• Service: Enterprise, Family business
  • Type: Business and industry issue
  • Date: 7/31/2013

Family Control in Business 

Family Control in Business
Raphael (Raffi) Amit, Wharton management and entrepreneurship professor, gave a lecture in November 2012 to a group of entrepreneurs in Shanghai on the costs and benefits associated with a range of family business control mechanisms. He was subsequently interviewed by in Beijing…

35% of Fortune 500 companies are family controlled firms, and more than 70% of them are family originated. What’s your definition of the family business?

“Two important things I want to share with you. First of all, there is no one way to define a
family firm. A very liberal definition would basically say that family firms are those in which
a family holding block of shares, either as a group or individually, is greater than 5%.

A more conservative definition would be that these are firms with family as the largest vote
holder or the largest shareholder, or a firm with the second generation or later involved in
management, or the family involved on the board of directors. Depending on how you define
a family firm, you will get different conclusions on whether a family firm is worth more or
less than the non-family firm.

Another important thing I want to share with you is that my research with professor Wu of
Peking University, about private firms in China, suggests that in China, privately owned
firms have better governance than state-owned enterprises. You might think that is surprising.
But in fact, when you try to think why, the explanation is that family firms have strong incentives
to have very strong governance.

In order to mitigate the control that public shareholders might have, the family appropriates
private benefits of control. So, families understand the issue and have better governance, as
measured by more independent directors, more committees and more meetings of the board
every year.

Families are more concerned than state-owned companies in China about showing shareholders
that they have nothing to hide. That is a very powerful observation, and an important observation
for the public to know.”

China has a saying that “family fortune never lasts longer than three generations.” Is there any data to prove it?

“Succession, which is a key issue for family business, is a particularly difficult problem in
China: First, most of the family businesses are first generation; second, there is one-child
policy in major cities; and third, there is a cultural issue of being very reluctant to welcome
professional managers to run the family business.

So in China, when it comes to succession, there is an issue of whether the founder is ready
to retire. If something happens to you, who will take over the business? If your child is not
willing or able to take it on and you don’t want an outsider in it, then most likely the business
will be sold. From that standpoint, it is more difficult to see later generations of the family
business in China.

I can tell you that as you quoted, 35% of Fortune 500 companies are family controlled firms
but none of them is first generation – these are later generation firms and in all these cases,
families welcomed professional managers to the firm. So, there is one way the family can
maintain the ownership of the firm even though a family member may not run it.

The message is that Chinese first generation owners should not hesitate so much to consider
bringing in professional managers. Our research findings suggest that one can expect the
value of the firm to increase on average when an outsider comes in as CEO. But our research
also finds that when descendants serve as CEOs, firm value is destroyed.”

If the second generation are mostly better educated than their fathers, why are they not doing well?

“In research we always do statistics on averages. But I can tell you some very successful
stories when the father hands it over to the son. But the point is that perhaps what drives
the father or the founder may not be present in the son. It’s not just about education, it’s
also about leadership, about charisma, belief, etc., that the father had. So there are many
factors here, with no one reason that one can identify.”

Have you hired in professional CEOs or managers from outside the family? Would you?

Dr Amit has published extensively his empirical and field research on a broad range of issues that relate to Families and their businesses and is frequently quoted in the press. For the full story, read The Cost of Control: Managing the Growth of Family Businesses.

Christophe Bernard

Christophe Bernard
I am a KPMG partner based in the French firm’s Paris office, responsible for encouraging the growth of our firms’ middle markets practice across Europe, Middle East and Africa, a majority of that market comprises of family businesses.

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