How Are Family Businesses and Family Offices Connected?

In a family business, the multiple positions of management, ownership, and family overlap. This can be a strength in the founding stage, but as the company grows and generations change, it can also become a source of increasing complexity.
What matters is not to confuse the management of the operating company with decision-making as a family. A family office is not an organization that intervenes in company management, but it plays an important role in clarifying the family’s thinking as an owner and building an appropriate relationship with the operating company.
This article explains how the management of the operating company and the family’s decision-making should be separated, and what role a family office should play in helping the family remain a “good owner” that enhances corporate value.

The Overlap of Three Positions: Management, Ownership, and Family

What makes a family business difficult to understand is that one person may hold multiple positions at the same time.
In the case of a founder, the same person is often the company’s manager, a major shareholder, and the central figure of the family.
By the second and third generations, these relationships become even more complex.
Among family members, one person may be both president and shareholder. Another may not work for the company but may hold shares. Another may have joined the company as a future successor candidate. Their spouses and children may also become shareholders in the future.
In this way, different relationships of management, ownership, and family overlap in a family business.
Reasonable judgments may differ depending on each position.
As a manager, one may want to direct profits toward growth investment.
As a shareholder, one may want to receive a certain level of dividends.
As a family, there may also be a desire to pass assets on fairly to the next generation.
It is not that one of these positions is right and the others are wrong.
The problem arises when discussions proceed without distinguishing the judgments that emerge from these different positions.

Unity as a Strength in the Founding Stage

In a company’s founding stage, the unity of management, ownership, and family can become a major strength.
The founder commits capital, takes risk personally, and makes management decisions personally.
Because the company’s direction and the shareholder’s decision about how much risk to take are completed within one person, decision-making becomes faster.
The company can also prioritize long-term growth over short-term profit.
When market conditions deteriorate, it may be able to continue investing for the future without being overly concerned about short-term evaluations from outside shareholders.
The long-term orientation and speed of decision-making found in family businesses partly arise from this unity of ownership and management.
Therefore, “separating ownership and management” does not mean completely cutting them apart.
What matters is to be conscious of each role.

Separating Management and Ownership as the Company Grows and Generations Change

As the company grows and generations advance, it becomes difficult for one person alone to carry the functions that were once integrated in the founder.
As the business becomes more complex, management requires specialized capabilities.
When considering overseas expansion, new businesses, M&A, human resources strategy, and capital policy, it is not necessarily best for management to be composed only of family members.
Shares are also passed on to the next generation.
If shares are dispersed among siblings and their children, the number of shareholders who do not work for the company will increase.
As a result, the distance between management and ownership naturally widens.
This is where an important transition occurs.
In the founder’s era, “what the president wants” was effectively the same as “what the shareholders want,” but in the next generation those two may no longer coincide.
This change does not necessarily need to be viewed as a problem.
Rather, it is something that naturally occurs as the company grows and the family moves across generations.
What matters is to change the decision-making framework in line with that change.

Separating the Operating Company’s Decision-Making from the Family’s Decision-Making

What is especially important here is to consider the operating company’s decision-making separately from the family’s decision-making.
The board of directors of the operating company is the forum for making management decisions to sustainably enhance corporate value.
Directors bear responsibility not as representatives of the family, but as directors of the company.
At the same time, there are matters that the family should decide as a family.
For example:
What values should the family share?
Will the family hold the operating company for the long term?
What conditions should be set if family members join the company?
How should the succession of shares to the next generation be considered?
Under what circumstances may shares be sold?
These issues are not matters to be decided solely by the operating company’s board of directors.
Conversely, it would also not be appropriate for a family meeting to decide management matters such as product development, personnel decisions, business investment, or individual M&A transactions.
If these two types of decision-making are confused, corporate management may be swayed by family circumstances, or family issues may be brought into the operating company.
What matters in family governance is that each type of decision-making takes place in the appropriate forum.

A Family Office Should Clarify the Owner’s Thinking, Not Intervene in Management

This point is also important when considering the role of a family office.
A family office is not an organization for directly intervening in the management of the operating company.
The operating company has management, a board of directors, and their respective authorities and responsibilities.
If the family office begins giving instructions on individual business decisions, responsibility for management may become unclear.
Does this mean that a family office should have no relationship with the operating company?
No. If the family office is a shareholder of the operating company, it can be regarded as one of the most important shareholders. In other words, the family office has a role in organizing what the family, as shareholder of the operating company, is thinking “as an owner.”
Does the family want to hold the operating company for the long term?
What level of growth does it expect?
How much risk is it willing to tolerate?
How does it think about dividends and reinvestment?
Is succession of the business to the next generation assumed, or could a sale to an external party also become an option depending on circumstances?
There is significant value in clarifying these basic ideas as an owner and sharing them with the operating company when necessary.
Intervening in management and expressing one’s views as a responsible owner must be considered separately.

The Owner’s Thinking Influences Corporate Value

I have observed companies for many years as an investor, and the character of shareholders has a significant influence on corporate behavior.
For any management team, if major shareholders demand large profit distributions over a short period, it may become difficult to make long-term investments.
Conversely, when shareholders with a long-term perspective exist, a company may be able to continue investing in research and development, people, brand, and new businesses without being overly swayed by short-term fluctuations in performance.
In this sense, family shareholders can become a major strength for a company.
However, this is not the same as “holding shares without saying anything.”
If the family will hold shares for the long term, why will it do so?
What kind of growth does it expect from the company?
What level of profitability does it seek?
What kind of capital policy does it want?
When the owner’s thinking is clarified, management can better understand the direction of decision-making.
Family governance is not intended to constrain management; it has the role of clarifying the premises that allow management to make long-term decisions.

Capital Policy as the Point of Contact Between the Family and Management

One area where the relationship between management and ownership appears most clearly is capital policy.
How much profit should be retained internally?
How much should be used for growth investment?
Should capital be returned to shareholders as dividends?
Should the company conduct share buybacks?
Should new shareholders be accepted?
If necessary for business growth, should the family accept a lower ownership ratio and introduce outside capital?
These are management decisions, but they are also deeply related to the owner’s thinking.
For example, if the family gives the highest priority to maintaining its voting rights ratio, it will likely be cautious about large-scale equity financing.
On the other hand, if the family prioritizes business growth, it may decide to use outside capital even if its ownership ratio declines.
What matters is that the family recognizes what it prioritizes and can engage in constructive dialogue with management.
This is especially important in listed family businesses.
A listed company has shareholders other than the family.
Even if the family is a major shareholder, the company cannot be run solely according to the family’s wishes.
Rather, other shareholders and stakeholders need to understand what value the family brings to the company as a long-term major shareholder.
In other words, what is being tested is not the mere existence of the family, but what kind of owner the family is.

Breaking Down What Is Succeeded, to Whom, and How

The term business succession often brings to mind the replacement of the president or the inheritance of shares.
However, succession in a family business is not limited to those matters.
The question of what should be passed on to the next generation includes several different elements.
Succession of management.
Succession of shares.
Succession of assets.
Succession of principles and values.
These do not necessarily need to be passed on to the same person.
One possible structure is for a family member with management capability to take on management, while other family members support the company as shareholders.
In some cases, the family may entrust management to an external professional manager while continuing to hold the company as a long-term shareholder.
Rather than asking only “who should be the successor,” it is important to break the question down into “what should be succeeded, to whom, and how.”
Here again, the family office does not take on the management of the operating company itself, but can play a role in organizing the family’s ownership, assets, and succession.

Conclusion: A Mechanism for Remaining a Good Owner

In a family business, the three relationships of management, ownership, and family overlap.
In the founding stage, that unity becomes a major strength for the company.
However, as the business grows and generations advance, the need arises to distinguish each role.
Management of the operating company is handled by management and the board of directors.
The family considers what it seeks to achieve as an owner.
The family office supports the family’s long-term decision-making by connecting assets, ownership, succession, professional advisers, and related functions.
What matters is not only how far the family should be involved in management.
Is it not also important for the family to consider “what kind of owner it wants to be”?
A family that has a long-term perspective, supports necessary growth investment, asks management for appropriate discipline, and at the same time takes responsibility for relationships with employees, business partners, minority shareholders, and the local community can become a major source of competitiveness for the company.
A family office can be positioned as one important mechanism for supporting the decision-making and dialogue needed for that purpose.