The Five-Factor Theory – Paving the Way to Successful Governance

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The “Five Factor Theory” is based on 30 years of experience as a non-family professional in a family business. The aim is to offer an overview of the intergenerational differences that owners and decision-makers must accept before setting up family governance for their business.

Factor One: Age Differences Across Generations

There are many family businesses with three generations all working under the same roof, which tells us that there are at least three different perspectives on the company. Additionally, within each generation, there are differences in age between siblings and cousins. In large families, these age gaps can represent several decades.

Due to the age difference alone, each family member will be at different levels of personal and professional development. This will significantly impact the way they see their roles as owners in the family business and what they expect this position to yield.

Factor Two: Different Education Levels

In family businesses that have been in existence for more than 50 years, one can find members with little or no formal education, some with high school diplomas, and others with a university, or graduate degrees.

In many family businesses, there are members (and in particular, some owners) with little or no formal education that are very open to new ideas, change, and assistance. On the other hand, there are also cases of family members who have some formal education who are conservative and close-minded to new ideas. In general terms however, the more education, the more varied the perspectives on growth strategies: family members with high school diplomas are usually open to new ideas, those with university degrees look for popular ideas and support, and those with graduate degrees can show a global orientation.

Factor Three: Differences in Risk-taking and Responsibilities

As a general rule, the owner is ready to assume responsibility for the entire family group with no risk limit. However, the second generation is prepared to handle only one company with a reasonable risk limit. This trend often continues to the third generation, where there can be instances of members who are concerned primarily with the financial rewards of being owners over the responsibilities associated with running the enterprise.

Factor Four: Different Ideas and Concepts

Perhaps this level is merely a consequence of the other three: diversity in age, education, and risk-taking and responsibility. Some family members believe that having a CEO lead the group is a good idea, while others might disagree. There can also be those family members who think that centralization is a good concept while others disagree.

These different opinions could be a very useful tool to get the group discussing options to reach a creative solution and possible agreement. However, sometimes it does not happen this way, and the result is a group of family members confused about several different dilemmas that make the decision-making process difficult to handle.

Factor Five: Differences in Benefits Received from the Family Business

This level is a summary of the other four factors: differences in ages, education, risk appetite, ideas, and concepts. This factor deals with the idea that every family member should fit into a position he deserves according to his/her capabilities. Consequently, this family member should be compensated according to his/her performance.

All family businesses must be aware of the existence of potential differences between family members, between brothers and sisters, and between all siblings and their parents. Every family member should occupy the position where he/she is best able to perform and then reap the benefits he/she deserves, because diversity and differences are the key attributes that force family owners to reach decisions that will bring innovations to the company.

Once family members believe in the power of differences and manage business positions accordingly, they are ready to discuss rules and how to govern the relationship between family members such as shareholder assembly roles, exit and evaluation roles, solving issues and conflicts between family members, dividends policies, family shareholders obligation, and employment conditions.