Glossary

agency theory. This theoretical construct believes that people will act in their own self-interest.

AGM (annual general meeting or annual shareholders meeting). This is the annual meeting of all the owners (stockholders or shareholders) of the firm.

altruism. Unselfish concern for the welfare of others at the expense of oneself. Families can make business decisions that hurt the business, such as avoiding layoffs in a downturn or keeping a long-term yet unproductive employee.

audit committee. This is a subcommittee made up of members of the BOD. The audit committee audits (or reviews) the financial reports.

board of advisors. This board is an informal group that offers advice and recommendations to the business. The family business is not required to institute their recommendations.

board of directors. The board of directors (BOD) is a governance mechanism designed to provide open communication, improved decision making, and increased levels of knowledge and experience in offering advice and instructions to the TMT. The board provides oversight of the organization. Board members are elected, have liability, and are compensated for their contributions.

chairman of the board. This is the person who is elected to chair or lead the BOD.

chief executive officer. This is an officer of the corporation, the leader of the TMT and responsible for the team with day-to-day management responsibility for running the business. The CEO answers to the BOD.

commitment. This is the desire of an employee or family member to continue with the firm.

compensation committee. This is a subcommittee made up of members of the BOD. It conducts benchmark research for market rate comparables and recommends employment compensation rates to the BOD.

competitive advantage. A competitive advantage exists when one company has something rare and hard to copy that places competitors at a disadvantage.

conflict. This means to be in serious and direct opposition to another’s ideas, viewpoints, plans, and strategy. Conflict can extend to the point of violent disagreement. When this occurs interpersonally, especially among family members, it has a negative impact on the family business. Conversely, conflict can be positive if all sides are able to share freely and debate over the process of how work should be done (called task conflict). In this manner, good decisions can be made, and work is performed efficiently.

conflict of interest. In a family business, this occurs when personal interests conflict with business interests.

control. This is used when discussing large companies, often with outside shareholders. The family may have enough ownership to exercise a high level of input on the strategic direction of the firm.

corporate social responsibility (CSR). Corporate and governance activists are demanding that corporations be responsible in their actions toward society (stakeholders).

cousin consortium. It is made up of third-generation members of the family.

culture. This is a company’s unique set of values, norms, beliefs, history, and experiences that make up the unique character of the organization. In a family business with a “positive” culture, the family members and employees have a shared system of beliefs, attitudes, and norms of behavior. It can be a source of tremendous competitive advantage. Conversely, in a business with a “negative” organizational culture, the employees do not share a similar value system, owners and managers may be at odds with employees, and there are no norms to guide decisions.

director. A director is an elected member of the BOD.

dual class shares. These shares allow for more votes than regular shares of common stock. They are also referred to as super shares. Families can control a corporation with dual classes of stock that do not match their ownership rights.

dual roles. This occurs when one person holds two roles in an organization, such as the chairman of the BOD and the chief executive officer roles simultaneously. It is a common yet controversial practice with overtones of conflicts of interest.

entrepreneur. This is the original creator or founder of the firm. Usually, one person can sometimes be a small partnership.

entrepreneurial orientation. This is the likelihood that the family will continue to be entrepreneurial through the generations.

estate planning. This refers to the proactive discussion and planning for a person’s disposition of property, possessions, and capital. It is usually purposefully and proactively structured to minimize taxes and maximize generational wealth.

explicit knowledge. This type of knowledge is clear and obvious. It is gained by education and reading and expressed by words, numbers, and codes. It is the opposite of tacit knowledge.

family. This most commonly refers to a nuclear family of blood relatives, such as a father, a mother, and their offspring. In family business terms, it can refer to extended family members and in-laws. The individuals are committed to mutual growth and development. They share a family history together and have strong bonds.

familiness. A term created to describe the interplay between the family and the business, it includes the various forms of capital, such as human, social, financial, and physical, that are unique to the family business.

family business. There is not one well-accepted definition of family business. The most common definition is where the family, consisting of more than one family member, owns a significant amount of the firm and influences the strategy of the business by the control of shares or votes.

family constitution. This is a tool of governance and refers to a written document the family creates and agrees to. It lists numerous items such as who can own stock and the policy for how the company terminates a family member.

family controlled. This is, typically, a larger firm that has gone public (sold shares to the public), where the family has either a simple majority of the stock or a dual class type of share, in which the family has more votes per share than common stockholders, thereby having control of the business. It is common in S&P 500 family firms.

family council. This is a more formal governance mechanism than a family meeting. It has an agenda, decisions are made by voting, and it is often run by an outside facilitator. In large firms, members are elected. The council interacts with the board and informs them of the family’s decisions and issues of importance.

family employees. These are employees of the business who are also members of the owning family.

family meeting. This is an informal meeting of the family to provide updates to family members.

family office. This is a group of service professionals who manage the family wealth as well as providing accountancy and legal services, specifically for the family. Usually the family charitable foundations are housed in the family office.

family roles. Familial roles are generally assigned to us early in life. For example, the youngest member of the family is the baby, the older child has extra responsibilities, and there may be the black sheep of the family. It can be difficult for other family members to see the person as anything different.

founder. The original entrepreneur who started the business, the founder, also referred to as the controlling owner.

generation one (Gen 1). This is the first generation of family ownership, usually the entrepreneur or original founder, often referred to as the controlling owner.

generation two (Gen 2). This generation consists of the sons and daughters of the founder. The siblings are referred to as a sibling partnership.

generation three (Gen 3). This generation is becoming larger, with many cousins involved and different branches of the family. It is referred to as a cousin’s consortium.

governance. These comprise formal measures of control instituted for effective management of the firm. Governance items include boards of directors, the family constitution, the family council, etc. There are three parts to effective family business governance—governance of the family, the business, and ownership.

human capital. This is a measure of the economic value of the employee or employees.

independence. In terms of board members, independence is important among many of the directors of the board to increase ideas, communication, and question decisions among what may be a family-controlled firm. It is also referred to as outsiders and means the opposite of insiders.

insiders. It refers to people who are family members or those close to the family. Their loyalty usually lies with the family. It may also refer to employees of the firm.

legacy. This is what the founder leaves behind. In the case of a family business, this may be a successful firm and the norms, mission, and vision handed down through the generations.

management. This is the administration, organization, and control of the business. Proper management is necessary for success.

mission statement. This is a statement that defines the purpose, duty, objective, or task of the family business.

nepotism. This refers to preferential treatment of family members in regard to employment, promotions, and compensation.

nomination committee of the board of directors. This is a subcommittee made up of members of the BOD.

nonemployed family members. These are family members who are not employed at the business. They may be owners or nonowners.

nonfamily employees. These are employees who are not members of the owning family. They are considered outsiders.

outsiders. This refers to those people outside of the family and the business. An example would be a nonfamily member director with no ties to the family or the company.

owners. People or families that hold ownership shares (stock) in the business.

pruning. To avoid having too many family employees or to keep the business in only one branch of the family, other family members may be bought out or encouraged to start a separate business.

resource-based view (RBV). This view states that a family firm has a sustainable competitive advantage based on the unique capabilities, resources, and relationships that nonfamily firms do not have and cannot develop.

shareholder assembly. This is a small group of owners of the business. It differs from the family council in that some may be nonfamily members. They meet several times a year, their main purpose being to oversee the financial liquidity and stability of the business.

sibling rivalry. As the children grow, they may engage in competitive or aggressive behavior aimed at securing parental love and affection. This behavior can exhibit itself when siblings try to break out of their family roles, with the conflict becoming problematic in the family firm.

social capital. The resources (e.g., ideas, information, money, and trust) that an individual can access through their social network. A high level of earned social capital is thought to be one reason behind a family firm’s competitive advantage.

social identity theory. Developed by social psychologists, it postulates that individuals behave in certain and often predictable ways as members of a group such as a family business, to which they have loyalty.

social network. This is a social structure consisting of individuals or organizations connected by ties such as a relationship, link, or bond.

socioemotional wealth. This is a popular family business theory that discusses the importance of the emotional component within the family. The value that a family gets from their ownership of the firm is not just monetary but includes family pride and their standing in the community.

stockholders (or shareholders). These are people or organizations that own shares of stock in the company.

stakeholder. A stakeholder is anyone or any organization that has a stake in the family business (will be affected by its success or failure). Stakeholders include the employees, the community, the customers, the suppliers, etc.

stakeholder theory. Stakeholder theory believes that all stakeholders should be considered and not just the shareholders of a firm.

strategic planning. A process used to define the company objectives, assess internal and external situations, formulate a strategy, implement the strategy, evaluate the strategy,, and make necessary adjustments.

succession. This refers to the transfer of ownership or leadership from one generation to another and is likely the most problematic issue in a family business.

system. This is a combination of related individual parts organized into a whole. A family business is a complex system with three subsystems—the family, the business, and the ownership of the business.

tacit knowledge. This type of knowledge is gained by being with and around other people; it is a sum of experiences, requiring joint or shared activities to develop. It is implicit, unspoken, and gained by observation and is the opposite of explicit knowledge.

the three-circle model (systems approach). This theoretical approach places people in three overlapping circles—ownership, business, and family. The model can be used to understand the complex and different roles and various constituencies by one’s placement within the model.

top management team (TMT). This is the C-level team that runs the day-to-day business operations, and it consists of the CEO, the COO, the CFO, etc.

transparency. Corporate governance advocates are demanding greater corporate transparency (better reports, open communication, ability to ask questions).

triangulation. This is a negative technique used to elicit support from one family member against another. The person being asked for support is placed in the middle of two conflicting family members.

trust. In family businesses, trust is a critical component and is necessary in the creation of a competitive advantage. Agency costs are reduced because of high levels of trust. Conversely, when a family is low on trust, dysfunction results.

values. These are the principles, standards, and norms to which the business aspires. In a family business, the values are accepted by the group and are often passed down to successive generations.

vision. The long-term goals of the family business, usually expressed in a vision statement.