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March 28, 2022updated 31 Mar 2022 8:44am

Are family-run firms set for investor reckoning?

Governance at family-run companies – a segment that includes groups from Walmart to BMW to Bacardi – is under rising scrutiny as shareholder engagement grows. But while asset owners are often opposed to dual-class voting structures, they typically don't have an investment policy on family firms.

By Paul Hodgson

governance issues at family firms
Rogier Snijdewind of PGGM says that if things take a turn for the worse at family businesses, their investors struggle to intervene. (Photo courtesy of PGGM)
  • Family-controlled firms are often seen as holding certain advantages, such as a long-term outlook, quick decision-making and a relatively unified approach. 
  • Questions are being asked as to whether the concentration of voting power in a few hands fits with a rising focus among investors and other stakeholders on responsible and sustainable corporate behaviour. 
  • Scandals at the UK’s BHS, car makers BMW and VW, and Canada’s Rogers Communications have put more scrutiny on both family-run groups and investors’ policies (or rather lack of them) around such firms. 

You can always rely on family – or can you? 

The growth in stakeholder-focused capitalism and a longer-term ESG-focused perspective among many corporations is mitigating the advantages that family-owned firms once had, while leaving in place the governance risks. This is a bigger deal than many might think: family-controlled businesses comprise around one-third of S&P 500 companies, for instance, and some very big groups elsewhere too. 

There is particularly strong representation of family businesses in the car and drinks industries. Think BMW, Fiat Chrysler, Ford, Tata Motors, Toyota and Volkswagen, and on the beverage side Anheuser-Busch, Bacardi, Heineken, Jose Cuervo and Thai Beverage Company. 

On the one hand, such companies are often seen as holding advantages over non-family-run businesses, including longer-term outlook, quicker decision-making, lower staff turnover and a more unified approach. 

But they also have clear downsides – most notably reduced independent oversight and external influence as a result of the concentration of power in a few hands. So when things go wrong, they can go very badly wrong, sometimes as a direct result of family wranglings, as high-profile scandals at the UK retail store chain BHS, BMW and Volkswagen, and Canadian group Rogers Communications have shown in recent years.  

Accordingly, concentration in voting power at family companies is coming under greater scrutiny – just as it is for other businesses, such as technology giants Google and Meta, Facebook’s parent, as shareholders increasingly seek to use their votes to steer companies towards having a positive impact amid the rising focus on corporate sustainability.  

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According to opinion provider ISS, 274 North American companies with family members on the board had an average governance quality score (GQS) of 7.3 as of December 31, significantly worse score than the 5.3 for companies without family members on the board (from an overall sample of 3,287 companies). The GQS ranges from 1 to 10, with a lower score indicating higher-quality governance practices and lower governance risk; it incorporates assessment of audit risk oversight, executive compensation, board make-up and shareholder rights. 

Limited shareholder voting power

Various big and influential asset owners admit to Capital Monitor that in the event of problems at family-run companies, their investors cannot intervene. As a result, they say, the perceived traditional benefits of such groups could become moot in the face of growing societal and regulatory pressure to consider ESG and wider stakeholder issues.  

Rogers Communications provides a timely example of how unequal voting power at family-controlled companies can be the root cause of governance disasters. A family dispute at the Toronto-based group helped contribute to a steep share price drop in late October last year. The Rogers family owns all the Class A shares, which represent about a quarter of outstanding stock, giving the family an outsize control over the company relative to its economic exposure. The publicly owned Class B shares have no voting power at all 

“The governance risks of family-owned companies are quite clear – lack of [independent] oversight – and the Rogers example makes them very clear,” Jamie Bonham, director of corporate engagement at Canadian asset manager NEI Investments, tells Capital Monitor.  

He points out that there are best practices that family-run businesses can employ that would mitigate some of the governance issues, such as ensuring that board committees are populated with independent directors and that there is an independent lead director. 

Rogier Snijdewind, director on the active ownership team at Dutch pension fund manager PGGM, expresses similar concerns. “Situations such as with Rogers Communications show that, if things take a turn for the worse, investors are unfortunately not able to intervene any more,” he tells Capital Monitor

“Investing in a family-controlled company is not an issue per se for PGGM, as long as this control is directly connected to the stake that is held in the company,” Snijdewind adds. “With Rogers, for example, this is by no means the case, as all the publicly traded shares carry no voting rights.” 

Last year, other members of the Rogers family removed Edward Rogers from the chairmanship and installed John MacDonald in his place. Edwards then successfully sued his mother and two sisters in the British Columbia Supreme Court to get his chairman title back. He appointed a new board, fired the existing CEO and appointed the former chief financial officer, Tony Staffieri, in his place in January this year. 

At the same time, Rogers was in the process of acquiring another family-controlled Canadian telecommunications company, Shaw Communications. The families that control the two companies have approved the deal, but the approval of three different regulatory agencies is needed before it goes through. If that happens, the Shaw family will become one of the largest shareholders in Rogers and two members of the Shaw family will join the Rogers board, arguably rendering it even less independent than it is now. 

ISS gives Rogers a GQS of 10, the lowest-possible score. Part of the reason for this is the make-up of the board, with only seven so-called independent directors (appointed solely by the Class A shares owned by the Rogers family), five directors who are members of or affiliated to the Rogers family, and two executive directors. Hence the ‘independent’ directors owe no fealty to public shareholders, so there is no material risk for ignoring them.  

And yet Rogers’ share price does not seem to have ultimately suffered – it is up some 20% since the end of October. Similarly, there does not seem to be an obviously stock price penalty for family-run companies (see chart below).

Lack of investor policy on family firms

Indeed, despite the curtailed voting rights involved, asset owners and managers across Europe and North America that Capital Monitor spoke to tend not to have policies specific to family-run companies. But they do oppose dual-class structures, which are in place at many such groups. 

For instance, the US-based Council of Institutional Investors (CII), representing asset owners and managers with some $48trn in assets under management, is opposed to dual-class shares but does not have a policy on family firms, says executive director Amy Borrus. But it requires them to have the same level of long-term corporate governance provisions that are consistent with the CII’s policies, she adds.  

Other institutions to oppose dual-class shares but to have no specific view on family businesses include the $255bn New York State Common Retirement Fund, nor the two largest public pension funds in California – the California State Teachers' Retirement System (Calstrs) and California Public Employees' Retirement System (Calpers), with $320bn and $500bn in assets, respectively – and the biggest in Canada, the Canada Pension Plan Investment Board (CPPIB), with C$550bn ($438bn). 

CPPIB’s voting guidelines are typical of the approach being taken: “In our view, enhanced shareholder engagement can foster a long-term shareholder base and serve to negate the perceived need for a controlling share structure.” 

All this suggests that family-controlled companies may face a reckoning in today’s investment environment in the form of ever greater pressure from ESG-conscious shareholders to overhaul their governance structures.  

PGGM says it is a strong supporter of the one-share, one-vote principle, describing it as “one of the most important safeguards for shareholders to ensure they can have influence over their investee companies”. The fund has opposed situations where companies – and in some cases legislators – have tried to deviate from this, says Snijdewind, without providing examples.  

Jamie Bonham of NEI Investments says that as the corporate world starts to adopt the approach that the creation of long-term value includes stakeholders beyond shareholders, family-run businesses lose their traditional edge in this area. (Photo courtesy of NEI Investments)

NEI Investments has taken a mixed approach to the issue of family firms over the years. It has consistently engaged with them over shareholders’ lack of voice and their unequal distribution of power, Bonham says. “We have voted, where we could, against the election of various chairs and family members for these reasons.  

“But we have also come round to the belief that some family firms are better able to take the long-term view,” he adds. Most shareholders were until recently focused on the short term to the detriment of the long-term interests of companies and stakeholders, Bonham says.  

However, as the corporate world starts to adopt the approach that the creation of long-term value includes stakeholders – such as customers and indeed wider society – beyond shareholders, family-run businesses lose their traditional edge in this area, NEI’s Bonham suggests.  

Governance: lack of regulatory response

With the level of governance failure evident at companies such as BHS and Rogers, one might expect regulators to place limits on family control. But there has been little sign of such thinking from the US’s Securities and Exchange Commission or EU regulators. 

The UK has at least taken some action after BHS, one of the UK’s oldest retail store chains, collapsed spectacularly after being used as a personal piggy bank by its owners, the Green family. The response was a parliamentary inquiry and a new corporate governance code for private companies.  

Anthony Schein, director of shareholder advocacy at Share, a Canadian non-profit organisation focused on responsible investment, is pushing regulators on the issue. “Access to public markets comes with responsibilities – including a share structure that allows for meaningful democratic oversight for investors,” he tells Capital Monitor. “Where dual-class share structures are in place, we advocate for a planned sunset to rebalance share rights.”  

‘Sunset’ dual-class shares revert to one-share, one-vote after a specified period, usually five to ten years after IPO. 

Ultimately, Share’s Schein says, “experience tells us that… the divine right to family control is more appropriate to royalty than to public companies”. 

Be that as it may, family-run listed businesses are likely to endure, and for good reasons. But they may well need to become more alert to environmental and societal issues – and more responsive to stakeholder pressure in that regard. 

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