McKinsey: Influence of family businesses rising globally

Family businesses are more present and stronger than ever, concludes consulting firm McKinsey & Company in its family businesses research. As these businesses are especially vital in emerging countries and these countries are expanding their global market share, the firm expects family businesses to further grow their presence. Family businesses experience several advantages over other businesses, but also have their own specific challenges that need to be overcome for them to flourish in the future.

Family businesses around the globe
Management consulting firm McKinsey & Company recently released the first issue of its new report on founder and family owned businesses. In the report, the researchers state that family businesses are now stronger, more vital, and more important than ever before, with an estimated share of 70% to 90% of the global GDP. Around one-third of the Fortune Global 500 companies are founder or family controlled, as well as around 40% of all the major listed companies in Europe.

Family businesses are especially important in emerging countries, where 60% of the private-sector companies with revenues of $1 billion or more are family businesses. In Southeast Asia this number is as high as 85%, in Latin America 75%, and in the Middle East 67% of businesses is run by families. As emerging regions and countries continue to grow, McKinsey expects the influence of family businesses also to grow as more and more family businesses will become leading companies over the next 15 years. The research suggests that in this period, more than 7,000 large companies expected to be established in emerging markets, of which 80% family run.

In its research, McKinsey also identifies what drives the successes of the family business. The report explains that family businesses tend to have long time horizons and a sense of mission that can suffuse and uplift the whole organisation. These businesses can confer a strong competitive advantage through emphasis of identity that creates a sense of belonging among employees. A second advantage of a family business is the fact that owner-managers can get things done quickly as they do not need to pass decisions up a chain of command or in front of an uncooperative board. A third benefit is the dominant home-field advantage, which is particularly present in emerging markets, as these companies have deep understanding of their countries and their industries.

Although family businesses experience many advantages, these businesses also face their own challenges. One of these is growth. McKinsey’s research shows that conglomerates in China, India, and South Korea are entering new businesses at a startling pace, currently on average one in every 18 months. Of these diversifying conglomerates approximately 70% are family owned. With their growth and diversification, old business models will no longer be suitable. An even bigger challenge is succession.  The report states that many family businesses falter at the first transition, from the founder to the second generation. Of the businesses that do succeed to the second generation, only 13% survives to the third generation.

Governance structure
To combat the last challenge, a comprehensive governance structure could help resolve the tensions that arise in the multigenerational family business. Important elements of this governance structure are the ‘Shareholders’ assembly’ and the ‘Family assembly’. Of which the first will deal with classical legal functions of the company and the latter, which typically includes spouses and the next generation, will foster family unity. The ‘Shareholders’ council’ is tasked with the regulation of the relationships among family shareholders and also between shareholders and the business, forming the most important link to the company for family-business owner. Through the establishment of such a set of councils and boards, these businesses are able to include the concerns of the diverse third generation, which according to the researchers, is crucial for family firms that have reached a certain size to tackle the short-term challenges and prepare the business for subsequent generations.