Don’t get too carried away about the importance of family businesses

Bill Gates: his views on under- and over-estimating change apply to everything...

Bill Gates: his views on under- and over-estimating change apply to everything...

Andre Hoffmann, a member of the family that owns the pharmaceutical company Roche, once said that when he was studying at INSEAD in the 1990s, family businesses were viewed as old fashioned. The thinking then, he said, was family ownership of businesses was destined to be swept aside by the mantra of the times: shareholder value.

The outcome, of course, was the opposite, shareholder value was discredited by the financial crisis of 2008, whereas family businesses, as an ownership structure, have come back in favour. Now it’s all about the long term, and the view today is that the ownership structure that best reflects this is the family business.

Hoffmann, and others that kept the faith when shareholder value was the conventional wisdom, deserve respect. They have been vindicated. And, interestingly, INSEAD now has one of the most active family business programs among any of the business schools.

Nevertheless, let’s not get too excited about family businesses as the perfect ownership structure. Yes, they will continue to be a popular. Family businesses, in many ways, better reflect current trends in society, where profit is no longer viewed as the only driver of success, and where businesses are having to think more about the communities they work in. Business families have been doing that for years, so they have built up some goodwill from the wider pubic around them. This makes them popular.

But, they probably aren’t going to be THE business model of the 21st century, as one writer has recently suggested. Arguably, the business model of the 21st will probably be the start-up. Whether the tech start-up, or the wine shop in the local community, that’s where most of the dynamism, and employment, have recently come from and will continue to be so for much of the next 50 years and beyond.

Yes, family businesses can continue to attract talented staff, but maybe not as well as start-ups, or even non-family-owned big businesses. In fact, surveys have shown that family businesses often have difficulty attracting talent. And maybe even more important, have difficulty attracting the next generation.

And big business still has a knack at attracting the best and the brightest...at least in their earlier employment years. Family businesses often find it difficult to attract the best graduates because they can’t compete with the salaries and other perks a big company can provide. Ambitious employees might also be turned off working for family companies because of the real, or perceived “glass ceiling” to achieve promotion to the top jobs.

Representatives of successful family businesses like Hoffmann at Roche are right to feel vindicated in their view about the longevity of the family business model. It hasn’t disappeared and will continue to proper.

But proponents of the model shouldn’t get dragged into the same mistake that those made about shareholder value in the 1980s and 1990s. Because in 20, or 30 years time, who knows what the thinking will be in terms of corporate structures - and what’s popular, and what isn’t.

As Bill Gates said about change, the human race tends to overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten years…

That applies to everything.