More

Which ownership behaviours produce the best results for a family business?

In 2012 the Journal of Small Business and Enterprise Development analysed family business ownership behaviours and the financial performance of theses family businesses. Specifically, the theorists examined four particular ownership behaviours.

1. Professionalism. The authors define professionalism as the extent to which owners meet roles and responsibilities. This includes adhering to family and/or business agreements, respect for hierarchy and lines of authority, and adherence to policies and procedures. Other professional behaviours include that non-employee owners didn’t make independent decisions about the business or make inappropriate demands on those who manage the business.

2. Active governance. Refers to the supervision of management by owners. The researchers found that more active governance by owners would produce better economic performance for the family business.

3. Owners as a resource. Refers to the owners ability to provide resources to the firm – both financial and non-financial. The study assumed that the more the owners behave as a resource for the firm, the better the firm’s performance and that of other family assets would be.

4. Fulfilment of basic ownership duties. This list of duties included providing capital, attending shareholder meetings, keeping informed on business developments and company activities, reviewing annual reports of the company and providing inputs on various topics like investment strategy, succession planning, etc. The authors suggested that family businesses where owners fulfilled these basic functions would have better financial performance.

So which of the four ownership behaviours positively affected family owned business financial performance? Which ones negatively affected family business?

Both owners as a resource and fulfilment of basic ownership duties proved to have no significant effect. For our family business readers and those of us who work in the trenches alongside them every day, these results were predictable. Most family businesses don’t require a great deal from their owners in the way of financial resources. Once established family businesses tend to be quite self-sufficient and self-funding. With regard to fulfilment of basic ownership duties, this is a given in the sense that family business leaders take their stewardship seriously.

Interestingly, active governance had a neutral to negative effect. It’s likely that the operators of the family business view active governance as micromanaging. No one likes having others direct their behaviour to a ridiculous degree.

The one ownership behaviour that proved to have a positive effect on financial performance was professionalism. That means family businesses develop clear roles and responsibilities and a strong level of accountability. There is a clear company structure and people follow the lines of reporting on the organisation chart. Family members and employees agree on and follow policies and procedures, and they don’t interfere in places outside their areas of responsibility. Importantly non-employee owners do not get involved in day-to-day management decisions. Family members make agreements among themselves and create a healthy trust environment.

In short, professionalising the family business pays off in a financial sense and it also reduces the incidence of conflict, which improves overall family harmony.

So what behaviours do you and your family members display?

If your family business is in need of support to make your family business operate more professionally connect with us today.

Phone (02) 6658 0775