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Why family-owned firms have a hidden edge

Editor's Note

Why family businesses outperform their publicly traded rivals

Hint: It has a lot to do with their ability to think long-term

The idea of a family-controlled business, passed down from one generation to the next, seems quaint in an age when a guy with a college degree and a computer can become a dot-com billionaire overnight. Watching New Economy starlets like Amazon steal all the headlines, it would be easy to assume family empires are a dying breed, rapidly being replaced by corporations where meritocracy rules, capital runs free, ownership is traded swiftly and the financials are posted for all to see.

Not quite. The family-controlled firm remains at the heart of even the most modern industrialized economies, and the cover story on the Richardson family, which you can find in the November issue of Report on Business magazine, shows why.

Family-run businesses still account for the vast majority of the world's companies—about 90% of them, in fact. Some are little more than corner stores, but they still make up 33% of all American businesses with revenues of $1 billion and up, and 40% of such companies in France and Germany, according to Boston Consulting Group.

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Many are the exact opposite of the cobwebby firms of yore—they include such modern marvels as Wal-Mart, Samsung, LG and Foxconn, which probably made your iPhone. More importantly, as a group, family businesses deliver superior returns. When Credit Suisse analyzed financial data from 920 large family-controlled companies from around the world, it found that over the past decade their share-price returns have outperformed the global MSCI benchmark by 47%.

Why would companies rooted in the past outperform modern publicly traded corporations? The main reason is their ability to think long term. The CEOs of your typical non-family-owned public companies don't spend a lot of time at the helm—the average tenure is less than 10 years—and they're under more pressure than ever to maximize short-term results. With just a few years at the top, these CEOs are more caretakers than owners, with every incentive to maximize returns (and rake in bonuses) while the going is good.

The leaders of family-run companies, on the other hand, are focused on where their businesses will be a generation from now. Horst Brandstätter, owner of the German maker of Playmobil figures, ran his company for 54 years. He reportedly once gave a designer 10 years to develop a new product line.

Sean Silcoff's revealing feature, which you can find here, offers a rare glimpse inside James Richardson & Sons—a Winnipeg-based company older than Canada itself. Long one of the country's largest grain handlers, it now has holdings in agri-foods, wealth management, oil and gas, and real estate. CEO Hartley Richardson is part of the fifth generation to run the company, and over the past 24 years, he's grown its revenues to $9 billion. Now he's facing the biggest challenge of his career: Who will take over when he's gone?

More than one family business has been brought down when control passed to children or grandchildren who lacked the smarts or instincts to run a big enterprise. The Richardsons were so afraid of that happening that they pushed the next generation out of the corporate nest to prove themselves before they could get a shot at the top job.

The experiment was perhaps too successful. Having seen—and thrived in—the outside world, many of the 20- and 30-somethings in the sixth generation are in no rush to return. Some in the family are questioning whether the next CEO needs to be a Richardson at all. Hartley's father used to say that when you're born into their family, "you have grain dust in your blood." Whether the next leader of the company will exhibit that quality is suddenly an open question.


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