Investment

Fake news, family businesses, and banks

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Here’s an interesting question: when is a company a family business? Well, in the investment world sometimes what constitutes a family business is open to a broad definition. Perhaps an even too wide a description to be credible.

Credit Suisse recently released a report on listed family businesses. The Swiss bank has often championed the performance of listed family businesses and in its latest report, The CS Family 1000 in 2018, it continues in the same manner.

As the report says: “The longer-term trend of outperformance of family-owned companies is clear, with our ‘Family 1000’ universe having delivered cumulative excess returns in every region and sector since 2006.” The report shows how its world of 1000 listed family businesses has outperformed their non-family listed counterparts in terms of sharemarket performance since 2006. Credit Suisse’s research goes into their performance in more detail and also looks at some interesting points, like one time period when family businesses appear not to outperform their non-family business counterparts. And this is during an economic upturn. More on that at another time.  

With a lot of emphasis on the importance of long-term decision making in the business world in recent years, family businesses are often held up as the exemplars of this theme

But what’s also interesting for the family business connoisseur is the constituent parts of the CS Family 1000. Nearly 400 of them, the majority, are founder-managed businesses. They include huge tech firms like Alphabet (Google), Facebook, Alibaba, Oracle, Baidu, and Softbank.

In Credit Suisse’s analysis, these companies constitute being a family business because the direct shareholding of their founders is at least 20%, and/or founder voting rights is at least 20%. But doesn’t this definition stretch the imagination a little bit too far? Aren’t these businesses still predominately entrepreneurial companies controlled by their founder(s)?

Yes, the ownership structure the founder(s) companies might fit into a family business definition – this being, the owners must own at least a significant amount of shares to influence the company’s direction. But surely they must also at least be transitioning to the second generation of family ownership if they are to be considered family businesses?

And maybe the real proof of this is to ask the leaders of these big tech companies whether they consider the businesses they run and/or own family firms. Family Capital might be wrong but we reckon not one of them would say they are family businesses.

To be fair, many of the businesses on the CS Family 1000 list are very much family firms when it comes to generational transitions – but 400 aren’t. And given the founder managed/owned tech businesses mentioned above constitute $2.1 trillion in market capitalisation, i.e. a considerable proportion of the total market capitalisation of the CS Family 1000, then perhaps the index has very little to do with family businesses. Indeed, doesn’t it have much more to do with the boom in big tech since 2009, or at least first generation entrepreneurial businesses, which tend to grow rapidly, rather than family businesses?

Credit Suisse’s research bears this out. It shows the more generations of ownership, the more likely the stock market performance of listed family businesses will be less good. In this case, it would be interesting for Credit Suisse, or any other bank/investment group to compose an index of just second-generation and above-owned family businesses and compare it against global indexes. Maybe the superior performance of such listed family businesses would be less good.

Although Family Capital isn’t suggesting Credit Suisse isn’t doing this, but the banking and investment community too often run with a popular investment theme to grow their client base. With a lot of emphasis on the importance of long-term decision making in the business world in recent years, family businesses are often held up as the exemplars of this theme. They are viewed as virtuous. So they are very popular right now, both listed and non-listed family firms.

That may be good for many family businesses, particularly if they’re looking to raise money. But a stricter definition of what constitutes a family business might be wiser to follow – not least because it will help to build better confidence between the investment world and family businesses, which sometimes isn’t as good as it should be.  

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