On a cold, rainy February night, I connected through New York’s La Guardia Airport. The plane stopped short of the gate, and the passengers walked down steps to the tarmac to collect our gate-checked bags and walk about 200 metres in the rain to the terminal. This is the airport for America’s greatest city, I thought, yet it is clearly suffering from neglect.
The La Guardia experience made me think about public spending. I worried that my country was spending too much on short-term ‘expense’ items and too little on long-term ‘capital’. The impact of too much short-term perspective was right before my eyes in New York.
Throughout my career, I experienced tensions between short and long-term thinking. For public companies, the mandate is clear: Wall Street generally rewards and punishes on current profitability, and since management and the board are tasked to increase shareholder value, they pay close attention to the short term. Family-owned businesses, it is said, manage for the long term and pay far less attention to current profitability. As a result, family enterprises create more long-term wealth, at least that’s what I said to my boss and cousin, the CEO of our family company, J M Huber Corporation, when my division missed its profit forecast (he didn’t buy it).
Is the belief in long-term family company superiority true or is it an old wives’ tale to justify lacklustre financial performance? It probably depends on the company.
Public companies focus on earnings and are dependent on Wall Street for their capital. Their owners lack emotional ties to the company and can vote by selling their shares, something family owners generally cannot do. Furthermore, senior management compensation is leveraged via stock options, intensifying the stock focus.
But family firms also care about profitability. They don’t say, “our profits are way off, but it’s okay because we love each other”. The difference is that family owners and management don’t get rewarded or punished by short-term swings in profitability or ‘missing Street expectations’. In fact, increasing firm value in the short term potentially has negative consequences: higher estate and gift taxes. For this reason, outstanding family firms go without profits today for disproportionately more later. Weaker family companies, on the other hand, sometimes rationalise poor earnings on long-term thinking, but the profitability never catches up.
Excellent family executives can tell the difference between tradeoffs and excuses. The tradeoff is most evident in the way family companies treat employees. They generally are much more loyal to their employees than widely-held companies. In my experience working with outstanding American family companies, like Sheetz (high-quality convenience stores/restaurants), Granger (waste management and landfill energy), ABARTA (Coca Cola bottling) and J M Huber, I have regularly seen a philosophy of paying more than the market, often in the top quartile of benchmarks. Benefits are also frequently more generous. Some consider this paternalism. In the short term, profits undoubtedly suffer (family firms could get a huge spike in profits by aligning pay with markets, but they don’t do it).
In the long term, however, it’s an outstanding investment. Family firms have happier employees, and engaged employees lead to all kinds of great things: higher customer satisfaction, lower turnover, higher growth, higher quality, and stronger profits. It’s a major reason why comparably sized family-owned firms outperform their public peers by wide margins.
There really is a cost to short-term thinking, more than just getting caught in the rain at La Guardia.
William Goodspeed is an American business executive with extensive experience in family businesses. A member of the Huber family and longtime Huber executive, he serves on several family company firms, including Sheetz, ABARTA, Granger and Longo’s. He also helps develop next-generation family members for future leadership.