Professor Studies How Family Businesses Make Business Decisions

Professor Studies How Family Businesses
Make Business Decisions

The University of Connecticut
by Karen File

A significant amount of research has been done to understand the type of businessdecisions and managerial processes that differentiate family businesses from other enterprises.In-depth studies have shown that family-owned firms have distinctive leadership processes, morenurturing family-like cultures, are more customer oriented, and consider family needs whenmaking business decisions. On this last finding is where a UConn family business researcher hasrecently focused.

Do family members participate in all business decisions or do they get involved in onlycertain kinds? If so, which ones?

Karen File, Associate Professor of Marketing at UConn’s Stamford branch, recentlycompleted a study that was designed to determine which business decisions seemed to triggerfamily involvement and which were processed with little or no family intervention.

Dr. Filedeveloped a list of 34 procurement decisions common to many different types of companies. Shesurveyed 396 family businesses. For each of the 34 product or services involved in the decisions,the chief executive officer (CEO) of the family enterprise was asked to rate the importance ofthe purchase to the business and, subsequently, to rate the degree of influence that non-employeefamily members exerted in each one of the decisions. Exhibit #1 summarizes what she found.

Category #1: Decision has High Importance to Business and Evokes Significant Family Involvement

Some decisions are important to the business and are likely to trigger family involvement.These tend to be decisions that have an effect on the finances of the business and on the fortunesof the family that owns it.

Comprising the first group in this category are decisions concerning current and deferredcompensation and benefits of senior (usually family) members. These include decisions topurchase benefits consulting, deferred compensation planning, and retirement planning services.Included in a second group are current strategic financial allocation decisions, includingpurchases of capital equipment and banking services.

A third group encompasses those decisionsthat might have both short and long-run impact on the direction of the firm, like managementconsulting services and management training services.The last group in this category houseddecisions that affect how the public views the family firm. Included here were advertising agencyselection as well as the specific services offered by the agency.

Category #2: Decision has High Importance to Business but Evokes Little or NoFamily Involvement

Some decisions are important to the business but evoke little or no family involvement.A common denominator in this category may be the technical complexity of the decision.

The CEOs of the family businesses surveyed in this study report that the family does notwield influence in decisions such as those concerning property insurance, accounting services,corporate legal services, software procurement, the selection of computer equipment, local areanetwork evaluation, security services or telephone equipment leases or purchases.

Category #3: Decision has Low Importance to Business but Evokes Significant Family Involvement

There are a few purchasing decisions which family business CEOs rate relatively low inimportance to the business but which do incite family involvement. They include key employee insurance, buy-sell agreements, and corporate philanthropy. Like advertising, corporatephilanthropy creates high visibility, reflects on individuals in the family and is considered to be an extension of the family’s philosophy. Furthermore, philanthropy is a way in which thebusiness makes itself felt within the community.

This type of favorable exposure is importantto the status and image needs of the family. Key employee insurance and buy-sell agreementstrigger family involvement for a different reason. They are contracts which have real intent butwhich also define the relative power and influence of various members or factions of the family.

All are relatively low in importance to family business CEOs, in part, because they are generallyinfrequently activated. But because they articulate individual family member power andimportance, family members exert direct influence on their content and terms.

Category #4: Decision has Low Importance to Business and Evokes Little or NoFamily Involvement

Finally there is a category of decisions which are of lesser import to the business and inwhich the family chooses to exert little influence. It includes service-oriented decisions such aslong distance, cleaning, printing, travel agencies and the like. Two of these decisions processesstand out as perquisites that often reflect status and power, namely car leasing and office design,but the CEOs in this survey have indicated that these decisions did not encompass familymembers’ influence.

Cross-Check

For the battery of questions as a whole, two non-procurement decisions were included as a consistency check on the importance and influence ratings of the CEO. These were hiringfamily members and hiring top managers. As expected, both were revealed to be important to the business and both included significant family influence.

Dr. File’s findings support emerging theory in family business studies. Her article basedon this research will be published this Spring in Industrial Marketing Management.