Family businesses are an antidote to the problems of short-termism

By Rob Lakla

Imagine your daughter coming home from fourth grade one day and, with a defeated look, handing you her midterm report card. She showed such promise in kindergarten. But for the second quarter in a row, she’s received Cs, B-minuses, and even some Ds and Fs.

Her teacher has added a sobering comment for you: “I don’t see things improving anytime soon.”
It’s been a mostly good decade with this kid, but enough is enough. You decide it’s time to disown her. You tell her she needs to find some other family to live with.

Of course, this scenario is ridiculous. But consider an analogous situation. Every quarter, investors in public companies review short-term forecasts and adjust their portfolios accordingly. Sometimes the guidance influences their decisions more than actual earnings reports and business fundamentals do.

In essence, that is what led Jamie Dimon and Warren Buffett to write a June 6 Wall Street Journal commentary, “Short-Termism Is Harming the Economy,” where they called for an end to quarterly earnings-per-share guidance. They warned that “quarterly earnings guidance often leads to an unhealthy focus on short-term profits at the expense of long-term strategy, growth and sustainability.”

Analogously, your daughter with the bad grades would likely begin cram sessions lasting past her bedtime to avoid her parents’ and teacher’s ire. Imagine how those habits would harm her ability to learn over the long term.

A dozen years ago, in the Berkshire Hathaway “Owner’s Manual,” Buffett described the opposite approach: “We hope you instead visualize yourself as a part owner of a business that you expect to stay with indefinitely, much as you might if you owned a farm or apartment house in partnership with members of your family. For our part, we do not view Berkshire shareholders as faceless members of an ever-shifting crowd, but rather as co-venturers who have entrusted their funds to us for what may well turn out to be the remainder of their lives.”

In other words, he wanted to treat investors like family.

Longer time horizons
That’s not to say every investment will be as dependable as Berkshire. The point is that shortsighted decision making will eventually undermine long-term goals.

I run the Tulane Family Business Center, now in its 25th year. During that time, we have worked with 264 family businesses across the Gulf South, and we’ve seen how many of these CEOs have taken the long-term approach that Dimon and Buffett encouraged. In 2010, Buffett told the Wall Street Journal, “Family-owned businesses share our long-term orientation, belief in hard work and a no-nonsense approach and respect for a strong corporate culture. Family businesses and Berkshire Hathaway have a common philosophy and make a good team.” 

The call to end short-termism should resonate with family business owners. There is evidence that family businesses tend to make decisions in pursuit of longer time horizons and that they persist in maintaining a long-term approach, even when pressure for short-term results is high. In a 2012 Ernst & Young study of 280 family businesses, nearly half the respondents said they would invest additional resources in “developing innovation, new products, new technology,” the highest of all priorities listed.

By contrast, a 2015 study of public companies by FCLTGlobal found only half the respondents would make the long-term (and unambiguously better) choice when presented with a major strategic challenge. That’s no surprise, since short-term pressure keeps increasing for executives. Eighty-seven percent report that they’re pressured to demonstrate strong financial performance within at least two years.

Community focus
BlackRock CEO Larry Fink has also addressed short- termism, making an argument that complements Dimon and Buffett’s. In the firm’s 2016 annual report, he wrote, “Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.”

BlackRock manages more than $6 trillion in investments through 401(k) plans, exchange-traded funds and mutual funds, so CEOs worldwide heard the message loud and clear when Fink warned that without a sense of purpose, they “will ultimately lose the license to operate from key stakeholders.”

Recent surveys substantiate Fink’s concerns. Of 33,000 respondents across 28 markets in the 2018 Edelman Trust Barometer, more than three-quarters said they “expect a company’s CEO to be personally visible in sharing its purpose and vision,” and 64% said “CEOs should take the lead on change rather than waiting for government to impose it.”

Howard W. Buffett, Warren Buffett’s grandson, wrote in Harvard Business Review in March, “Profit and purpose are converging.” And as he explains in his new book, Social Value Investing, “the pressing question isn’t whether managers and CEOs should care about advancing society’s goals, but how they do so most effectively.”

Here, too, we have much to learn from family businesses. Facing a rapidly consolidating market, Illycaffè’s CEO, Andrew Illy, told the Financial Times in 2015 that while it was tempting to go public, “We are a family business and we have two things to protect. One is the dream of the founder to offer the greatest coffee in the world and the other is our family name. This requires a long-term vision and cannot be achieved with quarterly results.”

Illy, a third-generation CEO, has said, “This is not only a family business, it’s also a family name, so this is even bigger as a responsibility. I am here with a very strong concern to preserve the legacy of the enormous reputation that we have and to continuously improve that, in order to respect what we inherited from the previous generation and prepare a better company for the next one.… We need to spend the next two decades creating a better society, focusing on renewable energy and wealth in developing countries.”

That may seem bold, but Illy is not alone. According to a 2011 study in the Journal of Business Ethics, family businesses approach their stakeholder relationships differently, taking a more holistic view toward society and future generations. After analyzing 706 companies from 1991 to 2005, researchers found family firms undertook more social initiatives than non-family businesses. The investigators also found that greater family member involvement was correlated with a higher number of social initiatives.

Likewise, in a 2010 study (“Socioemotional Wealth and Corporate Responses to Institutional Pressures: Do Family-Controlled Firms Pollute Less?,” Administrative Science Quarterly), researchers who analyzed 194 US firms that were required to report their emissions found the family-controlled companies had a better environmental performance than their non-family counterparts, “particularly at the local level.” The investigators hypothesized that “at the local level, the distinction among family, society, and business becomes rather blurred.”

Next-generation leadership
As any family business owner will tell you, all of the preceding findings certainly do not mean that pursuing multigenerational strategies will be the easier path. Family businesses face the struggles of family life along with (and often compounded by) the problems of running a successful business.

At Tulane, we have identified NextGen leadership as a key area that demands greater research and analysis. Along with trepwise, a New Orleans-based consulting firm, we have conducted in-depth interviews with over 50 leaders involved with family business and are now surveying more than 100 additional stakeholders about the concerns we have identified. Here are three of our main findings thus far.

1. Most family business owners want better preparation for succession. The family business leaders we surveyed gave an average grade of B- to their confidence in current succession plans. This was also reflected in data elsewhere. In a 2016 study of U.S. family firms, PwC found only 23% had a robust succession plan in place. Of the first- and second-generation firms, 75% stated “ensuring a smooth transition to the next generation is a concern.” It should be. The family businesses we interviewed reported that, on average, it takes 10 years to successfully transition to the NextGen after they join the business as full-time employees.

2. Current leaders are concerned that the NextGen will not be able to keep up with the changes in markets, policy, regulatory environment and technology. But beyond these extrinsic factors that are out of their control, they told us they are most concerned that the next generation has not undergone adequate preparation and leadership development. This also matches national findings. When Deloitte asked family business owners about the most disruptive factors on the horizon, 38% said “changes in family relationships” or “succession,” far exceeding “market disruption” at 20% and “digital disruption” at 6%. In the same 2017 Deloitte study, only 3% of respondents disagreed with the statement “Succession in a family business is a natural point of disruption,” while 73% either fully agreed or somewhat agreed.

3. Simultaneously, NextGen members are concerned that the previous generation will resist the change and innovation necessary to remain competitive. Among our NextGen interviewees, 25% were engaged in entrepreneurial ventures in-house, including a food truck launched under the family’s restaurant brand and a dog-walking company completely unaffiliated with the original family business. This also mirrors broader trends. Deloitte has found that 56% of NextGen leaders will change the company’s strategy once they are at the helm, and a staggering 80% say that their leadership style will be different from that of the previous generation. But change will not come easily. As one NextGen leader told us, “In a meeting, I proposed a massive rebrand. My dad was sitting in the room, and he looked up and said, ‘Who the hell made that decision?’ ” 

That might sound familiar. If so, I am sure you will agree we have work to do. Over the coming years, I hope the Tulane Family Business Center will play a leading role in that effort, through further research, analysis and curriculum development on NextGen leadership.

It will surely be worth it. According to research by FCLTGlobal and McKinsey and Company, “if all public U.S. companies had created jobs at the scale of the long-term-focused organizations in our sample, the country would have generated at least five million more jobs from 2001 and 2015 — and an additional $1 trillion in GDP growth.” These researchers project that short-­termism could cost the American economy another $3 trillion in forgone GDP and job growth by 2025.

To all of us at the Tulane Family Business Center, addressing that is a goal worth pursuing — over the long term.

Rob Lalka is professor of practice at Tulane University’s A.B. Freeman School of Business and executive director of the Albert Lepage Center for Entrepreneurship and Innovation, which is home to the Tulane Family Business Center.

Copyright 2018 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact


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September/October 2018

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