What sort of growth is good?

Photo by amenic181/iStock / Getty Images
Photo by amenic181/iStock / Getty Images

Imagine a chef who decides to source all his ingredients from local suppliers, and to cater for local customers. That is generally considered a good thing. His is a business model that is not necessarily focused on bottom line, or generating shareholder value, and that’s okay. Heroic, even.

But if that is okay for a chef, why is it not if you are making widgets? Many family businesses do something similar to that chef - sacrificing profits for other aims - and yet they are criticised for not aiming aggressively enough for growth. Can that be right?

Maybe it is best to put it another way - family businesses do aim for growth, but it is not necessarily economic growth. There are lots of different sorts of capital, such as intellectual, human, social, or spiritual capital. Most businesses are looking for growth in one of those forms.

Short-term growth may even be contrary to a family business’s core aims. As everyone knows, one of the huge strengths of family businesses is that they are capable of taking a very long-term view. A lot of them are not driven by what will happens in two or three years’ (let alone quarters’) time; they are much more concerned about still being there in two or three generations. Sometimes that means hunkering down and getting through difficult times, not worrying about what outsiders might read into their accounts.

Much depends on why the family is in business together in the first place. What is the business for? I have dealt with families who see the role of their business as providing everyone in the (often extended) family with a roof over their head, food on the table, and the dignity of something worthwhile to do. Achieving that is much more important to them than accumulating numbers on a balance sheet or money in the bank.

Is that a dying attitude? Maybe. Growing affluence always seem to decrease the sense of interdependence, of collective well-being, and many in the next generation seem more interested in “running money” than the operating businesses their parents built up. But there are plenty of others who won’t take that route.

Ultimately, there is a logical inconsistency in the classical growth argument. Economists accept it when somebody opts to sacrifice profit to use local suppliers, or to only do things that they think are ethical. They class these as reasonable (i.e. rational) exceptions to the rule that a firm must grow or die. But why are those exceptions acceptable and others - for example refusing to make lay-offs in downturns to protect the local community, or ensuring family members have a meaningful job - beyond the pale? If there are exceptions then why can’t every family choose its own?

What keep business families together is shared values. Those values constrain the sort of growth they will pursue, and how they will pursue it. That may seem  irrational to Econs (to borrow a phrase from Thaler and Sunstein’s Nudge), but it is very human. In any event aiming solely to boost the bottom line also constrains the sort of growth that a firm can have, often sacrificing human and social, not to mention the spiritual, capital.

That is not to say that maximising traditional shareholder value is wrong. After all, that is what corporations are for, and such an approach sits perfectly well with some families’ values. In any case, these things change over time. As a family business passes down the generations, its shareholder base can get very wide.

Those shareholders may bring in professional managers, and perhaps even float. For many in the family the business may then be just another investment. There is no longer such an emotional attachment, and the growth model could seem absolutely right for it. That’s fine; no model is best for all firms at all times.

And that is the crux of the matter. Family businesses must do what is right for them, and not be bullied by the gurus of growth.

Ian Marsh is the founder of familydr Limited, where he specialises in family dynamics and communication