Investment

Listed family businesses work at many levels – for the family owners, investors…and society

Might the most advantageous model of big business in the 21st century be the listed family company?

Listed family businesses would probably say yes, but not everyone is going to agree. After all, there are pluses and minuses for pretty much all types of business structures. But, at least in theory, listed family businesses might just give the best outcomes for the most number of stakeholders. And that is to be applauded.

From the perspective of the owning family, listing their business can be beneficial in a number of ways. The most obvious one is access to outside capital for expansion. At a time when many family businesses are under immense pressure to innovate, access to outside capital might mean, in the most extreme cases, the difference between survival or failure. What’s more, access to outside capital through a stock market listing doesn’t necessarily impair the family’s ownership, especially if a dual listing is allowed on the stock market the company is listing on.  

In a dual-class system, the class of shares held by the controlling family gives the family more votes per share (sometimes even all the votes), or special rights, in order to elect the board of directors they want. Here is some analysis from family business consultant and MIT professor John Davis on the benefits of dual-class shareholdings.

Listed family businesses really do seem to perform better than non-family businesses.

But don’t such structures lead to less favourable governance outcomes for listed family businesses, compared with non-family listed businesses? Not necessarily. Alexander Koeberle-Schmid, who runs German-based family advisory boutique group Koeberle-Schmid & Unger, says it can have better governance outcomes.  “Listed family-owned companies need to follow the requirements of the capital market in terms of transparency and governance. As a result, they are transparent to the outside as well as to the inside, which I think significantly improves the management of the company.”

He adds: “The following aspects make a significant contribution to listed family businesses success: a professional reporting system, a dividend policy geared towards the company and the shareholders, and a meaningful division between decision-making and monitoring bodies.”

And perhaps the best outcome from a governance perspective of a listed family business is the likelihood pay packages of senior management are kept in check. Shareholders of non-family listed businesses often fail to act in unison to block excessive pay packages of CEOs. In contrast, given the more prevalent role of family shareholders in a listed family business, pay packages of the bosses of these businesses are likely to come under greater scrutiny, or at least be tied more to long-term outcomes.

Corporate greed in the form of excessive pay packages of top managers of mostly listed businesses is one of the biggest gripes the public have with big companies in the 21st century. The media often portray these individuals as company fat cats, lining their pockets at the expense of their customers. That image doesn’t endear the public to big business.

No doubt there are many listed family businesses paying excessive salaries to their senior managers. And more analysis on the link between pay packages of senior management and listed family businesses need to be done. But if listed family businesses do keep pay packages more under control than this is surely a better outcome for society.

Investors are also beneficiaries of listed family businesses. This works on two levels – firstly, the better stock market performance of listed family businesses, compared with non-family businesses, and, secondly, more access to family businesses for all types of investors.

On the performance level, listed family businesses really do seem to perform better than non-family businesses. Take for example the DaxPlus Family 30 Index, which measures the share performance of the 30 biggest and most liquid German family businesses. According to a recent article in the German press, the Index gained around 110% from December 2012 to December 2017, beating the main German index, the Dax, by 37%.

The Euronext Family Business Index has also outperformed many indices. The chart below shows the outperformance of family businesses listed on Euronext, against a number of European bourses including the main French stock market index the CAC40. The blue line is the Euronext family business index.

Investors are getting good returns from listed family businesses, but not only that, listed family businesses are open to all investors. In contrast, non-listed family businesses, if they are open to outside investors at all, are pretty much only so to the very wealthy through private equity funds and/or family office investments. Listed family businesses make capital markets more democratic and open. Given the shrinkage of listed markets global in the last 20 years, that’s to be encouraged.

At a time when many family businesses are looking to raise capital, the listing option provides a compelling case. Nevertheless, given the greater scrutiny and transparency a listing will incur, and the fear of outside activist shareholders, many family owners are reluctant to go down this path. More needs to be done to reassure them otherwise because the benefits to all stakeholders are potentially considerable.  

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