By Dr Panikkos Poutziouris
The research investigation into UK Family Controlled Quoted Companies, in cooperation with the Institute for Family Business (UK) and with the support of UBS-Wealth Management, reveals that family shareholding control is stimulus to higher shareholders returns. In a nutshell, the Family Business Index reveals that family controlled – PLCs outperforms their FTSE peers by 40%. Despite the diminishing role of family-controlled firms in the UK stock market, evidence from this study which mirrors other findings in the US and other capital markets, suggests that the Family Business PLC model works and can offer value to all stakeholders.
The research has focused on the UK London Stock Exchange in order to understand the structure and performance of the family controlled quoted companies. The two-year study involved desktop research, surveying and interviews with family business owner-managers and other executives, and this culminated in the creation of a Family Business Index. The Family Business Index evaluates the performance of family-controlled PLCs in terms of shareholders’ returns. A family business PLC is defined as a quoted company where the family controls at least 10% of its shares, has active family members on the board, and there has been succession from founder to the next generation of family owner-managers. Alternatively a quoted business could be classified as a patrimonial family business where a certain family (and its units) is the dominant shareholder.
The profile of the Family Business PLC Economy:
Out of the 673 quoted companies that are constituents of the FTSE All-Share index, only 42 companies met the criteria for the classification as a family-controlled or a patrimonial PLC. Thus, the Family Business PLC Economy represents only 6.2% of the number of FTSE quoted companies across FTSE 100, FTSE 250 and FTSE SmallCap (excluding the Fledgling sector). The total adjusted (for free float) market capitalisation of the family controlled / patrimonial companies is approximately GBP 60 bln and represents 3.86% of the market capitalisation of the FTSE All-Share. Distribution of the capitalisation of quoted Family Business PLCs across the FTSE categories reveals that FTSE 100 family firms account for about 84% of the market.
About 45% of Family Business PLCs operate in manufacturing since the sector is hospitable to more traditional and mature industrial companies. According to the age distribution analysis (based on the year of incorporation), it emerges that the Family Business PLCs tend to be older than their mainstream FTSE peers. It can also be argued that the family capitalism in the UK is relatively more active in traditional industries, with the new wave of family firms exhibiting less enthusiasm for flotation in the main market.
In terms of their capital structure, Family Business PLCs have a tendency to invest more in tangible assets and adhere more to the principles of the pecking order. They reinvest more profits; use more long-term loans and relatively raise lower share capital. Given their prudence, they exhibit lower gearing ratio.
The comparative analysis in terms of performance parameters reveals that Family Business PLCs exhibit a lower growth rate in terms of sales turnover and accumulation of assets but record higher profitability rates when compared to their FTSE peers.
THE UK FAMILY BUSINESS INDEX
Using a basket of ordinary shares representing Family Business PLCs, the aim of the study was to compare their growth in capitalisation against that of the FTSE All-Share Index, during 1999-2005.
Figure 1: Performance of FB 30 and FB All-Share versus FTSE Indices
Figure 1 above illustrates the comparative performance of the growth in the capitalisation of Family Business PLCs as represented by FB 30 (top 30 family business PLCs) and FB All-Share (all 42 family business PLCs) during the 1999-2005 period. The graph reveals that both FB All-Share Index and FB 30 Index out-perform the FTSE All-Share Index by 40% and 25% respectively.
What are the factors shaping this superior performance?
In order to verify the role of family owner-managers in shaping the out-performance of family controlled quoted companies, a qualitative research investigation was pursued. The methods used for obtaining data included structured questionnaires and semi-structured interviews, secondary sources of information such as press archives, and observations and company reports from the firms and the Companies House. Executives from the following Family Business PLCs were interviewed and case studies have been documented:
• Associated British Foods PLC – the global food masters.
• Caledonia Investments PLC – the long-term investors in growth.
• Huntleigh Technologies PLC – the innovators.
• Town Centre Securities PLC – the builders of value.
The interviews and case study research have highlighted a number of positive attributes that family controlled PLCs have, which are summarised as follows:
• Devotion and commitment instilled from generation to generation since family wealth and heritage is linked to the family business.
• Long-term strategic horizon – they are not in the business of adventurous growth to impress opportunistic investors with short-term returns.
• Financial prudence is symptomatic of the drive to sustain financial health and autonomy; this is so as to insulate the family wealth creation from outside interferences.
• Strategic focus in the core business- the respondents had developed special capabilities to exploit without excessive risk exposure opportunities in their sectors.
• Stability and stewardship drawn from the dominant owning family.
• Harmonious relations with loyal investors who respect and understand the family way of governing growth and development.
• Culture of trans-generational sustainable development as they are driven by duty of responsible ownership to steer their companies across business cycles.
• Defensive – they are administering control schemes, e.g. trusts that will block hostile takeovers.
• Vision to keep the family at the helm of the business, as they are custodians of their heritage and guardians of their destiny.
Considering their views as to where family ownership could pose problems, a number of issues have been identified as follows:
• Family domination coupled with absence of governance scheme to regulate the role of family members could lead to damaging conflict.
• The chasm between family values versus business practises that professional non-family managers promote could erode goal alignment of stakeholders.
• Nepotism that could not only jeopardise the business performance but also strain relations with outside investors.
• The failure of family to evolve, adopt open thinking, and be ready for change in areas such as corporate governance, financial strategies etc.
• The expropriation of special benefits for the family at the cost of other shareholders.
• Management of ‘sacred cows’ syndrome – the failure of family owner-directors to decide whether to divest, or dispose of, assets which has sentimental value to the family.
The Future of Family Controlled Companies in Capital Market
Despite the strong performance of family controlled quoted companies, evidence suggests that there is a diminishing role for UK family business PLC capitalism. Over time, with smaller stakeholding, rising hostile takeovers, demanding institutional shareholders, increased capital market regulation and takeover reforms, families find it very challenging to sustain control. In recent years, we have also experienced the exodus of family–controlled PLCs from the stock market through the public to private deals. Notwithstanding the decline of the family business PLC economy, evidence from this study suggests that the family business model is far from deficient.
For a copy of the report, The UK Family Business PLC Economy, e-mail [email protected]
Dr Panikkos Poutziouris is Associate Professor in Entrepreneurship and Family Business at the Cyprus International Institute of Management and Visiting Fellow at Manchester Business School – UK .
How about Cypriot Family Business PLCs?
The Cyprus Stock Market (along with Athens Stock Market) is dominated by family businesses and business families. As the dust settles after the last boom-bust period, there is scope to explore the role of families in business at the PLC level. Surely the research methodology and tactics need to be modified to accommodate for the Cypriot culture. Often, there is arrested enthusiasm by Cypriot business entrepreneurs to accept the reality that the family is in control! So, all family business stakeholders are invited to reflect on the experience s of UK family business PLCs who participated in the interviews. It is evident that their superior performance is shaped by strategic focus in serving their profitable market niches and a tripartite partnership which involves: responsible family owners, loyal investors with a long term perspective and faithful long–serving managers that adopt the family dream about the entrepreneurial odyssey.
How prolific is this tripartite partnership in the Cypriot family business PLC economy?
Arguably owner-managed PLCs — with the dominant shareholding of families do not experience the classic agency cost problem governing the relationship between shareholders (expecting dividends and higher share prices) and managers (pursuing opportunistically short-term benefits at the cost of long-term value added). Family controlled enjoy the fruits of enhanced goal alignment, as there is more agreement about the avenue and pace of growth, provided of course there is in place the optimal ownership regime and governance structure that insulate the business from dysfunctional experiences (emanating both from the family heartland and corporate landscape).
