Avoiding the exit route

http://www.ifb.org.uk/How does Germany retain its global market share in manufacturing while other European rivals such as the UK, France and Italy have gradually been losing ground to China and others.  Obvious answers include a consistent focus on achieving productivity gains through investment in equipment and human capital, as well as keeping ahead in product development through R&D and innovation. Successful Mittelstand companies prioritise the continued existence of the company- making necessary investments.

This approach starts with owners who put business growth and continuity as top priority. Eschewing cashing in on their achievements they chose to remain privately owned. These owners provide consistency of purpose and stability; making relatively small liquidity demands on the company they send a signal through their boards that the company comes first. Freudenberg Group is a typical example of this approach; where family shareholders prefer to keep their assets tied up in their successful Eur6bn firm putting family ownership as a high priority rather than letting other people manage their money.

The UK Government’s new focus on mid-sized business expressed through various reviews including the latest one led by Lord Heseltine is a sign that the UK is increasingly recognising the importance of our own Hidden Champions. As in Germany family firms are the most common form of ownership in this sector of the market- their success is thus one of the key planks for driving national growth. To win back a strong position the UK will require a new generation of owners who put the success of their companies above making short term gains through managing a quick exit.

Buffett on keeping businesses for the long-term

http://www.ifb.org.uk/ As a guest at the 2012 Berkshire Hathaway Annual Shareholder Meeting, in Omaha, USA, popularly dubbed a Capitalist Weekend, all eyes are focused on CEO Warren Buffett sharing his 50 years plus experience as the world’s most renowned investor. For starters he spoke of goal clarity; investing in wonderful businesses - his eighty-eight-year-old partner Charlie Munger who was also on the podium, nodded in agreement. Buffett invokes going beyond private equity, with the exit no longer a goal. What could be more ‘beautiful’ he extols than investing to keep businesses for the long-run – in my view a parallel of the family business model.

As a controlling shareholder in many of their investee companies, Berkshire has the freedom to ignore the will
of the market and to focus on making decisions that favour long-term stewardship – another idea Buffett likes. That means committing to support investments that grow steadily in value over time.

Success is measured by a strong recurring cash flow, and an organisation with solid values where employees at all levels do the ‘right thing'. Where mistakes have been made Buffett accepts personal responsibility. If it goes wrong it’s generally not the fault of management as he sees it, but his misjudgement
on the competitive position of an acquired company.

On Board philosophy he invokes directors to think like owners. The main task of the Board; and here he is forceful, is to hire the right CEO avoiding mediocre leaders. Compensation packages for senior executives should lean to being “low” but with a high “stake” in the upside value. He lavishes praise on Berkshire managers who are revered via a song in the company annual video.

But one unanswered question is the Berkshire CEO succession plan; Buffett, 81, is still firmly in the driving seat and is expected to keep going for some time to come. He won’t comment publicly on who the Board might have earmarked to be his successor. But the media speculates that one of his divisional managers Ajit Jain, 60, who has made billions for Berkshire building its reinsurance business is Buffett’s heir apparent. But with applause ringing to the answers Buffett gives to the questions from the floor– he is still clearly loved by shareholders- and deserves to be!

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.