Family Office – Magic of Family Enterprise
While the challenges posed by a growing company, a growing list of shareholders, a developing sense of entitlement, the paradox of success and the ever popular global folklore of the three-generation-rule all represent a warning of the unique difficulties faced by affluent families, new research also points to the tremendous opportunity that family enterprise represents worldwide. Here are some highlights:
Worldwide, family enterprises represent anywhere from 80% of all businesses in developed economies to 98% of all businesses in emerging economies. (They account for about 90% throughout Latin America, depending on the country.) They are responsible for anywhere from 64% of the GDP to 75% of the GDP of individual countries, achieve anywhere between 6.65% and 16% higher annual returns on assets and shareholder equity than other businesses, and have created most of the jobs in the last decade. In the U.S., family controlled companies enjoyed 6.65% greater return on assets on an annual basis between 1992 and 2001; family-controlled firms also reinvested more than non-family firms.
In the EU, family-controlled firms (min. 50% family stake) outperformed the Morgan Stanley Capital International Europe index by 16% annually from 2001 to 2006. Family-controlled firms (min. 10% family stake and $1 billion in market capitalization) outperformed the pan-European Dow Jones STOXX 600 Index by 8% a year from the end of 1996 to the end of 2006.
In Chile, a study of 175 firms traded on the Bolsa de Comercio, or Chilean Stock Exchange, found the 10 year performance of the 100 family firms in the sample (1994-2003) significantly higher in ROA and ROE terms. Tobin’s Q – proxy for market value created – was higher also. In almost every industrial sector researched worldwide – information technology, consumer staples, consumer discretionary and industrial – family-controlled firms produced higher total returns to shareholders between 1997 and 2009. The only exceptions were the health care and financial services industries. (In health care the state’s role in most countries probably accounts for the finding, whereas in the financial services industry, the business model for the industry requires the use of other people’s capital to make money, thereby constraining any advantage that the family effect would have on these firms.
In Japan, a 2008 study of listed but family-controlled firms found higher returns on assets, returns on equity and returns on invested capital by family enterprises when compared to nonfamily firms. In Taiwan, a study of 228 firms listed in the Taiwan Stock Exchange, found family control not impacting financial performance. But two more recent ones have found family involvement to positively impact the financial performance of the firm.
In almost every industrial sector researched worldwide – information technology, consumer staples, consumer discretionary and industrial – family-controlled firms produced higher total returns to shareholders between 1997 and 2009. The only exceptions were the health care and financial services industry. (In health care the state’s role in most countries probably accounts for the finding, whereas in the financial services industry, the business model requires the use of other people’s money to make money, which might explain family business not outperforming in this industry, notwithstanding the positive “family effect” seen elsewhere.)
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