If family firms have weak management why do they perform so well?

Here’s a dilemma in the analysis of family businesses: a recent study has found that family businesses tend to have weak management, but another study has found they outperform non-family businesses. So is one of the studies wrong, or does management practices at family businesses have little to do with their performance?

An article by three prominent academics for the Harvard Business Review highlighted their research on management competency and how important it is for successful businesses. Entitled Why Do We Undervalue Competent Management?, the authors looked at many types of corporate structures and how important management competency was to their success.

They found that family-owned firms, or at least those with family CEOs, had weak management. This structure was the second worst on their chart: “Family-run firms tend to have weak management”, with founder CEOs at the bottom. To be fair, family businesses with non-family CEOs were the third least weak on the chart. But this type of structure was deemed not as strong as diverse shareholder or private equity structures – the gold standards, according to the authors, of management competency.

The authors argue that fostering strong managerial practices is often not given enough emphasis by businesses, or business schools, which may instead strive too much to develop a distinctive strategic position as a business priority. And the authors argue: “firms with strong managerial processes perform significantly better on high-level metrics such as productivity, profitability, growth, and longevity.”

To help illustrate their points when it comes to family businesses, the study uses the example of two businesses – Gokaldas Exports, an Indian family-owned business founded in 1979 that had grown into the country’s biggest apparel exporter in the mid-2000s, and Moleskine, a family-owned notebook producer based in Milan.

The Gokaldas example shows a firm that relied too much on family managerial decision-making and not enough on external managerial input. As such, this reliance ultimately hurt Gokaldas business – and it wasn’t until things became very difficult for the firm that it began to change and changes in management were made. 

In contrast, Moleskine brought in external management through a private equity sale early on, which enabled it to adapt and grow faster. Both examples are laid out in much more detail in the HBR article.

But is management competency so important to family businesses? Another study suggests it might not be. As Family Capital recently highlighted, according to a recent Credit Suisse report, the shares in listed family businesses outperformed those of non-family businesses over a nine-year period up to 2016.

OK, many of these family businesses don’t fall into the category of family managed firms – they are mostly managed at the top by non-family managers. So they don’t fit into one of the worst categories, according to the HBR article, of family-managed businesses when it comes to management competency. Nevertheless, listed family firms are being benchmarked when it comes to stock market performance against the top management competency structure – dispersed shareholding – and outperforming them.

Interestingly, the Credit Suisse report also highlighted that many listed family businesses don’t see succession planning as one of their big concerns. Instead, they see rising competition and the need to innovate as bigger issues. That’s interesting, because, if family business owners are saying they’re not too concerned about succession planning, they’re effectively saying they’re not too concerned about scoring high on things like management competency metrics.

Of course, no family firm is going to be happy with management incompetence, but maybe they’re going to be less concerned about applying MBA-quality management efficiencies in running their businesses, compared with many other business structures.

Nepotism, whether it exists or doesn’t at family businesses, will always haunt the sector. Nevertheless, management competency as it is applied in a traditional MBA/business school perspective will often count for little at many family businesses. What matters for them is to measure performance that keeps them being a successful business in the societies and communities they work in over a long period of time.

And the fact that the oldest businesses in the world are family owned suggests there’s something in their approach that works.