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Do family businesses live up to their reputation as good employers? | NPM Capital

October 10, 2019
Do family businesses live up to their reputation as good employers? | NPM Capital

Family businesses are widely considered to be dedicated, model employers. However, recent research by the Erasmus Centre for Family Business (ECFB), associated with Erasmus University Rotterdam, questions whether that image is really deserved. Contrary to popular opinion, family businesses invest less in their employees than do non-family businesses, which can lead to missed opportunities and earn them the label of ‘less good’ employers than non-family businesses.

With a quote of Rutger Ruigrok, Managing Director at NPM Capital.

In a comprehensive quantitative study, the Erasmus Centre for Family Business compared thousands of family businesses and non-family businesses that are registered on the stock exchange, using eight different categories of management practices: inclusiveness, training, career and mobility, health and safety, working conditions, work-life balance, job security and dealing with conflict. They asked questions such as: are family businesses investing enough in their employees? Do they offer enough opportunities? Do the choices they make as employers impact on their financial performance? Does it matter whether a business is led by a family member or by an external CEO? And how do Dutch family businesses perform in comparison with their foreign counterparts?

Let’s start with a definition: the study described a ‘family business’ as an enterprise whose founder (or his or her descendants) is also the majority shareholder. The decisive factor is whether the founding family has ultimate control; if that is the case, the company can be led by either a family member or an external CEO who is not a member of the founding family and still be classed as a family business.

The study generated some important new findings. It turns out, for example, that many family businesses rely heavily on employee loyalty. Non-family businesses invest more in their employees through training, whilst at the same time accepting that those employees could leave the business at any moment to pursue a career elsewhere. Family businesses offer their employees job security, and they tend to expect loyalty in return.

Better returns
Strange as it may seem, family businesses are actually also less family-friendly. Compared with their non-family business counterparts, they make less of an effort to help their employees combine a career with family life through initiatives such as offering childcare options. They are also significantly less likely to offer flexible working arrangements.

Given all of the above, the study’s key conclusion is that family businesses are missing out on opportunities when it comes to being a good employer. In the researchers’ own words: “Family businesses could improve their financial performance by investing more in being a good employer. That isn’t just something that costs a lot of money – quite the contrary, in fact: this study shows that investing more in employees can actually be a very pragmatic decision. Better employers see significantly better returns: the yield on both total and equity capital can increase by a few percentage points.”

Although the researchers conclude from their data that non-family businesses score better than family businesses on a range of indicators, both in the Netherlands and globally, the study also highlights areas where family businesses score much higher in terms of being a good employer. They get higher scores on job security, for example: 58% of the non-family businesses reported compulsory redundancies during the research period, compared with just 34% of the family businesses studied, and staff turnover at the top of family businesses is also somewhat smaller. In line with these findings, the researchers also found that family businesses experience less conflict with staff than do non-family businesses. During the period of the study, 4% of the non-family businesses faced a strike and the associated loss of working days, whereas just 2% of the family businesses faced strike action, showing that employees in a family business are less quick to go on strike during a dispute with management.


Management practices that family businesses could capitalise on

Diversity policy
In general, family businesses tend to be less ‘inclusive’ than non-family businesses. In other words: they are more socially conservative. According to the researchers, family businesses would do well to invest in a diversity policy that has the support of the organisation.

Training and education
Family businesses place less emphasis on training and education than do non-family businesses. This opens up various possibilities for gains in this area, whether by investing in policies for employee training and career progression or by getting the existing management team to brush up on their knowledge and skills more often.

Promotion policy
The study showed that employees have a better chance of promotion in a non-family business, 41% of which have clear promotion policies, compared with 38% of family businesses. This is an area that deserves more attention from the management teams within family businesses.

Health and safety
It’s a good idea for family businesses to invest more in internal structures to detect and resolve problems with employees’ health – including mental health – and safety.

Flexible working hours
Family businesses are less likely to actively help their employees achieve a good work-life balance. Being more prepared to offer childcare and introduce more flexible working hours would bring family businesses more into line with modern working practices.

Sustainable chain
53% of non-family businesses have introduced an active policy on working conditions that includes provisions to prevent slavery and child labour. Family businesses need to be more willing to embrace such a policy, and they should also select their business partners as far as possible on the basis of compatibility with that policy. One common aspect of this trend is offering a company’s suppliers sustainability training, such as environmental, social and governance training (ESG).

Response from Rutger Ruigrok, Managing Director at NPM Capital:
“At NPM Capital we have a lot of experience in investing in successful family businesses. The finding that there is generally a low level of staff turnover within a family business fits with my experience. On the whole, these firms employ people who value job security and a sense of belonging more than an above-average salary, top-notch perks or an established career path. It is possible that these businesses invest less in training and education, but I don’t think that’s the result of a misplaced desire to save money; it’s more likely to come from the strong element of pragmatism that is a feature of many family businesses. The total focus is on the business, and other things can get dismissed as optional extras. In my experience, family businesses often succeed precisely because they are less concerned with chasing after all sorts of trends and fads. The conservative tendency identified in the study doesn’t have to be a negative quality, as long as it’s there in moderation. It’s great to give someone a second chance in a different position when they’re not performing well, but sometimes you also have to be able to say: sorry, this is it. That’s one area where we always try to challenge the executive boards of family businesses.”

Also read ‘Agricultural innovator Lely wins Family Business Award 2019’

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