Family businesses are the cornerstone of the global economy, and some of the world’s most respected brands are family-owned.
As the world deals with the destabilising economic consequences of the Covid-19 pandemic, these kinds of businesses stand out. One quality in particular plays in their favour during this difficult time: resilience.
A study by Boston Consulting Group concluded that it was this, rather than performance, that family businesses focus on in such times. When the economy takes a nosedive, family companies outshine their peers.
Elizabeth Bagger, director general of the UK-based Institute for Family Business, argues that the resilience of family firms before the coronavirus crisis hit means that
those businesses are in a strong position to be able to see through the current challenges and be part of the rebuilding of our economy.
Family firms tend to be more risk averse and reinvest more profits than their non-family-owned peers. This approach is recognised positively by credit rating agencies.
Family firms typically have certain defined traits and practices, and chief among them is taking a long-term outlook. Long-term horizons reflect the sense of custodianship among owners of family businesses. Justin Craig, professor of family enterprise at the Kellogg School of Management at Northwestern University, explains why. “When I ask owners whom do they work for, they answer ‘for my kids and their kids.’”
That sense of stewardship causes them to manage assets differently than many of their corporate peers who prioritise chasing quarterly returns. “They will take on debt but get rid of it quicker than somebody else,” Craig remarks. Debt is necessary to grow, but they still want to maintain control.
This deep-seated sense of investment, the much-cited ‘skin in the game’, has numerous benefits. The long-term mindset and focus on stewardship afford family businesses a significant advantage because it often translates into capital being allocated in a more pragmatic, sustainable and disciplined manner.
Multi-generational companies can, by virtue of their longevity, be a source of reassurance to employees, suppliers and customers during a time of uncertainty and crisis. It is the reassuring knowledge that there is long-term ownership. This is primarily what differentiates and creates a competitive advantage.
And yet for all of their advantages, family enterprises do come with their own risks. Anyone who has watched the TV series Succession will know that the turbulence of transitioning from one generation to another can make for riveting drama. But in the real world, clan disputes, role conflicts and inter-family rivalries are not only destabilising and terrible PR but also deter investors.
KPMG advises outside investors to approach family companies
with less of a corporate mindset”. Instead, it recommends aiming to “understand the company more holistically, going beyond financial due diligence to find out whether there is a succession plan in existence and whether nepotism may be an issue.
A common issue with family business (and one that is not necessarily unique to them) is the danger of a dominant shareholder. A powerful central figure at the heart of the company, brings “a risk of absence of alignment with minority shareholders,” notes Alain Caffort from Pictet.
Another area of possible risk is succession planning, with the transition from one generation to another holding the potential to create turbulence and instability. To guarantee the long-term prosperity of a business-owning family across generations, strong governance is key.
Nonetheless, Caffort returns to the key aspect of stewardship as a defining strength of the family-run company. “For families, this is more than just wealth; it is about family values, family identity,” he says. This goes beyond the company itself, affecting the wider world.
When you’ve got your name attached to the company, you think twice before taking an environmental or social risk because this is your name on the line. Not only is that good for society and the environment, it’s also a fantastic shield for minority shareholders.Alain Caffort | Senior investment manager at Pictet
Ultimately, it’s the family companies aligned around a strong sense of values, embodying them in everyday practices, which get better results. This is where they leave their peers behind. “The ones that get it right start with understanding the value of values,” says Justin Craig of the Kellogg School. “They get that this is what distinguishes them in the market. It’s their DNA, their secret sauce.”
