Why family businesses outperform their publicly traded rivals

Hint: Family businesses think long-term

“Some companies are not making the investments that would make sense over the long run because of these short-term pressures. Short-termism, effectively, assumes that the world in five years will be the same as the world today. Moreover, in most industries, that’s a pretty bad assumption.” — Sarah Keohane Williamson, FCLTGlobal 

In an age when a person with a computer can become a dot-com billionaire overnight, the idea of a family-controlled business that is passed down from one generation to the next seems old-fashioned. Watching the headlines, it would be easy for one to assume family businesses are a dying breed. You may think that they are rapidly being replaced by corporations where meritocracy rules, capital runs free, and ownership changes quickly.

However, this transformation is not happening. The family-controlled firm is still at the heart of the modern industrialized economies.

90 percent of firms are a family business

Ninety percent of the world's companies are family-run businesses. While some are little more than corner stores, however, they still make up one-third of American firms with revenues of $1 billion and up. Also, 40 percent of such organizations in France and Germany, according to Boston Consulting Group.

Today’s family business is the exact opposite of the cobwebby firms of the past. These firms include such modern marvels that as Wal-Mart, Samsung, LG, and Foxconn. More importantly, family businesses deliver superior returns.

Credit Suisse analyzed financial data from around the world of 920 large family-controlled companies. It found that their share-price returns outperformed the global MSCI benchmark by 47 percent over the past decade.

Why would family businesses outperform modern publicly traded corporations?

The chief reason is their ability to think long term. A CEO of your typical non-family-owned public companies does not spend much time at the helm. The average tenure is less than ten years. Moreover, they are under constant pressure to maximize short-term results. At the end of the day, with just a few years at the top, the CEO is more of a caretaker than an owner. They have every incentive to maximize returns (and rake in their bonus) while the going is good.

Family businesses focus on the next generation

“I grew up in a family business... that really has provided the core of my belief in American small business, and in America's ability to grow and operate important businesses that can compete and be successful.” — Karen Mills

The leader of the family business, on the other hand, is focused on where their firm will be a generation from now. Horst Brandstätter, the owner of the German maker of Playmobil figures, ran his company for 54 years. He once gave a designer ten years to develop a new product line.

The Richardsons

Sean Silcoff's revealing feature, which you can find here, offers a rare glimpse inside James Richardson & Sons. The Winnipeg-based company is older than Canada itself!

It is one of the country's largest grain handlers. Today, it now has holdings in agri-foods, wealth management, oil and gas, and real estate. CEO Hartley Richardson is part of the fifth generation to run the company. Moreover, over the past 24 years, he has grown its revenues to $9 billion. Now he is facing the biggest challenge of his career: Who will take over when he is gone?

More than one family business had failed when control passed to children or grandchildren. Frequently they lack the performance traits and instincts to run a big enterprise. The Richardsons were afraid of that happening. They pushed the next generation out of the corporate nest to prove themselves before they could get a shot at the top job.

Their experiment was too successful. Many of the 20- and 30-somethings in the sixth generation are in no rush to return, after seeing and thriving in the outside world. Today, some in the family are questioning whether the next CEO needs to be a Richardson.

Hartley's father used to say that when you are born into their family, "you have grain dust in your blood." Whether the next leader of the company will exhibit that quality is suddenly an open question.

Concluding Thoughts

In a survey of more than 1,000 C-level executives and board members around the world, nearly two-thirds (65%) said the pressure to generate short-term financial results had intensified in recent years—and the overwhelming majority of these corporate leaders felt significant pressure to show commercial success within two years or less.

Liberate the executive ranks, boardrooms, and institutional investors from the tyranny of quarterly earnings guidance. Moreover, instead, getting them to embrace more meaningful metrics of success: from long-term return on capital to 10-year projections of economic value added.

For a family business, it is essential to develop the next generation of leadership. We assess their performance traits to see if leading the enterprise is right for them and then create a personalized leadership development plan for them.