Family businesses are the cornerstone of the Canadian economy: 80% of all companies are family-owned and according to some estimates they account for 60% of Canada’s GDP per year. Family companies are also among Canada’s oldest. The Molson Coors Brewing Company has been in the family ever since John Molson set up a brewery near the St Lawrence river in Montreal in 1786. In 1922, the Billes family opened a small tire store in Toronto, which later became the iconic Canadian Tire. The intrigues and machinations of families in business has also been the stuff of drama, from recent productions set in the boardroom such as HBO’s Succession, to the generational conflicts in a small neighborhood business like CBC’s Kim Convenience.
Yet it has long been assumed that family businesses were relics of a bygone era since they neither had the capital nor talent to rival public companies. Public companies were considered the real motors of the economy, run by professional managers and owned by diverse shareholders. Despite short shrift by business experts, Canadian family businesses from Bombardier and Thomson Reuters to Rogers Communications, continue to thrive and, in fact, count for some of the most prominent businesses in the country. According to a 2019 report by the Family Enterprise Xchange Foundation and the Conference Board of Canada, family businesses account for ‘nearly 50% of private sector gross domestic product and nearly 7 millions jobs across the country.’
Family businesses also tend to outperform their peers. The Johnston Centre (formerly the Clarkson Centre for Business Ethics) found that between 1998 to 2012, Canadian publicly-listed family firms outperformed the rest of the S&P/TSX Composite Index (TSX Index) by a total of 25% return to shareholders. Moreover, the view that most family businesses die within a generation is unfounded. Another Johnston Centre study showed that over a 48-year period from 1969 to 2017, 70% of family businesses survived while only 24% were acquired or went out business.
Given their sheer numbers and economic importance, their neglect by business analysts, managers and theorists is indefensible. Moreover, their longevity and outperformance of other companies suggests that they should not be treated as ‘half-formed’ public companies but as categories in their own right with distinct set of advantages in terms of long-term thinking, as well unique disadvantages such as succession planning and family feuds.
In recent years, interest in family businesses has grown. The economist put out a special report arguing that family businesses will remain an important feature of global capitalism; the Guardian issued a call for the owners of multi-generational family businesses to get in touch; major research institutions like the Oxford Saïd Business School have embarked on ambitious long-term research projects that are asking questions about the ownership structures of family businesses; membership organizations such as the Family Enterprise Xchange are undertaking their own research initiatives; the Harvard Business Review, a distinguished management magazine, has devoted several articles to family businesses on a range of topics from leadership and succession planning to ethics; and for the last ten years, PrizewaterhouseCoopers, one of the largest professional services firm, has been publishing a global family business survey.
Despite growing interest among the academic and management communities, family businesses continue to be treated as ‘second-class citizens’ in conversations around governance and fare poorly in governance rankings, which have been crafted in response to failures by widely-held corporations. In 2015, the Johnston Centre compared the rankings of family and non-family controlled publicly-listed firms on the Board Shareholder Confidence Index (BSCI), which measures the extent to which boards adopt best practices in board effectiveness and transparent communication. In 2014, the highest ranked family-controlled firm was Maple Leaf Foods Inc., which ranked 46th out of 242 issuers. MFI is arguably an anomaly since it has adopted many of the practices that are typical of widely-held firms. However, the next highest ranked firm, Saputo Inc, was much further behind at 101st place.
The study shows that while family firms perform as well as their peers on most measures, they tend to be penalized in conventional governance rankings on the following criteria – board independence, share structure, CEO duality and peer group disclosure. Let’s take a look at the first two criteria.
Independent boards and committees are generally considered important because they enable ‘impartial’ oversight over a firm’s strategy, management and operations. Companies are awarded the maximum number of points on the BSCI if at least two-third of the members of their boards are ‘independent’, that is they have no formal business or familial relationship to management. The BSCI’s framework considers some business relationships beyond those that simply meet the regulatory definition.
If boards are seats of challenge and inquiry, it is reasonable to assume that directors who exercise independent judgment can bring a degree of objectivity and accountability that family members may not be able to. However, what percentage of the board should be independent? Canadian regulators state that at least 50% of the board should be independent. In interviews with family firm insiders, they suggested that having some family members on the board is valuable since the business is in ‘their DNA’. Moreover, there is research to suggest that having more than one non-independent director can actually increase board effectiveness.
Similarly, family firms also lose points on the BSCI because they tend to adopt dual class share structures, in which two classes of shares carry unequal voting rights. Opponents of the share-class structure have legitimately argued that dual-class shares pose a significant threat to shareholder democracy by compromising the ‘one share, one vote’ principle. Countries such as the United Kingdom, Germany and Spain have gone so far as to prohibit their use.
However, family firms challenge the prevailing notion that controlling shareholders are fundamentally opportunistic actors who ‘seek to reap private benefits at the expense of minority shareholders.’ Rather, the adoption of dual class structures can be a distinct advantage if it allows the founder or family member to retain control while pursuing their ‘idiosyncratic vision’ in a manner that creates value for all shareholders. Moreover, as Aurelio Guerrea-Martinez, Professor at Singapore Management University, points out, market forces can create powerful incentives for companies to choose sound corporate governance structures. Founders and controlling shareholders (especially in family firms that tend to uniquely value ‘long-term’ gain over short-term success) are only likely to go public with dual-class shares when they feel the benefits associated with their use outweigh the costs. Therefore, there is sufficient reason to question the wisdom that dual or multi-class shares are detrimental in all contexts.
In response to the shortcomings of the BSCI, the Johnston Centre developed an alternate measure, The Long View, so named because of the advantage ‘family firms have in avoiding the temptations to choose short-term gains over long-term success’. The Long View was developed to measure family firms against criteria that was suited to their governance realities and to provide a framework from which to compare them against the norms of widely-held issuers. Since it was evident from previous research that family firms were great investments, it was important to have a measure that did not begin with the assumption that these firms were poorly governed because they did not fit generally accepted models of good governance.
In the Long View, researchers at the Centre make the case that ‘share structure’ should be removed as a criteria to measure board effectiveness and the threshold for board independence should be adjusted so that family firms can gain the full number of points if 50% (as opposed to 67% in the BSCI) of their board members are independent and the percentage of family representatives are no more than 10 percentage points greater than the percentage of the family control. While the researchers admit that the thresholds are open to contestation, they make the important point that, it became clear in the process of assembling the Long View that there needed to be more conversation around the unique strengths and governance challenges faced by family firms. There is no reason these firms should be forced to adopt governance practices that are ill-suited to their needs.
In the next few years, the Johnston Centre will take up the important work started with the Long View and ask: what does good governance actually look like in publicly-listed family firms? And furthermore, what does good governance mean in private companies with little or no formal governance structures? (A 2013 PwC survey, for example, found that nearly 41% of family owned companies did not have a board). It is important to fully understand the foundations of effective family governance systems if we are to accurately measure and improve it.
Moreover, if there is a case for an alternate governance ranking system as has been argued – should we begin with those developed for non-family controlled public issuers and adapt it to account for the unique features of family firms or create something from the ground up that is tailored to their unique strengths and weaknesses?
Given their economic importance, it is incumbent upon the research and management communities to continue to understand family firms in their own right.