Family firms: our past, present and future

Family firms: our past, present and future

Professor Sarah Dodd examines the strengths and weaknesses of family businesses, and dispels the myths about them being amateur, conservative, homely and old-fashioned.

Working alongside your family is an ancient tradition – perhaps it’s even a ‘natural’ activity, given that we evolved as social animals, sharing the tasks of farming, gathering and hunting, of making clothes, weapons, jewellery and shelter. Yet modern separation of private and public lives, of the professional and domestic, has helped create and sustain a myth that there is something old-fashioned, conservative, amateur and homely about the family firm. Nothing could be further from the truth.

By combining the worlds of the family and business, these firms are indeed different from other companies. Whilst some of the differences are potentially very positive, others present more of a challenge. Family-owned companies that rise to these challenges – and build on their substantial strengths – are amongst the oldest, biggest, best known and most innovative firms.

The world’s oldest businesses are all family firms, like Venetian glassmakers Barovia & Toso, with more than 1,000 years of experience, or Japan’s Houshi Inn & Spa, founded in 718, where the 46th generation is now in charge. Scotland’s oldest family business, John White & Sons, this year celebrates its 300th anniversary, with the eighth generation at the helm.

As well as longevity, family-owned and -managed businesses dominate the economy, questioning stereotypes about their competence and potential. Even in the developed world, family enterprises account for between 80% and 98% of all businesses, generate 50-75% of gross domestic product, and provide at least 60% of all private-sector employment, reaching 85% in some countries.

The largest firm in the world, according to Fortune’s 2014 calculations, is a family business: Walmart. Other Fortune 500 Global family companies include Samsung (13th), Ford (27th), and Hewlett Packard (53rd). Many top brands are also squarely in the sector: Benetton, Estee Lauder, Fiat, Heineken, Ikea, L’Oreal, McCain… the list could continue for pages. From Johnstons of Elgin to Walkers Shortbread, from four generations of Baxters to five generations of Grants, a large proportion of our most treasured Scottish brands are family owned and run, and continue to act as crucial drivers of the economy.

Research published in the 2014 Global Entrepreneurship Monitor report showed that, in Scotland, a family business background can double your chances of starting your own company. Today’s family firms also act as natural incubators for spin-offs or start-ups, with a quarter of all early-stage entrepreneurs developing their new ventures from the launch-pad of their family’s existing companies.

These family spin-offs are also much more growth-focused – and twice as well-resourced financially – than their counterparts. A great example is Jennifer Hope, whose The Wee House Company was spun out from her father’s construction business, and whose success has recently been recognised by the Association of Scottish Businesswomen’s 2015 Young Inspiring Businesswoman Award.

The point is well made: big firms – really big firms – as well as firms that have been successful over the very long term, can be family owned, and often are. So too are many of Scotland’s most dynamic young start-ups. There must surely be advantages, as well as drawbacks, to being a family business?

Among the clear advantages are how the overlapping responsibilities of owners and managers enable rapid speed to market, and easier organisational renewal, due to the lack of dominant external owners. Concentrated ownership structures also demonstrably lead to higher returns on investment.

Similarly, a desire to protect the family name and reputation often translates into high product quality and a heightened commitment to the enterprise. The family’s ability to take a long-term perspective creates so-called ‘patient capital’, which can accept lesser returns in the short-run, and generally is associated with much lower financial administration costs.

Families are able to communicate well with each other, so that skills and specialised knowledge are rapidly transferred, and a common vision both built and maintained around their shared values. Longer chief executive tenure – up to 20 years, for family firm leaders, compared to an average of three years in other firms – means that these values are sustained.

The down-side is largely generated by the difficulties in keeping ‘family’ and ‘business’ within reasonable and mutually-agreed boundaries. Nepotism is a potential failing,
and the confusion caused by dual roles, such as that of ‘mother’ on the one hand and ‘chief executive’ on the other, can make this still worse.

Conversely, expectations placed on younger family members can appear as much a burden as an opportunity, and too often the dependence on relatives as a low-cost resource can slip into exploitation, especially of women and children. Youngsters who enter the family business, and never study or work elsewhere, can experience real difficulty in developing a strong sense of self-worth, remaining in a comfort zone.

These challenges may explain why only 30% of family firms are successfully transferred to the second generation of owners, and only 12% survive to the third generation of family ownership. The core task for owners and managers, and the enterprise ecosystem that aims to support them, is to build, celebrate and draw upon these strengths, whilst facing up to and tackling their specific challenges.

Specialised education and training, well-informed advisers, and specific policies should all be founded on appreciation of both the strengths and weaknesses, and draw on cutting-edge research and practice that sets out optimum strategies and practices for addressing these.

Family firms are too crucial for our national economic and entrepreneurial wellbeing to be overlooked, or underestimated.

Sarah Drakopoulou Dodd is a professor in the Hunter Centre for Entrepreneurship at the University of Strathclyde in Glasgow.