The asset management industry has a central role to play in furthering good corporate governance in publicly traded family businesses, according to a report from March Asset Management which shows that good corporate governance has helped publicly traded family businesses become more profitable.
March CEO Miguel Angel Munoz says: “Diligent asset managers need to take corporate governance into account when valuing family businesses. Strong governance, together with the greater long term profitability demonstrated by family businesses, provides a compelling investment case. Managers have a central role to play in that process.”
Munoz’s comment follows publication of a report from the Madrid based Business School which shows that those publicly traded family businesses (FB’s) with good corporate governance are more profitable than those FB’s which demonstrate poorer corporate governance.
The report ‘Corporate Governance in Publicly Traded Family Firms’ is the third to investigate the “Family Premium” phenomenon which is the outperformance of public traded family business versus non-family businesses (NFBs). Professor Cristina Cruz, one of the co-authors of the report,1 said that improving corporate governance was a “profitable” investment for family businesses because the research showed that those family companies which have above average corporate governance, were more profitable than those with lower standards of corporate governance.
Cruz says, “In earlier reports we showed that listed ‘family firms’ out-performed listed non family firms. This third report shows that adding ‘company with good governance’ to that combination substantially improves performance and so the ‘Family Premium’.
The report is based on research which compared 1,127 publicly traded companies in the United States and Europe. In the report, Prof Cruz commented about the “superiority” of the ‘Anglo-Saxon’ model over its European counterparts when it comes to good corporate governance practices.
She said of ‘Anglo Saxon’ firms: “US and UK family firms continue to lag behind non-family firms in terms of governance, but their situation is much better than their peers in the rest of Europe”.
Cruz points out that while European family businesses were heading “in the right direction”, they still had “some way to go” to reduce the corporate governance gap. She suggested that it was in the interests of European Family Businesses to improve corporate governance because “in an increasingly global market investors are looking for profitable companies that meet universal good governance criteria, regardless of their origin or their capital structure.”
The research went into some detail as to which aspects of corporate governance should be improved by European firms. Particular attention was given to the working composition of the board of directors. Cruz says an efficient board, with the required committees, balanced composition in terms of independent directors, non-executive directors and members with proven professional experience, helped family firms mitigate the negative aspects of family control, maximising their capacity to create value for shareholders.
Independent non-executive directors (NEDs) are those who are wholly independent of the family and have no significant financial interest in the company. The research demonstrated that companies who increased the number of independent NEDs on their boards also increased their profitability regardless of whether they were FBs and NFBs. However, FBs did not benefit when the increased board representation involved NEDs who were not independent.
Cruz feels that companies not only needed to balance the types of directors on their boards, but they also needed to ensure that “those who occupy a seat on the board are able to bring maximum value to the company.”
