Family-owned businesses versus innovation – Family 1000 universe
Family-owned businesses can thrive for many generations. Our database includes some companies established almost 400 years ago. Is there a specific business model that enables that success? Our latest report looks at innovation in family-owned business and what it means for the long-term sustainability of these companies.
Family universe profile
Our CS Family 1000 database is a list of family businesses that have been identified as fulfilling one or both criteria: the founder or his or her family owns at least 20% of the company’s share capital or the founder or his or her family owns at least 20% of the company’s voting rights. Almost 50% of the universe is in the Asia Pacific region, with European family-owned companies making up 24% of the database and North America contributing 15%.
An interesting shift can be seen when we analyze the breakdown in market capitalization terms. Our database has a total market capitalization of an impressive USD 13.7 trillion and, while North American companies make up just 15% in terms of the number of constituents, they contribute 40% of the database’s market capitalization. When we look at the size effect by sector, we note that communication service companies change the structure of the family-owned universe the most. While they contribute only 8% of the number of constituents in our database, they make up 17% of the universe based on market capitalization.
In the long run, can excessive conservatism hinder innovation?
Family-owned businesses spend less than their non-family-owned counterparts on research and development (R&D) and yet the innovation output seems to be higher. The paradox comes from the notion that family-owned firms are more averse to risk-taking and yet they descend from founders who often made bold decisions.
A greater concentration of wealth within a business discourages risk-taking. While non-family-owned CEOs tend to diversify their investment portfolio, family-owned businesses have large holdings of family wealth in their business and as a result give precedence to long-term sustainability instead of potential but risky opportunities for growth. With time, though, the willingness to preserve both monetary and social-emotional wealth for future generations grows so the objectives extend beyond profit maximization.
What causes higher innovation output?
While legacy is one of the concerns, family-owned businesses enjoy strong human and social capital, which leads to efficient operating models. These intangible assets include company and industry knowledge, and networks of close relationships, which in turn generate other forms of capital. This results in clear communication and the exchange of ideas and advice, which boosts innovation. Knowledgeable partners enable trend identification and feedback through the development process, which can result in cost reductions and the acceleration of the development cycle of new ideas e.g. via referrals to suppliers or customers. Additionally, CEOs at family companies are more than twice as likely to have held their posts for over ten years. The resulting lower governance costs, which arise from the family owner’s ability to monitor top managers, further enable the efficient use of resources for innovation.
In the long run, the operational model for family-owned businesses generates higher innovation output, which might not be the first thought that comes to mind when picturing the stereotypical CEO of a family-owned business.