Jon I Martinez is the Jorge Yarur B Professor of Families in Business at ESE, the business school of University of los Andes in Santiago, Chile. He is also a counsellor and board member of several business families.
Family businesses are the backbone and the engine of the dynamic and market-oriented Chilean economy. And the signs are that they could become an even stronger force in the future
Family firms are the predominant form of business organisation in Chile, as is the case in most Latin American countries and other regions of the world. They cut across all sizes and industries. In this article we will see the characteristics of large business families, as well as the management and governance practices of average family firms in Chile.
Chile is located at one of the extremes of the world, in the Southern Cone of South America, bordering the Pacific Ocean, between Argentina, Bolivia and Peru. With an area of 750,000km2, the country has a unique geography, as it's one of the longest and narrowest countries in the world. Due to its 6,400km of coastline, it covers a wide range of climates, from the driest desert in the world (Atacama desert in the north) to the frozen glaciers in the south.
Discovered by Spaniards in 1536, the country remained under the Spanish crown until it declared its independence in 1810. Since then on Chile has exhibited a long history of political stability and democratic governments, with a few exceptions.
With more than 15 million inhabitants, predominantly urban (85%), its ethnicity and religion are quite homogeneous: 95% of the population is white and white-Amerindian, and 89% are Roman Catholics. The official language is Spanish.
The economic environment
Chile is a developing country with one of the highest income per capita in Latin America: about US$5,000 in nominal terms and $10,000 in purchasing power parity.
After decades of slow growth, increasing inflation, and protectionism under the import substitution paradigm, in 1985 Chile started a period of unprecedented economic growth in its history. Thanks to its pioneering reforms initiated a decade before, which opened up the economy and installed free market conditions, Chile exhibited an outstanding economic performance for more than 15 years, with an average annual GDP growth rate above 7%. After a slowdown caused by the Asian crisis and other internal issues, the country is returning to higher rates in 2003.
Nowadays, the Chilean economy is one of the most vibrant emerging economies and is favoured by foreign investors for the stability of its institutions, a market-oriented economy which guarantees free competition, and increasing opportunities due to the trade agreements recently signed with the EU, the US, and several other countries in the five continents.
The opening of the Chilean economy (average tariffs are below 5%) forced local companies to compete abroad. The four largest exporting industries are mining (especially copper, where the country is number one in the world); fresh fruit and vegetables; fish and sea food (especially salmon, where the country is also the first exporter in the world); and forest products, like paper pulp and timber. Another booming export industry is wine.
Family companies in the Chilean economy
According to research performed by the author a few years ago, 65% of the Chilean firms above a certain size classified themselves as family-owned or controlled. Our estimation is that if we include small firms, the percentage of family business among all firms in Chile would be well above 80%.
Family companies in Chile are relatively young. Only 16% of family firms have more than 50 years of age, while 32% are between 25 and 50 years. However, there are old family firms as well. According to the report 'The World's Oldest Family Companies', published by the Family Business Magazine a year ago, the oldest family firm in Chile is Hacienda Los Lingues. Founded in 1760, this is a 4,000-hectare ranch owned and run by the Claro family, which includes a small and traditional five-star hotel and one the most prestigious horse stables in the Americas. However, the oldest firm that has remained in the same family since its inception is Productos Collico, located in Valdivia (about 900km south from Santiago, the capital), and founded by the Kunstmann family in 1853. This 7th-generation family owns and runs a mill, a yeast company (in a joint venture with an Australian multinational firm), and a brewery (in partnership with the leader of the Chilean beer market).
During the 1990s, there was a massive landing of multinational companies throughout Latin America, as a consequence of a less regulated economic environment, greater political stability, privatisations, and better perspectives of economic growth. Chile was not the exception. Multinationals grew from 15% to 35% of the 500 largest companies in the local market during the period 1991-1999. State-owned firms counted for 15%, and the remaining 50% were local companies, most of them family businesses.
Large business families
Like in most Latin American countries, large business families are called Grupos. These business conglomerates are mostly family controlled, have diversified assets and operations in related and unrelated industries, are usually large and therefore exert a significant influence over the local economy, and are relatively young: their leaders are in the first or second generation. However, Chilean Grupos differ from their neighbour counterparts in some respects: they tend to be more professional and international as they were forced to compete in an open economy, and they have less influence in the political arena.
The majority of these large business families have a presence in the stock market as they control publicly traded firms. According to a recent study by Equity, a local consulting firm, 40 families are present in the stock exchange. Ten of these families concentrate more than 60% of the 77 family-controlled companies that are listed in that market. These 77 firms represent 45% of the 171 companies listed in the stock market, excluding financial institutions, social and sports clubs, and schools. In fact, the three main economic groups in the country: Angelini, Luksic and Matte are business families that control 13% of those 171 public companies. Some of these companies are also listed in the NYSE, as American Depositary Receipts (ADRs).
Regarding the distribution by industry or economic sector, large business families tend to concentrate in investment holdings, extractive industries (agriculture, and forests, fishing), food and beverages, and maritime services, which count for 50% of the firms. In contrast, non-family firms are more concentrated in the electric and other public utilities sector, metal-mechanic, and mining. These industries tend to be more capital intensive.
Practices of family firms in Chile
Our research, done a few years ago, compared characteristics, management and governance practices of family firms, non-family firms and subsidiaries of foreign multinationals (MNCs) in Chile shed light in a number of interesting topics. The companies that answered this questionnaire were in a range from small to large, excluding very small and very large firms. The average annual sales for family firms is $10 million, while for non-family ones is $21 million, and for foreign firms is $41 million.
Let us start by co-management or co-leadership. Family firms tend to have more co-leadership than non-family firms or subsidiaries of MNCs.
Regarding the length of time at the top as CEO or managing director, it is clear that family firms are much slower than non-family firms or multinationals in leadership renewal.
On governance practices, family firms in Chile are also behind their non-family or foreign subsidiaries counterparts. Although this is changing fast, especially among medium-size to large family companies, we think there is still a long way to go. In line with this, family firms tend to invite less outside directors to their boards. The average number of outside directors (external to the family or company) is 1.13 for family firms, 1.63 for non-family companies, and 3.43 for foreign firms.
Family and non-family firms do not differ much when dealing with compensation policy, but they do pay less than subsidiaries of foreign firms. With respect to dividends policy, Chilean family firms tend to be more conservative than non-family companies and foreign firms. That is also true for debt policy. Family firms are slightly more conservative than non-family firms and clearly more than foreign subsidiaries.
There are three indicators of the level of 'professionalisation' of the company: the use of a budgeting system, the appraisal of executives, and the strategic planning of the business. The three of them clearly show that family companies are less professional than their non-family and foreign counterparts, especially these ones. The comparison is especially tough when comparing family and foreign firms. Apart from the family ownership or management, this difference could be explained by the size of the firms, as foreign subsidiaries in our sample are in average four times as big as family companies.
Family companies are the backbone and the engine of the dynamic and market oriented Chilean economy. Two thirds of the medium-to-large companies are family owned or controlled. When we include small firms, figures go above 80%. In the other end, about half of the companies in the stock market are controlled by 40 large business families. These families tend to conduct their businesses in a very professional way.
Nevertheless, when we observe business practices of the average family firm in Chile, the reality is different. These practices indicate that family firms are less professional and advanced in management and governance issues when compared with non-family companies and subsidiaries of foreign multinationals. It is possible that size matters in these issues, and therefore, given that family firms are smaller in average, they could be in a former stage of development.