Why family firms are exceptional

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

By Barbara Spector

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).

• U.K. private bank Coutts & Co. analyzed 300 nominees for its Coutts Prize for Family Business between 2005 and 2010 to glean insights into what has made these family firms successful. (Citing the dismal economic climate, Coutts announced in October 2011 that it would stop granting the prize, which honored companies in England and Wales.) Researcher Rupert Merson from London Business School and INSEAD studied the companies and found that five groups of strengths were most frequently cited:

1. Exceptional human resources practices.

2. Agility and flexibility in decision making.

3. A personal approach to doing business.

4. Honesty and integrity in business affairs.

5. The family as a source of competitive advantage and brand image.

The Coutts report noted that several of these strengths have their downsides. For example, a company with many long-tenured employees could be seen as inspiring great loyalty or as too timid to prune the deadwood. By the same token, a company that benefits from strong personal relationships with customers and suppliers might be too dependent on a few key people.

• Executive search firm Egon Zehnder International queried 720 managers from around the world on their experiences with family businesses and their views on family firms. Respondents to the online survey included family business owners, non-family managers in family companies and executives with no family business experience.

More than half (56.3%) of the respondents said family firms’ most striking advantage is their long-term perspective. According to 53% of the executives and 64% of the family business owners, this long-term outlook allows family businesses to be more innovative than other companies. And two out of three of the family business owners said that being a family company helped them cope with economic downturns.

However, 63.3% of respondents with family business experience were aware of cases in which family conflicts hindered business decisions, and 29.7% described collaboration between family owners and non-family managers as “marked by major conflicts.”

Only 29.8% of those with family business experience said decision-making processes were transparent. According to 59.1%, “competence of family members working in the business” was a main source of conflict, followed by “lacking agreement on vision and future strategy of the business” (48.1%).

About 75% of respondents said that family members have an advantage over non-family members when it comes to CEO succession in family businesses. Nearly two-thirds (61.6%) of the participants cited “lack of professional structures and procedures” as a disadvantage of family firms, and 49% cited “limited potential to attract professional management.”

The researchers concluded that in order to make the most of their competitive strengths, family business owners should consider taking three measures: strictly separating family and company interests, instituting a policy of transparency in decision making, and offering attractive career opportunities for non-family members.

Copyright 2011 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permssion from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.


Quotable

“We are not a family that keeps looking over your shoulder and says things were better in my day. What we are saying is, ‘boy, have we got an opportunity now and it’s going to be really exciting in the future.’”

Nicky Oppenheimer, commenting on his family’s decision to sell its stake in diamond miner De Beers (Financial Times, Nov. 4, 2011).

 

“Did my last name get me in the door? Absolutely. I will be the first to admit that to you. I’ve been given an extraordinary opportunity, but with that comes a responsibility. I know that I am responsible not only to my job, but also to my last name.”

— NBC reporter Luke Russert, son of legendary NBC newsman Tim Russert (Buffalo News, Oct. 28, 2011).


The Scoop: Dodd-Frank deadline is March 30

Under the Family Office Rule —which Congress inserted into the Investment Advisers Act of 1940 last year as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act—certain family offices must register with the Securities and Exchange Commission by March 30, 2012.

Family offices are exempt from this requirement if they provide investment advice only to family clients (as defined by the SEC), are wholly owned and controlled by family members and do not hold themselves out to the public as investment advisers.

The Family Office Exchange (FOX) —a research, education and consulting resource to wealthy families and their advisers—notes that families that do not qualify for the SEC’s family office exemption have several alternatives to registering with the SEC.

1. Declining all clients that don’t fit the SEC definition of “family client” in order to become a qualifying family office.

2. Removing the investment function from family office control.

3. Reorganizing the office as a state-regulated, family-owned private trust company.

4. Seeking an exemption from the SEC.

Non-compliance with the law, however, is not an option, FOX stresses.