x Abu Dhabi, UAEWednesday 24 January 2018

Keep it in the family and edge out rivals

The Life: Family-run firms, particularly those in the second and third generations, consistently deliver stronger results than many of their rivals.

Family-run firms have always played a key role in driving forward economic progress. These businesses include a vast range of companies from the tiny neighbourhood "mum-and-dad" stores to the millions of small and medium-sized enterprises that form the backbone of most economies, to the multinational giants such as Swatch, Samsung or BMW.

And although many of the world's best-known family businesses diluted their ownership in the second half of the 20th century by listing their shares on public markets, many of these corporate powerhouses remain at least influenced if not controlled by their founding families today. This can have important implications for investors too.

The companies in which the founding families still own large or controlling stakes typically tend to have an enduring, multi-generational competitive edge over other businesses. In fact, according to a recent study by the Boston Consulting Group, this "family edge" is confirmed by family-run companies typically delivering more consistent profitability ratios than non-family businesses over all parts of the cycle, especially in times of crisis.

Another recent study with highly robust results for some of the oldest family-run companies in Japan also suggests that family control is closely related to long-term financial outperformance.

The more consistent profitability ratios that family businesses tend to produce are typically also reflected in their stock market performances. Family firms tend to outperform non-family firms in the long term, suggesting that family ownership can add value for investors.The DAXplus Family Index, which tracks the 30 largest German family businesses, has delivered a consistent outperformance over the broader DAX index of 41 per cent over the past 10 years.

Companies such as BMW, Fresenius, Henkel and Volkswagen have performed particularly well in this context. Another good example of family businesses outperforming their peers is the Credit Suisse Family Business Index, which tracks companies in both Europe and the United States. This index has outperformed the MSCI World index by 110 per cent over the past 10 years.

The precise reasons for this consistent outperformance of family businesses are difficult to pin down exactly. But broadly speaking, we trace this "family edge" back to three enduring advantages. First, family firms tend to have a clear long-term focus, often avoiding the pitfalls of "short-termism". Second, family businesses tend to be managed more conservatively than non-family firms, carrying less debt and investing their capital more cautiously. And family firms also tend to inspire a higher emotional commitment to their brands, resulting in lower employee turnover.

Although these factors support the case of a "family edge", investors should note that the family business also presents risks - such as succession planning, nepotism and family feuds. This is why we advise investors to focus more on companies that are at least in the second generation of ownership, which have already set up systems to successfully navigate some of these most vexing challenges.

For instance, many families establish explicit oral and written agreements that address potential challenges (eg conditions by which family members can or cannot work in the business, boundaries for corporate and financial strategy, etc). We therefore think that companies in their second or third generation should have set in place measures to keep the family business on course, thereby minimising risks.


Susan Joho is an economist at Bank Julius Baer & Co, the leading Swiss banking group