Tony Bogod is chief executive of the BDO Centre for Family Business and a partner at BDO Stoy Hayward.
In April, Newsweek reported that family companies outperform their rivals on all six major stock indexes in Europe. There would seem to be a case for non-family firms to model themselves on their family-firm counterparts. Tony Bogod asks whether this is likely or, for that matter, possible
Newsweek let the cat out of the bag. In April, the international business magazine trumpeted new research, carried out by Thomson Financial, showing family companies were "outperforming their rivals on all six major stock indexes in Europe, from London's FTSE to Madrid's IBEX."
The difference in performance, tracked over 10 years to December 2003, was striking. An index based on Germany's 10 fastest-growing family companies grew by 206%, compared to 47% for non-family companies, for example. Even in Italy, where the $18bn Parmalat affair has overshadowed the performance of family business stocks, these still performed considerably better, on average, than non-family counterparts.
The fact is that Europe's top quoted family businesses have demonstrated spectacular levels of growth in the past decade. According to Newsweek, Acciona of Spain grew by 373% between 1993 and 2003, while French Sanofi-Synthelabo managed 576%; but both were dwarfed by the family-owned Swiss digital TV security firm Kudelski, which mushroomed by 3,727%. All this begs the question: what have they got that non-family companies lack? And would it be feasible for non-family firms to emulate them and thus share in their success?
The benefits of listing
As mentioned by Barbara Murray in the last edition of Families in Business, to those of us who work with, or in, family business, the fact that they figure among some of the most successful companies on the planet is hardly news. But given the above figures, there seems to be more to it than just the family influence. Family firms are certainly very different in nature to non-family businesses (and some of these differences can be significant factors in their success) but this does not necessarily make them better performers.
Many tend to grow slowly, if at all, as a result of family agendas, personality clashes, dislike of change or resistance to recruiting vigorous outside management. Less than 30% make it through to the second generation and only 10–15% survive through to the third. So this is not just about family businesses versus non-family businesses: rather it is about their relative performance on the stock market. I believe it is the very fact that a family business chooses to float that points to the fact that they have one of the critical ingredients for success in family firms.
We all know that one issue that is fundamental to long term success in large businesses is 'professionalisation'; or the ability to over-ride personal interests in order to ensure the company is run in a transparent, professional way. This is about proper governance, best quality executives (whether family or not), or use of independent non-executives who have a real influence on the board. Professionalisation is, of course, a key pre-requisite for a stock market listing. So family businesses that opt for a listing must be receptive to a measure of professional management, transparency and external input and control – or they would not be able to go public.
Managing for the long-term
With a desire (and ability) to run the business in a professional way as a given, the real benefits of family leadership and ownership start to shine through. As Alden Lank discussed in Barbara Murray's article in the previous issue, families tend to be good custodians of assets, which is hardly surprising as these literally represent their children's inheritance. This means family bosses can have an astute and almost instinctive sense for creating returns without exposing the business to unnecessary risks.
Newsweek found examples of this uncanny skill among its top-performing European businesses. BMW's family board members were able to steer the business back from the brink of oblivion in 1997 and turn it into one of the most profitable companies in the car industry. The family owners of LVMH, the French luxury goods company, have meanwhile been able to turn the champagne brands in its portfolio from a minority revenue stream to a cash cow in the space of a decade, despite reportedly being advised to sell the assets many years ago.
This careful custodianship of cash is not universal, as Parmalat and a small number of other scandals have shown. But it is clearly much more entrenched than in non-family listed companies, where board members are more focused on whether their annual 'earnings per share' growth will satisfy the institutions and public shareholders.
Strong cultural values
A second major advantage that family firms tend to have over their non-family counterparts is that they classically have extremely strong, pervasive cultures. For founding fathers (and mothers), the business is not just a way of making money; it is usually also a way of life and possibly a statement of their ideals.
Family companies that make it through to later generations may literally carry this culture in their genes. And it is not just found amongst family members – their most trusted employees are likely to have similar views and values.
Having a strong culture with identifiable values has been recognised as important to the business since the time of Henry Ford. Today, its role in business success is amply demonstrated through family-owned companies such as Mars or SC Johnson, the privately-owned domestic cleaning products company whose second-generation owner-president Herbert Fisk Johnson famously said in 1927: "The goodwill of the people is the only enduring thing in any business. It is the sole substance... the rest is shadow".
A formula for non-family firms
Can non-family firms emulate these features of family businesses to create a greater level of success? Theoretically, it would appear so. It is well-known that corporate leaders who are inspirational, dedicated and hold clearly-defined values are able to demand better levels of performance from their staff and their business. Richard Branson or Stelios Haji-Ioannou have both created strong and successful corporate cultures reminiscent of those found in family business.
In essence, the kinds of returns that listed family businesses produce are exactly what shareholders in other quoted companies are after. With the same goals, it would seem logical to assume both types of business could achieve the same financial results. In practice, however, it may well be that the positive benefits of a significant family shareholding are difficult to re-create in a non-family listed firm.
The strength of businesses created by Branson, Haji-Ioannou and others comes from the fact they are founded by entrepreneurial owners, led by inspirational leaders, and not the traditional listed CEO who has risen through the ranks. It is hard to see how a hired hand can engender the kind of corporate culture seen in family businesses, no matter how good their training or the values they espouse. The current rewards system seen in the higher echelons of listed companies can by definition do little to encourage the kind of financial stewardship characteristic of family businesses.
Issues surrounding executive pay are the subject of wide debate but it is clear the prevalent model in most non-family listed businesses today has little to do with the typical family firm, where the payback for the top position is not in the form of a share option gains, but a stake in the business upon departure. Even that reward is mostly reserved for the business leaders' heirs rather than the leaders themselves.
It seems unlikely most non-family listed businesses will be able to achieve the kind of forward-thinking family business philosophy which was eloquently summed up by another member of the Johnson family, Sam, when he said: "We should worry not about whether we have lived up to the expectations of our fathers... but whether we, as fathers, live up to the expectations of our children."
A topical example
A stark illustration of the positive impact of family leadership on a listed company's fortunes is provided by Marks & Spencer, perhaps the most famous of British retailers. Up until the mid-1990s the company went from strength to strength, thanks to the stewardship of two generations of the Marks family and the leadership of Sir Richard Greenbury, a talented retailer who stuck closely to the family's values. As the family connection grew more distant in the late 1990s, however, the business floundered.
This is not to say the departure of family owners will automatically cause problems for a business, listed or otherwise. What does seem to be apparent is that, once listed, family businesses have a knack of returning long-term shareholder value that can be potentially very difficult to reproduce elsewhere.