The Role of Family Cohesion in Family Business Profitability

Successful Family Business - 3 Tips

Small and family businesses can capitalise on deep bonding and long-term focus to improve real performance.David Harland, Managing Director of FINH

A strong family equals a strong business. Studies prove that cohesive family businesses generate stronger returns and last longer than non-cohesive ones. Families who are unified last longer and build stronger customer loyalty. This is a critical element that no serious family business can ignore.

Strong emotional connection is important for all companies. The Harvard Business Reviewsays business productivity is directly linked to positivity in the workplace, and it specifically highlights empathy and emotional assistance to employees. The Australian Government also recognises that companies should invest in worker health and wellbeing.

Family businesses are particularly adept at building emotional connection. Research from Ernst & Young (EY) consistently demonstrates this. In fact, many of the most successful corporations in the world try to create a family-type atmosphere where employees feel cared for and respected.

For example, Google is virtually synonymous with personal care for employees. Facebook and Twitter openly copy many of Google’s innovations. Oil giant Chevron touts “the Chevron way,” and specifically advocates two rules: safety and care for one another.

Here are three demonstrated reasons family cohesion matters for family businesses:

1. Cohesive family businesses earn higher return on equity

The bonds between family members hold deep and primal psychological importance. It is not surprising that researchers identify strong links between communication patterns and levels of family satisfaction. Open and honest communication helps family businesses form stronger bonds.

To determine the strength of family bonds, in one 2014 EY survey researchers asked family business members if they agreed or disagreed with the following statements:

  1. Members of this family care deeply about one another.
  2. Members of this family are proud of being part of the family.
  3. Members of this family stick together.

Family businesses that answered yes to these questions out-earned and out-lived companies that didn’t.

Approximately 35 per cent of the difference between family businesses’ returns on equity (ROE) can be predicted by the strength of family bonds.

2. Without cohesion, family businesses fail

Between 80 and 90 per cent of family businesses fail before reaching the third generation, both globally and in Australia. I’ve written extensively about the need to strategically tackle family business longevity, especially around the areas of succession and conflict resolution. (These are critical topics for advisors, too).

The best family businesses plan for the long term: succession, reinvestment and a generational perspective. According to the St. Gallen’s Center for Family Business, approximately 44 per cent of family firms in the S&P 500 are owned by a fourth generation or older; just 5 per cent of other family firms can make such a claim.

The cohesive family business, however, has the ability to focus on a long-term sustainable business model. This means taking proactive steps that might not generate profits until years later, rather than only worrying about the next quarter.

In a quarterly results-driven business, managers may face a strong incentive to choose of immediate profits instead of the right long-term move. Family businesses are different. When it is your children or grandchildren who will inherit the company, owners have a reason to plan deep into the future.

3. Cohesive families build customer loyalty

According to EY, just 50 per cent of family businesses refer to themselves as a family firm. Of those who did, the top reason was “the family strongly identifies with the company and feels that the business is a large part of who they are as a family.”

Cohesion builds internal pride and promotes customer loyalty. HBR studies shows customer loyalty increases when a family company openly advertises that it is family run.

Employees, too. It highlights “shoring up relationships among family member through philanthropic activities and family-business branding” as a key to family business success.

The most famous and successful family businesses have great brands. These include names like Wal-Mart, The Hershey Co, Thompson Reuters, Tata Motors and Levi Strauss and Co.

Australia boasts strong family names like Visy Industries Holdings and Linfox Australia. All of these companies developed a serious brand with recognition extending far beyond the local communities in which they began.

This article was first published in CPA’s InTheBlack:

If you are looking for a family business adviser, please don’t hesitate to call us at FINH on 3229 7333.