Blame it on the grandsons
Are family firms good for business? The eternal debate is especially relevant to print, an industry dominated by family–run small and medium sized companies. Sadly, recent research by Nicholas Bloom, Raffaella Sadun, and John van Reenen for the Harvard Business Review (http://blogs.hbr.org/cs/2011/03/ family_firms_need_professional.html) suggests that family-run firms where the boss is a family member are even more badly managed than government-run businesses.
The research isn’t conclusive – the findings derive from a large survey but the way different kinds of company are statistically rated for the quality of their management isn’t especially convincing – but the study does usefully point out why so many family-run firms suffer from a syndrome the Chinese call “from paddy field to paddy field in three generations”. The decline of British industry from its 19th century peak has been blamed on what one economic historian called the “amateurishness, incompetence and weakness” of third generation business leaders.
Blaming it on the grandsons – as they would largely have been in the 1950s and 1960s – is a tad simplistic. But the study identifies three flaws inherent in family firms: limiting the talent pool (which doesn’t always produce the best candidate for a job), the Carnegie effect (industrialist Andrew Carnegie gave away much of his fortune to non-family members because he didn’t want his son to lack motivation at school) and the depressing effect of primogeniture on potential bosses who aren’t part of the ruling dynasty.
There is a case for the defence. The Harvard figures, the authors admit, are averages. We can probably all think of efficient family firms. Indeed, the Institute For Family Businesses estimates that they account for 30% of the UK’s GDP, so they can’t all be as bad as Harvard suggests.
The family has a vested interest in a company’s enduring prosperity so the boss’s strategy might receive more intelligent, thorough scrutiny than if it was presented to thousands of small investors. (Coutts, the posh people’s bank, says the family business accounts it runs are, typically, less leveraged than the average business – such conservatism proved useful when the economy imploded.)
The heir should have learned the business – probably more fully than a headhunted candidate – and the culture of the industry they work in. And there can be greater trust between family owners and managers than between, say, a ‘here today who knows where tomorrow?’ managing director and a head of department.
The Germans have bolstered their family firms against blinkered complacency. Many medium sized companies – in Germany they are collectively dubbed the Mittelstrand – hire professional managers to run the business. Maybe that could work in the UK and Ireland.
