"The enduring power of families in business and politics should trouble believers in meritocracy," says the Economist in a piece titled The power of families Dynasties from the April 18, 2015 issue. They draw parallels between the likely upcoming Bush-Clinton election and the Rothschild and Wallenberg families of Europe and the eminence of family businesses in most of the developing world, especially India and East Asia. "Family companies are not just surviving but flourishing"
Visions of modernity often discount the family and economic theorists concentrate on the public company. But 90% of companies in general and 40% of large companies are family businesses. Family and tribe loom large in human nature. Anglo-saxon capitalism is something of an exception in the prevalence of publicly held companies.
Family companies address two big defects at the core of capitalism: short-term focus and the conflict of interest between managers and owners known as the agency problem. Family companies, as a vehicle for the transfer of wealth across generations, have a longer term outlook and a deeper sense of ownership. They tend to underperform during booms but outperform during busts. Families can instill values and internal culture that inspires greater loyalty. Trust plays a big role, especially in the low-trust environments of many developing countries.
Problems arise in the handoff from one generation to the next. Succession battles and infighting can be big problems given the limited pool from which to draw candidates for top positions. "The third generation ruins the house." To access capital while maintain voting majorities, families often turn to complicated pyramids of holding companies and privileged share classes that separate control from income.
The ability of some of these families to keep managing those handoffs successfully and maintain control sometimes over hundreds of years is fascinating. Marginalized minorities (Jews, overseas chinese, mormons) can show great ingenuity in building business empires.
Further Reading
- David Landes "Dynasties"
- What You Can Learn from Family Business by Nicolas Kachaner, George Stalk and Alain Bloch, Harvard Business Review November 2012
- Ronald Coase "Theory of the firm"
- The Modern Corporation and Private Property, by Adolf A. Berle Jr. and Gardiner C. Means
- The Family Business Map: Assets and Roadblocks in Long Term Planning, by Morten Bennedsen and Joseph P.H. Fan
