How much are family businesses contributing to the productivity gap?

Are family businesses productive? The answer to that is yes, of course. But how productive? In the UK, not very, or at least that is how it has been recently reported. This is a potential concern for the UK, not least because the country consistently scores low on productivity measurements compared with Germany and France.

But how much are family businesses contributing to that productivity gap? Worryingly, a lot, says a BBC report.

To put it bluntly the management of family-run firms (which make up more than half of all manufacturing companies) is awful

Here’s how the BBC recently reported a study by the UK government’s Office for National Statistics on productivity and how family owned and run businesses were a hindrance to better productivity.

“Perhaps more interesting is new research by the ONS into the efficiency of family-owned and run manufacturing firms. That found well-structured management practices were better among larger businesses, multinationals and family-owned businesses that were not managed by members of the owning families. To put it bluntly the management of family-run firms (which make up more than half of all manufacturing companies) is awful.”

Attempts by Family Capital to get the ONS to clarify the family business part of its analysis were met with no answer, and Family Capital wasn’t able to track down the actual research on this. But the damage, when it comes to the perception of family-run businesses in the UK, had been done. The BBC is the most widely viewed source of news and information in the UK.

The problem with the BBC report is that it implied that family businesses run by families aren’t good when it comes to productivity - so, through association, it’s pretty easy to conclude that they are bad for the UK economy.

Clearly, UK family businesses and those supporting them believe this is blatantly wrong, and they make some powerful arguments to back this up.

Here’s what Elizabeth Bagger, the executive director of the Institute of Family Business, says about productivity at UK family businesses: “Productivity and business success is a complex issue.  During periods of economic downturn, we know that family businesses are more resilient, and tend to maintain higher levels of employment.  Family businesses, with their long-term outlook, are the backbone of our economy.  This long-term outlook ensures family firms invest in training their employees, and innovate and develop new products, processes and services.”

Retaining trained staff during a downturn will have a negative effect on productivity and short-term returns but a positive effect when business picks up and over the longer term could enhance shareholder value

And here’s what Ken McCracken, head of family business consulting at KPMG in the UK, says: “Some families promote based on merit over bloodline and, if successful, probably enjoy productivity gains. Others accept productivity costs in favour of having family in charge. One of the problems with research into just one measure is how it cannot recognise that families in business are balancing multiple forces. Recognition of the subtle interplay of these is needed in order to understand what contributes to family businesses’ achievements over time.”

McCracken adds: “For example, retaining trained staff during a downturn will have a negative effect on productivity and short-term returns but a positive effect when business picks up and over the longer term could enhance shareholder value.  Equally, having trusted family members in charge can mitigate the cost and red tape of overseeing external management. Maybe the business will not grow as quickly but the owners may sleep better at night and have more harmonious family relationships.”

OK, McCracken and Bagger would agree that productivity might be an issue for some family businesses, but they reckon other factors, like commitment to the long term, staff retention, and family harmony more than outweigh the downside of any productivity shortfall among family-run businesses. The ONS study didn’t go into these factors, nor did the BBC report.

And if there is any doubt of the futility of associating low productivity with family-run businesses and how that isn’t good for the UK economy, maybe the ONS and the BBC should look a bit more in-depth with high-productivity Germany.

Owner-managed family businesses there account for 44% of Germany's total GDP, according to The Foundation for Family Businesses. Their contribution is huge to the German economy - and surely they must also be contributing to the economy’s good productivity statistics, and much more as well.