The two sides of a mountain: Family businesses vs. public companies

While plenty of mom-and-pop firms certainly fit that description, it doesn’t reflect the powerful role that family-controlled enterprises play in the world economy.
by Yehia El Amine English @YehiaAmine

8 January 2018 | 16:14

Source: by Annahar

This photo shows Cafe Younes' first branch in Hamra opened By Souheil Younes in 1960. (Photo Courtesy of Cafe Younes)

BEIRUT: In 1935, Amine Younes had just returned from Brazil with two coffee mills and a dream.

He opened a humble coffee roaster in Bab Idriss Avenue to become one of the first roasters in Lebanon.

Younes worked hard, championed quality, and catered to people's love of bean extract. Years later, he passed on the crown to his son Souheil Younes, who carried it triumphantly from the heyday of the 1960s.

Bequeathed the legacy of his father, Souheil Younes managed to open a second branch in Hamra, before passing on the torch to his son, Amine Younes Jr. who grew the business to even greater lengths.

“We gave our undivided attention to safeguarding our authenticity and history that made us pass the test of time, and enabled us to grow from generation to generation,” Amine Younes told Annahar. 

Currently, Café Younes boasts a total of six branches across the country and one in Riyadh, KSA. 

The Younes family is an ideal example of the family-oriented business world of this compact Mediterranean country. 

In Lebanon, where around 80 percent of businesses are from the private sector, of which around 95 percent are family-owned, keeping family businesses strong is vital for the country’s economy. 

This is particularly crucial, given the fact that across the world less than a third of family businesses survive the transition from the first to second generation, and of those, another 50 percent don’t survive the transition from second to the third generation, according to Forbes. 

This, however, is one fold of family businesses. 

To many, the phrase “family business” connotes a small or midsized company with a local focus and a familiar set of problems, such as squabbles over succession. 

While plenty of mom-and-pop firms certainly fit that description, it doesn’t reflect the powerful role that family-controlled enterprises play in the world economy. 

Not only do they include sprawling corporations such as Walmart, Samsung, Tata Group, and Porsche, but they account for more than 30 percent of all companies with sales in excess of $1 billion, according to a study by the Boston Consulting Group. 

RESILIENCE OVER PERFORMANCE 

Conventional wisdom holds that the unique ownership structure of family businesses gives them a long-term orientation that traditional public firms often lack. 

“Our results show that during good economic times, family-run companies don’t earn as much money as companies with a more dispersed ownership structure,” according to a report by the Harvard Business Review (HBR). 

But, when the economy slumps, family firms far outshine their counterparts. 

“The simple conclusion reached is that family businesses focus on resilience more than performance. They forgo the excess returns available during good times in order to increase their odds of survival during bad times,” HBR highlighted. 

A CEO of a family-controlled firm may have financial incentives similar to those of chief executives of non-family firms, but the familial obligation they feel will lead to very different strategic choices. 

Executives of family businesses often invest with a 10 or 20-year horizon, concentrating on what they can do now to benefit the next generation. They also tend to manage their downside more than their upside, in contrast with most CEOs, who try to make their mark through outperformance. 

In retrospect, Café Younes has championed the art of resilience through a multitude of challenges that have confronted the business over the course decades, one of which is the fierce competition that Amine Younes Jr. is looking to defeat: The Third Generation Rule. 

One of the most prominent pieces of conventional wisdom about family business, and indeed wealth, is the three-generation phenomenon. It’s commonly referred to as the “shirtsleeves to shirtsleeves in three generations.” 

The adage is well known throughout the world, with the Italians saying: “from the cowshed to the stars and back to the cowshed,” and the Chinese saying “Wealth never survives three generations,” with many more sayings in between. 

“Through the passage of time, we have stood toe-to-toe with fierce competition, economic downfalls, political standoffs and many more,” Younes told Annahar, “but by staying extremely aware of our surroundings, staying patient, playing our cards right, and staying true to my father and grandfather’s vision, we are slowly taking steps to become more corporate,” he added. 

A FAMILY’S MONEY 

While countless corporations use stock grants and options to turn managers into shareholders and minimize the classic principal-agent conflict, family firms seem imbued with the sense that the company’s money is the family’s money, and as a result, they simply do a better job of keeping their expenses under control. 

“Family-controlled firms are especially judicious when it comes to capital expenditures or capex since our numbers show that most of the owners-CEOs at a family firm say that they do not spend more than they earn,” the study by HBR said. 

This sounds like simple good sense, but the reality is those words are never uttered by corporate executives who are not owners. 

At most family firms, capex investments have a double hurdle to clear: First, a project must provide a good return on its own merits; then it’s judged against other potential projects, to keep spending under the company’s self-imposed limit, according to a report done by Credit Suisse about family businesses. 

A STACKED ECONOMY 

Lebanon’s economy is known to be dominated by family businesses from both the small-to-medium enterprises (SME) to the big corporations and banks. 

The main reason for this is the lack of a developed stock market, according to Nassib Ghobril Chief Economist at Byblos Bank. 

“There are no incentives for family businesses to turn public in Lebanon, since the stock market isn’t that active, with the last transaction happening in 1998,” Ghobril told Annahar. 

THE ECONOMY THEN AND NOW 

Public companies had a clear advantage in the scale economy; they are especially suited to raising capital, according to HBR. 

But firms today are no longer looking out for endless opportunities. 

“Instead, they have to struggle for their very survival in an intensely competitive world of slower growth, lower returns, and more frequent economic crises,” the report added. 

For family-owned businesses, the story is rather different. 

Qualities often associated with family businesses, which were handicaps in the previous century, are turning out to be powerful sources of advantage, “giving them the potential to be more adaptive to the increasingly intense competition that all businesses are facing,” the study by Credit Suisse highlighted. 

Specifically, family businesses have the opportunity to achieve sustainable advantages in three key areas: 

1- The Talent Economy: From Mass Employment to a Higher Calling 

For much of the 20th century, success depended on a company’s ability to hire, train, and retain ever-larger numbers of employees, according to HBR. 

This was the era of the company man, where employees exchanged long-term loyalty for a livable wage and a pension plan. 

“In today’s knowledge economy, success depends instead on finding, empowering, and retaining the most talented people,” the study said, adding that businesses need to do more than offer competitive wages and benefits; they have to provide a “higher calling” that makes clear the intrinsic value of working for their companies. 

As a recent Bain & Company study put it, “employees want to work hard because they believe in their company’s mission and values, not just because they hope for a large salary or a fast promotion.” 

2- Investment: from Other People’s Money to Captive Capital 

In the scale economy, capital was the lifeblood of success. Given the pace of growth, capital was always in demand. 

In today’s economy, however, the priority has shifted from the quantity to the quality of investment. Outside funds bring with them a pressure to achieve short-term results that trade-off with value creation. 

A study by the Journal of Accounting and Economics has found that 78 percent of CFOs in public companies would be willing to make decisions that destroy value to achieve their quarterly earnings targets. 

3- Reputation: From Profit Motive to Sustainable Footprint 

Family businesses have a big head start in building a “sustainable footprint.” 

There is often a personal connection between the family and the communities in which it operates; reputations matter to families. Investments in the community are likely to have a social rationale in addition to an economic one. 

“In Lebanon especially, family businesses have always been more trusted by people than big conglomerates, since you’re offering them a local product and attempting to thrive in their neighborhood,” Younes told Annahar. 

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