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U.S. Family-Run Companies–They May Be Better Than You Think

Authors

  • Henry McVey,

    1. Managing Director in the Equity Research Division of Morgan Stanley and is the firm's Chief U.S. Investment Strategist
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  • Jason Draho

    1. Consultant to Morgan Stanley in the production of the Journal of Applied Corporate Finance and related content
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      This article is based on a research report put out by Henry McVey and his team in August 2005 titled “A Family Portrait.” The report benefited greatly from the contributions of Parul Saini, David McNellis, Frances Lim, and Nicole Davison. A number of Morgan Stanley analysts shared their insights on family companies: David Adelman, Douglas Arthur, Lloyd Byrne, Scott Coleman, Nigel Dally, Scott Davis, Chris Gutek, Matt Ostrower, Robert Ottenstein, Bill Pecoriello, Jamie Rollo, Jami Rubin, Stephen Volkmann, and Mark Wiltamuth. Damaris Skouras also provided invaluable insight into family-run companies. Any remaining errors are the responsibility of the authors alone.


Abstract

Despite the common perception of public family-run companies as poor investments, the evidence shows that they actually perform quite well. And there may be some good reasons for this: A family that both owns and controls a company avoids the classic agency problem—the natural tendency of professional managers to pursue some private interests at the expense of their shareholders—that confronts most publicly traded companies. The family's concentrated, long-term investment in the company and knowledge of the business make them potentially effective and highly motivated monitors.

Using a sample of “true” family firms from the S&P 500 (one that deliberately excludes “founder companies” like Microsoft and Dell), the authors show that these companies have in recent years produced considerably higher stock returns than their non-family counterparts. At the same time, family companies with dual-class share structures produced lower returns than those with a single class of shares, and the returns to dual-class firms with insider-dominated boards were still lower. Specific examples highlight the different ways that families maintain control, the consequences of the CEO choice (family member versus professional manager), and the potential benefits of the family's permanent presence, including a long-term investment focus and reputation for fair dealing with corporate stakeholders.

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