Study reveals strengths and weaknesses of family businesses

The majority of top managers and family business owners think that the nature of family firms helps them survive economic downturns, but they also believe that absence of meritocracy and rivalry among family members can affect commercial success.

These are the findings of a survey among 720 family business owners and executives from the Americas, Asia-Pacific and Europe by executive search firm Egon Zehnder International.

According to the report, released on 19 September, 56.3% of those surveyed said the biggest advantage of family-owned businesses is their long-term perspective on running the business.

“The greatest strength of family businesses is that they think in generations. Also, they tend to be less volatile, in both senior management and specialist positions,” said Jörg Ritter, co-head of the family business advisory division at Egon Zehnder International, who led the research.

“We’ve compared tenure of management board members and CEOs in family business and publicly listed companies and found that senior managers hold their posts for almost twice as long in family businesses.”

Over half of executives (53%) and 64% of family business owners think that this long-term agenda means that family businesses can afford to be more innovative than other companies.

Two out of three family business owners and 55% of executives also said the nature of family firms helped them cope with the economic crisis.

However, the survey shows that these strengths can often lead to shortcomings: over 60% of managers believe the lack of professional structures and procedures is the biggest disadvantage of family businesses.

Conflict among family members, driven by a lack of transparency and meritocracy, was also listed as an issue. Almost two-thirds of all respondents said they are aware of cases in which conflicts within families have got in the way of business decisions.

Doubts regarding the competence of family members working in the business are the most common causes of conflict (60%). The study found that while over half of family businesses owners (55%) believe management appointments are based on merit, just 38% of executives believe this.

There is room for improvement when it comes to integrating managers from outside the family, the study also found. Over 70% of the executives and family business owners surveyed believe formal integration procedures for non-family managers are crucial, but only one business owner in four said they have such processes in place.

With four in ten executives naming a lack of career prospects as the main reason why they would not work for a family business, the study says the separation of family and company interests, transparent decision-making processes and more attractive career prospects would help family businesses to attract the best managerial talent and improve competitiveness.

In fact, according to the study, when transparent governance structures are in place, managers benefit from the informal structure of a family business.

“Family businesses allow managers to become real entrepreneurs,” Ritter explained. “Once trusted by the family members and well settled, many family businesses are willing to give a share of the business enterprise or at least a very dynamic profit sharing to non-family CEOs who in turn can profit from real entrepreneurial responsibility. Also, as family businesses are usually less organised according to strict matrixes, they allow for greater organisational and creative freedom.”

“If family businesses are going to play to their strengths in the global competitive arena, they will have to adopt an even more professional approach,” the research said.