Feature of the Week

March 31, 2013 10:55 pm

A familial model finds favour once again in the classroom

Ferguson

As the world of big business lurches from one crisis to the next, a quiet change of perspective is taking place in many European business schools. The focus on schooling students to expect the prize of a well-paying executive-level position at a large multinational is giving way to a fresh look at one of the oldest types of enterprise in the world – the family business.

While some schools are looking to ramp up their family business education offering, others are expecting to benefit from never having taken their eye off the ball.

The number of family businesses in Europe supports the rationale for renewed interest in such enterprises. Julian Franks, professor of finance at London Business School, estimates that in Italy, which he considers to be the European country with the strongest tradition of family businesses, 60 per cent of companies are family-owned or family-controlled. In France and Germany the proportion is 40 per cent, and in the UK it is only 20 per cent.

Marina Puricelli, professor of small and medium-sized enterprises and family business at SDA Bocconi School of Management in Italy, believes the numbers for Italy are even stronger than Prof Franks thinks. She estimates that 90 per cent of Italiancompanies have fewer than 10 employees.

“The financial crisis has shown how strong the family business model is,” she says. “Before 2007, the model of our small and medium-sized family businesses was considered to be something of a weakness. That perception changed after the financial crisis.”

Ajay Bhalla, professor of global innovation management at Cass Business School, City University London, has also seen a resurgence of interest in the family business among the younger generations in the UK and Europe.

“Research shows that after the economic crisis, family businesses have contributed far more than non-family businesses,” he says.

“They survived better than non-family businesses. They were risk- averse so they had fewer problems. They don’t hire that many people so they don’t fire that many people either,” Prof Bhalla adds.

However, many business schools currently have only limited family business offerings. In contrast, IMD in Switzerland is aiming to educate family members themselves. Joachim Schwass, who leads IMD’s family business programme, says that the school offers a broad family business education as part of its MBA programme, but it also provides week-long and three-day courses aimed at individuals, as well as tailored tuition for specific families that can take place at IMD or at a location of the family’s choice.

In common with his counterparts in the UK, Prof Schwass has recently noticed a more positive attitude to family businesses, which he says is partly the result of the scandals of excessive executive pay in dispersed-ownership companies. “There’s no way a family business chairman would ask for six years’ salary as part of a non-competitive agreement,” Prof Schwass says.

He has seen lots of different data produced by different bodies, all with slightly differing definitions of what constitutes a family business. However, Prof Schwass believes that a broad consensus appears to be emerging that family businesses are contributing two-thirds of gross national product across Europe and two-thirds of employment too.

For IMD, which has always emphasised family business education, the focus is on how to steer families through the inevitable disputes that afflict them at each generation handover and to ensure the companies achieve strong growth.

“Europe is typically the base for more dynastic family businesses,” says Prof Schwass, adding that multi-generational businesses face their own particular challenges.

“With increasing numbers of family members you need to look at strong business growth to support them all.”

Prof Schwass says that it is useful to consider family businesses in three broad stages: the founder generation, where the entrepreneur plans succession, the sibling generation, where the offspring of the entrepreneur begin to take over the reins, and the cousin generation, where the siblings’ children are brought in. Most European businesses that he deals with are at the cousin generation or beyond, he says.

“The issue with the cousin stage is the large amount of diversity – some are in and some are out. You need to develop a governance structure that reflects that.”

There’s no way a family business chairman would ask for six years’ salary as part of a non-competitive agreement

- Joachim Schwass

Josep Tapies, chair of family business at Iese Business School, Barcelona, is also seeing strong demand for the school’s family business offering. He teaches much of the Spanish-language family business tuition (Iese also offers English-language family business tuition) and many of his students are from Spain and Latin America. Most family businesses in those regions are only second-generation. Spain is the exception to the European norm, he explains, because most family businesses were formed after the Spanish civil war, meaning they are only at the second-generation stage.

Teaching relies on case studies and students are encouraged to share their own family business experiences. Prof Tapies says that there are distinct cultural differences between Spanish and Latin American students, which demand different teaching approaches. “We have to confront different challenges.”

Whatever the particular focus of European schools, the renewed interest in family businesses across Europe means the schools have a job to do.

“I believe it is critical for family business members to get an education in a business school or, at the very least, to gain experience working in another company,” says Prof Tapies.

Italy is one of the top 10 economic nations in the world, adds Prof Puricelli. “And if we are in the top 10 it’s because of small and medium-sized companies. We need to reflect this in our teaching,” she says.

 

Multi-generational ventures decline in the UK

 

“Family businesses are very much representative of the societies they are embedded in,” says Ajay Bhalla, professor of global innovation management at Cass Business School, adding that in countries where the power of the family is being eroded, so is the standing of the family business.

This might explain why family businesses have been on the decline in the UK, he believes.

The UK has almost 3m family businesses employing more than 9m people. But “the UK is a sad case in point,” says Prof Bhalla, adding that 30 years ago there were many more multi-generational family businesses in the UK than there are now.

The problem is partly structural. “We should look at what we have now in the UK. It is very difficult for family businesses to borrow money. Unless you are very cash rich you cannot expand.”

The UK government has ignored the British equivalent of the Mittelstand, the small and medium-sized companies, over 90 per cent of which are family owned, that have done so well in Germany, adds Prof Bhalla.

Julian Franks, professor of finance at London Business School, also sees problems with the status quo in UK.

“Should the decline, or the low level, of family business in the UK worry us? One view is that it is a natural result of a sophisticated capital market. Another view is that we have a less diversified corporate economy because we have such a low percentage of family businesses. I tend to take the latter view rather than the former.”

He sees family businesses as the perfect antidote to short-termism and believes that the idea that corporations were healthier with dispersed ownership models is flawed.

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