According to management theories of the 1990s, family-controlled publicly listed firms were dodo birds, heading toward extinction. Yet, they survive -- and thrive, as a recent study by National Bank of Canada shows. In fact, they exhibit such outstanding long-term performance that NBC has launched in August an index tracking the group.
Out of the nearly 250 companies included in S&P/TSX Composite Index, the NBC study identifies 43 family-controlled businesses. Their outperformance is plain to see: from June 2005 to June 2018, the S&P/TSX Composite Index shows a total cumulative return of 132.7%, or 6.7% annualized; the NBC Canadian Family Index exhibits over the same period a total cumulative return of 206.2%, or 9.0% annualized.
"Until recently, there was a broad consensus that family companies were better suited to past eras," writes the report. In a modern rules-based economy, claimed proponents, "family-controlled businesses would be pushed to the margins by the rise of public corporations owned by diverse shareholders and run by professional managers," benefiting from a greater capacity to raise capital, attract highly qualified workers and earn higher profits.
It turns out that family-controlled entities do a better job in most of these instances, according to the NBC study and many other studies that it refers to. Notwithstanding the simple fact that family-run business are not the exception but rather the overwhelming rule, involving 80% of companies worldwide, from neighborhood "mom and pop" shops to global behemoths like Volkswagen, Samsung and Walmart.
In reality, under the "family business" label, it is corporate structures with multiple-vote shares that critics target, considers Yvan Allaire, executive president of the Institute for Governance of Public and Private Organizations, in Montreal. "They clamor for shareholder democracy with one share/one vote rights," he says. "But if you want corporations to have the same rules that apply to civil society, I reply to them, you will vote only every four years and newcomers simply won't be allowed to vote. When I tell them that, I don't hear many replies."
The multiple-vote share issue is real, however the NBC index extends beyond it, since only 27 of the 43 firms in the NBC index feature dual-class share structures. "Our focus is not share structures, but long term versus short term horizons," highlights Vincent Joli-Coeur, vice-chairman, financial markets, at NBC.
Soft-factor advantages
The outperformance of National Bank's 43-stock index hinges mostly on cultural and qualitative factors. "It is the 'soft' components that give a longer-term advantage," says Angelo Katsoras, geopolitical analyst at National Bank of Canada and one of the study's authors.
The key competitive advantage of family-controlled businesses holds in their capacity to better resist market pressures to favour short-term profits over long-term investments that will only deliver results many years down the road, sometimes a whole generation later.
Another key advantage is that such companies are more effective in keeping debt levels under control than their widely held counterparts. This leaves them "in much better financial position to weather significant economic downturns, such as the recent 2008 financial crisis, a period in which cash became king," writes the study.
Finally, family-controlled companies show lower employee turnover rates, which allows them to benefit from their employees' greater experience and dedication. Notes the study: "While the average tenure of CEOs in large U.S. companies is 4.6 years, those currently in charge of the 100 largest family businesses have already served an average of 13 years."
An investable index
There are many definitions of what constitutes a family business encompasses. But Joli-Coeur points out that, in designing the index, NBC "wanted an index that is investable based on criteria from sources that can be publicly verified." Indeed, for a smart beta index like the one NBC puts forward, the criteria must be readily available and "crunchable" inside automated algorithms.
The first criteria is control. To be precise, this control does not need to rest with a family group; it can be held by a number of individuals who exercise a family-like control. If a founding family or founder is at the helm, the cut-off point is control of 10% or more of voting rights; if individuals, or related entities, hold the reins, they need to directly or indirectly control 33.3% of voting rights.
Once controlling shares are determined, the index applies various filters to percolate down to the eligible companies: stock universe, size, liquidity, equal-weighting of stocks. "We put together all the pieces that allow the creation of an ETF with superior investing potential," claims Joli-Coeur. We own the license to this index and many ETF manufacturers could be interested in acquiring one to exploit it. We are presently in discussion with independent ETF managers and we expect to see developments in the next few quarters."
The numbers lined up by the NBC study "certainly paint a compelling picture," recognizes Matthew Dolgin, equity analyst at Morningstar in Chicago, who covers the stocks of 
Rogers Communications (RCI.A/RCI.B) and Shaw Communications (SJR.A/SJR.B), two family-controlled companies that are part of the NBC index. "I certainly agree that having a long-term view is an advantage that you won't have otherwise," he says.
But "family control" can cut both ways. If the family or individuals in charge really hold the welfare of the company to heart, fine. "But they can also be interested in self-dealing and tend to milk profits and vote dividends for themselves," Dolgin points out.
"It's great that these companies in the index tend to outperform," he adds. "But a shareholder should still be concerned that he is at the mercy of the family or the individuals who control the votes. If they don't entertain a short-term view, fine. But if they're only in it to line their own pockets, well… You have to accept that you will get the bad with the good."
