ISSUE 8 APRIL 2009

The good news is that family businesses often have a 'magic pill' that helps resist this temptation - and this magic pill could help them outperform their competitors in the decades ahead.

The magic pill is the patience of family shareholders. Their patience makes it much easier for managers to continue to keep the long term in mind. For example, one family business recently cut dividends at the same time as it made a major entrepreneurial acquisition. The management knew that the result was likely to be a fall in the price of the listed shares. But they felt confident enough to go ahead anyway because they knew that the family - who retain overall control - value long-term entrepreneurial activity and would continue to support them.

In 2009 many companies around the world are sacrificing the long term for the short term, because they are so desperate to keep shareholders happy. Family businesses, with their patient shareholders, now seem to have an important advantage. If they can keep doing the right things when others are going off track, they can expect to significantly outperform competitors over the coming years.

A number of factors help explain the patience of family shareholders:

Family shareholders are more concerned about values.
Many family shareholders are looking not just at the return on their capital but also at the impact of their capital. They are very happy to keep their capital in a business that is in

Patient capital is
a source of competitive advantage, particularly during economic downturns.

harmony with the family's purpose, values, and principles. One family shareholder says: 'Our family values include entrepreneurialism, making a positive contribution to society, and being professional in everything we do. Our family business lives by exactly those same values. As long as the business continues to have those values, we are happy to keep our investment in it.'

Family shareholders may be less concerned with relative returns.
Non-family shareholders in widely-held companies are quick to sell their shares if they feel their relative returns might be greater in a different sector or market. In contrast, family shareholders often feel an emotional ownership towards the business that gives its shares an additional value that outweighs the lure of (perhaps) getting better returns elsewhere. The shares have been handed down to them by their parents, who received them from their parents, who received them from their parents, and so on. A share of the family business is not just a financial calculation but part of a family legacy.

Family shareholders may be less concerned with absolute returns.
If dissatisfied shareholders in a widely-held company such as Microsoft feel their returns are poor, their only realistic course of action is to sell their shares. In contrast, dissatisfied family shareholders can often go to the management, perhaps through a family council, and try to influence change in the business. Whatever the eventual outcome, the key point is that dissatisfied family shareholders have an extra option that is not available to non-family shareholders, so the probability that they will rush to sell their shares is reduced.

Family shareholders may be less likely to liquidate their shares in the event of a personal liquidity/solvency crisis.
The first shares to be sold in a crisis are usually the most liquid shares. But shares in family-controlled businesses often have limited liquidity and are difficult to sell at their real value. Sometimes there is no market at all for the shares, or there may be rules that say that shares can only be sold to other family members. This may mean that family capital is not so much 'patient' as 'trapped'. The end result is still that managers can be confident that shareholders are unlikely to desert the business, even if short-term results are disappointing.

What does all this mean for today's economic situation? There are three main implications:

First, we should recognize that family businesses have a competitive advantage because of patient capital. This advantage is particularly important during recessionary times. Expect many family businesses to emerge from current problems with their long-term prospects less affected than some widely-held competitors.

Secondly, families need to review structures for family members to liquidate their shares. Should other family members be offered the opportunity to buy the shares before they are offered to outsiders? Should the business itself buy back the shares? The structures need to be agreed in advance, before they are needed. Personal solvency crises are always unexpected but, in times like this, far less improbable than they used to be.

Thirdly, it is more important than ever that there is a unity of values between the family shareholders and the managers. To what extent is the business living up to the values of the family? Is the business earning the right to have part of the family's capital tied up in it? By holding firmly to shared values, managers can resist the temptation of short-termism and continue to build sustainable success over generations.

In this issue

Next Generation money training
Parents find it easier to
train their children in
money management if
they understand their
children's natural 'money
styles'.

Intelligent nepotism
Some entrepreneurs claim they do not want to be 'family businesses'.

A lesson from past economic crises
What values and approaches have helped long-lasting family businesses to survive through past booms and busts?

Case study on using bonuses to motivate employees
Today's banking crisis has caused the media to ask questions about the wisdom of some types of bonus systems.

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