Family businesses with good corporate governance are more profitable, IE-Banca March Survey

The survey concludes: “having an efficient board, with the right committees and a balanced composition in terms of independent members, non-executive members, and members with proven professional experience, helps a family business to mitigate negative aspects of family control, maximizing the capacity to create shareholder value.”

A snapshot of a publically traded family business with the best corporate governance would be that of a large and relatively young company, whose founder is still present, where the family possesses less than 40 percent of the shares, and whose CEO is not a member of the family.

In 2012, March Asset Management launched the Family Businesses Fund, a global equity fund that invests in publicly traded family businesses on the basis of the competitive advantages they offer in terms of their management profile and organization. Since its launch, the fund has accumulated a 63 percent profitability.

The III IE- Banca March Survey on Family Businesses was carried out on a sample base of 1,127 publicly traded companies from the United States, France, Italy, Spain, Germany, and Switzerland within a six-year time frame.

Family businesses are more profitable if they are traded on the stock exchange and even more so if they meet international corporate governance standards, as shown by the III IE-Banca March Survey, which was presented on July 2 by Dr. Cristina Cruz, the Academic Director and lecturer in Entrepreneurial Management and Family-run Businesses at IE Business School, along with José Luis Jiménez, the Director General of March A.M, Banca March’s fund management division.

The results of the survey also show that improving corporate governance is a profitable investment for family businesses, because companies with higher levels of corporate governance are more profitable than others. If previous surveys showed that “family business + publicly traded company” combined the best of both worlds, this III Survey shows that adding “company with good governance” to the equation substantially improves the family premium, highlighted Dr. Cruz.

The conclusion is that “having an efficient board, with the right committees and with a balanced composition of independent board members, non-executive board members and members with proven professional experience helps a family business mitigate the negative aspects of family control, maximizing its ability to create value for shareholders.” José Luis Jiménez, the director general of March Asset Management, said at the press conference that almost 85 percent of companies in the world are run by families and added that they are the backbone of the economy. “Good corporate governance is something we bear in mind at March Asset Management when it comes to selecting companies run by families that invest in the Family Businesses Fund”.

Good governance is profitable

The analyses show family businesses which areas of corporate governance they should focus on. Data indicates that family companies, above all in Europe, lag behind non-family businesses in terms of the function and composition of their boards. Anglo-saxon family businesses, on the other hand, offer a model to be followed in terms of good corporate governance. The survey also shows that scoring well in this area has a positive impact on the profitability of a family business.

Dr. Cruz said that while ideally, the recommendations of the survey regarding good corporate governance should be followed “without bearing in mind the structure of the company,” they could also be adapted to the reality of a family business. “The analysis of the relationship between the percentage of genuinely independent board members and non-executive board members is very revealing in this sense,” she added. “The data shows that a large percentage of independent board members increases the profitability of both types of companies. That said, while increasing the percentage of non-executive board members improves the profitability of non-family business in line with the recommendations of good governance, the effect is negative for family businesses.” Therefore, the question is not just about balancing proportions between the types of board members, but to “ensure that those occupying a seat on the board are able to bring maximum value to the company,” says the report.

The conclusions of the data concerning the policies and mechanisms to guarantee the protection of the rights of shareholders should bear in mind the particularities of family businesses, which are distinguished by the presence of a majority shareholder whose objective is to maintain control of the company for future generations. The data shows that to achieve this, family-run businesses in the United States and Europe establish a range of mechanisms that diverge from the guidelines recommended for good governance. It is worth pointing out that these measure tend to be “punished” by the market by reducing valuation of companies that give special rights to certain shareholders. “It is therefore up to the family shareholders to decide whether to comply with good governance recommendations or not, and accept penalization,” says the report, which also points out that “the data shows that the presence of these mechanisms has a more negative impact on the profitability of non-family businesses than on family businesses, although these do not necessarily mean in all cases deviating from the objective of creating shareholder value.”

What characteristics of family businesses improve their corporate governance?

Finally, the survey reveals important differences within family-run businesses regarding corporate governance. The snapshot of a publicly traded company with better corporate governance would be that of a large, relatively young company, whose founder is still present, with the family controlling less than 40 percent, and whose CEO is not a member of the family. An example of this type of company is Inditex, which occupies the top positions in the global indices used in the survey.

The III IE- Banca March Survey on Family Businesses was carried out on a sample base of 1,127 publicly traded companies from the United States, France, Italy, Spain, Germany, and Switzerland within a six-year time frame.