Family Businesses: Capital Raising & Listing Opportunity for Stock Markets

Family firms dominate the business landscape across developing, frontier, emerging and developed markets. They are major contributors to both employment and gross domestic product (GDP), accounting for over 50 percent of of GDP in many markets, and range from micro-enterprises to some of the largest listed companies in the world. Recent news published in our local media outlets somehow confirms this — that about 10 families-run businesses’ seem to control a relatively substantial part of the country’s GDP — in the process of their pursuing enterprising motives they generate wealth to their families while at the same time providing much needed jobs, paying taxes, facilitating the availability of goods and services that we somehow need for our living, supporting other businesses in their supply chain, etc. A recent survey by the World Federation of Exchanges (WFE) also supports the same line of argument.

While family businesses share many of the same qualities as those of more traditional companies (some of which are listed in stock markets), they also have unique attributes and specific characteristics that impact the way they approach both management and growth of their business. In a family firm, for instance — professional life, work relations and business decisions co-exist with emotional attachment where informal bonds and personal choices are all so much intertwined.

Under such circumstances, the integration of family and business can be both a source of strategic advantage, especially in cases where well-run family firms outperform other businesses, but also family-run businesses can potentially be the source of inertia and governance-related challenges, where in some extreme cases may create significant socio-economic challenges to communities and societies in which they operate.
While the peculiar characteristics of family businesses are likely to influence how the family think about raising more capital via public issuance of equity or debt instrument and listing into the exchange, however, these companies will also be influenced by economic, financial and managerial considerations that have little or nothing to do with being owned and managed by a family. Thus, one may find cases where a founder-owned and managed firm, characterised by a strong paternalistic outlook and distrust of outsiders, would probably be reluctant to list on a stock exchange — we face this challenge in our society today, since we established the alternative window for capital raising by Small and Medium Enterprises (SMEs), called the Enterprise Growth Market at the DSE about four years ago — there has not been any of the family-owned businesses that have considered to pursue this route. Our engagements with such families has been somehow futile for now. At the other end though, we remain patiently optimistic that probably third-generation owned and professionally managed companies would consider going public, should listing be needed to sustain the long-term growth of their companies.

Given the prevalence of family firms across markets and the importance of their economic contribution there is value, particularly for us as stock market operators and the supporting eco-system (stockbrokers, financial/investment transactions advisers, nominated advisers, regulators, etc), in understanding the impact of ‘family-ness’ on the public capital raising and listing decisions and therefore engage in identifying possible mechanisms to enhance the attractiveness of equity and debt markets for these firms. For a example in this process I have learned that we need to understand that family firms are a discrete category of businesses with specific characteristics that impact the way they take decisions, perceive their activity and relate to stakeholders and other companies. We need to live with the reality that for the family owners/managers the company is not simply an investment, but also a source of income and professional realisation for the current and future family generations. We need to appreciate the fact that family owners/managers extract a significant amount of non-financial benefits from owning and administering a family firm, benefits such as the pleasure of owning and controlling a company that has their own name, or the benefit of influencing public opinion through their businesses, etc. Because of these, family owners/managers place a premium on maintaining control over the company and having family members involved with the firm.
So, what categorises a family business? According to the recent WFE survey report, family business may be expressed in a variety of ways, though typically includes elements of: (i) ownership: where the founding family has a reasonable ownership stake and the family do exert control through a majority stake in the company and (ii) management: where the controlling family is involved in the management of the company, generally through family members holding senior management or key decision making roles within the firm.

So, we understand that in most family-run businesses, companies are not simply investments, No — actually they are also a source of income and professional realisation of current and future family generations — many families that I talk to are in the position that the family expects future generations to participate in the ownership and running of the business.

We also understand that family owners/managers do extract significant non-financial benefits from owning and administering a family firm and therefore places a premium on maintaining control over the company and having family members involved. Given these kind of understanding — that family firms are source of economic stability and professional realisation for families over generations to come, and that family owners/managers naturally prefers that the firm continues to exist beyond their own direct involvement with the firm — some families therefore, do adopt long term, multi-generational outlook of their companies aimed at ensuring the continuity of the firm — despite the fact that this may sometimes negatively impact the firm and how it is run.

Again, given the emotional and strong sense of attachment that family members may have towards the business, especially when the business produces positive economic results, such attachment reinforces the family’s reluctance to dilute control, and sometimes such aspects induce them to be more risk averse or stimulate members of the family to have strong cohesion among them when they mutually run the company.

And then of course there is a whole issue of cases where family values, which in most cases do underlie family conducts, extend into defining of the firm as a whole, including some situational cases where the traditional expectations of profit maximisation is not one of the top priorities in characterising the way the business is run as well as the general conduct around the business management — cases where the desire to maintain control of the firm outweighs the more standard economic considerations.
Now, all these above together, where/what may be the capital markets proposition and opportunity for such businesses? The truth is, while family businesses differ from other businesses in several ways, they are also motivated by many of the same entrepreneurial motivations, as the case for non-family businesses. For example, retaining of control, resenting the level of external scrutiny, challenges to comply with good governance principles — these factors make businesses, whether family or non-family to perceive going public as a threat to their authority, independence, identity and values.

However, many companies and families that managed to overcome these concerns, and once they have overcame such concerns to the point of listing considerations, then it is in such moments when reasons for going public and being listed in the stock market become so strong. Consideration such as obtaining funding at cheaper terms, funding long-term projects and enable further growth and expansion of business, ensure stability of business, increasing visibility, brand awareness and affirming their competitive advantage, providing business new opportunities, benefiting from fiscal incentives, among other benefits because so attractive to the extent of exceeding concerns over the desire of ownership, control, strong paternalistic characteristics, distrust of outsiders, etc.
Now, in order to facilitate the competing motivations above, we, at the stock exchange and the whole eco-system of capital markets need to consider to explicitly align SMEs and family firms in our listing strategy i.e. addressing issues like adjusting the free-float requirements or strong demands of corporate governance requirements which discourages listing of family businesses. We need to consider adopting modified requirements specifically aimed at family business, for example allowing issuance and listing of dual-share structures (i.e having multiple classes of shares — some of which with more control and voting rights even though they may carry low financial interests) — these that may make listing less challenging for family firms — as it is family firms tends to prefer financing choices that do not open them to external control. This is what translates into preference for use of internally generated funds (such as retained earnings), or preference for debt financing (such as bank funding, and other financial institutions’ loans over equity). Yes, some family firms when are so much in need for equity financing; they would rather have it in the form of private equity, or venture capital fund or even crowdfunding — but not in the listed form.

So, in addition to addressing the concern about loss of control, the other aspect that, we, at the stock exchange and the capital markets in general can do in order to attract family firms in our space is to address the concerns around strictness in listing requirements, compliance to continuous listing obligations as well as the amount of paperwork and prospectuses’ content requirements.
To conclude, if we can identify the number of family firms in our jurisdiction that are of sufficient size to meet the listing requirements (either in the main investment market or the less restrict requirements for the enterprise growth market); if we can demonstrate that we understand family firms and their specific requirements and work with other stakeholders (such as professional services firms that are dedicated for family business offerings); if we could host forum and sessions that bring family firms and relevant experts in the field to discuss matters of common interest; if we can showcase good examples of other listed family firms in other economies; if we consider to have differentiated listing requirements (including free-float requirements, the permit of issuing of dual-class shares, occasionally allow waivers to allow such firms to move to requisite governance standards over time, corporate bonds markets which serve as a more palatable alternative to listing family firms), and so on — we may be closer to attracting family businesses in our capital market space. This may sound transformative and difficult — may if we can think of it and strike a balance that will ensure the investment public interests are still protected, it is worth a try.