Resilience over performance

‘In a global economy that seems to shift from crisis to crisis with alarming frequency, accepting a lower return in good times to ensure survival in bad times may be a trade-off that managers are thrilled to make.’

This suggestion is included in an interesting paper published in the November 2012 edition ofHarvard Business Review (HBR), entitled ‘What you can learn from family business’ (Kachaner, Stalk and Bolch). The paper identifies seven principles that make family businesses role models in these uncertain times:

• they’re frugal in good times and bad
• they keep the bar high for capital expenditure
• they carry little debt
• they acquire fewer (and smaller) companies
• many show a surprising level of diversification
• they are more international; and
• they retain talent better than their competitors do.

These principles challenge conventional wisdom about family businesses; for example, that they are doomed to go from ‘clogs to clogs’ or ‘shirtsleeves to shirtsleeves’ in three generations, or that they tend to be parochial and have difficulty recruiting non-family talent.

The authors mention the dangers of applying conventional (there’s that word again) thinking to family businesses. On the management of money they conclude ‘family firms seem imbued with the sense that the company’s money is the family’s money’ and ‘the leaders of family companies… extol the virtues of higher trust’. These findings mean that conventional corporate governance will not always be a good fit for family businesses. For example, when managers can be trusted to act as responsible stewards of the family’s money and assets, why would a family business need an equity-based incentive scheme to align the interests of managers with the owners?

The paper is based on an interesting sample of family businesses, which lends weight to the point made by the authors that the seven principles are ‘coherent and synergistic’. For example, it is common sense that ‘frugality and low debt helps reduce the need for layoffs, thus improving retention’. The desire among family businesses to carry little debt and the need to ensure that capital expenditure is both affordable and will generate long-term value, are certainly the type of practices that other businesses may well want to embrace as the new normal, especially given the decrease in the availability of debt finance.

As an aside, if legislators want to encourage the principled behaviour identified in the paper it would help if tax codes stopped discriminating against equity funding. Currently, the tax laws in most countries encourage debt financing by allowing a tax deduction for interest payments, while dividend income is mostly only partly exempted from tax. European Family Businesses (GEEF)1 , among others, has made a strong case for establishing tax neutrality between debt and equity funding, which would support the business families who are described in the HBR paper as ‘frugal’, simply because they prefer to reinvest profits and control leverage.

Every advisor who works with family businesses and wants access to the latest thinking, rather than relying on the conventional thinking about family businesses that is fast becoming outmoded, will welcome the HBR study.

The STEP Advanced Certificate in Family Business Advising has provided advisors from all professions with valuable new information, innovative approaches and practical ideas that can be combined with traditional expertise to provide a superior service to clients.

• 1See the GEEF policy paper Time for a Level Playing Field Between Debt and Equity and the OECD’s 2010 Tax Policy Reform and Economic Growth.