According to a study conducted by the National Bank of Canada, the 43 most prominent family-controlled public companies in Canada have consistently outperformed the S&P TSX Composite Index with an absolute return rate of 206 percent over thirteen years.
In the National Bank study, a family-controlled public company was considered to be a public company in which the family owns enough of the company to have significant influence over important decisions. Established family businesses focus on building a legacy through long-term profitability, resist market pressures to turn short-term profits over long-term growth, and carry lower debt loads; all of which can make them more attractive to shareholders. Some of these attractive statistics include:
- Family-controlled businesses have a longer average lifespan than any other control structure, longer than NCs by 14%
- The average CEO tenure in large U.S. companies is 4.6 years; those at the 100 largest family businesses have already worked there an average of 13 years1
- Stock price volatility over a 10-year period was 33% for family-controlled companies, and 49% for non family-controlled companies
Lower Debt Levels
Since family businesses are focused on long-term profitability, they have a built-in resistance to high debt levels, which are the natural enemy of long-term growth. The net debt to Earnings before interest, tax, depreciation and amortization (EBITDA) levels were consistently lower for family-controlled businesses than in the overall S&P/TSX Composite Index over the past 12 years. Capital expenditures, takeovers, and other debt-incurring actions are considered to be risks in family businesses rather than investments which can spur short-term growth.
Stronger Corporate Culture & Employee Retention
Various studies have shown that North American companies that are family-controlled show have a stronger, more engaged corporate culture. This leads to better employee retention rates, which reduces the costs associated with employee turnover. Some of the statistics on this include:
Ernst & Young survey of 25 large family businesses in global markets: Two-thirds of survey respondents stated that the family business brand differentiated them in the market and improved the company’s reputation.
Bain & Company study of founder-involved S&P 500 companies: Deep founder involvement in a company led to significant outperformance of S&P 500 companies which were not family-controlled. Founders, according to the study, are detail-oriented and have a vested interest in the longevity of the company . A family business is also more likely to implement corporate social responsibility, have a sustainability policy, and participate in philanthropic ventures - all of which are good for a brand’s reputation.
Family-controlled businesses have longevity
In a striking study on the longevity of family-controlled businesses from the Clarkson Centre for Board Effectiveness (CCBE), a group of businesses were tracked between 1969 and 2017. Out of that group, 70 percent of the family-controlled businesses survived for those 48 years, while 76 percent of the non-family businesses were delisted, acquired, or considered out of business. The average lifespan of a family-controlled business was 14 percent longer than a company not controlled by a family.
Lower risks for shareholders in both the short and long term
The same CCBE study examined 56 family-owned companies and 30 companies not controlled by families, all of which were publicly listed. The average annual volatility of the stock price of the family-controlled companies was 36 percent. The non-family businesses exhibited a significantly higher volatility at 51 percent.
Takeaways from the clear success of family-controlled businesses
The focus on longevity, perception of debt as a risk rather than as an investment, and the existence of a “founder’s mentality” that strongly influences corporate culture are all items worthy of consideration for improving all areas of a company, including a demonstrated uptick in value to shareholders.
Technically, the CEO should adopt the “founder’s mentality” and drive the business as if it belonged to their family, but the same mindset could be used as a lens with which to view financials, quarterly reports, and anything else that board members need to consider at a meeting. For example:
- Pretend you are a founder building a legacy for their family, and process all communications through that lens
- Approach each decision as if there were a significant consequence not just for yourself, but for your family
- Think of the ways “your” company can give back to the community or increase its sustainability footprint
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published on 2019/21/05