What are the common issues investors raise about family-owned businesses?The first point they argue is that family-controlled businesses are not as accountable for their actions and might end up squandering all of the company’s profits on a new corporate jet or a lush office. The second is that nepotism can play huge where you might hire your lazy brother and waste money through failed resources like that. 

They seem like legitimate claims. How do you respond to them?
We’re talking about publicly traded companies here, so it makes sense that any company that must report to its other stockholders would feel the affects of such actions because they will show up in the books and then in the stock price. In other words, they won’t do these things because owners are worried about stock price more than anyone else. Also, a central theme is that when it’s a more tightly controlled firm, they’ll be more involved in management decisions, not just ownership decisions. The result is a better cost structure. If owners and managers are one in the same, then their incentives to see the company succeed are the same. That’s not always the case with other companies where managers may have separate agendas from owners.

How can managers’ and owners’ incentives be different at firms with a larger ownership base?
It’s not always true that the things that are good for managers are good for owners. A lot of firms in the ’60s got into far-flung ventures pretty distant from their core business. For example, General Mills owned Eddie Bauer, Izod, Red Lobster and some other holdings. Some people thought the reason these corporations were stretching into different businesses was because the managers were pushing them into it so they could have large-firm management experience instead of small-firm management even though it might not be as profitable. Aligning manager and owner incentives in things like stock options helps make incentives the same for both parties. 

But we’ve seen with the accounting scandals that stock options for managers can be a bad thing too, right?
You’re less likely to have such an issue in a family-controlled business because the owners would be very involved in the firms’ daily practices and closely scrutinizing the books. In contrast, it took an accountant to blow the whistle at Enron. The idea is that with a family-controlled business, there wouldn’t be anywhere to hide such corruption. 

We’ve talked about debunking some of the perceived negatives of family-owned businesses, but what about the primary advantage for investors?Owners are thinking much more for the long-term future of the company. They’ll be more patient and not basing considerations on short-term metrics as much as other firms might with owners coming in and out. As an investor, you don’t know what new owners are thinking – it’s possible they’re looking to turn the company around, make a quick profit and then leave.  

Do they have a different type of internal climate?
We also found family-owned businesses tend to invest more in training, education, and salary for their workers, and they tend to pay their senior managers less. It all gets back to the long-run view for the company.  

Do all those benefits mean they’ll always be better investments?
Obviously you have to look at their performance and other aspects of the company. Also, because they tend to have owners and managers thinking for the long term, that also means family-controlled businesses will benefit long-term investments the most. If you’re looking for a six-month turnaround on a stock, family-controlled businesses may not be the best investment. 

How can investors determine if a company is family-controlled?
It’s pretty easy because they’re publicly traded – most of this stuff is on Yahoo! Finance. Giving a plug to my co-author, Danny Miller, he wrote a book, Managing for the Long Run, which looks at such firms with good management structures so that could be a good resource too.
 

Do you think enough investors look at this aspect of management?