Parent/child succession is a disaster, says top professor

Family businesses are “not as effective in terms of management and productivity”, and government policies that encourage them should be scrapped.

That’s according to Professor John Van Reenen, director of the Centre for Economic Performance at the London School of Economics, who told CampdenFB that having policies that help businesses to pass management on the next generation is “usually a big mistake”.

Van Reenen’s stance against policies that support family businesses stem from research he carried out, which looked at 10,000 firms in 20 countries.

This found family businesses were not as effective in terms of management and productivity as their non-family counterparts. Management was most effective in firms owned by dispersed shareholders, followed by private equity.

Founder owned and run was least effective in terms of management, while businesses that were owned by a family with a family member as chief executive came second from last.

“Usually, having a family member, particularly the oldest son or grandson, run a business seems to be a disaster,” said Van Reenen, who will speak at the Family Business Network summit in London in October. 

There is a “variety” of research, including studies by Perez Gonzalez, that found that firms that appoint eldest sons do worse than those with an external chief executive.

Van Reenen said this is because such children will typically be less well educated and younger than other chief executives.

“If the son knows he’s going to inherit the business, then he has less incentive to work hard at school and university as he knows he’ll be boss – this is called the ‘Carnegie effect’,” he added.

“There is also a knock-on effect on able non-family managers who are in family firms. No matter how hard they work, they’ll never get the top role.”

However, Van Reenen also admitted that the problem “is more to do with who runs the business and not who owns it”.

The research found that firms that were family owned, with a non-family chief executive, were among the top three performers.

He also said the study didn’t look at the long-term effects of private equity ownership on a business’s productivity or management.

Meanwhile, the Institute for Family Business, a UK-based lobby group, recently told CampdenFB that family business-friendly policies, like the UK’s business property relief, are important for long-term investment andgrowth.

Grant Gordon, IFB director general, said such policies were “key strategic tools” for the transfer of shares and the continuation of the family business, allowing families to plan for the future and not have to sell the business to pay inheritance tax.

“The assets of the business are protected and the family can continue investing and growing the business,” he said.