Guess Who’s in The Fast Lane?

GROWTH IS THE TALK of executive circles these days. Company leaders arc finding that cost-cutting and downsizing are not enough to improve a company’s long-term financial picture; you can only save so much. Beyond that, improving the bottom line depends on raising revenues.

However, as a June Wall Street Journal article noted, many executives are discovering that conventional growth strategies can backfire. Cutting prices may lead to price wars. Repositioning can bring even more competition. Extending product lines can cannibalize sales. Entering foreign markets can sap resources.

Family businesses may be the last place growth experts look for solutions. Most analysts and investors still view family firms as small, staid institutions, operated conservatively instead of aggressively. But a new stock index proves that America’s largest family owned public companies have provided better returns over the last 20 years than the glamor firms making up the S&P 500 Index. They provide lessons indeed.

The new Family Business Stock Index (FBSI) tracks the current and past performance of 210 of the largest family firms nationwide with publicly trade stocks. They provided an average annual total return of 16.6 percent from 1976 to 1996 versus 14 percent for the companies in the S&P 500 (see chart). As for stock prices, the FBSI companies rose 13.9 percent annually versus 9.6 percent for the S&P 500 during the same period.

The index was designed by Robert Kleiman, associate professor of finance at Oakland University in Rochester, Minnesota, and developed by NetMarquee Online Services in Boston. Rational Investors, an online investment management service in Cambridge, Massachusetts, charted the market performance of the 210 family businesses and compared it with standard indexes. Although the family businesses tended to be larger in market capitalization than the S&P 500, and had slightly greater price volatility, Kleiman and Rational Investors determined that neither size, volatility risk, nor industry explained the better performance.

“Clearly, there appears to be a ‘family effect’ that transcends business factors and results in better returns,” Kleiman says. He cited several factors. “Most families want to preserve their legacy and status in the world,” he says, “so they take a longer view. Their dividend payout rates are lower than in public companies. Their capital expenditures, that is, their reinvestment rates, are higher. They also tend to be more focused on leveraging their competitive advantage. And faster decision-making enables them to respond faster to changes in the marketplace. Research shows all these trends, and our data confirms them.”

To find the companies for the FBSI, Kleiman first searched the “Million Dollar Directory” for every company that had two or more officers or directors with the same last name. He then identified the firms from this list where persons with the family name held 10 percent or more of the company stock, as indicated in the Compact Disclosure Database. The result was 210 large, publicly traded, family owned and controlled firms.

Kleiman turned up many of America’s best known companies that have substantial family influence, such as Ford Motor Co., Wrigley Jr. Co., and Jacobs Engineering, along with some lesser-known stars such as Micron Technology and Danaher Corp. (see table). These firms are largely owned or controlled by single families. It is interesting to note that a number of them are high-tech and financial concerns, which don’t fit the stereotypical image of an old-line establishment business. The low 10 percent ownership threshold turned up several giants that few people think of as family businesses anymore, such as General Dynamics, and several that revolve around a single entrepreneur, such as Berkshire Hathaway, Warren Buffet’s personal holding company.

Top Performers in the Family Business Stock Index

Nonetheless, the vast majority of firms that make up the FBSI are mainstream family businesses. Their performance shatters the myths that family business owners fail to attain high growth rates due to conservatism, unprofessional management, or family squabbles. Their results also hold a message for investors who have traditionally shied away from family firms: You’ll do better investing here than in most of the rest of the stock market.

NetMarquee is now tracking the daily performance of the FBSI against the S&P 500, the Dow Jones Industrial Average, and the NASDAQ Composite on its World Wide Web site (http: //nmq. com). It also highlights the previous day’s top performing family business stocks. Meanwhile, Kleiman is diving into deeper analysis. His first step will be to match each firm on the FBSI with a nonfamily company in the same industry that has similar size and products. This “matched pair” analysis, growing in popularity among analysts, should shed more light on the family factors that lead to superior results.

The FBSI finally provides statistics to document the superior performance of family firms. How to actually run a company so it achieves impressive growth rates is another matter. For that, the best instruction comes from people who have done it or are attempting to do it. The three articles that follow suggest some approaches to planning growth.

— M.F.