Primogeniture Unmasked

The source: “Who Should—and Shouldn’t—Run the Family Business” by Steph­en J. Dorgan, John J. Dowdy, and Thomas M. Rip­pin, in ___The McKinsey Quarterly___, 2006: No. ­3.

Family-­owned companies tend to be better run than other ­firms—­except when they are run by the eldest son. Researchers with McKinsey & Co. and the London School of Economics studied 700 manufacturers in France, Germany, the United Kingdom, and the United States, ranking them on productivity, market share, sales growth, and market ­valuation.

On average, family firms were ranked no better or worse than the average company. But when ­family-­owned businesses were broken down into those run by outsiders and those run by the eldest son, the division was stark. Companies in which one family owned a majority of the stock but hired a professional to manage the operation performed 12 percent better than the average of all firms. Manufacturing busi­nesses run by eldest sons did 10 percent ­worse.

Stephen J. Dorgan, John J. Dowdy, and Thomas M. Rippin, all with McKinsey, explain that family ownership makes it possible for managers to take the long view. Unlike managers who must meet Wall Street’s expectations every three months, they feel somewhat less pressure to increase earnings every quarter. Family members have a direct stake in the outcome of decisions, and may pay closer attention to ­day-­to-­day operations than an outside board of directors. They are better situated than public shareholders to police any conflicts that arise between the interests of the managers and those of the ­stockholders.

Among ­family-­owned companies in the four countries, family management is most common in Britain, at 50 percent, followed by France, 44 percent, the United States, 30 percent, and Germany, 10 percent. Part of the explanation for these variations may be feudal legacy; part may be modern tax policy. In England and France, the eldest son typically inherits the family property. In Germany, the property is divided among the sons. Today, ­family-­owned enterprises worth $10 million or more receive inheritance tax exemp­tions of 50 percent in France, 100 percent in the United Kingdom, and 33 percent in Germany. There is no exemption in the United States, although there is wide­spread support among Repub­licans for abolishing what they call the “death tax” ­altogether.

Family management is not the curse, only the automatic designation of the eldest son. The authors observe that “someone who ex­pects to lead a company by birth­right may put less effort into acquiring the necessary skills and education than do people who expect to compete for their jobs.” Family-owned businesses that select their CEOs from all family members fare no worse than companies that select talent from hoi ­polloi.