Companies with founders still on board did best during the Great Recession.
Public companies that are substantially owned or operated by families are prevalent worldwide; in the U.S., they account for one-third of the S&P 500. This paper finds that a segment of these firms were able to outperform nonfamily companies during the Great Recession, offering lessons that could be applied by companies in general when confronted by economic turbulence in the future.
(An excerpt from an article in Strategy+Business, published by Social Science Research Network Working Paper Series, title: Are Family Firms Better Performers During Financial Crisis by Haoyong Zhou).
This paper examines the performance of family and nonfamily firms from 2006 through 2010, the period during which the global economic crisis formed, hit with full force, and began to recede. Although family firms didn’t outperform across the board, one type of Family Corporation did. That segment — companies with a founder who was still active (as CEO, board member, or significant shareholder) — did better than nonfamily firms, on average, by 2 percent during the five-year period, as measured by operating return on assets. And at times during two of those years, 2009 and 2010, those family firms outperformed others by as much as 18 percent.
The superior results could be explained, in large part, by the fact that founder firms had fewer administrative costs and invested significantly less, even though they retained better access to the credit market. Unlike nonfamily firm whose managers may be tempted, in an effort to save their jobs, to over-invest in risky projects and boost short-term earnings in harsh economic times, founder firms operated with a generally conservative long-term investment strategy during the crisis.
Four types of family firms were defined, in line with other recent studies. Founder firms are companies in which the founder is a board member, CEO, or blockholder (a shareholder with at least 5 percent of the outstanding shares). Heir firms are companies in which the heir (by blood or marriage) of the founding family is a board member, CEO, or blockholder. Family-owned firms are those in which one person or several from the same family control 10 percent of the outstanding shares either directly or indirectly through another family firm or fund. Leader/owner firms have a CEO or board member who is also a significant shareholder with an outstanding stake of at least 5 percent.
After controlling for country, industry, and firm-specific characteristics, family firms overall did not have better results during the crisis than nonfamily firms. This result was tied to two metrics — accounting performance (as measured by return on operating assets) and stock market performance (following Tobin’s Q, a commonly used rating that calculates the market value of a company against the value of its assets).
Only the founder firms stood out, and only as measured by return on assets. Their administrative costs were much lower, leading to the conclusion that in addition to being visionary or inspiring leaders, founders are also “good expense controllers.”
Put another way, the return on operating assets is a revenue-based measure of profitability driven by several factors — including business strategy, management skills, and operating efficiency — whereas Tobin’s Q is mainly driven by the price of stocks. The lack of a boost in founder firms’ stock value to investors’ irrational overreaction to bad market conditions and high volatility during recession times.
Founder firms substantially change[d] their investment and financial strategy during the crisis. The fact that founder firms raise[d] their debt level during the crisis suggests that [they] have more financing resources than nonfamily firms in bad times, when financial institutions tighten credit.
Although family firms overall did not outperform nonfamily companies during the global economic crisis, one type did: those benefiting from the active involvement of their founder. These firms controlled their expenses better and implemented a more conservative investment strategy once the crisis hit.
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