Family Business: Data

Family businesses are reputed to be unprofessionally run and destined to fail in the third generation. So how does one explain the continuity of companies like Cargill Inc. (founded 1865), S.C. Johnson & Son (founded 1886) and Mars Inc. (founded 1891)?

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Most family business owners have heard these statistics: 30% of family businesses make it to the second generation and only 13% make it to the third generation. This often-repeated statement, which is widely accepted as fact, actually is wrong.

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A survey of family businesses in Western Michigan found that family firms in the region are highly committed to their employees, to philanthropic giving and to keeping their companies in the family. Yet despite this commitment, most of these companies lack formal policies to help perpetuate the family values and ensure a smooth generational transition.

The study was a collaborative effort of the Seidman College of Business at Grand Valley State University and the Haworth College of Business at Western Michigan University. Academics and professionals at the two universities plus the Family Business Alliance of Grand Rapids helped develop the survey questions. Laurel Ofstein, an assistant professor of management at Western Michigan University, analyzed the data.

The 2014 edition of the Edelman Trust Barometer, an annual global study, found that in all regions except Asia, family-owned businesses are more trusted than big businesses. In fact, people in North America trust family-owned companies nearly twice as much as they trust big businesses (85% vs. 45%), according to the survey, which was conducted by Edelman, the giant, family-controlled public relations firm. In the EU, family firms are trusted by 76%, vs. 47% for big businesses.

To produce the Trust Barometer, Edelman's market research firm conducted online interviews in October and November 2013. The firm sampled 27,000 members of the general population as well as 6,000 members of the "informed public" (defined as people age 25-64 who are college-educated, with household income in the top quartile, and who read or watch business/news media at least several times a week and follow public policy issues in the news at least several times a week) in 27 countries. Although the Trust Barometer survey has been issued for 14 years, this edition was the first to include questions on trust in business based on ownership structure, according to Ben Boyd, global chair of corporate practice at Edelman.

U.S. family business owners were less concerned about market conditions in 2012 than they were in 2010, and more optimistic about growth prospects than their global peers were, according to PwC’s latest global family business survey.

For the U.S. edition of its survey, the professional-services firm interviewed 100 owners, leaders and top executives of family businesses via telephone between June and September 2012. Of this cohort, 93% said they were confident about growth in the next five years, compared with 81% of respondents in the global survey, in which representatives from nearly 2,000 companies in 28 countries were queried.

More than two-thirds (68%) of the U.S. respondents cited market conditions as a main issue they will face over the next year. In 2010, by contrast, 88% said market conditions would be a major challenge.

Perhaps because of optimism about the economy, 76% of the U.S. executives who responded to the survey said they plan to pass the business to the next generation rather than sell it. This is the highest percentage since the first PwC family business survey in 2007, and a significant increase over the 2010 figure (55%).

A recent survey of Canadian family businesses found that although about half the respondents expect a generational transition in the next five years, few have plans or governance structures in place to smooth the handoff. But the good news uncovered by the study is that next-generation members are aware of the challenges they face—and they have insightful suggestions about how their elders can help them.

The study, entitled “Family Ties: Canadian Business in the Family Way,” was conducted by KPMG Enterprise, a unit of the giant professional services network, in cooperation with the Canadian Association of Family Enterprise (CAFE), a national non-profit organization. There were two phases to the project, both conducted via online surveys. In the first phase, completed in June 2011, 322 family business members were polled; 43% of these respondents said their companies have revenues greater than C$10 million, and 38% have been in business more than 40 years. Survey participants’ companies had an average of four shareholding family members with an active role in the business.

In the second phase of the study, completed in January 2012, 195 next-generation members were questioned; two-thirds of these respondents represented the second generation of their business families.

Planning is overlooked

Why family firms are exceptional

Several recent studies sought to identify and explain family businesses’ competitive advantages.

Three recent studies aimed to shed light on family companies’ competitive advantages, and to explain the role of the “family factor” in conferring those advantages. The findings confirm some conventional wisdom about family businesses. They also indicate that if a proper balance is not achieved, a strength can become a weakness.

• A research team from Brigham Young University’s Marriott School of Management compared family-controlled public companies with other publicly owned businesses and found that companies whose founder or founding family strongly influences management are involved in more socially responsible initiatives.

John B. Bingham, an associate professor of organizational leadership and strategy, and associates (Journal of Business Ethics, 99:565-85, 2011) analyzed 700 companies that were listed on the S&P 500 between 1991 and 2005. They concluded that compared with non-family corporations, family firms are more likely to consider the local community and employees when making decisions and were more likely to engage in social initiatives that benefit their staff (such as retirement benefits) and the community (such as volunteer activity or charitable giving).

We asked participants in our Family Business Survey—an anonymous online poll conducted in July and August 2011—to list the family and business issues that keep them up at night. Here are some of the responses:

Family concerns

“Is it the business that keeps the family together or the family that keeps the business together?”

“Increased numbers of family members in coming generations.”

Appropriate distribution of family assets between those in the business and those outside the business.”

“Strained relationships with family members not in business because of jealousy.”

“Are the successors really going to manage the company properly?”

“Can they all get along when I am gone?”

“A divorce of a family business member.”

“Next generation has had it too easy, but not their fault.”

“Effects of alcohol on the happiness of family members.”

“Wondering if the cousins can work together in the family business. What next?”

“The challenge of passing on the wealth creating tools that my Dad showed me to my children before I die.”

“Non-active family members wanting to sell shares.”

“What to do with myself if I step down.”

In this issue, we celebrate the longevity of America’s oldest family businesses—companies that have been continuously owned by the same family for 155 years or more. Sustaining a family enterprise for more than a century and a half is a truly remarkable achievement. But does that mean family companies that last for only two or three generations are a failure? Should we consider families who have exited their businesses as less accomplished than those who continue to operate the legacy company—even if those who sell their businesses use the proceeds to create new, and greater, wealth?

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The Family Business 100: America’s largest family companies

 

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