Reference no: EM132861919

BUSINESS ETHICS. Read the case study and answer the question at the end:

Family firms and 'patient capital': thinking in decades, not quarters

Extracts from Galen G. Weston (2016), CEO of George Weston Limited, published in Re-imagining Capitalism (eds Barton, Horváth, Kipping), Oxford University Press.

'Reimagining Capitalism'

Family firms are the most prevalent corporate structure across the globe (La Porta, Lopez-de-Silanes, and Shleifer 1999). McKinsey & Company found that they represent one-third of the S&P 500 and 40% of the 250 largest companies in France and Germany (Casper, Dias, and Elstrodt 2010). Here in Canada, publicly traded family firms outperformed the benchmark TSX index by 25% between 1998 and 2013 (Spizzirri and Fullbrook 2013).

Across eras and geographies, family firms are prevalent, influential, and successful. In this respect, some suggest their stories are also understudied. Some of Canada's leading companies are owned and managed by generations of families: one of the nation's largest financial services firm, Power Financial Corporation; one of its best-known food companies, McCain Foods; and a world-class media company, Thomson Reuters; to name only a few. Our own company, George Weston Limited, offers one example, as an organization whose holdings include Loblaw Companies Limited and Weston Foods. It is more than 130 years old and among Canada's largest companies on various measures. As executive chairman, my father represents the third generation of family leadership. As deputy chairman, I am the fourth.

According to the Family Business Institute, research suggests our company had just a one-in-ten chance of making it to my father's generation with family ownership intact (Fernández-Aráoz, Iqbal, and Ritter 2015). This reminds us that most family firms do not survive. This chapter offers my observations on successful family firms, and the suggestion that those that do survive and thrive likely hold similar characteristics-grouped nicely under the notion of 'patient capital.' I would argue that these traits are common among highly successful companies, family owned or otherwise, but that they are greatly enabled by family control.

Four Traits of 'Patient Capital' in Family Firms

Among other measures, the success of companies can be charted on the basis of value creation over time. In the case of family firms that time is often defined as decades and generations, rather than the quarter-by-quarter growth of more meteoric success stories that may also create value, but which lack longevity. Similarly, for my family, retention of control is another important measure. If you support this view of longevity and control as complementary to value creation in measuring success, there is no question that family firms reap the benefits of 'patient capital'-a concept which has been well defined by various scholars. Sirmon and Hitt (2003: 343), for example, call it 'financial capital that is invested without the threat of liquidation for long periods.'

By creating value over decades and generations, rather than quarters and years, successful family firms outperform those seeking short-term shareholder returns. This manifests itself in four characteristics:

(i)   A predisposition for capital preservation and risk management over time-Successful family firms are predisposed to understanding the tradeoff between the short-term acceleration and the long-term accumulation of value. While every company will claim they are strategic, not all can claim they have the patience of a family firm.

(ii)   A reliance on company values and related people strategies-We subscribe to a concept that Brown Forman, maker of spirits such as Jack Daniels, calls 'planned nepotism' (Bellow 2003: 489). We do not seek professionals to run our family business; we use our business to develop professionals within our family.

(iii) An ability to buck conventional thinking-Family firms can make transformative decisions with a more balanced concern for their short-term impact, focusing instead on their long-term relevance. We scrutinize our business model every five years and truth-test our strategy annually to either confirm it or initiate change. Then, we can set and pursue our direction with focus and conviction.

(iv)  An appreciation for long-term social, demographic, and environmental trends-Successful family firms are particularly attuned to long-term trends. In some respects, this might suggest a humanist or environmentalist take on patient capital, but from a capitalist perspective this trend watching ensures that a business either profits from or perseveres through the developments that make the world a better or worse place.

A Note of Caution: Avoiding Common Pitfalls

For family firms, patient capital and the four related characteristics I have presented here are no panacea. They do not replace solid and consistent business management. Nor do they automatically bridge the many challenges common to family firms. Early in this chapter, I listed three out of dozens of potential risks: complacency, internal strife, and intergenerational succession. In the wrong combination or degree, otherwise positive traits-like a long view of investments and trends, or a preoccupation with values and legacy-can actually create complacency and inaction. Our family has buffered against that risk with a commitment to articulating clear five-year strategies, stress-tested annually. Similarly, we have held ourselves to account with a public float and independent board. And, less tangibly but equally importantly, we have fostered the family tradition of hard work, hired leaders who enhance our values, and made it a defining feature of our company for over a century.

The sister risks of internal strife and intergenerational succession are near inevitable in any family firm. Ours is no exception. However, at times when I have seen these risks managed well, I have seen empowered leaders, consistent family control, and the influence of non-family advisors and leaders.

Conclusion: Patient Capital beyond Family Firms

This chapter is intended to promote patient capital-specifically as illustrated by the four common traits in successful family businesses-as a worthy consideration for family firms, non-family firms, and policymakers alike. For non-family firms, I earlier offered the perhaps unhelpful view that the four positive traits of patient capital might rest beyond their grasp. Let me challenge my own assertion and say that the four traits promoted in this chapter are available to any business.

For those who agree with this point of view, two logical conclusions emerge: (i) the need to enable family firms to thrive; and (ii) the opportunity to encourage all firms-family managed or otherwise-to adopt the traits I have outlined in this chapter as their own.

QUESTION

What can the notion of 'patient capital' teach us about responsible governance in an increasingly globalized world?