Dynastic dysfunction: are family firms too hot to handle?

Mar 28, 2014

Investors often shy away from family companies, but some see promise in their grounded management style

THE media world’s favourite King Lear saga took a new twist this week when it emerged that, nearly ten years after abandoning News Corp for his own blasted heath in Australia, Lachlan Murdoch, 42, has returned as heir apparent. He’ll sit alongside his octogenarian father, Rupert, as co-chairman of both the publishing firm and its now separated sister company, 21st Century Fox. 

The news is no surprise to seasoned Murdoch watchers, who claim the patriarch has been trying to woo his older son back into the fold for years. Still, given the twists and turns of this particular succession race, it would be premature to rule out the younger son James who, despite being besmirched by the phone-hacking scandal, is said to be “biding his time”. In fact, he also got a leg-up this week, to become the co-chief of Fox. Their sister Elisabeth, once a fancied contender in some quarters, is back to reprising her Cordelia role, having reportedly fallen from favour because of her critical response to the hacking scandal. 

Gripping as all this is to Murdochologists, it will make grim reading for anyone who hoped that hackgate would have a permanent effect on corporate governance at the two media groups. They might be listed companies with a combined value of $83bn, but when it comes to critical issues like the succession, they are still apparently run as private fiefdoms and there’s little that outside investors can do to stop it.  Thanks to their grip on voting shares (the Murdoch family have 39.4 per cent in both companies), they will continue calling the shots.  

Of course you might take the line – and doubtless Rupert does – that you pays your money and takes your choice. If you don’t want to take a punt on the power of the Murdoch business gene, just get right out. 

It’s also arguable that the scions of business dynasties are better placed than outsiders to take critical calls on the future of their company. Even if you don’t believe the guff about the business being in their blood, one of the principle reasons for investing in a family concern is that the leading players have skin in the game. And that stops them taking the kind of crazy, self-aggrandising kamikaze moves that are all too prevalent in CEOs elsewhere. 

Indeed, some fund managers actively prefer picking stocks that are family affairs – on the grounds that they make better long-term investments. According to Chuck de Lardemelle of the US fund group IVA, family companies “tend to be more conservative financially” because “they are looking to compound growth over a generation”. And in the long run, these tortoises perform better than hares.  

Family-influenced companies are “less tempted to resort to accounting gimmickry”, agrees Dave Larrabee of the CFA Institute. They tend to carry lower debt and because they are “less beholden to the quarterly expectations of investors”, they’re in a strong position to plan ahead. “This long-term vision and focus on sound financial stewardship undoubtedly enabled family-controlled firms to navigate their way through the recent financial crisis better than most companies.” 

Well, maybe. But the reverse side of the coin is that companies with an entrenched family interest may turn out to be too conservative if they ossify and ignore pivotal market trends. South Korea’s chaebols (large, often family-run, conglomerates like Samsung and Hyundai) are credited with being the engines that transformed a poor agrarian country into one of the world’s great economies. But they’re coming under increasing pressure to reform – both from within South Korea (critics argue their dominance stifles new business growth), and from external financiers, who claim their often byzantine, opaque structures are an investment turn-off.  

It’s a similar story in India, another large economy dominated by family-held firms, where vicious dynastic feuding has become a national speciality. The bitter dispute between the warring Ambani brothers for control of the energy and industry behemoth, Reliance, threatened not just external shareholders, but the wider Indian economy, forcing the PM to intervene (though in the end, it was their long-suffering mother who brokered a peace). 

Closer to home in London, the recent misadventures of another family-controlled Indian giant, Essar Energy, (not to mention those of the doomed Rothschild/Bakrie family venture. Bumi) are cautionary tales of what can happen to investors’ cash when family dynasties collide with stock markets.  

We’re gripped by family business sagas because they tap into those three universal sources of human fascination:  love (and its converse, hate), sibling rivalry and money. But those are the very factors that can make these outfits so poisonous to external shareholders. 

“Numerous studies have drawn a link between family control and enhanced company financial performance,” notes Dave Larabee. But this is chiefly when a founder serves as CEO – or as board chairman with an outsider as chief executive. “A less cheerful picture exists in multi-generation dynasties.”  

The bottom line on publicly-traded family companies, then, is that when they’re good, they’re very, very good – and when they’re bad, they’re truly horrid. Yet with increasing tranches of global wealth now concentrated in ever fewer hands, it looks likely that their influence can only rise – with big ramifications for our pension pots and portfolios. Things could get increasingly interesting (in the Chinese sense of the word) as succeeding generations take over. Let’s hope they’re being brought up to play nicely. 

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