Perspectives from ISB

Companies in which founders and their families hold controlling stakes have the rare ability to maintain a long-term view. That can be a huge advantage, particularly when it comes to capital allocation. Should you be investing alongside them?

According to data compiled by the Boston Consulting Group (BCG), nearly one-third of all companies with sales in excess of $1 billion are family-controlled. Further analysis of the same data conducted by researchers at the Center for Management and Economic Research suggests that family-control can have a positive impact on the performance of a business and lead to superior long-term results for investors.

In 2012, researchers at the IE Business School in Madrid examined a sample of 2,423 publicly-listed European companies and found that those in which an individual or family held at least 20% of the shares outperformed by an average of 5.00% per annum during the decade ranging from 2001-2010.

A McKinsey study analyzed 154 publicly-traded companies in the US and Western Europe with greater than 10% family ownership. Total shareholder return for these companies was compared to that of relevant indices for the period from 1997 to 2009. The family-controlled companies in Europe outpaced the MSCI Europe index by approximately 2.00% per annum, while returns for the US-based companies exceeded those of the S&P 500 by approximately 3.00% per annum.

The number of publicly-listed companies in the US has declined precipitously over the past 20 years and currently sits at just half of the all-time high reached in 1996. Meanwhile, the number of publicly-traded companies with controlling shareholders appears to be rising. In 2002, IRRC estimated that 87 companies in the S&P 1500 had shareholders with ownership stakes of 30% or more. By 2012, that number had grown to 114, 79 of which had multiple classes of stock with unequal voting rights. In the period from 1995-2012, of the 27 controlled companies that completed IPOs, 20 had multiple share classes. And newly listed companies aren’t the only ones that seem to increasingly prefer multi-class capital structures. Companies with some of the largest market capitalizations in the world, including Google and Facebook, have added additional share classes with unequal voting rights recently.

There is considerable, if not indisputable, evidence supporting the theory that family and founder-controlled businesses with a single share class outperform over the long-term. At a minimum the data are sufficient to warrant studying the traits that make family-controlled businesses unique and to consider under what conditions they may be safe for investment. After all, the trend appears to be toward businesses with controlling shareholders becoming a higher percentage of the investible universe for most market participants. Developing an understanding of their distinctive characteristics, good and bad, and an awareness of the material impact different ownership structures can have on total returns will leave investors better off.

Source: Haran, Devin, July 27, 2017,