Let us start by asking a question, what characterizes a family business? according to the World Federation of Exchange (WFE) recent report; family business may be expressed in a variety of ways, though typically includes elements of: (i) ownership: where the founding family has a reasonable ownership stake and the family do exert control through a majority stake in the company; and (ii) management: where the controlling family is involved in the management of the company, generally through family members holding senior management or key decision making roles within the firm.
As it were, family firms dominate the business landscape across many economies. They are major contributors to both employment and gross domestic product (GDP), accounting for over 50 per cent of private sector contribution to GDP in many markets (according to WFE’s survey) and range from micro-enterprises to some of the largest listed companies in the world. Recent news published by local media outlets confirms that about 10 families-run businesses’ control a relatively substantial part of the country’s private sector contribution to the GDP — in the process of their pursuing enterprising motives they generate wealth to their families while at the same time providing much needed jobs, paying taxes, facilitating the availability of goods and services that we somehow need for our living, supporting other businesses in their supply chain, etc.
While family businesses share many of the same qualities as those of more traditional companies (some listed in stock markets), they also have unique attributes and specific characteristics that impact the way they approach both management and growth of their business. In a family firm, for instance — professional life, work relations and business decisions co-exist with emotional attachment where informal bonds and personal choices are all so much intertwined.
Under such circumstances, the integration of family and business can be both a source of strategic advantage, especially in cases where well-run family firms outperform other businesses, but also family-run businesses can potentially be the source of inertia and governance-related challenges, where in some extreme cases may create significant socio-economic challenges to communities and societies in which they operate.
While the peculiar characteristics of family businesses are likely to influence how the family think about raising more capital via public issuance of equity or debt instrument and listing into the exchange, however, these companies are also influenced by economic, financial and managerial considerations that have little or nothing to do with being owned and managed by a family.
Thus, one may find cases where a founder-owned-managed firm, characterized by a strong paternalistic outlook and distrust of outsiders, reluctant to list on a stock exchange — we face this challenge in our society today, since we established the alternative window for capital raising by Small and Medium Enterprises (SMEs), called the Enterprise Growth Market at the DSE about four years ago — there has not been any of the family-owned businesses that have considered to pursue this route. Actually, out of 21-domestic listed companies, only two can trace their background to family businesses. Our engagements with some families to consider raising capital via the stock market have so far been futile. However, we remain patiently optimistic that probably third-generation owned and professionally managed companies would consider going public, should listing be needed to sustain the long-term growth of their companies.
Now, given the prevalence of family firms across markets and the importance of their economic contribution there is value, particularly for us as stock market operators and the supporting eco-system, in understanding the impact of ‘family-ness’ on the public capital raising and listing decisions and therefore engage in identifying possible mechanisms to enhance the attractiveness of equity and debt markets for these firms. For instance, I have come to learn that we need to understand that family firms are a discrete category of businesses with specific characteristics that impact the way they take decisions, perceive their activity and relate to stakeholders and other companies.
We need to accept the reality that for the family owners/managers the company is not simply an investment, but also a source of income and professional realization for the current and future family generations.
We need to appreciate that family owners/managers extract a significant amount of non-financial benefits from owning and administering a family firm, benefits such as the pleasure of owning and controlling a company that has their own name, or the benefit of influencing public opinion through their businesses, etc. Because of these, family owners/managers place a premium on maintaining control over the company and having family members involved with the firm.
To deal the competing motivations (i.e. control, emotional and sense of attachment, family values, professional realization by family members, etc) we, at the stock exchange and the whole eco-system need to consider to explicitly align family firms in our listing strategy i.e. addressing issues like adjusting the free-float requirements or strong demands of corporate governance requirements, etc.
We may consider adopting modified requirements specifically aimed at family business, for example allowing issuance and listing of dual-share structures.