Minority shareholders are stifling innovation at family businesses

Here’s some new thinking on minority shareholders – they are bad for family businesses because they deter innovation. Yes, that’s right, they are no good for innovation – the idea that obsesses businesses from the tech giant Apple all the way down to the one person cottage industry run from a bedroom.

That’s the conclusion reached by some recent research done on the subject by a group of European academics. As one of the authors, Nadine Kammerlander, told Family Capital about the research findings: “Minority shareholders can really harm a family business and make it more short-term oriented. In our study, we found that in those countries in which minority shareholders have much power, family firms are much more short-term oriented and hardly invest anything in innovation.”

Kammerlander, a family business specialists at the Otto Beisheim School of Management in Germany, adds: “We reason that the minority shareholders mostly act as ‘traders’, and try to maximize their own, usually short term and monetary utility, while the family is more long-term oriented.”

The short-term basis of minority shareholders, especially when they’re non-family shareholders, has been discussed many times before. But the stifling of innovation such shareholders can potentially cause is a new idea – and a concern. How business owners react to this remains to be seen, but it’s probably fair to say that it will do little to further endear them to minority shareholders. In fact, it will probably confirm their suspicions of them and may even steer them away from public ownership of their businesses. That could have repercussions on nurturing good corporate governance.

But does this view mean non-family minority shareholders are all bad for family businesses? No. As Kammerlander says, the classical view of how they interact with family majority shareholders tells a different story.

This says in its most basic explanation that family shareholders are bad and minority shareholders are good. As Kammerlander says: “Classical family firm research suggests that minority shareholders are more rational, while the family tries to maximize family benefits, e.g., by appointing the incapable son or daughter as successor. In that perspective the family takes the ‘evil’ role, taking advantage of the ‘good’ minority shareholders.”

Even if this black and white classical view of minority shareholders seems dated that doesn’t mean non-family shareholders can’t be useful for family businesses. As Josh Baron, co-founder and partner at the family business consultancy Banyan Global points out, not all minority shareholders take the short-term approach. In fact, as he says, sometimes minority shareholders are very much aligned with family shareholders, even over multiple generations.

“I have seen examples of where family businesses have minority investors who are highly aligned with a long-term approach. Often they have been around for years, or even generations. They are more family-like, not there just for the returns.”

Still, minority shareholders aligned to the long-term objectives of family businesses are probably not that common. And if those more committed to short-term objectives are now found to be undermining innovation, family businesses are likely to be more suspicious of them than ever before. Minority shareholders like private equity groups should bear that in mind.