According to a study conducted in 2006 by the Technological Institute of Monterrey in Mexico, between 65% and 80% of the companies in the world are family-owned, and generate approximately 50% of the global gross domestic product. This number is even higher in Latin America where it is estimated that up to 90% of companies are family-owned.
As important as they are for the world economy, family-owned companies represent the simplest structure of corporate organization, and it is considered the first-stage in the life of most companies. Many times family-owned companies are thought of as being exclusively small, and are often confused with micro, small and medium businesses, both terms tending to be used indistinctly. Who hasn’t heard the term “mom-and-pop stores” to refer to small, independent establishments? However, the concept of the family-owned business is based on the family relationship among its owners, while micro, small and medium businesses are based on the amount of workers, the value of the assets and the volume of sales. Family-owned companies do not necessarily have to be small, and those who adapt to changes and evolve can grow to become great trans-national corporations.
The simple corporate structure of the family-owned company is distinguished by the fact that the shareholders, members of the board of directors and employees are all the same people — and all of them part of the same family. As this may result in benefits regarding control and general direction of the company — since as employees the family members would not have to be consulting themselves as board members, and as shareholders they would personally be involved in the day-to-day operations of the business — it can also bring conflict and disadvantages. The interests and powers of shareholders, board members and managers are not always the same, and on occasions may be conflicting. For example, managers or board members tend to prefer reinvesting profits back into the business, while shareholders want profits to be distributed as dividends. This usually leads to situations where the company fails to grow on par with its business potential if the family decides to always pay themselves dividends, or where the family struggles financially because they reinvest everything back into the business.
This simple corporate structure does not represent major drawbacks when decision-making is concerned, since being the shareholders, board members, managers, and even the employees, the same people, they are always in tune; so there are no major setbacks due to communication problems between the different corporate bodies. This is especially true when it is one sole member, the patriarch of the family, who maintains dominant control both within the family and the company.
It is the growth of the business itself that demands change. At the moment when a family-owned company feels the need to grow due to an excessive demand which its simple corporate structure—where family members are, and do, everything—can no longer satisfy, it is forced to specialize its operations, separating the different business activities in divisions, each one dedicated to exercising a specific function within the gearing of the company. This separation of functions necessarily demands changes in the corporate structure to secure adequate coordination and control over these new divisions. In this manner, the family structure is forced to evolve to a functional structure, where the operation of the company is divided in departments (eg. sales, accounting, human resources, administration, etc.), led by suitable people, not necessarily family members. This evolution is necessary in order to provide the corporate structure the strength it needs to support the heavier weight of the growing business.
“The simple corporate structure of the family-owned company is distinguished by the fact that the shareholders, members of the board of directors and managers are all the same people — and all of them part of the same family. As this may result in benefits regarding control and general direction of the company [ … ] it can also bring conflict and disadvantages.”
As reasonable as this may sound, it is more difficult than it appears. The family patriarchs and founders of the company often resist change, since they believe that what they have always done has always worked, and is the reason why the business has grown. So they do not feel a need for change. They hesitate to release the dominant control they have exercised over their own business and, above all, to yield decision-making power to strangers or even to their children, over whom they have always had a position of authority. They have a hard time delegating and subordinating themselves to their children in their new executive roles within the company.
What is true is that many family-owned companies do not make it past their second generation and many successful companies die prematurely because the families have refused to change. It is necessary that the patriarchs of family-owned companies adapt to these changes, that they allow their corporate structure to evolve and grow in par with the business, that clear rules of succession are established and that the designated successors of the company are prepared early. But, above all, it is imperative that spaces be opened to competent people, even if they are not family members, when the complexities of the operation demand it. Only then can the continuity of the company be assured as well as the transcendence of the business beyond the first generation.
