The family-business factor in emerging markets
Family-owned businesses are a large and growing force. Organizations that want to collaborate—or compete—with these companies in emerging markets must first understand them.
The
industrial titans of
the Gilded Age were largely family businesses. But today, in most
developed nations—particularly the United States, the United
Kingdom, and Japan—the largest, industry-leading companies are
typically held by a broad, dispersed mix of shareholders. Less than
one-third of the companies in the S&P 500, for example, remain
founder- and family-owned businesses, meaning that a family owns a
significant share and can influence important decisions, particularly
the election of the chairman and CEO.
So
far, the picture is quite different in emerging economies.
Approximately 60 percent of their private-sector companies with
revenues of $1 billion or more were owned by founders or families in
2010. And there are good reasons to suspect that these companies will
remain a more significant part of their national economies in
emerging markets than their counterparts in the West did about a
century ago. As brisk growth propels emerging regions and their
family-owned businesses forward, our analysis suggests that an
additional 4,000 of them could hit $1 billion in sales in the years
from 2010 to 2025. If that’s how things shake out, such companies
will represent nearly 40 percent of the world’s large enterprises
in 2025, up from roughly 15 percent in 2010. Developing an
understanding of them, therefore, is fast becoming a crucial
long-term priority—not only for global companies active in emerging
markets, but also for would-be investors that must ultimately decide
whether and how to support this fast-growing segment of the economy.
Why past may not be prologue
The
starting point for many family-controlled local companies is a
demonstrable, even dominant, “home field” advantage; they have a
deep understanding of their countries and industries, as well as
considerable influence on regulators. They derive all this from years
of personal relationships with stakeholders across the value chain.
Many have proved resilient through times of economic crisis.
The
very fact that they are family businesses
may be advantageous in an emerging market. Where the conventions of
commercial law and corporate identity are less developed, doing
business on behalf of a family can signal greater accountability—the
family’s reputation is at stake, after all—and a stronger
commitment. Indeed, we have observed circumstances where a personal
commitment from the owner of a family business was as powerful as a
signed contract.
Local
philanthropic efforts reinforce this signaling. In the Philippines,
the Ayala Foundation—a nonprofit branch of the Ayala Corporation,
the country’s largest conglomerate and a family-owned
business—states its mission as improving the quality of life for
all Filipinos by eradicating poverty. Similarly, in India, the GMR
Varalakshmi Foundation, an arm of the market-leading GMR Group,
strives to “develop social infrastructure and enhance the quality
of life of communities” throughout the country. Companies such as
these work within and for their communities.
They
can also work fast. As one executive at such a company told us: “All
the world is trying to make managers think like owners. If we put in
one of the owners to manage, we don’t need to solve this problem.”
An owner–manager can move much more rapidly than an executive hired
from outside. There’s no need to pass decisions up a chain of
command or to put them in front of an uncooperative board, and many
of the principal–agent challenges that confront
non-family-controlled companies are neutralized. Family-owned
businesses can therefore place big bets quickly, though of course
there’s no guarantee that they will pay off. Still, manager–owners
are largely relieved of the quarter-to-quarter, short-term benchmarks
that can define—and distort—performance in Western public
companies, so they’re freer to make the hard choices necessary to
create long-term value.
Indeed,
the owners’ long time horizons and sense of mission often suffuse
the whole organization. A McKinsey survey of businesses owned by
families and founders showed that 90 percent of board members and top
managers—family members or not—said that family values were
present in the organization, and fully 70 percent said that they were
part of its day-to-day operations. For the past ten years, McKinsey
has measured and tracked organizational health in hundreds of
companies, business units, and factories around the world. Nearly two
million employees have answered questions that rate the health of
their organizations. We then produce a single health score, or index,
reflecting the extent to which employees agree that their companies
meet empirically derived litmus tests in each of nine dimensions of
organizational health. When we isolate businesses owned by families
and founders in emerging markets—as we did for nearly 60 leading
companies in Asia, Central America, and South America, with over
100,000 survey respondents—we see health outcomes that are better
than or comparable to those of other companies in the same markets
(Exhibit 2). Moreover, in Asia these companies are stronger than
their non-family counterparts on several specific management
practices, including shared vision, strategic clarity, employee
involvement, and creativity and entrepreneurship.
For
all these reasons, there may be little need for companies to jettison
family-oriented governance to attract investment. In a world where
free-flowing capital seeks out success, the emerging markets’
strong-performing publicly traded family businesses will probably be
rewarded. Market-leading ones can expect to be sought out by
potential investors and venture partners alike, for success is a
magnet.
Playing by family rules
The
resilience of family-owned businesses in emerging markets contains a
paradox for global companies operating there. Many companies approach
these markets in search of rapid growth, yet the family-owned
businesses they’re considering partnering with are balancing the
importance of liquidity against an extremely long view. Founders and
families hold their shares for decades, even centuries. “For us,”
the chairman of such a business explained, “short term is 5 years,
and medium term is 20 years—that is, one generation.”
Multinationals that afford their country managers just three to five
years (and sometimes even less time) to make progress are creating a
significant mismatch.
Indeed,
mismatches between the time horizons of country managers and
businesses owned by families and founders can create tensions that
undermine strategic partnerships. Exacerbating matters is the
volatility of many emerging markets. Many country managers don’t
experience a full business cycle, so they struggle to understand and
quantify risk, to form a “through cycle” view of the
opportunities, and thus to partner meaningfully with their peers in
family-owned businesses.
Moreover,
many family-owned companies place a premium on building strong,
well-diversified businesses—sometimes to an extent that conflicts
with the developed world’s conventional core competence–based
strategies for value creation. As our colleagues have noted, for
example, the largest conglomerates in China, India, and South Korea
are entering new businesses (often in unrelated industries) at a
startling pace, adding an average of one new-business entry every 18
months.2 Almost
70 percent of these diversifying conglomerates are family or founder
owned. In large part, they aspire to play the portfolio game, taking
advantage of access to talent and capital, as well as allocating
family assets across different industries. This is an appropriate
strategy for preserving wealth over the long term—and one that, our
research finds, is paying dividends for conglomerates in the
BRIC3 countries.
The implication for global companies and investors is that
family-owned companies making moves into or out of seemingly
unrelated industries can show up unexpectedly as competitors,
partners, asset purchasers, or sellers, with varying degrees of
success.
The
wild card, of course, is succession. Fewer than 30 percent of family-
and founder-owned businesses around the world survive to the third
generation as family-owned businesses,5 and
it’s an open question whether those in emerging markets will fare
any better. History suggests they won’t. While statistics are
scarce, analyses comparing the top 10 or 20 family-owned businesses
in a given emerging-market country 20 years ago with today’s
leaders show great discrepancies. Nonetheless, there is some reason
for optimism: the factors behind successful transitions are
reasonably well known, and much can be learned from companies that
failed the test. (Today’s family-owned businesses in emerging
markets are more likely than ever to engage in careful succession
planning.) Still, the basic challenges—such as family feuds,
nepotism, and the gradual loss of entrepreneurship when leadership
passes on to new generations—will surely bring down many
family-owned companies in emerging markets, as they have elsewhere.
Similarly,
such businesses may create ownership models that are inflexible and
lack transparency, drawing the attention of activist investors who
see value in better governance, more disciplined capital structuring,
and getting out of so-called hobby businesses that support family
members. This strikes at the heart of the question: Is the family the
best owner or manager of a company, or is it in business to support
the family? Potential partners, investors, and competitors should
carefully look at such a company’s family tree, ownership models,
and current succession processes before drawing conclusions about
sustainability.
Finally,
people who watch emerging markets should keep a weather eye on the
role of regulation, as many governments in these countries are
struggling to strike a balance between denying family-owned
businesses excessive privileges and opportunities to make profits, on
the one hand, and fostering entrepreneurism to promote their
economies, on the other.6 Would-be
investors ignore at their peril the potential of regulatory
intervention to reshape the nature of competition in these markets
quickly and dramatically.
For
more on this topic, download the compendium Perspectives
on Founder- and Family-Owned Businesses, on
McKinsey’s Private
Equity & Principal Investors site.
By
Åsa Björnberg, Heinz-Peter Elstrodt, and Vivek Pandit
http://www.mckinsey.com/insights/emerging_markets/The_family_business_factor_in_emerging_markets?cid=other-eml-alt-mkq-mck-oth-1412
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