Excerpt
The world’s oldest family businesses are very successful in terms of longevity and resilience, but most are still competing effectively today despite rapid change. From the analysis of their websites discuss the reasons for their long-lived success.
Family business is one of the critical pillars on which our economies are built on. Some world famous enterprises like, Ford, Fiat, Ferrero, Wal-mart, Samsung are all family businesses. Although these companies had been through to crucial ups-and downs since their establishment decades ago, they are still playing a leading role in their industries. This is a successful record if compared to other family business whose longevity is far to be compared to such influential names. According to researches, only 30% of family firms reach the second generation (Beckhard and Dyer, 1983), while less than 16% survive to a third generation (Applegate, 1994). Family businesses though share the same name are of different fate. Some are long lived; the others have short very life span. This applies to many countries, like in Britain; we can also easily spot some bad-managed family businesses while there is no lack of successful one as well. To study the “longevity secrets” of the successful family business cannot only benefit all of the family businesses but also the economy of the whole society as well. In this paper, we choose three successful representatives, this is Arco, Berry Bros. & Rudd Limited and Bilgrave from a great number of family businesses in Britain to study and try to find out the common approaches they used in running their business so as to give more insights to others in terms of family businesses.
Arco
As a company, Arco has been in existence for almost 130 years and has diversified from manufacturing sports equipment to being the UK’s leading supplier of protective and safety equipment. Throughout its life, the company has remained a tightly-held family firm. Using perspectives from Maslow’s hierarchy of needs, agency theory, stewardship theory and transaction cost theory, it is shown that Arco has built a distinctive corporate culture which distinguishes it as being a family firm from shareholder-owned companies. By placing a member of the founding Martin family as a top manager of the firm, this essay shows that the principal-agent problem in agency theory is reduced at Arco. This part also argues that a focus on building a corporate culture, focus on staff and social responsibility have created unique competitive advantages that allow Arco to compete effectively in a competitive economy.
We begin with a discussion on an early theory of why economic entities coalesce in the form of firms proposed by Coase (1937). Coase (1937) questioned why firms exist at all when an alternative could be found in contracting; in other words, economic activity could be directed through the price mechanism in a marketplace in which an activity could be simply coordinated through the market by hiring the experts needed for a particular project. Using a neoclassical approach to the question, Coase (1937) reasoned that this process of searching for external experts can incur transaction costs, which could be even more significant in the case of highly complex activities, and therefore firms exist because holding all these expertise in-house in a single economic entity (the firm) would reduce those transaction costs. While this explanation provides a compelling argument for why firms exist, it does little to differentiate between publicly-traded firms and family businesses.
Jensen and Meckling (1976) was the first work to formulate the principal-agent problem that provides an explanation of the behaviour of shareholder-owned firms. Particularly in the case of diffuse ownership of a firm (many shareholders), there comes a point when the firm must hire managerial expertise and the managers are defined as the agents. Jensen and Meckling (1976) argued that there are intrinsic differences between the shareholder-principals and the managers; specifically, the principals tend to look for long-term growth in the value of the firms and their shares while managers may mainly look largely to enrich themselves, potentially at the cost of the shareholders. Shapiro (2005) characterise the managers as inherently risk-averse, and driven by specific roles and rules while the principal is naturally entrepreneurial – innovative, proactive and risk-taking. In the case of Arco, however, it would appear that the managers and the shareholders of the firm tend to be the same individual – for instance, a member of the Martin family is managing director of the firm and therefore represents both the shareholder family’s interests as well as takes a manager-agent role within the firm, reducing some of the differences between the principal and agent.
In a comprehensive review on the subject of family business, Ramachandran and Jha (2007) proposed that, under agency theory, the agents are implicitly assumed to be driven by lower order needs (economic, security and physiological) and therefore gain greater utility from accomplishing their personal rather than organisational objectives. Therefore, the way in which companies resolve this principal-agent problem is by instituting control mechanisms to prevent agents from pursuing opportunistic behaviour.
In stewardship theory, agents are not implicitly assumed to be opportunistic and Ramachandran and Jha (2007) state that a true steward is driven by Maslow’s higher order needs (growth, achievement and self-actualization) without necessarily being self-interested. Therefore, stewardship theory views actors as self-actualising, collective-serving and generally altruistic beings who are motivated to work towards longer-term organisational goals.
In the case of family firms in which family members are invested in the firm and take on management roles, Ramachandran and Jha (2007) argued that many of these agency problems can be minimised. The family itself becomes identified with the business and in cases where management of the company is composed of family members, the principals and agents are the same individuals. However, Ramachandran and Jha (2007) suggested that there can be additional problems when family relationships and ties between members complicate the business relationship. Also, nepotism, free riding and dependence upon parents can lead to the entrenchment of ineffective or predatory managers. The issue of succession is central to the consideration of family businesses and Handler (1994) argued that it is the most important issue faced by family firms, making succession planning crucial to the success of the firm.
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