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Family Firms in the News – Discussion

April 7, 2011

A post on a Harvard Business Review blog describes how Harvard, Stanford, and the London School of Economics conducted a survey of thousands of medium sized firms in over twenty countries. The purpose of the survey was to define and evaluate management practices in relationship to ownership structure. It looks for a correlation in performance as measured by productivity, profitability, sales growth, and survival. This survey seems to show a correlation between family firm and poor management. (Remember correlation is not necessarily causation)

Some of the reasons cited for this lack of management success in family firms are:

1. A small pool of talent like one’s children does not mean there will be the best talent available. They provide an example of Olympic candidates coming from former gold medalists.

2. “The Carnegie Effect”: when Andrew Carnegie made his intentions to pass on all of his wealth to his heir, what then became the incentive for the heir to work hard?

3. Inheriting management seems to have a demoralizing effect on other talented managers in the firm. There is little incentive to work when you know there is a glass ceiling.

Interestingly, the data shows that family firms with an outside CEO fare better than those that do not.

Defending Family Firm Management:

The article provided a few reasons why family management of a family firm might be prudent:

1. Heir learns directly from the founder

2. Greater trust between the organization and management since they are family.

 For the full article: Family Firms Need Professional Management

As practitioners at a family firm or advisors to family firms, what do you think about this data? Does it seem to cover the whole picture of family firms?

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