Comment: The wealth in family values

, 30/06/2020

By Ronald Graham, UK head of private wealth at Taylor Wessing

The last few months have made us all realise what values are the important ones in life; health (mental and physical), quality of life and yes the importance of family; a shift certainly for some from materialism and wealth for its own sake.

We've also seen many people selflessly risk their lives as key workers to help the rest of us, certainly not for financial gain but through a far greater sense of duty and personal reward.

Those non-monetary rewards can often bring substantial personal gain and underline family values. This plays out in the corporate world where such values are increasingly recognised for delivering great returns in both emotional and financial terms.

Ronald Graham

Family owned companies (and by that I define it loosely as meaning where a family owns or controls 30 per cent or more of the company's voting rights) are often something to be treasured, just like your own family in lockdown. According to Pictet, the Swiss private bank, in a recent report, family owned businesses outperformed the global market by 46 per cent from 2007 to 2019.

There are some fairly obvious reasons why a family owned company could be expected to be more successful than one that is not.

For a start, family owners usually take a longer-term view on their return and investing back into the business, they also do not focus on dishing out questionably generous option packages to senior management, whose vision can be reduced to a myopic next vesting period.

Family owners of companies have historically had more focus on social corporate responsibility and the long term well-being of their employees who are considered part of the family. Think of historic examples like the Lever Brothers' model village for employees at Port Sunlight. Today of course most companies have an ESG and CSR focus but there are degrees of importance and generally family owned companies have typically embedded this into their ethos.

Of course there are exceptions and numerous examples of weak corporate governance in family owned companies; a lack of clear succession and nepotism can result in some disastrous decisions.

As Logan Roy in Succession puts it to one of his sons, "What have you had your entire life that I didn't give you?". But with the right guidance those companies and families are now in the minority and regulations and statute have helped to weed out, if not eradicate, bad corporate governance in modern companies.

Many family companies have sought the advice of consultants and have consequently adopted a family governance policy which might, for example, prescribe what qualifications or experience a family member is required to have before he or she is given a managerial role in the business.

As a corporate lawyer who acts predominantly for families and family owned businesses, I am absolutely passionate about what families can bring to their companies, not just for the longevity of ownership but for the well-being and prosperity of their employees. Look at the success of Swire, Pentland Group, JCB and Dyson in the UK and across the channel we have more examples, Hermes, L'Oreal, LVMH, Bouygues and Kering and in Germany Bosch, ALDI, Volkswagen and BMW and many others, all well-run family owned companies.

A family owned company has more specialist and different adviser needs than one that is not. There are particular requirements for shareholder governance in terms of voting and control and rights to a seat on the board; succession planning to ensure that ownership transitions at the right time and in the right way (ideally not on death) to the next generation; economic returns to different levels of the family while maintaining the capital.

The Rockefeller family famously has a highly sophisticated family trust which enables the family members to each benefit from an interest whilst preserving the capital for future generations.

A recent article in the Financial Times focused on Lim Wee Chai the founder and chairman of Top Glove, a company which claims to have 26 per cent of the world's market for rubber gloves. Mr Lim has built a hugely successful company in 30 years and is a strong advocate for his workers health focusing on staff to "clean, eat, work, exercise and sleep well". A family owned company like this can introduce CSR polices for its employees such as this more easily than others.

Another feature is the lack of compromise that a family owned company can adopt. Sir James Dyson famously refused to launch his new robotic vacuum cleaner not because it did not make commercial sense but because he believed that the model they had at that time was too expensive and too heavy and until he was satisfied that the product was right he did not want to launch it.

It is hard to believe that this would happen in a purely corporate environment where revenue and profit are more likely to be the key objective. The result for Dyson is no doubt that its reputation as a leader for excellence and practical innovation is maintained and the long term value of the company is enhanced.

There is a significant body of evidence to show that investors, whether individuals or family offices, are interested in sustainable investing.

Pictet suggest this figure could be up to 85 per cent of investors and growing. This reflects a dramatic shift from historic wealth management where private investors would usually have kept their main investments separate from their ethical or philanthropic beliefs. Perhaps because of a generation who have now grown up listening to arguments on climate change, waste and recycling, modern slavery and pollution to name but a few key issues, the demand has never been higher from private investors for the companies they invest in to demonstrate their ESG credentials.

I believe that family owned companies are arguably ahead of the curve on this and, with the right professional guidance, can continue to grow both their companies and their efforts in this area while still offering long-term financial returns to those investors.

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