The art of family business- a hand on the tiller

http://www.ifb.org.uk/ The family business sector has been noted for its steady performance and is arguably coming out of the recession with fewer scars than the corporate sector generally. Such seeds of resilience that exist were sown during good times when family firms grew more slowly than their non-family counterparts; this might have cost them ground by not grabbing every new slice of business, but their caution has helped strengthen the sector’s balance sheets.

In an example of this a recent Financial Times article showed how family businesses have gained an advantage in the world shipping industry and this time it’s the Greeks showing the Germans how it’s done.

When business boomed prior to the recent recession, Greek shipowning families set aside funds to build up cash reserves ready to weather any downturn that struck the industry. Their main rivals from Germany, who mainly rely on investing other people’s money, made risky bets borrowing excessively which put many firms on course to sink into insolvency. Greek family business shipowners have therefore strengthened their grip on this industry by the careful stewardship of their resources and by keeping a tight hand on the tiller.

As every business leader knows a cautious approach to finance is not a sufficient platform for success; new research argues that one of the keys to performance is the behaviour of owners. Experts are beginning to say that the correct governance approach in firms involves the active engagement of owners - this applies particularly to family firms.

Professor Ajay Bhalla, of the Cass Business School, puts down much of the success of the leading German family firm Merck KG, now in its 11th generation, to the family’s hands-on approach. Prof Bhalla also cites other firms (see video) who have gone off track when the family has retreated from active involvement in setting strategic goals and monitoring performance.

Ownership matters

http://www.ifb.org.uk/ It was good to see the report of the Ownership Commission chaired by Will Hutton, which was published yesterday, argue for plurality of ownership models in order to strengthen the economy.

But the Commission does not see any panaceas - no one model is perfect. The economy benefits from diverse ownership types co-existing together, each with its strengths and weaknesses. Within the mix, that includes Plcs, family business, private equity, co-operatives and employee-owned firms, the report highlights the important role that family firms play in promoting corporate plurality, seeing many of the positive attributes of responsible capitalism in family businesses.

The Commission also calls for better stewardship where owners exercise a duty of care in relation to the assets they control. This is a characteristic that the IFB has already highlighted as an important performance lever in the IFB Family Business Stewardship report (2011).

Allied to this the Ownership Commission calls for greater corporate engagement by shareholders as a cornerstone for building responsible ownership, and cites the behaviours of good owners as noted in the Perspectives on Responsible Ownership guide (2007). Active and engaged family business owners challenge the status quo helping to fight the risk of a culture that kills off innovation.

The report emphasises the preponderance of family firms among the UK’s Mid-Sized Businesses (MSB) and calls for the expansion of the MSB sector. The Government has already identified MSBs as an engine for growth to potentially rival the German Mittelstand.

Boosting the performance of the UK’s MSBs however calls for better tools, including a more diverse range of sources of finance and enhanced skills at all levels in the organisation. The Ownership Commission recommends that the Government develops policies that tackle these two issues, supporting the arguments that IFB Representation has long been making on the sector’s behalf.

The Tyranny of the Quarter

http://www.ifb.org.uk/ There are some interesting comments made by John Kay (pictured), one of the UK’s leading economists, in the interim report on the Government’s review of UK Equity Markets and Long-Term Decision-Making.

Nailing his colours to the mast Kay commented in the FT on “the tyranny of quarterly earnings” encouraging investors to treat such reporting with caution and drawing parallels with junk mail.

So what’s the relevance of this debate to family firms? Last year the IFB published its white paper Family Business Stewardship that explored some of the drivers for success in a family business. We found that the best family firms are not only focused on the long-term – usually armed with a clear sense of purpose – but they also vigorously manage the short-term.

Family firms are generally no different than their non-family peers when it comes to managing the business, however where the family business can gain an advantage is by avoiding being a slave to excessive management reporting. Businesses increasingly recognise that there is a cost to reporting- transparency is good- but a surfeit of data is often unproductive.

Owners and their boards can judge performance in the short, medium and long-term supported by the right amount of information - neither too much nor too little, and measure success over the timescale of any particular investment project. Family business owners may also ask ‘where will our business be in 20 years time’ with a reasonable certainty that they will be there two decades later to take responsibility for their forecasts.