What are the advantages and disadvantages of family ownership?

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What are the advantages and disadvantages of family ownership?

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Emerging Markets: GE Innovates from the Base of the Pyramid

In global competition, large firms not only compete in product markets, but also in terms of how they are organized, financed, and governed. Definitions of what consists of a “large firm” vary around the world. A reasonable definition is that if a firm is large enough to be publicly listed, then it would be a “large firm” in that country. Almost all large firms started as small firms. Small firms typically feature concentration of ownership and control—the founders own, manage, and control them. There was a time that many small firms aspired to become large enough so that they could become publicly listed, which would be an awesome hallmark that these firms have “made it.” As firms grow larger, the founding families may run

out of money so that introducing outside shareholders would be necessary. The founding families may also run out of sons, daughters, in-laws, and relatives to staff key positions so that employing non-family, professional managers would be a must—so the theory goes. This theory was first published in a 1932 book The Modern Corporation and Private Property by law school professor Adolf Berle and economist Gardiner Means. Generalizing from several decades of transformation at leading American firms in which founding families such as the Carnegies and the Rockefellers gradually reduced their holdings and introduced outside shareholders and professional managers, Berle and Means argued that such transformation would be inevitable. In brief, their theory predicted separation of ownership and control as firms grow larger. What if the founding families refused to let go? In 1983, economists Eugene Fama (who won a Nobel prize in economics in 2013) and Michael Jensen asserted that failure to separate ownership and control “tends to penalize the corporation in the competition for survival.”

The question is: Really? The other two major forms of corporate governance are family ownership and state ownership. While the Berle and Means theory does a good job characterizing the evolution of large firms in the United States (and, to a lesser extent, Britain), the theory ends up not explaining the ownership and control pattern in the rest of the world very well. Numerous publicly listed firms continue to feature concentration of ownership and control in the hands of families. At present, about 85% of $1 billion-plus firms in Southeast Asia are in family hands, 75% in Latin America, 67% in India, and 40% in China. In Europe, families control 40% of listed firms. In the United States, 15% of the largest firms—those in the Fortune Global 500—are family owned and controlled. While there is no shortage of family drama and intrigue—remember the TV show Dallas?—evidently family ownership and control have no problem surviving and prospering.

The Fama and Jensen prediction that large firms with concentration of ownership and control would suffer from terrible performance cannot really be supported. In South Korea, Samsung Group, led by the capable Lee Kun-hee family, has marched from victory to victory, contributing 20% of GDP. In India, Tata Group, in the hands of the House of Tata, contributes 5% of GDP. An extension of the Fama and Jensen prediction is that while some large family firms may do well domestically, once they go overseas they would surely fail to become world-class in global competition. Again, this conjecture can be refuted. For example, Tata Group has emerged as one of the leaders of Indian firms’ globalization. In Britain, Tata Group is now the single largest private sector employer, proudly supporting 50,000 jobs—an accomplishment none of the UK-owned (and non-family-managed) firms can match. In the United States, some of the best performing and largest firms, such as Wal-Mart, Ford, and McKesson, are family owned and controlled. Newly listed high-tech firms such as Google and Facebook have carried on this tradition.

In addition to family ownership, state ownership remains a rival form of corporate governance. Despite privatization around the world between the 1980s and the 2000s,during the Great Recession of 2008-2009, Western governments in an effort to rescue ailing firms nationalized numerous private firms and turned them into state-owned enterprises (SOEs). Today SOEs represent approximately 10% of global GDP. Even in developed economies, they command 5% of GDP. Anchored by SOEs, China over the past three decades has grown its GDP by 9.5% per year. SOEs represent 80% of China’s stock market capitalization. But China is not alone. In Russia, the figure is 62%, in Brazil 38%, and in Norway 38%. SOEs include some of the largest oil and gas companies (such as Sinopec), the biggest telecom service provider (China Mobile), and the biggest ports operator (Dubai Ports). In 2014, they also represented six of the top ten most-profitable firms globally (measured by the amount of profits): Fannie Mae and Freddie Mac of the United States, ICBC of China, Gazprom of Russia, China Construction Bank, and Agricultural Bank of China (in descending order). In short, SOEs as an organizational form can be both large and successful.

Recently what seems to be under siege is the publicly listed corporation. In 1997, the number of US listed firms reached a high watermark: 7,888. Since 1997, their number has dropped dramatically—by 38% in the United States and by 48% in Britain. The hassles associated with public ownership have facilitated the rise of private equity. Michael Dell, for example, has taken Dell (the corporation) private, because private ownership would give the firm “more time, investment, and patience.” Private equity deals now routinely represent 25% of all mergers and acquisitions (M&As) in the world (and 35% in the United States). While existing firms can go private, many aspiring new firms do not bother to list at all. As a result, there is now a severe initial public offering (IPO) famine: between 1980 and 2000, on average there were 311 IPOs a year in the United States. The average went down to a mere 99 a year between 2001 and 2011. In short, going public is no longer as sexy as it was before. Commenting on the global competition in terms of how to best organize, finance, and govern large firms, the Economist suggests that “there is every reason to celebrate the fact that businesses have more corporate forms to choose from.”

Sources:

1. Bloomberg Businessweek, 2014, Private equity discover deals in the Middle East, September 29: 47-48;

2. G. Bruton, M. W. Peng, D. Ahlstrom, C. Stan, & K. Xu, 2015, State-owned enterprises around the world as hybrid organizations, Academy of Management Perspectives, 29: 92-114;

3. Economist, 2012, The endangered public company, May 19: 13;

4. Economist, 2012, The big engine that couldn’t, May 9: 27-30;

5. Economist, 2013, Dell goes private, February 9: 63-64;

6. Economist, 2014, Business in the blood, November 1: 59-63;

7. Economist, 2014, Relative success, November 1: 12-13;

8. Fortune, 2014, Global 500, July 21: F-13;

9. E. Fama & M. Jensen, 1983, Separation of ownership and control, Journal of Law and Economics, 26: 301-326;

10. Y. Jiang & M. W. Peng, 2011, Are family ownership and control in large firms good, bad, or irrelevant? Asia Pacific Journal of Management, 28: 15 39.

What are the advantages and disadvantages of family ownership?

Answer & Explanation (1)

Explanation
Hi, thank you! :)

Answer
Family ownership firm is defined as any business which two or more family members are involved and the majority of ownership or control lies within a family.

Advantage of family ownership:

You and your family are likely to share the same beliefs on how things should be done because the whole family have common values.
Family has a strong personal bond and that means that family members are likely to stick together in hard times and always shows determination needed for business success.
Inside family members, they decide who will lead the business and as a result of it, there is a longevity when it comes to leadership and that can also result in overall stability within the organization or business. A family members that is leading the business usually he/she will stay in the position for how many years until a life event that might happen such as illness, retirement or death results in change.
Strong commitment into family is having strong commitment to the business. It results in making an extra hours and effort that is needed to make the business success.
Unlike typical workers, family members who are working at family firms are willing to contribute their finances to ensure the long-term success of the organization. It can be a family member is contributing his/her share or reducing salary.

Disadvantage of family ownership:

Not all family members like we kno are not that interested on the business that they have. Sometimes, they aren't truly interested in joining the family business but they are doing still doing it because they are expected to do so.
There can be a family conflict to are bound to happen at any firm. Family quarrels can affect every single person and can draw divisive lines. Because family members are involved, conflict can be more difficult to solve and can result in difficult endings.
Sometimes, family members can appoint family members into roles that they don't have skills or lack of experience. This can result of having a negative effect on the success of the business.
We can't deny that there might be a favouritism among family members inside the business.
Succession planning among family members. When the leader has decided to step down on the position and family members has to decided who will lead the business.

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