The growing power of family businesses

Research shows the family business sector as a whole is increasing, and they’re outperforming their non-family peers on multiple levels.

Despite the forecasts of doom, family businesses are thriving as never before. Some of the world’s biggest multinationals, from Walmart to Samsung, from Porsche and Ford to BMW, are run by dynasties with enormous power. And it’s growing.

Most family businesses are private, but about a third of the Fortune Global 500 companies are founder or family controlled. And 40 per cent of the major listed companies in Europe are family businesses.

New research from consultants at McKinsey also finds that family businesses are important in emerging markets, accounting for about 60 per cent of private-sector companies with turnovers of $1 billion or more.

Indeed, around 85 per cent of businesses in South-East Asia with turnovers of $1 billion are family-run. Add to that the 75 per cent in Latin America and 67 per cent in the Middle East. Even in China, a socialist market economy, the research found that about 40 per cent of private firms are family businesses.

This is not a sector that’s shrinking. By 2025, McKinsey forecasts that there will be more than 15,000 companies worldwide with at least $1 billion in annual revenues, of which 37 per cent will be emerging-market family firms. That means the influence of family businesses is likely to increase. With the growth of emerging regions, says McKinsey, more and more family businesses are set to become leading companies in the next 10 to 15 years.

Why such growth? McKinsey says that one thing that sets family businesses apart from non-family businesses, and businesses in the corporate world, is their long-term time horizons. They are very different from corporate businesses that are focused more on appeasing shareholders with short-term profits.

Shareholders in family businesses, relying on dividends, tend to have a longer-term point of view than their counterparts holding shares in listed companies. By taking a longer-term view, they can divert money from cash cows to new industries that might take a long time to produce results. And they can keep management under control by exercising tight control of their empires through family controlled trusts, which can have more power than boards, and by slotting family members into managerial positions to keep them focused on the long term.

Secondly, family businesses are run by owner-managers who can move much more rapidly when there’s no need to pass decisions up a chain of command or in front of an uncooperative board. Also, the strong culture in family businesses ensures there is a greater alignment between owners and managers. According to McKinsey research, these companies’ top-management teams scored 4.1 out of 5.0 and had a felt sense of emotional ownership of the business.

McKinsey says family businesses also tend to have a home-ground advantage. That’s because they tend to be closer to their communities, giving them considerable influence across the value chain.

Other research in the Harvard Business Review, which compiled a list of 149 publicly traded, family-controlled businesses based in the United States, Canada, France, Spain, Portugal, Italy, and Mexico with revenues of more than $1 billion, found that during good economic times, family-run companies don’t earn as much money as companies with a more dispersed ownership structure. But when an economy slumps, family firms far outshine their peers, which means they would outperform over the long term.

The study also found family businesses are less leveraged. From 2001 to 2009, debt accounted for 37 per cent of their capital, on average, compared with 47 per cent of non-family firms’ capital. Also, family businesses tend to be frugal in good times and bad. They keep the bar higher for capital expenditure. They acquire fewer, and smaller businesses, making acquisitions worth just 2 per cent of revenues each year, while non-family businesses make acquisitions worth 3.7 per cent, or nearly twice as much. And they retain talent better than their competitors.

The authors of the study, Nicolas Kachaner, George Stalk and Alain Bloch write: “The simple conclusion we reached is that family businesses focus on resilience more than performance. They forgo the excess returns available during good times in order to increase their odds of survival during bad times.

“A CEO of a family-controlled firm may have financial incentives similar to those of chief executives of non-family firms, but the familial obligation he or she feels will lead to very different strategic choices.

“Executives of family businesses often invest with a 10- or 20-year horizon, concentrating on what they can do now to benefit the next generation. They also tend to manage their downside more than their upside, in contrast with most CEOs, who try to make their mark through outperformance.”

Whether big family firms will continue to defy expectations of their demise will depend on their ability to manage the uncharted waters ahead.

McKinsey says that the two big challenges are that the larger businesses will diversify and their business models may no longer be suitable. The second is succession, with only 13 per cent surviving to the next generation. These are the rocks that claim most family businesses.

The ones that succeed will be the ones that put in place processes to handle these transitions, while reconciling the family’s needs.