Families in Business…the heavy hitters of our economy

To mark the International Day of Families (15th of May each year), it’s appropriate to reflect on the valuable role that families play in our society. Throughout history, families and the skills and capital they bring, have been the engine room for entrepreneurial activity and growth of economies around the world.

The majority of businesses are owned and operated by families. This fact has largely been overlooked because policy-makers have traditionally classified business enterprises in terms of size (big vs small) or ownership (public vs private). In Australia, for example, family businesses make up approximately 70 percent of the private sector economy, employ around 55 percent of the entire private sector workforce and make a significant contribution to the national economy in terms of controlling substantial wealth estimated at $A4.3 trillion. Although many Australian family businesses have successfully become very large, over 90 percent are small to medium enterprises employing between five and 200 people.

So what, we hear you say, what does it matter whether they are family owned or not? Family businesses are different to other businesses because of the influence family members exert through the day-to-day operation of the business, through its ownership system and how they are governed. With the appropriate governance structures in place, family firms perform well, very well. In fact, based on our research published this year (in the leading international US-based journal ‘Family Business Review’), we find that unlisted family firms outperform their non-family counterparts.

When it comes to families working together, emotions play an influential role in family businesses where fathers, sons and daughters, often uncles and aunts too, are relatives working side-by-side as well as colleagues working in a boss/subordinate relationship. A potential impasse between the traditional views of the older generation members and the dynamism of the younger generation itching to spread their wings can be a barrier for successful succession. Nevertheless, planning should focus on the older generation retiring “to” something rather than “from” something, and the business should aim to recruit the best person for any role. Where a family has decided that, all things being equal, it wants a family member to be in a position of the most senior management role, then ensuring that person is appropriately qualified in terms of educational background, experience, and personal skills is highly desirable. Of equal importance is educating family members for their ownership and board responsibilities.

Failure to recognise and understand the nature and effect of the unique challenges faced by this sector may lead to policy-makers and advisors to family businesses overlooking the effect of decisions and actions they take (or don’t take) on a key sector of the economy. Take for example what we learn from the 2013 KPMG Family Business Australia National Family Business Survey which the Adelaide Business School was commissioned to do. Two-thirds of Australian family businesses plan to pass on the business to the next generation, and 43% of this group plan to do so in the next three years. Despite this, around one-third of this group have no (formal or informal) plans in place for this to occur. According to a report produced by the European Commission in 2003, the successful transition of family firms (e.g. to next generation, or sale) is critical to national economies as it is estimated that a successful transfer conserves on average five jobs, whereas a start-up generates on average two jobs. Also, a substantial proportion of these owners are highly dependent on this transition (whether by succession or sale) to fund their retirement. Clearly, this is something that advisors and policy-makers need to be cognisant of to ensure the successful transition of these family firms and the ongoing contribution they make to the Australian economy.

Fortunately, through the growing body of academic research on family businesses and the rise of associations such as Family Business Australia, we now appreciate the value (both tangible and intangible) they bring to the economy. The University of Adelaide Business School also recognises family business significance to our community with the establishment of “The Family Business Education and Research Group” in 2011. The Group promotes awareness of and industry engagement in the field of family-owned enterprises, encourages research in the field, and offers both undergraduate and postgraduate education to further our understanding of key issues such as management and ownership succession.  Too often it is only the negatives of family involvement that are highlighted and yet research has found that not only do family businesses frequently outperform their non family business counterparts but that as workplaces they are considered in a very positive light. This focus has underpinned the elective on “Family Business Issues and Perspectives” introduced to the Adelaide MBA.

Dr. Chris Graves & Dr. Jill Thomas

Family Business Education & Research Group

[Sections of this article were originally posted in The Adelaide Review]

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