We often find advisors will shine a light on mega-corporations and tell family-owned businesses that “this is what you need to do!!”. Sadly the basic concept that publicly listed companies are ‘better’ than the family governance model is simply wrong.
In fact, the opposite is actually true. In 2012, researchers Nicolas Kachaner, George Stalk and Alain Bloch at the Harvard Business School did a study on the profits of publicly traded companies, where most of the ownership is controlled by one family, to their listed counterparts.
The results were enlightening. “When we looked across business cycles from 1997 to 2009, we found that the average long-term financial performance was higher for family businesses than for non-family businesses in every country we examined”.
The following are what the mega public companies should learn from family-owned businesses.
Money matters
In a family, if you spend $20,000 on a purchase you are potentially squandering a year of a grandchild’s high school. In a public company, the CEO can enjoy additional remuneration by way of ‘perks’ – a flash office, first class airfares, nice meals on trips and so forth.
The sense of ownership a family has in the business brings about a common sense element when it comes to spending that is hard for mega companies to manage.
It is not just about money
Large companies are compelled to report every three months according to how they are trading. A CEO, with quarterly reporting, is drilled by analysts and investment banks on the earnings per share from quarter to quarter.
A family-owned company has a personal attachment to the brand and reputation of the business. The family business often has a driving passion and ethos that goes beyond generating revenue.
The ability of a family-owned business is one of the reasons why family-owned business has higher employee engagement than non-family firms (Azoury, Daou, Sleiaty, USEK).
The large number of family offices is a key indicator that the family model is well placed to create great outcomes while keeping the family culture alive.
You cannot run from a mistake
A large ASX listed company can make a mistake and the CEO can lose their job, but with gigantic salaries it is not really a significant issue.
In a family-owned business, if the head of the business destroys a legacy they have to live with that for the rest of their life. They have to explain it to their parents, siblings and children.
It is this primary reason for being more debt averse, and taking on fewer business acquisitions, that has led to the increased long-term profitability found by the Harvard study discussed above.
The long-term is what counts
Many great investments will take decades to fully recover their value. With a career span for many senior leaders spanning 3 to 5 years: the ability for a family to plan across generations gives them a patience that cannot be achieved in most publicly traded companies.
Substance over form is what gets you there
Many large corporates are dominated by policy and procedure which sometimes does not actually achieve anything. A family business is able to tailor their governance model and their business practices to what works and do away with “noise” that a government body or latest fad will impose onto a company.
If a family business is able to deal with the conflict in a family and apply professional practices to the business you have the recipe of a dynamic and formidable system of governance.
It is fair to say that many large companies have fantastic business practices that a family-owned business should and can learn from. However, the blanket application of ASX business practices to a family-owned business should be looked upon with alarm. A family-owned business has many natural competitive advantages that a large publicly traded company cannot hope to emulate.
If you are running a family owned business it is critical to engage a firm with a pure focus on making family-owned businesses great. Sadly many professional services firms, who are not focussed on one opportunity, will quickly throw “family business” into the “private equity” service lines.
A family-owned business has many unique advantages not only from asset protection, taxation and reporting sense, but also in terms of strategy and succession. Make sure you capitalise on them.
