Why family businesses could be better than public firms in the long run

A publicly recognized name might look good in an investment portfolio, but that doesn’t necessarily mean it’ll be strong for long.

A new study from the University of Toronto’s Rotman School of Management indicates that compared to public firms, family-controlled business tend to survive longer and represent a lower-risk investment, reported the Financial Post.

“Family companies live longer, are more stable and are less risky,” said Matt Fullbrook, manager of the Clarkson Centre for Board Effectiveness (CCBE) at Rotman and author of the study. The CCBE, which performs research on corporate governance largely through private donations from corporations, has been looking at family businesses since 2013.

Among all the family businesses tracked over a nearly 50-year period, nearly 70% survived; on the other hand, 76% of the non-controlled widely held companies that were studied either went out of business, got acquired, or were de-listed during the same time period.

The new research, sponsored by the Power Corp. of Canada, also found less executive turnover at the top of Canadian family businesses, with CEOs staying in their position an average of four years longer than their counterparts at non-controlled companies.

From the standpoint of their daily historical share price performance, family businesses were also less volatile. The study found that annual volatility for family businesses averaged 36% over 33 years, compared to 51% for non-controlled companies over 35 years.

“Our previous work on family businesses hints that their excellent long-term results may be driven, at least in part, by the long-term perspectives of family owners,” the latest report said. It also acknowledged that family-controlled firms run up against an “oft-cited” statistic that 70% of family businesses don’t make it to the second generation.

The new CCBE study roughly echoes findings from previous research by National Bank Financial in 2015. Comparing family-controlled Canadian companies with the S&P/TSX composite index, it found that family businesses outperformed the latter over a 10-year period. The National Bank report attributed that performance, in part, to longer tenures for management and the ability to follow long-term strategies without pressure to deliver short-term quarterly results.

However, the National Bank research noted some challenges family businesses face, including succession planning, the creation of strong and independent boards of directors, and establishing high standards for governance and transparency.