Family businesses are pandemic winners

Three decades ago when I started teaching Strategic Management at the MBA program of De L Salle University, the prevailing theory was that family businesses had a more than 95 percent failure rate by the time it reached the third generation. The ideal goal, therefore, was that family businesses must not only be professionalized, but also must be converted to being non-family business. After some research and study, I discovered that this could not happen in Asia. But I really thought this was also going to be the trend in the Western world.

Then early this year I came across an article by Pilita Clark in the Financial Times where she wrote: “Family businesses are welcome winners in the pandemic… In a crisis, community minded companies represent a kinder face of capitalism.

“Family businesses are unsung in modern economies, yet they are far from insignificant and as the pandemic wears on, many underline an intriguing fact that studies have shown for years: these companies seem to do well in disasters.”

According to Clark, in Britain family firms have lower insolvency rates than non-family businesses regardless of their size.

This resilience is not surprising because family firms do not just think of short-term profits but also think long-term, hoping the family business can be successfully passed on to future generations.

A family business consultant, Josh Baron, says that family businesses are more frugal, less inclined to flashy acquisitions and more community minded. Surprisingly, like other consultants, he found family firms to be more innovative and entrepreneurial than other companies. These are the qualities that have allowed many family businesses to survive the pandemic.

A study by the Boston Consulting Group concluded that resilience rather than performance is what family businesses focus on during a crisis like a pandemic. When the economy nosedives, such as what happened last year, family businesses are able to outshine their peers.

This quality of resilience of family firms before the pandemic means that those businesses are in a stronger position to be able to see through the challenges and become an active participant in the rebuilding of the economy.

The quality of long-term outlook among owners of family business reflects a sense of custodianship. Justine Craig, professor of family enterprise at the Kellogg School of Management, Northwestern University, explains:  When I ask owners whom do they work for, they answer ‘for my kids and their kids.’ That sense of stewardship causes them to manage assets differently than many of their corporate peers who prioritize chasing quarterly results. …They will take on debt but get rid of it quicker than somebody else…Debt is necessary to grow, but they may still want to maintain control.”

Family businesses and their owners attract a lot of headlines because of the personalities involved. However, many family businesses have enjoyed success for several generations. In Asia, because the family is the basic unit of society, family businesses actually dominate the business scene. There are family businesses like that of the Ayalas and the Aboitizes that have lasted several centuries. The Ayala companies trace their roots to a trading company that was set up by a Basque exile to the Philippines in 1840.

In Europe, family businesses with long ancestry are quite common. Josh Baron wrote in the Harvard Business Review: “But despite the headline grabbing tales, many family businesses have enjoyed success for decades, even centuries. For instance, the Italian winemaker Marchesi Antinon, established in 1385, has thrived as a family business for more than 600 years. Similar examples can be found across the globe just within the alcohol business, they include Gekkeikan in Japan (founded in 1637), Berry Bros and Rudd in the United Kingdom (1698) and Jose Cuervo in Mexico (1795). Then there are the Murdochs, owners of News Corp (Fox News), Walton family controlling stockholders of Walmart and the Ford family.

Family businesses actually still represent 85 percent of world companies. This is a figure that has hardly changed in the last three decades. Their dominant role in the business sector has convinced even economists and governments that ensuring the longevity of family businesses is essential for any hope of economic recovery.

The United States alone has 5.5 million of these businesses which employ 62 percent of the total workforce. In the United Kingdom, more than half of private sector workers are employed by family businesses. In the Philippines, almost all Filipino-owned businesses are family businesses. They are the biggest employers in the private sector, aside from BPOs and multinationals.

There have been many different theories and recommendations on how to ensure the longevity of family businesses. The one consensus, however, is that the most critical area is succession planning. I have read many different kinds of family succession planning strategies.

Succession is not an isolated or singular event. It is an endeavor that should take place over a number of years. The hardest management challenge an owner will ever face is orchestrating his or her departure from the company. The finest testimony to an owner’s career is how well the business succeeds once he or she is gone.

The pandemic has shown that family businesses can survive a major crisis and will be the cornerstone in rebuilding the global economy, including the Philippine economy.

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