Last week a study in the McKinsey Quarterly suggests that family businesses run by outsiders are better managed than those run by eldest sons. I believe it brings data to something that many have seen and heard repeatedly: sometimes the kids shouldn't be put in charge of the shop.
McKinsey conducted a study of more than 700 mid-size manufacturers in France, Germany, the UK and U.S.. It looked at key management performance metrics on a 1 to 5 scale, and found that the average management score for family-owned businesses was 3.2. However the average score for companies led by the eldest son was 2.9, while that of companies led by outsiders was 3.6. The biggest difference was seen in France, where family-owned companies run by eldest sons accounted for 43% of the gap in managerial quality.
I think there are several Challenge Dividend factors at play here:
- Diversity is needed. In any business, a range of perspectives helps come up with better ideas. Outside management can bring this, while family-only management often does not.
- Some children are pressured to join up. We all know the stories of fathers who pressured sons and daughters to take over the business when it was not their choice. This sets them up to fail.
- Other children are less pressured to succeed. Families can be much easier on each other in a business operation. You can't fire your family, so you accept limited skills or poor results. The eldest son may expect to take over rather than having to work hard for it for decades. But outsiders can be selected amongst thousands of candidates, and are easily fired if they fail.
- Ownership is usually private, so there is less outside pressure to drive results. These companies are protected from sharing their results publicly and can choose to operate unprofitably for decades.
Interestingly, the downsides of family businesses are one of the reasons that many companies in China and other emerging Asian economies may not make the jump to the big leagues of global business. There are cultural traditions in the East that place heavy value on the importance of the family and in sons following in the footsteps of fathers. Meanwhile, there is the natural tendency to trust one's family more than strangers, especially in an emerging economy with fewer laws and more corruption. In much of the Western economy, meanwhile, we have learned to trust strangers thanks to strong legal enforcement of contracts.
I am a big fan of family business and know several people who work in them, but I agree with McKinsey that a mix is best, especially for those companies that wish to grow from a small, family-owned business to large, publicly-traded corporation. In a way, a family business with outside management can be the best of both worlds, as it combines long-term thinking and owners who are personally invested in the operation with outside experts who bring diverse skills and can be easily let go if they fail.
Comments