John L Ward is the Wild Group Professor of Family Business at IMD (Switzerland) and Co-Director of the Center for Family Enterprises at Kellogg School of Management (USA). He serves on the boards of four family companies in Europe and the USA.
Family business tend to perform better than their non-family counterparts, which may be why more and more wildly successful firms like Google are getting in a family way
The evidence mounts: family businesses are, on average, superior performers. The proof began with research I conducted 20 years ago showing that family controlled companies had 20% higher returns and climaxed with last year's attention-grabbing research, by American academics Anderson and Reeb, showing family companies among the S&P 500 Index significantly out-performed the index as a whole. Additionally, Newsweek Europe recently ran a feature showing family businesses in every major stock index in Europe – CAC 40, DAX, FTSE 100 etc – outperforming their respective indexes.
What does this have to do with Google? Lots. As we explore the competitive advantages of family businesses, as we examine the long-term challenges family businesses face, and as we study the recent research on family business performance, Google's recent headline capturing declarations look just like family business behaviour. In addition to Google, let's look at Enron, Parmalat and Berkshire Hathaway. When we do, we'll see vivid examples that help us understand the good and bad of family business.
Google has disturbed the economic conventional wisdoms in several ways. In their initial public offering, they have been adamant not to sell their shares at an inappropriately high price – even if the market so demands. They feel it better that their stock price is tempered by realistic, long-term expectations. Neither will they manage quarterly earnings or offer quarterly results guidance in order to keep the focus on, and protect, the long-term. It is also their intention to create two classes of stock so the two founders can keep voting control of the company. Each of these actions has been criticised for compromising the market attractiveness of their shares and their future share price.
The bottom line to Google's decisions is that they want to protect the long-term interests of the company from stock market fads and short-term fancy – protecting the company from the stock market owners. It's interesting to note that management control is put in place to protect the company from its investing shareholders. Warren Buffett of Berkshire Hathaway agrees. Companies are better served by long-term owners and hands on owner/managers. Companies need ownership systems that assure the company does "the right thing".
Doesn't that sound just like a family business? Do the right thing, invest in the long-term, keep ownership control, lead with hands-on owners/managers and preserve inherent value despite market pressures. Google, like Berkshire Hathaway, is acting like a family business.
Where does Enron fit in? Enron proved that management with too much power can abuse it. If they want, management can bamboozle even good outside directors and share price devotion, management preoccupation with personal wealth from stock options and thirst for personal control can lead to horrible results. Enron showed that a strong board is needed to protect the owners from the greed and ambition of powerful managers.
How do we reconcile Google/Buffett and Enron? One shows we need to protect the owners from the managers. The other claims we need to protect the company and its management from the fickleness of stock market owners.
Research shows that when controlling ownership and hands-on management are in the same hands (Berkshire Hathaway and Google), the results are the best of any other governance combination. This circumstance is exactly what family firms have in their early generations: one or a very few owners who control ownership and lead the company. There is also no need for special management incentives as the key managers already have most of their wealth at risk in the company. If the owners are dedicated, long-term holders of the shares, then the firm benefits not only from owner-manager alignment, but from the long-term view. That's the competitive advantage of family firms.
As family firms age, it's likely that more and more family become owners. Ownership control is diluted among the family and management may well be non-family non-owners, or family owner managers with limited share power relative to the rest of the family. Widespread family owners may even have more disparity among their goals and values than a vast group of company shareholders who openly declare only one objective: maximisation of near-term share price. That is the special challenge of family firms. As ownership among the family spreads, can the costs and energies to hold the family together and keep the family on the same page of ownership goals be reasonable enough to provide genuine, consistent, long-term strategy and the resulting financial performance?
The research results are clear. On average, just as a widely held public company of anonymous shareholders loses its edge because of inherent owner versus manager conflicts, the same is true of family firms held widely by family owners. The special family business advantages evaporate and the family firm performance lessens the same as the non-family firm.
The suggestion is that business-owning families can benefit greatly from efforts to build a harmonious and committed family shareholder group. Based on personal observation, few make this effort as well as they might. The advantages of the Google founders and Buffett are limited in time unless they can find controlling manager successors of similar attitude and power.
Family firms have the chance to sustain their competitive advantage. Future family owners may not be well brought together – either from neglect or from unresolved past family conflicts. The effort of family owners managing their family's ownership is the critical difference between family businesses performing well long-term or not.
Enron abused management power to the disaster of the mass owners. But management abuse is not just possible from 'professional managers'. Parmalat of Italy proves that, as does Adelphia in the US In both cases, family owner/managers abused their power and destroyed their own family companies.
So what's the difference between the Google founders and the Parmalat or Enron chiefs? Perhaps only and simply, character. Power can corrupt. Distribution of power, however, leads to mediocrity (in economic enterprises). Google is behaving more like a good family firm. Enron performed more like a bad family firm. On average, statistics show a lot more Googles and Buffetts than Enrons and Parmalats. On average, owner-managed-controlled firms do better. The abuses are more the exception.
Close ownership matters. Responsible leadership is protected by close ownership. The combination allows for the long-term view and superior performance – the family business advantage.