WHY FAMILY BUSINESSES OUTPERFORM OTHERS

Numerous studies in the last few years indicate that family enterprises are, overall, more successful than their non-family counterparts.

A Boston Consulting Group study of 149 large, publicly-traded, family-controlled firms, for instance, revealed that their long-term financial performance was higher across the board. Similarly, research by Credit Suisse looking at data of 280 family companies worldwide from one financial year showed that family businesses outstripped public companies in revenue growth – this during the global recession of 2011-12.

“We have a body of knowledge that’s been collected over the last 25 years that suggests they do outperform others,” says Justin Craig, clinical professor of family enterprise at the Kellogg School of Management at Northwestern University, and co-author of the new book Leading a Family Business: Best Practices for Long Term Stewardship.

Yet he stresses the outcome of these findings depends heavily on how you define a family business and what you’re measuring. Family involvement in management and ownership of these firms varies widely, for instance. In his view, one of the best metrics for the success of family businesses versus others is the level of public trust in them. According to the 2016 Edelman Trust Barometer, more respondents trusted these businesses (66 percent) than public (52 percent) and state-owned (46 percent) companies.

Whatever the differences among them – and they are very heterogeneous – enduring family firms share common traits that experts believe allow them to stand the test of time while beating non-family companies at things like innovation and, in the case of publicly-traded family firms, shareholder returns. Here are four:

Long-Term Orientation

Family business leaders are committed to taking care of the enterprise and handing it over to the next generation in better condition than when they received it, explains Craig. “When I ask owners who do they work for, they answer ‘for my kids and their kids.’”

This focus on stewardship causes them to manage assets differently than many of their corporate peers who are chasing after quarterly returns. For one thing, they are more prudent with debt. “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.

It also makes them more cautious with spending. Research published by European academics in the past few years showed that while family firms on average have lower R&D budgets than other kinds of firms, their innovative output is higher. They suggest this is because family owners ensure that managers only make sound investments in this part of the business.

Institutional Memory

The European study just mentioned also found that family members’ long relationship with the firm and deep knowledge of the industry also increased their ability to bet on solid innovation investments. A good example here is France’s Mane Group, the fragrance and flavour giant founded in 1871. Now under the leadership of the founder’s great-grandson, it has continually invested in R&D and manufacturing processes with great success.

This longevity in the business also partly explains the attitude toward managing assets, according to Craig. Leaders of these companies have lived through decades of economic cycles, so they don’t react to these ups and downs in the way many non-family businesses do; sometimes they don’t react at all. “The market may be heating up, but family firms will put their cash away. They know the market will come down, and that’s when they step in. They ride the cycle differently.”

Smart Diversification

There is an increasing acknowledgment that family-owned businesses diversify more than others, claims Craig. This further reduces risk and allows them to leverage existing knowledge to grow. Most expand to businesses within the same or related industries, or up and down the supply chain.

S.C. Johnson in the U.S. has done this wisely. After buying a parquet flooring company in the 1880’s, the founder developed a line of floor wax. Now in its fifth generation of family leadership, S.C. Johnson has grown into a large, diversified company but remains focused on home products. The family’s wealth is estimated at $29 billion.

A Balance between Tradition and Change

Craig contends that family businesses tend to adapt well to technological and other changes even as they continue to embrace tradition. “These companies are not going to be the first adopters, but they are quick to respond,” he adds. It’s because leaders focus on the next generation, and younger family members have the ear of leadership. In other words, dining room conversations move easily into the board room.

Family firm heads can’t ignore disruptive business models, digitalization, and other emerging trends affecting their industries, argues Craig. “The longer they sit on their hands, the more frustrated the younger generation becomes.”

The CEO of Viessmann, a German family firm that is one of the world's leading manufacturers of heating, industrial and refrigeration systems, has taken an interesting approach to prepare the firm for the future. He appointed his son to oversee the digital transformation strategy of the company. His job is now to connect its traditional product line with digital services.

For all of their advantages, family enterprises can be uniquely tricky to lead and govern - what with the potential for succession struggles, role conflicts, and rivalries among colleagues who are also family. Family Legacies focuses on helping family businesses resolve the critical issues of keeping the family and business successful, maintaining continuity as they grow.

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Article by Kate Rodriguez, a former senior career search researcher, and government analyst who covers career development and higher education marketing for The Economist Careers Network.

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