Georg Ludwig Hartig wrote in his Instructions on Taxing Forests or for Determining the Timber Yield of Forests that "No long-term forestry management is possible or even conceivable if logging is not calculated on the basis of sustainability. Any judicious management of the woodlands must allow future generations to derive at least as many benefits from them as the current generation."
These instructions appeared in 1804. They tell us where the term "sustainability" (which, unfortunately, would come to be overused) originally came from: forestry.
Thinking across generational lines
Hartig's instructions provide lots of food for thought on the issue of forestry development and use. One thing that foresters must think about is how to plant the edges of forests to limit storm damage, which tree species are most resistant to climate change, and which combination of trees make the most sense from both an industrial and forest-management points of view.
One more thing: foresters can never be sure whether their efforts will be successful, as the results do not show up for several more decades. In short, foresters plant today for their grandchildren. The same goes for family-owned companies. All decisions that managers make today will also have an impact on future generations.
This aspect, along with the family's values and reputation, its close relations with its clients, and an often high degree of specialisation - all adequately expressed in the term "familyness" - have been the subject of much academic research. However, we wanted to look more closely into the financial aspects of family-run companies and determine whether this long-term way of thinking also shows up in financial metrics.
To do so, we commissioned a study on this issue from the Handelsblatt Research Institute.
Significantly better long-term performance
The study selected its sample of family-owned companies and the comparison group from European companies, as family-owned companies have a long tradition in Europe. One of these is The Coatinc Company, Germany's oldest family-owned company, which was founded in 1502 under the name Siegener Aktiengesellschaft and is now being managed by the family's 17th generation (Source: Handelsblatt, 3 June 2019).
Other criteria for selecting the sample of family-owned companies were:
- The company must be publicly traded;
- At least 25 percent of its shares must be in family hands (when including all stakes held by family members); and
- The company must have a market cap of no more than €25bn.
This upward limit on market capitalisation was added to prevent potential skewing by large companies that, while meeting the aforementioned definition of a family-owned company, often do not behave like one. Two examples that come to mind are Volkswagen and BMW.
The sample companies were split up into three major groups:
- Small caps, with market caps up to €5bn;
- Midcaps, with market caps from €5-10bn; and
- Large caps, with market caps from €10-25bn.
Forty family-owned companies from the following sectors were selected:
- Automotive and transport,
- Consumer goods and trading,
- Industrial processing, and
- Real-estate services and construction.
They were compared to non-family-run companies in the comparison group. These sectors were chosen as, in Europe, they contain the highest percentage of family-owned companies. So, let's look at the study's findings.
Simply comparing performances over the sample period since 2002 (the longest possible period with a stable sample) shows that family-owned companies have outperformed markedly.
Interestingly, total shareholder return (ie, price performance plus dividends) was relatively synchronous between the two groups until the financial crisis, before beginning to diverge significantly in 2009.
The study also found that outliers in terms of out- and underperformance were more likely to be found among non-family-owned companies. Most family-owned companies lie in a broad and stable middle field, and as a result, as a group produced far greater returns over the period under review.
This observation alone suggests that family-owned companies possess some mechanisms that provide stability.
In terms of working capital ratio, both groups of companies had solid liquidity positions over the period under review.
Reminder: the working capital ratio compares the percentage of current assets - ie, the value of inventories and supplies, and receivables from deliveries and services - to short-term liabilities. When it is more than 100%, all of a company's short-term liabilities can, in effect, be financed from current assets. The higher its working capital ratio, the more secure its liquidity position.
A comparison of this indicator on a country basis (ie, when that country has more than three representatives) within the group of family-owned companies shows that seven German and four Swiss companies have significantly higher working capital ratios and thus contributed heavily to the aforementioned finding.
In conclusion, this first part of the article shows that there are significant regional differences in the number of family-owned companies in Europe, that companies in the aforementioned sectors (regardless of whether they are family-run or not) clearly possess a solid liquidity position and that, during the review period family-owned companies produced significantly better total shareholder returns.
In the second part of this report, we will compare the two groups on the basis of other metrics, which, as we have hinted at here, will contain some very interesting findings. In addition, we will answer the question we asked at the start - what investors can learn from foresters and family-owned companies.
Guy Wagner is chief investment officer at BLI - Banque de Luxembourg Investments
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