Family performance indices

© INSEAD, 2002. This contribution is based on INSEAD studies authored by Christine Blondel, Nicholas Rowell and Ludo Van der Heyden (Paris and London), and Sabine Klein and Christine Blondel (Frankfurt). The studies benefited from the financial support of BNP Paribas Banque Privée, and the Tetra Laval Research Fund for the Large Family Firm. Tias Business School  conducted the study of Dutch and Belgian stock exchanges using the same methodology (Drs Albert Jan Thomassen).

Patrimonial firms on European stock exchanges

Following our analysis of patrimonial companies on European stock exchanges, we would like to share our preliminary results regarding the London stock exchange, compare them with results in continental Europe and reflect on the notion of "identifiable ownership", a characteristic of patrimonial firms.

Consistency in continental Europe
We initiated our research with the analysis of the Paris stock exchange. We took the 250 largest companies traded on the Paris Bourse – ranked by capitalisation – and analysed their ultimate ownership at two points in time: at the end of 1993 and the end of 1998. Our purpose was to identify the number of patrimonial firms; ie, companies with identifiable individuals or families as first ultimate shareholders, holding a "significant" equity stake, defined as at least 10% of the shares in each step of the ownership chain. 

To our surprise, patrimonial firms at the end of 1998 represented 57% of the 250 studied companies, a number far exceeding our expectations. When we looked at companies where families or identified individuals held the majority of voting rights (more than half of the votes), the number still stood at 40% of all companies. Moreover, the number of patrimonial companies in the largest 250 companies had increased from 48% in 1993 to 57% in 1998.

Patrimonial firms were present in almost all sectors of the economy, except banking/insurance and energy/utilities where previously state-owned companies dominated. It should be mentioned that patrimonial firms were concentrated in the smaller range of companies, as reflected by their share of capitalisation: patrimonial firms accounted for 57% of the number of companies, but just 35% of the capitalisation.

The extension of the research to Germany, with the study of the Frankfurt stock exchange, showed surprisingly similar results. At the end of 1998, 51% of the 250 largest traded companies were patrimonial, also a significant increase from the end of 1993 (39%). Thirty-two percent of all companies were controlled by families or individuals through the majority of voting rights.

As in France, though, the patrimonial companies were concentrated in the smaller range, with these companies representing 19% of capitalisation. This important difference also stemmed from the very large size of some of the non-patrimonial companies, such as Daimler-Chrysler, Allianz and Deutsche Telekom.

The French and German studies demonstrated that direct spread ownership (ownership without one single identifiable owner) was the exception rather than the norm in both countries. While it could have been expected that most traded companies would have "a sea of dispersed owners", this happened only in 13% (Paris) and 18% (Frankfurt) of the cases. The remainder had either the state or another company (ultimately with spread ownership) as first shareholder.

Our colleagues from Tias Business School in the Netherlands, led by Drs Albert Jan Thomassen, also found that direct spread ownership was the exception rather than the norm on the Amsterdam stock exchange, with only 18% of companies in this situation. They found a lower number of patrimonial companies (39%) than in France and Germany, but this still represented the largest group of ownership types.

The UK: a different type of stock market capitalism
When we extended our study to the UK,  we found very different results – much more consistent with the general idea of the "typical" stock exchange. Indeed, the majority of firms (54%) had direct spread ownership; ie, had no single owner with more than 10% share of capital. Most firms counted a few financial institutions as main owners, each institution owning a small percentage of shares.

When one financial institution had over 10% of the shares, we considered that the company had identifiable ownership, and we started looking at the ownership of this institution. Interestingly, for 14% of the 250 companies studied, the first identifiable owner was a financial institution whose first owner was a family or an individual. So, this financial ownership was of a patrimonial nature, in the sense that an identified individual or family, being the largest shareholder, had a key voice in the decision-making process.

These "patrimonial financial institutions" owning stakes in companies at the end of 1998 included Schroders, Franklin Resources and even UBS, where Martin Ebner owned more than 10% of the shares and had a say on the board of directors.

Besides, 19% of the 250 companies were still patrimonial in the same sense as in continental Europe (had a family or identified individual as a major shareholder with at least 10% of the shares at each stage of the ownership chain). Though well-known large companies such as Sainsbury, BskyB and even Orange were patrimonial, most of the patrimonial companies were concentrated in the lower range, and these 19% of companies represented only 9.5% of capitalisation.

They were present in the alcoholic beverages, construction, distribution, leisure and other financial services sectors. Interestingly, they were often under-valued by the market, with some of them appearing in a "good" position in the list of the "least loved companies" (a list of companies undervalued by the market).

Another difference stemmed from the level of control exercised by families on UK patrimonial companies: in France and Germany, families had absolute or majority control in, respectively, 74% and 62% of the patrimonial companies, while in the UK no family had absolute control (over two-thirds of voting rights). Furthermore, only a handful, representing less than 15%, had the majority of voting rights.

In fact, some families or some patrimonial institutions had less than the 10% threshold that we used for our study and thus were not considered as identifiable owners. These results lead us to wonder whether the 10% threshold should be lowered to study Anglo-Saxon markets.

In continental Europe, families tend to keep control of their companies thanks to high stakes combined with the use of holdings and voting rights. In the UK a number of large owners have stakes below 10%, but in a context of spread ownership this may still be sufficient to ensure seats on the board of directors, and hence, significant control over the fate of the company.

Benefits of identifiable ownership
The scandals involving publicly-traded companies with spread ownership, in most cases, have occurred where the top management team or the CEO were the sole decision-makers, with very little effective guidance and control from board members or owners at large. Unfortunately, in the absence of any safeguards, we have seen some of these executives adopt inappropriate behaviour. The debate on corporate governance in traded companies is about the balance of control between top executives, owners and other stakeholders, and the role of the board.

Interestingly, what distinguishes patrimonial firms is the fact that they have identifiable owners. This brings a major difference to the debate on corporate governance. The top management team knows the major shareholder group and this group is represented on the board of directors.

If the family is well-organised and functioning, the values and goals are clear, as is the decision-making process. If the CEO is a family member, there is a clear alignment of goals between ownership and management (the "agency costs" of having different shareholders and managers are minimal). The family CEO knows that he is responsible in front of his own family and this should be a strong motivational force.

If the CEO is not a member of the family, he benefits from knowing his major shareholders and from having a clear understanding of their goals. He personally knows the people whose strategic input is key and who can ultimately fire him. In the successful cases we know, the family representatives and non-family executives form a very powerful team.

We believe that family ownership (identifiable ownership with values and long-term commitment) can be very beneficial to business, provided that families organise themselves in order to bring about the full benefits of this identifiable ownership. Raising responsible shareholders, understanding governance, and ensuring consistency of values and goals are elements that families can work on that can bring superior value.