Why Returns Generated by Family Run Companies Outdoes Non-Family Ones

Wipro, Reliance Industries (RIL), Dr Reddys Laboratories, HCL Technologies, Cipla, and Divis Laboratories are the six Indian firms that feature prominently in top-ranked companies.

New Delhi: The return generated by family-owned businesses have been higher than the non-family owned ones since 2006, finds a study from Credit Suisse.

Using its proprietary ‘Family 1000’ database of over 1,000 publicly listed family or founder-owned companies, the Credit Suisse analysis suggests that since 2006, the overall ‘Family 1000’ universe has outperformed non-family-owned companies by an annual average of 370 basis points (bps).

The research house classifies a family-owned company where either the founder/family owns at least 20% of the company’s share capital or where the founder/family controls at least 20% of the company’s voting rights.

“Reasons for this include superior revenue growth and cash flow returns. Family-owned companies offer safety in periods of market stress – during the first six months of this year, they outperformed non-family-owned companies by 300 bps,” the Credit Suisse report said.

Family-owned companies, the Credit Suisse findings suggest, tend to be more profitable. Since 2006, revenue growth generated by such companies has been over 200 bps higher than that of non-family-owned companies for both smaller and larger companies. That apart, they, on average, tend to have slightly better ESG scores than non-family-owned companies.

Fig.1 The table reflects the returns of family-owned companies vs. non-family owned companies.

Even COVID-19 has not dented their spirit even though 80% of family-owned businesses saying that they have been negatively impacted by the pandemic.

Despite the impact on revenue growth this year, family-owned companies surveyed viewed COVID-19 as slightly less of a concern to their firm’s prospects with 21% of such companies saying the pandemic had either not had a significant impact on their business or had even been a net positive.

“Family-owned companies have also resorted less to furloughing their staff than non-family-owned companies (46% versus 55%),” the Credit Suisse report said.

Indian firms score high

Among regions, performance has been strongest for family-owned companies in Europe (470bps) and Asia (over 500bps) per annum since 2006. North America, on the other hand, family-owned companies showed a more moderate outperformance of around 260 bps per annum.

The report covered 12 markets in APAC, including Japan, which continue to dominate and represent a 51% share of the universe, with a total of 540 companies and a market capitalisation of over $5.56 trillion.

Fig. 2 The table presents the top-ranked companies in the USA, Europe and Asia.

The universe includes 111 Indian family-owned companies, with a total market capitalisation of $922.7 billion. Wipro, Reliance Industries (RIL), Dr Reddys Laboratories, HCL Technologies, Cipla, and Divis Laboratories are the six Indian firms that feature prominently in the top-ranked companies in the Asia ex-Japan region.

“Family-owned companies, including those from India in our proprietary database, continue to show signs of outperformance in growth and profitability as well as resilience to the ongoing COVID-19 pandemic,” said Mihir J. (Mickey) Doshi, Managing Director and Country CEO of Credit Suisse, India.

By arrangement with Business Standard.