Why a family business has the edge

The first, he says, is the rich seam of entrepreneurial behaviour that's embedded in the psyche of family enterprises. "The family business plays a big role in our country and society as a breeding ground for entrepreneurs. In those families are the seeds of entrepreneurship, people growing up and seeing that in your life you can become an entrepreneur, someone who does something", he says. Put simply, if you are raised among entrepreneurs, that ethos is likely to rub off.

What's more, the passing of the baton between generations can also have an important evolutionary effect on the running of a business that non-family firms don't get. "When the new generation comes in their ideas are different, they can see the world through different spectacles and can bring change that is sometimes the saviour of the company," says Mr Gordon.

Industrial relations

Family businesses also score highly on soft issues that fall under the banner of 'corporate and social responsibility' (CSR). While many investors scoff at CSR as a corporate distraction, large companies are taking it increasingly seriously, following in the footsteps of family businesses, for whom 'doing the right thing' has always been a keystone of their activities.

"For a lot of family businesses it's just part of their DNA. They've got their name over the door and are proud of who they are and so for many of them community is important," says the IFB's Mr Gordon. He believes that in the main, family businesses are a step ahead of many non-family businesses, which could prove a differentiator as ethical concerns grow in importance.

The downturn has been a crucial driver of this shift in business priorities; a breakdown in trust – particularly by customers and shareholders in banks – has seen the call for more responsibility in business growing ever-louder. Richard Lambert, director general of the Confederation of British Industry (CBI), has led the debate on the perils of the relentless pursuit of shareholder value. And while the blame for the problems that have beset the global economy can be laid squarely at the banking industry, as Mr Lambert points out: "There is plenty of evidence that the banking sector's troubles are affecting public perceptions of business more generally."

Part of the issue revolves around remuneration, a point stressed by Mr Lambert. "For the first time in history, it has become possible for a manager – as opposed to an owner – of a large public company to become seriously rich," he says, pointing out that more often than not the criteria that managers are rewarded against are usually relatively short-term share price moves. That, he argues, can result in poor decision-making that undermines the long-term returns of the business by overfocusing on the here and now.

One careful owner

As Grant Gordon of the IFB stresses, these problems are anathema to the family business sector. "The typically family business doesn't have this concern, they're not watching the stock price from day to day. So without that pressure they're more able to take a more balanced view about doing the right things for the short term without sacrificing the long term," he says.

While the stakeholders in family businesses are as inclined to make money as anyone else, reaping rewards without creating true value just isn't their style. If anything, shareholders in family businesses are more likely to plough their money back into the business to keep building towards that long-term objective.

In companies where a major blockholder has a say in the running of the business, remuneration isn't the divisive issue that has often caused much friction between shareholders and the board. "There is a very close alignment of interest between owners and managers; there are less agency costs to bear," says Mr Gordon.

Interestingly, that's a point that sits at the very heart of the Financial Reporting Council's proposed Stewardship Code. The consultation, launched earlier this year, aims to "bring about more effective engagement between companies and shareholders… will assist the ultimate owners to hold to account those acting on their behalf". In family business, of course, those two groups are frequently one and the same. The Investment Management Association – whose members hold 43 per cent of the UK equity markets – responded to the paper by saying that it recognises "a need to improve the stewardship of UK-listed companies".

Why keep it in the family?

That could leave family businesses in pole position as the emphasis in the management of companies shifts from the creation of shareholder value at all costs to one of 'stewardship'.

"It's easier for family business to take a stewardship approach, because they don't see themselves as short-term sellers of the business," says Mr Gordon, "If you're a pension fund or a hedge fund you've got to make money today."

Certainly, many of the things that the CBI's Richard Lambert is looking for companies to pay more attention to are areas where family enterprises have a head start. That includes a more collaborative approach with stakeholders – such as workers, suppliers and local communities.

It also includes an aversion to taking unnecessary financial risks, and focusing more on making a business operationally excellent. "What you don't see is a lot of financial engineering around the family business sector, you see more old-fashioned cautious approaches," says Mr Gordon. "They don't have access to the capital markets in the same way as other businesses and therefore they have to adopt quite a conservative mindset in how they finance the business." Family enterprises tend to have a much lower level of debt than their more widely-owned counterparts.

Critics of family-led businesses may argue that such a defensive mindset can put a constraint on growth. That's confirmed by the IFB's research, which shows a more steady pace of sales and asset growth. But, they point out, they also tend to be more profitable. And their cautious mindset means that, when it comes to making investments or acquisitions, they tend to be careful about how they're spending their money. "The money they're using, it's their own money and they don't want to be the one who's overpaying for an acquisition," says Mr Gordon.

Above all, family businesses offer stability. So while profit growth may be more restrained, there's much less chance of those companies coming a cropper. There's also evidence to suggest that, despite their more conservative approach, family businesses nevertheless outperform the wider market. As the table opposite shows, our selection of family enterprises have put in stellar returns over a decade when the returns from the FTSE All-Share have been flat. That's a pattern repeated across global markets, and suggest that family businesses well deserve their safe haven status.

It's a family affair

What exactly constitutes a family business? According to the Family Entrepreneurship Working Group, set up by Finland's Ministry of Trade and Industry in 2004, a listed family business can be defined as one in which:

■ The person who established or acquired the firm or their families possess 25 per cent of the right to vote through their share capital.

■ There is at least one family member on the board.

A study commissioned by the IFB in 2006 found that only 42 of the 673 companies quoted on the FTSE All-Share index met these criteria, just 6.2 per cent of the total. The research showed that a high proportion of the companies were involved in manufacturing, and that in two-thirds of the case the family's level of ownership tended to be less than 40 per cent.

Family unity

■ Long-term view

■ Moral compass

■ Interests of managers, owners, suppliers and customers aligned

■ Supportive tax environment

■ Less financial engineering and leverage

■ Entrepreneurial culture

■ Passionate about product

Family sagas

■ Succession issues

■ Conflict resolution can be tricky

■ Weaker governance

■ Exclusion of non-family talent

■ Sentimentality can lead to poor decision making

■ Lower liquidity