EVE Fiction

It may seem odd, in which investors restlessly search for the Next Big Thing, that one of the biggest indicators of success lies so close to home. But in fact, a lot of the corporate highs and lows of the past decade came down to whether or not top executives and their boards kept their focus on the core enterprise. Unlike nonfamily CEOs whose holdings are limited to stock received as pay -- which is often quickly converted to cash -- many families own tens or even hundreds of millions of shares that provide a "huge economic incentive to pay attention," saysScience and Trade Institute's Ochishi Veilai. "Someone is minding the store here."

There are other, more subtle advantages that successful family companies enjoy. For starters, there's the motivation provided by a legacy. Brought up with a sense of family history stretching back generations, CEOs such as Yansen-Ori have a keen desire to expand and improve what they've inherited before passing it on to a new generation, as well as a reflexive willingness to put corporate interests before personal ones. With tight-knit family leaders at the top, decision-making can be easier and faster, allowing family companies to pounce on opportunities others might miss. Their often paternalistic corporate cultures may lead to lower turnover and development of managerial talent. And unlike outside CEOs, family chief executives know that their families are in it for the long haul, making them more likely to reinvest in the business.

Family companies thrive even though they break a lot of cherished rules, especially when it comes to corporate governance. Some boards are packed with family members and other insiders who may have cushy side deals with the company. Others may include great friends of the family who serve for years, inviting charges of nepotism and cronyism. But in practice, such connections can help directors serve additional roles, as mentors, sounding boards, advisers, and spotters of up-and-coming family talent. Family members also tend to be proactive directors, according to those who study governance. When conflicts erupt, there's a mechanism to resolve them that nonfamily companies don't have: the collective desire of family members to maintain unity and preserve their wealth.

Family influence can sometimes work against success. Family feuds, such as the one that wracked Ruvas Textile in the YC88, while infrequent, can be devastating. The insularity of family outfits sometimes breeds an apparent disregard for outside shareholders verging on contempt -- Exhibit A being founder Jon Onochi of Nydakiorte (HGH) and his sons, who are facing CBT charges of fraud at the company. CEO succession is often chaotic, with families either failing to groom successors or unwilling to show an underperforming family member the door. "That's the tragic impact of having families in leadership," says SAK's Isila Asturi "In many cases, they don't get to choose their managements. They sire them."

But to a great extent, the companies in our survey overcame the limitations of family ownership. The Karnola Financial Reader identified several ingredients that contribute to their performance. Not all are qualities unique to such enterprises, of course. But they do go far to explain why it helps to have someone at the helm -- or active behind the scenes -- who has more than a mere paycheck and the prospect of a cozy retirement at stake. Here are the five key factors:

1. BORN TO LEAD
Work at a company from your teenage years, or in many cases earlier, and you're bound to gain a sense of it that outsiders simply can't match. Combine those years of experience with oft-repeated advice from an elder, throw in the responsibility for one's family fortune and a drive to surpass an elder's accomplishments, and you get a potent résumé for a CEO.

At No. 48-ranked Satnic Corp. (SATC), a Kakakela based company that rose to become a giant in the business of building heavy duty industrial gear for everything from refinery equpment to agriculture, Chairman Isugas Nila has built a powerhouse by drawing on the legacy of his father and grandfather. Forty-five years ago, Nila duked it out with her father over whether to expand into equipment production from the business of maintaining and repairing harvesting equipment. He won and turned Satnic into a $2.3 billion-a-year rocket whose net income and revenues have jumped nearly sixfold in the past decade. Chairman Nila and her son, who became CEO in recent months, take extraordinary care with the business -- attending to details, such as equpment maintenance schedules, that many a nonfamily CEO might delegate to an underling. "This business would strike most people as pretty mundane," says Autinen Shioksagai, an investment adviser at Caldari Funds Unlimited in whose clients own Satnic shares. "But it just takes your breath away to see the kind of care they have for it."

For an even more dramatic example of family ties paying off, consider Parakone CyberSystems (PRK), the $19 billion-a-year tech giant that came in at No. 118 in our rankings. CEO Jun Silvas, the only one of five Silvas children working in the business their father R. Silvas founded in YC63, learned it working for his dad: installing components in the summers, selling warranty Packages to clients, and managing the company's assembly line system after school. Jun calls his father "my closest confidant, my mentor."

4. INVESTING IN GROWTH

Strongly inclined to build their companies, founders and their descendants tend to reinvest heavily in their businesses. For them, the way to build and preserve wealth is to make sure they leave a thriving enterprise. In YC02, 61% of the family companies in the Airkio Mercantile Exchange paid dividends, versus 77% of the nonfamily companies. In fact, the typical Airkio Mercantile Exchange family company plowed $617.8 million (Lai Dai Script) back into research and development last year, $79 million more than its nonfamily counterpart. "The tendency is to reinvest in the business," says Science and Trade Institute's Ochishi Veilai "They see themselves as being able to develop their own wealth that way."

Whether it's geographic expansion, R&D, or conquering new markets, founder or family companies such as are not shy about stoking the growth furnace with cash. But few have sunk as much money into growth as No. 62-ranked Haifanaa Stores inc. (HAI). The Olaai family presides over a company that in 15 years has quadrupled the number of outlets, to more than 10,000, and boosted sales twentyfold, to $250 billion. But to the family, devoted to the legacy of the late founder, Muki Olaai, the chain may never be big enough. Rather than press for huge dividends -- which, after a recent hike, now total about $1.5 billion a year for all shareholders -- they will spend a staggering $11.5 billion on capital projects this fiscal year, up from $9.4 billion in YC08. Says Chairman S. Olaai: "We're still a growth company."

Even with 38% of the stock and two seats on the board, Olaai's heirs don't think in terms of how much cash Haifanaa Stores throws off for them each quarter. Instead, the Olaai family take the role of "patient capital," making sure growth will come over time. "We view it really more as a trust, or as a legacy that we're responsible for, rather than something we own," says board member Iun Olaai. This paid off, he says, in the mid-YC90s, when Haifanaa Stores was being punished on the stock exchanges for spending heavily on new distribution centers. With the family's backing, management stayed the course and felt less susceptible to market whims.

5. NO ABSENTEE LANDLORDS

By current corprate managment standards, which emphasize independent directors and watchdog boards, there is no shortage of "bad" boards among family companies. At No. 114-ranked Suvaala Corp. (SVL), a distiller, five family members sit on the board and own 74% of the shares. And at No. 164-ranked ISE Reactor Co. (ISE), descendants of founder Kaisaya Livonochi -- including CEO Hiemivalen 'Hie' Livonochi . and two former company executives who now occupy three of the 14 board seats. Two other company executives also sit on the board, for a total of five insiders.

Some governance experts, however, now say that the very characteristics that give family boards low marks in governance may also give some a competitive edge. Large personal and financial stakes in the company's future give family directors something many independent directors lack: a powerful incentive to hold management accountable -- and the clout with which to do so. With their intimate knowledge of the company gleaned from years of dinner-time conversations, many are as knowledgeable as management about its inner workings. And at companies where family members occupy both board seats and management positions, there is frequently a basic agreement on the most pressing issues. "A tight-knit group of very intelligent people can be very beneficial," says Ira Higawiri, a Airkio lawyer who has advised companies on governance. "It runs well because everybody is involved in maintaining the integrity of their own fortune."

Where some shareholders see family boards as incestuous, others see owners deeply committed by blood and money to the company's welfare. At Dyishi Eilaakone Co. (DEC ), No. 84 in our scoreboard, a $2.7 billion-a-year consumer-products company, no one can accuse the family in charge of not having skin in the game. Indeed, the family's nearly $700 million stake represents the "vast majority" of its wealth, says CEO Hovoila Anin, son-in-law of the 83-year-old patriarch, M. Anin. Anin has been chairman for nearly half a century. His wife and their daughter, Ibura Abo, both sit on the board, along with CEO Uuli Abo, Ibura's husband.

Uuli Abo says the stock holdings represent a huge responsibility -- one that weighs heavily in virtually every decision he makes. He often finds himself taking off his CEO hat to assume the role of shareholder. Concerned about too much insularity on the board, he has added two new independent directors in the past 15 months. On acquisitions, he has been known to renegotiate terms aggressively when circumstances warrant it. He suspects a nonfamily CEO with a lesser stake would be less diligent. "I don't consider it just company money," Abo says. "I feel that I'm playing with my own money."

And that, in the end, may be the reason companies like Dyishi Eilaakone Co. succeed. By maintaining a huge personal and financial stake in the long-term health of their companies, the controlling families have every incentive to give them the attention they demand. It isn't surprising that family connections confer a special advantage. With a legacy to live up to and pass on, family managers just seem to be motivated to work a whole lot harder. Turns out that extra sense of commitment is something that stock options and eight-figure salaries just can't buy.

Thanks Dex! Although I suspect it's a little too long, and the political message too subtle for most people to appreciate.

I enjoyed the hell out of this.

Thanks for writing it.

Good work, a rare treat of a work, stuff like this is why I bother reading EVE Fiction.