Thumbs-up for family values

2007

Public companies in which the founding family have kept a significant stake achieve markedly superior returns and higher profitability than companies with a fragmented shareholder structure.

At the turn of the last century, family-owned companies spearheaded industrial development in Europe and the United States. However, in the second half of the 20th century, this model was challenged and increasingly gave way to a model of widely dispersed shareholders.

But now research by Credit Suisse has found that European companies in which the founding family or manager has a stake of 10% or more (a Significant Family Influence, or SSFI) have outperformed other stocks by an average of 8% annually since 1996. Similar results were seen in the United States.

Comparing these firms to those with a highly diversified shareholder base, analysts uncovered three key characteristics that explain this difference in performance.

First, family shareholders usually demand a long-term strategic focus from their managers. Since most families intend to pass their holdings on to their descendants, they have strong grounds to keep their holdings in good condition and their interests lean towards the longer term.

Unlike companies with dispersed shareholders, companies with a strong family influence tend to focus less on the next quarterly results and can therefore also implement strategies that are earnings-accretive over a much longer time horizon.

Second, there is better alignment of management and shareholder interests. Families usually control a limited number of companies and those assets represent a material share of their wealth. As a result, families tend to focus intensely on the way a company is managed.

In many cases, the families appoint a representative - often a family member, who sits on the company board with the aim of improving corporate governance and influencing the company's strategic orientation. This can prevent management from pursuing targets that might not be aligned with the interests of the company, such as maximizing short-term share price rather than company value.

Third, family companies tend to focus on core their core business and restrict their involvement to a limited number of activities . This limits acquisitions, extensive use of leverage and trendy, short-lived strategies.

Meanwhile, influential families usually manage to keep a lid on their managers' attempts at diversification in order to maintain control of the traditional business.

If these sounds somewhat familiar, the report adds that there are striking similarities between SSFIs and Private Equity companies which help to explain the strong outperformance of both investments versus widely held stocks. However SSFIs have an additional benefit over Private Equity - namely liquidity.

Among the SSFI companies analysed were household names such as BMW, Ericsson, LMVH and Mittal Steel, all of which appear in Credit Suisse's new 40-strong international equity portfolio of SSFI stocks which is claimed to be the first of its type in the world.

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