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[5] Market-Civil Society
At the market-civil society interface, we find private, non-governmental organizations with a for-profit orientation that are aimed at the provision of private goods. Most family-owned firms appear in this category. Family-owned enterprises invest and expand on the basis of own capital. This makes them grow more slowly than joint-stock companies (archetype 3) that have better access to risk finance, but which also face greater basic governance challenges (e.g. due to opportunistic managers). Joint-stock companies that decide to ‘go private’ often do so to regain control vis-à-vis shareholders, and partly also to take more responsibility for the actions of their organization.
Agency Challenges
- Conflict between owner and managers: driven by emotional ties to the business, shared family wealth, and nepotism;
- Conflict of interest between controlling (family) shareholders and non-controlling shareholders, through ‘private benefits of control’ such as: excessive voting rights or board control, entrenched (family) managers, mismatch of control rights versus cash-flow rights, the transfer of profits or assets out of firms;
- Conflict of interest between insider (e.g. family, founding) shareholders who may have an interest in non-financial aspects of the firm, including preserving reputation and legacy, giving back to the community, or protecting the environment, and (family) outsiders whose financial interests (e.g. maximizing share value or increasing the dividend) can conflict with these objectives.
Typical Strengths
- Trust (alignment of ownership and management);
- Stability: no shareholder influence that induces short-termism;
- Strong leadership / direct influence in decision-making enables capability to take up issues quickly;
- Flexibility (hands-on mentality) and commitment;
- Long term outlook/ focus on continuity reduces over-ambitious risk-taking;
- Company interest prevails over personal gain;
- Risk aversion supports steady growth strategy;
- (Family) values-oriented;
- Family owners often have a profound emotional investment and interest in their firms; their fortune, personal contentment, and reputation are tied to success of the firm.
Typical Weaknesses
- Limited access to capital;
- Succession problem;
- Relational aspects play an important role in decision-making (e.g. family conflict);
- Inward looking/ risk of groupthink/ lack of checks & balances (family businesses are reluctant to allow outsiders into the top level, people are given jobs for which they may lack the skills, education, or experience);
- Overly risk-averse (slow growth, stagnation);
- Unstructured governance (related to formal decision-making; internal hierarchies; rules);
- Deficient flexibility to internalize opportunities quickly (capacity and capabilities challenge);
- Limited external accountability.