Step 3: Implement measures

Adjusting the governance structure of a family firm is a sensitive exercise because it affects all dimensions of the family firm system. Accordingly, some basic rules should be considered during the implementation of such initiatives (see Figure 10).

Figure 10: Step 3: Implement measures

First, timing is critical. Initiatives have to be implemented before they become urgent and before everyone recognizes the necessity of making adjustments. As implementation requires resources in the form of time and money, managers might be reserved not seeing the direct benefit of such a project. However, once severe emotional rifts between shareholders exist, the negotiation and establishment of e.g. a family charta becomes hard, if not impossible. In such cases the relationships between shareholders may become unmanageable and the consultation of mediators or family therapists may prove to be of more value than trying to influence the relationships by redesigning the governance structure.

Second, managers should prioritize the initiatives according to complexity. Trying to implement all measures at once will likely result in the confusion and discontentment of all parties involved. Moreover, it is recommendable to start with basic steps, such as a family charta,33 and to define and agree on basic rules of interactions, values and the way family and business parties want to treat each other. Independent, neutral facilitators should be involved to avoid that some shareholders feeling shut out by others. Once such an agreement has been reached, additional structural initiatives (e.g. setting up official bodies such as a family council) and process-driven steps (e.g. shareholder reporting, telephone-conferences) can be added, building on this groundwork.

Third, when adjusting corporate governance structures, it is crucial to involve all relevant stakeholders. This may be time-consuming and exhausting, but it is the only way to get the support necessary for corporate governance to work. In fact, this process can require extensive amounts of time. One of the firms in which we conducted interviews to prepare for this study reported that it took them almost two years to finalize their family governance setup. Nevertheless, if individual shareholders or shareholder-groups feel passed over, the success of the whole project is at stake, showing that time and effort to include all shareholders will be well placed.

Finally, managers should not try to set the rules themselves. A more promising alternative is to propose a detailed concept that can be used as a suggestion and basis for discussion. The negotiations that follow might be strenuous, but managers should be aware that these iterations are not only part of the process, but already part of the result. For example, during the developmental phase of a family charta, everyone has to express their views and attitudes. In such situations it can be surprising how differently people can look

at the same thing. Consequently, these discussions are necessary in order to grow together, to define a common basis and to find consensus.

In summary, although the recommendations presented in this section cannot guarantee a successful outcome, they represent some basic do's and don'ts. Keeping them in mind will without doubt increase the likelihood of establishing a functioning governance structure that supports the improvement or maintenance of shareholder relationships.

5.5

Summary and discussion

This study adds to our understanding of family firms and in particular to the relationship between active shareholders and NAS and its implications for corporate governance. The critical role played by NAS within the family business system has recently been identified in the literature (Jaskiewicz et al. 2006; Vilaseca 2002). In particular the severe impact that potential conflicts between active shareholders and NAS can have for the continuity of the business have been emphasized (Harvey and Evans 1994; Eddleston and Kellermanns 2007). Despite this, a comprehensive theoretical model explaining the drivers and influencing factors as well as incorporating the role of corporate governance was missing.

In Chapters 3 and 4 I proposed such a model, suggesting that NAS engage in four generic roles associated with higher or lower levels of goal alignment with the active shareholders and thus resulting in higher or lower aptitudes for shareholder conflict. The role selection by NAS is influenced by their level of identification and active participation, two dimensions which are in turn influenced by the structure and design of the corporate governance system of the family firm. Building on these findings, the core contribution of this chapter is an extension of the theoretical construct incorporating the concept of trust and the translation of my propositions into a practitioner-oriented concept.

First, I find that the concept of trust supports my propositions and that most of the prescriptions concerning the design of the governance structure (i.e. information & transparency, bi-directional communication, jointly defined rules and values, external board members etc.) will have synergistic effects supporting also the development and sustainment of trust (Sundaramurthy 2008). This is of great importance as the level of identification trust, if not supported by other trust bases (i.e. competence-, system- trust), is likely to fade over time as the company grows, also affecting shareholder relationships. Moreover, the model combines PAT and ST proposing that low levels of identification and emotional proximity will result in a more agency-like environment, while high levels will result in a more stewardship-like environment. The concept of trust supports also this assessment: as PAT assumes per se a low level of goal alignment (Jaskiewicz and Klein 2007) and neglects the behavioral learning effect stemming from repeated social interaction, the emergence of trust is excluded from the model and PAT assumes suspicion and low levels of trust between shareholders. By contrast, ST assumes high levels of goal alignment (Jaskiewicz and Klein 2007) and accounts for the learning effect resulting from repeated social interaction, thereby integrating the concept of trust into the model and suggesting that it is one of the most important factors promoting a stewardship environment.

Second, my findings suggest that corporate governance influences the relationship between active shareholders and NAS. Accordingly, it is crucial for managers to understand the coherences between corporate governance and shareholder relationships when designing, reviewing or adjusting the system of corporate governance in their firms. For this reason I translate my findings into a three-step analysis process that is intended to provide practitioners with basic guidelines on how to apply the construct in practice. As family firms differ in their developmental stages with regard to the governance structure

and in order to keep my recommendations as universal as possible, I decided to propose an analysis process rather than a series of steps outlining what to implement first, what next, and so on. I do, however, provide a number of examples of concrete initiatives that could be implemented, pointing out how such a project is likely to affect the behavior of NAS. Keeping this in mind will enable managers to act in a targeted manner and shape the corporate governance in line with the needs of the firm.

5.6

Limitations and future research

The aim of this chapter of the study was to expand our understanding about the coherences between shareholder relationships and corporate governance in family firms and to derive recommendations for practitioners on how to manage the important relationship between active shareholders and NAS. As with all research, the study has a number of limitations, which I discuss below.

First, as mentioned above, family firms are heterogeneous constructs, making it unfeasible to derive all-encompassing step-by-step recommendations applicable to all family firms in every context. Therefore, I propose a standardized analysis process that is more universal and applicable to the majority of family firms.34 Still, as each model is per definition simplifying in its nature, so is mine and I cannot rule out that some recommendations fail to take all the contingency factors of individual cases into account. As such, I recommend that managers consider the respective context of their individual firm before acting.

Second, the sample used for the development of the framework, although considering different firm sizes, different industries and different degrees of ownership

dispersion, consists only of German firms. Though I have strong confidence that this sample is a good proxy for other Western cultures as well, I cannot preclude that the coherences presented behave differently in other cultural settings.

To summarize, the proposed three-step process is an initial attempt to provide managers with a ready-to-use analysis tool that enables them to actively manage shareholder relationships and to design an appropriate corporate governance structure. However, the framework does not give detailed prescriptions about e.g. the optimal size or frequency of meetings of all governance bodies. Nor does it implement direct connections between corporate governance or shareholder harmony and corporate performance of the family firm. Such topics would without doubt contribute to further refine the theory of corporate governance in family firms, and are useful avenues for future research.