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Family businesses outperform their rivals

Families grinding out results from their businesses have a restrained appetite for growth but they are more concerned to avoid the humiliation of ruining them.

Family businesses tend to be small and niche, but, collectively, their influence on the global economy is significant.

Those which belong to Germany’s Mittelstand are at the heart of the country’s manufacturing miracle. Family companies are scattered right across Asia. Private banks in Switzerland are thriving, despite the credit crisis. Italy is kept going by a string of family businesses scattered across the north.

Berkshire Hathaway’s Warren Buffett, arguably the world’s most successful investor, has reaped rich rewards by putting capital behind family businesses and letting them operate just the way they always did.

In contrast, UK building societies like Northern Rock which demutualised to grow faster in the 1980s have fallen flat on their faces. Family-run nursing homes bought by listed companies, such as Southern Cross, have traded security for controversy.

According to Paris-based Oddo Asset Management, listed family businesses have generated growth equivalent to 9.4% a year, against 5.9% from the EuroStoxx index, since 1990. In France, the annualised performance of family companies is 9.6% against 5.5% from the CAC-All Tradable index.

Around 64.8% of French companies are family run, according to Oddo. The European average is 53.7%. England props up the bottom of the league table with 23.7% following corporate restructurings facilitated by City advisers.

Oddo’s European and French funds, which invest in family companies have shot the lights out against the opposition. Its French fund boasts a total 32.3% return over ten years, against a 15.4% fall from the CAC, earning itself a five-star Morningstar rating. Its newer European fund has produced a total return of 2.2% over three years, against a 12.3% drop from the EuroStoxx. Impressive stuff.

Why should family businesses do so well? Alex Scott, chairman of Sand Aire, his family business, told the Institute for Family Business: “This business is me. It is in my guts and it is in my demeanour, and I live it and I breathe it and I sleep it. And as an employee, or a shareholder, or anyone else, it is not you. It is part of the portfolio.”

Limited liability may well give directors the confidence to play the cycle by taking on growth strategies. But they are more likely to lead to higher boardroom pay than lasting success. Disciplines in private equity firms are better, but fouled up by leverage and investors expecting them to resell companies five years after purchase.

Families grinding out results from their businesses have a restrained appetite for growth but they are more concerned to avoid the humiliation of ruining them. Because family members trust each other, they are not afraid of asking each other awkward questions. They also bring to a business something which German sociologist Max Weber calls “traditional authority” maintained by custom and tradition.

Loyal workforces are the result. Jonathan Wild, chairman of UK tea merchant Betty & Taylors told the IFB: “Such is the strength of the culture that sometimes non-family behave more like family than family.”

Managements reciprocate loyalty by offering workforces generous benefits which feed a virtuous circle. When times are hard, both sides (often) make sacrifices.

Securing inter-generational succession can lead to stress, but things tend to get sorted out, if only for the sake of family pride. Shoe manufacturer C&J Clark was at war with itself in the early 1990s, but now it is one of the most progressive family companies in Britain.

It is not uncommon for families to advance loans to struggling companies on generous terms to keep them afloat. They pay attention to third-party directors and advisers, but do not carried away with grand strategies for fear of ruining the family fortune.

Third-party chief executives put in charge of family-controlled businesses tend not to take many risks. They may have executive control but ruling families have voting control. Decisions are slowed down as a result but this is not always a bad thing.

In contrast, former UK Treasury minister Lord Myners, argues listed companies end up being ownerless. This is because institutional shareholders tend not get involved in governance – except when it is too late.

Myners should know. He happened to lead fund manager Gartmore in its glory years, when it was under the protective wing of the Cayzer family. Subsequently, Myners moved on and Gartmore passed through the hands of a variety of limited companies, who enriched themselves at Gartmore’s expense before it was finally plonked on the stock market.

Stripped of much of its talent, Gartmore struggled and ended up being rescued by Henderson Global Investors this year.
 

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