Family Firms

I’ve always been interested in family firms because I come from one. My great-father founded Bobby’s as a milliner (hat shop) in Margate around 1900, and he and his son built up a small empire of department stores through the following twenty years, mainly around the south coast of England. I still meet people who can remember Bobby’s and most do so fondly, the stores were associated with class for many years.

I enjoy watching “Mr. Selfridge” on PBS and sometimes wonder if it could have been “Mr. Bobby”. I never met my paternal grand-father, since he died a year to the day before I was born – the reason I was given his names as two middle names. From what I hear he, like Harry Selfridge, was a bit of a character. It must have helped to be a swash-buckling society type in those early days of modern retail, and his flaws were as evident as well, including a propensity for gambling and a wandering eye.

Family folklore believes that the firm over-expanded and was caught out by the great depression, being forced to sell out to Debenhams. Debenhams retained the store names until the early seventies, the point at which brand management became very influential to senior managers. You can still find remnants of my family legacy carved into buildings around the south coast.

“Rags to rags in three generations” is a saying in England, one with an equivalent in other cultures. It expresses the theory that fortunes are often won and then lost again over a span of about a hundred years. My family follows the pattern. Frank, the founder, was a dreamy-eyed entrepreneur. Arthur, the builder, had a forceful if flawed personality. Harold, my Dad, inherited more of the flaws than the forcefulness, and might be said to have had things a bit too easy in his early days. Then there is me, without really much of a remaining legacy to follow and making the choice to take a different path.

Last month The Economist published a good survey of family firms. Perhaps the whole concept of the family firm is cyclical, not just the life cycle of a typical example. For the survey found that a couple of generations ago most successful businesses had a leading family. Then the concept seemed to hit a rocky patch, just like Bobby’s. But somehow it is making a comeback now.

Partly the comeback is due to the growth of Asia in business. Korean Chaebol are just one example of an Asian cultural approach of keeping things close to the family, and now Chinese, Japanese and other Asian firms are gradually conquering the globe without discarding their methods. But there is more to it than Asia. The Economist quoted the German Mittelstand as a set of enduring companies that usually had a dominant family and a paternalistic culture.

True to form, The Economist conducted an analysis of the strengths and weaknesses of family firms. The weakness is obvious. Family firms are anything but meritocracies.

Rather than selecting leaders based on talent alone, a family firm finds roles for the family, talented or not. So a founder will probably be great for the swashbuckling early phase, but may struggle when teamwork and patience need to replace autocracy. An elder son may give fresh impetus, but may be a spoilt brat resented by everyone in the firm. There may be several sons (or daughters), all with their eye on the main prize and unable to work together or divide the spoils. There may be no sons at all, or at least no children who actually want to take over the mantle. Any outsider joining the firm has to recognize that their ladder to the top will depend on ingratiation with family members, patiently waiting for delayed retirements, and might even necessitate marrying a chosen daughter. All of these issues multiply if the firm manages to survive into a third generation.

Given all these handicaps, it is truly amazing that family firms survive at all. Rags to rags is indeed much more common, but a great many firms manage to avoid that curse. Most have near-death experiences along the way, for example the fate of the Ambani brothers of Reliance, unable to work with each other after their founding father died and in the end surviving by splitting the company in two. Somehow, more survive and even thrive than one would think made any sense.

Why? We have to look at the other side of the equation, the advantages.

Family firms tend to have enduring leadership, with a consistent core purpose and strategy, pursued over multiple years without taking undue notice of temporary setbacks and short-term results. The culture and ethos of the company comes from the founder, and is often plastered all over the walls of the premises next to portraits. It is clear what the core values are, and the leaders epitomize them and demonstrate them.

Next, family firms are usually careful whom they borrow from. Most debt comes from domestic sources or from a local bank with a long-term relationship. Debt itself is often avoided or at least kept as a small portion of the balance sheet.

Finally, family firms engender genuine loyalty among staff. People tend to stay at such firms longer. They buy into the strategy and will work hard not just for themselves but for the family as well. Their rewards may not come consistently or even commensurately to their efforts, but they sense that they are treated fairly and that they will not be laid off except as a genuine last resort. If the family boss says something, they are inclined to believe it.

None of these advantages are fixed or guarantees of success. The stable strategy may be a misguided one or become obsolete. The inheriting son may not value long-term employees in the same way, and might force through reckless investment programmes. Worst of all, they may come to embody an ethos contradictory to that plastered on the walls.

It is these moments when a family firm is most vulnerable. But some can use these principles to help them through such potential crises and to emerge stronger on the other side.

The Economist made all these points, and concluded that the family firm is far from dead, and may even continue to outperform more conventionally managed competitors in many cases. And then the survey rested its case. In my opinion, it failed to ask the obvious next question.

What stops all firms having the advantages of family firms?

When you look at the so-called list of advantages, you can actually paraphrase them. You can simply describe the firm as well-managed. All firms should strive for clear values, consistent strategy, a long-term approach, managed debt, and authentic staff loyalty. And, with sound practice, the list is attainable by any firm.

So most non-family firms are actually poorly managed. Why? Well, when I started at Shell, I would say that the firm enjoyed most of the positive attributes. Even when I left, it still had many of them. To an extent some were lost, it is clear to me what the prime causes were. Managers became greedy, joined in the share-option and bonus circus and lost sight of their values. They started listening to consultants, bankers and financial analysts. And they started serving the master of the quarterly earnings report.

Shell is more immune to these diseases than most, because it has a deep legacy and still has conservative debt practices. But most publicly quoted firms have sold out to the new masters completely, spouting shareholder value and ignoring strong basic principles. To be fair, there are strong elements to such scrutiny, but I do feel that overall it has failed in its primary purpose of value creation.

Wall Street and the so-called investment community are the real villains of this piece. Despite competing against privileged, upper-class spoilt brats, sometimes talentless and usually fighting among themselves, shareholder capitalism has not convincingly won. Now isn’t that a scandal?

If I had somehow inherited Bobby’s intact and it was still independent, my conclusion from all this would be to avoid taking it public at all costs. As a small investor, my conclusion is to ignore virtually everything I read from financial analysts. And as a citizen, my conclusion is to ignore any political party or argument sponsored by these charlatans.

Now that would have been a neat conclusion to the survey in The Economist! Ah, but let me quickly check where their sponsorship and finance comes from. Oh yes, that explain it!