The Handbook of Family Business

Fabio Corsico (edited by)

• Publisher: LUISS University Press
• Year: 2020
• Print ISBN: 9788861055346
• eBook ISBN: 9788861055773
• Topic: Business
• Subtopic: Management
• Index: Business

Family business is the dominant form of business throughout the world, both in emerging economies and in developed countries. Family businesses are typically rooted in tradition but they are also able to develop innovative mindsets and culture. What is exactly long-term success for a family business? And what are its peculiar elements? This handbook is an integrated and analytical review of the existing literature on the subject. Fabio Corsico has collected testimonials from the most influential family managers and experts in the field. Every chapter provides both analyses and conclusions with rigor and relevance, linking theory to practice, thus offering an essential reference manual for researchers and professionals.

chapter 1

Introduction to family business

and theoretical perspectives

fabio corsico*, enzo peruffo**, chiara acciarini***

1.1. the essential traits of family businesses

The definition of “family business” represents one of the foundational concerns existing in previous literature. While Beckhard and Dyer (1983) associate a family business with the presence of business, family, founder, and other linking organizations, Chua et al. (1999) define them as systems where family owned and family managed; family owned but not family managed; and family managed but not family owned can exist. Moreover, Dreux (1990) clarifies that family firms are economic enterprises controlled by one or more families with a degree of influence in organizational governance sufficient to substantially influence or compel action. Among other definitions, the “European Family Businesses” describes these companies as characterized by the following features:1

- the person(s) who established the firm or who acquired the share capital of the firm or spouses, parents, child or children’s direct heirs also have the majority of decision-making rights;

- the majority of decision-making rights are indirect or direct;

- at least one representative of the family or kin is formally involved in the governance of the firm;

- listed companies meet the definition of family enterprise if the person who established or acquired the firm (share capital) or their families or descendants possess 25% of the decision-making rights mandated by their share capital.

In Italy, around 85% of the total companies is represented by family businesses;2 in Europe, they make up over 60% of all companies.3 More in general, European family businesses are dominated by Germany, France, and Italy (Credit Suisse Research, 2018).

Litz (1995) tries to clarify the boundaries of the domain of family businesses, integrating two different approaches: the structure-based approach and the intention-based one. Starting from the assumption that the structure-based approach is based on the separation between ownership and management, the author states that a family business is characterized by the concentration of ownership and management within a family unit. Following the intention-based approach, the degree to which family businesses desire to become, or not become, family-dominated is considered. More in general, Handler states that “defining the family firm is the first and most obvious challenge facing family business researchers” (p. 258). In general, family firms are considered crucial for business and society (De Massis, Di Minin and Frattini, 2015). Moreover, Lansberg (1988) suggests that specific features like family membership, ownership, and management are useful to make a distinction between family and non-family businesses.

Even though, prior to 1975, the studies in the area of family business were relatively limited (Handler, 1989) without a coherent comprehensive framework (Wortman, 1994), there is evidence that this kind of research is becoming increasingly sophisticated and rigorous (Bird et al., 2002). Family businesses are extremely important for economy and society: the recent report released by Credit Suisse Research estimates that around 30% of companies in Europe are in the fifth generation, even though the European House Ambrosetti states that in the Old Continent “the proprietary continuity following the first generational shift does not exceed 33% and only 15% are able to ensure continuity in the transition from second to third generation”.4 Furthermore, the data recently provided by Bank of Italy and Prometea underline that:

• 53% of Italian entrepreneurs are over 60;

• almost 70% of Italian companies with more than 50 employees are family-owned;

• 2% of entrepreneurs face problems of in planning succession of family assets annually;

• 70% of family businesses have a descendant in the corporate command group;

• typically, family businesses grow faster and generate better profitability than non-family firms. Moreover, higher revenue growth is related to higher share price performance. Finally, the impact on margins appears to be greater for small rather than large companies (Credit Suisse Research, 2018);

• normally, family businesses, compared to non-family ones (Credit Suisse Research, 2018):

- tend to invest a higher percentage of their revenues in research and development;

- tend to show higher growth than total investments;

- tend to allocate cash flow to business growth;

• in addition, family businesses perform worse during periods of economic growth, and this is related to their management which is more conservative and defensive (Credit Suisse Research, 2018).

According to Fernández-Aráoz, Iqbal, Ritter, and Sadowski (2019) and as illustrated in the following Figure 1.1, the essential traits of successful family businesses are: presence of a set of values, which represents a driving force behind value creation; future vision, but even more important a common vision on the business’s future development. Moreover, the level of staff involvement represents a crucial factor which increases the psychological climate of the firm. For instance, Azoury, Daou, and Sleiaty (2013) claim that “employees belonging to family firms are mostly happy in their career”; especially, “they feel that they are concerned with the organization problems” because they also have a good level of knowledge and culture (p. 26). Also, information sharing and cohesion, in addition to the respect among family members and to an effective family governance system, can be considered as representative traits of these companies. Particularly, in relation to the latter characteristic, specific pillars emerge from the analysis of governance structures:5

- Management, which can be external or internal. Each style is associated with well-defined specific criticalities and opportunities. For instance, family members could interfere in the operational business due to their strong relationship with the company;

- Income and monetary incentives play a strategic part in family businesses. Carrasco-Hernandez and Sànchez-Marìn (2007) identify the key determinants of employee compensation in family and non-family firms. Confirming that compensation mechanisms differ between firms, they also show that “the pay level is lower in family owned and managed firms than in both non-family and professionally managed family firms” (p. 224). A study by Chrisman, Devaraj and Patel (2017) proves that family businesses tend to have lower labor productivity as a consequence of both lower compensations and career opportunities;

- Control, which has been studied in terms of duality between formal and informal (Ansari, and Bell, 1991; Tsamenyi, Noormansyah, and Uddin, 2008) or characterized by no dichotomy in some other cases (Efferin, and Hartono, 2015);

- Equity, requiring the need to define the appointment of directors, payment of dividends, strategic decision-making, ownership interests, and business financing.

Figure 1.1: The Essential Traits of Family Businesses

Source: our elaboration from Fernández-Aráoz et al., 2019

Although our understanding of their heterogeneity needs to be enriched, family businesses play a significant role in the EU and worldwide economies, being big or small, listed or unlisted companies. Moreover, they are the most frequent ownership models adopted around the world with tremendous impact on global economy. Overall, the culture and behavior in family businesses represent driving forces which pass down from generation to generation. Especially, the role of values within the family is important for creating a strong sense of identity and for achieving economic success.

1.2. theoretical perspectives on family business

With the aim to frame the phenomenon of family business and more specifically the heterogeneity of family business definitions and characteristics, the theoretical framework needs to be outlined. Previous studies on family business have focused on different theories based on various assumptions and conditions. In this sense, the lack of homogeneity about family firms’ features is also reflected in the heterogeneity of theories and frameworks. More in general, the theoretical perspectives can be considered important ways of seeing and understanding the world (e.g. Nordqvist et al., 2015; Peruffo and Perri, 2017). In some cases, the explanation provided by a specific theory is not sufficient to explain and discuss a particular phenomenon of interest. In other circumstances, specific action and strategies applied within the business context can play an important role with regards to the type of theoretical perspectives selected (Nordqvist et al., 2015).

Thus, while the research about family business mainly discusses the agency and the stewardship theories, some other approaches are referred to the resource-based view and the behavioral agency th...

Table of contents

• The Handbook of Family Business
• Index
• Preface by Michael A. Hitt
• Chapter 1. Introduction to family business and theoretical perspectives. Fabio Corsico, Enzo Peruffo, Chiara Acciarini
• Chapter 2. Entrepreneur, entrepreneurial family, and family business. Bernardo Bertoldi, Fabio Corsico
• Chapter 3. Family office. Dario Tosetti
• Chapter 4. Strategic growth options of family businesses. Paolo Boccardelli, Santiago Iñiguez de Onzoño
• Chapter 5. Governance and family business. Marcella Panucci, Annarita Sofia, Francesco Gianni
• Chapter 6. The generational handover. Maurizia Villa, Paolo Saccavini, Fabio Corsico
• Chapter 7. The decision making process in family business. Anna Zanardi Cappon, Paolo Palazzo
• Chapter 8. Organisation of work and human resources management in Family business companies: an application of “the go-kart model”. Antonio Sebastiano, Antonio Giangreco, Gianni Camis
• Chapter 9. Family business in the digital era: navigating a scenario full of transformations. Enzo Peruffo, Chiara Acciarini
• Chapter 10. Finance in family businesses. Raffaele Oriani
• Chapter 11. An introduction to strategic communication. Louise Tingström, Jacopo Villanacci
• Chapter 12. Social impact and the evolution of the role of foundations in family business. Massimo Lapucci, Fabio Corsico
• Chapter 13. The Sustainable Family Business. Sarah Varetto
• Contributors’ biographies