I’m always curious about how to drive the best outcomes in an organization. Engagement, innovation, strategic vision, performance excellence… what combination of structural and motivational factors create the best results?
Recently, I’ve seen some debate about family-owned versus publicly-owned enterprises. The New York Times used the fact that Rupert Murdoch named his son James his successor as an opportunity to criticize family-owned businesses. BusinessInsider.com countered that argument with a story about a UBS-analysis of the relative prosperity of family-owned businesses.
Being engaged with both family-owned and publicly-owned businesses, I’ve noticed some interesting differences between how the two types of entities think and operate.
The UBS research named six reasons why family-owned businesses perform better.
1. Higher profitability
According to UBS, there’s a link between being an owner and driving higher profitability. I see that as the difference between being a hired gun and “truly caring” about the difference. Professional managers like to look good, so they take on high profile projects or strategies and often overlook the less sexy stuff that companies need to be solid on to be successful. Owners care about all the details of an organization whether they are glamorous or not.
Many successful family-business owners reinvest everything they earn back into the business to help it grow. They don’t seem to care as much about the trappings of wealth as professional executives or CEOs. Often, you wouldn’t even know they are wealthy by their lifestyle.
2. Taking risks in areas they know well
I agree with this completely. Family-business owners tend to know their business well, focus on those areas in a very concentrated way, and leverage that understanding to take calculated risks based on their expertise and experience. In this way, they exploit the comparative lack of true expertise in others. Really – their level of risk tolerance in the areas they control can get very high.
Professional executives, on the other hand, might go wild during bullish markets or according to their personal ambitions regardless some times of their level of expertise. They can be keen in impressing the Board or being impressive than making a bold and calculated gamble in order to grow the business or seize a true opportunity.
3. Disciplined capital allocation
Family owners are conservative and disciplined in their investments. They don’t waste bullets unnecessarily. They go gradually. They don’t like big bangs. The time frame for them is in generations or decades, not the next quarter or the next assignment. The opposite is true in the public corporate.
I was participating in a discussion recently where a friend of mine, member of family holding a group of companies for more than a century in the areas of banking, commodities and services, was commenting on fast changes of talented people. “I don’t understand. How much somebody could learn if she is in a job just for 2 years? This is 22 months, if we take out the time for vacations.” We would rarely think of net-time in a job discounting holidays. It`s a nuance which I believe reveals the way an owner might think.
4. Generation matters
Often, it’s said that the first generation of the family founds the company, the second builds it, and the third destroys it. UBS points out that first and second generation businesses operate at a premium.
While this is a valid criticism of many family-owned businesses, I’d say the same thing can easily happen in public enterprises. We call it suboptimal succession planning.
5. Transparency is important
We think of public companies as more transparent, but I disagree. While the books may be exposed to the public, the decision-making process can be just as opaque. And inside the company, information can be hoarded and disguised. Family-owned businesses may be opaque to the outside world, but typically every decision maker who matters shares information very transparently within the governing body.
6. Better governance
This is almost automatic in family-owned businesses. Governance and leadership are the same or in sync. In public companies, better governance is a constant concern, since Board members are not sole owners of the enterprise and can even be detached from direct affairs.
All in all, I think that family-owned businesses have some real advantages when they are run right. The feeling of ownership, the exploitation of risk in areas that are deeply understood, and the long-term vision over short-term wins can drive growth and innovation. I am always looking for ways to instill that thinking in the people that work for me. I want them to feel like owners who care about every aspect of their jobs and think about the best interests of the business in the long-term while also keeping up performance in the short term. When successful, I call them the Seamless Team.
I’ve also seen family-owned businesses fail, however, because they didn’t have the drive to grow and change. They were content doing what they’d done for generations. They were satisfied and not motivated. Or the family members were not aligned towards a common vision.
Probably, in the end, the difference comes down to leadership. Do you want to grow your business and thrive in the long-term or not? You have to care first.
Photo by Ruben Velez