“Rags to rags in three generations,” runs the old Chinese saw. The first generation makes the money, the second spends it and the third sees none of the wealth.
That may be true proverbially, and it may apply sometimes in real life. But new research by Ivan Miroshnychenko, Alfredo De Massis, Danny Miller and Roberto Barontini shows the reality is somewhat different: family-controlled companies that are publicly listed grew significantly faster than non-family-controlled counterparts.
Family is, of course, a broad term. For some, it denotes tiny, often artisanal, enterprises like butchers, bakers and winemakers. For others, it designates the much bigger Mittelstand groups typical of Germany, Switzerland and northern Italy, which have acquired significant size and international status through intense specialization on one or a handful of products, in which they may be world leaders.
But there is a further, very broad category of companies that, for need of capital to flourish, have gone public, while retaining family control – either through majority ownership or differential share classes. Many, but by no means all, are concentrated in fashion and luxury goods, where the list includes household names such as Benetton (before its delisting) or, much further upmarket, Hermès. Wines, spirits, and even media (Springer in Germany before delisting) also feature. Even Roche, one of the world’s biggest drugmakers, with a voracious appetite for cash, remains dominated by its founding Hoffmann-La Roche dynasty.
Despite the prominence of such groups, academic research on their comparative growth (as against earnings) performance has been limited. In particular, little or no work has been done on assessing growth rates against companies lacking any particular family influence or control.
What work has been conducted offers two wholly different conclusions. The first argues that family domination almost inevitably leads to slower comparative growth. In the mix of causes is a psychological desire to retain control and resist initiatives that might dilute family influence. Such motives can be reinforced by current family members’ wishes to use their publicly traded firms for private benefit (cushy quasi-sinecure jobs; prestige and assorted perks). Family owners will, accordingly, seek to preserve control and resist risks that may jeopardize that.
Such perceived perils could involve neglecting or entirely missing new business opportunities, or downplaying innovation if the latter were seen to threaten family control. Similar instincts could make proprietors more reluctant to assume the additional debt, or issue the extra shares, that might otherwise spur growth. Finally, personal reasons could play a part: among them fringe benefits, nepotism or just retaining less than topflight managers to avoid rocking the boat. Unsurprisingly, such owners might avoid hiring ambitious outsiders or adopting the latest productivity or growth-boosting financial management techniques.
This so called “temporally restricted” view of family ownership conflicts with the “transgenerational” model propounded by other business academics. They claim families invest generously in their companies and their growth out of concern for the welfare of their children, alongside the company itself and other stakeholders. Focused on their immediate offspring and later generations, current owners shun short-term measures that might boost earnings to concentrate on the longer term. “In other words, they promote conditions favoring future growth over current profits,” note the authors in an article first published in Entrepreneurship Theory and Practice.
Such proprietors stress investment to maintain innovation and competitiveness. Machinery and fixed assets aside, their priorities could include spending to improve employees’ training and working conditions. Similarly, the company may eschew an abrasive approach to key suppliers and other stakeholders in favor of emphasizing longer-term relationships.
The approach also encompasses access to cheap family capital, a contented, loyal and flexible workforce, a motivated and stable management team, and harmonious relations with local communities – including authorities and regulators. Conservative financial planning offers relative protection from short-term upsets – such as a pandemic – as well as the flexibility to make bold or opportunistic growth boosting decisions when circumstances allow.
Faced with two such conflicting theories, Miroshnychenko and his colleagues analyzed the growth rates of 5,265 publicly traded companies from 43 countries in 33 industrial sectors from 2007 to 2016. They also identified institutional country-level governance factors under which family companies could thrive.
The chosen companies derived from the NRG Metrics database’s Family Firms dataset, a list of 7,000 publicly traded (active and nonactive) companies from the US, Europe, Asia, and Africa beginning in fiscal year 2007. The list is compiled by expert analysts who manually enter, review, and cross check data with senior analysts, who perform frequent random audits. Their sources are public documents such as annual reports, corporate governance reports, company presentations, SEC filings, and press releases. Following common practice, financial firms were excluded.
The NRG data was supplemented by financial and accounting firm-level data from Thomson- Reuters Datastream to create a final sample of 5,265 publicly traded manufacturing and non-manufacturing firms from 43 countries covering the period 2007–2016 inclusive. The data covered three categories: companies in the dataset for the entire period of analysis (51.62%); those that entered the sample during the period (36.14%); and companies that, for whatever reason, exited during the period (12.24%).
The research also revealed that a positive country-level institutional environment of democratic freedom, government effectiveness, corruption control and political stability provided an extra growth boost
The bulk of the public groups covered involved companies of Anglo-Saxon origin (US, UK, Canada, Australia and New Zealand; 43%), followed by continental Europe (39%), Asia (12.5%) and the rest of the world (5.5%). The largest single batch of companies – some 22% – were from the US. More than half the overall sample were in industry, consumer goods, or the consumer services sector (57%), with the rest covering basic materials, healthcare, oil and gas, technology and communications and utilities.
Having developed a model of family firm growth, this was then tested across different settings, providing relative and absolute firm growth proxies using net sales and total assets to account for the diversity in growth measurements. Additionally, an overall index of country-level governance was adopted, based on World Bank indicators, along with individual dimensions of the index to capture the heterogeneity of institutional environments. A variety of more sophisticated filters and techniques were also harnessed to avoid anomalies and reinforce the robustness of the findings.
The analysis showed that family firms on average grew 2% more than non-family firms, supporting the “transgenerational” approach.
The research also revealed that a positive country-level institutional environment of democratic freedom, government effectiveness, corruption control and political stability provided an extra growth boost. Facing political instability or legal uncertainty, family owners in such environments might be inclined to cash in. Neither today’s Lebanon, for example, or eastern Ukraine, to take but two examples, would appear ideal for longer term investment planning. Likewise, political or legal uncertainty in Russia, China or even Turkey might deter even tycoons from taking the plunge. By contrast, the research showed that stable conditions, including trust in the rule of law, encouraged longer term thinking, reflected in even higher growth rates of close to 3% for private companies in such circumstances
The authors recognized that, while fascinating, the study would have been even more rewarding had it covered entirely private companies. Both recent academic research and regular media reports suggest purely private companies regularly achieve superior growth because of a focus – some might say obsession – with the long term. Many such private owners – take Swiss luxury watchmakers or private banks – speak proudly about thinking in terms of generations, not years. Acknowledging the interest, the authors note such an extension of their work was prevented by the lack of suitable data.
They also encourage colleagues to investigate comparing organic versus acquisitive growth at family companies, or growth rates among small- and medium-sized enterprises at different stages of their development. And they note that growth rates could be affected by the personal characteristics and backgrounds of family and non-family managers (education, age and professional experience, for example), as well as governance qualities such as executive pay, the composition of the board and its functioning.
One recent study has argued that involving non-family members in management increases family members’ prioritization of economic goals, including growth. Other research suggests incentivised pay matters more for the productivity of family than nonfamily firms – though this is disputed by others, with some business academics suggesting incentive-based pay matter less for the innovation performance of family firms, thereby potentially constraining their growth.
Whatever the reality, it is clear family companies offer a rich opportunity for further study around the world.
This article is based on Family Business Growth Around the World, by Ivan Miroshnychenko, Alfredo De Massis, Danny Miller and Roberto Barontini. The research was first published in Entrepreneurship Theory and Practice 2021 Vol 45(4) pp 682-708 (doi.org/10.1177/1042258720913028).
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