"Regulating the family-business relationship is key to survival"

April 07 2016
Executive Education INCAE

In Latin America, as in many other parts of the world, about 60% of companies are made up of family groups. Although a good part of them have managed to survive the vagaries of time and have become essential engines of the world economy, it is also true that others have failed to adapt to the changing world of business and globalization.

To delve into the strengths and challenges that characterize these organizations, Professor Esteban R. Brenes, Academic Director of the Family Business - Perpetuating Family Business program, gave the following interview.

-Around family businesses we can find some negative connotations, such as saying that “their days are numbered”, what could you tell us about it?

-In reality, most companies in Latin America are family-owned, therefore, if we see it that way, what we are saying is that companies in general do not work and that is not correct. I agree that in some cases, there are problems that need to be addressed, but most family businesses do well.

Here, the most important thing is that those who lead them understand the importance of giving them continuity in the long term and, the way to achieve this is through the establishment of very clear rules that regulate the family-business relationship.

-What kind of rules are you referring to?

-Those rules have to do with aspects such as: when would family members be admitted to work in the business? Under what conditions and circumstances? And what characteristics should these people have?

Other important aspects to consider are the issues of succession: when should we pass the command in the organization? There are people who do not want to stop captaining the ship until very late in their age, which is good and there is nothing wrong. However, the problem is that many times they do not prepare the second or third generations and then, the succession becomes difficult.

Others do not want to make decisions regarding who would be the successor, although these types of issues should be discussed, preferably when the leader of the organization, the founder or the founder, is still alive.

It is essential that the family meet and agree on a series of rules and everything is reflected in a document. This writing should contemplate basic moral principles, and all the necessary rules to regulate the family-business relationship, that writing is known as the Family Protocol. Even certain families
they decide to legalize some of these rules in their company statutes.

-What should family businesses take into account to avoid the fulfillment of the prophecy that says: "the first generation builds, the second develops and the third destroys"? 

-Today in Latin America, due to circumstances of our natural evolution, companies are passing to second, third and fourth generations at a great speed. Therefore, it is a good time to ask ourselves what should we do? For me - I insist - one of the fundamental things is to write a family protocol where the rules that are established are absolutely clear to everyone.

Adequate preparation of the successors is essential. There will be boys and girls who will not want to continue in the business and will dedicate themselves to other things, but there will also be enthusiastic people who can take the reins in the best way if there is proper planning.

-How many advantages do family businesses have compared to other business models?

-Many. One of them is that they usually have a long-term vision. They are run by people who are always thinking about non-short-term future results and that is very positive.

On the other hand, it seems to me that these companies also have the advantage of having a family that supports them, that supports them, that can give them continuity if things are planned in the right way and future generations are prepared in good time.

-In times of crisis, how has the behavior of companies led by family nuclei been?

-It has been shown that family businesses are very strong in times of crisis. They weather storms quite well because many times what their members do is sacrifice themselves personally so that businesses prosper and stay afloat. If you have to put money in, you put it in, if you have to work harder, you work, and so on.

-From your perspective, what are the areas for improvement that family businesses are facing at this time?

-The issue of Corporate Governance is central. For me, a family business must have a very well supported Corporate Governance. In other words, it is essential that the company has a robust board of directors, board committees, etc., for its proper functioning. My recommendation is that these bodies work with the presence of people outside the family, in such a way that there is an important balance between family interests and the objectivity of people who are not involved with the emotional part of the business.

-Why is this balance important?

-This balance is vital because families, beyond their advantages, sometimes get caught up in emotions and discussions could turn emotional. Instead, the balance of external people will allow them to make more objective decisions.

-Finally, in what measures should a family business set itself to know if it is on the right track?

-All companies, not just family ones, have to value different aspects. I would say that financial results are not always the best measure to say that we are on the right track because they could reflect what has been done, but not what is to come.

Rather, I think that generally speaking, companies should focus on, for example, doing customer satisfaction surveys, cost studies relative to competition, growth, new products and services that they have brought to market. That is, to point to other types of measures that tell us if the strategy we have is the one that will take us on the right track.

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