". . . when they are strong, they are the best . . . when they are bad, they are horrid"
Katherine Graham, former family CEO of the Washington Post Company
The perception of family businesses by the public is still too often one of under-performing companies, heavily rooted in tradition, unable to cope with change and progress. For journalists, family feuds and crumbling empires are a much more attractive topic than performing and innovative companies. On the other hand, listening to some enthusiastic advisors to families, one could believe that family businesses are the best form of enterprise – over-performing enterprises and havens for all stakeholders. The reality is neither black nor white. Here, we will add some colour to the debate, using existing research and INSEAD's experience with large family firms.
Several researchers tried to answer the question of whether family businesses perform better than non-family businesses and addressed it from several viewpoints. Performance is not a well-defined concept and family businesses are not a homogeneous species: the term 'family business'includes small or large companies, founder-companies, multi-generational businesses, private or publicly-traded businesses, and young and old companies. Also, the presence of the family in key management or board positions makes a difference. Thus, the question calls for multi-faceted answers.
Business performance can be measured through business growth, profitability, margins, return on equity, market value and stock price (for traded companies). Performance can also be measured in terms of human resource management: stability, training, salary or even the contribution to the vitality and renewal of the economy. For family firms, performance can also include contribution to the well-being of an important stakeholder -– the family itself.
Financial performance: the evolution of stock price: The stock price of publicly-traded companies is a relatively easy measure of performance. Several studies, both in the USA and in Europe, converge to establish that publicly-traded family-controlled companies out-perform the stock market in terms of appreciation of the share price. The Oddo family business index on the Paris stock exchange continuously out-performed the market. Over a period of 10 years (1991 to summer 2001), the Oddo index progressed by 446%, while the SBF250 index, made up of the 250 largest companies, progressed by 233%. The Oddo index also showed a higher performance of family companies in most other European markets. In the UK, Stoy Hayward established that UK£1 invested in quoted family companies grew to UK£11. 11 in 20 years, versus UK£8. 72 for non-family companies.
The Loyola University index of family businesses listed on the Chicago stock exchange demonstrated a higher stock price appreciation than the average market indices, both local and national, over a 5year period (1990–1995). An analysis conducted by Netmarquee with Oakland University established that for 200 familycontrolled companies, annual returns to investors during a period of 20 years averaged 16%, as compared to 14% for the Standard & Poors 500 stock index (study published in 1996). According to the authors, family-controlled companies tend to reinvest more of their earnings in the business and to stay more focused on core operations. Also, the top managers of family-controlled companies appeared to have greater motivation than corporate managers to do well for their companies rather than just for themselves. A study by the Pitcairn trust in association with Wharton Business School established that US$1, 000 invested in an index of 132 quoted family companies would have been worth US$14, 000 after 20 years, against US$8, 000 in the Standard & Poors index.
Our own research at INSEAD also suggests a higher appreciation of family-controlled companies on the Paris stock exchange: the total capitalisation of the family companies that were present amongst the largest 250 companies on the stock exchange both in 1993 and 1998 was multiplied by a factor of 2. 5 over the fiveyear period, while the capitalisation of the other companies also present in both years was multiplied by a factor of 1. 8.
It should be noted that these stock market studies are observations and do not analyse, for instance, the impact of economic sectors on stock performance. Indeed, INSEAD studies of the French and German stock markets show that while patrimonial companies are present in most sectors of the economy, they have a particularly strong presence in some sectors, for instance luxury or retail, while they are almost absent from a few sectors like energy, utilities and banking. Further studies might also take into account the distribution of dividends.
Ratio analysis: a complicated exercise: The studies of financial ratios are usually more complex and the results more difficult to interpret than the studies of financial performance. They often entail the comparison of 'matched samples' of family and non-family businesses, and the willingness to dissociate the family influence from other factors, such as the economic sector or the firm size.
Risk and return: There is a consensus that family businesses have a higher risk aversion and reluctance to borrow money over the long term (IESE, Manchester Business School, EM Lyon, among others). While some studies concluded that family firms preferred to sacrifice growth to control, several established no difference in the growth of family versus non-family companies (Manchester and Warwick in the UK, Ohio State University in the USA). The explanation may lie in the fact that family companies seem to be better at selffinancing growth.
Other results seem more mixed, probably reflecting the difficulty in isolating the 'family factor'and the diversity of methods and types of family businesses. For instance, an Oregon study established that familyowned nursing homes provided higher levels of care but were less efficient than non-family nursing homes. Researchers from the USA (Ohio State University) and the UK (Warwick) found no significant difference on several measures of performance of family versus non-family companies. A French study (by G Charreaux) found no difference in return on equity, though family companies had a higher market valuation.
Several studies, on the other hand, suggested that family companies had higher financial performance. Manchester and IESE evidenced a higher profitability of family companies. French researchers Amann and Allouche demonstrated an over-performance of family companies on most financial as well as human resources measures. According to their study, family businesses have higher profitability, return on equity, higher capacity to self-finance growth as well as lower debts. They invest more in employee training, have less difference between the higher and the lower salaries of the company employees, and their employees have been employed by them for a longer time period. A recent California State University and University of Cincinatti study (2001) also suggests that firms operated by the founding family have greater value, are operated more efficiently and carry less debt than other firms.
The role of family members
The presence of family members or not in some key functions was shown to have an influence on the companies'performance, though this is, again, contrasted. An IESE study established that a non-family Chief Financial Officer (CFO), when given enough influence, was associated with higher return on equity than a family CFO. A Harvard Business School study established that family-controlled corporations performed better, as measured by return on assets and market valuation, especially when the Chairman of the board was a family member.
Resilience over the long-term
A very different approach to performance is to look at the resilience and the capacity of renewal of business families over time. In our research with large, multi-generational family firms, we often encountered families that had resisted many challenges and sometimes even had completely shifted away from their initial business sector into another. This form of performance is not easy to measure when looking at individual company performance but contributes to the strength of the economy.
Several European families have seen their plants confiscated or destroyed by revolutions and wars, and yet have reconstructed them. Families have also evolved over time from ailing industries to new industrial sectors. Others demonstrate their ability to resist management 'fads': at the time of the 'mega-mergers', analysts predicted that companies like PSA Peugeot Citroën were doomed to merge or to disappear. Two years later, PSA posted strong financial results. The problems faced by mega-merged companies would seem to confirm that their more discreet strategy was viable and sound. Our study of the top firms on the French and German stock markets indicates that the number of traded family firms increased between 1993 and 1998, and that these companies were older than others. Current times of uncertainty will be another test for the stability and resilience of business families.
'Performance'has a variety of facets. It can be looked at from the financial, stakeholder and family viewpoints. It must also include a time frame discussion: poor performance over four quarters may be totally unacceptable to stock analysts but does not mean much when one thinks in terms of generations. Furthermore the notion that family firms perform better or worse than others implies a simple dichotomy between family companies and non-family companies. This seductive dichotomy falls apart when considering the diversity of structures and degrees of family involvement in ownership and control. So, not only is performance hard to quantify, but the concept of a family business itself is open to debate. Nevertheless, what the recent literature reveals is that family firms more than hold their own. Especially if the family is wise enough to appoint a non-family chief financial officer!