The family business: “Trust reduces governance costs”

La Quotidienne: What are the specificities of a family business?

Lamia Larioui: Before talking about its specificities, we must first define the family business. A business is said to be family-owned when:

• The majority of the company’s property rights are concentrated in the hands of one or more families whose members are linked by blood or marriage ties;

• Members of the same family (at least two members) are actively involved in the management of the business;

• The family influences the management of the company and vice versa (mutual influence family/company);

• The company intends to be part of an intergenerational continuity.

The family business is specific because it is characterized by the coexistence of two systems which operate according to two different, even contradictory, modes: on the one hand, the “Business” world which operates according to a rational mode and pursues economic objectives, and then a on the other side, the other world “the family” which functions according to an affective, emotional mode and often pursues non-economic objectives or more precisely socio-emotional objectives in particular the durability of family ties, the construction of a family social capital, emotional attachment…etc.

Indeed, each sphere in the family business has its own characteristics. However, family businesses are also heterogeneous. Because behind every family business, there is a family and then each family has its own history, its own system of values ​​and beliefs…etc.

LQ: How do family businesses integrate governance into their management?

LL: Governance in the context of family businesses is more or less specific. The researchers recommend having a governance system for each sphere: Corporate governance and then family governance. In the first sphere, the Board of Directors is the governance mechanism par excellence; while in the second, the researchers recommend the establishment of a family council and the drafting of a family charter where the objective is to specify who is a member of the family and who is not in order to avoid any conflict between family members especially when it comes to the third or fourth generation.

However, the establishment of a governance system, which takes into account good corporate governance practices, within family businesses is not always desirable. Indeed, relationships in family businesses are often based on trust (very difficult to control one’s brother, sister, son or wife!). And sometimes, these good corporate governance practices (having outside directors, for example) risk eroding that trust and possibly dampening the emotional attachment. This is why, in my opinion, it will also be necessary to take into account the informal mechanisms of governance that exist implicitly within the family business, in particular trust, social capital or even beliefs and values. Moreover, trust makes it possible to reduce governance costs.

LQ: What are the challenges facing Family Businesses (FBs) today?

LL: There are three major challenges. First, managing the balance between the interests of the family and the interests of the company. Because it is really difficult to take into account the interests of the company, individuals and the family at the same time. Achieving a balance between the interests of each actor is a challenge for family businesses! This is precisely the role of governance.

Then, ensure the continuity of family ties through intergenerational succession. The transmission must be prepared before the death of the founder. The successor must be actively involved in the management and ready to ensure the sustainability of the RU. Indeed, it is not only the company that must be transmitted but also the social capital. Today, we only talk about the transmission of the company but it is rare where we also talk about the importance of transmitting the social capital. And when I talk about social capital, I’m talking about both relational, cognitive and structural capital. Relational capital is quite simply all the social ties that the founder has been able to build over the years. Do not forget that it is thanks to this relational capital that the company manages to seize opportunities or to have access to resources that were previously inaccessible.

Structural social capital refers to the overall architecture of connections between family members including density and connectivity. Indeed, the social interactions between the members of the family community make it possible to create a feeling of attachment and establish principles and values ​​within the organization and above all to be united, united and devoted to a common objective.

Finally, cognitive social capital refers to common vision and common language. It therefore allows family members to set common goals and to consider that the success of the organization is the success of all. Having a common vision means fewer conflicts of interest. Ensuring the transmission of this social capital is essential because over the years, when the family will be more extended, other individuals belonging to other family branches (brother-in-law, sister-in-law, the most distant cousins, etc.) may be integrated into the family network and that of the company. These will probably have little interaction with the founder and his direct descendants, which will lead to relational and cognitive diversity (they do not share the same value system, for example). As a result, the influence of family social capital on the firm’s social capital is likely to diminish over time.

The third challenge is that of resilience.

LQ: How did RUs react to the Covid-19 crisis?

LL: Family businesses have always been considered resilient businesses that have unique strengths enabling them to cope with crises. Probably, the solidarity, the harmony and the family cohesion which reign in this category of companies, are behind their success and their performance. However, they were faced with an exceptional and unexpected crisis, the consequences of which remain unpredictable.

During a study we conducted with STEP Project (Successful Transgenerational Entrepreneurship Practices Project for Family Enterprising), we found that FFs were able to cope with the Covid 19 crisis thanks to the involvement of all members of the family, their strong identification with the EF and their emotional attachment either to the family or to the company. Let us add that out of 107 Moroccan EFs, only 3 have made layoffs. Indeed, the majority of the leaders of the Moroccan RUs affirmed that the employees are considered as being members of the family and therefore impossible to dismiss them. In short, we were able to identify three main factors of the organizational resilience of FFs: the strength of family ties, internal social capital (ties with employees) and external social capital (ties with stakeholders, in particular customers and providers).

The family business: “Trust reduces governance costs”