How family companies quietly outperform other companies (even in today’s disruptive environment)
MIT Sloan Executive Education faculty member John Davis, a pioneer in the study of family companies and the director of MIT Sloan’s portfolio of Family Enterprise Programs, is bemused by the sudden interest of corporations in ‘long termism'. “We see non-family, publicly-traded companies suddenly ‘discovering’ long-termism— as if they really discovered it. I'm glad they’re thinking about it; let’s see if they make a genuine effort and really do it,” he says.
Davis remains skeptical—and for good reason. He knows long-termism well, and he knows it works. He teaches the practices, planning, and mindsets to do it successfully to classrooms of business families at MIT. For more than 40 years, across 70 countries, Davis has studied, taught, and advised family-owned companies on how to survive in business for generations. What amuses him about Wall Street’s recent appeal for long-termism is that they define “long-term” in many cases as three years. Meanwhile, Davis works on 25-year, 50-year, and 100-year plans with multigenerational families, and was recently asked by a founder to develop a plan for his family enterprise to last 500 years (20 generations).
Family companies, Davis believes, favor the decisions and behaviors that matter to long-term, sustainable performance “more naturally and more inherently than non-family companies.”
Long-term thinking has always been at the heart of successful family companies. “And not only long-term thinking, but also planning, investing, partnering, relationship-building, and community-building for the long-term,” Davis explains. A long-term perspective “comes more naturally inside a company that is owned by a family, because their time horizon is intrinsically longer. They plan for their descendants to own this business or this land (or the wealth generated by its sale) for generations. There is an attitude of legacy and stewardship as a way of being in families, which permeates into the culture of the company.”
Another inherent quality of a family that penetrates the family company is the stability of ownership, “which says that what we're in this for the long haul – it's not a speculative venture – and if you come to work for us, or if you're one of our customers or suppliers, we're sticking this out.” This is reflective of their fierce loyalty, which “family companies tend to nurture more than non-family companies.” Davis cites.
Family companies also tend to develop financial stability, with stronger balance sheets and less debt. This makes them more resilient to economic downturns, avoiding the frantic efforts many non-family companies make to boost their suddenly shaky bottom lines. Davis’ work at MIT now focuses on how family enterprises can survive today’s disruptive, fast-changing environment, which requires some different skills than outlasting economic cycles.
The qualities described above that are inherent to family companies help explain one of the business world’s best-kept secrets: on average, family companies, whether public or private, whether small or large, consistently outperform their non-family counterparts. As established by the research, the difference in profitability, growth, or any other kind of return is significant, he says. “We're not saying that all family companies perform better than all non-family companies,” Davis notes, “but on average, they do.”
Most industry leaders are family companies. The majority of publicly listed companies are family controlled. While the famous three-generation rule – which states that many family companies don’t survive past the third generation after founding – may have some validity (Davis has researched this), the fact is that even fewer non-family companies ever last three generations.
Reluctance to Let Go—in Several ways
Of course, family companies have their challenges as well. One of the main vulnerabilities of family companies is their reluctance to “let go.” As Davis explains, “Family companies hold onto people who aren’t working out well way too long, they hold onto investment bets that aren’t working well too long, they hang onto products or business lines that aren’t working well too long, and sometimes the senior generation hangs on to leadership too long. Families tend to be excessively loyal, stubborn, and they get attached. That doesn’t work very well in today’s economy.”
The irony is that by remaining loyal to original products or to the original business rather than experimenting and scanning the horizon for new growth opportunities, the younger generation of a business family forgets the spirit that inspired the company’s founding in the first place. The driving ambition of the company’s founder was “to create something new that people will value,” says Davis; building a company was only the means to that end. Later generations, however, get attached to the means and forget the ends. As Davis urges his family company students and clients, “We need to migrate to new, good opportunities, and not fixate on the means of production.”
The challenge is that families have a passion for the family business, which is both a strength and a vulnerability. “It’s hard to create anything of great value if you’re not passionate about it,” Davis says, “but passion for a business also results in attachment to it.” Davis, who is also a trained psychologist, notes that success in life often depends on the quality of our attachments but also on our ability for detachment. Successful parenting, for example, requires balancing attachment, and, as children grow older, detachment.
At the family company level, achieving this balancing is a part of the culture that is set in motion by the owners, and then filters into the board and organization, says Davis. “How do you balance attaching and being passionate about something, but also moving away from it at the right time and letting go of things that don’t work any longer?” According to Davis, this skill is an essential part of the modern success formula for family enterprises in today’s turbulent environment. Most family owners don’t know how to do it well; they congregate in Davis’ classes to learn how.
Never Forget the Values
The best family companies know when to pivot and divest, but they also work hard to ensure that such moves are achieved in a positive and humane manner. “When a family business shuts down an operation in a community and people's lives are affected, you are judged rightfully about how you treat the people who helped you over so many years,” says Davis.
“Good families and good family companies make the right moves in the interest of long-term value building, but they do it with the right values,” he says. “They treat people with dignity, they help them find new jobs, they help the community, maybe repurpose their old factory in some way. They honor contribution and loyalty–and their roots.”
Such timeless values will ensure that no matter how volatile, chaotic, and uncertain the world around them, the best family companies will continue to quietly outperform their noisier, short-term focused, non-family competitors.
Learn more about MIT Executive Education’s portfolio of family business programs here
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