KEY CONCEPT

Family businesses tend to outperform companies with more dispersed ownership structures during economic downturns. Their ‘star’ quality is resilience — and it results from a set of strategic choices that put the long-term interests of the business first.

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IDEA SUMMARY

Family-controlled companies are associated with tradition and continuity, but that doesn’t mean they’re ‘behind the curve’. A recent study suggests that when it comes to sustainable performance, they can beat other companies hands down.

The study compared 149 large listed family businesses with similar non-family companies in seven countries — the US, Canada, France, Spain, Portugal, Italy and Mexico. The family-run companies didn’t earn as much as companies with more dispersed ownership structures in good times — but they far outshone them in bad and were more consistent over time. The study found that their average financial performance was higher across economic cycles from 1997 to 2009 in all seven countries.

What’s the secret of their resilience? Writing in the Harvard Business Review of November 2012, the researchers who led the study identified seven key characteristics common to family firms:

1. They’re frugal in good times and bad. Imbued with the sense that the company’s money is the family’s money, family-run businesses don’t spend more than they have to. They tend, for example, to have less luxurious offices/headquarters. This focus on frugality means they’re better able to withstand the ‘shock’ of recession.
2. They set the bar high for capital expenditure. Family businesses tend only to make capital investments in very strong projects. This means they miss some opportunities in good times — but it also means they avoid cash ‘black holes’.
3. They carry little debt. Between 1997 and 2009, borrowing accounted for 39% of the capital of the family businesses in the study but 47% of the capital of the comparison businesses. Family companies’ reduced reliance on debt means they don’t need to make big sacrifices to meet financing demands during a downturn.   
4. They acquire fewer (and smaller) companies. Generally, family companies prefer organic growth and joint venture or partnership deals. They avoid the risks associated with large-scale acquisitions.
5. They diversify. A large number of family groups, for example, Cargill, Koch Industries, Tata and LG, are far more diversified than the average corporation. In the study, 46% of family businesses were highly diversified, against 20% of the comparison group. CEOs of family companies told the researchers that diversification has become a key way to protect family wealth as recessions have become deeper and more frequent.
6. They are more international. Family companies generate more sales abroad than other companies. (Like diversification, this means they avoid putting all their eggs in one basket and hence spread risks.) 
7. They’re good at retaining talent. Family-run businesses tend to have lower staff turnover rates than other companies. They focus on creating a culture of commitment and purpose, avoiding layoffs during downturns, promoting from within and investing in employee development. (The family-run companies in the study spent an average of €885 per employee on training a year, the non-family companies just €336.)

These seven characteristics point to strategic choices that combine caution with ambition and focus on the future, not short-term performance. Executives of family businesses, say the researchers, tend to think in terms of 10- or 20-year investment horizons, “concentrating on what they can do now to benefit the next generation”.

To sum up, family-run companies avoid unnecessary risks, manage costs prudently, keep debt-to-equity ratios low — and they invest in organic growth and the development of employees.

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BUSINESS APPLICATION

The family business ‘model’ is a virtuous circle. The seven characteristics outlined above are a set of mutually reinforcing principles. Fewer acquisitions mean low debt. Low debt and frugality mean companies can afford to keep staff on when times are hard — and to make the kinds of investments that spread risk and safeguard the future. 

The model can be applied to other businesses. The researchers cite Nestlé, Essilor and Johnson & Johnson as examples of companies that are not run by families but appear to behave as if they are. (All, for example, maintain low levels of debt.)

Even companies under intense pressure from shareholders — and therefore less able to think 10 or 20 years ‘out’ — have something to learn. Family companies’ record on staff retention points to the importance of ‘intrinsic’ rewards such as job satisfaction. Note that the research links it not to financial incentives but to corporate culture.

At a time when economic cycles appear to be getting shorter and recessions more frequent, the case for copying the family-controlled company is arguably getting stronger.

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REFERENCES

• What you can learn from family business. Nicolas Kachaner, George Stalk & Alain Bloch. Harvard Business Review (November 2012).
• To prosper in a crisis, adopt the strategy of large family businesses. Alain Bloch. Knowledge@HEC (15th January 2014).

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