The governance of family-owned companies often stands out due to unique characteristics that diverge from those of non-family companies. Does this atypical governance catalyse the financial performances of family-owned companies?

Family-owned companies constitute a non-trivial pillar of the economy, with these companies ranging from very small businesses to major listed multinationals. These companies are wellsprings of stable jobs. Their singular governance nevertheless raises the question of whether it can effectively provide benefits on the strategic, financial and even stock market levels. This factor should be taken into account given that family-owned companies also represent a significant portion of listed stocks: over 40% of the French Top 250 and over a third of the companies in the S&P 500.

Governance practices far removed from traditional standards …

While there is no formal definition, a company is considered to be family-owned when the majority of decision-making power (as represented by voting rights at shareholder meetings) is held by one or several founding families. An in-depth ESG analysis would start with a review of the governance standards, something that could surprise purists.

If we concentrate on traditional themes such as the composition of boards of directors, the conferring of multiple voting rights, the dividend pay-out policy and remuneration policies, family-owned companies effectively display less flattering characteristics than other listed stocks, particularly in France¹:

In terms of the composition of board of directors, the combination of the roles of chairman of the board and CEO is seen more often in this type of structure than in non-family companies. Additionally, there are naturally fewer independent members on the boards of family-owned companies than at non-family companies.
In terms of succession plans, family-owned companies can provide the market with visibility when upcoming generations are gradually trained to assume management roles.
Family-owned companies feature a greater number of double voting rights mechanisms in their bylaws. This can dilute the decision-making power of minority shareholders.
The dividend pay-out ratio has been proportionally smaller at non-family companies over the last four fiscal years.
Finally, as concerns executive remuneration, the bias is positive at the family-owned companies with the largest stock market capitalisations. The share of long-term remuneration in total variable remuneration is lower at family-owned companies than at non-family companies.

… offset however by atypical strengths

Even if family-owned companies have less praiseworthy governance standards than their non-family peers, they nevertheless offer other advantages, as shown by research results:

The predominant roles of family members in management leads to less bureaucracy, thereby enabling rapid decision-making and the creation of more competitive advantages ².
The alignment of the objectives of the management team and a long-term vision are differentiating factors that allow performances to be improved ².
The board of directors plays a crucial role in arbitrating conflicts between the different types of family and/or minority shareholders ³.
Family shareholders are positively associated with the performance of the company. The correlation is particularly strong when the members of the family are the CEO, top executives, chairpersons or board members of the company ⁴.
The link between family shareholders and company performances is clearer at small and medium-sized companies (SME) than at major companies ⁴.

These strengths appear to add extra stock market buoyancy over the long term, as indicated by a Crédit Suisse study 5. The basket made up of 1,000 global listed family-owned companies outperformed non-family companies by 3% per year on average between 2006 and 2022. These results should nevertheless be put into perspective, with different investment horizons for the controlling families (very long term) and minority shareholders (potentially shorter term).

Performances of family and non-family companies

Source: Crédit Suisse, Refinitiv

No hasty conclusions, a cautious ESG analysis oriented more towards risks rather than opportunities

Based on these observations, it remains difficult to lump all family-owned companies together and to arrive at clear conclusions. We believe that the governance of family-owned companies should be evaluated on a case by case basis. The governance risk is effectively higher in three specific situations:

At companies where the family continues to be represented on the management level (succession risk / dependence on key persons in the case of founder succession for example, cf. LVMH, EssilorLuxottica)
At companies where the family has a disproportional presence on the board of directors (lack of controls / outside sources of proposals, cf. OVHcloud, Bouygues)
At companies where shareholdings are divided between different branches of the family (risk of disagreements that could negatively affect minority shareholders, cf. SEB)

Family-owned companies have specific corporate governance characteristics that do not correspond to generally accepted standards. Even if complex, governance can be optimised by effective shareholder commitments and voting policies at shareholder meetings that can adapted in particular cases. By diversifying boards of directors, encouraging transparency and carefully planning successions, these companies can not only meet the specific challenges derived from their structure, but also reinforce their performances and resiliency over the long term.

Sources:
¹ Data provided by Proxinvest, Mandarine Gestion analysis
² Sabri Boubaker, Bang Dang Nguyen, Duc Khuong Nguyen, Corporate Governance, Springer, 2012
³ Sir Adrian Cadbury, Family Firms and their Governance Creating Tomorrow’s Company from Today’s, Egon Zehnder International, 2000
⁴ Family ownership and firm performance: Influence of family management, family control, and firm size, Asia Pacific Journal of Management, 26 November 2009
⁵ Credit Suisse, The Family 1000: Family values and value creation report, 2023

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