The cost of dysfunctional families on business

The U.K has managed to earn the title of being one of the worst productive countries in the G7 for our economic output. (Even taking into account different variables the outcome remains similar in rankings, see Figures 1, 2 and 3)

There has been extensive research on contributing factors, the findings of decade reports highlight a multiple range of increased and more prevalent health issues. Ranging from physical conditions including musculoskeletal disorders, obesity and mental disorders such as depression and anxiety. Finally, social change drivers such as an increased part-time employment, gig economy and an older working-age population have all impacted on firms productivity. What is not mentioned in the plethora of reports is the productivity of different firm structures and the intra-relationships between the owners and employees.

Figure 1: Labour productivity in 2015 for G7 countries

Some of the questions to be asked are, did the owners and employees know each other to any degree and in all management levels before working in the firm? If so to what extent? And are the relations a positive one and helpful to the firm? These are questions that could be asked at any organisation but are tailored more specifically to family-owned and run businesses. This could hold one of many solutions to Britain’s productivity puzzle.

 

A family affair

Culturally, Britain is very sentimental about the importance of family business; some claim that we are almost as sentimental about family business as we are about pets. However the issue is an internal one, as they underperform when the firm is family owned and managed compared to other more objective ownership. This topic is important as MP’s and advisors are currently consulting the government on ways to improve current productivity rates. There are identifiable cultural elements in family businesses.

However, Britain is not the only country which is an advocate of embedding family values. Germany also incorporate these values as two-thirds of Germany’s economic output are by family-owned businesses. The only difference is that Germany has an efficient family management process. Perhaps education has a part to play, German family owned businesses have degrees and 70% have degrees in more non family management/ownerships. Whereas 37% of British Family owned businesses have degrees. Maybe degrees are not only the solution, having access to business management programs tailored towards family owned and run firms could be extremely useful in tackling interpersonal issues.

In a report by Nottingham University Business School and Leeds University Credit Management Research Centre, found that the most common objectives for family owned business were creating long-term income revenues, adverse attitude towards risk taking and the preservation of family and emotional wealth. Most interviewees of the report were opposed to external influence or involvement by investors unless necessary or compulsory, fear of loss of control of the family business was the main concern. This behaviour was further emphasised by Small-medium enterprises as they tend in decision-making terms stay within their ‘comfort zone’ and try not to penetrate new markets.

Approximately only 20% of family owned businesses make it or pass the second generation. However, this is double of SME’s who only make it past year one, as 90% of financially fail. Even though family owned businesses survive longer, their financial return, contributions to the economy, and growth are diminished compared to those of independent management. This is emphasised as none of the top 20 FSTE-100 firms (concluded as the author analysed each of the top 20 FSTE-100) are family owned businesses; they are all public listed companies, where the majority shareholder are private listed holdings.

All these contributing variables led to one significant outcome. Family owned and run companies are 19% less productive than others, only a tenth of small medium family firms export, where as 18% of small medium sized firms’ export. The findings by the Office for National Statistics also highlight that non-family management do better than family management (see chart 1).

Chart 1: Britain’s manufacturing and labour productivity

It is important to keep the heritage and legacy of family firms, for long-term stable growth and sentimental value. However, this does not give them a scrutiny pass where cracks are starting to emerge, they need to be filled and solved before they turn in to unfixable crevasses. There a couple of solutions that have previously worked. Certain family firms have successfully floated (moving from private listed to public) that lost some of their total share ownership but received in exchange high levels of funding, and external monitoring. The global family index defines family firm in two categories: “For a privately held firm, a firm is classified as a family firm in case a family controls more than 50% of the voting rights. For a publicly listed firm, a firm is classified as a family firm in case the family holds at least 32% of the voting rights.” There is no surprise that Walmart and Volkswagen are top ranked respectively for market capitalisation.

The other solution for smaller family firms and others that do not want to go down that route is to seek support from independent groups such as Families in Business, who provide consultancy, memberships and tools to help family owned businesses. The Entrepreneurial Family Business Centre focuses specifically on issues surrounding Succession; Governance; Growth and Innovation in a family business environment. It is, therefore, important to know what it means to get in involved in family business and to be cautious of sometimes economic and interpersonal issues which are often locked behind closed doors.

Sources:

https://workspace.imperial.ac.uk/businessschool/Public/research/I_Egroup/Dongtan%20docs/JFBS55.pdf

http://familybusinessindex.com/

https://bdaily.co.uk/articles/2016/09/12/family-business-support-group-sets-up-in-scotland

https://www.economist.com/news/britain/21732097-desire-pass-business-next-generation-means-they-value-stability-over

https://www.imperial.ac.uk/business-school/research/entrepreneurial-family-business-centre/

https://www.forbes.com/sites/neilpatel/2015/01/16/90-of-startups-will-fail-heres-what-you-need-to-know-about-the-10/#6c8ad5e76679

https://workspace.imperial.ac.uk/business-school/Public/research/I_Egroup/Dongtan%20docs/FAMILY%20BUSINESS%20REPORT_NOV2010.pdf

Further reading:

https://workspace.imperial.ac.uk/business-school/Public/research/I_Egroup/Dongtan%20docs/JFBS55.pdf

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