Relative success

TODAY real power is rarely inherited. Monarchs spend their lives cutting ribbons and attending funerals. Landed aristocrats have to climb the greasy pole if they want to wield serious influence. Even in the United States great dynasties such as the Clintons and Bushes have to go to the trouble of getting themselves elected. The one exception to this lies at the heart of the capitalist system: the family firm.

Leading students of capitalism have been pronouncing the death rites of family companies for decades, arguing that family firms would be marginalised by the arrival of industrial capitalism. They also insisted that the Dallas-style downsides of family ownership would become more destructive: family quarrels would tear these companies apart and the law of regression to the mean would condemn them to lousy management. Most countries have a variation of the phrase “clogs to clogs in three generations”. For a long time, they appeared to be right: in both America and Europe, family firms were in retreat for much of the 20th century.

Yet that decline now seems to have been reversed. The proportion of Fortune 500 companies that can be described as family companies increased from 15% in 2005 to 19% today. That is largely because of the rise of emerging economies, in which family firms are more common. But even in the rich world family companies are these days holding their own. Of the American firms in the Fortune Global 500, 15% are family firms—only slightly less than a decade ago. In Europe, families control 40% of big listed companies.

You can happily go through a day consuming nothing but the products of family concerns: reading the New York Times (or the Daily Mail), driving a BMW (or a Ford or a Fiat), making calls on your Samsung Galaxy, munching on Mars Bars and watching Fox on your Comcast cable. And the growth is likely to continue. McKinsey predicts that in 2025, family companies from the emerging world will account for 37% of all companies with annual revenues of more than $1 billion, up from 16% in 2010 (see article).

Pass the silver spoon, Dad

Why have family companies defied their obituarists? Many of them continue to suffer from serious problems: witness the recent debacle at Portugal’s Espírito Santo. But, particularly in the West, family firms have far fewer defects than in the past, largely because they have got better at addressing their obvious weaknesses.

These days it is rare for a family boss to hand his job on to an obvious dud. Most family companies train future leaders by sending them to business schools and putting them through their paces in a succession of lower level jobs. A growing number (particularly in Germany) have become masters at moving family members from executive jobs to supervisory roles in the boardroom. An entire consulting industry exists to help families deal with the peculiar dynamics of their companies, such as managing personal conflicts and sidelining thick relations without hurting their feelings.

Family firms’ strengths, meanwhile, are just as important today as they were in the early days of capitalism. They solve the “agency problem” that Adam Smith put his finger on in “The Wealth of Nations” when he argued that hired managers would never have the same “anxious vigilance” in running companies as the owners. Family managers are often parsimonious: companies such as Walmart, Koch Industries and Mars & Co are famous for running a tight ship with humble headquarters, lean management and an obsession with operational efficiency. They are good at thinking in terms of generations rather than quarterly results: Roche makes long-term bets on developing pharmaceuticals; the Murdochs and Newhouses have stuck with print media in difficult times.

But the emerging world is currently witnessing a battle for the soul of the family firm. Old-model family companies are sprawling conglomerates that rely on political connections to protect them from global competition and complex cross-ownership structures designed to give families maximum control for minimum cash. New-model family firms are professionally managed, transparent outfits whose owners maintain long-term vision and quality but eschew the sort of wheeling and dealing that made them rich in the first place.

The best way to ensure that the right side wins is to increase competition: India’s great liberalisation of the late 1990s persuaded Tata and Mahindra & Mahindra to transform themselves. Emerging-world governments should also outlaw cross-ownership and strengthen the rights of non-family shareholders, as America did in the 1930s and other countries have done more recently.

The other great problem with family companies, which plagues the West as well as the emerging world, is that the weaker members of the breed have failed to learn from the stronger members. Too many fail to make even the most basic plans for the future: PricewaterhouseCoopers discovered that only 16% of the family firms it surveyed had put a formal succession plan in place. Too many lack the ambition to think that they can compete with the best in the world: convinced that they are a bit of an anachronism they tend to keep themselves to themselves. The remarkable record of the best family firms should remind millions of business owners that, in the corporate world at least, you do not have to surrender family control in order to prosper.