Family Firms and Economic Performance

If the family firm is here to stay, especially in environments such as ours, we could advantageously imbibe the strong sense of values the better performing family firms of the world have made theirs. Quality and endurance foremost

Most of the Mauritian companies started at the initiative of family members, right from the start. Their roots can be traced back to sugarcane and to international trade. Thus, today’s Ireland Blyth Company was set up by the Blyth, Greene and Jourdain families in the olden British days.

Today’s Iframac originated from a merger of two family firms, Ireland Fraser Limited and Harel Mallac Company. Rogers & Co was also set up by families coming together to serve the economic opportunities available at the time, be it in shipping, merchandise trade or services. Most of the sugar estates were emanations of concessions granted to settler families from France during the French occupation of the country.

A number of family companies which dominated the economic scene in the past have either ceased doing business altogether or they sold away their business to other more nimble firms. A number of newer companies, such as those in the hospitality sector, that have come on the scene more recently were based on past wealth generated by family businesses. Others were set up by individuals taking advantage of new market opportunities as Mauritius opened up more significantly to international trade, such as textile and garment factories. Even as one looks at the holding structure of modernized larger sugar companies (with more diversified activities) of the past decades or at the textile companies or the more recent ICT-BPO companies, family ownership still remains predominant, centuries after the creation of joint stock companies involving a diversity of investors and despite the operation since 1987 of an official Stock Exchange of Mauritius.

Along with those larger companies on the business landscape, there have emerged, since several decades past, small and medium enterprises (SMEs) covering a wide diversity of activities, mostly in the retail business but rarely going out to serve external markets as do the larger companies. The SMEs also have a core family ownership structure. They have expanded in scope the past years but have never attained the scale of the classic larger family businesses both in terms of revenues and sales.

These smaller SME units currently account for 54% of total employment in Mauritius. Although also basically family-owned, SMEs collectively provide the most of jobs in the economy. Nevertheless, the larger firms, including family firms, are the ones that contribute the most to GDP because they are more sophisticated and operate the higher value adding activities such as trade, finance and other services and tourism.

The larger family firms of the country have, through cross-ownership of shareholdings across companies, retained dominance of the country’s major economic activities. Financial regulators haven’t been able to deal with the dominant control families have in them if only to strengthen the rights of non-family shareholders. As a result, families have continued to occupy a preponderant role in the affairs of our bigger firms. Cross-ownership of as many companies as possible by family groups is being adopted just as well by the upcoming owners of newer businesses.

The question therefore arises as to whether family firms are here to stay. The conventional wisdom was that once larger and liquid capital markets would come on stage, local family firms would no longer rely on continued funding by families for their expansion. It was believed that firms’ greater ease to tap both local and global stock and bond markets for financing would give family owners of funds the opportunity to exit the firms they had founded so that the founding dynasties would get replaced by numerous other investors, including institutions having surplus funds to invest in profitable companies. The evidence at the global level and more so in emerging markets is that this is not the case.

Fortune Global 500 tracks the world’s largest firms by their annual sales figures, typically those with annual sales of $1 billion and more. Data show that 85% of $1 billion+ firms in South-East Asia are family-owned, 75% in Latin America, 67% in India, 65% in the Middle East, 40% in China and only 35% in sub-Saharan Africa.

Globalisation and recent years’ rapid economic growth have reinforced this trend. Lower percentages for China and sub-Saharan Africa are due to the fact that in these places, the largest firms are state-owned. Fortune Global 500 shows that, in contrast, only 15% of large American firms are family owned but not declining. The figure is 40% in the case of European big stock market listed companies, much lower than in emerging markets but high for a developed market.

The entrenchment of the still-dominant family corporate structure of Mauritius is therefore no different from the recent trend observed in emerging markets and developing countries which recently experienced rapid economic growth. Existing families have extended their hold on the corporate market. Our state-owned enterprises made no compensating headway either to expand the public domain; in fact, many public sector enterprises have fallen behind in scope or are being sold away under the influence of so-called World Bank-type ultraliberal “reforms”. We are quite removed from what obtains in America and Europe where much lower family ownership prevails. Moreover, our family-owned companies have not had the strong ambition of family firms in other places: innovating continuously, making incursions into more promising markets and going for a better diversified market reach in unexplored territories.

Some globally well-known firms are family-owned. The big names include multinationals like Germany’s BMW, the world’s largest US family firm Walmart, South Korea’s Samsung, India’s Tata and Reliance Industries, French luxury houses LVMH and Kering and Sweden’s Wallenberg business empire, amongst numerous others. McKinsey, a consulting firm, forecasts that Fortune Global 500’s family firms are set to increase from 8,000 in 2010 to 15,000 by 2025.

The reasons for the expected sustained growth of family firms are: their better access to capital markets without loss of control in the case of the best managed firms, controlling shareholders keeping under constant hard scrutiny the need for the firm to professionally manage itself to maintain its competitive advantage, a longer-term vision and perspective based on learning by doing, pursuit of long term sustainability rather than adopting the custom of non-family and/or private equity-owned firms targeting short term gains, a healthy reluctance to get entangled into unsustainable debt to make the firm more resilient when times are not so good and standing on a proven business culture based on noble family values resulting in worker-management relationship of greater trust and mutual dependability.

If the family firm is here to stay, especially in environments such as ours, we in Mauritius could advantageously imbibe the strong sense of values the better performing family firms of the world have made theirs. Quality and endurance foremost. Our firms could light the way by not indulging in futile family squabbles and feuds which have destroyed in the past the very first stirrings of progress, landing entire families at notaries’ doorsteps for dispute resolution or splitting up properties into uneconomic smaller parts.

Family firms could pre-agree to a viable and acceptable succession plan to keep the business together and thus avert the risk of splintering the business due to sterile conflicts of personality among family members if only to maintain public faith in their endurance and grow. From their vantage points, such firms might be tempted to raise barriers to entry of all sorts to gain monopolistic or oligopolistic advantages preventing others entering the market. But it is not the way forward when seen in the perspective of the country as a whole, e.g., our telecoms sector became a commercial instead of becoming an industrial enterprise.

At society’s level, there has come about a feeling of alienation at the rate of appropriation of most of the resources and the bigger avenues for economic growth by the more powerful family firms of the country over the years. This is why the promise by a political party that it would “democratize the economy” if it won at the polls carried a wave of support from voters.

It hurts nobody should a government adopting a new set of policies open up more economic space by creating opportunities for a wider swathe of entrepreneurs to emerge from our ranks and take on the markets – not only the domestic market. History has shown that we have extended our scope into production territory that had been heretofore foreclosed to us. Going in that same direction with all our available talents does nobody harm. Without pitching one set of people against another, we can grow our scope with family firms et al by extending a fair chance for more of our budding entrepreneurs to delve into business. All it needs is effective policy-making.

* Published in print edition on 14  November 2014