Russia brutalizing Ukraine. Washington politics still in a muddle. The cost of a home soaring. With this being the news these days, it would be a relief to hear something encouraging, wouldn’t it?
Try this. A 2021 study published in the Harvard Business Review found that the alleged failure rate of family-owned businesses has been misunderstood and exaggerated since it was first reported in the 1980s. The original research article described only manufacturing companies in Illinois, and the finding was not that they tended to wash out after one generation of family ownership – giving rise to the common wisdom that only 30 percent of family businesses last beyond the first generation, an average of 30 years. The actual statistic was that 30 percent extended into the second generation of family ownership, or about 60 years.
That’s a significant difference. A little more digging in the data reveals that, on average, publicly owned companies today have a surprisingly short lifespan. The McKinsey consulting firm determined that the average lifespan of companies listed in the Standard & Poor’s 500 is less than 18 years. According to the International Institute for Management Development, McKinsey’s research suggests that by 2027, about 75 percent of the companies currently on the S&P 500 will have disappeared. The cause of death of many large public companies? Inefficiency — that is, requiring so much in resources to produce so little in profit.
There’s a message there for businesses of all kinds, and especially for family-owned businesses. Falling into operating inefficiency is easy to do. Sometimes the first blush of business success leads owners and managers to overextend financially, organizationally, even physically. Sales are up enough to convince you that in five years you’ll need another 25,000 square feet of space and another 50 employees. So you plunge into that upsizing now, pouring in resources that don’t generate revenue for another five years – and might not generate it then if your calculations are flawed.
In addition, some family companies are run with less than iron-clad cost controls, management oversight and limits on family access to assets and earnings. At some point upgrading the equipment can begin to take a distant second place to buying that next Ferrari. Today more and more family-owned businesses are instituting controls that restrict the misuse of resources to fund personal priorities.
Then there’s good news in ownership and management succession. Consultant Andrew Kyet notes the average tenure of a public company CEO is six to eight years. The head of a family company might hold the corner office for 25 years or more. Regardless, succession planning is crucial for both organizations. The untimely demise of some public companies is brought on by faulty succession planning when the CEO and the board can’t get together on the criteria for hiring a new person. The company then begins to drift.
The same can be true in a family business, where the board or the family inner circle might have less influence over succession planning if the senior owner exercises strong control. But as U.S. family companies have become more mainstream recently they have moved to systematize and standardize their governance procedures.
There are still companies where “because I say so” is the deciding vote for or against an orderly and effective succession process. But those cases are getting fewer.
We can mark these changes as bright and promising lights. Young people don’t just naturally follow into their parents’ vocations or professions as they once did because there are too many competing career choices out there.
But many of them still know a great opportunity when they see it. So family businesses remain as strong and vital elements in the national and global economy as ever. And that’s good news.
James Lea is a family business speaker, adviser and author. Contact him at james.lea@yourfamilybusiness.net.
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