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4 ways family businesses can lead the pandemic recovery

Family business members gathered around table
Jiawei Ye
Platform Funding Lead, World Economic Forum Geneva
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Family Businesses

This article is part of: The Davos Agenda
  • COVID-19 pandemic has revealed an intergenerational crisis and urgent need for a better model of capitalism.
  • With its long-term vision, stewardship and values-driven strategy, the family business model can be part of the global solution.
  • Economic recovery requires a more resilient and sustainable model that measures value and externalities holistically.

The COVID-19 pandemic has profoundly changed every aspect of our lives. Amid the short-term public health and economic crisis, it has also exposed an intergenerational crisis, putting the long-standing divisions and imbalances of our economies and societies into sharp focus.

This unprecedented challenge has been a moment of global awakening. Our past economic and social systems, driven by shareholder primacy and short-term profit maximization, is in question. In this context, society at large demands action toward a more resilient, equitable and sustainable economic, societal and environmental model.

How businesses have responded to the disaster has proved that a more principled management philosophy exists. A particular form of organization—family-owned businesses—when well governed and united around purposeful owners, possesses the right ingredients for a responsible business model.

Similarly, the Belgian chemical company Solvay has created a solidarity fund to support their employees affected by the crisis. Solvay’s extended senior leadership team voluntarily agreed to forego 15% of their half-year salary to contribute to the fund. Nicolas Boël, Chairman of the Board and family member, has contributed 50% of his annual salary. The families, who are represented by over 2,300 shareholders, agreed voluntarily to contribute one-third of their final dividend towards the fund.

Family businesses are one of the oldest and widely represented form of organizations, ranging from small corner shops to household names like Swarovski, publicly listed companies like Walmart or privately held like Mars. Some of the family businesses have been pioneers in stakeholder practices and have been operating under strong ethics for years.

The Chinese “Yih-Jong” (mansion of righteousness), originally established by the Fan family in 1050 to systematically support clansmen and local communities, is one of the earliest stakeholder models and was subsequently followed by numerous prominent business families over several centuries. The same value-based principles are found in the 19th-century British Quaker business families, who prospered under the conviction that business is an extension of the family and a deep sense of responsibility toward the workforce, local community and society.

Family businesses think about generations and legacy, they seem to have crafted the secrets of long-term resilience. How can family businesses lead a sustainable pandemic recovery, and what solutions can they bring to the intergenerational crisis?

1. Longevity improves prosperity

Public companies operate on a quarterly basis; while families businesses operate under the principle of generational legacy. Businesses need to think beyond the quarterly culture, that has created structural fragility, and secure sustainable long-term value creation. The average tenure of a public company CEO is seven years, whereas their counterparts often stay for a quarter of a century in privately held firms.

Facing global issues which go well beyond the quarterly reporting cycles, family businesses operating with long-term perspectives, can make the right strategic and investment decisions for their stakeholders.

Evidence shows that long-term oriented businesses have been exhibiting stronger performance. Family businesses that take a long-term perspective have continuously outperformed non-family-owned peers, and shown greater resilience during the COVID-19 pandemic.

Chart displaying long-term firms performance over last 15 years
Long-term firms exhibited stronger fundamentals and performance than all others in the last 15 years.
Chart showing market capitalisation.
Market capitalisation weighted and sector adjusted returns – family owned alpha through time.

Stein Erik Hagen, Chairman of Orkla, Norway’s leading supplier of branded consumer goods, sees family as purposeful long-term shareholders with responsibility to act in the best interests of all stakeholders. Putting sustainability at the core of their strategy, the family decided overnight to replace palm oil with alternatives in all its products.

Camilla Hagen Sørli, next generation and board member of the family investment holding, pointed out: “As a family-owned business, the decisions we make today we will be measured by future generations. To create a legacy to your next generations, you have to invest in what is around your business. There is no business without people and environment that are well.”

The 132-year-old Hong Kong based Chinese sauces producer Lee Kum Kee has been undertaking a plan to keep the family business alive for another 1,000 years (the average lifespan of companies listed on the S&P 500 index is less than 20 years). How could a company last a millennium if it does not have the trust of its employees, the love of its consumers or a habitable Earth?

2. Exercise responsible ownership

Families with a controlling interest in their business have the ability to implement radical changes throughout the organization, quickly and efficiently. Steering hundreds of billions of assets and thousands of employees, their power is unrivalled.

Family ownership also comes with identity and legacy – family aspirations are central to business strategies and inspire stewardship across the whole organization. This heightened responsibility tackles the myopic and free-rider issues of anonymous and dispersed shareholders that tend to ignore the broader and longer-ranging implications of its actions and externalities.

Nicolas Pictet, Chairman of the Board of the Swiss private bank Pictet, expressed this sense of stewardship: “We see ourselves as custodians of wealth. Our mission is to constantly improve our value, and then transmit the business to the next generation in the best possible condition.”

Third generation and Deputy Chair of British sports and fashion business Pentland Group, Andy Rubin, worked with his family shareholders recently to update their company’s purpose. The new purpose is “to create value for all stakeholders”, and for their brand management division, the purpose is “to build a family of brands for the world to love, generation after generation.”

The Chearavanont family, owners of Thailand’s largest family-owned conglomerate, Charoen Pokphand (CP) Group, has a guiding principle to create prosperity for the country, local communities and the company. Suphachai Chearavanont, CEO of CP Group and third generation family member emphasized: “This remains central to everything that we do, especially during difficult and challenging times.”

During the pandemic, the company has donated $29.14 million to medical professionals and healthcare workers where it operates. The group is not only committed to avoiding lay-offs due to COVID-19, they also announced a nationwide recruitment drive of 28,000 jobs to help solve unemployment.

Have you read?

3. Business for good

Many businesses have been giving back to society through Corporate Social Responsibility (CSR) or philanthropic activities. However, this is a partial approach as the overall externalities are not assessed in a holistic way. Businesses can engage in charity or CSR activities whilst unethically maximizing profit on the other hand – this dichotomy is no longer tenable.

With a holistic ownership approach, families can ensure a positive impact in business, family office and family giving. Businesses owning families need to be net contributors of their externalities, and this demands taking an integrated view of their overall footprint.

For André Hoffmann, philanthropist and Vice-Chairman of Roche, one of the largest pharmaceutical companies in the world, owners and shareholders not only want to know the return on investment, but also the impact of the company they own or invest in. Producing profitable solutions is important, but the concept of prioritising profit at any cost then “fixing it” with philanthropy is no longer enough to meet society and consumers’ expectations. Businesses should tackle the problem by leading with sustainability. “A ‘business for good’ is the most impactful vehicle contributing to stability and sustainability.”

4. Embrace stakeholder capitalism

Shareholder primacy and short-term profit maximization have dominated management practices for the past 50 yearsand businesses’ negative externalities have often been perceived as “someone else’s problem”. Incredibly, 157 of the world’s 200 largest economic entities are corporations – these multinationals have tremendous power in society.

Recent evidence highlighted in McKinsey’s research, shows that a stakeholder business model can be profitable and more competitive in long-term, optimizing the return for all stakeholders. Similarly, research shows that the majority of ESG funds outperformed non-ESG funds over multiple time horizons and have higher survivorship rates. Suggesting it’s possible to achieve the best of both worlds: reconciling profit, people and planet.

Pie chart showing ESG.
Paying attention to environmental, social and governance (ESG) concerns does not compromise returns, rather the opposite.
ESG and non-ESG assets held in European mutual funds (EUR bn)
ESG and non-ESG assets held in European mutual funds (EUR bn) Image: Figures compiled by author Jiawei Ye based on PwC report: 2022 – Growth opportunity of the century?

André Hoffmann is convinced that the root of the issue lies in the way businesses measure value. Historically, only financial capital has been measured and reported on, whereas environment and society have been placed in a different metric. The world needs to be measured in a more inclusive and sustainable way, a framework that includes natural, social and human capital.

Roche has been ranked as the most sustainable pharmaceutical company of the Dow Jones Sustainability Indices (DJSI) for 11 years. For André, focusing on long-term sustainability demands financial investment, and it’s seen as a benefit to the company not a cost. What we need is a change of mindset and a philosophy of stakeholder responsibility.

Building a responsible economy

The family business model has its virtues and weaknesses, but these examples reveal that a better model of capitalism is possible. When shareholders, the board and management are well governed and aligned under strong values, businesses can drive positive change with profound impact.

The world recognizes the need for a more efficient method measuring stakeholder welfare. A global movement is coalescing to improve disclosure, reporting and tracking on environmental, social and governance (ESG) performance. The World Economic Forum Family Business Community has embarked on a journey towards stakeholder capitalism, committing alongside the corporate sector to rebuild a better economic and social system.

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