When the family shareholders in Australia’s Myer retail group suggested they might sell out completely in the forthcoming AUD2.5bn public listing, there was a volley of complaints from institutional and individual shareholders. If the family didn’t retain a significant investment, particularly in the middle of the financial crisis, what did that say about the 109 year-old group’s future?
While mum and dad investors felt betrayed, local fund managers argued that the Myers as well as the other major shareholders, Texas Pacific and Blum Capital, should stick around on the share register as a show of confidence.
The family bowed under the pressure. To restore faith in the chain – and boost the share price in the middle of an institutional book-build, it allayed investors’ fears by announcing it would retain around a fifth of the pre-float shareholding. In the current environment, that affirmation made the job of chief executive Bernie Brookes much easier as he toured the world’s financial capitals.
Eighteen months ago, it’s unlikely that institutional shareholders would have reacted in such a way. In the UK and US in particular, institutional analysts tended to regard family blockholdings as a millstone around a company that made for eccentric decisions, undue influence on chief executives (the Ford family were routinely accused of “meddling”), excessively long-dated strategies and an inexplicable aversion to debt.
But eighteen months is a long time in a crisis. Family shareholdings in some of the world’s biggest businesses including Ford are increasingly seen as an anchor in the financial storm, particularly so because of the problems and even collapse of once-preferred categories of shareholders such as private equity, hedge funds and even such typical institutional investors as insurance companies and wealth management funds.
Compared to some of the above, particularly private equity and hedge funds, the traditionally low or zero debt of family shareholders among other virtues has come to be viewed as a stabilising influence in companies where other shareholders may be awash with debt.
This recognition of the anchor value of family shareholdings, if not necessarily control, is well-founded. A recent landmark study of the top 1000 companies, both private and listed, in four countries – France, Germany, Italy and UK – notes: “In continental Europe family firms are more profitable than non-family firms.”
The April 2009 study – The Life Cycle of Family Ownership by researchers from the London Business and Said Business schools, University of Oxford and Milan’s Bocconi University – is the most comprehensive and thorough in many years of the relative influence, profitability and importance of family-owned firms. It goes on to point out there are a surprising number of them. According to the study, two thirds of the top 4000 companies in these four nations are family-owned.
The stabilising role of family control – or at least influence – is not however news to long-term students of Europe’s family firms. While largely negative institutional research has tended to dominate the issue, a series of scholarly studies over the last few years contradicts many of its presumptions. For instance, far from “meddling” in a firm’s executive, in Germany families tend to “exert strong disciplining of poorly performing management” to the company’s long-term benefit, argued a 2003 study in the Journal of Small Business Management.
Europe’s faith in the family-owned business model is also reflected in ownership patterns. “We find that among the largest 1,000 firms in each country, family controlled blocks are the most important category of ownership in the three Continental countries, as high as 57 percent in Italy and 43 percent in Germany. In contrast, it is only 23 percent in the UK,” add the Life Cycle study.
The family touch appears to be an important element of the firm’s continuity, for instance in their banking relationships. While most UK family-owned companies were swallowed up by outside investors because of their need for capital, many European families built up such good relationships with their lenders over the generations that they didn’t have to resort to IPOs to raise money.
And in a shock finding, most of the surviving family companies in Britain are owned not by UK families but by European or American ones. “[Over half] of UK family firms are controlled by foreign families,” notes the report.
German banks, governments and institutions are so enamoured of family ownership that, when a family sells out of its business, the new owner is another family. The classic recent case is the family-owned Schaeffler Group’s family’s EUR12bn bid for tyre-manufacturer Continental AG.
In Germany, things don’t change much even after IPOs. After the IPO, two thirds of companies remain under the absolute majority of the original, family shareholders. Even when non-voting shares are issued, most family blockholders will continue to exercise dominance. Like France, Spain, Italy, Switzerland and other European countries, Germany has an insider system as opposed to an outsider system such as in the UK and US with their highly regulated emphasis on independent directors, codes of compliance and other factors.
“Families may be more likely to dilute control in outsider systems, where the value of the private benefits of control are lower, new equity is less expensive and the market for corporate control is more efficient,” explains the Life Cycle study. “Conversely, families may be more likely to stay in control in insider systems, where the private benefits of control are greater, new equity is more expensive and the market for corporate control is less efficient.”
After following the fortunes of companies in both systems for ten years, the study concluded that goes a long way to explaining the overnight discovery by institutional shareholders of the long-held virtues of companies where families have a strong say. “Over the 1996 – 2006 decade, UK family firms have a lower chance of survival as family-controlled firms than French, German and Italian family firms,” it notes. “Only 44 percent of UK family firms survived over the decade as family-controlled firms, compared with 74 percent in Germany, 64 percent in France and 78 percent in Italy. “And right now, survival is clearly the name of the game. One company that has long earned top marks from analysts despite its family dominance is Spain’s Inditex, parent of the Europe-wide Zara fashion chain. Listed since 2001, it’s one of the most admired firms in the world and a regular subject of academic case studies despite the fact that founder, executive president and major shareholder Amancio Ortega rarely talks to the media or public, breaking all the transparency rules of “outsider” systems.
Another is France’s 50 year-old “street furniture” firm, JCDecaux, that illustrates the resilience of the family model. Publicly listed but controlled by the sons and daughters grouped around founder Jean-Claude Decaux, it was predictably hard-hit by the slump in the advertising-based, front-line spending on which it depends. Yet it stayed well in the black, with profits down by 40 percent, considerably better than the rest of the industry. A contributing factor to the mitigation of losses, analysts point out, is the firm’s conservative funding typical of family firms. Its ratio of net debt to ebitda is just 1.6 times, much lower than the media sector’s average ratio of four to five. Even in the US where strict, governance rules favour much more diluted shareholdings than in Europe, the family format is more dominant than assumed. “It might not be apparent to many consumers, but some of the biggest and best-known American companies still have deep family ties,” explains a consultant to family companies. “Wal-Mart (the Walton family), Motorola (the Galvin family), Comcast (the Roberts family), Tyson Foods (the Tyson family), Campbell Soup (the Dorrance family), The New York Times (the Sulzberger family), Coca-Cola (the Woodruff family), and Archer Daniels Midland (the Andreas family) are just a few.”
Until 18 months ago, Ford was one firm that attracted criticism from analysts. With just 3.7 percent of the company’s total equity, the descendants of Henry Ford control 40 percent of the voting rights through their class B shares dating back to 1936.
And that control is rock-solid. Bill Ford is chairman and CEO, father William Clay Ford Sr is a director along with Edsel Ford II. Elena Ford, a grand-daughter of Henry Ford II, heads product and market planning for prestige brands while a brother-in-law of Bill acts as his chief of staff.
Suddenly, nobody seems worried about it. After the government’s rescue of GM and Chrysler – and Ford’s refusal of a bailout, virtue is seen in the way the family pulled the firm through the crisis. While GM, a classic publicly-owned beast, has been delisted, Ford’s share price has been rising steadily and was heading towards USD10 by year end. The company even expects to break even by 2012. Its rivals aren’t evening nominating a date.
Meantime back in Europe, family-owned European automobile companies are riding the storm particularly well. Although the feuding family shareholders of Volkswagen and Porsche are in a battle over control of the latter, nobody’s complaining about their profits. And there’s no serious debate that the firms would be better off without the families.
