Results from an analysis that combined 204 academic studies covering 3,880,267 businesses across 30 countries was recently published. When it comes to family businesses these were distinguished based on family’s involvement as owners, managers or both. This is an important distinction. Various studies have shown that family owners, on average, improve the performance of the business. However, the effect of family managers on the business is less clear. So the questions remains. Why is it that some studies and research show that some family-managed business fared better and others much worse?
The results from this analysis shows that these differing outcomes could be best explained through a country-by-country variation in two important variables: trust in family and trust in institutions.
Trust in family
In some countries, the importance of and trust in family is primary. The analysis has found that in those countries where they put heavy importance and trust on family, this meant that such family businesses are more likely to hire less qualified siblings, children, nieces, nephews and cousins into management roles and are more likely to use firm resources for personal matters. Such family businesses, in instances where the family and business needs conflict are very likely to prioritise the former over the latter.
Conversely, in countries where people place only moderate trust in the family and draw a clearer line between its needs and those of the business, family-managed firms perform much better. Corporate resources are more strictly used for professional purposes and firms face less pressure to employ relatives.
Trust in public institutions
The second key factor relates to citizens’ confidence in the efficacy of their country’s formal procedures and laws and their belief that police, public officials and courts will uphold them. Through the above mentioned analysis a variable was created by combining the value of people’s confidence in each of the following institutions in a given country: police, courts, government, parliament and civil services.
The end result was that if institutional trust is high in a country, families are likely to employ impartial processes to hire qualified individuals for each management position regardless of family ties. Citizens expect business owners and managers to be liable for wrongdoing and penalised for non-compliance with laws, and nepotism is discouraged. Family managers may employ relatives for summer jobs or internships, but they are more aware of the negative consequences of promoting less qualified family members over more capable non-family managers.
Conversely, if citizens lack confidence in government institutions and doubt that public officials will act with integrity, family businesses are more likely to turn inwards and employ more family members. By definition, this limits them to a smaller talent pool, increasing the possibility that they will make poor decisions.
Perhaps the most interesting finding from this analysis was that it is in countries with strong faith in both institutions and families, that family-managed firms performed the best. The lesson here is that a well-regulated businesses pushes families to implement best practices while sanctioning misbehavior. At the same time, the social relevance of families may imply more well-functioning support from such families.
In conclusion, while the debate around the role of family managers as good performers or just the result of nepotism, is likely to continue, the results from this analysis suggest that family-managed businesses work well when stable and when limiting the downsides arising from favoritism and self-serving behaviour by family managers without then canceling the upside from having their commitment as long-term owners of their businesses.