Question

Provide 2000 word report that evaluates the Agnellis and Fiat: Family Business Governance in a Crisis case study and analyse aspects of succession, strategy, performance, governance, and structure. Use characteristics from your respective family businesses or those previously discussed in class to provide depth and context to your analysis.  Ensure you critique and make recommendations for change where necessary. 

Note

To offer synthesis students are encouraged to incorporate relevant theory into the narrative they present.

Students should avoid generalizations and seek to be clear and precise in their arguments.

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Subsequent violations of the Honor code are assessed on a case by case basis before the Academic Standards Committee and may result in sanctions up to and including dismissal from the program.

You are responsible for ensuring that you have read and understood the section entitled “Academic Integrity” in the Student Handbook. If you have any questions about that material, please speak to your instructor.

Answer

Name of Student:

Institutional Affiliation:

Contents

Introduction. 2

Succession. 3

Strategy. 4

Performance. 5

Governance. 6

Structure. 7

Conclusions. 8

Recommendations. 8

References. 9

Introduction

One of the most serious problems facing large family businesses is the succession crisis following the death of a patriarch. Due to a lack of proper planning, many family businesses face a crisis following disagreements among various members of the family. In many cases, the disagreements arise from the divergence of views on how best to govern the company. Older family members who are aware of the management philosophy that led to the current corporate success may oppose new ideas brought forth by members of the newer generations. Thus, such businesses must confront the challenge of grooming new family members to become successors to avoid a leadership vacuum in the event of retirement or death of the patriarch.

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One case study through which such problems can be put into perspective is that of the Fiat Group and the leadership crisis it faced during the mid-2000s. At this time, the company was at crossroads because for the first time, a suggestion was made for a person who was not a member of the founding family, the Agnellis, to become both CEO and President of the vast business empire. Another example is that of J. Perez Foods, whose founding family became embroiled in a leadership, ownership, performance, succession, and management conflict following the death of the company’s founder.

The aim of this paper is to analyze the case study of Agnellis and Fiat and the business governance crisis that the family business faced following the death of its two patriarchs Giovanni Agnelli and Umberto Agnelli in quick succession (Davis, Bertoldi & Quaglia, 2012). In this analysis, the five issues that are examined include succession, strategy, performance governance, and structure. The paper also draws insights from the case study of J. Perez Foods for purposes of contextualization, illustration, and comparison. Based on this analysis, recommendations for change at The Fiat Group are provided.

Succession

The problem of succession in family businesses has been well documented in literature. Handler and Kram (1988) point out that many family businesses face the problem of resistance during succession. It is for this reason that only 10 percent of these businesses survive to the third generation (Handler & Kram, 1988). Thus, it is not surprising that the Agnelli family encountered numerous problems in an effort to facilitate succession to the third generation. During success, personal factors play a critical role; some of the older family members remain hidebound in the past while the new generation always seems overly enthusiastic to take the business towards a new direction by trying new things. This brings about intergenerational conflict, which is responsible for the collapse of many family businesses.

At Fiat Group, succession was a major problem. When Umberto Agnelli, the family patriarch died in 2004, a crisis ensued as the founding family embarked on a frantic effort to hire a new corporate chief who would serve the interests of the business empire in changing times while at the same retaining its tradition of maintaining family control (Davis, Bertoldi & Quaglia, 2012). Twenty years earlier, the Fiat Group had explored the possibility of merging Fiat Auto with Ford’s European subsidiary. The need to combine operations was salient for both companies in light of changing technological and manufacturing practices that had revolutionized the automobile industry. However, Gianni, the leader of the business empire at the time, vetoed the decision at the last minute. He was simply prepared to lose control of Fiat Auto, which was the centerpiece of the Agnelli family’s investments. Fifteen years later, the company was compelled to follow a similar route through a merger with General Motors. This explains the extent to which resistance to succession can derail organizational change.

Strategy  

Soon after it was founded, the Fiat Group embraced a business strategy that embraces vertical integration. Under this model, the founder identified automobile industry as the centerpiece of all business operations. From this point, he diversified into other businesses, including locomotives, air transportation, steel and electricity, beverages, coal, and financing. Other business areas where Giovanni Agnelli, the company’s founder, invested in included soccer, construction, and publishing. However, as intergeneration succession took shape, the family business started losing its strategic focus. To pursue this strategy, the founder embraced an autocratic style of leadership under the mantra “one leader at a time”. This strategy has worked well in terms of addressing different aspects of business operations, including managerial values, family interests, and social responsibilities. This is evident in the company’s success in terms of goal and strategy formulation, strategy implementation, and organizational performance.

The problem with such a strategy is that it fails to address the need to separate the business system from family considerations. This view is best expressed in the rationalist approach to business strategy, which states that the business and family systems are so different that it is impossible for them to coexist except under unusual circumstances (Sharma, Chrisman & Chua, 1997). A contrary opinion is that it is possible for family influences to be accommodated in all business decision-making processes. Indeed, this is precisely what happened at the Agnelli business empire. In goal and strategy formulation, family influence was exerted through the pursuit of family goals and succession issues. During strategy formulation, elements of family business culture were put into consideration. In terms of organizational performance, the familial dimension was expressed through an evaluation of family goals. This explains why most members of the founding family were unwilling to accept the Fiat-Ford merger as well as the takeover by Giuseppe Morchio as both Chairman and CEO. To these family members, such courses of action simply moves contravened the family business culture.

Performance

            Fiat underwent tremendous expansion during its formative years. This growth was attributed to the visionary leadership of its founder. However, in recent years, the company has struggled to dominate the industries where it operates. Giovanni Agnelli’s efforts enabled him to adopt a vertical integration strategy and expand business operations in various industries. In contrast, the company has been struggling to consolidate its operations since the early 1980s. At the height of the succession crisis, the company had a bank debt that was barely sustainable. Inability to replay this debt on time would lead to takeover of majority shareholding in the company by banks, thus taking over business control from the hands of the Agnelli family.

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During the crisis, the company portrays an image of a floundering ship because its leaders were busy selling important assets as well as soliciting cash infusions from the founding family to finance ambitious expansion plans to meet debt obligations. This jeopardized the company’s long-standing tradition of consolidating financial resources through diversification. To reach the performance targets of its glory days, Fiat must embrace change through restructuring, even if this means hiring a non-family member as chairman. The decision that Fiat’s leaders need to make are more or less similar to those that Jamie Perez Sr. needed to make at J. Perez Foods in order to avoid a family conflict over ownership and performance. The ownership rights in the form of shares that Jamie Perez Sr. gave to his children before his death should have been held in trust to avoid shouldering those children with concerns about business performance.

Governance

            One governance theory that is applicable to the case study of Fiat is parental altruism typology, which is normally elaborated on in the context of agency theory (Lubatkin, Durand & Ling, 2007). In parental altruism, parental welfare is always directed to their children as well as other family members. When it is coupled with private ownership and resources that are readily available, parental altruism can bring about substantial inefficiencies in governance (Lubatkin, Durand & Ling, 2007). These inefficiencies can end up compromising the patriarchs’ own long-term welfare as well as that of all the family members who depend on them. However, a major shortcoming of agency theory is that it fails to provide an accurate picture of the influence that parental altruism can have on the way family businesses are governed.

            At Fiat, parental altruism was a major barrier to the establishment of proper governance structures. Many successors were being entrusted with enormous business operations even when they lacked the requisite experience to offer focused leadership. For example, Giovanni wanted until he was aged 66 to name his successor, a 14 year-old grandson named Gianni. Giovanni chose Gianni instead of the 17 year-old Giovanni Nasi simply because the latter did not belong to the direct lineage of the family, given the fact that her mother had already gotten married. Similarly, John Elkann was designated as the future leader of Fiat in spite of his young age and lack of experience on matters relating to business. In a family business where patriarchs are willing to sacrifice age over and experience for purposes of succession, governance issues are likely to emerge. Many other case studies highlight this problem. A case in point is that of J. Perez Foods, where Jamie Sr., the family patriarch divided the business ownership among his children, some of whom were young and experienced. These inexperienced shareholders from the founding family ended up causing many governance problems at the company by trying to spy on workers and to assert their authority.

Structure

            Since the founding of Fiat over a century ago, many changes in organizational structure have occurred. These changes reflect variations in the business environment and the need to adapt for the sake of survival. In these efforts, the company faced various structural challenges. One of them was the need to prepare new shareholders’ agreements whenever relatives traded in IFI (Industrial Finance Institute) shares among themselves. The family business leader was compelled to establish a holding company by the name The Accomandita, which deals exclusively on IFI common stock held as family shares. This proved to be an effective ways of avoiding the need to come up with new agreements whenever shares traded hands among family members.

Moreover, the practice of giving the family business leader the highest number of IFI shares also made a lot of sense because it was an excellent way of portraying the amount of influence the leader had on the entire business empire. Furthermore, the practice of creating the option of holding the Accomandita shares through family trusts for various branches within the family was an effective way of preventing frequents arising from the day-to-day running of the business empire. This point is well illustrated in the J. Perez Foods, where failure to hold family members’ shares in family trusts led to the tendency by individual family members to meddle in business activities to the point of creating different centers of power, creating disharmony in the organizational structure, and ultimately crippling business operations.

Conclusions

In conclusion, the case study of Agnellis and Fiat sheds light on how succession problems can lead to a crisis. At Fiat, this crisis posed a serious, immediate threat to the very existence of the Agnelli’s business empire. As numerous changes started unfolding in the industries where the Agnellis operated, the need for change became inevitable. However restructuring efforts were hampered by family-related considerations, primarily the need to maintain family control over the business empire. The circumstances under which this crisis unfolded shows that there comes a time when family members must choose between letting outsiders participate in business operations and control or helplessly witnessing the collapse of the business empire. To avoid this dilemma, succession planning should be incorporated into the family business’ overall strategy and governance structures.

Recommendations

1. To reach the performance targets of its glory days, Fiat must embrace change through restructuring, even if this means hiring a non-family member as chairman and CEO.
2. Family business leaders sometimes need to veto decisions that are likely to boost performance such as mergers in order to prevent loss of control over business operations by the founding family. However, they must be ready for loss of control if that is what it takes to prevent the business from collapsing.
3. Fiat needs to incorporate succession planning into the family business’ overall strategy and governance structures to avoid a crisis in future.
4. Family patriarchs needs to overcome the problem of parental altruism in order to promote governance.
5. All IFI shares of family members who have not been assigned management, administrative, and leadership roles at the company should be held through family trusts to avoid the tendency by individual family members to meddle in the day-to-day running of the business.
6. Family business leaders should not allow business tradition to come in the way of restructuring efforts particularly in the face of industry changes and stiff competition.

References

Davis, J., Bertoldi, B. & Quaglia, R. (2012). Agnellis and Fiat: Family Business Governance in a Crisis. Harvard Business School, Boston, MA: Harvard Business School Publishing.

Handler, W. & Kram, K. (1988). Succession in Family Firms: The Problem of Resistance. Family Business Review, 1(4), 361–381.

Lubatkin, M., Durand, R. & Ling, Y. (2007). The missing lens in family firm governance theory: A self-other typology of parental altruism. Journal of Business Research 60, 1022–1029.

Sharma, P., Chrisman, J. & Chua, J. (1997). Strategic Management of the Family Business: Past Research and Future Challenges. Family Business Review 10(1), 1-36.