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Chapter 1
Introduction
Over half the country is employed
in these businesses and something like 70 per cent of this country's
businesses are in private family business hands. It is extraordinary when you
think about the footprint they hold. It is pretty well hidden under a bush in
many respects.[1]
...my point is not only are they
different but they are also significant. Different and significant are
necessary but not necessary in sufficient conditions to actually make them the
focus of attention. They have been overlooked. They are different; they are
significant and they are overlooked.[2]
1.1
As a field of policy focus, public debate and academic inquiry in
Australia, 'family business' has been relatively neglected. There are several
inter-related reasons for this. There is no official definition of 'family
business' and no official data collected. There is no specific public policy
focus on family business: the focus is often on small and medium-sized
enterprises (SMEs). And academic research in the field is nascent, with limited
data available and very few Australian universities with a course on family
business.
1.2
Reflecting these factors, the public debate on family business in
Australia often seems limited to the stereotypes of the family corner store at
one end of the spectrum, and the trucking dynasty or the media empire at the
other. The media seem often to refer to businesses that are family owned and
operated without using the phrase 'family business' or acknowledging that the
structure and operation of the business is because of family ownership. Indeed,
it seems that many businesses that are owned and operated by family members do
not themselves identify as a 'family business'. Rather, they identify as a
small business, a corporation, or with reference to the sector in which they
operate.
1.3
This inquiry is focussed on family businesses in Australia. It is
interested in how 'family business' might be defined, the contribution these
businesses make to the Australian economy and their structures, mindset, resilience
and sources of funding. The inquiry aims to stimulate public debate on family
business in Australia. In particular, it considers the case for developing a
formal definition that yields regular and reliable data which is useful to
policy-makers, the business community, academia and the public at large.
The referral
1.4
On 16 August 2012, the Parliamentary Joint Committee on Corporations and
Financial Services ('the committee') initiated an inquiry into family business
in Australia. The terms of reference for the inquiry direct the committee to
examine the following matters:
(a) the definition of 'family business';
(b) the availability and reliability of information and statistics about
family business in Australia;
(c) the contribution of family business to the Australian economy, in terms
of financial, social, employment, innovation and sustainability outcomes;
(d) structural, cultural, organisational, technological, geographical and
governance challenges facing family business;
(e) the role of family trusts in facilitating family business;
(f) access to and the cost of finance and insurance for family business; and
(g) family business responses to the challenges of the Global Financial
Crisis (GFC) and post GFC resilience.
1.5
The committee set 27 February 2013 as the reporting date. The reporting
date was extended to 20 March 2013 to enable tabling in both Houses on a
sitting day.
Submissions to the inquiry
1.6
The committee called for written submissions by 31 October 2012. On 1 November
2012, the committee granted an extension of time for submissions until 30
November 2012.
1.7
The committee sent written invitations to make a submission to 102 individuals
and organisations. This group included various lobby groups, consultancies,
government departments, academics, major banks and other financial
institutions. In addition, the committee sent invitations to 48 Chief
Executives of Regional Development Australia.[3]
1.8
The inquiry was advertised in The Australian newspaper on 29
August 2012, 26 September 2012, 24 October 2012 and 7 November 2012, as
well as on the committee's website. The committee also requested those member
organisations that were sent submission invitations publicise the inquiry among
their members.
1.9
The committee received 38 submissions. Of these, 37 are publicly listed
on the committee's website; one submission is confidential and another is
published with the name withheld.[4]
1.10
The committee received ten submissions from consultancy, advisory and
legal firms;[5]
eight were from peak industry associations and institutes;[6]
six submissions from government agencies and statutory authorities;[7]
five from members of Family Business Australia (FBA) and the FBA itself;[8]
four submissions from academics;[9]
and one submission from a major bank.[10]
There was only one submission from a family business that was not a member of the
FBA. That submission begins: 'Hardly anyone in small business knows about this
inquiry and you have missed an opportunity to hear from us all'.[11]
1.11
In some respects, the committee is disappointed with the relatively low
number of submissions received during this inquiry. Considering the claims of
some stakeholders about the size of the family business sector and its
importance to the Australian economy, one may have expected a greater response
particularly from Australia's larger and better resourced family businesses. As
Mr David Smorgon, himself from one of Australia's most successful family
businesses, told the committee:
...it is quite ironic, and frankly disappointing, that so many
large family businesses are not here today—they are conspicuous by their
absence in not giving submissions to this parliamentary enquiry. You have to
ask yourself why. I don't know the reasons; I haven't asked them—perhaps it
highlights the very private nature of family businesses: they do their own
thing behind closed doors and are not focused on others...So it is not just the
politicians; it is also the responsibility, particularly of those larger family
businesses, to play their role.[12]
1.12
However, the committee does acknowledge that many family businesses are
SMEs with limited time, finite resources and experience of the parliamentary
process. These factors undoubtedly contributed to the lack of engagement from
SMEs in this inquiry.
Public hearings
1.13
The committee held six public hearings: in Canberra on 13 November; in
Melbourne on 14 November; in Sydney on 15 November; in Brisbane on
16 November 2012; in Devonport on 21 January 2013; and a further hearing in
Canberra on 7 February 2013. At the Melbourne, Sydney, Brisbane and
(subsequent) Canberra public hearings, the committee held a roundtable with
several family businesses having the opportunity to discuss issues of
importance and concern relating to the terms of reference. The second Canberra
hearing was an opportunity for the committee to take further evidence from
Treasury and Australian Taxation Office officials, as well as several witnesses
from Perth via videoconference.
Acknowledgements
1.14
The committee thanks those who made written submissions to the inquiry
and who appeared to give evidence at the public hearings. It appreciates the
FBA's assistance in organising the public hearings and raising awareness of the
inquiry. The committee particularly thanks those family businesses who generously
gave of their time during trading hours to give evidence.
1.15
The committee also thanks the FBA for its invitation to the National
Family Business Day event at Parliament House in Canberra on 19 September 2012.
Committee members found this event useful in terms of meeting some of
Australia's most successful family businesspeople, as well as outlining issues
of key concern for the sector. The committee commends the FBA for organising
this event. One of the key challenges that family businesses face is raising
public awareness of their contribution to the Australian economy and the
community. To this end, National Family Business Day is an excellent initiative
and one that the committee hopes will continue.
1.16
The committee also thanks Ms Paula Pyburne from the Law and Bills Digest
Section of the Parliamentary Library for her assistance on matters relating to
family trust law.
A brief historical context
1.17
Families have, of course, been central to the functioning of economies
for millennia. Hunter-gatherer societies were based entirely on kinship. These
societies varied in structure but were alike in that their social organisation
was formed in terms of kinship.[13]
1.18
For centuries, the power and influence of royal families structured power
and commerce in Europe. Succession planning was crucial to maintaining power
and maintaining property. This was also important for families generally. As the
Irish and English parliamentarian Edmund Burke wrote in 1790:
The power of perpetuating our property in our families is one
of the most valuable and interesting circumstances belonging to it, and that
which tends the most to the perpetuation of society itself. It makes our
weakness subservient to our virtue; it grafts benevolence even upon avarice.
The possessors of family wealth, and of the distinction which attends
hereditary possession, (as most concerned in it,) are the natural securities
for this transmission.[14]
1.19
There are celebrated examples of European families without royal blood
that have used the family structure to gain and maintain power and wealth. In
Renaissance Italy, families used their wealth to form allegiances that led to
political power. Most famously, the Medici family, which founded the Medici
Bank in the 15th century, subsequently gained political power in Florence as
citizens rather than monarchs.[15]
In the 19th century, the five sons of Mayer Amschel Rothschild established
renowned banking houses in London, Paris, Frankfurt, Naples and Vienna. The
brothers were closely connected to their father and to each other and operated
according to clear, defined objectives and principles.[16]
1.20
In Europe prior to the Industrial Revolution, home-based 'cottage
industries' represented the main form of production.[17]
Goods were home-made and families themselves sold their wares at market. During
the first Industrial Revolution in England, family businesses offered
stability, certainty and clear property rights.[18]
In the United States, family businesses were the basis from which large economic
organisations grew.[19]
Well-recognised corporate brands such as Eastman Kodak, du Pont and Kellogg
commenced as small family businesses in the nineteenth century.[20]
1.21
As the process of industrialisation in Western countries continued, and
as businesses outgrew the family structure, the corporate form of organisation
appeared. By the 1930s, with growing interest in the separation of ownership
from control, historians and management specialists began differentiating
family firms from other business categories.[21]
The American political scientist, Francis Fukuyama described the shift from
small family business to a corporate form in the following way:
...as a business grows, its increasing scale usually outstrips
the capabilities of a single family to operate it. First to fall away is family
management: a single family, no matter how large, capable or well educated, can
only have so many competent sons, daughters, spouses, and siblings to oversee
the different parts of a rapidly ramifying enterprise. Family ownership often
persists longer, but here too, growth often requires raising more capital than
one family can provide. Family control is diluted first through bank borrowing,
which gives the creditor some voice in running the business, and then through
public equity offerings. In many cases the family gets pushed out of the
business it founded, as the latter is bought out by non-family investors...The
often ad hoc decision-making structure of family owned businesses gives way to
a formal organization chart with structured lines of authority.[22]
1.22
There was a view that economic development required a weakening of
family ties. For some time, social scientists were of the belief that there was
a natural development path that led from 'family businesses based on
traditional moral reciprocity' to the 'modern, impersonal, professionally
managed corporation based on contract and property rights'.[23]
1.23
Business consultants writing in the 1960s and 1970s viewed a tension
between the non-rational family and the rational business. The thesis of many
writers was that when the family and the business components clash, the
rational component—the business—is the loser. Accordingly, the recommended
solution was to excise the family so as to operate firms in a more
'business-like' way.[24]
1.24
This perspective has changed as researchers have focussed in more detail
on the contribution that family businesses make to different societies.
Fukuyama notes that while it is possible for families in some societies to be
too strong to allow the formation of modern economic organisations, in other
societies the family has been important to the path of economic development. In
this context, he draws parallels with family structures in central Italy and in
China:
In both cases, the family plays a central role among social
structures, with a corresponding weakness of nonkinship-based organisations,
and in both industrial structure consists of relatively small family businesses
networked together in complex webs of interdependence....In both societies, small
family businesses rely on networks to achieve what amount to economies of
scale. On the other hand, neither the Italian nor the Chinese family firm has
been able to break out of those sectors to which they are limited by their
scale and therefore occupy similar niches within the global economy.[25]
1.25
In other countries, however, businesses based on family structures
occupy a central role in key national industries. The obvious examples are the chaebols
in South Korea which have been supported by the South Korean government for
decades as part of its strategy for economic development. These conglomerates,
which include Hyundai, Samsung and Lucky-Goldstar, have entrenched family
control with multiple business lines. They are also important political
players, with their close ties to politicians and government officials. During
the 2012 Presidential campaign, both candidates campaigned to reform the chaebols.
The winning candidate, Ms Park Geun-hye, campaigned to pursue these reforms on
a more gradual basis than her opponent.[26]
These measures aside, the challenge for the chaebols is to ensure the
transfer of hereditary power from the second to the third generation.[27]
1.26
Family businesses provide fascinating case studies that attest to the
durability, flexibility and vulnerability of the family unit. In 2007, BusinessWeek
magazine reported on the demise of 'the world's oldest continuously operating
family business'.[28]
Japanese temple builder Kongo Gumi had been in operation under the founders'
descendants for 14 centuries—since 578.
1.27
The BusinessWeek article noted four factors contributing to the
longevity of Kongo Gumi. First, the industry in which it operated was highly
stable: '[F]ew industries could be less flighty than Buddhist temple
construction'.[29]
Second, the company was flexible in selecting its leaders. Rather than
automatically shifting ownership to the eldest son, Kongo Gumi chose the person
'who best exhibited the health, responsibility, and talent for the job'. On one
occasion, this person was grandmother of the company's last president.[30]
Third, the company adopted the practice of sons-in-law taking the family name
when they joined the family firm. This practice, common in Japan, allowed the
company to continue under the same name even when there were no sons in a given
generation.[31]
Fourth, at various times, the business had to diversify. During the 19th
century Meiji restoration, for example, the business lost government subsidies
and began building commercial buildings.
1.28
Succession planning is not always as smooth, as the case of the Indian
conglomerate Reliance Industries attests. In 2012, Fortune Global 500 ranked
Reliance Industries 99th on the list of the world's biggest corporations, with
revenue for that year exceeding $US76 billion.[32]
The company was founded in the late 1950s by Dhirubhai Ambani. His death in
2002 led to a long family feud between the two brothers, Anil and Mukesh, over
the terms of the father's succession plan. There was dispute between the
brothers as to whether ownership and succession issues had been settled before
the father's death. Anil left Reliance in 2005, taking the company's telecom,
power and finance businesses. It was the brothers' mother, Kokilaben, who
implemented the division of the Reliance empire.[33]
The need for a clear succession plan is a key theme of this report.
Successful Australian family businesses
1.29
Australia has a short but proud history of successful family businesses.
Some of its most iconic companies have been—and remain—family owned and
operated. While there is a lack of reliable data on the family business sector,
historical accounts of successful family firms give a sense of the diversity
and longevity of these businesses.
1.30
In 1994, Edna Carew published a book titled Family Business: The Story
of Successful Family Companies in Australia. It contained profiles of eight
Australian family businesses, all of which were at the time at least 50 years
old:
- the Brown & Hurley Group established in the 1940s;
- the funeral directors Tobin Brothers, formed in 1934;
- the Ballarat-based Selkirk Brick founded in the late 1800s;
- the transport business E Murphy and Sons established in 1858;
- G James, the glass and aluminium business which commenced operations
in in 1917;
- the food processing and packaging company Ward, McKenzie which
began in 1863;
- Thomas Warburton, a wholesale engineering supplier founded in
1853; and
- the packing company J L Lennard which was set up in 1879.[34]
1.31
The book notes at the outset that most family businesses never make it
beyond the first generation: 'a trickle survive into the hands of a fourth
generation'. The book's introduction summarises the following features common
to the development of these eight businesses:
- most have confronted, and dealt with, the problem of succession;
- they have a cautious approach to borrowing;
- they have a clear business plan with an aversion to
diversification for its own sake;
- they are 'loyal to family goals';
- they have a sense of having developed 'something of long-term
value';
- they foster a satisfying working environment that leads to a core
of long-serving employees; and
- they recognise the utility of occasionally employing 'outsiders'.[35]
1.32
A second volume was published in 1996 under the same title.[36]
Again, a range of Australian family businesses were profiled including Grenda's
Bus Services, the vitamin manufacturer Cenovis and de Bortoli Wines. The book's
foreword is written by Professor Ken Moores (then) of the Australian Centre for
Family Business at Bond University. He notes that family businesses 'have not
generally attracted the attention they deserve' in part because they are in
such diverse industries and locations.[37]
1.33
The second volume also has introductory pieces by the Commonwealth Bank of
Australia and the Chartered Accountants Howarth & Howarth. These were aimed
at explaining how family businesses can benefit from the use of their services.
Notably, Howarth & Howarth's comments identified the importance of
establishing a Family Constitution which set out details on the following
issues:
- a clear objective—whether to sell the business or keep it in the
family;
- identifying, training and installing a successor;
- the options for clear ownership;
- a policy on remuneration of family members; and
- a policy on who can join the company.[38]
1.34
In 2012, Free Run Press in conjunction with Australia's Family
Business Magazine published an anthology of 100 Australian family
businesses titled Soul Stories. The collection highlights the longevity
and diversity of family firms in Australia. It includes stories on:
- A. H. Beard, a fifth generation Australian bedding company that
began in 1899;
- Angove Family Winemakers, a fourth generation wine producer
established in the 1880s;
- Beerenberg, a South Australian-based farm product firm that began
in 1969 by fifth generation dairy farmers;
- Coopers, the 150 year old beer brewing firm;
- Dysons Group, a family owned bus company that commenced operating
in 1952;
- Haigh's Chocolate, a fourth generation firm;
- Haymes Paint, a paint-making firm that began in 1935;
- Lionel Sampson & Sons, established in 1829 in Fremantle. It
purchased R. C. Sadlier (another Western Australian company) after
the outbreak of World War 2; and
- Tobin Brothers Funerals.[39]
Family businesses and the BRW 200
1.35
Family businesses rank among the wealthiest in Australia. In June 2012,
the Business Review Weekly published its annual BRW 200 Rich List.
On that list, 29 of the 200 inherited their wealth. Most notably, the daughter
of the late Lang Hancock, Gina Rinehart tops the list with an estimated
personal wealth of $29.2 billion. Anthony Pratt, the son of the late Richard
Pratt, is worth an estimated $5.45 billion. James Packer, the son of the late
Kerry Packer, has an estimated personal wealth of $5.2 billion. Then there
are first generation family business owners. Notable examples are Frank Lowy
(the owner of Westfield) and Lindsay Fox (the owner of Linfox).[40]
1.36
The BRW Rich List distinguishes between a family in business and
family businesses. While several prominent family members (some mentioned
above) make the list of 'billionaires', there is also a list of the 50 richest
family names. Heading this list are the Smorgon, Lieberman, Besen and Myer
families, all with net wealth over $2 billion. Twenty-nine of the wealthiest
50 family businesses have property investments in their portfolios.[41]
Family businesses and migrants
1.37
Many Australian family businesses were established in the early post-WWII
years by newly-arrived migrants seeking to escape economic and political turmoil
in Europe. A number of the businesses on the BRW Rich List were
established by newly-arrived European immigrants in the 1930s, 1940s and early
1950s: these include the Roth, Valmorbida, Rabinowicz, Burger and Barro
families.[42]
Italian migrants arrived in Australia with a 'specific form of
entrepreneurship', which resulted in many successful Italian businesses in
areas such as wine making and building construction.[43]
1.38
Migrant family businesses usually had access to an informal workforce
through family and spouses who were able to contribute to the business. This
workforce increased as family businesses were transferred to the second
generation. The requirement that children help out in the family business was
often a matter of survival for many second generation Chinese families.[44]
However, many second and third generation family business members were able to
obtain the formal educational qualifications that their parents did not,
incorporating this knowledge into the family business.[45]
1.39
The committee is interested in the contribution made by family
businesses from culturally and linguistically diverse (CALD) communities. It is
an area that seems largely unexplored in academic research. Unfortunately, this
inquiry was unable to produce much by way of evidence in this area. The
committee does make a recommendation (chapter 2) that government should
consider the need for data on family businesses from CALD communities.
The Australian family farm
1.40
Australia's agricultural sector has been based on the family farm, a
form of ownership that governments have assisted. Beginning in the 1860s, land reforms
were introduced to create small family farms to replace the existing broad
scale pastoral holdings of the wealthy squatters.[46]
After World War 1 and 2, returning soldiers were thanked for their service with
farmland distributed through various Settlement Schemes.[47]
Chapter 3 of this report notes that today, more than 95 per cent of Australian
broadacre and dairy farms are family operated and at least partly family owned.
This type of farm accounts for 68 per cent of all Australian farms. The
indications are that vegetable industry farms and irrigated farms in the
Murray-Darling Basin have a similarly high proportion of family-based operations.[48]
Structure of the report
1.41
This report has 9 chapters:
- Chapter 2 looks at the fundamental issue of whether a formal
definition of family business is needed and if so, the possibilities and
challenges in framing a definition. It considers submitters' and witnesses'
views on a range of matters relating to a definition of family business.
- Chapter 3 is concerned with the availability and reliability of
data on the sector. In the absence of a formal definition and official data,
several consultancies have attempted to collect and collate their own
statistics. This chapter details this evidence and comments on the accuracy and
reliability of these data.
- Chapter 4 summarises the committee's evidence on the
characteristics and mindset of family businesses. The committee received
considerable evidence that in certain key respects, family businesses have
traits that are either not present in non-family businesses, or not evident to
the same extent. This chapter discusses these attributes.
- Chapter 5 discusses the challenge of planning for succession.
- Chapter 6 considers the challenges to family businesses of
operating a trust structure. It details the concerns raised with the effect of
taxation requirements under Division 7A of the Income Tax Assessment Act 1936,
Division 6 of the 1936 Act, and the capital gains tax provisions.
- Chapter 7 focusses on various issues of apparent concern for
family businesses in current policy settings. These include the 80 year limit
on trusts, the 50 member non-employee shareholder rule in section 113 of the Corporations
Act, employee share schemes in Division 83A of the Income Tax Assessment
Act 1997 (ITAA) and the effect of Division 7A of the ITAA on the use of
trust structures.
- Chapter 8 considers the capacity of family businesses to access
finance. It also considers the evidence that family businesses were able to
weather the Global Financial Crisis better than non-family businesses.
- Chapter 9 presents the committee's conclusions.
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