ALL IN THE FAMILY?
Scoring management
By Jennifer Lee

“Wealth can’t last more than three generations” is a Chinese proverb that reflects a common perception of family-run businesses: the first generation builds the business, the second generation maintains it, and the third sees its decline. Now a study by US consultancy McKinsey and the London School of Economics, which examined more than 700 manufacturing companies in the US, UK, Germany, and France, to glean the impact of ownership structure on growth and wealth creation, is lending credence to the saying. Only, the study shows that the decline is beginning as early as the second generation – unless the company is run by outsiders.

Family-run companies enjoy certain advantages over companies with other ownership structures. Decisions can be made quickly, and are unlikely to be changed. Providing those decisions are the right ones, the family-run company has a competitive edge because it can move fast to capitalize on opportunities.

But this ownership structure also has drawbacks. Families often find it difficult to trust outside professional managers, and the eldest son, who traditionally gets the reins when a patriarch retires, may not be capable of running the business as successfully. Growing up knowing that he will run the business one day can act as a disincentive for aggressively pursuing the skills that will help him, since he knows he will not have to compete for the position.

The companies in the survey, of all types of ownership, were interviewed and given a score of one to five in areas such as total factor productivity, market valuation, market share, and sales growth. Across all companies, including those owned by families, the average score was 3.2. But the results for family-owned companies diverged when examined more closely. Those run by outsiders scored higher than the average, at 3.6. But those run by eldest sons scored considerably – more than 10% – lower, at 2.9.

Interestingly, the survey found no difference in company performance when the CEO was selected from among all the family members. Still, for Asian companies even that represents a break with tradition. But family-owned companies that overcome the trust barrier and bypass the eldest son if necessary can reap benefits from both sides. The emotional investment and long-term view that drive many family-owned companies to success are still there, while professional managers bring the talent, skills, and drive for short-term results.