Can the attributes of how a family business manages capital be also found at a family office? In most cases yes, but in one important respect, no. This might pose challenges for family offices in the future.
In the canon of family business thinking, there are arguably three main factors that explain their success. First, they are owned by a family that creates continuity, second, they are committed to long-term goals, rather than short-term profit cycles, and third, they follow the idea of stakeholder value more than just shareholder value.
Every family business is different and some might emphasize these factors more than others, whereas others less so. But what about family offices? Do they also have these attributes? Like family businesses, they are owned by a family and many family offices also extol the virtue of patient capital and invest for long-term outcomes rather than short-term ones.
But when it comes to stakeholder values, family offices aren’t like family businesses. This might not be intentional. Most principals of family offices would say that stakeholder values are a good idea in themselves, particularly if the principal(s) come from a family business background. But the nature of their investments makes the link between themselves and the stakeholders less strong.
When a family has built a business from the beginning, or at least been involved in directly growing it during an important phase of its existence, stakeholder values are likely to be much closer to the overall management of the business. But when a family office takes a stake in a business, even if it is a majority stake, the relationship with the stakeholders is more remote.
OK, the family office might say otherwise and in a few cases that might be the case, but in most cases, an investment in a business that wasn't built by the principals of the family office will be more remote from the stakeholders of that business.
Does this matter? In the short term, no, because the returns on the investment will be the priority, or, at least, the remoteness of stakeholders won’t pose a problem. But it might pose more of a problem over the longer term if the non-shareholder stakeholders feel little link to the shareholder stakeholders.
And the more geographically remote the shareholder is to the business, the more likely that can cause a problem. It is as well to remember, even many of the biggest family businesses in the world like VolksWagen, IKEA, and Walmart appreciate the concept of the importance of being connected to the community they emerged from. They may allocate capital globally, but their commitment to their community where they came from remains strong. These huge businesses get the value of their stakeholders and that helps them gain greater acceptance.
In an age when capital is footloose and global, the link to the stakeholders in the businesses family offices invest in will be weaker. Of course, some family offices will remain very local and invest in businesses close to their geographical community. For them, the link to stakeholders in their investment will be stronger. But these type of “local” family offices are in the minority. Most look at investing beyond their community.
Some investors at a family office level, or at least close to it, are beginning to appreciate more the value of stakeholders in the investment process - at least in the abstract. An interesting case in point is a venture fund launched late last year called the Rise of the Rest Seed Fund.
The fund is backed by Steve Case’s Revolution venture capital business and fellow venture capitalist, J.D. Vance. Case is best-known for co-founding America Online, or AOL, whereas J.D Vance is best-known for his recently published book and memoir called Hillbilly Elegy. The book details his upbringing in a white working class Rust Belt town and the economic and cultural decline of America’s white working class.
The Rise of the Rest Fund is an attempt to back entrepreneurs and businesses in out-of-the-way places in the US, or in the Rust Belt. In some ways, it’s trying to bring back prosperity to economically marginal areas of America, many of them white working class, and address the popularism that gave rise to Donald Trump in a constructive manner. The fund, which has attracted some big named investors like Jeff Bezos of Amazon and the Koch and the Walton families, wants to highlight investment in these areas, rather than the well-established venture centres of Silicon Valley in California, New York City and Cambridge, Massachusetts. These three places get around 80% of all venture funding.
The Rise of the Rest Fund is an attempt to better link investors to stakeholders, where stakeholders, in this case, are a much bigger pool of the American people than in places like Silicon Valley and New York City. The fund is very much profit driven and is not an impact-type fund idea that is also trying to create better social outcomes - although, of course, the intended consequences of Rise of the Rest Fund could lead to better social outcomes through empowering entrepreneurs in less privileged areas.
Granted, the link might be somewhat tangential between investors and stakeholders when compared with a family business and its stakeholders. But this might be the start of a trend where stakeholders will matter more for investors, especially in the sphere of privately-owned businesses.
After all, it is important for family offices to realise they are so-called “market-dominant minorities”. And market-dominant minorities are likely to come under pressure more as direct democracy grows as a political force in the 21st century. If this is indeed the case, it may be well advised for investors like family offices to take note of this trend and realise the importance of all their stakeholders in their investment decisions.