Report from the Economist: Family companies are much more than just half-formed public companies. They are a category of companies in their own right. They have unique advantages in the form of long-term thinking and concentrated ownership. They have unique disadvantages in the form of succession problems and family feuds. And they have unique ways of dealing with these problems. Given the sheer number of family companies of all sizes, and their economic importance, they deserve a lot more attention, in particular from three groups of people: business analysts, professional managers and theorists of the firm.
Business analysts would do well to add some new tools to standbys such as company prospectuses and analysts’ reports. They might read more novels—say Jane Austen’s “Pride and Prejudice” for its observations on the marriage market and Thomas Mann’s “Buddenbrooks” for its insights into the fading of the entrepreneurial spirit across the generations. They should also follow the gossip columns. A bad marriage can doom a business empire.
They should certainly keep an eye on problems of succession. A huge transfer of corporate wealth and power is currently taking place in two parts of the world—Asia and the Middle East—which have little experience of such things. The fate of two of the world’s biggest companies, Samsung and Hutchison Whampoa, is being shaped by family succession.
Business analysts like to argue that conglomerates will become less prevalent as markets develop, but conglomerates are also driven by families’ desire to provide opportunities for their offspring. LVMH has managed to buy a number of family-owned luxury companies because they are much happier selling to another family firm than to an anonymous public company. Estée Lauder is pursuing a similar strategy in buying up family-owned beauty companies.
A consulting trio argues that public companies have a lot of important lessons to learn from family companies, from the value of long-term thinking to the virtues of frugality. They commended family companies on their ability to develop a cadre of loyal staff. Nestlé, a Swiss food company, slightly underperforms its big competitors in good times but outperforms them in bad. Essilor, a global leader in optical lenses, is obsessed with cost, keeps its debt low and has little staff turnover.
The more companies compete to sell “meaning” as well as mere products, the better family companies will do.
The most intriguing challenge posed by the enduring success of the family company is to one of the building blocks of modern economics: the theory of the firm.
The prevalence of family companies in so much of the world suggests that theorists of the firm need to think more in terms of groups of firms rather than just individual firms.
Inheritance and ownership bring with them a whole collection of problems that are every bit as tricky as agency and transaction costs. Heirs frequently quarrel about their inheritance, and some owners behave less responsibly than others.
The company is one of the most powerful instruments ever produced by human beings; it allows investors and workers to pool their resources to serve the needs of strangers to mutual benefit. Families with names like Rothschild and Baring played a starring role in creating modern capitalism. Families with names like Godrej and Lee will play a starring role in re-creating it in a more global age.
