Three key ingredients for success
Many investors see family-owned or -influenced businesses, i.e. companies where a family holds a significant stake, as very small and usually privately held. The reality, however, is very different.
Indeed, almost half of the largest French and German listed companies and a third of the largest US have a strong family influence. Family-influenced companies comprise widely known names across the globe such as LVMH in France, BMW in Germany and Walmart in the US.
Furthermore, many academic studies show that family-influenced companies tend to outperform those that are not family-influenced.
This raises the question of what makes these companies so special. There are 3 main factors that explain why they could be more successful:
- Voice of shareholders is better heard
Family-influenced companies tend to enjoy better corporate governance and more solid balance sheets. This is mainly due to the fact that the voice of shareholders is better heard than in companies where shareholders are more fragmented. Indeed, family members as large shareholders in their company can ensure that the management acts in the long-term interest of the shareholders and that the top management incentives are fully aligned with those of the shareholders. Such family members are instrumental in choosing the CEO and the Chairman of the Board and often have seats on the supervisory board of their companies. - Focus on long-term strategy
Family-influenced companies tend to have a clear focus on the long term and place more emphasis on a long-term strategy. This is due to the fact that many such families have holdings in their companies, which they keep for generations. Therefore, a family-influenced company is less prone to shorter-term thinking and quarterly earnings management than is the case for a company with more fragmented shareholders, who can get very nervous if longer-term investments have a negative impact on shorter-term earnings. - Strong link to the core business
Family-influenced companies tend to focus on the core business that made a company great in the first place. Since family members have a strong connection to the core business, they tend to be reluctant to “over-diversify” and move to non-core businesses, for instance by making acquisitions in less familiar areas. This is the reason why BMW, for instance, stuck to manufacturing premium cars, while Daimler, which has a more fragmented shareholder base, made disastrous acquisitions in non-premium car manufacturing such as by acquiring Chrysler and Mitsubishi as well as acquisitions in unrelated businesses such as aerospace and defense.
Does this mean that all family-influenced companies could outperform the market? The answer is no. But key attributes such as a strong alignment between management and shareholders, long-term thinking as opposed to short-term earnings management, and a clear focus on the core business are key ingredients for a company to be successful.
The CIO weekly thoughts focus and reflect on key topics, which caught Lars Kalbreier's mind during the week. It is more a free expression of thoughts to trigger healthy debates amongst the readership and by no means intended to be a strategy review.