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Family business structure and succession: Critical topics in Latin American

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Article  in  Journal of Business Research · February 2006

DOI: 10.1016/j.jbusres.2005.09.011 · Source: RePEc

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 PUBLICADO EN EL JOURNAL OF BUSINESS RESEARCH 29 (2006) 372-374

Family Business Structure and Succession:

Critical Topics in Latin American Experience

Esteban R. Brenes, INCAE Business School

Kryssia Madrigal, bac&asociados
German E. Molina-Navarro, bac&asociados

Abstract

This article builds on the premise that management succession, control, and structure, are
central to family business continuity and that, once these are defined, other issues with
potential for family conflict are easier to negotiate. These topics are addressed through the
analysis of three cases of family businesses in Latin America. Research findings indicate
that, for family members, succession and control are sensitive themes to be resolved to
anticipate family conflict and business disruption. Family formal tiers as corner stones in
structure and reliance on external members, where found to be central issues seeking a
balance between business and family.

Key words

Family-business, succession, business-planning, structure, control.

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Introduction

Family businesses face the dilemma of long-term survival by not only overcoming
difficulties common to all economic activity but also conflict specifically arising from their
family-business nature. Statistics show that a significant number of business firms worldwide
are family businesses and also that few have survived generational transition (Carlock &
Ward, 2001). This article builds on the premise that management succession and structure
are key topics that must be dealt with to ensure continuity of family business firms and that,
once these are defined, other topics with potential for family conflict are easier to negotiate. It
is intended to establish the paramount importance of defining family-business policies and
their effect on overcoming hindrances that go hand in hand with establishing a structure
allowing channeling the family vision, values, and business expectations.

Family Business Core Concepts

What makes a family business is the degree of presence and control of owners and
relatives in the company (Romero, 2001). As family member interaction at the work site
increases, a higher risk of painful family conflict must be expected, leading to an imbalance
in the family/business relationship. Business firms strive to strike a balance between
business and family; however, this is not attained most of the time (Brenes & Madrigal,
2003). Often family welfare and needs take priority with no consideration for the firm’s need
for future growth. When the company is given priority, this usually occurs to the detriment
of family communication, harmony, and fulfillment of other family needs and issues. This
gives family businesses a unique character (Carlock & Ward, 2001).

A family-business balance (or imbalance) depends also on the arrival of new

generations to family businesses (Romero, 2001; Carlock & Ward, 2001, p. 94). The
success of succession, anticipation of family members’ conflict and the continuance of the
family business, depend on the existence of a structure providing wider participation for all
family members in current and future decision-making and control of the business. Family
tiers or fora such as the Family Council, the Business Board, and the Board of Directors, are
particularly important to define the family position vis-à-vis issues connected with the
company (e.g., procedures to appoint family - or non-family - members to the Board of
Directors, dividend policies, mechanisms to purchase and sale shares of stock) (Brenes &
Madrigal, 2003). These fora constitute the family business structure that serves as two-way
communication channel between family and business, and allows new generations awareness
of family business values, prior to their joining the family enterprise.

Family Situations and Structures in the Businesses

Research information was gathered during facilitation processes provided by the

authors during actual formulation of family business continuity plans developed by three
participant families that owned family businesses. Table 1 provides background information
for the three family business firms. In addition to developing family business continuity
plans, all Firms are successful in their own industries and have formulated their competitive
strategy.

2
 [Insert Table 1]

Company 1 is the result of two brothers associating with each other. The business
experienced significant success for over 20 years, however, as a result of frictions, Company
1 broke apart. The brother with a majority interest bought the other out and became the only
owner of the family business. The second generation, made up of four family members, all
(except for one) currently work for the family firm. The family philosophy focused on the
company, with criteria such as growth, profitability, and development of new business
prevailing. In Company 2, the owner distributed shares of stock equally among his four sons.
Since they proved unable to work together, their father bought back all shares of capital and
retains 100% interest in the company. In addition, by a unanimous decision of the entire
family, management of the business firm was delegated to professionals external to the
family. In Company 2 the philosophy is focused on the family, as family members’ family
harmony prevail, without neglecting profitability and business growth.

Upon the demise of the founder of Company 3, his two sons became owners with
50% of total shares, each. The older brother died 22 years after; at that time his two sons
receive 25% each of the firm’s equity. To establish succession in the family business, the
four children of the second family unit were encouraged to participate. Two members from
each family unit, all of them successful business people, took responsibility for the
company’s operations. Unity and solidarity within each family unit prevailed; however,
given that each of these owned 50% of shares of stock, decision-making and implementing
the stockholders’ assembly decisions became difficult. Family members in Company 3
focus on the family, with family unity, harmony, and respect prevailing over the business.

Results

Results may be analyzed under three fundamental premises: a. Control and succession
definitions are necessary to insure family business continuity. b. Families are aimed at
achieving a family–business balance, and c. Structure plays an important role in achievement
of family business agreements.

a. Succession and control are necessary to insure family business continuity

In coincidence with research findings in different parts of the world (Carlock & Ward,
2001; Romero, 2001), control (both in terms of shares of stock and of governance) was
negotiated in advance in all three families. In all cases, shares would be evenly distributed
among direct family members and devices to buy/sell shares of stock were established in case
a family member does not want to remain a shareholder or in case a family member divorces
or dies without direct heirs. These decisions fully coincided with stewardship practices
commonly observed among family-owned firms in Latin America (Poza, 1998).

Also coinciding with the literature reports on actions aimed at achieving a family-
business balance (Brenes & Madrigal, 2003; Carlock & Ward, 2001) all family units and
potential successors were provided with a chance to chair the Board given periods of time.
Nevertheless, surrender of control with regard to governance was defined differently in each
case: Company 1 established board positions held by family members on an age basis;

3
Company 2 unanimously chose a chair based on authority with appointed responsibilities and
functions; Company 3 defined that the chair position would revolve between two family
units. Seeking a family-business balance, all three the families defined serious requirements
for family members willing to work at the family business, including academic degree, work
experience outside the family business, and the company need for the position.

b. Families are aimed at achieving a family–business balance

Definitions aimed at attaining a family-business balance were particularly important

to Firms 1 and 2; the former recently facing family disruption, whereas the later anticipated
decisions on business control to avoid it. In Firm 3, achieving a family-business balance was
central particularly considering that critical decision-making was practically suppressed in
order to avoid conflict. In the midst of circumstances, each of the three Firms relied on
external Board members as a referendum council in critical decision-making situations and to
insure balance between family and business, including execution of agreements within a
family business continuity plan. In addition, family members’ effectiveness in the Board
would be enhanced as external members will provide objectivity in definitions of
mechanisms for and evaluation procedures on family members’ performance and
accountability. In this sense, all three families constituted a Board of Directors mainly made
up of external directors, with direct family members as their counterparts.

Family member responsibility and behavior were other dimensions addressed by all
three families in their efforts to achieve a family-business balance. In this case, responsibility
for family members was established as an exclusive duty of the family, i.e., the company is
not responsible for directly supporting family members’ welfare. However, in all three cases
dividend policies and mechanisms (e.g., life insurance paid through dividends) were
established to ensure welfare for all family members over time, taking into consideration
cases of disease, early death, or divorce, among others.

Board members external to the family, family members’ participation in the Board,
and Behavior Codes, all had clear roles and functions in seeking family-business balance and
resolution of eventual difficulties arising from family member’s behavior. Accordingly, in
all cases, structure had significant value in family business decisions regarding actions to
confront family member’s misbehavior, but in corresponding agreement execution, as well.

c. Structure plays an important role in achievement of family business agreements

Definition of a formal link between family and business, i.e., a Business Board, was
central to the three families. Composition of the Business Board varied depending on the
family and the stage the family business is in. In Companies 1 and 3, it was made up of all
direct family members, including those not involved in the family business. In Company 2,
where family members resigned their management positions in the family business, all direct
family members belong to the Business Board. A third tier in the structure considered central
by family members in our study, is the Family Council (also discussed thoroughly by Carlock
& Ward, 2001). The three families decided that all direct family members will participate in
the Family Council, regardless of involvement with the family business. In-laws were not

4
considered part of this Council or in any other position in the company; however, they were
participated in social meetings as defined by the Family Council.

Conclusions and implications

Research findings suggest that survival of generational transition or the family

businesses as a whole, require defining guidelines to anticipate conflict. Our research
findings indicated that family structure, decision mechanisms, and actual agreements on
issues concerning succession and business control, all attempt to achieve a family-business
balance and business continuity. Nevertheless, all efforts targeted family union preservation.
Even in the most sensitive cases involving business-related critical decisions, families relied
on external members as a way to gaining objectiveness and to avoiding conflict. Business
Boards with inclusion of members external to the family, have proven determinant for family
business continuity plans development and communication (Upton, Teal & Felan 2001).

It was clear that family business owners find useful to define at least three different
tiers aimed at formalizing agreements and at linking family and company together. However,
we cannot be assured that structure solely will accomplish its objectives. Two family-
business groups here studied disciplined themselves into following the structure and so far
have gone by formal agreements, nevertheless, no transition or conflict situation has occurred
to confirm this principle. On the contrary, in one case, infringement of agreements occurred
as the topic of departure from the family business was considered by one family nuclei. This
situation suggested that long-term survival of family businesses might be linked to control of
shares of stock by a family partner with a majority interest and that, should things be
otherwise, there is a significant likelihood of departure from the family business.

Although is not possible to draw extended conclusions given that family business
continuity plans implementation is relatively incipient in Latin America, it seems that more
than good will from family members is required to honor agreements on family business
structure, succession, and achievements of family-business balance. This is corroborated by
the fact that at least two of the firms here studied legalized documentation so as to become a
family shareholders agreement. Our bets, however, must go to the role of outside directors in
the board and to management by non-family members. Provided an effective group of
external directors, if family members strengthen their focus on the business philosophical
area, generational transition, and family integration, difficulties commonly found in family
businesses would not be expected to lead to family conflict and family business disruption.

5
References

Brenes, E.R. and Madrigal, K. Anticipando el conflicto en los negocios familiares. Revista

INCAE. 2003; 13:3.

Carlock, R.S. and Ward, J.L. Strategy planning for the family business: Parallel planning to

unify the family and business. Palgrave, London. 2001.

Poza, E.J. La competencia global y la empresa familiar latinoamericana. Revista INCAE

1998; 10:2.

Romero, L.E. La sucesión de los negocios en familia : un reto a su supervivencia. Revista

Dinero 2001;. Setiembre. www.dinero.com:8080.

Upton, N.;Teal, E.J; and Felan, J.T. Strategy and business planning practices of fast growth

family firms. Part 2 of 2. Journal of Small Business Management 2001; 39(1)60.

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 Table 1
Background Information

Company 1 Company 2 Company 3

Sales (US$Million) 110 45 4.7
Employees 1,800 400 17
Industry Retail Distribution Real Estate
Market Share (%) 60 30 N/A.

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