How should you measure a business's success?

An employee at VW's South African plant. Photo: Volkswagen

An employee at VW's South African plant. Photo: Volkswagen

How do you measure a business’s success? In the Anglo-American press it is usually by either some variation on its income - turnover, revenues, profits, EBITDA - its share-price or its market capitalisation. But these metrics reveal the biases of economists (or journalists, or readers) because they inevitably make shareholder-owned business - which in most cases expressly aim to maximise short-term profit and share-prices - look superior to family-owned ones.

Family companies generally have a longer-term outlook and their owners care about things other than money, which is sometimes called “socioemotional wealth”. That is harder to measure than money. Here are three alternative ways to evaluate a company’s success.

Number of employees

Job-creation is at the heart of a business’s social usefulness. In Germany, where family businesses are well appreciated, magazine stories often mention how many people a business employs before its income, such as this one about Aldi - which employs 170,000 people. The world’s biggest employer is family-owned Walmart, which has 2.2 million. Volkswagen employs 590,000, Arcelor Mittal 240,000, Bosch 281,000.

Of course, there are big non-family owned employers, but family businesses are often involved in clusters of expertise, for instance in off-shore drilling in Norway, container shipping in Piraeus, Greece, or textile manufacturing in Prato, Italy. Because families pool expertise and because they look to the long-term they are often resilient. Because they are often rooted in a region, they can create a network effect which attracts other business there. This creates even more jobs.

Take Italian brake-maker Brembo, 53% owned by the founding Bombassei family. It weathered the economic downturn after 2008 because it works with high-end sportscar makers, which tend to be family-owned, such as Ferrari and Porsche. Brembo employs 7,700 people, but supports the tens of thousands more jobs near its home of Bergamo and across northern Italy - and now in the US and Mexico too, where it has plants.

Longevity

Long-lived businesses provide stability, both economically and socially, to the place the business is based by creating a stable supply chain, and the wages it pays support other businesses. One example is Britain’s oldest brewer Shepherd Neame, established in 1698 and in its fifth generation of family ownership (a businessman called Neame bought it in 1864) which employs 4,500 people and uses 1,500 local suppliers.

The longer a business continues, assuming it grows over time, the larger this web grows. And most of the world’s oldest businesses are family-owned. Japanese inn Hyoshi Ryokan was founded in 781 and is in its 46th generation of family ownership; Italy’s Fonderia Pontificia Marinelli, a bell-maker, dates from about 1000; Metalwork firm William Prym GmbH & Co from Germany started out in 1530; Spanish wine-maker Codorniu began in 1551.

These businesses become hubs of knowledge and best-practice - what we would now call “incubators”. How many people have learned their trade in these companies over the centuries, and started other businesses? Longevity itself is a plausible measure of success. A 400-year-old business must be doing something right. Will Google still exist in the year 2400?

Usefulness

The financial press gets all hot under the collar about the huge valuations of tech firms - messaging app Snapchat is valued at $15bn, and taxi service Uber at $40bn - but it is not clear how much these businesses contribute to humanity. On the other hand there is Vestergaard, a Danish family-owned business which makes water filters that have contributed to reducing cases of Guinea worm disease from 3.5 million in 1986 to 126 in 2014. Imagine how many hours have been worked that otherwise wouldn't have. 

Biologists talk about keystone species, creatures which are essential to a functioning ecosystem. You could think of these as keystone businesses, which make other things possible. You could mention Essel Propack, which makes tubes for the pharma industry - 6 billion of them a year. Or Japanese firm Fanuc which makes robots for industrial manufacture, or Mexico’s biggest insurance firm Grupo Nacional Provincial. All are family-owned.

Families are also willing to expand into niches that others might not. Take, for instance, 350-year-old Dutch company Van Eeghen which switched from spices and herbs to nutraceuticals or the Mulliez family which turned a sewing kits business into the Auchan supermarket group. Norwegian billionaire Fred Olsen’s green energy firm evolved out of one which made nautical nails. Automaker Suzuki started as a loom-maker.

Why does this happen? Because the family need to support an ever-expanding family, have the expertise to spot opportunities, and the capital to change direction. Families are risk-averse and look to set up useful businesses that are genuinely needed. Finding a way to measure that could be truly useful.