Gill South: Family values pay dividend when the times get tough

Historically, family businesses do better during downturns. They tend to have less debt, a longer-term outlook and don't panic in the face of adversity.

There are even statistics to back up that view: since the January 2007 launch of a global index of family firms compiled by the bank Credit Suisse, such companies outperformed the MSCI World Index by 4.8 per cent.

And there are a lot of them: family operations account for 70 per cent of businesses worldwide and 60 per cent of New Zealand businesses, according to accounting and consulting group Grant Thornton.

Christine Woods, senior lecturer at the University of Auckland Business School, which has set up the Family Business Research Group, defines a family business as one in which two members of the family significantly contribute to operations.

One family should own more than 50 per cent, and the CEO or managing director views the firm as a family operation.

Well-known local family businesses include Corbans, Resene Paints, Sleepyhead and the Todd family interests.

There are qualities which other businesses can borrow from family firms, particularly in tougher times.

One common denominator Woods has found among family businesses is a "not on my watch" mentality - in other words, "this business is not going to fail while I'm in charge" - whereas a corporate manager is more likely to give up on a struggling company in bad times.

Family businesses are especially good at integrating into the community, which stands them in good stead in recession, says Woods. The wine industry, in New Zealand and overseas, has a long heritage of being run by families, she says.

One of those operations, and the largest private wine company in New Zealand, is Villa Maria, which is working its way through the rocky conditions now facing the industry.

The most difficult challenge has been dealing with the grape surplus, which has led to discounting across the industry and pressure on margins, says Villa Maria chairperson Karen Fistonich, daughter of founder George Fistonich.

But the company acted swiftly to meet the situation. "When the 2008 grape harvest came in 40 per cent above expectations, we immediately put a plan in place to sell all the surplus wine before the next harvest, irrespective of the short-term effect on the balance sheet," she says. "At Villa Maria, change is always by team consensus."

The Fistonich family has watched other New Zealand wine companies go public or merge with other companies and eventually sell to overseas interests - and has no intention of following suit.

"My father and I share similar goals and aspirations for Villa Maria: to remain New Zealand's leading producer of quality wines and to remain New Zealand-owned and operated.

"The board is driven to ensure Villa Maria remains viable, not only for our consumers, but also for our family of staff whose careers and livelihoods depend on it," says Fistonich.

Real estate company Barfoot & Thompson is a business which has had continued commitment from not two, but three generations of the two families that own it. The company, which began in 1923, is co-owned and run by the Barfoots and the Thompsons.

Garth Barfoot, the son of co-founder Val Barfoot, is now 70, while Peter Thompson, the firm's managing director and the grandson of Maurice Thompson, is 48. Barfoot's daughter Kiri is rising up the ranks and will soon be made a director.

"There is an overlap of the generations between each one, so you can always go back to get support from the generation before," says Thompson.

One of the key differences between Barfoot & Thompson and its competition, he says, is that the family will often reinvest back into the company. Also, there is no strict policy of paying dividends to shareholders.

"We have 65 branches and 75 per cent of these we would own rather than lease," he says. In bad times that helps, he says, as the company is not at the mercy of landlords. "Our branches that are making a profit are supporting those that are making a small loss."

Family businesses have family values, says Thompson, and this is a valuable image when most people buying houses are families.

Barfoot & Thompson is more agile, he argues. "We most probably have a less formal management structure than corporates, but that does give us flexibility to make decisions rather than refer to partners and shareholders."

Over the past few years Thompson has brought in more outsiders at top levels and the firm now has a chief executive, Wendy Alexander.

"In the last two or three years, instead of trying to do all the work, I have spread the responsibility which I have loved. No one's invincible," says Thompson. But some things remain the same; Garth Barfoot still interviews every new salesperson.

"Garth Barfoot will be exactly like my father," says family business specialist Ken Boler, a director of Grant Thornton. "They remember the Depression, they remember what their parents went through. A lot of people who are new to business don't have the benefit of that history."

Where Boler sees resilience in family businesses, it is generally among those who are headed by older, 50-plus owners. "They have been through the '87 crash, they have been a bit more conservative in their spending, and have accumulated wealth in property," he says.

According to Grant Thornton statistics, 62 per cent of family business shareholders are 50 or older. "You find that younger people, the Generation Xs, didn't go through the '87 crash. They spend a lot of their money on flashy toys and are less resilient. Those businesses are not faring so well. They've got second homes at the beach, there are a lot with high debt ratios."

One plus Boler sees with his family business clients is that customer service and satisfaction are very important to them, because they want repeat business.

Family businesses also promote camaraderie with their employees and can claim some loyalty when the going gets tough, adds Boler. As with Villa Maria, staff are seen as "part of the extended family", he says. "The owners will muck in and get stuck in."

But the family connection can have disadvantages. Domain Associates director Grant Raynor argues that in difficult times family-run businesses are less willing to make staff cutbacks and this can hurt.

But, he acknowledges, they do have the ability to sacrifice their own interests for the good of the business.

However, the MGI 2007 Family and Private Business survey shows family businesses are declining. Only 24 per cent of New Zealand family business owners have a policy of definitely remaining family owned.

The survey says it would be optimistic to expect that more than a third of family businesses in New Zealand would pass to the next generation.