Nice idea: probably won\’t work though

However, evidence suggests that family-owned companies run by sons or daughters on average under-perform their professionally managed peers.

The Business Department is expected to encourage wider use of external expertise and non-executive directors on boards as part of a package of measures.

All mid sized companies that recognise they have reached the limits of their own skills are set be helped to bring in outside expertise. The Institute of Directors is understood to be drawing up a database of experienced non-execs as a new resource. Business schools could also be asked to redesign their MBA programmes to accommodate the needs of family owned companies.

All very nice: but a large part of what the management of large companies does is actually deleterious to the performance of the company. It\’s only possible for them to do it because the margins and buffers of a large company can absorb the waste.

In medium sized companies salesmen go and sell. In large ones they have diversity meetings.

OK, that\’s not quite true, but I can\’t remember whether it\’s Peters or Parkinson who points out that the best way to bankrupt a medium sized business is to bring in the ex-Chairman of a large one. What he\’ll spend on redecorating the executive suite is what a medium sized business would spend on developing the next version of the product.

They\’re just not the same worlds and the skills (hah!) aren\’t transferable in quite the manner people seem to think.

And asw to small business: how many people in a large corporation have ever thought about cash flow? And how many (surviving) small businesses think about virtually nothing else?

14 comments on “Nice idea: probably won\’t work though

  1. “… average under-perform their professionally managed peers”

    Whose definition of ‘under-perform’? What’s wrong with a family-run business not wanting to over-reach itself?

  2. If anything there’s an argument for going the other way. Family businesses which have been handed down generations are generally run on the basis of long-term stability. If the CEO is the grand-daughter of the founder and hasn’t been expensively taught a lot of MBA nonsense about current business fashions her aim will be to pick those of her children, nephews, nieces, siblings who will be able to be developed into managers for the business with the aim that there will still be a business for them to pass on to their children.

    One of the problems we have compared to competitor nations is that these successful family SMEs aren’t encouraged to grow into successful large family businesses. Instead, large corporates are more likely to buy them up and absorb them and their distinctive nature.

    There is a balance to be struck, but if sustainability is important then family businesses are a model for it. Perhaps there’s a parallel with other things which in theory ought not to work but in fact do, like hereditary peers in the House of Lords – in theory professionals and appointed experts should be better than random old men whose great-great-great-great grandfathers did something disreputable enough to be ennobled for, but somehow they very often aren’t. A Harvard MBA and accountancy qualification ought to make you better at running a business than merely being the founder’s grandson, but this is often not the case.

  3. I think the finance people in most large organisations think very hard about cash flow. And they use their size to withold payment as far as they possible can.

  4. Under preformance…..

    Is that on a risk adjusted basis?

    Family companies often have a very conservative approach to business (certainly long lived ones do). There is nothing wrong with being cautious with the family’s wealth.

  5. I think it would mainly be an education for the more open-minded non-executive directors. As you say, big (let alone huge) companies are rather different from smaller ones, where for instance the owners are typically proper capitalists and primary shareholders; big companies have “managers” (a word originally used in connection with handling horses).

  6. ““managers” (a word originally used in connection with handling horses).”

    Before, bolted,closing, door, have, horses, stable, the, the, (rarely).

  7. A turnover of £500m is a medium sized business?

    I feel all inadequate now.

    I’m 32 and I’ve changed my business strategy to the following:
    – Find a business consultant with a successful career behind them.
    – Hire them to teach you how to do it.
    – Copy. Paste. Copy. Paste. Copy. Paste.

    Seems to be working pretty well.

    I’m always employing family for various projects.

  8. I thought we were supposed to be copying Germany with its core of small to medium sized, family owned, businesses at its core?

    As blindcyslitsts points out as well, many, (some, most?) of these businesses run them as a lifestyle choice.

  9. There was a study several years ago finding many small business owners worked more for self-fulfillment including joy of their work and pride in details and quality of their product than for profit. They could have increased profit (I think return on capital was the measure) but chose personal alternatives.

  10. But the finding that second and third generations don’t do as well as the founder is pretty well known anecdotally, is it not ? First generation builds, second maintains into mediocrity, third sends it down the drain was the usual pattern.

    And for good reason, the first generation usually had some reason to succeed, inspiration or genius or sheer bloody mindedness and hard work. makes a hard act to follow.

    Most companies in fact do fold after a period, it’s the transitions that are hard. Transition in size from a one person controlled to a management team to departments, each phase change is fraught with difficulty, often a founder is a whiz at one aspect, often selling or marketing, and can lack the financial disciplines, or lacks the interest in it. Transitions of ownership especially generational ones are similarly tricky.

    Fairly standard management theory in fact. And some of course do make the transition, more power to them.

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