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Family firms are better – so what else is new?

Barbara Murray is executive director of the Family Business Network.

A recent Newsweek article sung the praises of family businesses on the basis of a report it commissioned by Thomson Financial. Using stock market indices, family firms "outperformed the pack" across Europe, the report found. Case studies such as BMW, LVMH in France and Acciona in Spain illustrated the essential differences that lead to competitive advantages in the consumer and capital marketplaces.

So what's new? It has been well documented for nearly ten years now that family businesses can outperform their joint-stock counterparts. What's new is the refreshing sense of objectivity that is becoming more apparent in media reports. This is happening alongside a positive trend that recognises the importance of family businesses in economies around the world.

Combining the best of both worlds
What is not new to followers of family firm performance is the fact that publicly-quoted family businesses outperform their non-family counterparts. This was first documented in 1989 in a Stoy Hayward study carried out by the London Business School. It showed that over a 20-year period the group of family controlled PLCs on the stock exchange outperformed the index by nearly 30%. Similar results were documented in the US where 165 family firms outperformed their non-family counterparts.

The question is why? Maarit Koivisto, the fourth-generation president of the Finnish building concern Onvest Oy, attributes the strength of family businesses to their sustainability and the patience of their leaders. "Owners are not as anxious to take out profits as investors are."

Bill Gordon, chairman of the Family Council at the wines and spirits company William Grant & Sons, reinforces this long-term outlook. "Our long-term vision and investment policy towards building and nurturing outstanding brands such as Glenfiddich, Balvenie and Grants Family Reserve is a major advantage over our larger publicly-owned competitors," he says.

But "patient capital", as Koivisto puts it, has more facets to it than just an investment strategy. People who choose to invest their earned or inherited wealth for the long term usually forego financial benefits in the short term. To feel sure this is the right thing to do, they wish to have a much closer connection to the business than would be the case with anonymous investors.

While some commentators would say therein lies the problem – interfering owners – the opposite is being said in informed circles.

Joachim Schwass, a family business expert from the Swiss business school IMD, believes certain family firms have a natural advantage. "Publicly traded family businesses have the potential to combine the best of both worlds: on the family side, a values based strategy, a long-term – often generational – horizon, and an institutionalised memory represent strong added value to the business."

As for William Grant & Sons, these values are embedded in the family business. Says Gordon: "Our passion for exceeding expectations is something we have grown up with that is shared by everyone in William Grants. Ours is a long felt, deep passion which stems from being family owned. It is a passion which goes much deeper than fulfilling shareholder expectations – our publicly owned competitors just don't have it."

Alden Lank, a founder of the FBN and author on business governance, agrees. "Successful family companies' owners are typically not in the game for a limited period," he says. "Business families believe that they must see that their firm is managed in such a way as to ensure that its value will be enhanced from generation to generation. They typically do not look for an increase in earnings per share every quarter and can be called 'the patient breed of capitalists'."

Custodians of the future
Family business owners who follow a multigenerational strategy often regard themselves as custodians of the business. They want to pass on to their own children what they received from their parents. They want a greater legacy. Lank calls for staying power. "Patience requires vigilance if the worth of the business is to be enhanced by each generation." He also believes vigilance is the essence of both family business governance and the passion which keeps the family close to the action.

Indeed, one commentator in the Newsweek article concluded: "If you want to boil it down to one sound bite: 'someone's minding the store.'" Gordon believes custodianship strengthens the brand and brings the best people into the business. "We see ourselves as stewards for the next generation and aim to hand over a stronger, larger more commercially successful business," he says. "We also see ourselves as pioneers, carrying forward the legacy of William Grant with a performance culture that is the envy of our competitors and an entrepreneurial culture that ensures we punch above our weight."

Onvest Oy's Koistovo agrees this closeness to the business has two sides. One is so-called patient capital, the other quick decision-making. "In companies where the final decisions are made in the small family circle there's very little bureaucracy. Owners who take part in the business operations are well aware of everyday life's reality and can make quick decisions when needed."

Model businesses
Ultimately the focus is on how businesses govern themselves and the attention being paid to family businesses is bearing fruit not just for family entre­­preneur­ship but for mainstream business too. Well-governed family businesses are a model for other firms. Indeed, family-controlled public corporations are increasingly under scrutiny to see what they're doing so well.

Schwass believes family PLCs welcome the rigours required to maintain PLC status. "The financial markets bring an imperative financial discipline, a need for transparency and effective governance systems," he explains. "These are complementary qualities which can create meaningful synergies if combined under the umbrella of a publicly traded company."

Much of the current attention to family businesses is focused on those who have gone public. This can partly be explained by the ongoing growth in demand for "mass prestige" sectors where companies like LVMH with high end brands are enjoying growing demand from people who now want to enjoy a piece of luxury. Luca Garavaglio of the Italian drinks group Campari has been observing family business PLCs in other sectors too. "BMW clearly shows that [family firms] can outperform competition not only in light industries, but also in highly capital intensive sectors."

The common denominator, says Garavaglio, is the quality of management.  "The opportunity to really have the best of both worlds – the opportunity to take a long-term view, since management is not as obsessed with quarterly reports as it is in private companies – but having at the same time a professional and committed management team."

At BMW, it is known that the Quandt family provides 'mandates' which set out their family-investors values and ethics, guiding management decisions without interfering in operations.

If 'public' family businesses are doing so well by demonstrating a form of governance which leverages their patient capital and passion to a distinct advantage in the marketplace, why is going public usually anathema to many business-owning families? But Schwass cautions those interested in going public. "The stock market seems to work best for family businesses which experience rapid growth and strong funding requirements."

FBN treasurer Anthony Travis says going public has profound implications for a business. "The initial listing of a part of the shares of a family owned business is not a small or simple matter and demands substantial and long-term changes," he says.

"The dividing line between privacy and transparency is not cast in stone and the additional public disclosures demanded of a listed company can lead to considerable debates within the business as to whether such disclosures are culturally acceptable."

How do unlisted family businesses become well-governed entities? By following the same rules of governance required for public concerns, says Koivisto, who notes that  Finland's industrial bodies have already drawn up the corporate governance rules for listed companies. "Even though Onvest is unlisted we publish all our result information."

Other countries have been active in creating governance guidelines and best practices for unlisted family businesses: the Dutch chapter of the FBN has published best practice guidelines while family business owners in Brazil recently drafted their own governance protocols.

It is a move in the right direction to see best-practice and good results being lauded, and to know that all family businesses can leverage their instinct for patient capital and minding the store. The other part of the magic mix is, of course, being in the right sectors.

Bill Gordan, BMW, fbn, murray, newsweek, PLC
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