ELEMENTS OF GOOD OWNERSHIP
MATTI KOIRANEN,
UNIVERSITY OF JYVÄSKYLÄ
[email protected]
OPENING WORDS:
STIMULI FOR THIS COURSE
• ”Owners - provided they are active,
competent and well-positioned - have a crucial
role to play in the processes of creating value
for business property”. (Carlsson, 2001)
• ”Ownership is the strongest motivation of
human action” (Kao et al., 2005)
AIMS OF THE COURSE
• To deepen the understanding of various
dimensions and implications of ownership
• To familiarize learners with the criteria and
ingredients of good ownership
• To examine good ownership policies and practices
• To understand the legacy of family business over
generations, and to discuss about the dynamism
involved in family ownership
THE RELEVANCE OF GOOD OWNERSHIP
IN FAMILY BUSINESS
•
A healthy owning family with strong values is, perhaps, the greatest
resource a business can have. The values and sense of purpose
nurtured by the owners are, thus, the strength and energy for
business.
•
Ownership taps the potential power of the family as the engine to
drive (family) business.
•
Ownership enables that owners have a possibility to grow and
develop their potential as well as to fulfil their dreams in and for a
society.
•
Ownership constitutes a task, a territory, and a role as well as a
collection of rights, power, wealth, a source of motivation and
pleasure. But is also constitutes duties, risks, responsibility, worries,
accountability, and can even be a burden or a mental imprisonment
for some. Above all, it creates (but may also limit) opportunities.
•
Competition of getting good owners at many levels is increasing.
DEFINING OWNERSHIP VISUALLY
• RELATIONSHIP and INTERPLAY between the subject and
the object (Grunebaum 1987).
• The nature of ownership is RELATIONAL and RECIPROCAL.
SUBJECT=
THE OWNER
(For example a person)
Ownership as
relationship and interplay
OBJECT=
THE OWNED TARGET
(For example:
A house
A car or
A membership)
* Thesaurus: Ownership ~ Dominion, possession, proprietorship.
OWNERSHIP: OTHER DEFINITIONS
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”Legal right of possession or proprietorship” (Collins Dictionary,
1995, 1115)
”The ability to use and control an object” (Hall, 2005)
”Voting shares or voting power” (Ward & Dolan, 1998, 306)
”The state or fact of exclusive possession or control of property.”
(Wikipedia/Ownership)
”The state or fact of being an owner” i.e. ”A legal right to the
possession of a thing”. (www.answers.com TM)
”The act of having and controlling the property = The act of
keeping in one’s possession (www.thefreedictionary.com)
TARGET IS NOT ALONE A RELATIONSHIP
• In colloquial language, we often relate to ownership
with such adjacent concepts as holdings, assets, capital,
property, and wealth. In fact they are not relationships,
as they are just targets or objects.
• In doing so, we mix the relationship with the object.
• This kind of every-day speech also reveals that the
legal and economic dimensions of ownership are
dominating in our thinking of ownership.
GOOD OWNERSHIP: CRITERIA OF ”GOOD”
1)
RESPONSIBLE: Ethical (-->high moral values),
Sustainable (--> Surviving and adding value over
generations), Caring (-->Maintaining good
stakeholder balance, stewarding attitude to owning),
Patient (--> long-term view).
2) ENTRE-AND INTRAPRENEURIAL: Innovative (
-> Creating new, renewing old), (Pro)active (-->
Initiative behaviour and action), Risk-tolerant (-->
Accepting uncertainty & coping with it)
3) BALANCING
--
OWNERS ARE KEY STAKEHOLDERS
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Owners stake is unique. It is their capital input with risk taking,
their reputation, their legacy, their history and their future that is at
stake.
Owners’ responsibility cannot be delegated, but to some extent its
risk can be managed, reduced or transferred (like through
insurance).
Owners’ interests are an essential part of strategic guidelines to
management and they are represented in corporate governance by
the directors of a board.
Companies compete with each other to get good owners; cities and
regions compete to get good owners in their areas.
Active owners are more than short-term investors. They think more
about the continuity than exiting the business.
Owners’ financial rewards are dividends and value appreciation.
If owners do not use their voice and rights, someone else will do it.
OWNERSHIP AND ATTITUDES -1
• In the relationship, like ownership, where something
belongs to somebody, attitude to ownership can lead to
different kinds of ownership behaviour, such as:
•
-
Selfish and greedy (emphasizing mainly power
and proprietorship)
• +
Unselfish and generous (emphasizing mainly
responsibility, stewardship, and even philanthropy)
OWNERSHIP AND ATTITUDE -2
• These two different attitudes are extremes; in reality
between the two there is a continuum
• Ownership behaviour can be contextual. It is possible
that the owner can be selfish and unselfish depending on
the situation.
• Bergolm et al(1994:1): ”Vi har inte ärvt jorden av våra
föräldrar. Vi har bara lånat den av våra barn.” i.e. ”We
have not inherited the earth from our parents. We have
borrowed it from our children.”
• Question: What comes to your mind when you apply the
above attitude into the business context: proprietorship
or stewardship. Are you a short-term investor or a longterm owner ?
QUALITY OF OWNERSHIP:
SOME ALTERNATIVES
1) GOOD. Value adding and stewarding
2) DISTURBING. Conflicting interests between various owners, bad
governance etc.
3) GREEDY. Speculative and selfish. Owners are short-term
exploiters, such as ”slaughterers” or ”cornering specialists”.
4) PASSIVE. Lazy or unmotivated people for whom ownership
means nothing, or simply a remote investment. Leads easily to a
”power vacuum” in which somebody else starts to use the owner’s
voice.
5) COMBINATION. A company can have a mixture of different type
of owners representing the above groups of 1-4. This can lead to
tensions and lack of direction.
INHERITANCE VS. OWNERSHIP
(applied from Karlsson -Stider 2000:173)
• Like ownership, inheritance can also be a relationship
• Financial inheritance (like money); Social inheritance (like
relations); Symbolic inheritance (like prestige or status).
• The heirloom thinking: Family business can be seen as a heirloom.
What are the consequences?
• Inheritance processes can be gendered and seniority based.
Sometimes gender and seniority are favoured, like favouring
oldest sons.
• Enlightened nepotism reproduces the relation between a family and
their business although, if not enlightened, this can be disturbing
and demotivating to non-family actors involved.
MULTIDIMENSIONALITY OF OWNERSHIP
1) LEGAL: Mine or ours by legal possession
2) ECONOMIC: Connected with the legal. Mine or ours with
economic implications
3) PSYCHOLOGICAL: Mine by emotions and feelings (affective
and individualistic)
4) SOCIAL - PSYCHOLOGICAL: Ours by emotions and feelings
(affective and collectivistic)
5) SOCIO-SYMBOLIC: Mine or ours, typically as a status, role or
identity constructed by possessions. ”To have is to be”.
LEGAL - ECONOMIC OWNERSHIP
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Based on social agreements, like legislation. Is a social construct
The right to own is a well-protected tradition, and can be
regarded as the key axiom of market economy. Scope and limits
can be derived from the laws and court decisions. Makes
proprietory decision making possible
Source of power
Creates a domain (is territorial)
Sometines manifested by symbols (like name tags).
Source of giving (like in philanthropy)
Often: Target of taxation. Either the object itself or its yield or
both.
Can be transferred quickly or rather quickly.
LEGAL-ECONOMIC OWNERSHIP IN THE LIGHT
OF FINNISH ESTATE LAWS
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Tax rates: Depends on realtionship rank. I = 16 %; II = 32 %,
III = 48 %. Some tax reliefs between close relatives when
inheriting business wealth.
Grantee classes: I = Lineal descendants & Spouse; II = Parents
& Siblings; III = Grandparents. Cousins do NOT inherit.
Basinc philosophy: To preserve wealth across generations.
Particulars: ”Portion-at-law” rights for descendants. No
favouritism can substitute this principleImpact on family business: Favours ownership transfers to close
relatives. However, the concentration of ownership can be
difficult.
THUS, GOOD ESTATE PLANNING PAYS OFF. TAXATION,
HOWEVER, IS NOT THE ONLY CRITERIUM.
STRATEGIES IN CHANGIN LEGALECONOMIC OWNERSHIP STRUCTURES:
SOME ALTERNATIVES
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TRADE = SELLING AND BUYING. The target can be the
whole company, part of it, or just its business. The price can be full
or lowered.
INHERITANCE
GIFT
SUCCESSION: May be based on Trade/Inheritance/Gift, or
their combinations.
OTHER OPTIONS: New owners by issueing new shares; Buying
own shares to the company; Merging companies; Splitting
company; Changing the legal form, like from partnership to a
corporation (limited company); Creating a holding-company - or
a foundation-based ownership; Changing shares; Liquidating
wealth and closing the business
PSYCHOLOGICAL OWNERSHIP - 1
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Can exist with / without legal ownership. Based on emotions. State of
mind, feelings and attitudes.
Three main roots or motives (all based on human needs): 1) Efficacy;
2) Self-Identity, and 3) Having a place
Three main routes or paths (All are bond-creating): 1) Control over
target ~ power; 2) Self-investment into target ; 3) Intimate knowing of
the target. The above three can be interconnected and / or mutually
reinforcing.
Not quickly transferable. Evolves gradually. Time is an important
dimensions. Remains also in memories.
Researchers of this field, for example: Pierce, Kostova, Dirks,
Cummings, Rubenfeld, Morgan, van Dyne, Hall, Furby, Beggan,
Brown, Mattila, Ikävalko, Nyyssölä, Rauhamäki, Lehti, Koiranen
PSYCHOLOGICAL OWNERSHIP - 2
•
Quotation from Pierce et al (2001: 301-2): ”As a state of mind,
psychological ownership is that state in which individuals feel as
though the target of ownership (material or immaterial in nature)
or a piece of it is theirs. (i.e. It is ”MINE”). The core of
psychological ownership is the feeling of possessiveness and of
being psychologically tied on an object. One’s possessions are felt
as extensions of self. (Belk, 1988; Dittmar, 1992; Furby, 1978 a,b)
- what is mine becomes (in my feelings) part of ME (Isaacs, 1933) and, thus, the state of psychological ownership emerges. When
property is grounded psychologically, for the individual, ”mine”,
as the individual finds himself or herself in it (Kline & France,
1989), and it is within the individual. Thus, the target becomes
part of the psychological owner’s identity”.
REINFORCING LOOP OR TRIANGLE
PSYCHOLOGICAL
OWNERSHIP
INTRAPRENEURSHIP
AND/OR
ENTREPRENEURSHIP
JOY OF WORK
SOCIO-PSYCHOLOGICAL AND
SOCIO-SYMBOLIC OWNERSHIP
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Based on social interaction.
Ownership is a social creation existing in symbolic relationships as
well as in the interpretations that actors give to it, as they act in everyday life (Nordqvist, 2005)
Inter-individual process drawing attention to symbolic relations asn
values of ownership
Relates to self-expressive, and categorical aspects, like social position
and status. Cf. ”To have is to be” (Dittmar,1992: 65-76)
Etzioni (1991:466): ”Ownership is a dual creation. Part attitude, part
object. Part in the mind, part real.”
Ownership is a social and symbolic phenomenon and a construct
based on social relationships (Nyyssölä, 2006).
TYPES OF OWNERSHIP: A COMPARISON
TYPE OF OWNERSHIP
CHARACTER
NATURE
LEGAL-ECONOMICAL
Socially
constructed and
institutionalized.
Absolute,
verifiable, easily
transferable.
PSYCHOLOGICAL
Emotional
Relativistic
Processual
SOCIAL i.e.
sociopsychological and
sociosymbolic
Socially
constructed and/or
Relativistic
internalized in the
Processual
process of
interaction.
ROUTES
Social agreements,
like law.
Intimate knowing
Controllability
Self-investment
Values,
Symbols,
Learned and shared
meanings
THE PYRAMID OF OWNERSHIP MOTIVES
(Ward 1997, in the Best of Family Business Review II, 109)
Contribution to society
Actualization, Realization
Strong family purpose.
Legacy and Values. Best
investment.
Achievement, Esteem.
Loyalty to employees.
Employment opportunities.
Keep family together. Avoid
passive wealth.
Social satisfaction
Comfort and Security
DIFFERENT OWNERS CAN HAVE
DIFFERENT INTERESTS
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Company owners are not all alike. Sometimes far from that.
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Some want to participate and work in business actively, some
”just” want to own and perhaps control the company. Some can
be reluctant and detrimental owners. Some are investor-type
owners whose main interest is in dividends and/or value
appreciation.
•
Some have short-term objectives, some have long-term orientation
in being an owner.
•
Good owner control (governance) is decisive for the company’s
success.
OWNERSHIP TYPES: POWER PERSPECTIVE
OWNER'S
POWER
Closely-owned family business
Core Family
Private large investor
State-owned
(municipal)
Private large investor
"IDENTIFIABLE OWNERSHIP"
"UNIDENTIFIABLE OWNERSHIP"
Domestic institution
Fragmented family ownership
Private small investor
Domestic or foreign investor
Corporation
Private small investment
"IDENTIFIABLE INVESTMENT"
"UNIDENTIFIABLE INVESTMENT"
PRIVATE OR
FAMILY OWNED
PUBLIC OR
STATE-OWNED
The individual owner’s power is an U-curve. In state-owned
companies it is representational but still strong.
OWNERSHIP CREATES RIGHTS
AND RESPONSIBILITIES
• Rights and responsibilities are products of conceptions
regarding moral and legal action as the members of the society
construct them in that place at a certain time. This means
that rights and responsibilities are related to social and cultural
environment.
• Ownership with its rights and responsibilities can be shared
between individuals and groups.
• Rights and responsibilities based on owenrship can be
transferred to people who are not legal owners.
• Ownership is relational. For example, what are the rights and
responsibilities of an owner compared with those of a nonowner ?
OWNERS’S RIGHTS AND RESPOSIBILITIES:
A COMPACT AND SIMPLE VIEW
1) An owner can USE the owned object (as s/he likes).
2) An owner can CONTROL, how others use it.
3) An owner can TRANSFER these rights (as s/he likes)
4) An owner is legally responsible for MAKING SURE that the
owned object does not cause damages to anybody.
5) An owner is morally responsible for ENHANCING common good.
==> OWNERSHIP IS A COMBINATION OF RIGHTS AND
RESPONSIBILITIES (CF. MONKS & MINOW, 2004:9899)
AN OWNER NORMALLY CAN …
(cf. Monks & Minow, 2004)
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Maintain the right to own shares and deal with them.
Control over how profit is distributed.
Make or delegate managerial decisions.
Get information about the performance and a chance to
monitor it.
Recruit and, if necessary, dismiss top management
Make strategic decisions
Transfer the above rights to someone
Have the right and responsibility to intervene if the firm is
going to a wrong direction and entering into a crisis
OWNERSHIP AT FOUR LEVELS
cf. Mattila & Ikävalko, 2003)
1) OWNERSHIP SOCIALLY. Example: how others see you as an
owner, and how you can interact with them as an owner.
2) OWNERSHIP LEGALLY (de jure). Example: According to the
law and agreements, are you an owner or not. The most typical
way to define and interpret ownership.
3) OWNERSHIP OPERATIONALLY. Example: Who is using an
object / working with or for the object. Who is using power or
taking responsibility related to the object.
4) OWNERSHIP PSYCHOLOGICALLY. Example: Who honestly
feels that the object is his/hers.
OWNER’S RESPONSIBILITIES
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A) Background: Face-less, heart-less and impatient owners have
become more common and have caused anxiety among other
stakeholders. Very little ownership education at schools or
universities. Scandals due to bad and irresponsible owenrship.
Increase of hedonistic ownership. More multicultural and
multinational ownership.
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B) Responsibility as a concept: The obligation or a duty to give
a response, if somebody asks: Why did you do this/so (active
responsibility) or Why did you not do this /anything (passive
resposibility). Can be based on causality, virtue ethics, capacity,
task, role expectation
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Responsibility ~ Answerability ~ Accountability
FACETS OF RESPONSIBILITY
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Expected or Desired vs. Actual
Personal, collective, or corporative
Sometimes hierarchically defined
A moral code protecting a person, other people and
a society (like responsibility of driving cautiously in the
traffic)
• Categories (although overlapping): Psychological,
social, economic, legal, environmental, moral, etc.
• Examples of managerial responsibilities: profit
responsibility, budget responsibility, project
responsibility etc.
ACTIVE SHAREHOLDERS’
RESPONSIBILITIES TO THE COMPANY
1) To define and then demand what are reasonable
returns on equity or invested assets.
2) To provide values and principles of doing business and
ensure that tehy remain instilled in the company.
3) To define the owner-related priorites and policies
and communicate them clearly
OWNERSHIP VS. WALTER BAGEHOT’S IDEAS OF
THE RIGHTS OF THE SOVEREIGN
• A sovereign (like a king) has normally the following
rights: 1) Right to be consulted and get advise; 2) Right
to encourage; 3) Right to warn and to be warned.
• Think about these rights as applied to a family
business owner.
TYPICAL STAGES OF OWNERSHIP
IN FAMILY BUSINESS
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FIRST GENERATION: Founder as a (sole) controlling owner.
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SECOND GENERATION: Siblings in partnership
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THIRD GENERATION: Cousins as a confederation
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ETC., ETC.
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N.B. From the ownership’s perspective: It is possible, and often
advisable, to ”prune” the family tree and narrow down the
number of owners.
VALUE CHAIN OF GOOD OWNERSHIP IN A
FAMILY BUSINESS CONTEXT
1)
2)
GOOD OWNERS, GOOD OWNERSHIP
GOOD GOVERNANCE (incl. family life & business)
3)
GOOD BUSINESS
MANAGEMENT
GOOD FAMILY
LIFE
4)
GOOD BUSINESS
PERFORMANCE,
GOOD COMPANY
HAPPY
5)
FAMILY
SUCCESSFUL FAMILY BUSINESS
BALANCING CONTESTING INTERESTS
IN A FAMILY BUSINESS CONTEXT. Examples
a) Rights and Responsibilities
b) Privileges and Duties
c) Business interests and Family interests
d) Growth and Controllability
e) Balance sheet and Profitability
f) Interests of family actors vs. non-family actors
g) Interests between active and passive owners
h) Contesting ideologies of paternalism, managerialism and
entrepreneurialism
i) Interests of retiring vs. next generation
j) Distributing profit and retaining profit in the company
k) Emotionality and non-emotionality (the latter sometimes wrongly
called rationality
STRATEGIES IN CHANGING OWNERSHIP
STRUCTURES: SOME ALTERNATIVES
•
The objects of legal-economic ownership can be changed by the
following means:
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TRADE, i.e. Selling and buying. The object can be the company or
just its business. The price can be full or reduced.
INHERITANCE. This can be will-based or defined through
normal legislation regarding estates.
GIFT. Ordinary or ”Early inheritance”
SUCCESSION. Typically based on one of the above.
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OTHER ALTERNATIVES IN CHANGING
OBJECTS OF L-E OWNERSHIP
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Introducing new owners by issueing new shares, like outside
financers, for example venture capitalists
Buying own shares into the company itself
Merging companies
Splitting companies
Changing the legal form, like from partnership to a corporation
(limited company)
Creating a holding company / foundation - based ownership
Changing shares with someone
Liquidation and Cessation of the company
Option-based rewarding schemes leading to later changes
CHALLENGES OF THE OWNER-MANAGER
WHEN PREPARING FOR SUCCESSION
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Understanding one’s role right: Support and guide, do not force.
Upbring the successor in the right way: ”The art of teaching is the
art of assisting discovery” / Aronoff & Ward, 1992:41)
Finding mentors, consultants, and outside directors when needed:
these external advisers can help considerably.
Avoiding the trap of unsciously thinking that one is indispensable.
Your successor can be much better than you are.
Avoiding the trap of ”cloning” a successor. This is impossible
anyway, and it is often detrimental as the successo would perhaps
be ill-equipped with the future challenges
IMPLICATIONS OF OWNERSHIP:
A SUMMARY
• Ownership means a status, a role and a task. It includes
risk, duties, and worries. By acting in a responsible way, the
owner has a well-deserved and legitimate right to use
power, to grow wealth, and to feel joy caused by successful
ownership.
BECOMING A GOOD FAMILY BUSINESS
OWNER: WHAT SHOULD BE LEARNED?
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How to interact in a mature and respectful way with your coowners.
What are the rights and responsibilities of an owner?
What is the nature and structure of the family assets?
How to arrange financial wealth in an effective way (allocation,
decision making, taxation etc.)
When is the optimal time for ownership transition and why ?
How to define the ownership strategy and align it with the family
strategy?
How to interpret the financial information regarding the family
business
N.B. The above list is inadequate. It coves only a few of the topics.
PERFORMANCE OF FAMILY FIRMS:
OWNER’S VIEW (Sharma, 2004: 1-36)
FAMILY DIMENSION
Positive
BUSINESS
DIMENSION
Negative
Positive
Negative
I
WARM HEARTS
DEEP POCKETS
High Emotional and
Financial Capital
III
WARM HEARTS
EMPTY POCKET
II
PAINED HEARTS
DEEP POCKETS
High Financial but
Low Emotional Capital
IV
PAINED HEARTS
EMPTY POCKETS
High Emotional but
Low Financial Capital
Low Financial and
Emotional Capital
OWNERSHIP STRUCTURE
AND CLASSES OF STOCK
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At the beginning normally: One type of stocks, all owned by the
controlling owner (typically the founder)
•
Later: Redesign of capital structure of the company. For example,
recapitalizing the stock into two classes (voting and non-voting).
Minor impact on power transfer, major impact on profit
distribution. This kind of arrangement can be used and it is
worth consideration when the company will have esternal
shareholders (like venture capitalists), and / or when there are
active and passive relatives as owners.
•
Non-voting shares: ”Phantom stock” provides incentives to
management.. Offering just financial benefits but no power.
OWNERSHIP AND PATIENT CAPITAL
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The ownership subsystem of a family firm protects the healthy
and responsible owner-family-business interaction. It is deemed to
keeping the family capital patient.
•
In its absence, if the owners do not use their power or are not
responsible, the long-time investment horizon disappears
•
Providing shareholders liquidity and creating good buy-sell
agreements are useful when preserving concentrated ownership in
the hands of family members.
OWNERSHIP AND SHAREHOLDERS’
LIQUIDITY
• At an early stage of the family business, one but not the only
aim often is to increase equity capital. At that time, less
thought is given to owners’ liquidity, as the company is
struggling for survival and growth. Cash flow surplus, if any,
is used for growing the company and securing the company
liquidity.
• Later, successions challenge these reinvestment paradigms.
For example, inheritance taxes cause an increase in the demand
of owners’ liquidity. Current income i.e. Dividends as a
predictable cash flow become increasingly important.
• The shareholders’ liquidity needs to be balanced with the
company needs, i.e. Company liquidity, company risk level,
growth rate, taxation.
• Liquidity planning at two levels (company, owner) is crucial.
OWNERSHIP AND OPTIONS
• The use of options is more typical in a non-family than in a
family firm. Management options are rather typical in public
firms.
• Options are used to create and maintain higher commitment
from managers and/or employees to the success and the value
creation of the company. They are used as an incentive.
• Options mean, in fact, a transfer of wealth and future
ownership rights (incl. power) from the present owners to the
transferees.
• Option-based profits are taxable income to the transferee. If
the marginal rate of the taxation of the transferee is over 50
%, it is the public sector that gets most out of this benefit.
OPTIONS AS A METHOD FOR REWARDING
•
Options are financial instruments. Option schemes are normally
based on the increase of share value. This arrangement tries to
solve the so-called agent-principal problem.
•
Options are intended to lead to the goal alignment between
owners and managers (sometimes also other employees). Options
are also intended to create motivation and commitment to
increase the share value. Options can be sold and bought.
•
Options lead to the issue of new stocks, which dilutes the relative
share of old stocks. Option schemes have pros and cons. If the
dilution effect is bigger than the incentive effect, the scheme is not
economically viable from the owners’ point of view.
•
Profit-based bonuses are often much simpler solutions.
ALTERNATIVES OF OPTIONS WHICH
OWNERS CAN USE FOR REWARDING
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Stocks (without the option scheme) based on the achieved
results or after a certain amount of years in service.
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Phantom stocks = Synthetic stocks that give financial benefits but
no voiting rights.
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Employees’ fund as an owner (--> ”industrial democracy)
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Bonuses, profit-sharing schemes and salary increase
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Fringe benefits, like a company car, additional insurance,
pension arrangements, training programmes etc.
PLANNING THE ESTATE
•
Estate planning (and making a will) is too often a target of
procrastination. It is delayed or postponed, but it should not be. Is
often delayed in the fear of losing control or causing disputes
between the heirs.
•
It is important for continuity, and its lack can cause bad damage.
•
Experts’ need is often needed (legal, financial, taxation etc.)
•
The business itself is typically the most significant part of the
family’s income and its net assets.
•
An estate plan that covers the family firm should treat the business
as an on-going concern, not just as a collection of assets. This is
essential for the business continuity.
•
Valuation of the company’s worth can be tricky.
VALUATION ALTERNATIVES: HOW TO
FIND OUT THE ECONOMIC WORTH ?
1) ACCOUNTING APPROAH: Book Value; historical and
sometimes far too low. With/out inflation adjustments.
2) MARKET APPROACH: ”Business-based”, like similar deals,
received offers, comparable deals etc. Highly depending on the
marketability.
3) INCOME APPROACH: Net present value of future cash flows
(DCF) or Economic value added (EVA). Earning capacity.
Sometimes difficult to estimate, and includes question marks.
4) NET SUBSTANCE VALUE: Worth in bankruptcy or in
liquidation. Assets minus liabilities. Normally based on book
values. ”Bankers’ view.”
5) LAST YEAR’S TAXATION VALUE. Also historical. Can be too
low or too high as compared with the ”real” value.
OWNERSHIP AND CORPORATE
GOVERNANCE
ORIENTATION
SCOPE
BROAD
NARROW
GOAL ORIENTED
TASK ORIENTED
System for direction and
Secure the economic
viability and legitimate. control.
Example B
Example D
Satisfy and look after
owners' interests.
Select good managers
and make them
accountable to owners.
Example A
Example C
OWNERSHIP AND CORPORATE
GOVERNANCE: DEFINITIONS - 2
•
Example A = NARROW AND GOAL-ORIENTED: ”Corporate
governance can be defined as how the owners’ interest is organized and
exercised in order to influence the strategy processes.” (Melin &
Nordqvist, 2002)
•
•
•
Example B= BROAD AND GOAL-ORIENTED: ”Corporate
governance is a system of structures and processes to secure the
economic viability as well as the legitimacy of the corporation.”
(Neubauer & Lank, 2004)
Example C= NARROW AND TASK-ORIENTED: ”A good
governance structure is one that selecst the most able managers
and makes them accountable to investors.” (Tirole, 2001)
Example D= BROAD AND TASK-ORIENTED: ”Corporate
governance is the system by which companies are directed and
controlled”. (Cadbury, 1999)
OWNER’S WILL IS REFLECTED IN OWNERSHIP STRATEGY,
CORPORATE GOVERNANCE AND IN COMPANY STRATEGY.
OWNER’S VOICE IN HEARD.
OWNER’S WILL & COMPANY STRATEGY
OWNER’S WILL
Vision
= What shareholders want? And
why? What are stakeholders wants?
Mission
OWNERSHIP STRATEGY
= How is ownership structured? How
to add value?
Values
Goals etc.
Guidelines
Structure
Capital structure
Life-cycle
Risk policy etc.
CORPORATE GOVERNANCE
= How to secure business viability?
How to keep things legitimate?
CORPORATE STRATEGY AND
BUSINESS STRATEGY
Direction
Control
Board activities
Business that satisfies
the owners and other
stakeholders
OWNER’S VOICE THROUGH
GOVERNANCE BODIES
BUSINESS
SIDE
FAMILY
SIDE
ANNUAL GENERAL
MEETING (AGM)
FAMILY ASSEMBLY
BUSINESS BOARD
(for governing)
FAMILY COUNCIL
CEO & SENIOR
MANAGEMENT (for
managing)
FAMILY COMMITTEES
AND WORKING
GROUPS
A FAMILY BUSINESS GOVERNANCE SYSTEM
MAKING OWNERSHIP POLICY EXPLICIT:
ITEMS IN FAMILY PROTOCOL
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Jobs: Entry & Employemnt & Exit
Compensation
Shareholders’ agreement(s)
Liquidity in the family and in the company (dividend policy etc.)
Board of directors (Family vs. non-family participation)
Family Council or Family Office (Tasks and nature)
Communication, reporting to share- and other stakeholders
Venturing programme: new business ventures
Philanthropy
Archives (to keep family and business memories alive; to respect
the family and family business history).
GOOD BOARD IS CRUCIAL IN
CORPORATE GOVERNANCE
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Very important. The board is the owners’ extended arm in
directing and controlling the performance.
Board is expected to transfer owners’ values, expectations and
targets into the managerial work.
Board and management team are important sources of the
company’s credibility capital.
A board is a renewing force and adds value to managerial work.
A good board member should always have business competence
as well as an entrepreneurial mindset. Even better, if s/he has also
industry- and branch-related knowledge, but some of the board
members’ metaskills are quite general and very similar in
different kinds of businesses.
ACTIVE OWNER AS A
GOOD BOARD MEMBER
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Sees the total picture and has good judgment. Exercises
independent judgment but is also a good team player.
Is committed and dedicated.
Has the skill and courage to ask incisive questions.
Has high integrity.
Is as much as possible free from possible conflicts of interests.
Fits well with the composition of the board. It is important that
the board members have complentary competencies and ideas.
Makes a meaningful contribution i.e. adds value.
Prepares oneself carefully and professionally to the meetings.
Has an open mind to learn from others.
THE BENEFITS OF AN ACTIVE BOARD
WITH NON-FAMILY MEMBERS (Cf. Ward, 2001:15-27)
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A good board can be a valuable asset by:
1) Combining in-house experience and External expertise
2) Enhancing self-discipline and accountability among family owners.
3) Serving as a useful sopunding board, like, for example, in evaluating
ideas.
4) Getting an external’s opinion (can be more objective)
5) Contributing to strategic planning and councelling.
6) Providing insight into key people, offering contacts to these key people.
7) Making challenging questions
8) Offering confidential and emphatic councelling with trust.
9) Adding creative thinking and decision making.
10) Adding valuable corporate relations.
VALUE DRIVERS IN VALUE CREATION
Value drivers
+
GROWTH
DETERMINANTS
OF VALUE
DRIVERS
+
PROFITABILITY
RISK
VALUE OF
THE FIRM
-
TENSIONS BETWEEN VALUE DRIVERS
GROWTH
RISK
PROFITABILITY
In family firms, where the risk element is very concrete and the desire
to keep family control is high, growth is often curtailed. Value of the
firm is increased stepwise and continuously.
VALUE CREATION AND TIME HORIZON
VALUE ACCELERATION
ENTREPRENEUR'S
ATTITUDE
INTRAPRENEUR
ENTERPRISING FAMILY
BUSINESS
OWNER OR OWNERENTREPRENEUR
GENERATIONAL
UNINTERESTED,
PASSIVE
PRESERVER OR A
"DROP-OUT"
NON-ENTERPRISING
FAMILY
WEALTH PROTECTOR
WEAK
TRANSGENERATIONAL
STRONG
ECONOMIC OWNER'S
ATTITUDE
VALUE PRESERVATION
Attitude to value creation: acceleration vs. preservation
Attitude to the length of ownership: generational vs. transgenerational.
ADVISERS CAN HELP FAMILY BUSINESS
OWNERS: SOME EXAMPLES - 1
• OWNERSHIP AND LEADERSHIP EDUCATION
• CONTRIBUTING TO STRATEGIC PLANNING
PROCESSES AND SECURING PLANS THAT ARE
SOUND AND DEVLOPMENTAL
• DEVELOPING GOVERNING MECHANISMS THAT
SUPPORT THE BUSINESS GROWTH AS WELL AS
OWNERS’ AND OTHER STAKEHOLDERS’
INTERESTS
• HELPING FAMILY MEMBERS TO DISCOVERR
AND DEEPLY UNDERSTAND WHY THEY OWN
AND WORK TOGETHER
ADVISERS CAN HELP FAMILY BUSINESS
OWNERS: SOME EXAMPLES -2
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ADVISING SUCCESSIONS. HELPING TO RESTRUCTURE
AND TRANSFER OWNERSHIP AND LEADERSHIP OVER
GENERATIONS. ASSISTING THE MANAGEMENT OF
CHANGE PROCESSES
HELPING IN BOARD DEVELOPMENT
IMPROVING COMMUNICATION
GIVING ADVISE REGARDING TAXATION AND FINANCE
SOME WIDESPREAD THEORIES FOR
OWNERSHIP STUDIES - PARTICULARLY
IN THE FAMILY BUSINESS CONTEXT
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Agency Theory (= AgentPrincipal Theory)
Stewardship Theory
Stakeholder Theory
Resource-based theories
Theories of Firm Growth
Network/Partnership theories
Risk theories
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Systems theory
Transition theory
Power theories
Motivation theories
Ethical thoories
Organizational
theories
• Social-psychological
thoeries
THE KEY PLAYERS WHO SHOULD LEARN
MORE ABOUT OWNERSHIP
• OWNERSHIP
• MANAGEMENT
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FAMILY MEMBERS
FAMILY COUNCIL
ALL OWNERS
OWNERS’ COUNCIL
AGM PARTICIPANTS
NOMINATION COMMITTEE
BOARD
CHAIRMAN OF THE BOARD
CEO
EXECUTIVE COMMITTEE
OR MANAGEMENT TEAM
• ADVISORS
• POLITICIANS
BEING SIMULTANEOUSLY A GOOD
OWNER AND FAMILY MEMBER
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A long-term tie between the two roles. Metaphorically
expressed: For family membership you do not get just a shortterm visitor’s visa or a working permit, you get a ”permanent
passport”.
Depending on what role you take and what type of owner you are,
you can expect different kind of returns.
Owner types and their returns: ”Investor” (Return on
Financial Investment); ”Proud” (Return on Identity); ”Active in
Governance” (Return on Voice); ”Active in Business” (Return
from Participation). As you can see the legacy or inheritance in
family business is not just money. It can be a heirloom.
FAMILY BUSINESS AS A HEIRLOOM
(Adapted from Karlsson-Stider, 2005)
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HEIRLOOM IS A VALUABLE OBJECT THAT HAS BELONGED TO
A FAMILY FOR GENERATIONS. FOR THE OWNERS IT IS A
SYMBOL OF CONTINUITY, UNITY AND TYPICALLY MORE
VALUABLE TO THE FAMILY THAN TO THE OUTSIDERS.
THEREFORE, AND FOR EMOTIONAL REASONS, IT IS NOT ”FOR
SALE”. THE OWNERS DO NOT WANT TO LOSE IT.
THERE IS A DIFFERENCE BETWEEN MANAGING A COMPANY
AND MANAGING A HEIRLOOM. WITH A HEIRLOOM YOU
TRANSFER THE LEGACY AND RESPECT FOR THE FAMILY
HISTORY. AT THE SAME TIME YOU ALSO HAVE TO PLAN FOR
THE FUTURE.
HEIRLOOM CREDO: ”YOU NEVER ACTUALLY OWN, YOU
MERELY LOOK AFTER IT FOR THE NEXT GENERATION.”
THUS, PLANNING FOR SUCCESSION MEANS PLANNING FOR
THE SECURITY AND CONTINUITY OF THE HEIRLOOM.
GOOD FAMILY BUSINESS OWNERS ARE
STEWARDS, NOT PROPRIETORS
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•
According to Poza (2006,16) the stewardship perspective means that ”…
family members view the firm as an extension of themselves and therefore
view the continuing health of the enteerprise as connected with their own
personal well-being.” In other wordss, Poza regards that family owners
are ”…stewards of the firm.” (Underlinings added by MK)
Stewardship implications of ownership can be seen as an endeavour to
continuing health in business and family. It is taking the view to the
continuity without selfish opportunism, expropriation or entrenchment
that controlling owners could otherwise exercise in their relations to other
stakeholders. Stewards feel that their responsibility is to build value not
just to shareholders but also for other stakeholders.
Stewardship perspective is one of the key ingredients for the long-term
sustainability of family business. It satisfies owners’ justified interests
and also pays attention to what is regarded as common good.
OWNERS’ STEWARDSHIP CREDO FOR
FAMILY BUSINESS
• Mr. Lehmann, the owner-manager from Fel-Pro (as
quoted by Ward, 2001,245) says: ” We want to be able
to make decisions about our mission ourselves. We
want to be masters of our destiny. And we want to be
able to preserve what we think is good about our
company for our children and for the community.”
• This kind of attitude pays off as it gives the owner a
gratifying sense of personal purpose and responsibility
as well as significant benefits for the family, economy,
and society as a whole.
IN BALANCE OR OUT OF BALANCE?
REWARDS
GOOD &
ACTIVE
EMPLOYEES
FAMILY BUSINESS
OWNERS
BADLY
INDEBTED
BUSINESS
OWNER
RISKS
VENTURE
CAPITAL
FINANCIERS
RIGHTS
RESPONSIBILITIES
GOOD & ACTIVE
EGOISTIC
STAKEHOLDERS
SUCCESSFUL FAMILY FIRMS OFTEN
HAVE SIMILARITIES
•
BUSINESS SIMILARITIES: 1) Strong, visionary leaders; 2)
Strong entrepreneurial spirit and drive; 3) Good business skills
and expertise; 4) Responsible owners with ”heart” and ethics; 5)
Ability to respect shareholders i.e. The stewardship philosophy; 6)
Successio process based on jointly accepted rules and common
vision.
•
FAMILY SIMILARITIES: 1) A long-term continuity of the
family to remain in (family) business; 2) Strong family values; 3)
Family pride i.e. Respect for the family name and history; 4)
Social engagement i.e. Willingness to make the community and
the world a better place to live in; 5) Sufficient voting rights to
retain control over key strategic decisions.
FAMILY’S INVOLVEMENT MAY DIFFER
(cf. Habbershon & Williamsn, 1999)
• The involvement in ownership and management
• /----------------------/------------------------/
A
B
C
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•
•
A = CONTROLLING FAMILY OWNERSHIP. Typically family
management and rather simple structure.
B = CONCENTRATED FAMILY OWNERSHIP. Typically toplevel family management
C = CONSOLIDATED FAMILY OWNERSHIP. Typically multilevel family management