Family businesses at the forefront of sustainability
Family-owned businesses are incredibly wide-ranging in size. Some are very small, but others are huge multinationals. Yes! Even some of the world’s biggest and best-known companies are family-owned businesses, if you look at how much voting rights the founding family has.
Family businesses are at the heart of the global economy. According to analysts at Family Capital, the 750 top family businesses in the world by revenues generated USD9.1 tn in revenues in 2018 and employed 30.5 million staff. In fact, in most countries, family businesses account for 40-60% of all private-sector jobs. And most start-ups (85%) are actually funded by family money.
Successful family businesses generally share a few structural characteristics:
- Entrepreneurship. Often innovative or disruptive, family businesses invest more resources in research and development (R&D) than others;
- "Skin in the game”. With most of their wealth and reputation invested in the firm, the interests of family owners and their business are closely aligned;
- Careful stewardship. Family businesses typically show a strong desire to invest now for the success of the next generation; and
- Longer-term perspective. As family owners’ wealth is often tied up in the business, they typically reinvest for growth. Usually with lower gearing ratios than non-family-owned companies, they tend to fund operations more through internal funds than through debt.
Do family-owned businesses have a sustainability advantage?
There are as many varieties of family-owned business as definitions of sustainability. My favourite is contained in ‘Our Common Future’, the 1987 report from the United Nations’ World Commission on Environment and Development, which defines as sustainable any “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”
As such, sustainability concerns companies’ financial, social and environmental risks, obligations and opportunities, often called the ‘triple bottom line’.
Often, depending on the ESG rating provider, family-owned companies score better in sustainability surveys than non-family-owned companies. This is mostly because of better environmental and social scores, whereas they may lag in terms of governance.
Family businesses may find it easier to deliver sustainable value creation, as their inter-generational perspective allows them to focus on the long term.
Families launching and passing on their business to the following generation have always existed. The world’s oldest existing business is a family-owned Japanese spring resort founded in 705AD called Nissiyama Onsen Keiunkan. It is one of a select group of businesses in existence for over 1,000 years, and united around what is called the Spirit of Shinise (Japanese for established and long-standing company). The Spirit of Shinise has four main purposes:
- to ensure a sound company resides in a sound society;
- to create tradition through the continuity of innovation;
- to maximise customer satisfaction by ensuring employee satisfaction; and
- to convey the moral value of Shinise to people around the world.
Not far from the concept of sustainability, is it?
The most successful family firms are often those committed to more than just profitability. Not being answerable to shareholders anxious to maximise profits helps. Additionally, their sense of commitment typically includes long-term relationships with a wide circle of stakeholders, including customers, employers, suppliers and the extended community — again, behaviours that fit in well with the basic principles of sustainability.
Another distinctive advantage family businesses enjoy is a shorter chain of command when it comes to making crucial decisions, including resource allocation. This means family-owned companies are often faster and more patient than other companies when it comes to R&D, which gives them a key role in finding solutions to this century’s global challenges.
If the concept of stewardship for future generations comes naturally to many family-owned businesses, these companies are not necessarily “perfect” from a sustainability perspective. Due to their ownership and board structures, some family-owned companies may, for example, score poorly in implementing corporate-governance best practices.
What does this poor governance score mean? In some cases, the so-called ‘best practices’ defined by publicly owned companies’ behaviour may not be appropriate in a family-owned environment. For example, the concentration of ownership is considered a threat in standard frameworks, as there are companies with highly concentrated ownerships and poor transparency that have abused minority shareholder rights. But when looking at the specificities of a family business, the concentration of ownership may become a valuable and defining trait, with visionary family owners being particularly devoted to product and brand quality. Furthermore, these entrepreneurs are dedicated to creating strong and durable businesses. Their strong impact on social and environmental scores is strictly linked to the possibility of leveraging concentrated ownership in decision making. Does this make them unsustainable? Definitely not.
Other governance best practices may be applicable across family- and nonfamily-owned businesses alike.Family-owned companies may also have less diverse management boards or lack the resources to explore best practices and implement change (ie.demand supply-chain information or ask suppliers to do things differently).
Key to ensuring family-business sustainability is establishing the right corporate governance conditions so that the positive aspects of family ownership are coupled with safeguarding the interests of non-family investors.
Family-owned businesses and covid-19
Every business today is facing the greatest challenge in generations, as the pandemic forces owners to drastically rethink business models, supply chains and working practices.
Family-owned businesses’ long-term perspective, entrepreneurial spirit, agility and guiding sense of purpose, together with the resilience of their leadership teams make them especially well prepared to fight a such crisis, especially as their multi-generation perspective allows them to meet their customers’ changing circumstances through economic cycles.
The covid-19 crisis has produced some great examples of family businesses displaying their experience as innovators to support their governments and communities in need. Some have pivoted their production lines to produce critical medical equipment in short supply, others have found ways to improve the lives of people in lockdown. All these companies tend to prioritise people, from their employees and customers, to their suppliers and the communities in which they work.
Look at one of the US’s biggest carmakers (and one of the world’s most successful family-owned businesses), which partnered with a healthcare company to manufacture ventilators. Similarly, a fifth-generation UK business, known for manufacturing luxury outerwear, moved to produce gowns and scrubs to support frontline medical staff. Or the Danish toy company that launched a website to encourage families to share creativity and play ideas and help children to develop problem-solving skills while they are out of school.
These are just a few examples. Through their efforts, family businesses are strengthening our defences and will play a crucial role in driving the global recovery.
Any family business that wants to make the difference needs to think of sustainability not only as something they might support or engage in, but also as something they influence through their supply chains. According to the IFB Research Foundation, such families also: keep a clear sense of long-term vision for their organisation, balancing long-term objectives and short-term performance; engage publicly in sustainability issues and leverage their position to influence supply chains; develop people capital; and focus on resource efficiency to avoid depletion of resources and ensure materials security.