Are private family firms really so conservative and sluggish?

 A recently-published research paper co-authored by Professor Pursey Heugens at the Rotterdam School of Management, Erasmus University (RSM) has shed new light on private family firms, showing they are just as high-performing as other private firms, and contradicting their ill-deserved reputation for under-performance and conservatism.

The paper encourages a new line of thinking about private family firms, which are the world’s most common form of ownership structure and are often the hidden champions of the economy, contributing a substantial proportion of employment and GDP in many nations. It will be the focal topic during the family business dinner discussion on 28 May.

The paper, ‘What Do We Know About Private Family Firms? A Meta-analytic Review’, written by Michael Carney, Marc van Essen, Eric R. Gedajlovic, and Pursey Heugens, has recently been accepted for publication in Entrepreneurship Theory and Practice. It describes family firms as having a variety of different characters. They can be privately owned or have public ownership and governance. The paper delves deeper into the distinction by comparing privately held family firms not just to publicly held family firms, but also to other types of private and public firms.

Prof. Heugens is a professor of organisation theory, development, and change at RSM, and academic member of the Erasmus Centre for Family Business. In the paper, he also examines the effect of the strategic decisions made by private family firms on their business performance. He analyses their level of investment in research and development, international diversification and capital structure and portrays private family firms as being loss-averse – as opposed to risk-averse – to their long-term benefit.

“Conservative they may be, but their performance levels are shown to be on a par with other private firms”, says Prof. Heugens.

The paper also compares private family firms to their public equivalents. They are more likely to forsake short-term gain in the interest of long-term profitability. Their greater emphasis on non-economic goals and the importance of handing over a healthy legacy to the next-in-line actually means tighter monitoring and potentially greater profitability. Private family firms are also less exposed to the demands and fluctuations of external capital markets, and retain more control over business activities in the firm and with the family than what is customary in publicly-listed companies.

Prof. Heugens’ observations are substantiated by an analysis of their strategy, from three angles. These firms avoid risking family wealth, which makes risky R&D investments less likely. Although this can harm performance, it’s also a more selective and persistent approach to investment.

He also observes that such firms place a lower priority on investing in more than one country because of the importance of retaining family control. Their capital structure gives them less pressure from shareholders than public firms, and they have a natural aversion to debt, which can produce longer-term profitability than their public equivalents.

This phenomenon is explored country-by-country to correlate performance with corporate legal systems. On the downside, family firms are portrayed as having a negative impact in crisis-hit Italy and Spain. But in the USA and Finland – where a stronger legal system takes away some of the negative expects of family control – they actually out-perform other private corporations. This revealing result goes against the general theory that private family firms struggle in economies where corporate laws are tighter.

For Prof. Heugens, the paper encourages a new line of thinking about private family firms: “Their case illustrates that an aggressive investment strategy is not always the key to higher returns. Private family firms are more cautious for a number of reasons, but overall this is not hurting performance,” he says.

“This shows that there is no ‘one best way’ but that the strategy adopted by private family firms is just as viable and potentially profitable as that taken by private firms under different ownership.”

The Erasmus Centre for Family Business contributes to the development and long-term viability of family businesses around the world through the provision of research on family business, development of family business leaders, and outreach activities. As a leader in international family business scholarship, the centre develops, disseminates and shares knowledge on the challenges involved in family, business, and responsible ownership, through teaching, development of educational materials, and outreach activities, in order to ensure the long-term viability of family businesses around the world.

Rotterdam School of Management, Erasmus University (RSM) is ranked amongst Europe’s top 10 business schools for education and amongst the top three for research. Based in the international port city of Rotterdam - a vital nexus of business, logistics and trade - it provides ground-breaking research and education furthering excellence in all aspects of management. RSM’s primary focus is on developing business leaders with international careers who carry innovative ideas into a sustainable future thanks to a first-class range of bachelor, masters, MBA, PhD and executive programmes. RSM’s executive education and alumni support services are also offered from its office in the Amsterdam Zuidas business district.

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