The Long-Term Survival of Family BusinessMatt Fullbrook | Rotman School of Management
The Clarkson Centre for Board Effectiveness (CCBE) at the Rotman School of Management has a mission to study corporate governance and provide practical insights for companies about what good governance means. For more than a decade, we, like many of our peers, embraced the widely-held and publicly-listed model as the paradigm of good governance. Every new crisis in the 1990s and early 2000s seemed to reinforce the importance of director and committee independence, shareholder democracy and an ever-increasing burden of disclosure to the public. To be sure, most of the recent evolutions in good governance have had a net beneficial effect for most companies. For example, the separation of the Chair and CEO roles is related to the adoption of other effective governance behaviours (Spizzirri, 2014). Our Board Shareholder Confidence Index board ratings (BSCI) have also tracked a steady increase in adoption of valuable practices such as board evaluations over the past 17 years.
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Our interest in the governance of family enterprises is further driven by the fact that most formal studies of family businesses focus on identifying and managing their unique risks – succession planning, protecting the founder’s vision, managing internal conflicts – but not their strengths. This has led, for example, to the development of tools such as the “Three Circle Model” (Davis, 2018). However, since family businesses generate more wealth for shareholders over time, perhaps claims about the outsize risk of family control are somewhat exaggerated.
The life cycle of every company is entirely unique from founding to growth, from growth to prosperity and from prosperity to, in nearly all cases, death. Because each company’s experience is so varied and nuanced, there is no perfect dataset with which to study precisely what causes some companies to thrive and others to falter. Our previous work on family businesses, however, emphasizes their potential for long-term value creation. Meanwhile, influential thinkers and investors have sounded the alarm on short-termism in capital markets, arguing that it had a primary role in the Great Recession, and potentially poses a threat to capitalism as a whole (Barton, 2011). (1)
(1) Yvan Allaire explains that “corporate short-termism is the conscious decision (under external pressures or not) by management/boards to take actions that will bring benefits in the immediate future, knowing full well that these actions may prove eventually detrimental to the welfare of the company.” (Allaire, 2014)