are no specific training for the next generation in order before to work inside the company, but I would suggest that working outside the company for the few years in order to get the idea for the improvement or the specific role would be helpful for the individual as well as the company.
As SGP is operated as the public limited company, thus there are dividend which gives out to the shareholders each year, however, some of the family member who working in the business but did not have share in the ownership of the company may have conflict over this, as they have no benefits, this implies to the in-law etc.
In term of Business Performance
SGP is a large LPG distributor in Thailand with a second largest market share in the LPG sector. Their financial performance has shown satisfied profit level which has increasingly each year due the high demand of the LPG as it is the substitute of the petrol. The rise in oil price leads to the increase the demand of the LPG consumption. The company uses KPIs tool in order to analyze the performance in each department every quarter.
The company plan for the expansion in the South East Asia is going well according to the recent take over in the gas port in some part of China.
In term of Corporate Social Responsibility
Corporate Social Responsibility has been incorporated in SGP business strategy since they started their business. They has increase the main concern on the business environment, the company concentrated more on managing their operations responsibly and efficiently amidst this current complexity, as well as contributing to socio-economic development.
The main focus is on improving the health, safety, security, environment for their employees and other stakeholders. Also they aimed to improving the safety at the workplace and increase the level of awareness for people who working inside the company.
SGP believe that invested in the community programs that help improving people quality of life and their educations.
The main goal of this improvement in the area of safety, security, health and environment is to be able to conduct its activities without causing impact on the personnel and properties of the company, the contractors, the public and environment.
This also can help SGP to increase the motivation at the workplace and can encourage people to take collective responsibility for delivering improvement to the practices in their respective workplaces. To minimize the number of the accidents and losses which can occur throughout the operation of the business.
Since SGP is operated as energy distributor, they has good intention to corporate social responsibilities focusing on their operational, communities as well as the society at large. As they are appreciates that the liquefy petroleum derived from beneath the surfact of the earth is invaluable treasure of the Kingdom of Thailand. The company therefore has the approach to return these benefits to the society as a whole by cultivate intellectual assets for communities and society which leading to improved lives , education, environment in local communities
As the role of Chairman my father donated some of the earning each year in order to build the local schools and hospital for the poverty area where they are needed. Recently, this few months SGP has also been donated the drinking water to the flood victim and money to many other charities.
To concluded this I believe by matching up some of those criteria I have suggested earlier SGP seem to be a successful family business where they have good corporate governance, family governance, outstanding business performance, social responsibilities towards their stakeholders and the local communities.
Reference and Bibliography
(1) Niehm. L. S. and Miller N. J. Journal of entrepreneurship and the impact of Mangerial Role of Family Business Success
(2) Johnson. , G, Scholes. , K and Whittington R., Exploring Corporate Strategy Text and Cases, seventh edition p.165, 191-193
(3) Dawson A., Private Equity Investment in Family Firm: an investigation of Decision-Making Models and Criteria. Dissertation submitted to Universita Commerciale Luigi Bocconi in partial fulfillment of the requirement for the Ph.D. in Business Administration and Management.
(4) Sharma. P,Chrisman J. J., Chua J. H., Strategic Management of the Family Business : Past Research and Future Challenges.
(5)Hess E. D., The Successful Family Business, A proactive Plan for Managing the Family and the Business, (2006)
(6) Corporate Social Responsibility , Measure the effectiveness of your corporate social responsibility http://www.businesslink.gov.uk/bdotg/action/detail?r.s=m&r.l1=1074404796&r.lc=en&r.l3=1075408468&r.l2=1074446322&type=RESOURCES&itemId=1075408572
Accessed 26 November 2010
(7) Davis. J.,The Three Components of Family Governance (2001)
Accessed 25 November 2010
(8) Siam Gas and Petrochemical Public Limited Company main website http://www.siamgas.com/News.php
Accessed 25 November 2010
(9) "Keeping the Business in Business", [online] available at
Accessed 25 November 2010