Challenges

The “Lucky Sperm Club”, as Warren Buffett likes to call it, is still going strong in the commanding heights of business.

Founding dynasties run, or wield significant clout at, some of the world’s largest multinationals, from Walmart to Mars, Samsung to BMW. Half a century ago management experts expected the hereditary principle to fade fast, because of the greater ability of professionally-run public firms to raise capital and attract top talent. In fact, family firms have held their ground and, in recent years have increased their presence among global businesses.

Family-controlled firms now make up more than 15% of the companies in the Fortune Global 500, which tracks the world’s largest firms by sales. This is largely because of rapid growth in big developing economies where family ownership is the norm among large businesses. Since 2005 the countries that have most increased their share of the Fortune Global 500 are Brazil, China, Russia, South Korea and Taiwan. By 2025, McKinsey forecasts, there will be more than 15,000 companies worldwide with at least $1 billion in annual revenues, of which 37% will be emerging-market family firms. In 2010 there were only 8,000 firms worldwide of this size, and only 16% of them were family-controlled and from emerging markets.

Around 85% of $1 billion-plus businesses in South-East Asia are family-run,

One reason why the experts’ predictions of 50 years ago have proved wrong is that stock markets and regulators have been so accommodating in letting founding families retain a fair degree of control despite selling large stakes to outside investors.

Besides being able to access capital markets without losing control, there are at least four other reasons why so many big firms have defied expectations and stayed under family control. One is that they are often the product of a superbly talented entrepreneur. While such founders are alive and on form, the combination of their abilities and the freedom they have as controlling shareholder to run by their own rules often gives them a strong competitive advantage. Even after they are gone, their heirs can keep up the firm’s success, simply by continuing to follow the founder’s successful principles.

Whether private or public, family firms also tend to take a longer-term perspective. Non-family-controlled public companies tend to be obsessed with meeting the demands of investors to maximize short-term profits, and companies owned by private-equity firms, which although able to take a longer view than public firms must still cater to investors who want to sell up for a juicy profit within a few years.

Family firms are also less likely to load up on debt. A reluctance to borrow may limit growth in good times, but it can make family firms more resilient when the going is tough.

They also tend to have better labor relations. This may be because workers are readier to believe promises that they will be rewarded for delivering in the long run, if such pledges are made by founding families rather than outsider bosses who may be gone in a few years. Overall, those family firms that get big tend to have a superior corporate culture to their non-family peers.