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Yes-no debate over the best business model


The first step is to define family business. The approach practiced by IMD is essentially qualitative and future oriented: a business controlled and influenced by one or several families with the intention of passing it on to the next generation. Therefore, family businesses can be 100 per cent privately owned or publicly traded, even with minority financial ownership, as long as there is a family influence, in particular in the selection of the chief executive.

To evaluate the financial performance of family versus non-family businesses, the most reliable comparison involves the widely held public corporation and publicly traded family businesses.

Since the first study, in the United States in 2003 by Anderson and Reeb, that demonstrated the financial and market outperformance of quoted family firms over non-family firms, a substantial number of research projects have reinforced this finding:

  • Thomson Financial/Newsweek in 2004 quoted family businesses outperforming their rivals, in terms of stock prices, on all six major stock indexes in Europe;
  • German stock market DAX PLUS Family 30 Index, regrouping the 30 largest German and international family controlled businesses, in 2011showed outperformance of the general DAX Index over five years by more than 10 per cent;
  • Credit Suisse family business global research in 2012, with European dominance and one third of businesses consisting of 4th generation family members and beyond, showed outperformance of the MSCI World Index over five years, and superior cash flow.

These and other financial studies demonstrate that quoted, but family-controlled and influenced, companies create more wealth and outperform the widely held public corporation on diverse measurements, such as total returns and cash flow, in addition to a lower level of indebtedness and the willingness to accept longer periods of returns on investment.

It is harder to compare family businesses that are 100 per cent privately owned with the anonymous, widely held public corporation. While the latter provides access to financial information, in the vast majority of cases, the former does not. Most families owning businesses view the performance as a private matter and restrict full disclosure.

Quoted but family-controlled and influenced companies create more wealth and outperform

The IMD insight is that family businesses produce more extremes than non-family businesses. They can be either extremely underperforming and kept alive by subsidies from the owning family for non-business reasons, or extremely outperforming, in which case it is in the family’s interest to stay private and discrete.

Family businesses, however, have an inherent advantage over non-family businesses: the overlap of capital and management provides a strong incentive to manage wisely, especially when the overriding vision is to pass on a healthy, growing business to the children.

A very long-term perspective, a deep understanding of the business and a values-driven approach are their strong points. As with public corporations, the business has to be managed to the highest professional standards. But, in addition to the public corporation, the owning family also needs to be managed. And it is this that tends to be the key challenge for most family businesses.

Dr Joachim Schwass is professor of family business at IMD and director of The IMD Global Family Business Center. His recent books, as lead author, are Wise Growth Strategies in Leading Family Businesses and Wise Wealth. He is an active owner of his own family business.


As the recession staggers on, big business fat cats are pilloried and family-run businesses lauded. Family ownership has much to recommend it, but there are many downsides in having the founder’s descendants in charge.

First, restricting the choice of chief executive to only family members reduces the pool of potential talent. In the 2016 Rio Olympics, would we want to restrict the British team to children of previous medal winners?

Second, knowing that you are going to get the top job may cause the next generation to slacken off. Why work hard at school if you know that you will inherit the family jewels – the so-called “Carnegie” effect?

Third, restricting the top jobs to family members is dispiriting to other talented managers in the same company. I have known many top MBA students planning to leave their family firm because they know they will never make it with the wrong bloodline.

Family firms should be meritocratic and think carefully about chief executive succession

There are arguments in the opposite direction and lots of anecdotes of successful family firms. So the question is an empirical one: on average do family-run firms do better? The answer is that the best studies show that family firms do worse.

My work has looked at management quality in more than 8,000 firms in 20 countries. Controlling for industry, firm size, country and a host of other factors, we found that, although family-owned firms did slightly better than their counterparts, firms run by a second generation (or greater) family member were significantly worse, especially if it was run by the eldest son.

This result is consistent with a study, by Stanford University’s Professor Perez-Gonzalez, of US publicly listed firms, focusing on what happened when there was a change of chief executive. When a family member took over, the profits of the firm fell significantly compared to a non-family member. Digging deeper, the analysis found that family chief executives were less experienced and more poorly educated than their unconnected counterparts.

Of course, whether a firm stays in the hands of family member is not random. But the best evidence we have is a study of Danish firms which looked at the gender of the first child of the firm’s founder. If the first-born was a boy, the firm was much more likely to be eventually handed over to him than when the first-born was a girl. Since gender is random, this is about as close to a clinical trial of family firms as we are likely to ever get. The results confirmed that family-controlled firms were less profitable and more likely to go bankrupt.

These are average effects – there are great family firms who buck this trend. But the results from these studies strongly suggest that family firms should be meritocratic and think carefully about chief executive succession.

It is often remarked that the economic backbone of Germany is the Mittlestandt – manufacturing small and medium-sized businesses which are predominantly family-owned. However, compared to the UK, these German firms are more likely to get in outside professionals to run them rather than family members. Family rule isn’t good for government, nor is it generally good for business.

Dr John Van Reenen is professor of economics at the London School of Economics and director of the Centre of Economic Performance; he is a fellow of the British Academy and has been a senior policy adviser to 10 Downing Street, the Health Secretary and European Commission.