Why family ownership works
Big family businesses tend to get a bad press. They are caricatured as conservative, ponderous dinosaurs that resist the contemporary corporate virtues of transparency and accountability to keep the family in control.
Legendary investor Warren Buffett refers derisively to the “lucky sperm club” of senior managers at family controlled companies who came in to their positions of power and wealth by no merit, but by a roll of the genetic dice. High-profile feuds or mismanagement at prominent family-controlled companies reinforce the stereotype.
Yet evidence from tracking the performance of publicly listed companies with significant family investors (holding 10% or more of shares) paints a different picture. A ranking by Credit Suisse of the top 10 such companies according to share price performance over the past five years reveals a group of stellar performers, led by German solar energy company, SolarWorld.
What’s more, Credit Suisse’s family index, comprised of the 40 top US and European companies with significant family investors, has outperformed the broader market easily over the past five years. As with any index there is survivorship bias: only the cream of the crop are included while the many failing family businesses are not. “But the structures and qualities that propelled these businesses forward are likely to persist,” said Michael O’Sullivan, head of research for Credit Suisse’s private bank in the UK.
He highlighted the longer-term planning that is possible at companies where significant family ownership provides stability in the share register, and the willingness to explore and embrace new technology that often results.
The Siemens family has a reputation for promoting new technology while Lakshmi Mittal, head of steelmaker ArcelorMittal, has prospered by embracing new production processes.
O’Sullivan added that successful family businesses often share Why family ownership works favourable characteristics with private equity-owned companies, with the advantage that they tend not to borrow heavily making them less susceptible to the credit crunch that has undermined many leveraged buyouts: “Typically, family businesses tend to have lower levels of leverage and longer-term leverage, particularly in continental Europe,” he said.
For Joachim Schwass, a professor specialising in family business at the IMD business school in Lausanne, Switzerland, Credit Suisse’s findings provide further evidence of what he calls “the long-awaited awakening of the family business model”.
The continued success of Germany’s Mittelstand companies – mostly small to mid-sized family owned manufacturing businesses – in driving the country’s export growth has been a strong counterpoint to the conventional, Anglo-Saxon wisdom that public companies striving to create shareholder value are invariably the best businesses.
Schwass said the potential advantages of family ownership were increasingly being recognised but that family businesses needed to “come out of hiding” and accept greater scrutiny. “We are constantly telling them they need to be more transparent,” he said.
Many of the top performers among Europe’s listed family businesses come from sectors of the market that have enjoyed success in recent years: alternative energy; mining; chemicals; and internet services for example. But the same ranking over three years includes names from less fashionable sectors.
Italian carmaker Fiat, controlled by the Agnelli family, appears in tenth position thanks to the transformation in the business overseen by chief executive Sergio Marchionne since 2004. The decision by the Agnellis, who own 30% of Fiat, to pluck Marchionne from relative obscurity heading SGS, a Swiss certification company, and allow him to make sweeping changes to management might have been tough to push through in a company with broader share ownership.
Frank Asbeck, chairman and founder of SolarWorld, believes well-run family businesses have an obvious advantage in this regard. “Family-owned companies can rely on more efficient decision processes,” he said in an email exchange. “There is a clear strategy: what is good for the company is good for the family. Other companies might have a wider variety and range of shareholder interest.”
But marrying family and public ownership is often tricky. Schwass said there is inevitable tension between the long-term approach of family owners and the shorter horizon of many shareholders.
For Simon Berry (pictured), chairman of family-owned wine merchant Berry Bros & Rudd, the idea of public ownership is contrary to the very ethos of a family enterprise. “There may be parts of the business that make no sense economically but are reasons “There is a clear strategy: what is good for the company is good for the family” He said it amounts to an understanding of “the soul of the business”.
Schwass refers to this idea as promoting a “values-driven enterprise” and said listed family businesses needed to retain their core values if they were to thrive. When the link between family owners and management becomes too distant it creates problems.
“If the family wants its ownership to persist over generations there has to be a value exchange between the family and the business,” he said. “I think the best-performing family businesses tend to be those where there is family involvement in every level of management.”
This article first appeared in the monthly Wealth Bulletin in May.
del.icio.us
Digg
Newsvine
reddit
StumbleUpon