Keeping it in the family is good for business

Family-owned firms operate on a different set of business principles, which at first sight might seem puzzling in mainstream commerce


Owner-managed businesses have their own peculiarities, but one sub-set has more than most – family-owned firms. These account for 72 per cent of all owner-managed businesses in the UK and dominate the mid-market. With family ownership comes a whole host of issues, such as succession and governance, which might seem alien to those who have been taught that business is all about profit maximisation. But these “soft” issues are often far more important than money for family-owned firms.

When academics talk about family businesses they often use the concept of “socio-emotional wealth”. Put simply, the idea is that families who own businesses do see wealth purely in terms of monetary returns, but measure success by other metrics. For instance, their priorities are often things like providing jobs for family members, ensuring the business stays in the family and boosting the family’s social standing in the community. To some people those might seem like odd and unbusinesslike aims, but that really begs the question: if so many successful businesses do think about these things, then by definition they are part and parcel of business.

A different species

As Ken McCracken, a family business adviser at Withers Consulting Group, says: “Comparing family businesses to publicly owned ones is like comparing two different species. A lion doesn’t live like a giraffe, but both can flourish.” Some of the norms that dominate publicly owned businesses just don’t apply in family businesses, which can seem strange at first glance. “In the family business environment, it is perfectly reasonable to factor in auntie’s worries about her dividend when you are making business decisions,” adds Mr McCracken. “It might seem ridiculous to those from other sorts of businesses, but in a family business it is not ridiculous at all.”

Some of the norms that dominate publicly owned businesses just don’t apply in family businesses, which can seem strange at first glance

Do such principles restrict a business? Not necessarily. The New York Times newspaper was bought in 1891 by the Ochs-Sulzberger family and has always been run explicitly to provide jobs for his family members and is currently in the midst of a succession battle with three relatives vying to take over. It had profits of $92 million in 2014. In the UK, brewer Shepherd Neame, in its fifth generation of family ownership, is proudly based in Kent where it uses 1,500 local suppliers and employs 4,500 people. The Neame family, whose head Jonathan runs the business, takes its responsibilities to the region and the jobs it supports very seriously.

In mainland Europe, vast, 100 per cent family-owned and managed businesses such as Italian Nutella-maker Ferrero, with 2014 profits at £660 million, and German brewer Warsteiner, with 2014 revenues of £381 million, have kept production in the small towns where they began out of duty to the people who they employ there, when moving elsewhere would have been more profitable.

The same is true for many of the firms that make up Germany’s Mittelstand of mainly family-owned manufacturing businesses whose owners wouldn’t dream of offshoring their operations from Dusseldorf or Dresden to China, where it might be cheaper. It is hard to argue that any of these firms are failures or handicapped by peculiar, business-defeating aims.

Long-termism

The conventional wisdom is that what stands behind all of this is long-termsim. “If you think that your tenure in charge of the business will be 30 years and your aim is to pass it on to the next generation, then you see yourself as a steward and that leads to different behaviour,” says Sabine Rau, a professor of family business at Kings College London. “I will want to be a preferred supplier to my customers and I won’t do anything that will have a negative long-term effect on the business for a short-term gain.”

But Professor Rau says the wider driver is the family’s desire for “survival”. There are many parts to that including maintaining family harmony, making enough money to live and reputation. But these cannot be disentangled so that some are “financial” while others are “non-financial”, and instead they become a sometimes nebulous whole.

She refers to one of her students, the member of a 16th-generation German family firm who gave up a lucrative career at a large professional services firm to return to his ancestral village to run the family business. “My other students didn’t understand it, but he said the business was a locus that keeps his family together, and also allows him to contribute to society by providing jobs and generating good returns,” says Professor Rau.

It is hard to generalise about family businesses – a fourth-generation German engineering firm is hugely different from a family-owned South Korean conglomerate, such as Samsung, or a British firm like tea shop and coffee empire Bettys & Taylors. But all too often the “family” aspect of family business is seen as old-fashioned and irrational. Mr McCraken says families are often bad at talking about their aims among themselves, so it is hardly surprising that outsiders don’t understand them. But in the best cases, a strong sense of purpose can produce long-lived, profitable businesses that provide employment and strengthen communities. If part of that is securing auntie’s dividend, then who can say it is wrong?