New York – News Corp. has the Murdochs. Viacom Inc. has the Redstones. Wal-Mart Stores Inc. has the Waltons. Family businesses and those who control or run them are among the most prominent names in corporate America.
Even if the founders are long gone, their descendants often have a heavy hand in how these businesses operate, and many are very successful at what they do. When looking at the returns of family-owned companies versus the overall market, their stocks significantly outperform, in part because their leadership tends to be more stable than most and the companies largely embrace a longer-term approach to growth.
Still, not all these companies practice family values in a way that agrees with all investors, from how they structure their stocks to their views on everything from dividends to divorce.
And just like for all public companies, investors must keep tabs on whether families use their businesses as their personal piggy banks. Think back to big losses suffered by shareholders in Adelphia Communications Corp. after prosecutors accused its founders, the Rigas family, of looting the cable television company.
There are 63 companies in the Standard & Poor’s 500 index that have some link to the founders of their companies, either through significant economic ownership, voting control or representation on the board or management team, according to Morgan Stanley. In the past year, they topped the S&P 500’s performance by more than 4 percent, while achieving superior results of 18 percent over the past three years and 106 percent since 2000.
But these companies also come with troubles that you don’t find everywhere else – and that largely have to do with the complications that can develop when work and family try to coexist under one roof.
Just look at this summer’s surprise announcement that Rupert Murdoch’s son Lachlan, 33, had stepped down as a senior executive at News Corp. despite being deemed the likely heir apparent to his father’s media empire. Reports said his departure was due to a strained relationship with his father after the elder Murdoch remarried and started a family with his third wife.
The difficult part is knowing when a family feud could erupt. Morgan Stanley chief investment strategist Henry McVey suggests some tools are available for investors to navigate the best and worst family companies.
He favors those that tend to have only one class of stock and have successfully made a transition from the founding generation to a mix of family executives and professional management. Those S&P 500 companies that fit that criteria – which include Wal-Mart and Campbell Soup Co. – not only beat the performance of family-run companies in general but far outpaced the S&P 500’s returns.
