Family businesses take on ESG
Family-owned companies consider and incorporate ESG (environmental, corporate, and social) factors more than their counterparts that are not family owned. Businesses owned by families tend to take a longer-term view and are often better prepared for the future. The latest Credit Suisse Family 1000 report looks at the differences in detail and concludes that, over time, family-owned business with strong ESG credentials perform better.
Family-owned business perform better
Family-owned companies outperform broader equity markets. Since 2006, revenue growth generated by family businesses has been more than 200 basis points higher than that of non family-owned companies. At the same time, family-owned businesses tend to be more profitable. They also seem to outperform because of a perceived longer-term investment focus compared to non family-owned companies. We also observe that family-owned companies tend to focus more on research and development, which is arguably a long-term indicator.
ESG performance of family companies vs. non-family companies
Family businesses are increasingly attuned to ESG: On average, they tend to have slightly better results than non family-owned peers when it comes to ESG scores.
However, family businesses are mostly better in environmental and social areas but seem to lag behind non family-owned businesses with regard to governance factors.
It is also worth mentioning that older family-owned companies have better ESG scores than younger businesses in all three ESG areas. It is possible that older family-owned firms have more established business processes which allow them to focus on areas relevant to maintaining overall business sustainability.
Interdependence of ESG and other financial metrics
A review of the ESG characteristics of family-owned companies shows that, on average, they score slightly better than companies that are not family owned. Furthermore, the financial performance and share-price returns for family businesses are stronger than for non family-owned companies. Since ESG performance of a company is becoming an increasingly important part of the investment process, it is possible that investors will be more likely to put their money in companies with higher ESG performance.
Corporate governance: Room for improvement
The overall better ESG performance of family businesses is mostly led by better environmental and social scores as they appear to fall behind their non family-owned peers in terms of governance. As an example, their management boards tend to be less diverse and are less likely to support minority groups.
Although there is no significant difference between family-owned and non family-owned companies on a global level, only 4% of family-owned companies have a female-dominated board. In addition, women make up less than a quarter of the board in 52% of family-owned companies.
This suggests that there is still ample room for improvement when it comes to gender equality in board representation, especially in family businesses.
Such governance issues will come under greater scrutiny as ESG grows in importance for investors.