AMMAN, 7 July 2003 — According to the Organization for Economic Cooperation and Development, more than 75 percent of all registered companies in the industrialized world are family businesses, and not just small and medium-sized ones. About a third of listed companies in the Fortune 500 have families at their helm. Forty-three of Italy’s top 100 companies are family-owned; 26 of France’s and 17 of Germany’s. Family companies employ about 50-60 percent of the work force in the industrialized world. Many publicly traded companies in most countries are still controlled by a remarkably small number of family dynasties.
The situation is not much different in Jordan and the Middle East, family businesses continue to be dominant in all sectors. Many of these businesses have traditionally been involved in trade and real estate, but have expanded their activities to include industry, banking, insurance and telecom among other services. While accurate statistics on family businesses do not exist in the region, it is safe to say that more than 90 percent of private sector companies are still family owned businesses.
In a publicly owned shareholding company the goal of management is to maximize shareholders’ value. With family businesses, there are other objectives to achieve beyond shareholders’ value which include providing employment for family members, staying away from businesses that require excessive disclosure and financial transparency, getting into new lines of business that meet the requirements of one of the siblings, etc. Family members feel they are only entrusted to take care of the business before handing it over to the next generation hopefully in a better shape. In a typical family firm, progress is measured in small, regular steps. Management is usually conservative in nature, have longer time horizons and lower appetite for borrowing. Following the recent corporate scandals in the US and the collapse of the stock markets, there has been a return to the kind of values prevalent in family owned companies, including taking a long-term view rather than live or die by quarterly results and earnings per share.
A study published last month in the Journal of Finance, the publication of the American Finance Association measures the performance of family controlled companies compared with their non-family run companies, all listed on the US stock exchange. Using a combination of accounting and stock-market measures, the authors concluded that companies controlled by family members were 5.5 percent more profitable and achieved 6.65 percent better return on assets than their non-family counterparts. Family-run companies also were valued 10 percent higher by the stock market than non-family companies. The study lends quantitative support to the argument that family-controlled businesses are a viable model for generating profit and long-term growth. Family companies have a kind of stability and long-term focus that can build value over time.
During the past 30 years, many family controlled companies started to draw on professional management to help run their business. These companies have been facing both internal and external challenges that needed to be addressed. The internal challenges include issues such as retirement and succession, father-son relationship, family infighting and sibling rivalry, intergenerational differences, the need to go public, etc. There are as well a set of external challenges such as rising competition, tougher bank lending terms and more transparency. While family businesses do not have to report their performance and financial health to outside observers, nevertheless, the heightened security since Sept. 11 and the new accounting rules made it difficult for banks, suppliers and business counterparties to deal with family companies who do not follow international reporting standards.
To address these new challenges family businesses should not be prisoners of the past. They must be willing to respond in new and creative ways to the changes taking place in the market. Increasingly more family businesses are likely to restructure into private ownership companies in preparation for going public. Interestingly enough, most family companies know the challenges that face them. It is often not a question of understanding these challenges, but rather the willingness to address them in an effective way. Family companies in the region have started to face the painful transition of moving from operating under pampered local trade regulations to the harsh reality of the WTO and Euro-Mediterranean Partnership.
In the Arab world, for a family company to go public carries a social stigma. It is seen in the same light as a company facing financial or managerial difficulties since it is assumed that the family is incapable of running its business. Furthermore, the idea of going public raises concerns in the area of disclosure and control. It is feared that greater corporate disclosure might reveal considerable private wealth that has so far been hidden. Another concern is that going public will make it more difficult for future generations to re-establish their family identity if the company is owned by “faceless” investors. There is also the worry that an old rival, or some local or international giant could take over with little or no concern for the family’s name or values.
Family companies that are most capable to go public are those who have realized the benefit of having an experienced and professional management, are following transparent reporting standards and are willing to spread the risk by inviting other investors to join. Family businesses that need cash may want to consider bringing in a new group of investors instead of borrowing as it has been the case so far. Joint ventures may also be the way forward. A natural transition from a family business with 100 percent ownership is to own 20 percent to 40 percent in a larger company with a group of similar minded joint venture partners.
The future pattern for family companies in the region could be represented by the approach followed by Al-Zamil Group of Saudi Arabia. This group, which has one of the most successful industrial and services companies in the region, decided to go public in 1998 to create the joint stock company Zamil Industrial Investment Company (ZIIC). The family maintained a 60 percent stake in the company, offering the rest to other local and Gulf investors. This injected additional capital allowed the group to expand into the global market.
As the region’s stock markets gain depth and become better regulated, initial public offerings (IPOs) become a feasible option for family businesses who want to realize the value of their company or to raise additional capital. Investment banks are becoming well entrenched in the region and is able to provide such services as valuation, underwriting and market placement of IPOs. Jordinvest, for example, has recently made a significant investment in a small, mainly family owned company, helped to restructure it by bringing more investors on board, and converted it into a private shareholding company in preparation for taking it public few years down the road.
Other family owned companies are opting to stay in control by forming a holding company that invests in the various businesses that the family owns with aim of floating these businesses piece by piece in the future. Other forms of control also exist but the natural evolution of successful family businesses is now well documented. These businesses will become the great corporations of tomorrow, run by professional managers with the established brand names outliving their founders.
(Henry T. Azzam is chief executive officer at Jordinvest.)