Brian Sturgess is Economic Consultant to the Centre for Policy Studies and Managing Editor of World Economics.
Family firms dominate economic activity across the world. They are one of the main generators of sustainable wealth. This alone should be a signal to governments to take note of the importance of family businesses to a country’s economic well-being. Any party committed to enterprise and a pro-business agenda should adopt policies that will create an environment where family firms can grow and flourish. A couple of years ago a report by Oxford Economics for the Institute for Family Business (IFB) estimated that British family businesses generated £1.1 trillion in sales and supported 9.2 million private sector jobs.
While there is a general fear that loose monetary policy is keeping a host of ‘zombie’ firms on life-support whose ultimate survival is threatened when interest rates are normalised, family owned and operated firms appear to be surprisingly robust. A recent study by Professor Nick Wilson of the University of Leeds and his colleagues found that that family firms are significantly less likely to fail than their non-family counterparts.
This conclusion came from a study based on a large-scale survey of over 700,000 private family and non-family firms in the UK. The study also found that the structure of the boards of family firms, which often have to rely on internal funding of projects, are more careful in their spending. They scrutinise business opportunities with greater intensity and take fewer business risks than private firms. Interestingly, the study also found 80 percent of family owned businesses are more gender balanced, having at least one female director.
Despite the evidence of superior survival, surveys show that family businesses are challenged more by taxation, unnecessary regulations and red tape than their non-family controlled rivals. Employment legislation, particularly on the regulatory burden around tribunals and dismissals, is a significant burden for family-businesses. While the extension of the number and scope of regulations on firms and the introduction of the minimum wage during the Blair-Brown administrations fell proportionately more on family firms, affecting their ability to create wealth, the Coalition could do much more for the sector. In 2012 the government helped by reducing corporation tax rates and raising capital allowance relief to £250,000, but nothing has been done to remove the discriminatory regulations in the tax system that reduces the incentive for family members to invest in their own business. The connected persons’ test for the Enterprise Investment Scheme (EIS) also discourages investment in family start-ups.
One major problem facing family firms is intergenerational survival is less assured. Research by the US-based Family Business Institute shows that while 88% of current family business owners believe the same family or families will control their business in five years, in reality only about 30% of family and businesses survive into the second generation, 12% are still viable into the third generation, and only about 3% of all family businesses operate into the fourth generation or beyond. The main reason family companies fail to survive through the generations is generally due to poor family business succession planning. In the United Kingdom sensible succession planning is hampered because there are tax incentives to gift business assets to unready successors without the stability and structure offered by a Trust.
Unfortunately, although the benefit of policies encouraging family businesses will only be realised over a number of years by creating more investment making the economy more productive and dynamic, short-term populist policies - such as the Chancellor’s desire expressed in January to raise the minimum wage above the rate of inflation - will harm the job-creating powers of family businesses.