Family Firms Enjoy Better Returns

The crisis notwithstanding, Italian family firms are more profitable than other kinds of firms. Over the last years they have started to bring debt under control, but they have been less aggressive in cutting costs. Mostly, their governance is still monocratic, but collegial leadership is rising. Returns are higher still if leaders are under 50 years. A female presence at the top positively affects returns, too, but its incidence is still very limited, although women entrepreneurs are very unevenly territorially distributed. This is the evidence emerging from the 2010 report of the AUB Observatory, promoted by the Italian Association of Family Companies (AIdAF), Unicredit and Bocconi to monitor structure and performance of all Italian family firms with sales exceeding €50 million.

The analysis thus considered 2,522 family groups in existence at the end of 2008, thus shedding light on how these firms have reacted to the crisis. If on one hand, in the 2008-2009 two-year period, revenues went back to 2005 levels (putting 2000 = 100, total sales where 174 in 2007, but down to 158 in 2008), on the other the reduction in circulating capital due to shrinking revenues has determined an increase in liquid reserves, signaling higher future investment capacity, which is crucial to be able to jump on the recovery bandwagon. In 2009, almost 22% of family firms had cash reserves in excess of financial debts, up from 15% in 2007. In parallel, firms have sought to lower leverage ratios, which decreased from 6.5 in 2007 to 5.2 in 2009. Next to this, there has been decreasing ability of firms to honor their debts: the ratio between Net Financial Position and Operating Margin in fact went from 5.5 to 6.5 over the same period, showing that, in spite of debt reduction, family firms are still highly dependent on the banking system and have acted less decisively on costs. "This could be ascribable to the lack of pressure coming from financial markets or to the presence of the Italian welfare system subsidizing employees' short-time, but also to the tendency of caring for one's own employees and be more lenient in slashing company benefits," Guido Corbetta, AIdAF-Falck Chair in Strategy of Family-Owned Companies at Bocconi, explains. "This way, family firms have sought to maintain that 'social capital' that is one of their lasting features. But if the crisis lasts, harsher action on the cost front might take place". The 2010 report confirms that family firms enjoy better performance. From 2000 to 2008, these companies have displayed a higher Return on Investment (ROI) and higher Return on Equity (ROE) – they were 1.3 and 0.7 points higher that in non-family firms. However the gap has been closing in recent years: it was halved from 2007 to 2009 (from +1.9 to +0.8). Coming to generational dynamics, the third-generation curse is supported by the data, providing confirmation for the adage: the first generation builds, the second consolidates, the third squanders. Generational differentials in performance are significant, so that, while the second generation has average performance, the first generation performs better than average (ROI +0.6; ROE +2.1; growth +1.5), while the third clearly underperforms (ROI -0.8; Roe -2.5; growth -2.1). The report also looked at the relation between family company performance and age of the leading entrepreneur, showing that leaders under 50 perform better in terms of both profitability and growth, whereas leaders over 70 are "resistant to growth". In terms of company seniority, 6-10 years of experience at the top produce the best performance. Thus job experience is a plus, provided that it's not too much to hamper strategic dynamism and propensity to risk. But, as Gioacchino Attanzio, Director-General of the Italian Association of Family-Owned Companies points out, "the best solution could balanced representation for all the various generations of the controlling family". On the governance front, the growth of collegial management in family companies is apparent: 32,2% in 2000 vs 37,1% in 2008. This phenomenon is especially present in Central and Northern Italy, but it's not a model warranting better performance: over the 2000-2008 period profitability is 0.9 points lower than in firms where individual leadership prevails. Not only, wherever leadership is concentrated in one family member, performance is better than what can be achieved by an external manager, both in terms of profitability and growth (ROI +0,3 points, ROE +1.2 and growth 0.7), while when there is a collegial leadership, better performance is obtained in teams wholly composed by family member. Data thus do not support the prejudice according to which family companies should not have family members in top managerial positions. As Attanzio remarks, "Empirical data confirm that the family, if united and compact, makes a difference in achieving superior performance with respect to other types of firms." Another key element that was investigated was the presence of women at the top. In this respect, the situation hasn't much changed over the last years. Women at the top or in boards of administration are still very few. in family companies they very slowly incrased their presence from 8.4% (2000) to 9.8% (2008), while the percentage of women members in boards nudged from 17.6% al 18.5%. Size can be a barrier for women: with respect to the total average, in bigger firms only 6,9% are company leaders. The same occurs in boards, where female presence is just at 13%. In spite of disappointing figures, the research study shows how women positively affect the perfromance of family firms: in boards where women are between one third and one half of members, ROI and ROE are +0.9% and +1.3% with respect to the mean of the sample. In the case of collegial leadership, the presence of at least one female chief executive produces similar results (+0.5 and 1.8). Central Italy displays the strongest incidence of female leadership. At the level of provinces: Bologna, Naples, Turin, and Treviso see a stronger presence of women leaders. In this regard, Attanzio says: "The Italian Association of Family Companies would like a much stronger presence of women leaders in family firms, considering that they are bearers of a culture and values that are complementary to male values and particularly apt for dealing with complex situations". Territorial diversification is major aspects of these firms, as Corbetta adds: "Family companies are different from region to region and from province to province, in term of debt management, company results, leadership models, generational renewal and openness to women. This highlights the lack of a widespread entrepreneurial and managerial culture, which could orient business choices on the basis of theory and evidence on the merits of certain managerial approaches with respect to others". Marco Gabbiani, Head of the Family Business Owners channel of UniCredit, emphasizes how the AUB Observatory "has developed a rigorous analysis which is unique in its kind, in terms of the time length and size of the sample, on the Italian family firm. The research study highlighted that in the next future the processes of managerialization and rationalization of governance and finance will play an increasing role in these firms. Our job is to support the family leadership with knowledge of entrepreneurial dynamics. That's why we have launched a specialized lending channel for family business owners, merging private banking and corporate banking skills. We have twelve territorial teams working on medium-sized and large family companies, providing strategic consulting on the firm-family-assets trinomial".