Banks often praise the family business sector, or at least listed family businesses, in a marketing effort to promote their own products and services. This report from Credit Suisse probably has an element of that, but it also shows just how family businesses outperform their non-family counterparts in almost every worthwhile measurable criteria.
OK, the report uses listed family businesses and big ones at that - with their market capitalisation at least $1 billion - but there’s much in their performance that is often mirrored in non-listed family businesses as well.
Here’s some of the report’s most interesting findings:
An index created by CS of 900 listed family businesses across the world (the Global Family 900), all with at least $1 billion in market capitalisation, outperformed in terms of compound annual growth rate the MSCI All Countries World Index by 4.5% since 2006.
Over the longer term, family companies in the Global Family 900 have generated twice the economic profit, a far more robust measurement of profit, which looks at earnings in excess of the opportunity cost of using assets or capital, compared to most benchmarks of all other companies.
The business cycle for family businesses is smoother and more stable. The report shows that sales growth among the 900 is less volatile through the cycle with lower peaks and less pronounced troughs.
Family business growth doesn’t rely on mergers & acquisitions and is much more organic, which creates greater stability. Since 1990, M&A among family businesses has contributed to just 2.1% of sales, compared with 5.8% at non-family businesses. The report also found that family-businesses make better and cheaper acquisitions in terms of the growth and returns achieved in the three-year period post acquisition.
This is perhaps the biggest finding, or at least the one that is often reported to be negative for family businesses, compared with non-family businesses. Concern about corporate governance risks at family business are overstated, the report found. CS evaluated empirical measures of accounting performance as a corporate governance proxy and found that there is a closer alignment between owner and minority interests than the market understands. Accounting quality at family-owned companies is superior and reflects the owners’ focus on preserving wealth over the long term.
CS went on to compare the performance of some family businesses with their major non-family competitor in their sector. The results backed the broader findings.
After this report, it’s a wonder why banks like CS don’t advocate family ownership in the financial services sector...where it is, of course, miniscule, compared with most other sectors.