Institutional Investors like Family Firms

In preparation for the next STEP Global Summit, we organised a short conference last week on the governance of listed and non listed family firms. Ethos Foundation, which represents major Swiss Institutional Investors and Pension Funds, provided some interesting data on the Swiss Stock Exchange. Among the listed companies, 107 have a controlling shareholder (more than 1/3 of the voting rights, and only 97 companies are purely public. In 75 companies the controlling shareholder is a family; so in Switzerland like in many other Countries, family firms account for a significant share of the financial market. This is a fact often overlooked by economists and corporate finance scholars who are still attached to the idea that ownership and control are normally split in large corporations . Is this fact positive or negative for our economy? Institutional Investors tend to consider family firms as a positive feature of our financial market, because family business ‘long-termism’ is aligned with the investment objectives of pension funds. Furthermore, family firms are more loyal to the local economy: more jobs are kept in Switzerland, which is good from a pension fund perspective. Finally, family shareholders exert a stronger control over management, preventing excessive reward packages. Obviously, there is also some bad news. Listed family firms are less contestable than purely public companies. This can penalise minority shareholders. In many cases, directors have excessively long tenures (often exceeding ten years). A fast turnover is bad because it favours short-term objectives. However, too much stability is also bad, because new ideas and visions tend to be stifled, particularly when they are most needed, for example during succession. An alliance between Institutional Investors and family firms is probably good for economies and societies alike, even though there is still much to be done in order to improve governance structures and practices. I believe that this is not unique to Switzerland, and I look forward to sharing ideas with our STEP scholars and enterprising families during the STEP Global Summit at USI (November 8th — 11th, 2017).

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