The Power of Family Businesses

Economics

The word economy comes from the ancient Greek concept of a household, an oikos (oikonomia). Ever since the ninth and eighth centuries BC, this notion of a household demonstrated the complete integration of work, family, and community.

This integrated model of life continued to prevail largely until the onset of the Industrial Revolution in the last half of the nineteenth century, at which point more people migrated to cities. Work occurred in factories and (sometimes) offices, separating the workers from their families. Kids went to school while the parents worked. Thus, we fragmented our lives into separate compartments, making it harder for us to hold them all together.

Nevertheless, one aspect of the Greek oikos—the family-owned business—continues to dominate the global economy. In a 2020 academic paper published by the Oxford Review of Economic Policy, researchers found that “family ownership is the dominant form of corporate ownership of public corporations around the world." In addition, these researchers state that 60 percent of all US partnerships in private corporations are family businesses. (The paper outlines the criteria for defining what constitutes a family business.)

That research is backed up by numerous other academic studies. Work by researchers at the University of Reading in the UK (2018) states that “family businesses dominate the global landscape” and that they “account for two-thirds of all businesses around the world, generate 70-90 percent of annual global GDP, and create 50-80 percent of jobs in the majority of countries worldwide.” In the US, family firms produce a total of 64 percent of the US GDP.

An academic article published by the Journal of Family Business Strategy in September 2022 bolstered this view, saying that “family firms are the most ubiquitous form of business organization in any world economy.”

Despite the Industrial Revolution’s impact of family fragmentation, this research demonstrates that huge numbers of people are still integrating family relationships with work, business, and the broader economy. And this system of work and business appears to be working very well.

In the Oxford paper cited above, the researchers found that family businesses have a higher long-term survival rate than non-family-owned companies. They found numerous reasons for this better success rate.

“Family ownership reduces the classic agency problem between owners and managers by . . . uniting ownership and management in the same individuals,” they write. “Families provide their firms with a long-term orientation and ‘patient capital’ that allows them to undertake investments from which, in the long run, all shareholders (and other stakeholders) will benefit” (p. 8).

They add that family firms, because the owners are so financially and emotionally committed to the company, are better able to withstand macroeconomic downturns. Research shows that they are far less likely to let employees go during recessions than non-family-owned businesses.

“We find that family firms are less sensitive to both positive and negative profit shocks,” according to researchers at the University of Pennsylvania’s Wharton School of Business. “[This suggests] that founding families retain control [of their companies] when doing so gives them a firm competitive advantage, not just when they can appropriate private benefits of control at the expense of non-family shareholders” (p. 4).

It also appears that family businesses are better at applying innovation than non-family businesses, at least in general terms. The 2019 study by the Journal of Family Business Strategy found that many family businesses are more conservative and cautious and that they are often less willing to take on the risk of innovation. However, when they do move forward, “family firms can be more efficient in converting innovation outputs than non-family firms.” All the research demonstrates that “family firms invest less in innovation but perform better, or innovate more with less” (p. 6). In other words, they are more cautious about taking on risk, but when they do, they remain committed for the long term to that investment.

The Relational Factor

As with the early Greek notion of an oikos (household), when family and business were always fully integrated, the same occurs with modern family-owned firms. What happens in the business can affect the family relationships, and what happens in the family relationships can affect the business. There are positive aspects and difficult tensions related to this integration.

On the positive side, when there is strong family cohesion, the businesses benefit from mutual trust, long-term commitment to company goals, and from a generational succession of the company. Because everyone in the family has a financial and reputational stake in the success of the company, they tend to work harder toward the company’s success over the long term. They are less willing to “cut their losses” and quit during economic downturns, according to the 2019 study cited above. The 2022 paper also emphasizes that family members become emotionally attached to their companies, and therefore are willing to invest personal capital to get through economic shocks. This makes these firms more resilient (able to rebound after a shock).

The Reading University study concluded that family businesses usually bring more benefits to the local communities where they are based. The family members typically have strong social ties with the stakeholders who helped launch them. They have deep roots in the localities where they were born, which rarely happens with non-family-owned businesses that are launched by a scattered group of investors.

However, problems within family relationships can undermine the future of a business. Researchers have looked extensively at how poor family cohesion can affect these companies. Problems like divorce and marriage can generate conflicts over ownership rights in successive generations, or cause divergences in how a company is run (i.e., the vision and values of a firm).

The potential relational pitfalls of family businesses, however, do not seem to be impacting the persistence of family ownership over many years. The 2020 Oxford paper found that, overall, “family ownership is remarkably persistent.”

The importance of relational cohesion, then, becomes vital for family-run companies. The owners need to learn how to integrate their personal lives with the public life of running a company, without harming either side of the equation. This is one reason why GCN Press published our book titled Working Together: A Practical Theology of Workplace Relationships. (It can be purchased here: https://bookshop.org/shop/gcnpress).

Despite the tensions and benefits related to a family business, all the research indicates that these companies continue to be the economic powerhouses of our global economy. That old idea of the oikos has had a lasting appeal.

Research for this article was provided by Tom McMahan

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