A diverse board makes for a robust business

If there is one thing everybody thinks they knows about family businesses, it is that they go from shirtsleeves to shirtsleeves in three generations. It is often said that only 3% of family firms make it to the fourth. But is it really true that they are less robust than others? What does the data say? 

A recent paper called Family Business Survival and the Role of Boards sets out to discover just that, by looking at the bankruptcy rates of British firms between 2007 and 2010, when the country went through an economic downturn.

The academics defined a family firm as one in which family directors make up more than 30% of the board. They discovered that 1.3% of family-owned firms went bust, compared to 1.8% of non-family firms. The effect was even stronger when the number of family members increased, up to 50%, at which point it dropped off.

The question is: why? There are plenty of reasons to believe family companies might be fragile. Feuds can tear them apart; they sometimes employ family members who are not up to the job; they sometimes invest too little in R&D; and they can be risk-averse.

Conversely, there are also good reasons that family businesses ought to be long-lived. Three things – their desire to pass on the business to the next generation; their aim to grow “socioemotional wealth”, ie, non-financial goods such as enhancing their standing in the community; and strong contacts with suppliers, customers and banks – add up to what is sometimes called “survivability capital”. This theoretically should help the business continue through recessions, hard times or after mistakes.

But rather than dealing in generalities, the academics looked at something concrete: board composition. They discovered several differences between family and non-family firms. Family firms had a third more women on boards, and 80% had at least one. The boards were more stable, perhaps because that the presence of women means there is less conflict, the academics theorised.

The directors of family businesses also tended to live closer to the business. (Perhaps they are better able to communicate with each other? Maybe they can see each other more often?) Family firms also had older and more experienced boards, and their directors had been on the boards of fewer businesses that had previously failed.

There were also fewer directors from outside the business, perhaps suggesting that in times of crisis, such as a recession, it’s a case of all hands on deck. To put it another way, it is better to have directors with skin in the game.

The academics also suggest that family board members are able to draw on the experiences of other family members, meaning that these boards have “built-in diversity in terms of age, experience, and gender”. They might also be more motivated to keep the business going, as they are very aware of the reputational damage associated with failure: board members who are concerned with socioemotional wealth might be better at keeping a business afloat than those who are only concerned with financial gain.

Of course, the research raises many questions – are the results the same for non-British firms? Are these businesses satisfactorily profitable – ie, would be perhaps better if they did go under? And, as older businesses are less likely to go bust, does this study have a selection bias in favour of family firms?

But the results – that firms tend to be robust if their boards are composed of up to 50% family members, have more women directors, and more directors who are employees and who live closer to the business – should interest anybody who wants their business to live on into the next generation.