Family ownership and sustainability

An inherent aspect of sustainability is about encouraging the players of a market economy to consider the long term. This is explicit in the European Commission’s Action Plan on Financing Sustainable Growth; one of the plan’s three aims is to ‘foster transparency and long-termism’. If all CEOs and investors were only concerned about the next few quarters, or even years, then it’s easy to understand how sustainable factors such as finite resources, climate change and diversity wouldn’t feature high on the agenda.

The average holding time for public equities has been falling for decades, from an average of seven years in 1940 to somewhere between 6 months and 11 seconds depending on your source. In recent years boards and remuneration committees have attempted, through increasingly complex compensation structures, to align the interests of management of public companies with owners. However, with investors holding shares for relatively short periods of time, this alignment isn’t always in the best interest in the long-term future of the company.

One group of companies that inherently focus on the long-term are family-owned businesses. Family-owned businesses are prevalent, supplying approximately half the jobs in Europe and the Americas. We define family-owned businesses as those where a founder or family holds at least 20% of the voting rights. Often, but not always, the executive team is led by or involves family members.

Family businesses tend to have a long-term mindset. By nature, the managers of a family business think about being stewards of the business and importantly preserving its value for multiple generations thereafter. The question is whether this correlates with a greater consideration of sustainability? Committed to more than just short-term profitability, there is evidence that the answer is on average yes, they pay greater attention to all stakeholders including customers, employers, suppliers, the environment and the community.

Good governance remains important in a family-owned business, with the need for structures that separate the family and the business and ensure oversight from a professional board. A CEO of a family-controlled firm may have financial incentives similar to those of chief executives of non-family firms, but the familial obligation he or she feels will likely lead to very different strategic choices. They will invest across a 10 to 20-year time horizon, which is not often seen in public non-family owned business. And the result, as many studies demonstrate, is relative long-term outperformance.

From an environmental perspective, these are usually long-term factors whether it’s climate change, water scarcity or damage to biodiversity. It makes sense that a company managed with a responsibility to the next generation may pay greater attention to these issues, and not just from a financial preservation perspective but also to consider the impact of their business and connected heritage.

From a social perspective, a difference is more pronounced and well documented. A study led by consultants at Boston Consultant Group researched the difference between family-owned businesses and non-family businesses, looking at companies based worldwide and with revenues over $1bn. Beyond their initial finding that the former group outperformed the latter in every geography over the long term, they sought to understand the key differences.

Source: The Long-term view of Family Business 2012, Harvard Business Review

One was that staff retention at family-run businesses is on average better, with annual turnover of 9%, nearly 20% below the non-family peer group. Leaders of family companies often extol the benefits of longer employee tenures: higher trust, familiarity with coworkers’ behaviours and decision-making, a stronger culture. Importantly, in general, this loyalty isn’t earned through financial incentives, but instead through a focus on creating a culture of commitment and purpose which often includes avoiding layoffs during downturns and investing in people.

This culture affects not just employees but also customers. Global communications company Edelman sends an annual survey to over 33,000 respondents across 28 countries, asking various questions about business and the economy. In the 2017 survey questions highlighted a greater trust in family-owned businesses across all geographies except China. The study also identified the same attraction for staff as that of BCG, with 54% of respondents stating they would rather work for a family business (vs. 21% who stated they would rather not).

Source: Edelman’s Trust Barometer Special Report 2017

Other factors may contribute to the superior long-term performance according to BCG – lower debt, greater diversity, fewer and smaller acquisitions to name a few. But we’re confident in the evidence that not only are family-owned businesses managed in a more sustainable way with a multi-stakeholder and long-term view, but that this approach is a contributing factor to their long-term outperformance.


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