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Investors fare better in the fold: Family owned firms outperform others

People walk past a Rogers store in Montreal on Tuesday, June 26, 2012.

Ryan Remiorz/The Canadian Press

Family owned companies in Canada have a better track record for investors than widely-held companies or even controlled companies that are not owned by families, a new University of Toronto study has concluded.

A review examining 15 years of performance data for Canada's largest family companies whose shares trade on the Toronto Stock Exchange -- including giants such as Power Corp. of Canada, Thomson Reuters Corp. and Rogers Communications Inc. -- shows family owned firms averaged a compound annual growth rate of 7.7 per cent compared to 6.1 per cent for the rest of the S&P/TSX composite index.

It means $100 invested in family firms on Jan. 1, 1998, would have been worth $304 by the end of 2012, compared to $243 for other companies, for a difference of 25 per cent.

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The research was done by the Clarkson Centre for Board Effectiveness at the University of Toronto and examined returns for 23 companies that fit the criteria of being at least 30-per-cent controlled by a family and having control of the firm change to the next generation of the family or having a family member in a clear position to succeed to the next generation. That means firms were excluded if they are controlled by an entrepreneur but there is no clear evidence of family succession.

Clarkson Centre manager Matt Fullbrook said family firms typically have far longer time horizons than widely held firms, and their "baked in" focus on long-term planning may be a factor in their greater success.

"They've got a different sort of goal internally -- they need to protect their family's wealth, and they're concerned about ensuring their family is taken care of for generations going forward," he said. "This is a different type of decision-making driver than at many widely held firms."

Other academic research has also shown that family firms have longer CEO tenures, he said, and typically operate with a culture that embodies the values of the founding family, which can help to unify an organization.

Mr. Fullbrook said his centre's annual governance ranking of boards in Canada contains biases against family-owned firms -- including penalties for companies with dual-class shares and those with fewer independent directors -- but said he wants to do further research to consider whether good governance at these companies should be assessed differently.

"I don't think we have all the answers yet, but what this shows us is that there certainly has not been any market performance reason to discourage people from paying attention to family firms," he said.

The findings show an outperformance by family firms on average over the past 15 years, but particularly between 2010 and 2012, when family firms earned compound annual returns of 10.4 per cent compared to 7.8 per cent for other companies.

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One of the consistently highest performers in the group was Atco Ltd., which had a 15-year annual compound growth rate of 12 per cent and a 30-year rate of 13 per cent. Atco provided funding for the study, Mr. Fullbrook said, but was not involved in designing the research or approving the work.

The average 7.7-per-cent compound annual return for family firms in the past 15 years compares to returns of 4.7 per cent for controlled firms owned by a non-family shareholder, such as an individual or an institutional investor. The report said it appears family control may be a more significant driver of performance than just control in general.

Family firms with dual-class shares -- which means some shares have more votes than others -- had 15-year returns of 8.8 per cent compared to 5.1 per cent for family firms with equal voting shares.

Mr. Fullbrook said it is difficult to draw firm conclusions from the finding, however, because there were only five family-owned companies with equal voting shares, so the sample was very small. That group also includes several companies that had notable share price declines in the past decade, including Thomson-Reuters, George Weston Ltd. and Maple Leaf Foods Inc.

The 23 family-owned companies studied are highly concentrated in sectors such as retailing and communications, and their composition does not mirror the resource-heavy weighting of Canada's broader markets. But Mr. Fullbrook said most of the companies also did well on average compared to their own industry peers, although there was wide variability.

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About the Author
Real Estate Reporter

Janet McFarland is the real estate reporter for The Globe and Mail’s Report on Business, with a focus on residential real estate trends. She joined Report on Business in 1995, and has specialized in reporting on corporate governance, executive compensation, pension policy, business law, securities regulation and enforcement of white-collar crime. More

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