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Success and succession: Five characteristics of a good family business

Wednesday, 20 September 2017

Chances are high that seven out of 10 of the businesses you know are family owned. As defined by audit firm PricewaterhouseCoopers (PwC), a

 

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How CEOs Can Work with an Active Board

Wednesday, 20 September 2017

At companies of almost all sizes, across all sectors, boards are undergoing a profound transformation. Largely as a result of

 

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Solving the Puzzle of Ownership Alignment in a Family Enterprise

Wednesday, 20 September 2017

alignment  noun | ə-ˈlīn-mənt State of agreement or cooperation among persons, groups, nations and the like with a common cause or view

 

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Joining the family business: Should the children work elsewhere first?
Sunday, 09 October 2016 10:54

For the past decade or so, the prevailing wisdom among family business consultants is that second generation (and beyond) family members should work a minimum of three years outside of the family business before joining. Many are now recommending a five-year minimum.

 

Of course, similar to all best practices, this guideline must be applied thoughtfully to every situation based on the specifics of that organization, and, in this case, the individual.

 

Generally speaking however, the following list provides support for this practice of having family members work elsewhere before joining the family business as their primary job. It:

 

1.Increases credibility of family member among non-family employees. Others can see that this individual has actual experience rather than just a family connection.

2.Provides outside knowledge and processes that can be brought into the family business. Innovation doesn’t come by avoiding new ideas…it is the byproduct of it.

3.Minimizes individual’s insecurity of feeling that they have no skills or value outside of the family business. My book, Trapped in the Family Business, was written, in large part, for those who doubted their ability to get a job elsewhere because never had to write a resume, go on a job interview or have an annual performance review.

4.Allows the child to explore other potential career paths that might be a better fit based on personality, interests, or goals.

5.Potentially increases the individual’s appreciation of the value and opportunities provided to them by being a member of their family’s business. How can they appreciate what they have if they never experience living without it?

 

 

Included in the recommendation to work outside of the family business first is often the requirement for individual family members to demonstrate success. This can be through a promotion, increased responsibility, or some other tangible measure of growth. Without this, family members may not truly explore and engage in this outside job and simply be waiting for their time to run out.

 

Similarly, if a family member fails to demonstrate success in another work environment, this could indicate that they have problems with authority, collaboration, motivation or some other area that could have extremely negative consequences once they are in the family business.

 

To be fair and balanced, it is critical to note that there are many advantages to joining the family business soon after graduation. It:

1.Expedites development of individual’s specific knowledge and processes of the family owned/operated business. They won’t be spending their time learning potentially irrelevant knowledge at another business.

 

2.Accelerates the building of working relationships with key customers as well as employees. Relationships take time to build, and this provides the opportunity to start (or continue) building them rather than waiting for years.

 

3.Provides additional time to get to know the business “from the mailroom to the boardroom” by rotating through various departments before taking on management/leadership responsibility. If the next generation starts young, there may be less hesitance to start them at the bottom than bringing them to do that after they have already “paid their dues” elsewhere.

 

4.Provides career/management development opportunities (whether by position or project) that would not likely exist in other companies until mid-career or later because of family-member status. They might be trusted more to experiment or apply academic knowledge because they are family rather than having to climb the ladder at another company.

 

5.Expedites succession planning by developing individuals for specific leadership roles in the family business or, alternatively, determining that they do not possess the necessary personality traits, values, or skills for such positions.

 

 

Clearly, a case can be made for either decision. However, being open, honest, and realistic while having ongoing discussions on this topic is always going to be the right decision in a family business.

 

 

 

 

 

 

 

Source: http://www.sbnonline.com/article/joining-family-business-children-work-elsewhere-first/

 

 
The 5 Models of Family Business Ownership
Sunday, 09 October 2016 10:30

One of the first questions we ask clients is, “How do you own your family business?” Often the response is legalistic: “We are a limited liability company”  or “Our shares are held in trust.” This information is essential, of course, but it leaves unanswered the more fundamental questions: “In your family business system, who gets to be an owner? And what, precisely, does ownership mean to you?”

 

 

The lack of awareness that family business ownership requires a set of choices is perhaps the greatest – and most harmful – misconception in the field of family business. Indeed, a failure to understand your ownership options can ultimately cripple your business, causing it to lose its competitive advantage, even resulting in buy-outs or sales that nobody really wants.

 

The best way to head off these crises is to understand that there are different ways of owning family businesses. Although there are hybrids, most family businesses adopt one of five models of ownership. One of the most important decisions you’ll ever make is to choose which model to adopt.

 

 

We worked with the fourth generation of a construction giant, for example, where the family was deeply divided because owners held different ownership assumptions. Those actively engaged in the business resented what they called the free-loaders – family members entitled to equal distributions of profits, even though they were uninterested or unqualified to work in the business. The free-loaders had their own bone of contention. They saw owners working in the business as robber barons who inveigled cushy salaries and benefits.

 

 

Superficially, warring family members were arguing about compensation and dividends. In reality, disagreement ran deep about what it meant to be owners in their family business system. Some family members were adamant that owners should work in the business, while others passionately disagreed: “This is our inheritance! Our great-grandfather wanted us to be equal owners.”

 

The breakthrough came only after the warring camps became aware of the five basic ownership models: owner/operator, partnership, distributed, nested, and public. Understanding each model’s implications and trade-offs finally allowed the owners to start having calm discussions about what ownership meant for them, making compromise possible.

 

 

It’s critical to periodically revisit how you own your family business – particularly during times of transition. Holding on to the model that worked beautifully in the previous generation can threaten, or even kill, the business in the next generation. It can also put an impossible strain on family relationships.

 

 

Perhaps the simplest model replicates the role of the founder – it keeps ownership control in one person (or couple). This model, which we call owner-operator, can be successful for many generations. Think of the British monarchy. Or Caterpillar Inc., whose corporate philosophy encourages distributors worldwide to have one person who works in the business with ownership control. For the owner/operator model to work, families need to find a means for deciding who gets to be the owner-successor that is perceived to be fair.

 

For other owners, the partnershipmodel works well. Partnerships are unique in that only leaders in the business can be owners and benefit financially from it. We worked with a massive shipping company run by five brothers as a partnership. The sons expanded the business they inherited from their father into a billion-dollar company. Their partnership worked because the brothers contributed more or less equally to the business’s success. They drew the same salaries and profit distributions.

 

Trouble didn’t break out until the third generation. Four of the brothers invited their sons to enter the business, creating a dilemma for the brother with just one daughter. She wasn’t even considered as a potential business partner, an exclusion that cost her millions. Her father gave his brothers an ultimatum: either they admit his daughter, or he’d blackball their other sons from entering the partnership, too.

 

 

Questions of entry to the partnership became paramount. The company continued to operate day-to-day, but since the partnership required consensus, all major decisions were postponed. Tragically, when the brothers couldn’t reach unanimity, they sold the company that had given them, and other family members, a deep sense of identify and purpose.

 

 

Was this outcome inevitable? Not at all. Even in situations of tremendous conflict, you can save your family business if you consider different ownership models. The owners here might have moved to a distributedmodel, for example, where ownership is passed down to most or all descendants, whether or not they work in the company. Shifting to this model might have allowed the brothers to reconcile their differences. All members of the third generation could have become owners, while changes in the compensation policy would have rewarded those contributing to the success of the business.

 
 
 

The distributed model is the default position in most family-owned businesses. Parents usually want all their children to inherit equally and, besides, most assets are wrapped up in the company. But there are challenges with this model, too. Family members working in the business often disagree with those outside the business, differing, for example, on compensation and distribution policies.

 

 

Still another option for family business owners is the nested model: Various family branches agree to own some assets jointly and others separately.  This model – nested in the sense that smaller family ownership groups sit inside larger ones – is particularly attractive when conflict or differences in preferences interfere with decision-making on shared assets. For the nested model to work, the family runs the core business as a profit-making operation and distributes relatively large dividends to the branches, which then use the money to create their own business portfolios.

The nested model can effectively reduce tension among branches while keeping the family together as a whole. There’s a risk, however, of under-funding the core business to finance the outside investments. A final option is the publicmodel, where at least a portion of the shares are publicly traded, or where a family business behaves like a public company even though it remains privately held. Whether shares are publicly traded, or not, the business is run by professional managers, and the owners play a minimal role, usually limited to electing board members.

Otherwise, they either support the direction of management or sell their shares. This model works well when the business requires a significant infusion of outside capital, or when owners are too numerous, dispersed, or disinterested to be engaged actively in decision-making. The key question then becomes how the family owners can maintain control when they play such a limited role in making decisions about the business.

 

 

There’s no natural progression from the owner-operator model to the public model. Owners can, and do, move back and forth between models. We’ve seen ownership groups shift even very large companies from the public model to the distributed model.

Of course, moving to a different ownership model involves big changes in governance, legal structures, and family relationships. That’s not easy. But adopting a new ownership model can help owners unlock a family business that’s become very stuck. It may also be the one thing that can keep your family together.

 

 

Some of the identifying details in this article have been changed to protect confidentiality

 

 

 

 

 

 

Source: https://hbr.org/2016/09/the-5-models-of-family-business-ownership


 
Family business need professional managers, firms told
Sunday, 09 October 2016 10:21

Family owned businesses must integrate professional management in their if they are to experience faster growth and mitigate risks associated with demise of vision bearers.

 

Addressing Business Daily-KPMG sponsored TOP100 Midsized Companies forum, Sanlam Kenya Group Chief Executive Mugo Kibati said companies planning expansion beyond their vision bearers must institutionalise management where all processes are managed via market research and not individual instincts.

 

Mr Kibati said trained management teams would also help firms to safeguard themselves against risks associated with businesses saying Small and Medium Enterpises could have lost about Sh50 billion last year based on claims volume filed under the general insurance class.

 

“For me, the volume of claims paid out is a good indicator of the level of risk exposure given than only 3 SME’s for every 10 tend to hold risk solutions,” he said adding that companies need to put in place comprehensive risk solutions to shield SME’s from emerging risks such as cybersecurity and cyberterrorism.

 

Need for risk management

He said the tough economic climate and scarce resources, demanded that SMEs embrace modern standards of management that combines risk mitigation and management solutions.

 

It was observed that many businesses ignored the need for risk management solutions adoption due to poor financial knowledge associated with self-made successful traders who assume they are know-alls.

 

“It’s a worrisome scenario to note that most SME’s do not have comprehensive risk and asset management solutions which leaves them heavily exposed to manageable risks,” Kibati noted, adding that, “sadly, SME businesses built on blood and sweat rarely recover from threats such as fire and burglary due to lack of risk coverage.”

 

He added that many entrepreneurs preferred to pay for third party insurance for their motor vehicles and public liability insurance covers for their properties saying this provided negligible relief to entrepreneurs.

 

 

 

 

 

Source: http://www.businessdailyafrica.com/Family-business-need-professional-managers/539552-3407502-jaxi1w/

 

 
Diagnosing Innovation Readiness in Family Firms
Thursday, 07 July 2016 14:11

Introduction


Innovation is often defined as the multi-phase process of generating and adopting new or improved products, services, processes, or structures to adapt to dynamic environments. Innovation is essential for all firms in order to remain competitive.

But the successful navigation of the innovation process is not easily achieved among family firms. While most stages of the process present difficulties, the initial adoption phase is among the most important. One key means of enhancing the success of innovation within family firms is to assess readiness prior to beginning the innovation process.

 

 

 

 

Readiness for Innovation in Family Firms


By conducting an examination of the family firm's underlying readiness for innovation, family managers can better understand how the firm is positioned to move through the innovation adoption phase. If executed with care, the likelihood that the process will proceed efficiently can be greatly improved.

The Readiness for Innovation in Family Firms (RIFF) framework allows family managers to assess the extent to which the firm is prepared to adopt and incorporate any new innovation, and takes into account the specific characteristics of family firms

 

The framework consists of structural and psychological factors.

 

 

chart

 

 

Structural factors represent the basic building blocks that are necessary for innovation readiness, and include aspects like ownership control, family commitment, and alignment of existing knowledge, skills and abilities with regard to the new innovation.

 

 

 

 

Psychological factors, on the other hand, reflect the extent to which members of the family and firm are cognitively and emotionally inclined to accept, embrace, and adopt an innovation.

 

 

 

 

 

 

 

Among these factors are innovation appropriateness (acceptance among the family that a specific innovation is correct for the situation) and innovation benefits (shared belief that the innovation aligns with the family’s overall goals and aspirations).

 

 

 

 

Implementation


With an understanding of key structural and psychological factors, assessing the appropriate factors within the framework at the appropriate time can be a critical aspect of innovation readiness, as successful adoption is influenced by accurately diagnosing and addressing the appropriate issues at the appropriate time. The firm's readiness can be evaluated through a sequence of assessments: initiation, decision making, and experimentation.

In the initiation phase, family leaders must first recognize the need and importance of innovation. During the decision-making phase, structural factors related to the family and firm should be considered in addition to the psychological factors related to the family. Foremost, family owners' control and established direction are key structural factors. Other details, like ownership, managerial involvement, and board representation should be decided at this stage. The final stage of innovation adoption, the experimentation phase, is contingent on psychological factors.

Some of the most radical shifts in management style and organizational structure have evolved out of the experimental phase of innovation adoption.

Innovation is not limited to products and services; some of the most radical shifts in management style and organizational structure have evolved out of the experimental phase of innovation adoption. One example is W.L. Gore & Associates (the creators of Gore-Tex) who conceived of a provocative company structure connecting every individual in the organization to every other, in an informal network that allowed free flow of information without layered management.

This was only possible after a shift and alignment of psychological factors among the family and all of the firm's stakeholders.

 

 

 

 

 

Implications


Innovation is widely accepted as the primary path to sustaining competitive advantage in both family and non-family firms. Family firm leaders may improve their ability to successfully adopt innovations by understanding innovation readiness. That understanding is derived from an understanding of both the structural and psychological factors that influence the family, individuals within the firm, and the firm itself.

The RIFF assessment framework, which describes a sequence of three phases within the innovation adoption stage, can benefit family owners as they attempt to lay the groundwork for innovation within their own products, services, and business models.

 

 

 

 

 

 

 

Source: http://cmr.berkeley.edu/browse/articles/58_1/5806/

 

 
Profit is Personal for a Family Business by Christophe Bernard on April 26, 2016 in Wealth Preservation
Thursday, 07 July 2016 14:06
In a family business, the impact of any profits are seen and felt daily by those involved in the business, as well as those affected by the business’ performance.
A good turnover means those extra lessons for an owner’s child, or a new home for a family member.
 
 
The business is borne out of the family’s need, and its main responsibility is to look after those involved in it.
 
 
 
 
 
 
 
So how is profitability measured in a family business?

True profitability in a family business is not just about the figures and bottom line – but is rather measured in the goals and lives of the family behind the business.

 

Family Stakeholders must see the profit going towards the right expenses.

 

The firm can get buy in from stakeholders when they can first see that family members within the business are looked after properly in terms of salary and benefits, and how family members affected by, but not directly involved in the business, are treated by the company's Related Party Transaction Policy.

 

Lastly, the Philanthropic Expenditure Policy is also of high importance to stakeholders – showing that money is being spent on the right causes that are close to the family's values.

 

 

 

 

 

 

A family business is still a business

As much as the context and qualitative element of the profit is important to the business, so is the quantitative results to discern just how well the business is performing.

 

In order to know if the year's profit is good or not, it must be measured against the following:

Last year's profit yield
Expected profit
Return on owner's equity
Profit margin
Return on assets

 


These factors gives the profit true context and meaning to determine the health of the business in its own right, and not against the family's needs. As important as it is for the business to serve the family, it can only do that successfully when it is treated as its own free-standing entity, with its own needs, when it is assessed.

 

 

 

 

 

Who gets to decide on the profitability goals?

Considering the sometimes differing goals of these two entities – the family and the business – within a family business, it's important for a middle ground to be struck.

 

While the voice of the family in the different levels of the business are important, at the end of the day decisions regarding the business should be left in the hands of shareholders and shareholders alone. They are the ones with feet in both camps and will have the needs of both the family and the business at heart.

 

No decision should be made in a vacuum though, as for the family to continue to support the business, they need to understand and buy into the profitability goals of the business at all times.

 

 

 

 

 

 

Source: http://www.kpmgfamilybusiness.com/profit-is-personal-for-a-family-business/?platform=hootsuite

 
Playing it straight in family business succession
Wednesday, 06 July 2016 09:41

Handing down the family business can be a delicate affair. We've all heard the stories. Parents who won't let go. Children not ready for the job. Dysfunctional relationships both at home and in the office.


The hardest part about having a family business is the challenge of passing it down to the next generation, says Eric Clinton, director of the Dublin City University Centre for Family Business.


He cites research from the Kellogg School of Management near Chicago that about 30 per cent of family businesses will survive from the first generation to the second. Only 12 per cent will survive from the second to the third.


What can families do avoid becoming a statistic? A large part of the answer, it seems, is regular communication about what will happen when the older generation is no longer in charge.

 

 

 

 


Have the difficult conversations early


"Family businesses are a lot like life, like relationships," says Clinton. "If you want it to work, you have to work at it.


"My advice is to have the difficult conversations and have them early. Have regular communication. Talking over the kitchen table at 8pm on a Saturday night might not necessarily be the healthy way to do it."


Preparing the next generation early on in the process is crucial in case of unforeseen events like a sudden illness, he says. If children have to take over earlier than expected, things "can become very dysfunctional very quickly".


"How do you mentor the next generation into it?" Clinton asks.


"Do they have an adviser? Do they shadow the incumbent? It's not just about giving the next generation power, it's about giving them ownership and control and mentoring. They can't just be thrown into the role."


Clinton teaches families about the "4Ls", which are phases of the family business life cycle: learning business, learning our family business, learning to lead our business, and learning to let go of our business.

 


The first two phases are about apprenticeship.

Clinton says families might bring in rules or a "constitution" that require the next generation to reach a certain level of education and/or outside work experience before joining the family company.
According to the 4Ls, business owners should "learn to let go" through planning: developing a timeline for retirement, creating management development systems and sticking to the plan.

 


Succession can actually be a breath of fresh air for businesses, according to Clinton, as long as there is a balance between tradition and change.
"Succession is often a time for innovation because the next generation often comes in with new ideas. The next generation gives energy and lifeblood to the business."

 

 

 

 


Principles of succession


"Succession issues are probably the most difficult topic because there are no black and white solutions. A wide array of issues could arise in one family," says Suzanne O'Neill, a partner at Irish accounting and business advisory firm Baker Tilly Ryan Glennon.


Baker Tilly's client base is predominantly family businesses, and O'Neill specialises in succession planning.
Family businesses need a structured approach to succession, she says. The results of a study by Baker Tilly International, which surveyed 1,650 business owners across 55 countries, were condensed in to eight principles of succession.


They are meant to be a practical guide for families.
The eight principles are:

1. Succession is not retirement

2. Start with readiness

3. Set your goals before the journey

4. Price is not first

5. Harmony is a must

6. Plan early, start earlier

7. Equality of, not equal

8. Ask before you get lost.

 

 

Family harmony is an important issue on the list, O'Neill says.
"The whole issue of family harmony certainly comes up in dealing with clients. The key requirement in any succession is harmony and open communication. All relevant parties have to be engaged in the process at an early stage."


She says the owner should bring the next generation on board so they are comfortable with the plan from the start. Owners should also be willing to listen to everyone's point of view. These are ways to avoid "disharmony".
Part of the process is identifying the family member or members who should take over the business and to start handing over responsibility so they have the opportunity to demonstrate their abilities early on.


O'Neill calls these "stepping stones" that should be put in place well in advance of retirement. Aoife and Paddy Hayes of CST International 'It wasn't a 'someday this will be yours, my daughter' type thing' CST International is a small, Dublin-based market research agency run by Paddy Hayes (69). His daughter Aoife (33), head of client services, will soon take over, and the pair appear to be getting a lot of things right in their succession planning.
"I started the company about 20 years ago, and it's my third business," Paddy says. "So I'm 42 years signing my own paycheck." But Aoife might sign a few before the end of his 43rd year.
While Aoife began helping out at the office as a teenager, she says her path was not laid out for her. She worked in the arts for a few years and then did a master's in project management.


Taking over the business became an option after she went to work there full-time four years ago and saw how she could drive the company forward.
Paddy says it was her call. "It wasn't a 'someday this will be yours, my daughter' type thing. It was very much: go to school, go to college, do what you want to do. And then, if you feel it's something you want, that's grand."


CST specialises in guest feedback for the hospitality industry, and Aoife is now spearheading a new aspect of the business: employee engagement research. CST puts together surveys to figure out how engaged a company's employees are.
"The more engaged you are, the more willing you are to go the extra mile," says Aoife. "We feel like we're providing companies with really useful data that they can use to make their businesses more successful."


Father and daughter talk about the succession regularly, and the handover is about three quarters of the way done. It has happened in stages. This year, for the first time, Aoife went to an important meeting with their largest client without Paddy.


"That was conscious and deliberate," he says. "But that's what you have to do, and that's not easy because I would have loved to be there.
"When you are the founder of a business and you attend these meetings, just by virtue of [your role], you tend to dominate and people tend to address questions to you because you're the founder of the company.


"If you're going to give other people space, then you have to give them space," Paddy adds. "And a way to do that is by not being there.
"She was coming in and working with people who were used to working with me, and that's tricky. And that's something she has managed extraordinarily well. She's extremely good with people . . .

 

So I think she has a lot of the skills that will be needed to take this business where it can go." Paddy will be available after he steps down, but he says he's ready to move on. His first book, Daphne Park: Queen of Spies, a biography of a British spy, will be published later this year. He is already working on a follow-up.
"Your early 30s is a super time to take over the running of a business," he says. "Why wait until your 40s, 50s, 60s? Do it now . . .

 

You have that great combination of energy and drive, tempered with maturity."

 

 

 

 

 

 

 

Source: http://www.irishtimes.com/business/work/playing-it-straight-in-family-business-succession-1.2203869

 
Small business fraud and the trusted employee Protecting against unique vulnerabilities
Monday, 04 July 2016 08:37

Small businesses have it rough. They're particularly vulnerable to fraud because they lack the resources to implement complete systems of internal controls and properly.

 

 

segregate accounting duties among their limited staffs. However, small businesses don't have to be rife with fraud. Here are some viable prevention options.

 

 

Bob and his brother, Bill, owners and operators of Acme Tractor for 30 years, were close to retirement. A local bank had continually financed Acme, which had an inventory of farm tractors worth millions of dollars. The owner's wives, Jane and Julie, shared accounting duties in the company. Jane would approve invoices. Julie would prepare the checks and either Bill or Bob would sign them. The receipt and payment cycle included a series of checks and balances with no one employee responsible for the entire cycle.

 

 

Jane and Julie retired from the business, and James, Bob's son, assumed the bookkeeping responsibilities. James, 30, had been working in various jobs at the business since high school. Now the brothers entrusted him with all aspects of bookkeeping for the business: accounts payable, accounts receivable, payroll, and all account and bank reconciliations. They gave him check-signing ability and a business credit card.

 

 

Soon after becoming the bookkeeper, James married and began a family. As his personal monthly bills increased, he found it difficult to maintain the lifestyle he had known when he was single and living with his parents.

 

 

The fraud scheme began simply. At first, James began illegally using his business p-card (or purchasing card) for small personal expenses, such as gas for his personal vehicle and fast food meals. After several months, his charges for personal expenses increased in number and dollar amount, including charges for taking out his wife and children to fine restaurants, clothing for himself and his family, and even high-end electronic products. No one at Acme noticed the continual increase in charges for personal items because James controlled all payment checks to the credit card company.

 

 

James' fraudulent activities expanded. He began embezzling from the payroll system. Because he was a manager, he didn't have to use the time clock and began to pay himself for excessive overtime pay. He would give himself paychecks in lieu of not taking vacation time, even though he took all his vacation days. Acme management was still oblivious.

 

 

He then began writing checks payable to himself, but he would write a regular recurring vendor's name on each check stub and hand-key it into the computer system. When the bank statements came each month, James would alter the images of the checks on the statements to match the vendors on the check stubs and in the system. Then he would hide evidence of the fraudulent checks he had cashed by photocopying the altered pages of the bank statements and shredding the original statements.

 

 

Crafty James wasn't done yet. He opened a new personal credit card at the business' bank. Now it was easy for him to electronically make bank drafts for paying the business' monthly credit card statements and then write company checks to pay his personal card. If anyone reviewed the check stubs, it would only appear that one credit card invoice had been paid each month. James could charge the company's credit card for his personal expenses and charge additional purchases to this new credit card. He used company funds to pay off both cards. Sweet deal.

 

 

Some fraudsters rationalize their thefts as "temporary" loans they will repay later. James executed his frauds without any intention of returning the money. His thefts from the company for 2½ years were large enough to create company cash flow problems.

 

 

One of James' cousins accidently discovered the crimes in December 2010 when he was searching the business' online banking system for a canceled check and discovered that several checks in one month had been payable to and signed by James.

 

 

Management didn't contact law enforcement nor engage an outside accountant. During its internal investigation, the family determined that it had lost at least $60,000 (though it was probably quite a bit more than that). Family members confronted James. He confessed and explained how he had stolen the money. The business fired him after he signed an agreement for restitution, which stipulated that the family wouldn't prosecute.

 

 

 

Before they discovered James' crimes, Bill and Bob had attributed cash-flow problems to a downturn in the economy. And James, of course, concurred. The brothers had to lay off employees and cut or reduce employee benefits for both family and non-family employees. The company still hasn't recovered from James' fraud schemes.

 

 

Small businesses are particularly vulnerable to fraud because they lack the resources to implement complete systems of internal controls and properly segregate accounting duties among their limited staffs. Therefore, accounting personnel may be tasked with completely inappropriate job functions that provide easy opportunities for committing financial frauds. Furthermore, the business cultures of small businesses are developed around a concept of a "trusted family" of employees. Consequently, placing trusted employees in positions without proper internal controls doesn't appear to be an unreasonable decision to managers of a "family" business.

 

 

According to the ACFE's 2012 Report to the Nations, estimated median losses for small organizations — those with fewer than 100 employees — that experienced a fraud were $147,000. The report indicated that small organizations are the most common victims in fraud instances at 31.8 percent — the highest rate of any business size category. (For example, organizations with 100 to 999 employees had a fraud incident frequency of 19.5 percent; 1,000 to 9,999, 28.1 percent; and 10,000 plus, 20.6 percent.)

 

 

The five most common fraud schemes for organizations with fewer than 100 employees in the ACFE report were: billing fraud, corruption, check tampering, skimming and expense reimbursement fraud. Corruption schemes deal with crimes such as bribery, illegal gratuities and kickback arrangements. The largest number of perpetrators in the entire study, 41.5 percent, had been with the organization between one and five years, most of them had a college degree and worked in the accounting area.

 

 

Even using ACFE survey data, it's difficult to estimate the true losses from employee frauds. Small businesses often don't report these crimes because of families' embarrassment, decisions not to file criminal charges or wanting to keep knowledge of the crimes privy. Only a small number of small business embezzlement victims — roughly two percent — report crimes even though 40 percent of small businesses report they have been victimized, according to the May 16, 2011, article in The Daily Record, "Employee theft at small business high and hard to detect," by Kathleen Johnston Jarboe (accessible for a fee).

 

 

In this article, we provide several practical recommendations for small business managers to help them prevent these fraud schemes.

 

 

 

 

THE TRUSTED EMPLOYEE

 

Employee thieves normally don't fit the stereotypical career criminal profile. They often are in good standing, have worked with a company on average of four to five years and nine out of 10 of them are first-time offenders, according to the January 2011 article, "Opportunity Knocks," by Brian Shappell in Business Credit magazine (available only to NACM members).

 

 

Approximately 87 percent of the occupational fraudsters studied in the ACFE's 2012 Report to the Nations had never been charged or convicted of a fraud-related offense, and 84 percent had never been punished or terminated by an employer for fraud-related conduct. Consequently, the most trusted employee — who has easy access to funds and has never stolen anything — may yield to the overwhelming temptation to take company resources when he or she is faced with personal financial stress. Donald R. Cressey's well-known fraud triangle highlights factors such as personal stress (what he called "perceived non-shareable financial need" or pressure) that contribute to the implementation of a fraud scheme. (He said the other two points of the triangle are perceived opportunity and rationalization. See the ACFE's 2013 Fraud Examiners Manual, 4.502 – 4.504.)

 

 

The motives for committing a financial fraud include greed, financial pressures or employee disenfranchisement. Disenfranchised employees become resentful after spending years handling mundane details for their employers without recognition, according to "The Downside of Good Times," by Anita Dennis in the November 2000 issue of Journal of Accountancy. They feel forgotten.

 

 

Other employees are motivated because they believe they're entitled to more financial compensation. They also rationalize they'll only "temporarily" borrow the money, and they'll return it later. Motive, rationalization and opportunity work in combination to increase the potential for employee fraud in any organization.

 

 

 

In many small businesses, the major reason fraudsters can commit their crimes is because management trusts them so much; they're family members or longtime friends, or they have proven work records and years of service, according to "The Trust Factor," by George A. Cassola in the Managerial Auditing Journal, volume 8, 1993, issue 7. That high trust level enables fraudsters to hide their activities. Even when business owners find suspicious behavior, they often believe it's inconceivable that employees would violate these trusted relationships. So, consequently, they hesitate to investigate, which results in much larger frauds

 

 

 

 

Thanks to Tricia O' Sullivan and Conor O' Sullivan for sharing this great article with us.

 

 

 

 

Source: http://www.acfe.com/article.aspx?id=4294976289

 

 
How can a family’s values be transformed into social impact?
Thursday, 30 June 2016 13:34

This question goes to the heart of family business philanthropy. And it's central to our latest study, which surveyed over 500 family businesses globally and found what makes them engage in giving.

 

 

We discovered that philanthropy plays a big part in bringing different generations closer together and that the founder's values are crucial. And there's a growing emphasis on social impact investing, which is the newest form of giving.

 

 

 

 

Investing in impact

 

We found that family businesses apply a portfolio approach. They invest in several forms of philanthropy at the same time. Providing services to the community is the most popular, followed by monetary contributions to charities. Next, though, comes social impact investing – targeting specific social objectives while earning a financial return.

 

It was interesting to see that more than a third of all family business owners, and a half of all large businesses, said that they're "highly engaged" in social impact investing. More than two-thirds say they're already involved in some way. I see these levels of engagement going higher in the years to come, in family businesses throughout the world.

 

 

 

 

Looking to the legacy

 

The study also revealed that family firms have a holistic perspective, centered on the founder's vision. Many family business owners pay particular attention to the past and cherish the business's heritage. Nearly 90% of sixth-generation family members agree that their philanthropy should be in line with the founder's values. I think that this sense of identity is very powerful and informs the social and environmental causes the family supports.

 

What's more, there's a positive relationship between the owners' wish to pass on the business to the next generation and their philanthropic giving. Owners who are concerned with the future well-being of the family are more motivated to address the long-term social and environmental issues in the world outside.

 

 

 

 

 

Government incentives

 

Family businesses adjust their portfolio and their chosen investment vehicles according to the local cultural and legal context. Government support is a decisive factor here. In countries where our respondents believe there are tax benefits for charitable giving, family businesses are more likely to engage in philanthropy.

In particular, there should be more tax breaks to encourage impact investing. The UK has extended its social investment tax relief – I'd like to see other countries follow suit. We need enlightened policymaking.

 

 

 

 

 

 

The next chapter in philanthropy

 

But where is family business philanthropy heading? In my view, families are united in their search for effective solutions. That's reflected in the high levels of personal involvement, which are greatest in small family firms and in the larger businesses. They want to be as close as possible to their favored causes.

 

And it's why families evaluate their philanthropy very carefully. There's room for improvement, though – nearly 60% of owners would like to have a sharper focus on their projects' effectiveness. They want to know about the connections they're making, the problems they're helping to solve and the positive impact they have on the world.

 

Family business philanthropy is all about forging relationships.

It's a long-term social investment with a clear family identity and a strong value base.

 

 

 

 

 

 

 

 

 

https://familybusinessblog.ey.com/2016/06/07/how-can-a-familys-values-be-transformed-into-social-impact/#more-926

 
Balancing the family business board
Wednesday, 29 June 2016 11:32

Sustainable and successful family businesses tend to have strong governance. One important prong in their governance models is a board of directors. As featured in our report, Staying power: how do family businesses create lasting success?, nearly 90% of the world's largest family businesses have a functioning board.

 

A strong board helps reduce the risk of nepotism, internal conflict, inequitable allocation of ownership shares and succession woes. And well-functioning boards diligently monitor performance and draw on the industry knowledge gained through the years.

 

 

Unfortunately, a board made up of only family members can experience governance issues due to the unique dynamics of family relationships. But independent outsiders can help family members navigate idiosyncratic personalities and the family dynamics that can impede smooth succession and sound business decisions.

 

 

For family businesses to make the best decisions regarding leadership, purpose, business strategy and succession, they need to be able to reflect. Personal interests and feelings often cloud that reflection.

Independent directors can provide the needed clarity as well as a fresh perspective. Since they are not part of the family unit — or a friend or paid advisor — they can bring the necessary objectivity to the difficult decisions, particularly those regarding strategic initiatives and management roles.

 

 

Independent directors help balance the family's desires with the fiscal needs of the business, a key component to a lasting legacy. Their responsibilities span from mediating shareholder differences to identifying new growth areas. They offer expertise and knowledge that the family management team may be lacking, and they can shed light on areas the family may have never even considered.

 

 

Because of the pivotal role independent board members play, family businesses should take great care when seeking out such advisors. Recruitment should focus on the specific capabilities and experience the company needs, such as work in a related field, experience in assisting with succession plans, a strong financial analysis background and more.

The goal is to find a candidate who can help balance the family's expectations with realistic objectives — someone who can assist the family with making decisions based on market insight, objective data and sound principles. The ideal candidate will be an independent outsider with no other ties to the company so he or she can make recommendations without fear of repercussions.

 

 

Independent directors of family-owned companies provide more than business intelligence. They:

 

Serve as coach, counselor and peer advisor


Consider how strategic and operational recommendations, such as succession planning and dividend policy, affect family dynamics
Place the enterprise on a path to a strong legacy for future generations
Family businesses should strive to add independent outsiders to their boards of directors.

The objectivity, clarity, and valuable insight they bring to the table can help create a long lasting legacy.

 

 

 

 

 

Source: https://familybusinessblog.ey.com/2016/05/05/balancing-the-family-business-board/ 

 

 
Here's a 21st Century take on the traditional family farm
Monday, 27 June 2016 13:41
Kildare Farm Foods is an example of intelligent entrepreneurship at its very best. They know what's working and they know when to diversify
 
 
 
Since taking up farming during his late teens David, like his father before him, has been keen to expand and improve, which may explain why Kildare Farm Food's offerings today are so multifaceted.
Over the last two decades, David has moved from rearing turkeys to processing, cold storage and distribution, and more recently into retail with Kildare Farm Foods' latest venture - a shop and free open farm, which has become a hugely popular family and tourist destination, employing more than 40 people.
 
 
"My grandparents came here to the farm from the West of Ireland. It was a Land Commission holding - just a few small houses built by the Land Commission back when they were dividing up the big estates from the landlords," David explains.
"That is where it began. So my grandparents had a very small farm and my father also worked as a farm labourer on another farm to top up the income."
 
 
David describes his father, who now works in a semi-retired role at Kildare Farm Foods, as an "extremely progressive and energetic" person who has always had "aspirations to be a bigger farmer".
"He wanted to be a full-time farmer and grow, so he got into things that were not really mainstream at the time and turkeys were one of these," David explains.
 
 
"He was a dairy farmer, he kept some horses, he kept some cattle, he also bought pigs from all the other local farmers. He had a little weighbridge, so he used to bring them on to the factories or bring them to the sales and he would turn money from that, but with turkeys he found that he could get into things without a lot of land."
Inspired by his father's progressive approach, David grew up deeply involved in the family's growing farming business.
 
 
"I wanted to do nothing but farming; I wanted more cows, more of anything that I could get my hands on," David remembers. "It was the early 1990s and a tough enough time - but I was as determined as my father and I wanted to progress. There was great potential in the turkeys because there were no quotas or restrictions, all you needed was enough money to build a shed and have a small amount of ground, so I went at it hell for leather and put in as many turkeys as I could, even before I finished school."
David did well in school, despite the fact that he only had eyes for farming. After his Leaving Certificate, his parents allowed him to attend agricultural college under one condition; that he would go on and do a degree after he had finished.
 
 
David agreed and returned from his year at agricultural college to farm by day and study accountancy by night for the following four years.
"The turkeys became very profitable; turkey wasn't just for Christmas anymore, it was in carvery restaurants, which were now springing up all over Ireland too," David says.
 
 
Soon, David was supplying huge orders of turkeys, mainly to the hospitality industry.
"Within a year, it just took off. We couldn't keep up with the demand," he says. "So we expanded and it continued to a point where we were going into the millions in turnover within a few years, which was extraordinary."
 
 
"It flew for a few years. However, in the late 1990s the market worldwide opened up - and European products started to come into Ireland and the European product was in some cases half the price of our product," David adds.
"I spent a few years trying to go against the grain and question the quality, but it turned out that the European stuff was actually as good, not locally grown and produced, but often a fantastic quality product from countries who had a long history of poultry farming."
 
 
David managed to maintain a level of presence in the market by focusing on his service and adding the distribution of a number of other products to his company's offering.
 
 
"We started to sell chicken instead of just turkey, then a customer said 'is there any chance you'd get me a few chips?' so we'd do that and then it was bread rolls and it went on and on. We currently have about 3,000 different product lines now," David explains. "At the same time this was all happening, we reduced down the amount of slaughtering we did and the number of turkeys we were selling and we then decided that we would take a look at stopping the slaughtering and specialise moreso in the marketing of the product, the distribution and the portioning in-house; further processing the raw material from the slaughterhouse.
 
"So we scaled down our own slaughtering operation and at the same time we built cold storage - converting the existing turkey houses - and in 2004-2005 we built a combined cold store to hold about 550 pallets of product, which also had a boning hall, packing rooms and specialised tracing equipment," David adds. "By so doing, we found that we were again able to hold our own and grow again."
 
 
However, more obstacles were on the way for Kildare Farm Foods; when the Irish economy fell off a financial cliff in 2007, a large number of their regular customers could not pay their outstanding debts.
 
 
"We had accounts everywhere, in every restaurant and hotel that you can think of within 50 to 100 miles of here - and unfortunately, when the economy nose-dived, almost everybody caught us for money.
"And it wasn't small amounts, it was several hundred thousand," David explains. "While it was disastrous, we had been in business quite a while, so we had built up a certain durability - we had some money in the war chest, so to speak.
 
 
 
"We decided that we would step back from all of these hospitality-type accounts at that point and while this was all going on, I had a plan that I would be able to further process products for other distributors," David adds.
 
 
"So suddenly we had guys who would have been our competition at the very start coming to us because we found that we could portion these products for them and brand them with their name on it, in a very cost-effective way. So we went back to what we had been doing originally really, which was cutting up white meat products and getting our hands dirty."
Again Kildare Farm Foods managed to return to form and by carving this niche in the wholesale and food servicing market for themselves, they managed to once again double their turnover within two years.
 
 
As well as the more profitable sides to his business, for a number of years David opened a farm shop counter each Saturday morning at the premises in Rathmuck where he would sell produce directly to the public.
 
 
"It sometimes seemed like a total waste of time to be honest, but I kept it going because I would never drop anything. If I thought there was even €50 in it, I would continue to do it because you never know where the potential is," David says.
On the next occasion that David decided to expand the premises, he included a purpose-built, 15 foot by 15 foot shop space in the plan.
 
 
"For some reasons, Christmas 2007 saw a huge upsurge in interest in the shop - people flooded in and we sold 10 times the turkeys we had before and when people came in they'd also buy other products - cranberry sauce, glazed ham. It was fantastic," David says.
 
 
"January came then and we slipped back into our routine, but we had a small Falabella pony in the field here in front of the shop. I hadn't taken any notice of it really, but I saw this little girl crying one Saturday morning when she was going out the door with her grandmother.
"I went out after her with an ice cream and the grandmother told me she was crying because they had been coming every Saturday to look at the pony and the child was distraught that it wasn't there that particular morning. So I thought then there might be something in that."
 
 
This event planted a seed in David's mind; he would add value to his products by giving something back to the customers, an experience, and it would be free.
 
 
"I thought that if we had something like that, that you could come in and feed the animals and walk through the shop and back out through, then surely if we were good enough at our jobs we'd be able to sell people something," David smiles.
And with that, Kildare Farm Foods open farm and shop was born.
 
 
"One thing led to another, we spent about €250,000 doing it because we wanted to do it right and have it so that you could use it every day of the year," David explains.
 
 
"We gutted the place and shut for a week, then we reopened on Easter Saturday and it just exploded in popularity. We opened every day after that, firstly just in the afternoons and then all day every day."
 
The premises has since been expanded again, with a cafe added in 2014 and an extension to the open farm, which is now home to wallabies, mara, pigs, goats, ponies, deer and ostriches among others, a party room, an indoor 18-hole crazy golf experience and the 'Adventure Rail Road' - a train which departs from the Farm Shop station for a spin around the farm several times a day.
"We will keep changing and making it different all the time," David says. "We are always trying to create a relaxed, customer-friendly environment and you can never underestimate that feel-good factor."
 
 
David's wife, who was previously an IT consultant with Deloitte, now works full-time in the business also.
 
 
"There is very little differentiation between work and life; it is our life and we like it that way," David says. "We reinvest every cent and more. Food is not an easy business, it is competitive and it can be a hard slog, so you have to constantly change and adapt.
 
 
 
 
 
 
 
 
 
 
 
 
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