Family companies

Family companies – Trouble making and inequality

This document is an economic article published by the English language weekly magazine “The Economist”. This article deals with family companies and raises several matters. Indeed, it focuses, first of all, on the trouble making encountered by the latter and, second, on the inequalities that they create and maintain over time. Thus, the core line of argument developed by the author is that family companies are characterized by a management pattern that has evolved over time to overcome the hurdles it has faced.

On the one hand, the author places emphasis on the family companies’ benefits and drawbacks. Thus, they mainly help to preserve gains and control from one generation to another, and this is the main goal of this form of organization. In addition, there are other benefits such as the trust passed on inheritors to facilitate decision-making. Lastly, they also have more difficulties to maintain a strong brand image from one generation to another.

However, the author balances his or her point of view by saying that family companies show numerous drawbacks that might imperil them. Actually, the main issue that is underscored is that of succession. Indeed, succession is at the origin of many quarrels, causing rivalries to attain leadership, the maintenance of initial goals set up by the founder, but also the lack or surfeit of heirs, the impact of death on the company’s performance. Lastly, all these factors might, as a consequence, reduce the company’s performance or lead to its demise.

On the other hand, in addition of these initial drawbacks, family companies resort to unethical means that create deep economic inequalities in order to maintain the family company’s wealth. Indeed, family companies tend to use various tools such as : the introduction of strong incentives to hand down skills and knowledge over generations; the establishment of convoluted ownership structures like conglomerates ; or the use of foundations or investment funds to dilute the ownership stakes at the utmost to ensure the control by the same group. They also take advantage of pyramid control and dual-class shareholding. Besides, family companies are very likely in today’s society to place emphasis on new means, such as the use of political marriages or even political connections.

In the end, there is no denying that these methods, characteristic of poor corporate governance, lead to the emergence of deep economic inequalities such as poor or no upward mobility due to cronyism.

Last but not least, although economic inequalities are less common generally speaking, they tend to return over time and raise several concerns. Hence, the anti-pyramid movement, the foundation of associations that promote ethical practices and legal reforms have become more widespread and allowed family companies to shift toward a new management model, characterized by stronger corporate governance.

464 words.

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