Passing the Torch

Contents

• Introduction
• Family firm
• Adolescents’ decision
• Culture
• Succession
• Conflict
• Parenting styles

Introduction

A company managed by family members shares threats and opportunities faster than non-family-managed companies. Communication speed between members gives the company a competitive advantage in the imperfect market. Competitive advantage is a condition or circumstance that puts a company in a favorable or superior business position. A family company is one where "a single family member has majority decision-making power" or "when a family member owns five percent or more of the company in the form of shares." We must consider the ethnicity, culture, and religious environment in which a family company operates because they help us understand their motivations. "Culture is patterns of thinking that parents transfer to their children, teachers to their students, friends to their friends, leaders to their followers, and followers to their leaders."

Career decisions of the second generation of family members immensely impact the company's future planning, investments, and survival. The career decision of the second generation of a family is intentional successor, intentional entrepreneur, or intentional employee. Training of an intentional successor starts from childhood to adulthood.

Simple conflicts are necessary for a company to make beneficial business decisions. However, complex conflicts and poor succession planning threaten a family company's survival. The difference between a thriving and failing family company is its ability to transfer entrepreneurial skills. The skills once practiced and perfected by their parents. An entrepreneur is a person that organizes and operates more than one business, taking higher financial risks than usual.

Family firm

A company aims to build good relationships with suppliers, customers, and the community. Family companies generate 80% of employment within Pakistan; therefore, these companies' well-being and continued growth are essential for a developing country like Pakistan.

A family business is like a marriage, where communicating with respect, love, forgiveness, and understanding is necessary. A healthy family includes characteristics of unconditional acceptance, putting family interests first, and enjoying a lifetime family membership. The structure of a family firm is hierarchical, and power is typically centralized. Protecting the founder's legacy is essential to gain pride and social status within society.

Adolescents’ decision

An adolescent is a young person in the process of developing from a child to an adult. The possible outcomes of their decision are shown in the figure above.

Intentional successor:

In this case, the successor’s training has already started during their childhood. Parenting style has a significant influence on creating a successful successor. Kinship linkages (connectedness to distant family members) may make succession an opportunity or burden for the successor and a structured succession process is necessary for achieving success.

Intentional founder:

Parents transfer entrepreneurial skills to the adolescent. Suppose the adolescent has strong views about making money in solving an existing problem and possesses the skill set to do so. In that case, they often work independently in their area of interest. Parents have shown disappointment when adolescents choose to be intentional founders because the parents have to do additional work, i.e., looking for alternative solutions.

Intentional Employee:

This decision gives the adolescent a free choice to choose their area of work, independence from distant family members, and offers no responsibility for the company's well-being. Similar to that in the case of decision number 2, parents show disappointment.

Culture

Culture plays an essential role in the ownership and management of a company where multiple family members work together.

Pakistani culture is collectivist, highly power distant, and masculine.

In a collectivist culture, a collection of socially tight-knit individuals from among relatives, tribes (village), and friends offer services with unquestioning loyalty in return for economic support—a kinship network or “biradiri," as it is called in the local language. The concept of kinship networks extends beyond the immediate family. This culture supports cross-cousin marriages (to retain land and property). They help each other in feuds regardless of the issue of justice involved and a high level of trust or bharosa exists between them.

Power-distant culture is where “inequality is seen as a fact of life’. Particularly the inequality that exists between relationships. Pakistani culture is characterized as highly power distant. Families support a structure of hierarchy. The father is the head of the family and the eldest son has more say in decision-making than the younger ones. An older brother is referred to as “bhai” in Urdu. This 'is not a symbol of equality but a mark of respect for family hierarchy.' Children are expected to respect their parents by refraining from questioning their authority. The elders of the families, such as paternal or maternal grandparents (buzurg), are considered wise and experienced. They are to be treated with deep respect.

Masculinity is a societal preference for achievement, heroism, and material success. In a masculine society, there is a maximum difference between the social roles of the males and the females. Sons of the family are expected to assume leadership, and the daughters are expected to be married off and honorably start a new life in a new home. The status of masculinity is closely tied to the concept of “izzat," which can be translated to "widespread respect."

Succession

The process involving the transfer of “ownership and decision-making powers” to the next generation is called a succession process. The succession process helps to increase the wealth and reputation of the family and the company.

Since both the parents and children are concerned about the operations and future of the company. The successor development process starts in early childhood where parents provide training regarding adjustment in the company environment. During adolescence, entrepreneurial skills are taught and in adulthood they are made responsible for business after the transfer of ownership.

A quality relationship between owner and successor is considered an asset during the succession process. The succession process is successful when planned and implemented in small steps. A stages-based model is the most successful. A successful succession process ensures the continued survival of the company.

Pre-entry stage

The successor is introduced to the business conversation over formal dinner events, e.g., operations, management, and strategy. To provide work experience to a successor, the owner offers an internship or opportunity to work voluntarily over the summer holidays in the company.

At this stage, successors can be categorized as effective and non-effective successors. Effective successors are those who enter the business earlier with only high school diploma. They have more working experience within the company. Non-effective successors at this stage continue their strategic education and enter business with university degrees. The advantage of university degrees is “that non-effective successors can recognize specific needs of the business and design formal management systems." Some owners believe the successor must work outside the family company, as part of the successor development process.

The potential successor explores career options: namely, intentional successor, intentional founder, and intentional employee. They develop intentions consistent with their abilities, values, and interests.

Parents discuss and develop consensus on strategic education with the successor. Strategic education is one that is most beneficial in future to the company. Forming a roadmap of specific education and strategic work experience for the adolescent in areas that would benefit the family business the most.

Entry-stage

If skills need improvement, successors can take part in short executive development courses. The adolescent is now allowed to work in the company full-time, after strategic education and strategic work experience.

Entrepreneurial bridging takes place when the successor is now mature and actively works alongside the owner, receiving the necessary training to conduct business. Training takes place by allowing the successor to work at different job roles with in the company. Giving the successor challenging assignments, which are above their current capabilities. It has proven to be the most effective mode of executive learning.

The owner provides feedback on the successor’s performance, mentioning his strengths and weaknesses. For the feedback to have maximum impact, it is provided objectively and in a supporting atmosphere. This period acts as an opportunity for the owner to benefit from the successor’s strategic education and work experience.

Mutual role adjustment is when the owner reduces his involvement and allows the growing involvement of the successor. Sharing decision-making power with the successor while the owner imparts their business philosophies. This allows the successor to learn about the leadership of the company. Providing the successor sufficient freedom empowers them and makes them responsible and accountable for decision-making. The result is the company making several innovations.

Succession stage

It takes at least two years for the succession stage to complete. During the succession stage, the successor masters the complexities of the company's executive position. Transfer of equity by the owner keeps the successor interested in the business and the successor assumes the CEO position. The successor acknowledges the life-time commitment to company. Clear boundaries around the owner's involvement in the business are drawn because it can infringe on the successor's leadership and management practices.

Conflict

Almost every company has internal conflicts. Conflict is usually expressed through communication and behavioral problems. 70% of companies managed by families have no procedure to resolve complex conflicts.

A company managed by a family practices a centralized system of control, similar to that they practice at home. Where leadership and management style authoritative (low support and high control). The methods adopted to “managing a family” compared to “managing a business” oppose one another. Business management includes a "perform or leave philosophy" whereas family management includes "unconditional acceptance". When family members interfere in business management, they make business management a domestic issue. Immensely multiplying the interpersonal differences. Resulting in severe/long-term/repetitive conflicts. Furthermore, a higher level of altruism is seen among family members. Altruism is linking the well-being of one's self to another. This is one way the family ruins business.

Conflicts are rarely caused by poor business performance or misunderstandings. They are caused when family members believe that their individual needs are not being met. Family members can be divided into actively or passively involved. Actively involved members are aware of financials and operations whereas passively involved members are not. Passively active members need to be made aware of finances or operations in order for them to effectively resolve conflict.

Conflicts lead to the disintegration of the company into smaller business units. This is why only some companies managed by family members survive the succession process. In Pakistan, the father/owner typically divides the equity. Equity is the value after subtracting liquidated liabilities from the liquidated assets. The logic behind such a practice is to avoid potential conflicts among siblings while keeping the

business intact as a single entity and allowing the siblings to carry on the business activities without affecting the decision-making or business performance.

Some arguments that lead to complex conflicts:

• 50% of companies managed by families argued about the future direction of the company. i.e., who can and cannot work, the proportion of reinvestments and dividends.
• 50 % of companies managed by families also argued because of lack of consultation between family members when making decisions.
• 40% of families argued about members’ performance at work
• 25% argued about remunerations

Simple Conflict

Such conflict arises when discussing how work should be accomplished, proper utilization of personnel, and delegating responsibility.

Complex Conflicts

Complex conflicts are emotionally charged. They cause failure to make benefiting business decisions and lack of productivity. This type of conflicts cycles repeatedly throughout the company on multiple occasions. It is vital to make a list of outside sources that give birth to complex conflicts.

Disruptive Conflicts

Arise due to lack of acceptance between parents and children. It is difficult for children to disagree with their parents, because such action appears disloyal. The lack of open communication has the affect of limiting health discussion. Children leave the company and family. Feeling guilty and developing an identity crisis. Poor succession planning is the root cause of such conflict. If children stay, they engage in infighting, missing potential business opportunities.

Relationship conflicts

Arise when the “majority shareholding entity” takes advantage of their position. Leading to unhealthy competition, i.e., sibling rivalry. Underlying reasons include jealousy, bitterness, lack of forgiveness, unfairness and battle for parental attention. Such conflicts cause a complete lack of decision-making and productivity. Incurring unnecessary loss in business.

Personalities Conflict

Personalities can cause conflict between members of a family. Observing individuals' personalities reveals that members can be categorized as leaders or managers. This type of analysis is based on the Big Five Personality Traits. Where responses to questions on the traits below reveal an individual’s personality.

1. Conscientiousness is the personality trait of being careful or diligent. Conscientiousness implies a desire to do a task well and to take obligations to others seriously. Conscientious people tend to be efficient and organized instead of easy-going and disorderly.
2. Extraversion includes traits such as talkative, energetic, assertive, and outgoing. Social interaction is the key here. Extraverts often take on leadership positions, first to offer their opinion and suggestions. They are often quick to approach others, especially on the dating scene.
3. Agreeableness is a personality trait that describes a person's ability to put others' needs before their own. More agreeable people are more likely to be empathetic and find pleasure in helping others and working with people who need more help.
4. Openness to experience: People who are highly open to new experiences are motivated to seek new challenges and engage in self-examination.
5. Neuroticism is a tendency toward anxiety, depression, self-doubt, and other negative feelings. All personality traits, including neuroticism, exist on a spectrum—some people are much more neurotic than others.

Conflict management

Five strategies that are normally offered for resolving group conflicts can also be applied to family companies. These are: competing, accommodating, avoiding, compromising, and collaborating. Each strategy is categorized based on varying levels of cooperativeness and assertiveness adopted in behavior. Cooperative behavior is an attempt to satisfy the other person's concerns, and assertive behavior is an attempt to help one's concerns.

1. Competing: Being assertive and uncooperative is pursuing one's concerns at the other’s expense. e.g., “I am firm in pursuing my goals this time.”
2. Accommodating: Being un-assertive and cooperative-neglecting one's own concern to satisfy the fears of the other person. e.g., “If it makes the other person happy, I might let him maintain his views.”
3. Avoiding: Being un-assertive and uncooperative is neglecting one's own and another's concerns by not addressing the issue. e.g., "I feel that differences are not always worth worrying about."
4. Compromising: Being neither assertive nor cooperative is an attempt to partially satisfy both oneself and the other by finding a middle-ground position. e.g., “I try to find a fair combination of gains and losses for both of us.”
5. Collaborating: Being both assertive and cooperative is digging into an issue to find a solution that completely satisfies the concerns of both parties. “I tell him my ideas and ask him for his.”

To resolve all sorts of conflicts, it is important for family members to first understand their own perspective with regards to solving each particular conflict. Differentiating between management and ownership issues. Establish clear communication by presenting clear job descriptions to manage expectations. Turning to family counselling and organizational development experts (advisors) if all efforts fail.

Parenting styles

Parents and children solve problems internally; they are emotionally attached and in long-term relationships with one another. Their interaction with each other every day in the presence of resentments deepen conflict and do not expect to be mistreated. In the end, causing hurt to one another.

Parents' behavior towards children can causes children to misbehave irrespective of already existing business conflict. Parenting styles can be categorized as Permissive, Authoritative, Authoritarian, and Neglectful. The level of support and control distinguishes each category.

The permissive parenting style (high support and low control) has shown a higher level of misbehavior among female children. In contrast, the Neglectful parenting style (low support, low control) caused a higher level of wrongdoing among male children.

References:

• Career Choice Intentions of Adolescents with a family business background
• Conflict management and resolution in family owned businesses
• Difference in Management styles, levels of profitability and performance across generations
• feuding families when conflict does a family firm good
• first second and third generation family firms a comparison
• indentification of success factors for sustainability in japanese family businesses
• life cycle of family firms
• predicting the growth of high growth smes
• succession in family owned SMEs the impact of advisors
• The flaws that plague the family run business
• Thomans Kilmann: Conflict Mode Instrument