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Family Businesses Are Less Likely To Fail Than Big Business According To Latest Research

23rd May 2013 Paul Andrews

Family firms are usually made up of a well functioning and diverse board of directors.

Family businesses are less likely to fail than big business because they are usually made up of a well functioning and diverse board of directors.

These directors are able to advise effectively,  according to a report published today by researchers from Imperial College Business School, Leeds University Business School and Durham University Business School.

The researchers found that family businesses were less likely to go bankrupt because they are able to recruit and maintain an experienced, diverse and knowledgeable board of directors.

The team also found that 80 percent of family owned businesses are more gender balanced, having at least one female director. 

Professor Mike Wright, Director of the Centre for Management Buyout Research (CMBOR) at Imperial College Business School, and one of the report’s authors, commented: “Running a successful business of any size is no easy task and this year we have already seen some high-profile businesses such as Comet being forced to close.  Family businesses could provide lessons to larger firms, as our findings show that a more diverse and experienced board of directors, which are prevalent in family firms, could be related to reducing failures in businesses.”

Professor Nick Wilson of the Credit Management Research Centre, Leeds University added: "This is one of the first studies to identify the board and ownership structure of private family firms in the UK and to track their survival rates relative to other firms."

The board of directors in a company provide advice and direction to management.  It is responsible for ensuring that companies fulfil their mission statement. They also provide advice to executives if they see the company drifting away from its goals and objectives.

The researchers in today’s study found that the diversity of the boards of family businesses means that they are more stable.  Surprisingly, the team found that this limits conflict between board members. This diversity also means that board members have a wider skill set making them more able to address potential threats to the survival of family businesses.  This is in comparison to other private firms where board turnover is higher.

The team found that these boards also ensure that family firms, which often have to rely on internal sources for financing of projects, are more frugal in their spending. They scrutinise business opportunities with greater intensity and take fewer business risks than private firms.

The study highlighted the fact that family-orientated goals such as preserving unity, wealth and providing employment for family members may also contribute to their survival.

To carry out their research, the team analysed data of over 700,000 medium and large private family and non-family firms with an annual sales turnover of at least £6.5 million, a balance sheet total of at least £3.26 million and at least 50 employees.

They analysed the filing accounts of private companies from 2007-2010, which contained information on a company's directors, secretary (where one has been appointed), registered office address, shareholders and share capital.  The data was collected from Companies’ House, the national database on limited companies and the Insolvency Service from 2007-2010.

The research was carried out by Professor Nick Wilson, Director of Credit Management Research Centre at Leeds University, Professor Mike Wright, Director of the Centre for Management Buyout Research at Imperial College Business School and Dr Louise Scholes, Senior Lecturer in Entrepreneurial Management at Durham University Business School.

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