BETTER ENTREPRENEURSHIP | Family Companies |Far from declining…

The head of the business-retro style
To Have And To Hold

…, family firms will remain an important feature of global capitalism for the foreseeable future

FAMILIES HAVE ALWAYS been at the heart of business. Family companies are among the world’s oldest. The Hoshi Ryokan, an inn in Japan, has been in the same family since 718. Kongo Gumi, a Japanese family construction firm, was founded even earlier, in 578, but went bust in 2006. The Antinori family hasbeen producing wine in Tuscany since 1385 and the Berettas have been making guns since 1526.

Family companies played a starring role in the development of capitalism: think of the Barings or the Rothschilds in banking or the Fords and Benzes in car making. Family companies are ideally suited to the early stages of capitalism. They provided two of the most important ingredients of growth, trust and loyalty, in a world where banking and legal institutions were often rudimentary and poor communications made far-flung activities hard to control.

It was easier to raise money from kinsmen than from strangers. And it was safer to send a relative than a hired hand to expand the business abroad. Business enterprises also provided patriarchs with a way of transmitting wealth and status to future generations. “The banker’s calling is hereditary,” said Walter Bagehot, a distinguished 19th-century editor of this newspaper. “The credit of the bank descends from father to son; this inherited wealth brings inherited refinement.”

Family businesses make up more than 90% of the world’s companies. Many of them are small corner shops. We will focus on the larger companies that shape the global economy and develop world-changing products and ideas. The point is to show that family businesses can flourish in the most sophisticated areas of the modern economy.

Defining these larger family companies is tricky. If you restrict the term to companies that are both owned and managed by family members, you will end up with remarkably few. If you expand it to include companies that are run by the founders, you will take in tech giants such as Google and Facebook, which few people would see as family firms. The Boston Consulting Group has produced a reasonable definition made up of two elements: a family must own a significant share ofthe company concerned and be able to influence important decisions, particularly the choice of chairman or CEO; and there must have either been a transition from one generation to the next, or, in the case of a founder-owned firm, plans for such a transition. On that definition, BCG calculates, family companies represent 33% of American companies and 40% of French and German companies with revenues ofmore than $1billion a year. In Asia and Brazil they are even more prevalent.

The most important skill for any family business is managing the family itself

The majority ofthe world’s most successful medium-sized companies are also family firms. Hermann Simon, chairman of Simon-Kucher & Partners, a consultancy, calculates that they account for two-thirds of Germany’s mighty Mittelstand, including world leaders in doors (Dorma), balancing machines (Schenck) and industrial mixers (Ekato). Italy has a large number off a mily owned global champions in taste-conscious niches: Ferrari in cars, Versace in fashion, Ferrero Rocher in chocolates. The most striking thing about family companies is arguably not their average quality but their variance.

Put companies and families together, and you have a uniquely potent combination

The best thing about family companies is their sense of ownership. That helps them get round two of the most troubling defects of modern capitalism: the focus on short-term results and the so-called agency problem (the potential conflict of interest between owners and managers). On their own admission the CEOs of public companies find it hard to think about the long term because they have to focus on “hitting the numbers” every quarter, and the length of their job tenure has fallen steeply over the past decade. Family owners regard their shares as long-term investments and keep a close eye on management even if they do not run the company.


Join us and listen to family companies owners of the consumer packaged goods sector and their success stories

at the 11TH International Label Conference




Source: The Economist | Special Report Family Companies | Adrian Wooldrige | 2015

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