Managing family firms is one of the biggest challenges in China--

Managing family firms is one of the biggest challenges in China(1)

2007-07-11 17:28:28 [ Big Normal Small ] 　Comment

Special：Xing Talk—Celebrities Interview

Recently, Xing Zong, a 5th year Ph.D student at Duke University took an exclusive interview with Wharton School Prof. Raffi Amit on the topic of family business.

About Prof. Raffi Amit
Raffi Amit is the Robert B. Goergen Professor of Entrepreneurship and a Professor of Management at the Wharton School. Dr. Amit is the Academic Director of the Goergen Entrepreneurial Management Program which encompasses all of Wharton’s entrepreneurial curricular programs. As well, he co-founded and leads the Wharton Global Family Alliance (Wharton GFA), a unique academic-family business partnership established to enhance the marketplace advantage and the social wealth creation contributions of global families through thought leadership, knowledge transfer and the sharing of ideas and best practices among influential global families. Dr. Amit has extensive experience in executive education having taught a range of courses in North America, Europe, Asia, and in Australia.

Interview
Xing Zong: Prof. Amit. Thanks for taking my interview. First tell us why you choose family business as your research? Why does it intrigue you?

Amit: Family businesses comprise 70% of the business around the world. In Asia, they comprise an even larger fraction of the total number of businesses. In mainland China, while many businesses are state owned, we see very rapid growth of family businesses.

In business school, we traditionally teach people how to start, how to grow, how to manage and how to sell the corporation. The vast majority of the businesses around the world are family businesses, therefore there’s an obligation to meet and expand the academic knowledge and start new curriculum. Many students at Wharton come from substantial families around the world. We would like to be the global leader in family business. Therefore we create the Wharton Global Family Alliance, which is a partnership between Wharton faculty and global family firms.

We study the issues that concern family businesses. At the top level, there are three issues. One is family business management and governance, the second has to do with wealth management and the third with philanthropy. There are issues the family has to deal with, such as succession, how to control the family business. For example, in the United States, 35% of the fortune 500 companies are family business. How do families keep control of these very large companies? The Ford family controlled Ford Motor Company, the largest automobile company in the United States. So there are mechanisms for the family to use to control the firm. We studied the implications for the value, for family and so forth.

Xing Zong: You just mentioned 1/3 of the Fortune 500 companies are family controlled and more 70% of them originated from family business. But a lot of economists consider the enterprises which have the family control to be the symbol of old business which fall behind. Do you agree?

Amit: No, I don’t agree with them. The first question is how do you define a family business? Of course different people define their family business in different ways. No matter how you define it, we see family business leading in many industries. For example in the newspaper industry in the United States, New York Times, Washington Post are both from family business. I don’t know whether you heard about Konda company, it is controlled by a family. Even for today’s sophisticated IT companies, many of them are family owned. So I disagree with them.

Xing Zong: Many non-family companies suffer from the standard conflict between management and shareholders over such issues as returns, management pay and governance. This is quite obvious advantage for family business.

Amit: You have to be careful. You are correct in the observation of this conflict which we academics usually refer to as the “agency problem” between ownership and management. However, in the family business, these kinds of problems don’t exist because the owner is the manager, right? However, in family businesses, there might be conflict between the family owner, the majority of the shareholders, and non-family shareholders. The question is: which of the conflicts has a greater effect on the firm? My research shows that, conflict in the descendant CEO firm is more costly than the standard conflict. You raised a very good question, but it depends on which company it is. Is it the founder’s company, or is it the descendant’s company?

Xing Zong: During the startup period, family business can have better performance because it doesn’t need sophisticated management. While it grows, it will inevitably face the bottleneck of people! How do you think people can solve this issue?

Amit: Every startup is a family business. One of the issues that family members have is, how to attract and retain professional managers. In large corporations, professionals can get stock and options, worth a lot of money. If family members are at the helm of the company, people will ask, how can I be compensated for my contribution? How can I advance? Different families have different issues. For some people they need job security. So there are other issues. I should say that it is a huge problem for family business to attract high quality professional managers. It is a challenge.

Xing Zong: I think another challenge is the company culture. Usually the founders have utmost authority. But this will bring problems because he can also make wrong decisions. What do you think?

Amit: first of all, I agree that corporate culture is a profound aspect of business today. Yet I can tell you that family firms can add a unique dimension to their company’s culture. Because people observe the presence of the founder, feel the attachment to this person, the commitment to this person. They identify his value, they will never find it anywhere else. What you describe as the challenge is actually positive to the firm.

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