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  • Marco Antonio Sandoval Madrigal Omar Josué Ramírez Torres Jorge Eduardo Gómez Villanuev

Structural Risk Model in Family Businesses

Marco Antonio Sandoval Madrigal

Omar Josué Ramírez Torres

Jorge Eduardo Gómez Villanueva

Accounting Vision Magazine November 2023


THE LEVEL OF STABILITY OF THE SYSTEM


The degree of risk in family businesses is a function of the behavior of several factors both at the business level and at the family level, if in a family business there are problems at the business level but at At the family level, there is harmony and good relations between the members, the company's problem is mitigated and generally resolved favorably. Likewise, if conflicts arise at the family level but the management of the company is being carried out effectively, the family problem is mitigated and in general terms the difficulties are also overcome.

However, when serious problems arise at the business level and at the same time there are strong problems at the family level, then the impact of said problems on the business family becomes a kind of “expansive wave” generating great difficulties in the continuity of the family business. This situation is known as the resonance phenomenon.


THE STRUCTURAL RISK MODEL


The structural risk model developed by Gimeno et al, 2009 establishes that the level of structural risk of a family business is a function of the complexity of the family, the complexity of the company and the degree of development of the structure of the business family, this model is shown in the following figure:



Complexity of the family


The level of complexity of the family is a function of the number of people that make it up, therefore, a business family that is in the third generation will have greater complexity than another which is found in the first, is also determined by the variety of roles existing within the family, such as in-laws, divorces, second marriages, etc., in addition to the difference in interests with respect to the company and the different life experiences of family members in relation to their way of seeing and understanding the environment that surrounds them.

It should be noted that the complexity of the family simply grows with the passage of time, in this sense, there is little that can be done to reduce the level of structural risk according to the model.


Complexity of the company


The level of complexity of the company is a function of its size, logically, the larger the size, the greater the complexity, the level of turbulence or dynamism of the sector or industries in which it operates, Its complexity also depends on the degree of internationalization of its operations, the type of technology used, its level of automation, the complexity of its distribution channels, diversification strategies, etc.

In short, the level of complexity of the company also grows over time, and given the conditions of the current environment of organizations and due to the growth objective that every company family has, the actions to reduce the level of structural risk by trying to reduce the complexity of the company are very limited.


Structure development


If we can do little or nothing to reduce the complexity of the family and the complexity of the company, then to answer the question: how can we reduce structural risk in family businesses? ?, the answer lies in the development of the structure, this structure is composed of rules, processes, roles and governing bodies that the family uses to relate to the company and, in this way, generate order and provide direction to the family system. company. The more complex the family and the company are, the more developed its structure must be.

The development of the structure is made up of five elements:

1. Family-business differentiation

2. Communication and conflict management

3. Professionalization of management

4. Corporate governance

5. Succession


1. Family-business differentiation:


We must not forget that the purpose or final objective of each of these systems is completely different, that of the company is to generate profits with a spirit of creating shared value for society and, that of the family, it is the formation of children growing in unity and harmony, achieving their happiness. In the decision-making of the business family, we can take three types of logic according to Cisneros and Genin (2010).


  1. a)  A logic of economic action that gives priority to the needs of the company, has the benefit of making decisions aimed at the profitability of the company , to performance in different key indicators of the organization. However, this decision logic has the drawback of coldness or lack of sensitivity towards the interests of the family.

  2. b)  A logic of family action that prioritizes the needs of the family, has the advantages of focusing on what family members want , generosity and protection of family interests, however, has the disadvantage of falling into practices of nepotism, excess of paternalism that affects the permanence of the company in the market.

  3. c)  Finally, a logic of political action or power, where the advantage is the conduct of a negotiator, diplomatic leader, oriented to problem solving, however, this logic has the disadvantage of falling into manipulative behavior, or excessive authoritarianism.

When the manager of the business family is confronted with difficult decisions where two other logics of action are in conflict, the leader, instead of trying to explore how they can complement each other, these logics, only forgets the benefits of two of them and decides, either consciously or unconsciously, to base only on one of them, this is what is known as a “hypertrophy” in decision making, because using only one logic, the leader cannot benefit from the advantages of the other action logics.


2. Communication and conflict management


This section is about defining mechanisms to communicate effectively to understand with empathy the points of view of others, without falling into prejudices that prevent reaching agreements that benefit the community. family and the company. In this case it is important to distinguish when functional or dysfunctional conflicts occur.

Functional conflicts are constructive, in this case, people can better understand their position, since they have to discuss and substantiate it, they help to make decisions more carefully (unification of points view), in addition, they increase the information necessary to make decisions and not make the decision process solely intuitive, and, finally, they give room for creativity and innovation to seek win-win solutions.


Dysfunctional conflicts are destructive, if we do not adequately manage this type of conflict in the family business, it will go through the stages of confrontation, wear and tear, and the result will be tension, frustration and aggression, in addition, a negative work environment will be created, also affecting teamwork.


3. Professionalization of management


In this case it is important to stop being a non-professional business family where personnel are hired based on family interests, the company is run in a subjective-emotional way, in a intuitive, without having clear organizational structure and functions. As well as improvising aimlessly for the growth of the organization.


Therefore, the aspiration will be to become a professional business family, where the hiring of collaborators will be based on capabilities and competencies, with an objective-rational direction, decision-making with based on information, with an organizational structure and clearly defined staff functions, and, within the framework of strategic planning that defines the direction that the business family wants to achieve in the future.


Management must be effective and efficient, doing the right things (with the ability to offer valuable goods and services for society) and correctly (achieving productivity through the optimization of resources), that is, effectiveness leads us to have a proactive approach from the future to the present, creating value by asking ourselves: What should we be doing to continue creating value in the market?, complementing the aspects of efficiency with its reactive approach from the past to the present, in search of productivity, trying to answer the question: How can we do better what we are currently doing?


4. Corporate governance


Governance for the business family are formal structures for making decisions for the family and the company, with the purpose of creating value for the organization and to achieve the well-being of the family. From the family it is necessary to have a Family Council, from the company it will be essential to have an Advisory or Administration Council, and finally, if the business family is large, from the property it is necessary to implement an Assembly of Shareholders.


Among the reasons why governing bodies are not implemented we find the following:

  • Due to ignorance of its great usefulness, the great benefits of it are generally ignored

  • It is a luxury for us, it is very expensive, it is thought that it is only for large companies with resources

  • Decision-making becomes slower and requires a lot of time, it is preferable to continue with an assumption

  • These are people who do not “live the company”, the capacity and competencies of independent directors are doubted


However, it is important to take into account that beyond the previous reasons we must be careful with the following:


  • Loss of power of the businessman (he does not want to be accountable or lose control) when implementing governing bodies

  • You can feel supervised (what will they think if I fail) when detecting errors in decision-making on the Board of Directors.



In conclusion, working on these five components of the development of the structure is how the level of structural risk can be reduced, thus overcoming the challenges of the increase in natural complexity that occurs with the passage of time of the family and the company. Without a doubt, there is a long way to go to aspire to have solid business families that advance in their processes of institutionalization and continuity for the following generations.


GENERAL REFERENCES


  • Family business models. Practical solutions for the business family. Alberto Gimeno – Gemma Baulenas – Joan Coma – Cros. Collection of the Family Business Institute. Deusto Editions. Barcelona, Spain. 2009

  • Family businesses, dynamics, balance and consolidation. Imanol Belausteguigotia R. Editorial Mc Graw Hill, 5a. 2022 edition

  • Cisneros, L. & AND. Genin. (2010). “A three-dimensional model to analyze management style of small family business founders”, Electronic Journal of Family Business Studies, 1(4).


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