CREDIT SUISSE DISCOVERS THAT FAMILY COMPANIES ARE A SUPERIOR FORM OF ENTERPRISE.

Why can't all companies be like the best family businesses?

Investment bank Credit Suisse is the latest in a long line of investigators to discover that businesses with a strong family involvement in their ownership and direction perform markedly better than the classical quoted company with multiple institutional shareholders.
So excited were they with their discovery that they have set up a new investment fund, the Family Index.
Their press release is slightly breathless at the revelations of their research:
"Research conducted by Credit Suisse revealed that family owned companies demonstrate superior performance characteristics. In the long term, they tend to achieve superior returns and higher profitability than companies with a fragmented shareholder structure...."
What Credit Suisse discovered about family-influenced companies like BMW, Mars, Michelin, LG, Samsung, Ikea, Roche, Novartis, Heineken and many others has been public knowledge for a long time - in the UK, companies like JCB and Marshall's Aerospace have proved that, with the right kind of skill and commitment, manufacturing can be a very profitable and innovative field of endeavour. These two companies have established strong international positions - in the case of JCB, a position in the top three global companies in the very competitive construction equipment market. In a slightly different mode and industry, the John Lewis Partnership is a trailblazing success.
On the other side of the coin, the poor long-term performance of FTSE 100 companies is also available to those who want to know (See FTSE 100).

Credit Suisse's research identified three key characteristics that led companies with a Significant Family Interest to out perform most quoted companies. These special characteristics: in Credit Suisse's own words?

• Longer- term management focus

  Family shareholders usually require a long-term strategic focus from their managers. Since most families intend to pass their holdings to their descendents, they have strong grounds to keep their holdings in good conditions and therefore their interests lean towards the longer term. Unlike companies with a highly diversified shareholder base, companies with a strong family influence tend to focus less on the next quarterly results and can therefore also implement strategies that are earnings accretive over a much longer time horizon.

• Better alignment of management and shareholder interests

  Families usually control a limited number of companies and those assets represent a material share of their wealth. As a result, families tend to focus intensely on the way a company is managed. In many cases, the family appoint a representative - often a family member, who sits on the company board with the aim of improving corporate governance and influencing the company's strategic orientation. This can prevent management from pursuing targets that might not be aligned with the interests of the company, such as maximising short-term share price rather than company value.

• Focus on core activities

  Focusing on core business is a key asset of SFI's (companies with a significant family interest). This tends to restrict involvement to a limited number of activities and focus on niche markets as part of their long-term strategic focus. This limits acquisitions, extensive use of leverage and trendy short-lived strategies. Meanwhile influential family members usually limit their managers' diversification endeavours in order to maintain control of the traditional business.

A crucial discovery! Excessive exposure to institutional investors and equity markets is a disadvantage and should be avoided if possible!

Credit Suisse's research, like so much before it, reveals that companies which take a long-term strategic stance, are able to align the interests of all major stakeholders and dedicate themselves to excellence in their chosen business will tend to do well.
Of course, they might have added that they need to know their business, be competently managed, well organised and adapt well to change in their markets.
Additionally, family companies have their own special problems, especially those of managing family involvement and generational change.
But, wait a minute! This research reveals something else of vital importance - having a "highly diversified shareholder base" actually prevents companies from shaping themselves to perform well and survive for a long time. Having dominant institutional equity ownership opens companies up to the machinations of investment managers juggling their portfolios for short-term gain and down the line, the tender attentions of Hedge Funds and sundry speculators, none of which is good for the business.
A diversified shareholder base is therefore a source of competitive disadvantage and a condition which any company that wishes to achieve superior performance should seek to minimise!
Credit Suisse describe family ownership as the spearhead of Nineteenth Century industrial development and the current model of diversified shareholding as its Twentieth Century replacement.
We need a new model for the Twenty-First Century, as the old one is clearly failing.
All we need to remember is that the new model must:

• Support a long-term focus
• Align the interests of all key stakeholders in the business
• Encourage dedication to a core business, avoiding unnecessary diversification, financial engineering and strategic' fads'.

Is Private Equity that model - we think not, as it doesn't meet any of the three requirements very well.

Badly needed - a new kind of investment market and better investors

We need a new kind of investment market - a Responsible Investors market, which rewards those who commit to long-term relationships with the companies in which they invest and are able to deeply understand the business and work with managements. Such a market needs to be protected against the ravages of the speculative pack by an impenetrable cordon sanitaire. It would be worth the time of any responsible government to consider how to encourage setting up equity markets that simulate responsible family ownership and how to specially reward responsible long-term investors for their commitment.
So let's keep thinking, Mr. Brown.