A huge succession wave is coming for family businesses

hBollywood has it Recently there has developed an obsession with business dynasties – especially those on the verge of imploding. It’s not just “Succession,” a hit series about a media giant and his feuding heirs that appears to be inspired by Murdoch. “La Maison” transfers the same drama to the glittering world of French fashion; A reboot of the 1980s series “Dynasty” brings it into the energy business.

Television executives have their finger on what the corporate world often forgets: Family companies are not a sideshow, but arguably the core function of capitalism. They account for about two-thirds of all businesses worldwide and, according to McKinsey, a consultancy, they also create an equal share. gross domestic product. Most are small—but not all. Some of the world’s largest companies are still controlled to varying degrees by their founding families.

These dynasties are now facing the truth, as many prepare to hand it over to the next generation. In the West, baby boomers are reaching or surpassing retirement age. Succession is also going to happen in China, where private companies began to flourish in the 1980s, and elsewhere in Asia, where national-independence movements brought a wave of entrepreneurship a generation ago. If not handled properly, the disruption to global trade could be serious.

Despite decades of research, academics have still not reached a consensus on whether family firms perform better or worse than the rest. Industry, size and geography matter. Different measures of success also produce different results. To study the question, we limited our focus to listed businesses, for which data are more readily available, compiling a sample of approximately 1,600 non-financial companies in the main stock indices of the US, Europe and Asia. We found that those controlled by families have produced broadly similar returns to shareholders, including dividends, relative to others over the past two decades – but with significant variation across different sectors, countries and time periods.

Family firms have obvious shortcomings. Many, though not all, still appoint a successor as chief executive or chairman – a practice Warren Buffett, an investment wizard, once compared to choosing the eldest sons of Olympic gold medalists to compete in the next Games. Yet they also have two big advantages, which help explain why they thrive in some contexts.

First is their ability to nurture relationships. The Rolodex is passed down like an inheritance. Family names build trust. Thomas Zellweger of the University of St. Gallen in Switzerland believes this helps explain why clans play an especially prominent role in industries such as retail and consumer goods, where winning the trust of consumers and suppliers is paramount. In our sample, family firms accounted for more than a third of the companies in these industries.

Of course, focusing on relationships can be a problem if it reaches the point of nepotism. However, in developing markets, networks of trust are critical to how business is conducted. “It’s a question of growth,” explains Sanjeev Bajaj, heir to the Bajaj Group, one of India’s largest businesses. Where institutions are weak, a clan’s ability to strike a deal with a potential supplier (or influential politician) is essential. It is useful to know the names of banks where capital markets are growing rapidly. Family businesses dominate the stock markets of India and Southeast Asia (though not China, where state-owned enterprises play a particularly large role). Despite South Korea’s rise in prosperity, they also continue to dominate business.

This also explains why the largest family firms in emerging markets tend to form giant conglomerates. Their advantage is not expertise in any one industry, but access to financial, social and human capital. Topping the list of the rich in Indonesia is the Hartono clan, whose empire extends from cigarettes to banks. In the Philippines, it is the Sy Brothers who are involved in everything from retail to real estate. In India, it is Mukesh Ambani, whose Reliance Industries spans telecom, textiles and more.

Another advantage of family businesses comes from their long-term perspective. Successors think not in quarters but in generations. This may make them conservative. For example, research shows that family companies prefer to invest in tangible assets rather than research and development. “There is a good balance between innovation and preservation,” says Pasquale Marinelli, 26th-generation owner of the Marinelli Foundry, an Italian bell maker considered to be Europe’s oldest family business. In rapidly changing industries, following tradition can become a liability. However, in other cases, this can serve as an advantage – as evidenced by the enduring success of family-run luxury brands like Hermès.

Furthermore, conservatism often pays off during volatile periods. Various studies have shown that family firms overall outperformed their peers during the 2007–09 financial crisis and the COVID-19 pandemic. In our sample, they lost about the same amount of shareholder value as other companies during each initial shock, but bounced back more strongly. In part this is a product of financing choices, with family firms carrying less debt relative to equity. J.C.Decoix, a French outdoor-advertising company, was able to outperform rivals in Britain and Germany during the 2007-09 crisis thanks to its low borrowings and healthy cash pile. “Never waste a crisis,” says its second-generation boss Jean-François Decaux.

The major challenge for family firms is to manage change in each new generation. There are countless examples of poorly chosen heirs running a healthy business. Maurizio Gucci, grandson of the luxury brand’s founder, took his company to the brink of bankruptcy and then sold it to outside investors – before being killed by hitmen hired by his ex-wife (a dramatic saga to be made into a Hollywood film in 2021).

Judging by the plethora of cautionary tales, family businesses appear worryingly unprepared for the handover wave ahead. According to Deloitte, an accounting firm, only 57% of unlisted family firms in the US have a succession plan. The absence of one risks costly internal conflict. In February a South Korean court ended a long-running inheritance battle lgOne of the country’s largest conglomerates, whose former chairman died intestate in 2018.

To avoid such situations, many dynasties have informal ways of building relationships between business and children from an early age. Josh Baron at Harvard Business School works with a family that has produced toy blocks decorated with the company’s logo and a storybook covering the firm’s history to give to newborns in the clan. Lizzie Rudd of Berry Brothers and Rudd, a 328-year-old wine merchant, hosts events for family members at their quaint headquarters in London, which include magicians for the children, “so they remember this is a place where magic happens”, she explains.

Once heirs reach adulthood, dynasties also have their own ways of testing them. Mayer Amschel Rothschild, founder of the Rothschild dynasty, sent his five sons to establish banks in various countries. Mokhtar Riyadi, who founded Indonesian telecoms-to-hospitals giant Lippo Group, financed his grandchildren’s entrepreneurial ideas and monitored their performance. John Riady, the grandson who now runs the empire, proved himself by investing in several successful Southeast Asian startups.

But there is a growing realization that succession planning should be formalized. Courses for families at business schools are moneymakers. The number of bankers, lawyers and consultants specializing in serving families has increased. They complain that the clan calls them too late, when a chief is on the verge of retirement, and shy away from awkward conversations. “A family that says there is no conflict between them is actually a red flag,” says Jeremy Cheng of Lansberg Gersick Advisors, one such consultant in Hong Kong.

Mr Cheng urged patriarchs to think not only about the next leader of their empire, but also about all other family members and their futures. Li Ka-shing, a Hong Kong tycoon, offers an example: He passed to his group, C.K. Hutchison, in addition to his intelligent eldest son, gave his enterprising younger son money to start his own venture and set up a charitable foundation to keep himself busy and out of the way.

However, many family businesses must look beyond the bloodline for their next leader. In Japan, it is common for people without a suitable heir to adopt an adult in the family. In the West, not so much. According to Deloitte, less than a third of unlisted US family businesses with revenues of more than $1 billion expect their next chief executive to come from the family. Until the younger generation is ready, outsiders can act as a bridge. But once family companies hire professional managers, Deloitte believes three-quarters of companies keep it that way.

Not only management, but even ownership may pass from the hands of the family. In a 2023 survey of German family firms published by the Ifo Institute for Economic Research, 23% of heirs said they do not rule out a sale, up from 14% in 2020. Some people may be eager to free themselves from their family obligations. Others may be forced to sell shares to cover inheritance taxes.

One option, already adopted by those in our sample, is a public listing, which offers families the option of maintaining some degree of influence over the business. However, this may cause panic among other shareholders. Last year when tension was displayed JBSBrazilian meat giant, listed in New York. JBS To ensure that the Batista family maintained control, it issued two types of shares, which worried investors, given that the clan has been caught up in various scandals involving bribery and deforestation. Wesley Batista, who runs the business with his brother, denies all such allegations. “When you have a family business, you have someone to blame and someone to punch,” he adds.

Families willing to give up control may look to private equity instead. Others may sell to a competitor. Earlier this year, Schroders, a British investment firm, was taken over by Nuveen, a US rival, bringing to an end the family’s two centuries of control. The next few decades may see more such sales, leaving heirs short of cash. TV Officers may be looking for new inspiration. ■

This article appeared in the Business section of the print edition under the headline “Into Thine Varis”.