Warren Buffett famously said: "It takes 20 years to build a reputation and five minutes to ruin it”. These days, given the influence of social media and direct consumer feedback, the smallest issue can have widespread consequences for businesses. Not surprisingly, a survey by the Reputation Institute revealed that reputation is a top priority for 65% of business leaders. However, only 16% felt their organisation had the capability to manage their reputation comprehensively.
For families, the stakes are even higher. They only get one opportunity to build and preserve their good name. A study by UBS called Why do Family-Controlled Public Companies Outperform? The Value of Disciplined Governance demonstrates that family-controlled midcap companies come at a 30% valuation premium versus large and non-family controlled. This premium is undoubtedly driven by a number of the “usual suspects” such as superior earnings growth, but what is often underestimated is the impact of intangibles such as governance, culture and reputation.
Family businesses bring their successes and failures home in a very visible manner. When they are good, they are really good—the consuming and investing public attach a premium to products and companies led by iconic families. Trust is built so consistently over time that it comes to define the name. However, if issues do crop up, the prominent name means that word spreads quickly and dirt tends to stick. Furthermore, in this digital age some sectors of society welcome public opportunities to attack what they regard as the privileged classes, so there is a chance that any perceived problems may become a social media football driven by a wider agenda.
Many families today actively work on developing and polishing the family brand—through corporate social responsibility, family/corporate philanthropy or in other ways. The Guggenheim story is an inspirational tale of a family which successfully re-invented itself and created an instantly recognisable global brand. How many of us know how the Guggenheims originally made their money? It wasn’t from the arts.
The UBS study referred to earlier suggests working on the corporate governance and succession strategy of family companies can enhance their value. The traditional caveat for investors looking at family companies has long been concern about potentially ineffective or non-existent governance, succession issues, and fears about conflict within the owning family. Addressing governance issues in an effort to mitigate these fears and thus enhancing a family's “intangible” reputation can have the effect of bolstering the premium and creating very tangible value in the real world.