Banks make money out of the listed family controlled businesses, not the non-listed family controlled sector.
Credit Suisse has recently produced a report about family business entitled: The Family Business Model. Although making some useful insights, backed up with plenty of handy data, the report underlines why most banks don’t get family businesses. Here’s why.
The prism (prison) of the stock market
This is the biggest problem - banks looking at businesses through the prism of the stock markets. As far as most banks are concerned, if the business isn’t listed, or about to be listed, on a public market it’s not really worth paying any attention to because the banks can’t make money out of non-listed businesses. The trouble is most family businesses aren’t listed. Just how many aren’t listed is encapsulated in the fact that there are less than 5,000 companies publicly quoted in the US out of a total of more than five million businesses. Of course, many of these non-listed businesses are small, but not all of them. There are plenty of big ones and many of them are family controlled, like: Cargill, Koch Industries, Mars and HE Butt Grocery.
The Credit Suisse report is based on its index of family businesses, the CS Global Family 900, which comprises more than 900 businesses all listed on the stock market. In fact, the only family business criteria used is that the family must control 20% of the equity in the business. Stock market benchmarks are then used to evaluate the performance of these listed family businesses with non-family listed ones. The study shows that over a nine year period since 2006, listed family businesses outperform non-family listed ones in terms of stock market performance and even profitability. Profitability is important for any business, but profitability for family businesses is often linked to long-term performance and the importance of quarterly profitability performance of the listed sector is much less relevant.
There’s also another big problem with the Credit Suisse data, it includes businesses that are run by first generation entrepreneurs, like Google, Facebook, Oracle Corporation, Softbank and Foxconn Technology Group. These businesses are hardly family controlled in terms of a more traditional definition of the term (and arguably better), whereby they must at least be transitioning to the second generation and beyond. Again, here the emphasis is on short-term stock market performance, rather than long-term stakeholder attributes.
The benefits of minority shareholders
A big negative, as far as Credit Suisse is concerned, is that family businesses fail to protect minority shareholders’ interests. As quoted in the report: "The negatives linked to family-owned businesses mainly relate to corporate governance shortcomings and the inability of minorities to control or exert good influence over owner-managers.” Although the report does go on the qualify this by adding: “But such corporate governance concerns are generally overstated. Investors should not underestimate the importance of reputation and integrity to many family business owners.”
Interestingly, the biggest proponent of the “minority shareholder” argument are often hedge funds, groups like Elliott Associates, which recently targeted Korea’s biggest family-controlled business Samsung in terms of the importance of minority shareholders and control. Yes, minority shareholders concerns should be taken into account, but family businesses are often about long-term goals, not short-term shareholder profitability, which hedge funds want to ensure they make money.
Of course, there are always exceptions. Banks, normally the smaller ones, with strong corporate and wealth management relationships at a local level with non-listed businesses probably do understand family businesses better. But, the financial industry as a whole, needs to stop looking at businesses always through the prism of the stock market and the various other criteria linked to stock market performance. A broader perspective is needed.