|
|
 |
|
| 100 Year Plan Part II |
The Third Generation Bounce
Dwight Cass
01/01/2005
|
Founder-CEOS create value in family businesses. Second-generation CEOs destroy it. And third-generation family CEOs build it up again.
These are the somewhat startling conclusions of a research paper published last summer by Professors Belén Villalonga of Harvard Business School and Raphael Amit of the Wharton School at the University of Pennsylvania. The two set out to examine how family ownership, control and management affect firm value by analyzing the performance of Fortune 500 firms between 1994 and 2000.
 Villalonga and Amit found that the family businesses on the list that still had their founder in the CEO’s office, or serving as a chairman alongside a professional, nonfamily CEO, enjoyed the best performance. (They determined this by calculating each company’s Tobin’s Q, a gauge of the quality of a company’s investment decisions, computed by dividing the market value of its assets by their replacement value.) Companies with second-generation CEOs and no involvement by the founder saw their Tobin’s Q plummet. The performance of those with third-generation management rebounded; their Tobin’s Q was in line with professionally managed nonfamily businesses. “Third- and later-generation family firms are not significantly different in value from nonfamily firms,” Villalonga and Amit concluded.
Many observers have noted the decline in performance of family firms under the auspices of the children of entrepreneurs; the conventional wisdom holds that they fail to develop their own skills and independence while laboring under a charismatic, talented founder. Many second-generation managers also see themselves as stewards of the family legacy, and are therefore more conservative in their management, which may also lead to underperformance. As noted in “Wrestling for Control of the Family Business” (Worth, December 2004, page 61), intergenerational conflicts can also take their toll.
Generation X-CEL
None of this explains why third-generation managers should be more successful at creating value than their immediate forebears. One possible reason: There are far fewer of them. The Family Firm Institute, a research group, estimates that only 30 percent of all family businesses survive to the second generation, and fewer than 12 percent make the leap to the third.
Certainly some variant of natural selection is at work in the realm of family businesses. Those that endure to the third generation usually have done so by taking extraordinary steps to ensure their survival: embracing industrial-strength governance and management policies, aligning the family’s interests with the business in such a way to allow needed sacrifices to fall equitably among owners and so on.
The third-generation families running these surviving companies have evolved beyond the first generation’s often-paternalistic management style, characterized by a rigid hierarchy, close supervision and distrust of outsiders. They have embraced the sort of meritocratic management that relies on nonfamily professional specialists, or have invested in developing training programs and vetting procedures for family members who wish to participate in running the business.
|
|
|
|
|
|
|
