The global variations in family business structures
Their concentration, nature and performance is different in the US, UK, Germany, Indonesia and IndiaUpdated: Sep 29, 2019 20:12 IST
The last piece in our six-part series on family businesses explores their spread and importance globally. As a proxy, we have considered family-owned companies in the United States (US), the United Kingdom (UK), Germany, Indonesia and India. The US, UK, and Germany are three of the top five global economies and Indonesia and India are among the fastest growing emerging economies. After 2000, both India and Indonesia have quintupled their economies.
We examined the concentration, the nature, and performance of family-owned businesses in each of these countries by studying family businesses present in the top 200 companies within them. The differences are significant. At one end, the US and UK have barely 5% of their largest enterprises owned by families. So, despite the talk around the Waltons (Walmart), the Pritzkers (Hyatt) or Travis Knight of Nike, family-owned businesses have a low share. The founders have not passed on management control to the family. This is most evident with big technology companies like Microsoft, Apple or Google. On the other hand, India and Indonesia have a far higher share of family-owned enterprises that continue to operate as family businesses. In fact, as the graph shows, more than 40% of the largest companies in these countries are owned by families. Germany leans towards the two Asian nations. Europe more broadly also shows a greater family orientation.
When we examined how family-owned businesses are managed, another clear distinction became apparent. In developed countries like the US, UK and Germany, they are not often owner-managed. Families prefer to act as activist investors (with positions on the board) or sometimes are even passive shareholders. This is a far cry from India and Indonesia. The typical model here is of an owner-manager. CEOs come from within the family, and other family members often occupy management positions. What drives such a significant variation?
To understand this, we explore social norms, the maturity of economic institutions, and the depth of capital markets. It is evident that the family unit in India and Indonesia is much stronger than the family unit in the US or UK. Marriages are still often arranged by families, the rate of divorce is lower, and the Hindu philosophical tradition in India has been influenced by stories in the Ramayana and the Mahabharata, which are about family values and resultant social norms. It is not surprising in India to find working children, even married ones, living with their parents. Later, elderly parents end up living with their children. In Indonesia again, families especially of Chinese-origin, are very close, and act as a strong family unit. The philosophical underpinning in the US certainly, and the UK in the last 50 years, has been built on the concept of individualism. Many marriages end in divorce. It is completely acceptable for the child of a business family to pursue a career path that interests them outside the family trade, even if this results in the families selling their business. The maturity of capital markets makes it easy for families to find a buyer (often an activist fund) and cash out. These issues collectively explain the difference in ownership style.
Germany finds itself between these two ends of the spectrum. There is a great deal of national pride associated with family-owned businesses and their role in the country’s growth. But there is also a culture of individualism that is making it harder for these businesses to find successors. A growing presence of activist funds and private equity firms in Germany is making it easier for these successor-less firms to be bought out. One has to see whether, in the future, family-owned businesses go the way of their Anglo-Saxon counterparts.
In terms of performance of family-owned businesses versus non-family-owned businesses, we find similar trends persist. Indonesia is very similar to India. Family-owned businesses in Indonesia are risk-taking — so, they grow faster, deliver better shareholder returns, and have lower profitability than their non-family-owned counterparts. One sees a clear bias for growth as these businesses push themselves to expand rapidly in size and value at the cost of profitability. In contrast, both in Germany and the US, it becomes much harder to see significant differences in the performance of family-run and non-family-run firms. Revenue growth and shareholder returns are either similar (as in the case of Germany) or family-owned businesses lag behind their non-family-owned peers (as in the case of the US — although the sample size of family-owned businesses here was quite small). It points more towards a mindset where the family is looking to conserve wealth. The aggressive growth mentality one sees in emerging markets is replaced with one that is far more cautious.
These differences in performance and type do not take us away from the premise that we have explored in our articles till now. Where families want to run businesses, they must predict conflict regardless of which part of the world they are in. They must set up forums and structures to manage themselves. Where they are owner-managers, it is important for them to train themselves to manage. Where they are activist shareholders, or even more passive shareholders, they nonetheless need to develop an ownership perspective. They need an agreement possibly enshrined in a family constitution that reflects the vision and aspirations of the family. They will need to establish forums in which they can meet, deliberate and decide. They will need to have the ability to communicate effectively to stay together. Families in emerging markets with a different risk capacity need to be more agile in their decision-making to retain their entrepreneurship. They must be careful not to copy more conservative Western families and their structures, but rather invest time and effort themselves in developing solutions.
Quarrels among business families in many countries have an impact much beyond the family — on employees, investors, suppliers and distributors. As family businesses are the engine of economic growth for the country, they must be aware of their larger stakeholder responsibility.
First Published: Sep 29, 2019 20:12 IST