A family business is a company owned or managed by family members, often across multiple generations, with a strong emotional commitment and shared vision for the future.

Family Business

1. Chapter 3 Ownership Challenges MGT4101: Family Business Management

2. What you'll learn Concentrated Ownership Shareholder priorities and responsibility Effective governance of the shareholder-firm relationship Information, communication, and education: Shareholders Ownership structure

3. The Systems Model – Family Business Family Management Ownership Family Members Other Shareholders Family Shareholders Owner-Manager Family Members Owner-Managers Family Employees Non-Family Managers & Employees Source: The Systems Model. Adapted from Davis and Tagiuri , 1981. Family Meeting Family Councils Board of Directors Shareholder Meetings

4. Ownership

5. 1st Generation: Concentrated Ownership “Concentrated Ownership” Majority of shares are held by few owners, i.e., family members For public companies, the top 5 largest shareholders in the companies listed on the Stock Exchange of Thailand Concentrated ownership leads to higher overall corporate productivity and longer-term commitment to investments in people and innovation.

6. Ownership structure impacts Corporate Productivity Hill, C., & Snell, S., Effects of Ownership Structure and Control on Corporate Productivity. Academy of Management Journal, 32(1), 1989, pp. 25–45.

7. Next Generation Ownership As 2 nd and 3 rd generation family members become owners it is more likely that some will NOT be working in the family business This often creates problems regarding:

8. Next Generation Ownership This challenge usually grows in third- and later generation of family businesses. Shareholder disagreements regarding dividends, return on investment, business strategy, financial results, and management succession are often responsible for the implosion of successful family companies. This is not just a family dynamic issue, but also an ownership issue, with precedents in finance and business management.

9. Managers VS Owners – Agency Theory Ownership: Returned on invested capital Family unity Shareholder value Continuity Management : Competitiveness Growth Career Opportunity Profit

10. Shareholder Priorities

11. Shareholder Priorities Shareholders want: Risk adjusted returns as captured in shareholder value, dividends or distributions Family firms often want: More than just a financial scorecard! Noneconomic outcomes such as:

12. Shareholder Priorities Family shareholders expecting to understanding of management and fulfill their responsibility of aligning management interests with shareholder priorities Financial literacy Otherwise , this can hamper the effective operation of a family-controlled business. If family unity suffers as a result of this pressure by some family members for high returns and short time frames, a loss of will and vision may result.

13. How can family businesses develop committed and responsible shareholders?

14. Responsibility of Shareholders to the Company

15. Responsibility of Shareholders to the Company

16. Effective Governance of the Shareholder-Firm Relationship Roles of the Board

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18. Importance of Board N ext -generation leaders of family companies undertake a critical review and restructuring effort involving their board Frequent communication and education needs to take place beyond traditional board work and strategic planning processes. 28

19. The Role of Shareholder Meetings, And Meeting of the Family Council When extended family is large, representative family councils can be used to educate and inform the family These representative councils can also provide the Board with input regarding family strategy and policies

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21. Information, communication, and education: Shareholders Most essential education and sharing of financial information should be done in regularly scheduled shareholder meetings and meetings of the family council The ability to read and understand a financial statement with a high degree of comprehension is a must This keeps family shareholders involved and fulfills the legal requirement to recognize the rights of minority shareholders .

22. Information, communication, and education: Shareholders Trust comes from information, reliability, shared goals, emotional bonds, a sense of fairness, and transparency . Shareholders who are not sufficiently informed and involved can get suspicious and concerned

23. Ownership Structure: Design and Execute it Many family businesses begin as entrepreneur firms and the owner takes competitive advantages from speed and agility The costs of losing this advantage when they continue in later generations of the owning family.

24. Ownership Structure: Design and Execute it Ownership Structure: later Generations Loss speed and agility advantage as ownership transfer of voting shares equally among family shareholders often decay a next-generation manager's ability to lead The authority to lead is earned , not inherited Transferring ownership without an eye toward corporate control makes it more difficult to acquire the authority to lead

25. Therefore, ownership-transfer policies motivated by a desire to love and treat all family members equally Or expectations of equality by family members which are likely to promote an impasse in order to continued agility and competitiveness Successors need to manage the business with ample capacity to lead. Ownership Structure: Design and Execute it

26. Contractual agreements between shareholders and the company Typically used by family business owners to help facilitating an orderly exchange of stock in the corporation for cash It is often the primary vehicle through which family shareholders can realize value from their highly wealth of company stock. Ownership Structure: Buy-Sell Agreements

27. Ownership Structure: Buy-Sell Agreements The most obvious benefit of a buy–sell agreement is that it allows some family members to remain patient shareholders while providing liquidity to family members with other interests or goals May allow only family members active in the business to own company shares ; Selling stocks to non-family members or non-active family members is not allowed