Dr Jeff Cornwall

Impact Lab summarizes a study that appears in the June issue of Family Business Review in which the author finds that family businesses experience better financial performance than non-family firms.

Professor Jim Lee said family firms tend to experience higher employment and revenue growth and are, overall, more profitable than non-family businesses. He says his study suggests the average profit margin for family firms was 10 percent, 2 percent higher than non-family companies.

Most of us think of family businesses as being Mom, Dad, sister Sally, and cousin Fred. Prof. Lee looked at a very different type of “family business.” His sample was Fortune 500 businesses that still have the founding family having a significant presence in the company. I know, I know, this is a blog about entrepreneurship, not corporate America. But, the study does raise an interesting issue that is relevant for all businesses from small to gigantic.
I wondered why these businesses would have better performance. Were they smarter business people? Not likely. Were they in certain types of businesses that performed better? No, because he controlled for those other variables.
Then I started thinking about the chapter I just sent to my co-author earlier this week. It was about the virtue of prudence in entrepreneurship. We argue that prudent entrepreneurs are those who understand that their role as a business leader is one of stewardship. From a theological position, we are all stewards continuing God’s creation here on earth. From a more pragmatic perspective, we are stewards of the resources we have pulled together from a variety of sources: money from investors and/or lenders, labor from our workers, time away from our families, space from a landlord, materials from our vendors, and so forth. As entrepreneurs, all of these folks trust us to use the resources given to us wisely and effectively.
You will often hear entrepreneurs talk about the heavy responsibility they feel when an investor hands them a check. It is no longer just the entrepreneur’s money to lose, but now someone else has said, “I trust you to use this money to build a successful venture.”
By being good stewards, by being prudent, we think twice about how we use this precious resource that we have been given to build our business. We think long and hard about whether what we are spending will really build sales and profits. Good stewards are good bootstrappers. We look to be effective, but by spending the least amount of money that we can.
In today’s public corporation there is not just a separation of ownership and management, there is a total disconnect. We see CEOs from public companies spending money like drunken sailors. If fact, some might argue that they are spending money like politicians in Washington! A million dollars here, a billion dollars there. But who’s counting? My co-author Mike Naughton talks about the disconnectedness between capital and communities in today’s culture as a contributing factor to this absence of stewardship and prudent actions in business.
But, maybe in the public firms in this study, where there is still a large presence of the family still associated with the business, there is a stronger sense of stewardship. Money is not some commodity that comes flowing in from people they will never meet nor be personally responsible or accountable to: it is still in large part the family’s money they are spending.
This study at least hints that good stewardship in business is not only a morally good act, but financially good, as well.