Family businesses RS
Market insights

Family businesses at the forefront of sustainability

Family-owned businesses will play a key role in finding and implementing solutions to this century’s global challenges. 

 

Family-owned businesses are incre­dibly wide-ranging in size. Some are very small, but others are huge multi­nationals. Yes! Even some of the wor­ld’s biggest and best-known compa­nies are family-owned businesses, if you look at how much voting rights the founding family has.

 

Family businesses are at the heart of the global economy. According to analysts at Family Capital, the 750 top family businesses in the world by re­venues generated USD9.1 tn in reve­nues in 2018 and employed 30.5 mil­lion staff. In fact, in most countries, family businesses account for 40-60% of all private-sector jobs. And most start-ups (85%) are actually funded by family money.

 

Successful family businesses ge­nerally share a few structural charac­teristics:

 

Entrepreneurship. Often innova­tive or disruptive, family businesses invest more resources in research and development (R&D) than others;

"Skin in the game”. With most of their wealth and reputation in­vested in the firm, the interests of family owners and their business are closely aligned;

Careful stewardship. Family bu­sinesses typically show a strong de­sire to invest now for the success of the next generation; and

Longer-term perspective. As family owners’ wealth is often tied up in the business, they typically reinvest for growth. Usually with lower gea­ring ratios than non-family-owned companies, they tend to fund opera­tions more through internal funds than through debt.

 

Do family-owned businesses have a sustainability advantage?

 

There are as many varieties of fa­mily-owned business as definitions of sustainability. My favourite is contained in ‘Our Common Future’, the 1987 report from the United Na­tions’ World Commission on Envi­ronment and Development, which de­fines as sustainable any “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”

Depending on the ESG rating provider, family-owned com­panies score better in sustainability surveys than non-family-owned com­panies.

As such, sustainability concerns companies’ financial, social and en­vironmental risks, obligations and opportunities, often called the ‘triple bottom line’.

 

Often, depending on the ESG rating provider, family-owned com­panies score better in sustainability surveys than non-family-owned com­panies. This is mostly because of bet­ter environmental and social scores, whereas they may lag in terms of go­vernance.

 

Family businesses may find it ea­sier to deliver sustainable value crea­tion, as their inter-generational pers­pective allows them to focus on the long term.

 

Families launching and passing on their business to the following generation have always existed. The world’s oldest existing business is a family-owned Japanese spring resort founded in 705AD called Nissiyama Onsen Keiunkan. It is one of a select group of businesses in existence for over 1,000 years, and united around what is called the Spirit of Shinise (Ja­panese for established and long-stan­ding company). The Spirit of Shinise has four main purposes:

 

  1. to ensure a sound company resides in a sound society;
  2. to create tradition through the continuity of innovation;
  3. to maximise customer satisfaction by ensuring employee satisfaction; and
  4. to convey the moral value of Shinise to people around the world.

 

Not far from the concept of sustainabi­lity, is it?

 

The most successful family firms are often those committed to more than just profitability. Not being answerable to shareholders anxious to maximise profits helps. Additionally, their sense of commitment typically includes long-term relationships with a wide circle of stakeholders, including customers, employers, suppliers and the extended community — again, behaviours that fit in well with the basic principles of sustainability.

The most successful family firms are often those committed to more than just profitability

Another distinctive advantage fa­mily businesses enjoy is a shorter chain of command when it comes to making crucial decisions, including resource allocation. This means family-owned companies are often faster and more patient than other companies when it comes to R&D, which gives them a key role in finding solutions to this centu­ry’s global challenges.

 

If the concept of stewardship for future generations comes naturally to many family-owned businesses, these companies are not necessarily “perfect” from a sustainability perspective. Due to their ownership and board struc­tures, some family-owned companies may, for example, score poorly in im­plementing corporate-governance best practices.

 

What does this poor governance score mean? In some cases, the so-called ‘best practices’ defined by publicly owned companies’ behaviour may not be appropriate in a family-owned envi­ronment. For example, the concentra­tion of ownership is considered a threat in standard frameworks, as there are companies with highly concentrated ownerships and poor transparency that have abused minority shareholder rights. But when looking at the specifi­cities of a family business, the concen­tration of ownership may become a valuable and defining trait, with visio­nary family owners being particularly devoted to product and brand quality. Furthermore, these entrepreneurs are dedicated to creating strong and du­rable businesses. Their strong impact on social and environmental scores is strictly linked to the possibility of le­veraging concentrated ownership in decision making. Does this make them unsustainable? Definitely not.

 

Other governance best practices may be applicable across family- and nonfamily-owned businesses alike.Family-owned companies may also have less diverse management boards or lack the resources to explore best practices and implement change (ie.demand supply-chain information or ask suppliers to do things differently).

 

Key to ensuring family-business sustainability is establishing the right corporate governance conditions so that the positive aspects of family ownership are coupled with safeguar­ding the interests of non-family inves­tors.

Many family companies tend to prioritise people and the communities in which they work.

Family-owned businesses and covid-19

 

Every business today is facing the greatest challenge in generations, as the pandemic forces owners to drasti­cally rethink business models, supply chains and working practices.

 

Family-owned businesses’ long-term perspective, entrepreneurial spi­rit, agility and guiding sense of purpo­se, together with the resilience of their leadership teams make them especial­ly well prepared to fight a such crisis, especially as their multi-generation perspective allows them to meet their customers’ changing circumstances through economic cycles.

 

The covid-19 crisis has produced some great examples of family bu­sinesses displaying their experience as innovators to support their govern­ments and communities in need. Some have pivoted their production lines to produce critical medical equipment in short supply, others have found ways to improve the lives of people in lockdown. All these companies tend to prioritise people, from their employees and customers, to their suppliers and the communities in which they work.

 

Look at one of the US’s biggest car­makers (and one of the world’s most successful family-owned businesses), which partnered with a healthcare company to manufacture ventila­tors. Similarly, a fifth-generation UK business, known for manufacturing luxury outerwear, moved to produce gowns and scrubs to support frontline medical staff. Or the Danish toy com­pany that launched a website to en­courage families to share creativity and play ideas and help children to develop problem-solving skills while they are out of school.

 

These are just a few examples. Through their efforts, family bu­sinesses are strengthening our de­fences and will play a crucial role in driving the global recovery.

 

Any family business that wants to make the difference needs to think of sustainability not only as something they might support or engage in, but also as something they influence through their supply chains. Accor­ding to the IFB Research Foundation, such families also: keep a clear sense of long-term vision for their organisa­tion, balancing long-term objectives and short-term performance; engage publicly in sustainability issues and le­verage their position to influence sup­ply chains; develop people capital; and focus on resource efficiency to avoid depletion of resources and ensure ma­terials security.