Are family businesses the weak economic link?

Are family businesses inefficient? A recent piece in the UK’s Daily Telegraph, headlined “Family-run firms are Britain’s weak economic link”, seems to think so.

It was drawing on research carried out by the London School of Economics, which it says found that second and third-generation firms generally had weaker management than non-family-run firms.

"People think it's a wonderful thing to pass on to the next generation but if you look at the management qualities of those firms they seem to be less well managed and less productive," co-author John Van Reenen, director of the Centre for Economic Performance and a professor of economics at LSE, told the Daily Telegraph.

But that’s not always the case, as another report from the Department for Business, Innovation and Skills in the UK shows. Released last week, the study by Middlesex University Business School looked at medium-sized companies, with revenues between £25 million (€29 million) and £500 million – 46% of which were family owned.

It found that just 32% of family businesses exhibited perceived weaknesses compared to 63% of their counterparts. They were more likely to be planning management improvements than non-family companies (44% compared to 37%) and fell firmly into the middle tier of performers – not exactly the UK’s weak link then, are they?

So it’s hardly surprising that the UK’s business secretary, Vince Cable, recently lent his backing to family companies. Speaking at an Institute for Family Business event in November, he said family firms have the ability to be the backbone of what he calls “responsible capitalism”. The long-term nature of family businesses should also be encouraged, he added.

This long-term nature has boosted Germany’s economy, where the Mittelstand, dominated by family-run firms, is seen as the mainstay of the country. Its been powering Germany’s export-driven economy for more than a century – and its family links don’t seem to be harming the country.

Yet Van Reenen still believes that foreign takeovers of British companies should be encouraged – something many family business leaders will disagree with, even if they advocate professionalisation.

That’s because it’s common for family businesses to feel close links to the city, region or country where they were established.

Take Shepherd Neame, a brewer based in Kent that has sales of £120 million. Jonathan Neame, family member and chief executive, recently told CampdenFB that he wouldn’t sell the business, no matter how much he was offered. He’s committed to Kent – and a global company, with headquarters in Europe or Asia, probably wouldn’t feel the same links.

That’s the thing with family businesses – it’s not always about money and the bottom line. It’s about creating a profitable company, with employees and the community at the heart. “Responsible capitalism”, one could call it. In fact, a study by Brigham Young University in the US found that family-controlled public companies were more socially responsible – especially when it comes to the community and care of employees – than businesses where no members of the founder’s family was involved.

So what’s more important in the long run for the British economy (and other economies around the world) - family business demonstrating “responsible capitalism”, with a long-term outlook and a strong commitment to remaining in the UK, or a more profitable global conglomerate that will move its operations abroad at the first sign of better tax incentives or a cheaper workforce?