Generational Resilience: The Power of Family Businesses

Family-owned businesses represent a successful model that defies time and the turbulence of global markets. Through solid governance and forward-looking management, they continue to be fundamental pillars of the global economy.

Gaetano Graziani Global Equity Portfolio Manager, Cornèr Banca

In today’s global environment, marked by constant economic, geopolitical, and technological disruptions, companies across sectors are accelerating their efforts to swiftly adapt while maintaining operational continuity. While this balance may seem new to many organizations, it has long been an essential principle for family-owned businesses. Despite the challenges posed by evolving market conditions, these enterprises have not only withstood the test of time but have flourished over the decades. Iconic companies such as Merck (1668) and Hermes (1837) have enjoyed centuries of uninterrupted success, standing as enduring examples of generational resilience.

Family businesses (FBs) have been the backbone of global economies for centuries, contributing an estimated 70% of global GDP and employment. The 500 largest family-owned businesses alone generate over $7 trillion in revenue and create more than 24 million jobs worldwide. In the United States, FBs account for 62% of total employment, underscoring their critical role in job creation. Similar figures are seen across European countries, where FBs account for 40% to 70% of employment.

FBs are defined as companies managed by members of the founding family and successive generations. In these businesses, founders and their descendants remain directly involved in management, even after going public, opting not to fully dilute ownership. This is often achieved through limiting free-floating shares or implementing dual-share structures, where the family retains the majority of voting rights while holding a smaller portion of the shares. Such mechanisms allow the family to maintain control over the strategic direction of the company—an often critical factor in enabling long-term decision-making. Academic research emphasizes the ability of FBs to address a core governance challenge: the misalignment of interests between management and owners, known as the principal-agent problem. This misalignment, characterized by information asymmetry, often leads to inefficiencies for shareholders. FBs circumvent this issue as owners are actively involved in management. Recent studies also show that these companies have evolved their operational models to accommodate the business’s growth, often developing more sophisticated structures with formalized governance, such as the creation of holding companies to manage ownership more effectively.

Research conducted in collaboration with Cornèr Banca and the Centre for Family Entrepreneurship and Ownership (CeFEO) at Jönköping Business School highlights the adaptability, resilience, and impact of FBs. These businesses possess robust infrastructure and well-established strategies, enabling them to navigate periods of uncertainty successfully. To examine the success of FBs and how the most successful ones generate value and impact, we analyzed publicly listed FBs and compared their performance with non-family businesses. The results consistently showed that FBs deliver superior returns. Although it was widely acknowledged that FBs outperformed their non-family counterparts, the reasons for this were less clear. Our studies reveal that FBs tend to be more profitable and make long-term investments that reflect financial management focused on sustainable growth and the transfer of the business to future generations. FBs also exhibit more prudent debt structures, relying more on internal capital than external debt to finance growth initiatives, which allows them to extract higher returns from the assets in which they invest. In terms of operational efficiency, FBs outpace non-family businesses, demonstrating superior capital management and stronger relationships with customers and suppliers.

FBs tend to dominate consumer-facing sectors such as retail, consumer goods, and automotive industries but are less represented in infrastructure-intensive sectors like transportation and public utilities. Furthermore, they are less prevalent in research-intensive and technology-driven sectors such as pharmaceuticals, IT, and finance, where the pace of innovation and the demand for external capital often exceed the typical capabilities of family-owned structures. While FBs have historically been more prominent in Europe, they are expected to see even greater growth in emerging economies like China, India, Latin America, and Southeast Asia, where their contribution to GDP and employment is projected to rise.

In conclusion, family businesses remain a cornerstone of the global economy. Their ability to adapt and thrive across generations, while maintaining long-term management focused on sustainability, makes them an extraordinary example of how tradition and innovation can coexist. As we look to the future, it is evident that their role will not only continue to be relevant but will be instrumental in shaping the global economy of tomorrow.

Sources: Data processed by Cornèr Banca / CeFEO
Data as of 30.08.2024

Biography

Gaetano Graziani is Portfolio Manager at Cornèr Banca, manager of the AcrossGen Global Equity Fund, specialized in selecting family-owned businesses on a global scale. Focusing on family governance, he pursues the creation of sustainable long-term value, emphasizing the stability and strategic continuity of these enterprises.