Risk Management in Family Owned Businesses Term Paper

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Risk Management in Family Owned Businesses

A family business can be simply described as "any business in which a majority of the ownership or control lies within a family, and in which two or more family members are directly involved" (Bowman-Upton, 1991). In other words, it is a multifaceted, twofold structure consisting of the family and the business meaning that the involved members are both the part of a job system and of a family system (Bowman-Upton, 1991).

Most families seek stability, intimacy, a sense of community, and belonging through the family business (Hess, 2006). On the other hand, whenever family and business are mentioned together, a majority of people think of continuous conflict, competition and contention (Crenshaw, 2005). However, "successful family businesses do not let the family destroy the business or the business destroy the family" (Hess, 2006).

The family-owned businesses are the backbone of the world financial system. According to a number of estimates, more than ninety percent of all business projects in the United States of America are owned by families. Other estimates reveal that sixty percent of all workforces are involved in the family owned businesses. About 30-40% chief businesses in USA are family owned. Similarly, in the United Kingdom, more or less seventy six percent of the major 8,000 companies are either owned or controlled by families. Similar data and figures have been found regarding the family firms all over the world. Hence, in order to understand the world economy, it is essential to have an understanding of the distinctive characteristics of family owned businesses (Vaknin, 2010).

Relationship between Family and Business Systems

The two systems i.e. family and business can overlap that may result in the occurrence of conflicts as each system has its own set of laws, responsibilities and necessities. The family is an emotional system that has its main emphasis on relationships, faithfulness, reliability, love and care. One enters into this system since the time of birth and attains an everlasting membership. The role of an individual in the family bears with it definite tasks and prospects. Besides, families possess unique modes of correspondence, communication and conflict resolution that take years to become perfect. Such styles, however, may be good for family circumstances but might not be the finest means for resolving conflicts in the business (Bowman-Upton, 1991).

On the other hand, the business system is not an emotional one and is based on contract. One can enter in this system only through experience, knowledge and potential. Performance determines the duration of the membership and the rewards are given in the form of material. The roles of business workforce also have particular tasks and expectations just as family members have. The businesses also have unique methods of communication, conflict resolution and decision making (Bowman-Upton, 1991).

Families build, expand, and demolish their business ventures in a generation's time. Even though their businesses bring riches, prosperity, satisfaction, pride and authority; they also bring nuisance, friction, and pungent divisions. History reveals that a number of families have created great businesses, and have destroyed them later. Family disputes have the tendency to demolish a top-notch business. Business quarrels and clashes may also ruin family relationships and break up the ties of love (Scott, 2002).

Challenges/Risks Faced by the Family Owned Businesses

All the business organizations have an exclusive set of confrontations and problems. Similarly, family business has its distinct risks and challenges. Though a lot of these problems are present in commercial business settings, several can be found in a family business. Family business undergoes different stages of development and expansion ultimately. Thus, a number of challenges have to be faced once the subsequent generations take over the business. According to a famous Mexican saying, family owned business can be summed up as "Padre noble, hijo rico, nieto pobre" (Iwan, 2006) meaning "Father, founder of the company, son rich, and grandson poor" (Iwan, 2006). It can be understood as that the initiator puts the efforts and builds a business, the son later occupies it but manages the business poorly enjoying the wealth at the same time, and the grandson takes over a dead business and poured out bank account (Iwan, 2006).

Risk Assessment and Management

Risk Management can be simple described as "the formal process of assessing exposure to risk and taking whatever action is necessary to minimize its impact" (as qtd. In Cotten, 1993). Risk management seeks to provide remedies to any vulnerability faced by the company (Gerber & Feldman, 2002).

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The issue of risk management is comprised of all the features of the "family office's work, from the investment process to personal security" (Daniell & Hamilton, 2010, p. 211). In order to have a lasting family business, the owners and their advisors must make certain that "asset and risk management decisions are made with the complete understanding of what the family values, has at risk and how those risks can be managed" ("Risk Management for," 2012). It is also important to identify the risks through the process of risk identification that helps in the exposure of various risks (Culp, 2001, p. 210). It enables the businesses to determine the good and bad things that it may encounter in the future (Frame, 2003, p. 134).

In recent years, increasing attention has been given to risk management (Kimball, 2000, p. 3). All forms of personal activities and businesses are affected by risks (Barrese & Scordis, 2003). Therefore, to have an ample knowledge of risk and risk management is indispensable for understanding the modern business and financial scenarios (Dubofsky & Miller, 2003, p. 22). The major question is what makes up a risk management plan in family-owned businesses? Shrewd and smart executive teams are always there to prepare a retort to disasters that might slow down or encumber the continuity in the business. However, a majority of risk management plans are unsuccessful in incorporating one issue that can have calamitous penalties for any family-owned business i.e. The estate plans of the family owners. Issues that involve succession, tax planning and leadership are some of the challenges faced by the family businesses in case the corporate plan are not compatible with the estate plans of the family owners. If there is a failure in managing these issues proactively, a domino outcome can be achieved that may cripple a company on a permanent basis (Erskine, 2012).

Risk management, thus, comprises of the financial and personal aspects of risk which could have a considerable impact on the contentment, comfort and security of individual family members and family members as a complete unit (Daniell, 2008).

Every family-owned business must follow best risk management practices. Firstly, the context establishment containing information regarding strategies, stakeholders and environment of the company is important. The situations that can have an impact on business objectives must be identified. Later, the risk analysis and assessment must be done. In order to manage the identified risks, strategies must be designed. Then the management processes must be implemented and integrated. The competence, productivity and susceptibility of the business must be measured and monitored. In the end, the owners must be presented with the data so that they can take appropriate steps (Bodine, Pugliese, & Walker, 2001). Thus, it is clear that "risk management is more than preventing bad things from happening" (Wallis, 2012).

Emotions

Family problems are a great risk for the family-owned business and can have a great effect on the business. Situations such as divorce, separations, health or financial problems are found to be creating hard and complicated political situations for the family members, particularly those involved in the business set up (Iwan, 2006).

Thus, emotion is the additional aspect as parents, spouses, children, siblings, uncles and aunts, nephews and nieces etc. work in unison. This emotional dimension must be recognized by the individual who manages such a company. In order to make smooth performance of the jobs, the owner of a family business must take necessary objective decisions. It is important to mention here that the emotional eruptions and flare-ups not only impacts the family, business and relationships but clashes and negative feelings among family members also influence the nonfamily employees.

Therefore, it is the responsibility of the manager to keep the internal strife, backbiting and power struggle from hampering the business functions. This is because an emotional environment may persuade the nonfamily employees to support their decisions on family strains. It is really necessary for the smooth running of a family-owned business to not become a warring camp. It is exceedingly important for the entire workforce to understand that only a united and profitable organization may best serve their interests and not particular family members ("Challenges in Managing,").

Lack of formality

The family-owned businesses also face serious risks due to the absence of unambiguous policies and business rules and customs for family members (Iwan, 2006). If informality in a family business is practiced at a higher.....

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