CELEBRATING PREM WATSA AND FAMILY-CONTROLLED BUSINESSES
Article | June 2018 | by Craig Postons
Although families have always been at the heart of business (think Heineken in beer, or Ford in automobiles), seldom do we think of family-controlled companies – particularly family-controlled public companies – as outperforming their peers. Common wisdom would have us think institutionally-owned companies perform better.
One Canadian example stands out. Recently, Prem Watsa, founder, chairman and CEO of Fairfax Financial, gave his first-ever television interview with BNN Bloomberg. The wide-ranging conversation, led by Amanda Lang, is packed with useful perspectives on everything from doing business internationally to what motivates Prem these days (building a company that outlasts him).
You can view highlights from the interview here, in three brief video segments.
To us, what’s especially relevant in listening to Prem’s perspective right now is the understanding that he’s operating (and growing) what is essentially a family-controlled public company. The extraordinary long-term performance of Fairfax, with Prem at the helm, validates the most up-to-date research produced by multiple independent sources on family-controlled public companies: family-controlled public companies perform better in the long haul.
We’ll get to the research in a moment.
First, here are some of our favourite perspectives from Prem’s interview:
· On what motivates him: “…to build a good company – a good Canadian company that will outlast me, located right here in Toronto. And I’m hoping in 100 years that this company will still be here, perhaps in the same office … That’s what we’re trying to build, a company that lasts for a long time.”
· On free enterprise: “There’s huge opportunity in Canada in whatever you do. Look, you have to provide good service. Be focused. And look after the people you employ… and, in our case, give back to the communities where we do business. We’ve re-invested $25 million back into those communities. So the free enterprise system – capitalism – is fantastic, and I’ve experienced it. It’s open to anyone.”
· On playing the long game: “In the free enterprise system, you’ve got to make a return… actually a return over time. Not three months, not six months. We always talk about the long term. We’re trying to build our company over a long period of time – long after I’m gone.”
Three separate research reports confirm long-term performance of family businesses
The latest, from the University of Toronto’s Rotman’s School of Management in April 2018, affirms that family businesses tend to survive longer and represent a lower-risk investment than non-controlled public firms. This complements two other reports from recent years that highlight the performance of family-controlled businesses.
The Rotman study, published by the Clarkson Centre for Board Effectiveness, reviewed nearly 50 years of historical data. The highlights include:
· Canadian family businesses experience less executive turnover at the top, and are less volatile based on daily historical share price performance — suggesting less investment risk. “Family companies live longer, are more stable and are less risky,” says Matt Fullbrook, the study’s author and manager of the Clarkson Centre.
· This performance by family businesses suggests taking a long-term view. The emphasis placed on quarterly results is viewed by some institutional investors as damaging to company health and the capital markets because it inhibits longer-term strategies and decisions where the impact won’t be evident in near-term financial results. Rotman first looked at family business performance in 2013. Its earlier CCBE research hinted that the excellent performance of family businesses may be driven, in part, by the long-term perspectives of family owners – the discipline to “play the long game.”
· Nearly 70 per cent of the family businesses tracked over almost 50 years survived, while all but 24 per cent of non-controlled widely held companies had either gone out of business or been acquired or de-listed during the same period.
You can access Rotman's latest report here.
Credit Suisse research shows family-owned businesses consistently outperform equity markets.
This report, published in late 2017 by the Credit Suisse Research Institute (CSRI), identifies the investment case for family-owned companies, revealing that these companies have outperformed broader equity markets in every region and sector by an annual average of 400 bps per year since 2006. In addition, the financial performance of family-owned companies is superior to non-family-owned peers. The report’s lead author adds: “Family-owned businesses are outperforming their peers in every region, every sector, whatever their size.”
Among other key findings:
1. Family-run businesses demonstrate superior growth and profitability. The financial performance of family-owned companies is superior to that of non-family-owned businesses. Revenue and EBITDA growth is stronger, EBITDA margins are higher, and cash flow returns are better.
2. Family-owned companies prefer conservative growth. New investments are largely financed through organic cash flows or equity. More than 90% of companies believe they have a greater focus on quality and long-term growth than non-family-owned peers.
3. Valuation doesn’t seem to be a concern. On a sector-adjusted P/E basis the report found that family-owned companies trade on a 2% premium to non-family-owned companies, much less than the historical average of 12%.
National Bank Financial points to strong cultures rooted in the commitment of founders.
Other research has suggested family businesses outperform their widely held counterparts. In 2015, National Bank Financial published research that found family-controlled Canadian companies outperformed the S&P/TSX composite index over a 10-year period.
This report – similar to the latest from Rotman and the CSRI research – suggested the performance could be tied, in part, to longer tenures for management and the ability to implement longer-term strategy without the pressure of short-term results.
The authors point to a number of factors in the superior performance, including:
1. more cautious borrowing;
2. quicker decision-making capability;
3. stronger corporate cultures built on the commitment of the founders; and
4. better labour relations.
Here’s more on National Bank Financial’s view.
When Prem Watsa says, “We’re trying to build our company over a long period of time – long after I’m gone,” all the research validates his thinking. Prem’s performance with Fairfax – and the research – point to family-controlled companies that think several steps further into the future than the typical publicly traded firm.
They’re truly built for the long haul.