Governance Structure Theories for Family Business

Governance Structure Theories for Family Business

Ashok Chopra, Satish Menon
Copyright: © 2021 |Pages: 23
DOI: 10.4018/978-1-7998-6669-5.ch005
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Abstract

It is perceived by the authors that family ownership may be seen as an opportunity or a threat based on various factors. Ownership and commitment to business would definitely be able to address the concerns of the investor community. This is because of a better understating by the family in having a strategic approach to risk management. Therefore, all the more important to have the right governance conditions in place which reflects the positive aspects of family ownership. The author further states that in order achieve the said perspectives, there emanates a need for a design structure of governance to have a balance between family and business. Hence, it becomes all the more vital to define family values and have the involvement of each and every family member. The author further elucidates on the fact that it becomes imperative to improvise capital and ensure a proper leadership succession planning so that business continuity does not suffer.
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Evolution Of Family Business Governance

Family businesses are common around the world and their survival is crucial to fueling and funneling economic growth both locally and at a global level. Interestingly many well-known and successful organizations started out as family businesses, including some of the Fortune 500 companies. Not only do these companies play a very vital role but they open windows of opportunities for newer investments which are secure and provide a more stable outlook. Many business models have been societal oriented ones, both at a local and at a regional level.

From an evolutionary point of view most of the family business saw their birth as being entrepreneurial. This has slowly, but surely gone through many changes due to various external forces at play and this has brought about a much-diversified thought process amongst the families. In that, business diversifications were seen to emerge that gave rise to big and profitable conglomerates. Over the years we have seen the family business go through generational transitions which paved the way for other business opportunities to be explored.

Given this pace of change, the need for a structured governance mechanism became more imperative. To explain the evolution more elaborately, we need to rewind to the era of 80’s. This period saw the three-circle family system model which was put forth by The Harvard Business School.

The three-component model has interdependent yet an overlapping system within a family enterprise. It is basically Family, Ownership, and Business. For seamless functioning, it is important to know the dependence of one system on the other and how they interact and provide a support mechanism for other systems. This system gives a certain autonomy to individual family members and let them know the extent of empowerment given to each of them. A combination of the above is the essence of Governance.

Figure 1.

The three circle model of family business system by Renato Tagiuri and John Davis

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