The stock exchange and family firms – two irreconcilable terms upon first glance. Going public seems to mark the beginning of the end for family firms and to entail an entirely different type of governance. But the book “Successful on and off the stock exchange – Governance practices in family firms” written by Dr. Sonja Kissling and Dr. Bianca Braun shows that this is not true. Firstly, there are numerous listed family firms that are very successful. Secondly, the listing does not introduce a binary division between family firms regarding their governance.
Listed firms are typically set in contrast to privately-held family firms and in this comparison, listed firms tend to perform worse. Reasons cited for this lower performance are the short-term outlook of the listed firms and managers acting in their own personal interest. The exposed and heavily regulated stock exchange environment does not permit autonomous players much room to manoeuvre. In comparison, privately-held family firms typically comprise a strong and trustworthy anchor shareholder, long-term strategies, free enterprise, and owners who act in the public interest. In this world, personal and long-term business relationships are the ones that count.
In view of this, going public seems to mark the beginning of the end for family firms. Family firms are simply not compatible with the stock exchange environment as it requires an entirely different type of governance. Based on the assumption that there is a clear division between listed and privately-held family firms the book addresses the question of how the governance practices of listed family firms differ from the ones in non-listed family firms.
The key aspects of the analysis were the ownership structure, the Board of Directors, the strategy, and the information policy of ten privately-held family firms and ten listed ones. Although listed firms are subject to stricter formal requirements, in particular with regard to transparency and the composition of the Board of Directors, going public proved to be less of a distinguishing characteristic with regard to the governance of family firms than one might initially presume. The findings did not lead to confirmation that going public is indeed the key differentiation criterion for the governance of listed and privately-held family firms.
However, some interesting facts were discovered. Most importantly, going public does not mark the end of a family firm. In fact, quite the opposite: Numerous listed family firms have been successful players on the stock exchange for a long time. Various stock indices and academic studies have proven that listed family firms often tend to outperform other listed companies. This is regularly attributed to the positive characteristics traditionally linked with privately-held family firms. On the other hand, privately held firms are not less professional than their listed colleagues. Some privately-held family firms are in the position to go public at any time, in other words, they are not inferior to listed firms in terms of transparency and professionalism.
Introducing four types of family firms
Analysing the governance practices, the book reveals a range of similarities between the family firms investigated – regardless of whether they are listed or not. Four different types of family firms emerged:
Puma family firms are typically young family firms or firms managed by founding personalities. The families of Puma firms are accordingly small and agile, consisting of a manageable family shareholder base. Only a few family members are active in the firm, but they play a very strong governing role and are committed to the company. They display daring and entrepreneurial characteristics with a strong desire for both independence and creativity. Pumas are strong and independent family firms that are still completely managed by their owner family.
Hippos are particularly strong family firms with a distinctive sense of family. This should perhaps come as no surprise, considering Hippos tend to have a very complex family situation, containing numerous family members and therefore numerous family shareholders who feel a close connection to the family firm. When a family member dies, the shares are inherited by the next generation according to the principle of equality. The proud and family-orientated Hippo exhibits a breadth of experience in all areas of family governance.
Fittingly, the Octopus is a family firm with several arms. It is a highly diversified family firm. Octopus family firms grow through their arms. The original family firm, the parent company, remains the favourite arm of the family for a long time. The family then uses the assets generated by the parent company to diversify into other arms, the first step is often a real estate firm. The active and versatile Octopus has a keen entrepreneurial spirit and has diversified its assets.
Mammoths are family firms that have been around for so long that barely anyone acknowledges they are still in family hands. In general, management of Mammoths firms is no more in the hands of the founding family. The Chairman of the Board of Directors and CEO are no longer positions held by family members. However, the family, against the odds, maintains a very strong influence on the firm as it acts as guardian of the firm’s soul.
Family firms can indeed be a success both on and off the stock-market. But to ensure that they survive good governance practice is essential. Although listed firms are subject to stricter formal requirements, going public proves to be less of a distinguishing characteristic with regard to the governance of family firms than one might initially presume. Instead, we might move towards a more nuanced understanding when viewing through the lens of the puma, the hippo, the octopus, and the mammoth.