Families taking care of business better than others, study finds
Family companies perform better than non-family businesses, says a new U.S. study of firms in the Standard & Poor's 500-stock index, which counters a widespread perception that family ownership eventually breeds inefficiency and mediocrity.
The study, by U.S. finance academics Ronald Anderson and David Reeb, also shows that outside professional management, often touted as the saviour of nepotistic family firms, isn't all it's cracked up to be.
When family members serve as chief executive officers, the return on assets is generally stronger than with non-family CEOs, says the eight-year study, titled "Founding Family Ownership and Firm Performance: Evidence from the S&P 500." The study is to be published this June in the U.S. publication Journal of Finance.
The study brings fresh perspective to the debate over family companies. It has been fuelled by recent governance concerns, including a scandal involving Adelphia Communications Corp., a U.S. cable TV company allegedly looted by its controlling clan.
The study's conclusions will be welcomed by Canada's large contingent of publicly traded family companies, where the family's control is often exercised through majority voting rights but only minority equity interests.
The U.S. study found that family ownership is also common south of the border, where founding families are present -- in terms of fractional equity ownership or seats on the board -- in about one-third of the companies surveyed in the S&P 500.
"That number shocked me," said Prof. Reeb, who teaches finance at the Culverhouse College of Commerce at University of Alabama. His colleague, Prof. Anderson, teaches at American University in Washington. The academics, who focused on 403 non-bank/non-utility firms in the S&P 500 in 1992, found that companies with founding family participation enjoyed significantly higher returns on assets than those without a family presence.
They also discovered that family firms scored 10 per cent higher on the measure of Tobin's Q value -- the company's overall market value divided by the replacement cost of assets -- indicating that investors also placed a premium on the value of family presence.
That stronger performance in the study should not be surprising, said Ian Greenberg, president and chief executive officer of Astral Media Inc., the Montreal-based public company controlled by his family.
Mr. Greenberg said the competitive advantage of family companies like his own is that their senior executives can afford to take a long-term perspective without the fear of losing their jobs because of one or two bad quarters.
As family firms get older, the study shows their relative profit performance declines, but they continue to outperform non-family companies. Thus, the supposed curse of the second and third generations -- that they move from rags to riches to rags -- seems to be overrated, according to the study.
Perhaps the most surprising result is the stronger relative accounting performance of companies where a family member is CEO. It flies in the face of conventional wisdom that outside professionals bring a much needed discipline and objectivity to the CEO's job.
"One interpretation is that the family understands the business and that involved family members view themselves as the stewards of the firm," the study states.
But in terms of market value performance, companies with founders' descendants as CEOs lag behind those with founder CEOs or with hired CEOs. The results suggest that investors see little difference between companies run by descendants and non-family firms, the authors say.
Mr. Greenberg says the key is having a CEO who has a familiarity with the business and its culture. Family members are, by definition, insiders, rather than "outside sharpshooters who don't know the company."
The study also found that the gains associated with family ownership tend to peak at the point where the families hold one-third equity ownership. "When families have the greatest control of the firm, the potential for entrenchment and poor performance is the greatest," the study concludes.
Prof. Reeb acknowledged that there are plenty of cases of family owners hiring their relatives, extracting excessive rewards, and hurting the interests of minority shareholders. However, he said it is not the family ownership structure that causes problems, but how governance is exercised by the board in such firms.
The study shows, he said, that the founding family, with its wealth linked to the firm's longer-term success, is effective at monitoring professional managers, who might be moved by short-term results and personal compensation issues. "But who monitors the monitors?" Prof. Reeb asked.
He said that role falls to directors who are truly independent from the family and management. He pointed to Adelphia where the controlling Rigas family and management dominated the board, leaving little counterbalance to the family's power.
"It may be that the ability of outsiders to monitor family activity is an important attribute in minimizing family manipulations," the study says. Prof. Reeb said he is planning a follow-up paper on the role of governance in family firms.
The academics acknowledged another possible explanation for the superior performance of family firms -- that families in poorly performing firms are simply more likely to sell their shares.
To distinguish between the different explanations, the study relies on a statistical method called instrument-variable regression to chart the causality between family ownership and firm performance. Using that technique, the study says ownership is still shown to influence performance.
Written by Gordon Pitts and published by the Globe and Mail March 11, 2003.