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Letter from the US: Family businesses investing in the long term

The root of family-owned advantage comes from many sources, such as a mutual loyalty with employees and a mission that matters. But a big factor is independence from equity markets and therefore intense earnings scrutiny. This allows management for the long term

Despite family businesses providing the majority of economic activity in the US, most business commentators and leaders view widely-held public companies as vastly superior to their family-owned counterparts. Almost no-one cites family firms as models of success—just consider the subjects of myriad business reviews from the best universities. These strong beliefs stem from the notion that large public firms are much more sophisticated and successful. There are, however, diehard family owners who claim otherwise, citing their ability to invest in the long term as a source of competitive advantage.

So who’s right? The answer is: both, neither and/or it depends. That’s not very satisfying, so let me explain.

There are two conflicting strategic forces at work here: the advantages of scale and relative market share versus the advantages of family ownership. Strategists have shown for decades that size confers competitive advantage. This is due to a combination of economies of scale and the experience curve, which drive costs lower and quality higher. This is just management consultant speak for the fact that in business, size really matters.

When it comes to size, widely held public firms generally have an advantage over family-owned businesses. Public firms can access much more capital via equity markets and can grow faster. They can also take bigger risks because their shareholders usually are not dependent on one company for their livelihood (unlike with family firms).

So when people cite public company superiority, they may be right, but they also may be comparing apples to oranges. In the US, widely held public companies tend to be much bigger than their family-owned counterparts.

But the answer changes dramatically when firms are the same size. Once the advantages of scale and experience are eliminated, family-owned companies have a very strong edge. Many studies have demonstrated that family-owned firms have a substantial performance advantage over similarly sized widely held companies in the long term.

The root of family-owned advantage comes from many sources, such as a mutual loyalty with employees and a mission that matters. But a big factor is independence from equity markets and therefore intense earnings scrutiny. This allows management for the long term, such as increasing investment during an industry slump and a maniacal focus on developing core competencies over decades.

William GoodspeedI was fortunate enough to experience this as the president of Huber Engineered Woods in the late 1990s. At the time, the structural wood panel industry in the US was languishing due to over capacity and tepid demand. We were haemorrhaging money. My team and I desperately sought ways to cut costs to limit the damage. But my boss, the chief executive of JM Huber (a family company founded in 1883) and great-grandson of the founder, encouraged me not to cut Research & Development and Marketing. In fact, he encouraged me to double down in these areas, which we did. The result was a wave of product innovation at a time when our larger public competitors were cutting back, helping us build products, brands and core competencies that still bestow advantage twenty years later. If we had been public, it would not have happened.

What I experienced taught me the power of family-ownership: size disadvantages can be overcome by investing in innovation in good times and bad.


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