Family businesses survive longer and offer less investment risk, Rotman study finds

Family businesses tend to survive longer and represent a lower-risk investment than non-controlled public firms, a new study from the University of Toronto’s Rotman School of Management suggests.

Nearly 70 per cent of the family businesses tracked over almost 50 years survived, while all but 24 per cent of non-controlled widely held companies had either gone out of business or been acquired or de-listed during the same period, according to the study conducted by Rotman’s Clarkson Centre for Board Effectiveness.

The study, sponsored by Power Corp. of Canada, found Canadian family businesses had less executive turnover at the top, and were also less volatile based on daily historical share price performance — suggesting less investment risk.

“Family companies live longer, are more stable and are less risky,” said Matt Fullbrook, the study’s author and manager of the Clarkson Centre for Board Effectiveness at Rotman. He added that the contribution of family businesses to Canada’s economy provides “a strong incentive to keep studying them and understand the keys to their success.”

Among the lessons to be learned from family businesses, the study suggests, is to extend “perspectives farther into the future,” thereby combatting short-termism. The emphasis placed on quarterly results is viewed by some institutional investors and academics as damaging to company health and the capital markets because it inhibits longer-term strategies and decisions where the impact won’t be seen immediately in financial results.

The Rotman study, published Monday, found that average tenure for a chief executive is longer at family businesses, a finding that held up in all three jurisdictions examined: Canada, the United States, and the United Kingdom. In Canada, CEOs stay in their position for an average of four years longer than their counterparts at non-controlled companies.

Meanwhile, average annual volatility for the family businesses was 36 per cent over 33 years, compared to 51 per cent for non-controlled companies over 35 years, according to the study.

Rotman’s Clarkson Centre for Board Effectiveness, whose study of corporate governance is largely funded by private donations from corporations, began looking at family businesses in 2013. The CCBE’s earlier research found that Canadian family businesses generate a greater return to shareholders over long investment horizons.

“Our previous work on family businesses hints that their excellent long-term results may be driven, at least in part, by the long-term perspectives of family owners,” the latest study says, while acknowledging that firms controlled by families live with an “oft-cited” statistic that 70 per cent of family businesses don’t make it to the second generation.

Other research has suggested family businesses outperform their widely held counterparts.

In 2015, National Bank Financial published research that found family controlled Canadian companies outperformed the S&P/TSX composite index over a 10-year period. That report suggested the performance could be tied, in part, to longer tenures for management and the ability to implement longer-term strategy without the pressure of short-term results.

The National Bank research also noted some of the challenges for family businesses, such as the transition of power to subsequent generations or to professional managers, the creation of a strong and independent board of directors, and the establishment and maintenance of high standards for governance and transparency.