Family Business and Its Governance

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Table of Contents

Introduction
Philanthropy
Social responsibility
Family governance
Corporate governance
Competition and key strengths
Conclusion
References

Introduction

Family-owned firms are one of the foundations of the world’s business community. There is however no proper definition of family business and academic literature appreciate this (Donnelly 1964). Their creation, just like Perdue Farms growth and length of existence are critical improvement of the world economy.

The farm is now a major contributor to the improvement of the world economy. It is not only producing products for local market but for external consumption too. Just like publicly owned ventures, family businesses face a lot of management issues.

Family firms have special characteristics which allow them to have competitive advantage over other businesses. A long-term perspective comes from keeping a business for the next generations. When people hear of Perdue Farms, they tend to think of longtime chief executive officer and advertising spokesman Frank Perdue.

The company was actually founded by Frank’s father, Arthur W. Perdue. In 1920 the elder Perdue bought five dollars worth of laying hens and went into business selling eggs in Salisbury, Maryland.The company remained a tiny, family-run organization, in large part because of Arthur Perdue’s unwillingness to borrow money to finance expansion.

The strength of most family firms’ values gives them a clear identity in an increasingly faceless corporate world (Clarke 1972). There are however a number of risks associated with this type of business, the common one being the dissension that may arise within families, particularly between family members who are actively working in the business and those who are purely equity holders.

As family firms grow, the owner equation shifts and complexity increases (Neubauer & Lank 1998). The paper will look at the various criteria ranging from philanthropy, social responsibility, and business performance but critically evaluate family governance and corporate governance with regard to Purdue farm.

Philanthropy

Most family business owners are natural philanthropists and in most cases, family businesses are more likely to support charitable activities than non-family businesses. Their commitment to being philanthropic, socially responsible and adorable members of the society is greatly felt and more robust and they are never monopolized when being philanthropic. They are instead committed to long-term stewardship, stability and continuity.

This means that a philanthropic outlook is frequently embedded in their business. Maryland’s Eastern Shore is known for crabs courtesy of the business acumen and philanthropic nature of chicken industry leader Perdue Farms; it is now making great strides in production of renewable energy. The world celebrated the completion of one of the largest commercially owned solar power systems in the eastern United States and commended Perdue and its partners Standard Solar for taking up such a project.

It’s installation at Perdue’s headquarters in Salisbury, MD sits on six acres of Perdue property. The clean electricity from the solar panels in both Salisbury, MD and Bridgeville, DE will greatly reduce carbon emissions. Just as Jim Perdue notes completion of the project is a step forward in Perdue farm commitment to giving back to society.

Philanthropy provides a forum for family collaboration and for reflecting the family ethos to the wider world. Concern for the community is a core philosophy of many families in business. It is of great importance that they would come together to demonstrate this to all stakeholders in a real and tangible way through philanthropy. Charitable giving is essential to both the family and business culture. A holistic view of commercial enterprises as citizen focus globally and locally is common among closely-held companies.

Family businesses often stand out for their discretion with regard to communication. In most occasions, the family businesses show particular commitment towards their stakeholders in the society. Whetten &Mackey (2005) argue that family businesses have special interest of maintaining good reputation and thus traditionally engage in socially responsible activities. The family shareholders and the company’s managers would hate having a negative image embedded on the family and by association on themselves.

Godfrey (2005) argues that the family in itself has substantial influence on the company’s assets and the economic success of the company. To realize it corporate responsibility Perdue farms work to be a good corporate citizen. This is evident in the farm code of ethics and in its effort to minimize environmental damage.

When properly done, socially responsible activities can simultaneously meet the needs of the owners, the employees and the community at large. Chicken processing have been under criticism ranging from animal rights to repetitive motions on environmental pollution. The farm has for instance come up with better ways of disposing dead birds by using composters on each farm (Carter & Jenning 2004).

Social responsibility has been a subject of intense debate and controversy over the last few decades (Jamali 2008). In a slightly different vein Campbell (2007) argues that socially responsible corporate behavior has become difficult to define as it means ‘different things in different places to different people and at different times’ (Campbell 2007).

The focus of social responsibility has evolved from just having an economic focus and ensuring only shareholder interest in 1970s, to include a number of additional dimensions which emphasis on economic, legal, ethical and philanthropic responsibilities (Carroll 1999).

Social responsibility therefore not only means fulfilling economic and legal obligations, it also refers to voluntarily adopting ethical business practices that go beyond legal and regulatory compliance by integrating wider considerations for the environment, human and social capital.

Family governance

Family governance can be defined as a process that helps make better and more-informed decisions. It is impossible to design a process that helps families make better decisions when there is no way to effectively measure what a good decision is for a certain family. Family governance therefore is a system that helps families makes decisions in such a way that the decisions will be respected over time.

Eliminating family conflict in absolute terms is impossible. In real sense the principal goal of a family governance system is to manage the extent of family conflict by making it more likely that decision made will not be challenged (Gray 2007).

A good family governance system often comprises both structures and documents. Perdue Farms must have to a large extent embraced a good family government hence the great success witnessed even with handing over the business to grandson.At some point younger Perdue felt constrained by his father’s conservative ways.

Frank Perdue held a vision of turning the family business into a fully integrated breeding operation with its own hatcheries and feed mills. With proper family governance in place, the older Perdue agreed to his son’s plan to finance a soybean mill by borrowing money. This was the very first time in his 40 years in the poultry industry that he had willingly gone into debt.

The concept of family governance is futuristic and optimistic by nature. It requires to be rooted in the idea that there’s something in need of governing, perpetuating and developing. It also can be of great help not to burden oneself and other family members with unachievable expectation that the governance system created has to be perfect from the outset and set it like a guideline to be followed by generations to come (Hughes 2007).

In that case, any system created should offer the opportunity to revise and reconfigure in the face of change. In face of the different family needs, there is no accepted standard or template to follow when creating and implementing a family governance system. Families thus, have tremendous flexibility to create one that fits their specifications best. A family policy should however address the following issues:

The process of creating governance-related documents such as a family constitution, a mission statement or a vision statement is what should be considered important. The document in itself is not of much importance.

A family that can come together and engage in the collaborative process aimed at producing such documents will have a good chance to emerge with a set of principles that show what’s important to the family, what it would like to achieve and how it views itself in comparison to others. Revisiting these principles on a regular basis will help family members stay connected to one another and to their collective goals (Livingston 2007).

A common complaint within families that don’t have a rule-guided and transparent system in place is that most decisions are made, or appear to be made from one centre. Such a decision is prone to challenge on certain grounds such as it was not consultative, it was not deliberative or it was motivated by personal animus. In contrast, if a decision is made pursuant to a rule directed and transparent process, it will be by definition deliberative and consultative.

Families that operate under family council often find that each time the council issues a decision the family ultimately accepts, the respect for the decision making process itself grows. With each favorable outcome, the system acquires increasing moral and persuasive force and gets stronger. In the long run it becomes volatile of the family culture to challenge a decision made by the family council.

If a family gets this far, the authority of a decision made by the council becomes almost unquestioned. A particular arena where a normative way of making decisions could be of is when family members have significant responsibilities to play in the family business.

The hiring and firing of these family members are decisions full of potential for trouble. However, if the family can create a set of rules and procedures in advance and then seek to apply them neutrally to situations as they arise, it’s more likely that the decision will be unbiased. Such a decision is then likely to have greater moral and persuasive force over all (Ebbena & Johnson 2006).

Implementing a family governance system can help a family create a successful and integrated family economic plan. Family governance goes a long way to help a family not only perpetuate your wealth, but also deal with the ever-present and often contentious and political issues that can be prejudicial to wealth objectives (Hughes 2007).

A family governance system is a key component of an integrated family wealth plan. A successful governance system can be instrumental in equipping a family to overcome the challenges related to family, business, financial and succession. This criterion has been heavily employed by the Perdue Family.

The family business has been expanding and experiencing substantial growth. A family structure should thus create a structure that is inclusive enough to be agreed upon by all members of the current generation and be flexible such that the future generations will embrace it (Sullivan & Steven 2003).

Corporate governance

For quite some time, international attention has focused on corporate governance practices in family owned business. These businesses face major challenges to do with their sustainability and profitability. Corporate governance measures both at the family and business levels provide awesome solutions to family ownership challenges and often are indispensable to the long-term success of the family business (Cadbury 2000).

This is true especially with succeeding generations. Family-owned businesses are organizations in which the shareholders belong to the same family and participate substantially in the management, direction, and operation of the family business. It must be noted that each family has its own unique ethics, values, histories, unwritten rules and communication methods special to itself. The changes instigated by new generations can improve or harm the business.

Corporate governance, generally, refers to the processes, structures, policies and laws that govern the management of a company (Roe 1994). It can also refers to the way the Board oversees the operations of a company and about how board members are accountable to the company particularly to its shareholders.

Management scholars argue that the paths of economic development and competition are based on the quality of the corporate governance rules practiced in a business. For a business to compete favorably it must have good governance policy. Corporate responsibility is quite evident in Perdue farms, when Perdue retired as chairman he remained the company’s chief public relations asset.

The gap was to be partially filled by Perdue’s 41-year-old son James, who became chairman upon his father’s retirement. The Perdue Farms board of directors decided to leave the chief executive officer slot open, hoping that it would serve as an incentive for both the younger Perdue and his second-in-command, company President Pelham Lawrence. Unlike his father, James Perdue did not start out in life as very enthusiastic poultry man.

He worked just informally for the family business while he was growing up. The key purpose of corporate governance is to promote accountability, transparency, fairness, disclosure and responsibility which are the core values relevant to the success of any businesses (Saleh 2006).

Competition and key strengths

Although Perdue Farms did enjoy increasing popularity, because of its chief executive officer and its chicken, to success and fortune, it did not by any means escape the attention of its competitors. Its main competitor was North Carolina-based Holly Farms, which later became a subsidiary of Tyson Foods.

Holly Farms had a bigger market than Perdue Farms and sold chicken to a nationwide market. Perdue Farms was its main competitor in the lucrative Northeast. As early as 1971, Holly Farms watched the Perdue in its infancy as it sold at the retail level under its own brand name with great interest and concluded that Perdue Farms could not beat them at least in part because Perdue Farms was pricing its broilers as higher than other brands. That year, Holly Farms began selling under its own brand name.

The two companies competed stiffly during the 1980s, introducing new products in an effort to increase sales growth and out-do the other. During the early 1980s both were spending a lot on advertising. In 1983 Perdue Farms introduced a new product-hot dogs stuffed with chicken instead of pork or beef.

In 1985 Holly Farms began selling fillets and bite-size nuggets. Perdue Farms responded and launched a line of prepared chicken products called Perdue Done It! which included breaded and precooked nuggets and cutlets. It finally turned out, neither Perdue nor Holly Farms could quite outdo the other, but both succeeded well enough so that in 1985 the two companies together accounted for one-fourth of all the fresh chicken sold in the United States.

The major strength and breakthrough in Perdue farms was advertisement. Advertising generated consumer awareness of the Perdue brand name beyond the company’s highest expectations. Perdue Farms had significant advantage over its major competitors in that it had easy access to the major urban markets.

Conclusion

When family members work together, emotions may interfere with proper running of the business. Conflicts tend to be many because relatives view the business from different angles. Those who are dormant partners, stockholders and key directors are likely to judge capital expenditures, growth and other critical matters primarily by economic gain. On the other hand, those engaged in daily operations are more concerned with maters of production, sales figures and personnel matters.

Growth also may be prejudiced if some relatives are reluctant to plough profits back into the business. When offspring of company founders take up after the founders like Jim Perdue in business acumen, then the business have chances of expanding. When proper criterion and policies are employed, a business can become a big success-just like the Perdue Farms.

References

Cadbury, A 2000, Family firms and their governance; creating tomorrow’s company from today’s, Egon Zehnder, London.

Campbell, L J 2007, “Why should corporations behave in socially responsible ways? an institutional theory of corporate social responsibility,” Business journal,32 (3), pp. 94-967.

Carroll, B A 1999, “corporate social responsibility: evolution of a definitional construct,” Business and Society, 38 (3), pp. 268-95.

Carter, C R & Jennings, M 2004, “The role of purchasing in corporate social responsibility: a structural equation analysis,” Journal of Business Logistic, 25 (1), pp145–186.

Clarke, P 1972, “Small businesses: how they survive and succeed,” Journal of business, 3 (2), pp. 34-35.

Donnelley, R G 1964, “The family business,” Journal of business, 8(4), pp. 93-105.

Ebbena, J & Johnson, A 2006, “Bootstrapping in small firms: an empirical analysis of change over time”, Journal of Business Venturing, 21(6), pp. 851-865.

Friedman, M 1970, “The social responsibility of business is to increase its profits,” The New York Times Magazine, September 13.

Godfrey, P C, 2005, “The relationship between corporate philanthropy and shareholder wealth,” A risk management perspective, 5, pp. 777-798.

Gray, L 2007, “The three forms of governance: a new approach to family wealth transfer and asset protection, part I,” The Journal of Wealth Management, 12, pp. 54.

Hughes, J 2007, Family: the compact among generations, Bloomberg Press, New York.

Jamali, D 2008, “A stakeholder approach to corporate social responsibility: a fresh perspective into theory and practice,” Journal of Business Ethics, 82, pp. 213-231.

Livingston, J 2007, Founders at work: stories of startups’ early days, Apress, Berkeley, CA.

Neubauer, F and Lank, A 1998, “The family business -its governance for sustainability,” Macmillan Business, 5, pp. 23-56.

Roe, J M 1994, Strong manager, weak owners: the political roots of American corporate. Princeton University Press, Princeton.

Saleh, B 2006, Corporate Governance of Family Businesses, Art Group Graphic, Cairo.

Sullivan, A & Steven, M S 2003, Economics: principles in action, Pearson Prentice Hall, New Jersey.

Whetten, D A and Mackey, A 2005, An identity-congruence explanation of why firms would consistently engage in corporate social performance, Brigham Young University, New York.

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