INTRODUCTION
The need for family businesses to have trained personnel to act on their behalf to achieve the goals of the organization and to make the company effective and efficient, in addition to offering competitive advantages that make it different, oblige them to have a clear awareness of the factors that go into achieving them.
The problem to be developed in this work consists in the application of the agency theory in the field of family businesses. The importance of this theory lies in the fact that it helps to define the fields of action and knowledge, as business owners, and to establish the rights and duties of the agents, that is, the employees of the organization. The agency theory was developed in 1977 by Jensen and Meckling, but at the undergraduate level, no university in the country has presented it to the students until now. Going further, very few administrators in this country know about it.
The general objective of this research is to determine the impact of agency theory on family businesses in Santiago. The specific objectives are: to establish the criteria to be applied on the agency theory to our analysis, to expand on other general aspects of said theory, to publicize the general aspects of the city of Santiago de los Caballeros, to publicize the general aspects of family businesses, apply the selected aspects of the theory to family businesses from Santiago.
This research is limited to the study of family businesses in Santiago de los Caballeros, so it covers aspects of agency theory, which can be applied to such businesses.
The applied methodology corresponds to bibliographic documentation, based on books, magazines, brochures, Internet sources, among others. This research was limited by the few bibliographic resources found on this specific topic.
This work comprises five (5) chapters covering the following topics: in the first chapter we present the theoretical framework on agency theory to apply to Santiago family businesses: contract theory, asymmetric information, agency costs, principal, agent, agent incentives, information systems between agent and principal, and separation and control of ownership and control.
The second chapter presents the general aspects of the agency theory: definition, its basic structure, the concept of organization according to the contract theory, the behavior of the contracting parties according to this theory, the agency problem given by unobservability on the other hand, the mechanisms for solving the problems implied by the agency relationship.
The third chapter discusses the general aspects of the city of Santiago de los Caballeros: location, the city in the regional context, the historical evolution of the city, its population, its culture, the SWOT analysis of it.
The fourth chapter deals with the general aspects of family businesses: definition and importance of the family business, the characteristics of the family business in Santiago, the competitive advantages of family businesses, the types of founders, the culture of the family business, the fundamentals on conflicts in family businesses, continuity in family businesses.
The fifth and final chapter shows the application of agency theory to family businesses in Santiago de los Caballeros, Dominican Republic: application of contract theory, analysis of asymmetric information, determination of agency costs, determination of role of the principal, choice of the agent and definition of his role, establishment of incentive policies for the agent, establishment of information systems between the agent and the principal, determination of the separation and control of property and management.
Ultimately, this work aims to provide guidance on what agency theory is, what family businesses are, what characteristics the city of Santiago de los Caballeros presents, and how we can apply it to solve the problems that arise in this type of organization. The heads of family businesses must embrace the agency theory as the way in which they will be able to overcome the problems that arise, because they do not have the necessary knowledge, and in this way they will achieve permanence in the market in which they operate.
Likewise, universities must adopt them within the curricular activities of the faculty of social sciences, to prepare an avant-garde professional, who is in line with the new business trends.
This theory can not only be applied in the field of family businesses, but it can also be applied to corporate governments, to analyze outsourcing services, to the student-teacher relationship, to cooperatives, in politics, in small businesses. companies, in the administration of old agricultural assets, in accounting institutions, among many other areas.
CHAPTER 1.- THEORETICAL FRAMEWORK OF THE AGENCY THEORY TO DEVELOP AT WORK
1.1 Theory of Contracts
Contract theory is an essential part of agency theory, since it deals with contractual relationships between agent and intermediary. Through them the parties involved know what to expect and what they have to give in that contractual relationship. Various authors have referred to the subject, thanks to its importance. Here are two quotes about it:
For Botten and Dewatripony "The theory of contracts studies how economic agents can construct and make contractual arrangements, usually in the presence of asymmetric information".
According to Okum "The theory of contracts is the study of the way in which labor and capital agree on the production parameters, the amount of risk and the benefits that each one will obtain"
Patrick Botten and Mathias Dewatripont state that they are arrangements that are generally built between the parties when there are cases where asymmetric information exists. Arthur Okum agrees with them when he says that they are agreements, but adds another factor, the profit factor, that is to say that through the contracts the parties establish the remuneration that they will obtain by the coalition formed.
In short, contracts are of vital importance in any type of commercial transaction, since they are private agreements, oral or written, on the conditions that will govern their commercial relationship, and whose fulfillment must be given by both parties. These generate rights and obligations for both parties. They are a manifestation of the will intended to regulate your rights.
1.2 Asymmetric Information
Asymmetric information is not more than a situation in which one of the parties has more or better knowledge than the other in a particular situation. Some authors suggest that this type of information gives the agent more power, since it is the person who possesses it, others on the other hand understand that with a good contract this power can be diminished. Here are two quotes about asymmetric information:
McConnell and Brue define it as: “Asymmetric information is the situation in which one of the parties to a market transaction has much more information about a product or a service than the other; the result can be under or over allocation of resources ”.
According to Bebzuck "Asymmetric information is considered to be the fact that borrowers have better information than their lenders"
Both authors concur by stating that one of the parties has more information than the other, McConnell and Brue understand that the fact that there is a situation in which asymmetric information occurs can cause an incorrect allocation of resources. The definition made by Bebczuk is more oriented to the financial world.
In our opinion, asymmetric information should not be a disadvantage, as long as we use it correctly to achieve our goals. That is, the ideal would be to take advantage of what others can contribute and not be intimidated by the knowledge of other people. The main one could reduce the disadvantage that an asymmetric situation puts it by clarifying each of the agent's competences and responsibilities, previously in the contract.
1.3 Agency costs
Agency costs establish the advantages of different alternatives of an agency relationship according to the criterion of reducing as far as possible the disadvantages derived from the deviation from the ideal transaction according to the principles of neoclassical theory, which characterizes the economy not so much as a closed system, but as a method of optimization, which is applicable to society as a whole. Here are two definitions about them:
The Answer.com website defines agency costs as: "Agency costs are a type of internal cost that must be paid to an agent acting on behalf of a director."
Farlex, the free online dictionary defines them as: “Agency costs are expenses resulting from the performance of an agent's services for a principal. They are generally the commissions that agents earn "
Both definitions establish that agency costs are those that are incurred for an agent to represent us, that is, they are the expenses that are incurred to be able to count on the services that a trained person occupies the position that is offered. One of them goes further and says that all commissions paid to agents are considered agency costs.
Companies design various internal mechanisms to reduce these costs among shareholders and managers, among which the following stand out: compensation systems based on shares or stock options, participation of managers in capital, the supervisory role developed by the Board of Directors, among others. In short, agency costs are all costs incurred in order to benefit from an agent, who provides us with their capabilities to achieve the desired objectives. They are important, since they will determine the degree of satisfaction of the agent to work for us.
1.4 Main
The principal in an organization is the person who hires the agent to act on his behalf. The principal, with the intention of facilitating the achievement of her interests, transmits or delegates her decision-making powers to a partner contracted in a specific agreement to which she grants remuneration in exchange for her services. Here are two definitions of this concept.
On the Wikipedia.org website they refer to the principal as: "The principal is a person who authorizes an agent to act to create one or more legal relationships with third parties"
Farlex defines it as "The principal is the owner of a private company or the principal party of a transaction, either as buyer or seller at his own risk and expense."
Both definitions qualify him as the person who in a certain act has the power, either to delegate or act, without the need for this authority to be delegated to him. Among them are the owners, the General Meeting of Shareholders, the Board of Directors, among others.
In conclusion, for the principal, the contractual delegation has its own advantage, since through it it takes advantage of the agent's competences and domain of information in his own interest. The principal contractually ensures that his agent provides the returns that best respond to his interests, thus reducing the power granted by asymmetric information.
1.5 Agent
The agent is nothing more than the delegate in the management of business by the principal, that is, he is the person who is hired to manage the company, acting on behalf of the principal. This is important since it is the individual from whom we will benefit, to achieve the achievement of our objectives. There are several authors who handle the relationship of the agent and the principal as their central subject of study. Here are two quotes about this concept:
On the Wikipedia.org website it is defined as: "The agent is a person who is authorized to act on behalf of another (main call) to create a legal relationship with a third party"
On the same website, mentioned above, but in the Contracts section, they define it as: "The agent is a person employed to perform any act, on behalf of another in their relationships with third parties"
Both definitions agree when referring to the agent as an employee who performs acts on behalf of the principal with other people. The returns from the agents' activities fall on the principal, except for the personal costs incurred by the agent. For example: the employee's production goes to the company, which also bears the costs of materials and equipment, but the employee bears the costs of the effort they make.
Ultimately, the agent is the person to whom the agent delegates decision-making and enforcement powers, determining said relationship by conditions of asymmetric distribution of information and uncertainty as well as by different distribution of risks. The agent must ensure that the benefits offered by the principal are well established in the contracts that govern the relationship.
1.6 Agent Incentives
If we want to make sure that a person acts as we expect, we need to reward them for doing so, that is, give them incentives. This does not escape the principal-agent relationship, which leads to the establishment of incentive plans in favor of the latter, a motivated employee will do his job better than one who is not, and incentives are a great contribution to motivation. Here are two definitions about them:
The Interinstitutional Committee for Internal Control of Public Universities defines incentives as: "Stimulus offered to a person, group or sector of the economy in order to increase production and improve performance"
According to the definition web page, Definión.org, the incentives are: “Extra compensation paid to an employee or worker for performing additional work to the minimum set. Many methods have been devised to fix them (which are known by the name of the person who created them), seeking a more just remuneration for workers. Reward in goods or services granted to a person to motivate him in the performance of his work "
Both definitions agree that incentives are a stimulus, the first is broader and refers to any person or economic group, but the second is based more on the incentive to employees. The latter is the one that concerns us, because in an agent-principal relationship, we can classify the agent as an employee of the principal.
In short, clearly establishing the incentives that the agent will receive, for his work as a representative of the principal, is extremely important, because it will ensure a high level of commitment from the agent to the principal, because he will feel compensated for the functions he performs, in your capacity as representative.
1.7 Information Systems between the Agent and the Principal
Through information systems, an information platform necessary for decision-making is created and, most importantly, its implementation achieves competitive advantages or reduces the advantage of rivals. In the case that concerns us, information systems are very useful in the agent-principal relationship, because they help to obtain accurate information at the right time. Here are two definitions about them:
Daniel Cohen and Enrique Asín define it as: “An information system is a set of elements that interact with each other in order to support the activities of a company or business. In a broad sense, an information system does not necessarily include electronic equipment (hardware). However, in practice it is used as a synonym for computerized information system "
According to Laudon and Laudon, information systems are: “An information system can be technically defined as a set of interrelated components that collect (or retrieve), process, store and distribute information to support decision-making and control in an organization "
For Victoria Martínez and Jordi Alberto it is: "The separation between ownership and control of the company is a characteristic phenomenon of the current company, in which the executive power rests in the hands of professional entrepreneurs or managers"
Both clearly state that the ownership of the company is in the hands of one and the management of the company in the hands of others. The second goes further by referring to the fact that this is a characteristic of companies today. The property corresponds to the partners; control is exercised by managers (salaried specialists of the company). This theory is valid for large companies, in which the existence of a large number of owners makes it impossible for them to control the company.
Definitely if we are using an agency system, we need to delimit roles and responsibilities. All the qualities must be previously clarified, to avoid conflicts between the principal and the agent where one may feel displaced or the other that reduces authority. This can be achieved with the separation and control of property and address, if they cannot be seen in conflictive situations, due to not having clear delimitations.
CHAPTER II- GENERAL ASPECTS OF THE AGENCY THEORY
2.1 Definition
Agency theory holds that the natural alignment of owners and managers (agents) diminishes the need for formal agent oversight and elaborate governance mechanisms, thus lowering property agency costs. In more recent studies, this theory is used to pose a contrary position, establishing that the altruism of the owner agents generates higher agency costs due to their inability to handle the conflict between the owner-managers and the managers not belonging to the core of the principal.
Jesús García Tenorio refers to it, in his book Organization and Business Management, as: “The Agency Theory, initially formulated by Jensen and Meckling, in 1976, focuses on the study of contracts that collect situations of collaboration between economic agents: agency relations "
Kenneth and Jane Laudon, in their book Management Information Systems, define it as: "Economic theory that considers the company as a set of contracts between individuals interested in themselves, who must be supervised and directed"
Both authors concur by saying that the company is a set of contracts between both parties, but Laudon establishes that the individuals who are part of it are interested in their own benefits, for this reason they must be supervised and directed. The parties that comprise it are: a) the owners, owners; b) administrators; c) creditors; d) government; e) staff; f) the environment in which the company carries out its activity.
In conclusion, the agency theory refers to the contractual relationships between the principal and the agent, both seeking to benefit from this coalition, one to get their company ahead and the other to receive an economic benefit. In general terms, the field of application of the agency theory extends to any form of cooperation characterized by divergence between the parties and uncertainty about their behavior.
2.2 Basic Structure of the Theory
For Manuel E. Herrera, agency theory is supported by several basic ideas: a) a concept of organization built from the theory of contracts; b) A behavior model that focuses on the maximization of utility, differences in the interests of the two parties, and attitude to risk in those parties, as well as a preconception about economic rationality; c) A conception about the influence that the asymmetry entails in the distribution of information in the contracting parties; d) Assume that the optimal configuration of agency contracts includes the calculation of the costs of that agency.
2.3 Concept of Organization according to the Theory of Contracts
The agency theory considers companies and their relationships with the environment as networks of contracts established between the parties to regulate their economic exchanges. That is, all types of ordering of economic activities that are manifested as organized, is understood with this prism of analysis of the concept of the contractual as a network of contracts between different parties. Examples: purchase, delivery, credit, leasing, insurance, or salary contracts.
The contracts legally or tacitly bind the rights, powers and obligations of the contracting parties as well as the distribution of the benefits obtained.
The concept is linked to the idea that every organization, including its relationships to the environment, can be broken down into relationships between individuals. The Theory of the Agency thus presupposes a super theory that does not admit any other possible relationships or influences than those derived from individual actions. Thus, it eliminates from its analytical observation instruments the categories that would also allow us to observe influences or interactions between social systems. It is therefore a theory in which even social interaction is seen as aggregates of individual actions.
Consequently, this theoretical approach excludes as an illegitimate concept the usual distinction between organization and environment. For this theory there would only exist, at most, different forms of inter-individual contractual relationships.
Regarding the configuration of such contracts, the theory accepts that the parties do not normally come to specify with all exactness the modalities in which the fulfillment of the tasks delegated by the principal to the agent must be carried out. That is why they would always be imperfect contracts.
The non-completion of the contracts may be due to imperfect information, the uncertainty of the future circumstances in which the delegated activity will have to continue, and the anticipation of foreseeable costs incurred when attempting to complete more information or when elaborating all the possible alternatives that would have to foresee.
Furthermore, it is assumed that the parties are aware of these imperfections in their contract regarding the specification of the performance of future activities. For this reason, counting on the possible opportunism of the parties, incentive, control or information mechanisms are included that compensate somewhat for the effects of the lack of precision in the contract.
2.4 Behaviors of the contracting parties of the Agency Theory
The theory, in its analysis of business and economic activities, is based on the assumption that the individuals who establish these contracts are driven primarily by the expectation of being able to maximize their individual profits.
This premise includes several statements about the following aspects of behavior: a) Human behavior responds to the model of "economic rationality", that is, it is oriented on preference schemes given with stability and consistency; b) The individual behavior is oriented to the achievement by maximizing an individual utility; c) The individual operates in her calculation from an opportunistic position - application of tricks, deception, masking maneuvers, among other techniques, so that the interaction between the contracting parties will assume behaviors in which an attempt is made not to perform the contract, fraudulent. Actually,the principal-agent contract will always have as its basic objective the reduction of those opportunistic intentions of the agent; d) The utility function basically covers a wide range of objectives: monetary (salaries, awards, dividends, profit sharing) and non-monetary (career, prestige and image, positions of power in front of other subordinates, leisure and time free, or be realized by accepting the principal's mandate); e) The parties orient their behavior according to that teleological-instrumental rationality and expect a corresponding orientation in the other party. This allows them to anticipate future behaviors of the other in principle or to control them through contractual negotiations; f) The parties may have a different attitude and degree of acceptance of the risk involved in their decisions.In general, the principal is assigned a greater ability to take risks, and the agent a certain degree of risk rejection.
This theoretical construction of this model of the Agency implies, as a consequence of the tendency to maximize own profits. The statement of a high probability that there is a conflict of objectives between the parties.
Opportunism constitutes here the central variable on which the entire theoretical vision or theoretical prism with which business reality is observed and analyzed is "built" (restricting in this vision the field of what is observed to the relationships between the owner and his agents).
Critics indicate that the neoclassical model does not attend at all to this world of personal relationships with often conflicting interests and in which cunning and opportunistic behaviors can occur. The neoclassical model would therefore lack any real basis, it would suppose a Victorian utopian world in which conflicts of interest are admittedly admitted but where it is believed that a handshake is really a sincere handshake. To this objection, the representatives of neoclassical theory take refuge in their basic thesis that their model only wants to create a system in which all other relationships are irrelevant for the efficient functioning of the complex world of economic transactions, and believe that its idealization supposes really such a solution.But this model is unilaterally fixed on market transactions and does not address an element that should be basic in an economic conception: the problem of optimization in the same allocation of resources. Eliminate this dimension to simply facilitate the pricing model, and this decision is illegitimate at the level of the simplest theory of scientific knowledge.
In a simile to what happened in the narrative of the Odyssey (Ulysses has to be tied to the mast before he can hear the sirens without danger of being seduced by them and dragged to his doom), the agents must resist the song of opportunities. The possibility of tying them to the mast of the company, will therefore be a central reason in all this theory. And without reaching ethical foundations, the utilitarian maxim is adduced here that fraud ends up being expensive for those who practice it, not only for those who suffer it. One cost induced by opportunistic fraud is the loss of fame and the consequent blocking of future profitable operations. Apart from the fact that the fraudulent seller will end up crashing in any market open to free competition:the buyer defects and turns to the competitor who offers better products at the same or lower price. And the same thing happens with opportunistic managers: the labor market offers many alternatives of well-trained people who may demand even less than the opportunistic agent.
One could think of a moral bond in which the virtue of loyalty and fair play is considered superior to opportunistic selfishness, but this is not the center of the ideas of the Agency Theory. In fact, there are psychosocial laboratory studies that apparently show that an honest strategy would be more popular, and with greater prospects of success than one based on selfish opportunism, thus making the assumptions of this theory vulnerable.
As a logical consequence of these assumptions about individual opportunism, the theory also deduces, from this foreseeable situation, the need - on the part of the principal - to get to configure control mechanisms that motivate the agent to act in the line of decisions favorable to the interests of the principal and not to follow their interests in opportunistic strategies.
The governance mechanisms include: bureaucratic control measures such as that exercised by the Shareholders' Meeting over the Board of Directors and by the latter over the Management, or the configuration of incentives such as reward systems, profit sharing. New information systems, profit and loss accounts, etc. are increasingly being used for this same purpose. they must be understood here, first of all, as information to the Principal about the way the Agent, the Management, conducts the business entrusted to him. The configuration of the contract with the agents would therefore be one of the main tasks to properly define such governance mechanisms.
2.5 Agency Problems: Unobservability of the Other Party
The basic problems that the theory observes / selects are restricted to differences in the level of information and orientations of the interests of the parties involved in transactions in the social-economic sphere, that is, to "unobservability" or observability only very limited by the other party in the heterosupply relationship.
The basic hypothetical construct of the theory is here that this unobservability of the other is translated into asymmetry or unequal distribution of information.
In the first place, the total unobservability by the principal regarding his possible Agent regarding the inconveniences or possible risks involved in choosing a false person are considered. It is the problem that arises when a Director of the steering committee is elected, or when a person is employed for a position, and the risk intensifies with the scope of delegated tasks.
To overcome this difficulty, the Agent is recommended to send signals or indicators of their capabilities to the possible Principal (certificates on their previous jobs, titles, among others, that is, everything that goes into a well-ordered curriculum vitae, and references from former employers). The Principal is recommended to use a search for additional information about the candidate for Agent. In this context, the “Self Selection” method is also recommended, in which the Agent places the candidate in a situation or scene with problems so complex that they will allow them to understand if the candidate has the right profile.
Inequality in information is considered in this theoretical observation as an opportunity for the agent, guided by his selfish interest, to even frantically present himself as the owner of information that he does not really have. This is what can happen when hiring a consultant who has previously informed himself about the managers who can hire him and knows their skills and limitations in specific knowledge of a field of work.
The other problem considered as more relevant by the Theory is that of the «hidden action»: here we are dealing with what happens in the phase between the beginning of the delegated action and the conclusion of the agency relationship in reference to the possibilities and agent's actual activities. Given the margin of freedom in their own activity, the delegate or agent can choose between different means to achieve the objectives that the principal cannot observe exactly, or only through very high costs.
Although the principal may verify, ex post, the final result, he will obviously not be able to obtain reliable information on the situation before the decisions made by his agent, or on his real efforts. It is almost indiscernible whether the final positive results are due to the agent's efforts or external circumstances.
This opacity of the agency could also tempt the agent to reduce his returns or to take advantage of his own interest. In other words, the unobservability or opacity of the action also implies the moral hazard of opportunistic behaviors on the part of the agent, which is called in the theory "Hold up". In this theory, the specificity of the transactions is the basic reason for this risk situation to arise.
To better understand this risk involved in the opacity of the intention of the other party, the theory considers that the principal who initiates the agency relationship assumes previous costs as a specific investment in the establishment of the contractual relationship. But upon reaching that relationship, he begins to depend on the agent.
2.6 Mechanisms of solution to the problems implied by the agency relationship
The theory certainly has, along with its merely speculative-descriptive intention to achieve a coherent vision linked to other presupposed conceptions, that of a certain "normativity", at least in terms of practical theory that recommends certain strategies or forms of action.
Given the type of selective observation of problems that has been exposed in the previous paragraph, it is logical that the mechanisms or instruments available to the Principal are also described to link the behavior of the agent in a way that is oriented to the realization of the interests of your agent. The theory, in its most prominent representatives, poses three basic types of disciplines to the agent:
- a) Encourage the agent. In order to efficiently configure these incentives, participation in results is considered relevant, first of all. A results-oriented contract could better link principal and agent preferences and reduce the potential for conflict between their different objectives by determining common outcomes for both parties.
This could also help to reduce information costs for the Principal about the activity of his Agent. The only thing to discuss would be the amount of these distributions of results. In practice, however, the application of this idea in the so-called management by objectives has encountered such difficulties and unforeseen secondary effects (departmental selfishness, orientation to the result without attending to the previous processes, among others) that today it is almost ruled out generally in favor of other solutions.
However, contracts aimed at incentives for results lose efficiency when it is the surrounding situation that probably determines the result, in which case the contract implies a wide margin of insecurity for the agent and an increase in risk. If the agent is attributed an adverse attitude to risk, it is clear that the distribution of risks that this type of contract implies will make him request greater incentives. But that makes conditions worse for the principal.
A simultaneous optimization in the distribution of risks and control through incentives implies a certain conflict between partial objectives. The optimal allocation would assume that the Principal assumes all the risk, as when the business salary is justified in this way and that the agent receives a stable salary in return. But this solution is manifestly insufficient as an incentive to the agent: to the extent that his performance did not influence his remuneration, he would have to have less interest in his work. This means that closing contracts aimed at incentivizing results must always be done in the form of a commitment to distribute results and risks.
- b) Another possibility of keeping the Agent disciplined consists of direct control of their behavior. Thus, certain rules of conduct will be agreed and their observance will be controlled, negatively sanctioning their non-compliance. The Agency Theory interprets that this possibility is only feasible with many limitations, since formulating the corresponding regulations would require a large amount of information from the principal and would hardly be possible under conditions of medium complexity of the tasks to be performed. Furthermore, the formulation of such direct controls would discourage the agent.c) The most used mechanism should therefore be the improvement of the information system of the Principal on his Agent (of the Board of Directors on the Management, or of the Parliament on the Government, or of an insurance company on the directors of the hospitals etc..). By making more transparent what would otherwise remain opaque as far as the agent's activity is concerned, the temptations of the agent to behave opportunistically are certainly reduced. But it is clear that such systems also involve agency costs. This is what happens with the usual accounting and financial information systems - in fact destined much more to the information of the principal, or to inform, necessarily, the Treasury, than to internal cybernetic control.
CHAPTER III- GENERAL ASPECTS OF THE CITY OF SANTIAGO DE LOS CABALLEROS
3.1 Location
The city of Santiago de los Caballeros is located in the center of the Cibao region, about 155 kilometers northwest of Santo Domingo, capital of the Dominican Republic. Its geographical coordinates are 19 or 28 '28 ”north latitude and 70º 41' 15” west longitude. The average altitude above sea level is 178 meters.
For Ernesto Jorge Poza "family businesses are those controlled by members of the same families or partner families in such a way that they have the possibility of continuing from one generation to another under the same family control."
Their importance, according to Gonzalo Gómez Betancourt 2005, lies in the fact that they form an important part of a country's economy; especially the consequences that their business activities cause in the integral development of society. According to him, family businesses constitute the backbone of economic development.
4.2 Characteristics of the Family Business in Santiago
The monarch founders present a very strong family ego as well as a strong business ego. Their personality is autocratic, their word is the only truth, they are usually empirical and controlling people, they are strict and do not delegate responsibilities to their children to run the company.
The general founders have a very strong business ego. Business is your life if it resembles military life. They leave office only if forced, they leave voluntarily but plan a return to power. They come out of retirement to rescue the company from the real or imagined ineptitude of its successors. This type of founder returns to course to regain his former glory and attempts to achieve even higher achievements.
The founding governors have a lot of social spirit, they tend to maintain the family unit and they no longer worry about who will succeed them, because they know that someone else can run the company.
The founding ambassadors manage to carry out a pleasant and trauma-free succession process, since they leave the company voluntarily and maintain contact as advisers. His exit is graceful and his interest in keeping a role in the company is to help in the transition process. Many hold positions on the board of directors. They are comfortable with their lives in retirement, proud of their contributions to the growth of their company, but also recognize the limitations of their talents in their organization.
4.5 Family Business Culture
Contrary to the general perception that family businesses are small and look like backward mom-and-pop stores, some of the largest and best-known companies in the world are run by families.
Contrary to the widespread notion that family businesses are so rooted in history that they forget the present and are not prepared for the future, they have been observed to show more focused business trends and an extended threshold of return on investment time horizons. wider.
The culture of the family business plays an important role in determining the success of the business, and can manifest itself, in four dimensions:
According to de la Cerda and Núñez (1993), cited by Imanol Belausteguigoitia Rius, the degree of efficiency of an organization (or a country) is largely determined by its work culture, which is different between countries, communities and organizations.
4.6 Fundamentals of Conflicts in Family Businesses
Belausteguigoitia Rius assures that one of the fundamental reasons why people decide not to do business with their relatives is the fear that there will be conflicts within the family.
Before deciding to work with a member of the family, it is necessary to consider that, in fact, the harmony of the family group is put at risk when the family is mixed with the company.
In family businesses, unlike non-family businesses, members are equally interested in improving their relationships both in the family and in the business. One of the main reasons that conflicts are better handled in these types of organizations is because the family is interested in the business; in addition, family rules to resolve conflicts between them influence so that they can also be resolved within the business.
Conflicts can be viewed from two completely opposite perspectives: a) as something harmful, that is, it must be avoided at all costs because it is something negative and cannot bring anything good; b) as an option for improvement, which is a more modern position, which considers that disagreements can lead to favorable changes.
Conflicts can be divided into two large groups: functional (also called cognitive), which are usually considered positive from the perspective that considers differences as an option for improvement, and dysfunctional, which have to do with feelings or emotions, and are not capable to favor the progress of the organization.
The functional ones can in turn be divided into two: conflicts by goals and conflicts by procedures. In both cases, if handled diligently, positive results are possible.
Regarding dysfunctional conflicts, there is the possibility of building an organizational culture that inhibits this type of conflict if a series of behaviors is rejected, such as avoiding making destructive comments that originate from jealousy and envy.
Among the most used models in conflict management and prevention is that of Blake and Mouton. In it, two dimensions are taken into account: that of reaffirmation (or the self) and that of cooperation (or the you). Here is a graph about it:
The competitor intends to satisfy his interests over others. The accommodating takes second place his interests and yields to others. The avoider ignores the conflict. The conciliator wants to achieve something in exchange for receiving a benefit and, finally, the collaborator who wants to satisfy the needs of the parties involved in the conflict. Win-win negotiations are located in this last quadrant and although in theory the quadrant related to the collaborator is the most effective, in practice it is considered that it is better to apply the appropriate style to each situation. Even the evasive style that corresponds to that of the turtle may be the most appropriate style to resolve a certain conflict.
4.7 Continuity in the Family Business
The existence of conflicts in the succession processes of the family business is very frequent due to the different management styles among family members and due to the distribution of the property of the company. There is no common guideline to the succession processes in the family business, but the correct application of the different legal, economic and fiscal tools can solve a problem that in the family environment can go beyond the economic aspect and influence personal relationships.
Nepotism, sibling rivalry, and the difficulty of delegating command to the next generation are just some of the problems that John Davis (educator, speaker, book author and consultant on the subject of family businesses, since the decade of the the 70's), considered as the highest authority in family business management. These variables are analyzed by him as the greatest source of conflict for the healthy growth of this type of structure.
The keys that family businesses should use to face the very challenges of their environment and of global competition are: to stay updated and trained according to world trends.
Remain creative developing new ideas that allow them to impose themselves and set the tone, that is, to become innovative without fear of failure.
A company active in the search for customer acquisition is worth more than a stable company that does not worry about changing but about being static; sooner or later it will lag behind.
Without a doubt, especially in Latin American countries, it is important to maintain control within the family, especially when looking to grow the business. We cannot continue to inherit positions from people in the family who are not trained or have the commitment or the determined vocation for such work.
However, what we can do is a family council in which the objectives to which the company wants to be brought and what is needed to achieve it are created.
For the economy, family businesses are absolutely driving forces. Globally, family businesses account for 2/3 of all global businesses, more than half of the largest companies and more than half of companies with public operations
John Davis, in his book Family Businesses, mentions some guidelines that favor the creation of successful family councils. In his view, the councils that achieve the best results establish and adhere to a schedule of regular meetings, the frequency of which ranges from two to four times a year. It is best to hold meetings outside the company and home to minimize interruptions.
Sometimes it is useful to analyze some topics in subgroups before discussing them together. For example, members of the first generation on the one hand, and those of the second generation on the other.
Additionally, effective boards are characterized by clearly delineated leadership responsibilities; generally, one of the family leaders chairs the council. And they are also distinguished because they do not hesitate to turn to outside advisers when they deem it necessary, especially in the early stages of board formation. One last point is that they organize their activities in a "family plan."
One of the main difficulties that family businesses face is that personal conflicts between their members are easily transferred to the business environment, but can be reduced. For example, two brothers who worked in a firm we advised had very different personalities and abilities. This circumstance can be an advantage if complementation is achieved; But in the company in question, rivalry affected decision-making, and some measures were postponed indefinitely. Now, how do you solve the dilemma if two brothers are equally owners and both want to work in the company? When the conflict is not acute and they are willing to find a solution, I would recommend that they hire a professional consultant and possiblyalso refer critical decisions to the board of directors, external advisers or the family council. Thus, the management of the company will not suffer interruptions.
The success of most businesses, but especially small and medium-sized companies, is related to the talent of employees, which is why it is vital in today's world that companies develop most of their internal talents and capabilities: and executive education is important for it.
Nepotism has a bad reputation. In some family businesses this reputation is deserved. I believe that it is necessary for family businesses to create high standards for family members or relatives to work in businesses and to reinforce these standards. The basic principle in this case is that family members will naturally have more opportunities and more rewards than non-family employees, but to stay this they must work harder and perform better.
Effective family business leaders typically have different personalities and skills; However, the most effective leaders of the family business are highly trusted to work for the interests of the business and the family, capable of inspiring business employees to present good service in the company, and are skilled in certain critical aspects of the business. handling it.
The members of the management could consider the following characteristics: to be reliable, experienced and objective advisers of the company.
In order for family businesses to remain a vibrant and important sector in the family economy they must learn to adapt in our increasingly global and competitive world.
Chapter V.- Application of the Agency Theory to Family Businesses in Santiago de los Caballeros, Dominican Republic
5.1 Application of the Theory of Contracts
In economics, the theory of contracts studies how economic agents can make contractual arrangements, generally this occurs when there is asymmetric information, that is, when one of the parties has more knowledge than the other in a certain matter. This theory is closely related to the field of law and economics.
One way to evaluate employee performance is by verifying the performance of contracts. This will depend on the observation and verification that the employer often performs on its employees, in order to create incentives for the agent who acts taking care of their interests.
The theory of contracts also uses the notion that a contract must be fulfilled one hundred percent (100%), which is why contracts specify the legal consequences for each possible outcome. The most recent theory developed is the theory of incomplete contracts, the first to use it was Oliver Hart and his co-authors, they studied the incentive effects of the parties and their inability to write contracts that include contingency clauses, in case they do not. are fulfilled
During the last 20 years, many efforts have been made to analyze the dynamics of contracts. The most important contributors to this literature are Edward J. Green, Stephen Spear, and Sanjay Srivastava.
As for the contracts that are given in the agency theory, we have the employment contract as the most important. Within the framework of the employment contract, individual contracts are an important method of restructuring incentives, by optimally connecting available information on employee performance, and compensation for that performance. Due to differences in the quantity and quality of information available on employee performance, the ability of workers to take risk, and the ability of employees to manipulate evaluation methods, the structural details of individual contracts vary widely, including mechanisms such as piecework, discretionary bonuses, promotions, profit sharing, efficiency wages,deferred compensation, and so on. Typically, these mechanisms are used in the context of different types of employment: salespeople often receive part or all of their remuneration as commission, production workers are usually paid hourly wages, while office workers are paid monthly or biweekly. The way these mechanisms are used is different in the two parts of the economy that Doeringer and Piore refer to as primary and secondary sectors.Production workers are generally paid an hourly wage, while office workers are paid monthly or biweekly. The way these mechanisms are used is different in the two parts of the economy that Doeringer and Piore refer to as primary and secondary sectors.Production workers are generally paid an hourly wage, while office workers are paid monthly or biweekly. The way these mechanisms are used is different in the two parts of the economy that Doeringer and Piore refer to as primary and secondary sectors.
The secondary sector is characterized by the short term of labor relations, little or no prospect of internal promotion, and the determination of wages primarily by market forces. In terms of occupation, it consists essentially of low or unskilled jobs, be they blue collar, collar, or service employment. These jobs are linked by the fact that they are characterized by low level of training, low level of income, easy entry, short tenure of jobs, and low returns to education or experience.
Agency contracts establish certain obligations to the agent. Its obligations are governed by the generic duty to act loyally and in good faith, ensuring at all times the interests of the employer on whose behalf it acts.
Other of its obligations are: a) to take care of the promotion and, if it is the case, also of the conclusion of the acts or operations that have been entrusted to it; b) communicate to the employer the information it has regarding the solvency of third parties with whom there are operations pending completion or execution; c) carry out their activity in accordance with the instructions they receive from the principal, provided that they do not affect their independence; d) receive, on behalf of the employer, any type of claim from third parties regarding defects or defects in the quality or quantity of the goods sold and the services provided as a result of the operations promoted, even if they had not been concluded; e) keep an independent accounting of the acts or operations relating to each of the entrepreneurs on whose behalf it acts.
Likewise, agency contracts establish obligations for the principal. The employer or principal is also obliged to act in accordance with the generic duty of loyalty and good faith.
Other of his obligations are: a) to make available to the agent, with sufficient notice and in the appropriate quantity, the samples, catalogs, rates and other documents necessary for the exercise of his professional activity; b) provide the agent with all the information necessary for the execution of the agency contract and, in particular, let him / her know when appropriate that the volume of acts or operations will be significantly less than the agent could have expected; c) satisfy the agreed remuneration in accordance with the chosen system, which may consist of a fixed amount, a commission, normally agreed based on the volume of sales, or a combination of both systems. Remuneration is an essential element of the contract, therefore, in the absence of an agreement,the remuneration will be fixed according to the uses of the place in which the agent carries out his activity; in the absence of these, it will be up to the judge to establish the remuneration that he considers reasonable.
From the scope of the family business, contracts are much more important when it comes to passing power from one generation to the other, seeing the agent as the successors and the principal being the patriarch of the family. Many families are in legal conflicts, which leads to the final separation of them, because each of the parties wants to get more out of a succession. In our society, several family businesses have been in the power of the most skillful at the time of awarding the successor assets.
5.2 Analysis of Asymmetric Information
The asymmetric information model allows economists to estimate the amount of risk a lender faces when the borrower's creditworthiness is unknown.
Wikipedia The Free Encyclopedia. The Market of Lemons.
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