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Spring 2013

May Current Thinking Column

Thursday, May 29, 2014

Which Values Do You Attach to Your Business?

Motivation for Sustainability in a Family Business

by Burak Kocer, PhD

Fuat and Metin Ayhan, brothers and founders of a successful manufacturing business in Izmir, Turkey, started transitioning their company into a new period under the management of their children. In some 35 years, the two brothers had brought the company to a reputable position in the market place with long-established customer relationships. Yet two of their four children have started to complain about the way they manage the company. Ahmet and his younger cousin, Efe, have recently failed to show up to work, often times without an excuse. In due time, Ahmet told his father that he is no longer sure about pursuing a career in the company. On the other hand, Ahmet’s frequent absenteeism and lack of commitment concerned Fuat about his readiness for leadership. Furthermore, Efe’s lack of attachment to the company was equally concerning. Relying on revenues from the business, he had not developed an alternative career, yet he simply refused to take responsibility in the company. 

When we are talking about sustainability, to which the discipline of family business itself owes its recognition, we are most aptly referring to people’s motivation to stay together. During times of transition, multi-generational collaboration is fundamental to ensure that the younger generation is ready and qualified to assume more critical responsibilities. However, it is equally important to create an atmosphere in which the potential successors feel that their voice is being heard and recognized.

Having worked with the company for 8 years now, Ahmet has been complaining to his sister, Leyla, that he has virtually no control over managerial decisions. Additionally, despite all his hard work and “know-how” he has accumulated since joining the company, Ahmet’s salary is nearly equal to his cousin Cem’s salary, who joined the company 3 years ago following his college graduation. The most recent controversy occurred over a bank loan, which fueled Ahmet’s resentment toward his father and uncle. Essentially, Ahmet secured an international order from a reputable French company that required an extension to the production line. He planned to finance this additional investment with a bank loan, which would only equal a minimal portion of their balance sheet. However, Fuat and Metin refused this financing and missed the export opportunity, undermining all of Ahmet’s work.

The problem faced by the first and second generations of the Ayhan family is not unusual. The transfer of managerial control from senior to younger generations is the most critical phase in securing the sustainability of a family business. Many financially successful family businesses do not survive simply due to the lack of people’s motivation to stay together. Most likely, the sustainability of the Ayhan family business will depend on Ahmet’s decision to stay with the company. Understanding the precedents of his motivation will help us identify possible arrangements and practices that favor sustainability. 

Psychology scholars have developed various theories to analyze why individuals choose to follow certain courses of action. Particularly, the Expectancy Theory, popularized in the 1960s by distinguished Yale professor, Victor Vroom, has a great deal of practical value with its three-level approach: 

1. Expectancy: Our own perception that our effort will result in performance 
2. Instrumentality: Our own perception that performance will result in a certain outcome 
3. Valence: The value we attach to that outcome

What this three-level approach implies is that we do not bother putting effort in something, if we know there will be no performance at the end. Even if we anticipate the performance, we again are not motivated to put effort in something if we know that the performance will not bring achievement. Finally, achievement itself is not sufficient for motivation if we do not value that achievement. 

1. Expectancy:

The perceived relationship between effort and performance for Ahmet was most likely the opportunities made available to him where he could possibly make an impact on the company’s future (e.g. achievement). The business must grow to keep pace with the expanding family. Despite all those years he spent preparing for a managerial position, Ahmet still had no control over making a meaningful difference in the company. What was perceived by Ahmet as being “over-protective” was actually his father and uncle continuing the business practices with which they founded the company, including avoiding risks with rapid growth and external financing. Throughout the years, Fuat and Metin have adopted a well-known Turkish idiom as a principle: “Roast with your own oil,” which roughly translates to “Stand on your own feet.” To make sure that the company was run properly, they have tried to actively manage the company along with their children until they felt that their children were ready.

Nevertheless, the failure to differentiate between monitoring and executing has the potential to risk the sustainability of the business rather than creating a healthy environment for control. Combining these two functions also delays the finalization of transition. Corporate governance offers a useful tool to manage this issue—a board of directors. Equipped with the necessary experience, boards are there to provide guidance and monitor the performance of the employees. By identifying certain matters reserved for a board of directors according to the level of risk involved with a certain business decisions, the company could provide a clearly defined space for the members of the younger generation. 

2. Instrumentality:

Ahmet was also asking himself, “What is the difference if I could make an impact on where we are going?” The perceived link between performance and achievement disappears in the absence of policies and practices that make family members feel recognized and rewarded accordingly. In Ahmet’s case, the family recognized their children as future and equal share owners of the company. Yet the problem lies in the fact that these people were not only the future share owners, but more importantly for the moment, also employees (or managers) of the company. As such, employees are compensated with salary, but not dividends. Dividends are equal for the holders of the same class of shares, while salaries are much more complicated to shape. The consequences of this failure to differentiate the rights and responsibilities of an employee from those of a share owner may be intolerable in terms of the sustainability of a business. 

3. Valence:

Of the three prerequisites for motivation to stay together, valence is the most crucial in fostering sustainability. The Ayhan family can create structural arrangements and policies, such as a functional board or an effective compensation policy, so that two generations are able to cooperate effectively in managing the company. These arrangements could secure Ahmet’s motivation to stay with the company up to a certain level. Even in the presence of an environment where his efforts would bring high performance (e.g. increased sales) and in turn, successful results (e.g. growth of the business), he should value this achievement to be motivated enough to accomplish it. In the case of the Ayhan family, Ahmet’s de-motivation was caused by factors related to the first two prerequisites, expectancy and instrumentality, whereas the problem with Efe pertained to the third prerequisite, valence. 

To a large extent, sustainability is related to what a family’s business means to them. Is it merely a career alternative that provides good living standards? In that case, sustainability stems from the family members’ reluctance or inability to seek/maintain the same standards elsewhere. In most cases, the most powerful valence is the attachment to a family’s most valuable asset: its legacy. Carrying out a business that is perceived as a “tradition” or “defining role in society” serves as the strongest factor leading to sustainability. Furthermore, this sense of ownership is fostered by governance mechanisms in the family, such as family council meetings, which help younger generations truly internalize the meaning of what they own.

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