Advances in Business
Public Companies can Learn Lessons from Family Firms
Introduction
The fast-changing world leads many individuals and groups of individuals to come up with many ideas in relation to obtaining their livelihood and subsistence. Many were able to establish businesses in different industries in order to gain from the trade and provide service to the community. For many centuries, many individuals and families depend on their established businesses, whether local or international, which serve to their “bread and butter”. The establishment of such businesses leads to the formation of publicly and privately owned companies, which serve to be one of the sources of economic, political and social stability of many societies and nations. However, despite the success, function and importance of such firms, it can still be pointed out that most of these businesses are more successful than the others. This is a given fact, for with increasing market goes the increase in competition among firms, both in private and public industries. The increase in competition then leads to the innovation, improvement and development in different aspects of the businesses and firms, which allow each company to gain competitive advantage over other firms. In addition, the increase in competition also allows the management of every business firm to assess and evaluate their own system, which is vital to the success and establishment of the company in its own industry and to its market.
From a general perspective, it can be perceived that publicly owned companies and business are far more successful and prestigious than family owned or privately owned firms. This is related to the fact that publicly owned firms have the edge of recruiting and selecting more workforce than privately owned ones. Nevertheless, despite this, family owned businesses are more successful because of their form of management. Management in all aspects is one of the most crucial parts in retaining a business in whatever industry. With an effective and efficient form of management, a particular business will have the opportunity to become successful in an industry for a number of years. With an effective and efficient form of management, a loyal and skillful workforce could be retained and maintained in the company.
With this argument, this paper aims to discuss the concepts related to public limited companies and family owned firms. This paper aims to provide a comparison between the two firms, which will enable and provide understanding that a PLC can obtain knowledge and learning from the management of family firms, which would contribute to its success. The characteristics of both types of firms will be discussed, which will become the basis on how can public companies can learn from the management of family firms. Aside from the discussion of such concepts and theories, the argument of this paper will be strengthened using concrete examples, from which the concepts discussed will be given proof.
Public Limited Companies (PLC)
It has been reported that a public limited company may be also referred to as a government-owned corporation, and means that a company, where public ownership of assets and interests are being upheld, by and for the people as a whole (2007). Its value or sized is termed as its market capitalization, which is often calculated as the number of shares outstanding multiplied to the price per share, and is wherein often traded on a stock exchange (2007). In addition, the shares of PLCs may be offered for sale to the public and with the liability of the members is limited to the amount paid on shares they hold, which includes community interest public limited companies ( 2003). The term was introduced by the Companies Act 1980 in the United Kingdom and by the Companies Amendment Act 1983 in the Republic of Ireland (2005). In essence, public limited companies or PLCs are companies that are owned by the government, and function in the guidance of the government.
Public limited companies present a number of advantages or benefits, which include:
Access to Capital – public companies can raise large sums of money or capital through the selling of its securities, thus, generating stocks. The money generated could be utilized for the growth and expansion of the company, for retiring existing debt, for corporate marketing and development, and for acquisition capital and corporate diversity (2005).
Liquidity – this enables the public company to have a market for its stocks, in turn, providing the company with great opportunities to sell its shares of stocks to its investors. In essence, the stocks of a public company is more liquid, thus buying or selling the stocks more readily (2005).
Mergers and Acquisitions – moneys or stocks acquired by a public company are considered a good source of buying or acquiring other organizations or businesses, which increases the possibility for mergers and acquisitions.
Increased Valuation – the value of the markets of public companies is higher than the market value of private companies because the market of public companies is larger and more diverse. They have an increased value in terms of market value because the availability of other alternatives to raising capital allows them to greater leverage in terms of its negotiations, both in institutional and individual investors ( 2005). With this, it can be understood that more stocks and resources makes them more valuable.
Compensation – because public companies have more stocks and more sources of money, they have more means in providing for their employees, in terms of compensations and incentives. Thus, the increase in compensation leads the employees to become more productive, loyal and with high morale (2005).
Prestige – having a large sum of resources entitles a public company to be perceived by other companies as being successful and stable in its own industry, being able to sustain its reputation and increase its business opportunities in its market. This also gives the company the image of being highly competitive and effective in managing and sustaining its workforce, and in marketing their products and services to its corresponding market (2005).
Personal Wealth – personal wealth can be achieved in two ways, namely, through salary and through selling or trading of stocks (2005). With this, it can be understood that the shareholders and employees working in a public company would have the opportunity to receive higher sums of money, based on the amount of money the whole company receives.
Estate Planning – it has been reported that a public company can be utilized as part of a retirement strategy for owners, thus, allowing them to hand over the assets to their heirs, in their desire to transfer the value of the company to his or her family ( 2005).
Publicity – public companies receive more attention from all forms of media; thus, have more potential and opportunities for becoming known in the industry. The attention that public companies get from the media enable can be used to establish interrelationships with other businesses and companies, attract potential partners and stakeholders, and attract more consumers and clients (2005). In addition, PLCs can use this chance to issue advertisements that can offer any of its securities for sale to its market ( 2003).
However, despite the number of advantages that PLCs hold are a number of disadvantages, which limit the operations of public limited companies. Primarily, PLCs should consider the increased regulations imposed by the government, which must be followed, including reporting and disclosure requirements. These are considered to be costly to comply with and may provide several competitors with the information they need regarding the company’s activities and connections (2007). Second consideration to be made by public limited companies is the drastic changes happening in the economy and the stock market, where their resources are based and dependent to. The fluctuations in the economy and stock market must be taken note of to be able to have a consistent assessment of the available resources of the company in terms of budget, compensation, production and maintenance. Third consideration is the public company’s mobility to receive aid or help from the government. The help of the government is crucial for any public company for it will be able to have the opportunity to obtain useful information and connections with the guidance of the government (2003). Fourth consideration to be made is to consider the recent financial performance (2003) of the public company, to be able to effectively and efficiently assess and evaluate the standing and status of the company. This would enable the public company to have knowledge on the extent of the resources, such as lacking and existing resources for its subsistence. Last point to consider is the current reputation of the company and its senior managers (2003), so that the company would have an inkling of how the public or its market perceives the company. In terms of negative reputations, the company must come up with effective strategies that would improve and develop its existing strategies to be able to attract and retain its customers and clients.
Family Owned Firms or Businesses
(2001) defines a family business or a family owned firm as a business in which the family either owns the business right away or have gone to the markets for capital, and retains enough of the stock that the business can use to sustain the control of their management, without the fear of being replaced or outvoted. The family business includes the services of family members including immediate family members, cousins, in-laws, and members of the third generation (2001). In the United Kingdom, family business composes approximately 75% of all UK businesses and where over 50% of employees are employed (2005).
Because many family businesses can be observed to be flourishing in the industry, it can be understood that there are several advantages from which businesses are able to enjoy and take advantage of. The question why some firms perform better than the others lies on the fact that a company’s performance depends largely to their available resources (2003). Primary advantage that family businesses have is because they have unique resources known as “familiness” of the firm, which are unique bundle of resources created by the interaction of family and business and can lead to competitive advantage and wealth creation. Resources in the familiness of the firm include human capital, social capital, patient capital, survivability capital, and governance structure and attribute (Hitt and Sirmon 2003). From this, it can be perceived that the interaction of such factors leads many managers and owners of family firms to adopt a much different approach and management style. Second, family businesses have the ability to make long-term decisions (2001) due to their independence. Owners and managers of the family business have the freedom to decide to invest in a particular market, in a particular product, or in a particular service, depending on its perceived profitability, based on a target period (2001). Third, because majority of the employees in the family business are family members, the style of management becomes consistent over time because the style that the owner and manager use is based on the style of management that is already established in long periods. In relation to this is the fourth advantage that family firms, due to its independence, it will have the chance to risk using unconventional strategies ( 2001) that would be perceived to improve the management and operation of the family business. Because the owners of the family business oversee the entirety of the business, they have the opportunity to make decisions based on the changes that they perceive in the market. Fifth advantage of family firms is the fact that because owners hold the money and resources of the company, they have the power to decide on its distribution, depending on the need of certain departments or projects. This fact also depends on the cash flow the business must control and manage. Last advantage is the fact that owners of family businesses can make fast and drastic decisions when needed because it has few individuals to consult ( 2001). With this, family businesses have the opportunity to implement changes in the company more drastically.
Underlying Assumptions
Given the characteristics and advantages of both PLCs and family firms, it can be understood that despite their success in their own fields, nowadays, family firms are regarded to be more successful than PLCs based on performance and management. Findings of Professor Ward indicate that family firms are more successful than PLCs, based on return on capital, profitability, growth, and sticking power ( 2006). The difference between public limited companies and family firms depend on their ownership and management, which creates a big difference in terms of culture and practices in the organizations.
The underlying assumption that private firms can do better than public limited companies is dependent on the fact that private firms are more flexible than publicly owned companies are. Primarily, family owned firms are owned and managed by the family members, while different individuals capable of managing the business manage publicly owned firms. The decision in terms of management in family owned firms come from the owners of the business, while in PLCs; decisions must make depending on the stockholders of the company. Because with family firms, the owners of the company will make the decision, decisions would be made easily and more immediately depending on the number of family members essential for making effective decisions in the company. With this, the changes perceived and its implementation in the company would be made easier and distributed to its employees much faster. In comparison with PLCs, the decision-making process is much more complicated and slower, for the management of the company would have to consult all the stockholders of the company. The decisions must be made in consensus with the decisions of the stockholders before actually making the necessary arrangements and changes for company implementation. With this, drastic change and decision making is not allowed in the company, thus, making public limited companies not as flexible as family owned firms do.
Second aspect that must be taken note of is the management of both firms. Because family owned firms have the same owners and managers, the management style used by managers are fairly consistent all throughout the operation of the company. In terms of changes, the owners and managers of family owned firms can continually make amendments and changes immediately, including adopting and implementing new management styles when needed. This adds to the flexibility of family owned firms for they will be able to see the changes that must be done to their business for they are completely immersed in the business, and because some of the employees and workers in the business are also family members, application of the changes would not have to difficult. On the other hand, the management of public limited companies depends on the expertise and capabilities of selected individuals, seen to have been standing out from the rest of the employees in the company. With this, it can be understood that with the diversity of employees and workers in the company, the style of management that must be adopted should depend on the type of employees handled in the company. This means that a more sophisticated style of management must be adopted, thus, accommodating all the necessary working needs, styles, and attitudes that employees have. This also means that once a particular style of management is adopted, changes must not be done immediately, so as not to make things more complicated and difficult for employees. From this, it can be understood that the publicly owned firms focus on the management style that they must adopt to manage and sustain their employees. This is not actually the case in family owned firms, for they focus on building and sustaining their workforce, in developing their trust and capabilities in line with the goals of the company.
The flexibility of family owned firms can be seen in their aim of developing their workforce, for the development of the workforce would enable the company to produce and train effective and efficient individuals. These individuals would have the abilities to endure the challenges to be faced by the company, and would have the skills and talents to express ideas that would be useful for the company. In doing so, family firms are able to build trust, including its important aspects, namely, communication, congruence, consistency, competence and compassion, which are being developed in each family member and its employees in the company (2001). The development of such aspects in the employees and members of family owned businesses enables the firms to become more flexible, as each individual in the company would have to become knowledgeable in terms of the different aspects of the family business. This serves to be the third factor of comparison, which must be given importance in terms of success of family firms compared to public limited companies. This discussion proves the assumption that private firms can do better due to their high flexibility.
Lastly, the lesser flexibility of publicly owned companies lies on the fact that their management and operation is more predictable that family owned firms. Because PLCs focus on hierarchy and bureaucracies, the actions and decisions of managers become predictable over time, thus, leading to weaker forms of social action and instability (2000) that limits the development of PLCs. This aspect thus, limits the flexibility of PLCs, which limits also their capabilities to become more productive and advanced such as family owned firms.
The second underlying assumption that private companies have higher profitability than public limited companies can be argued through the fact that the resources of family-owned firms are more manageable than the resources of PLCs. It has been mentioned that the resources of family owned firms create competitive advantage and wealth, given that they are unique and plenty. The uniqueness of family firms arise from the integration of family and business life, which creates salient and unique characteristics, including human capital, social capital, survivability capital, patient capital, and governance structure (2003). Human capital includes the acquired knowledge, skills, and capabilities of a person that permits for unique and novel actions, and produces positive attributes such as extraordinary commitment, warm, friendly, and intimate relationships, and the potential for deep firm-specific knowledge (2003). Social capital involves relationships between individuals or between organizations, while patient capital is invested without threat of liquidation for long periods, thus, giving more opportunities for pursuing more creative and innovative strategies. Survivability capital refers to the pooled personal resources that family members are willing to loan, contribute or share for the benefit of the family business, and thus, help sustain the business during poor economic times, such as after an unsuccessful extension or new market venture. Lastly, is the fact that the governance structure of family owned firms lack agency costs, and is focused on mutually shared goals of wealth creation and maintenance of family relatedness ( 2003). From this, it can be understood that the mentioned resources and characteristics are lacking in publicly owned companies. Because employees in PLCs are not related to one another, they would not have the focus and time to make a much more effective and trustworthy relationships, thus, leading to a lack of loyalty, strong ties and long-term commitments (2003).
Another argument to support this assumption is the fact that publicly owned companies float with the tide of market sentiment ( 2006), and dependent on the changes that take place in the economy and governments of their society and nation. Most publicly owned companies become dependent on the changes happening in the economy and the government, such as oil prices, increase in taxes, and policies and regulations set by the government. A relevant example of this is the situation of Centrica plc, which is a large multinational company based in the United Kingdom, and the largest residential supplier of gas and electricity in the country (2007). However, despite its association with British Residential Gas, the leading supplier of energy to the business sector, Centrica suffers from loss of customers due to the increase in prices it places over its products. The increase in its prices is in relevance to the additional supplementary tax charge on gas production profit, and led to the loss of millions of customers. Centrica have higher prices than other competitors have in the industry, and in effect must be able to lower their prices and operational costs. Because of the company’s dependence on the taxes imposed by the government, the company also has to adjust its prices to compensate for money it has spent. This creates price conflict among its customers, leading to loss of sales and profit.
On the other hand, this situation is minimal in the operations of family owned businesses. Family businesses focus on making long-term goals, and as a result, are braver about what they do and say, and stick to long-term values that have been established over many years, thus, building up loyalty and trust in their customers and staff (2006). Although, this does not mean that changes in the economy and government do not affect the operations of family owned economies, instead, the effects are a lot less drastic and significant compared to PLCs. With this, it can be perceived that because the operations of family owned firms are not as much affected with the changes happening in the government and economy, it can be understood that the earnings and profit of family owned firms are much bigger than publicly owned firms are. In addition, the extent of the resources of family firms and their flexibility, contributes to their high profitability.
Learning of PLCs
The previous discussions emphasized the different characteristics, advantages and disadvantages of both family owned and publicly owned businesses. It has pointed out on the strong points of comparison between the two types of businesses and the proof giving the justification and support for two assumptions. In this discussion, the last assumption will be given emphasis, including the discussion as to why the tyranny of the stock market prevents PLCs from learning from family firms.
The third assumption suggests that public limited companies are not able to reach the performance of private companies, and this assumption is a generalization of the overall performance of PLCs. In general, this is the case of PLCs, for as mentioned earlier, PLCs are dependent on the changes that take place in the economy and in the government. With this, it can be understood that the performance of PLCs is largely dependent on the operations of the government and the economy. In addition, PLCs obtain their primary source of funds and resources from the stock market, thus, is open to fluctuations and inconsistencies during the process. Changes in the stock market are dependent on the changes that happen in the economy, and thus, become dependent upon by PLCs. In addition, it has also been mentioned in previous discussions that the primary focus of PLCs is the development of its management, and not the development of its workforce, unlike the focus of family owned firms. It can be understood that the success of firms and organizations lies on its skillful workforce, and if employees are not skillful enough the meet the standards of the company and demands of customers, then the whole business organization will not be as successful in its industry. Moreover, family owned firms have more sources of funds and resources compared to PLCs, thus, limits the opportunities of PLCs to perform much better.
The dependence of publicly owned firms in the operations of the stock market prevents them from learning from family owned firms regarding the effectiveness of its operations. Because their resources may become limited in several instances, this compensates the development and improvement of its workforce, unlike in privately owned firms, wherein, due to a number of resources and profit, companies are able to focus more on employee development. Learning in this context is organizational learning, which is a complex, multilevel process that is bounded by the reliance of rational decision makers on attention and search routines, which conserve cognitive resources and binds their search for alternatives to past choices reinforced by increasing returns to experience (2000). At the organization-level learning, learning is biased against discovering opportunities far from the past choices used by the organization, and permits exploitation of choices for discovering great opportunities (2000). With organizational learning, knowledge and practices will be integrated and distributed to all employees in the organization, thus, focusing in overall development and improvement.
However, although organizational learning can be obtained and done within public limited companies, learning of PLCs from family owned firms is limited and prevented due to the reasons previously mentioned. An important point to take note of is the presence of a patient capital as an essential resource of family owned firms. As defined earlier, patient capital is a financial capital that is invested without threat of liquidation for long periods (2003). This type of capital is not the type of financial resource of publicly owned firms; instead, the financial assets of PLCs are liquid to enable selling of stocks to stockholders and shareholders. This just means that PLCs lack financial capital that has no threat to liquidation, thus, presents a threat of having less funds and resources compared to family owned firms. In this aspect, the tyranny of the stock market becomes a limit to the learning of PLCs from the operations of family owned firms. Learning does not only mean obtaining relevant and useful information, but also applying the obtained information using own means. In this case, although the PLCs could obtain useful and relevant information regarding the operations of family owned firms, they would not be able to apply them given their limited resources.
Another important aspect to emphasize is the existence of the survivability capital as an important resource of family owned firms. As also mentioned earlier, survivability capital represents the pooled personal resources that family members are willing to loan, contribute, or share for the benefit of the family business (2003). This type of capital is also not considered one of the financial resources of publicly owned firms, thus, another point for its learning. Due to the fact that publicly owned firms are not owned by a family or family members, survivability capital is not needed as a source of capital and funds. From this, it can be observed that when it comes to resources, public limited companies only rely on the stock resources they have, and have no other means for obtaining other forms of funds and resources. In this light, the assumption that publicly owned companies are less performing well compared to family owned firms may be proven in terms of its financial resources. The limit in the number and extent of resources that PLCs have due to the stock market provides the realization that the tyranny of the stock market largely influences the learning of PLCs from family firms. As mentioned, although PLCs can obtain useful and relevant information from family firms, its limited resources through the means of the stock market, makes the application of such knowledge limited and not possible.
Another important lesson and aspect that PLCs can learn from family owned firms is the fact that family firms give primary focus on the development of its workforce or employees apart from everything else. This becomes the primary focus of family owned firms because the efforts, ideas, time, and participation of its family members matter the most to the business. Without the support and effort of the family members, then the entire family business would not be as functional and operative as possible. This is a good learning aspect on the part of publicly owned businesses because one of the most important source of success and continuous operations of companies is the participation of its workforce or employees. If PLCs would not give due importance to its workforce, then it would not have the chance to develop and improve, thus, contributing to the instability of the business due to lack of motivation, coordination, improvement and job modification. In addition, in comparison with PLCs, family firms are characterized with employees that have intense loyalty and trust with the business. Because of this, PLCs must also strive in order to achieve such goal.
Last point for the learning of PLCs from family owned firms is the difference in their management, from which the employees and its workforce are dependent upon. Because the employees of PLCs are different from the employees comprising family owned firms, the difference in the style of management and leadership would also follow. Given the fact that employees working in PLCs are not as loyal and trustful with its form of management compared with family firms, the point of learning that must be done here is adopting new and revolutionized forms of management and leadership strategies depending on the type of employees that organization has. However, given the nature of work, priorities and resources of PLCs, managers must work double time to be able to perform as efficient and as effective as family owned firms.
Conclusion
From the discussion, it can be deduced that the performance of public limited companies cannot reach the performance of family owned firms, given several reasons, including its resources, its dependence with the changes that happen in the economy and in the government, its less priority with the development of its workforce, and its type of management. These important aspects emphasize the role of the stock market in the sustenance of the resources of public limited companies. With the role of the stock market, financial resources are liquid in PLCs than in family owned firms. In addition, because the stock market is the primary source of financial resources of publicly owned firms, the existence of survivability and patient capital is lacking, as compared to family owned firms. These two sources of capital are additional sources of capital for the operations of family owned firms, and thus, contribute to its financial resources. With this discussion, it can be understood that there are several aspects from which public limited companies can learn from the operation of family owned businesses. However, with the constraint generated by the stock market, as the source of PLCs financial resources, publicly owned companies will not be able to perform and function as family owned businesses do. This gives the realization that the most important element in any operation of the any business is its financial resources, which serves as the fuel for other processes.
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