Publicly-traded family firms are falling behind in a global push to boost corporate governance standards at listed companies, research showed on Tuesday, hurting their traditional ability to outperform rivals without family ties. Companies founded, managed and part-owned by successful entrepreneurial families have garnered a reputation for delivering stronger returns than other listed firms in recent years, thanks in part to the perception of a closer alignment of interests with external shareholders.
But a report by Spain's IE Business School and Banca March analysing governance benchmarks at 265 family firms (FFs) and 861 non-family firms (NFFs) in Europe and the United States between 2008 and 2013 showed the former were on aggregate more poorly governed than the latter.
As a result of low corporate governance scores, the family-run firms were delivering a smaller so-called "family premium" than their better-managed peers.
The compound annual return achieved by FFs over the six-year period was 12.8 percent compared with 10.4 percent for NFFs, although the best-governed FFs generated 20 percent compared with 12 percent for all other companies in the sample.
The family firms who scored highly on the report's corporate governance metrics include Spain's Inditex, Britain's Stagecoach Group and Switzerland's Holcim, now part of Holcim-Lafarge. "Investors are looking for profitable companies that meet universal good governance criteria, regardless of their origin or capital structure," Professor Cristina Cruz, one of the co-authors of the report, said, pointing to particular flaws in board composition, board supervision and shareholder rights.
"The US and UK family firms continue to lag behind non-family firms in terms of governance, but their situation is much better than their peers in the rest of Europe," Cruz added.
Specifically, the report put the percentage of independent board members of listed companies at 82 percent for NFFs compared with 56 percent for FFs. It said 16 percent of European FFs have a corporate governance committee to supervise standards, compared with 22 percent of NFFs. A similar situation exists for appointment committees responsible for vetting senior hires, which are present in 72 percent of European FFs, compared with 95 percent of NFFs.
Policies that guarantee the application of the "one share - one vote" principle, a mechanism designed to avert excessive control by one segment of shareholders, are in place at 95 percent of NFFs but in just 75 percent of FFs, the report showed.