A Dialogue on Family Business in Mature and Emerging Markets


BCG family-business experts Vikram Bhalla and Nicolas Kachaner recently met in London to discuss the regional differences uncovered in their research on family businesses.

NICOLAS KACHANER: Hi Vikram, I’m very happy to be here today to discuss the differences and similarities of family businesses in mature and emerging markets. What is clear is that they are an important and growing force in the global economy. In mature markets, we’ve found that over 30% of the large companies, the ones above a billion dollars, are actually family controlled. And I’m sure it’s even higher in emerging markets.

VIKRAM BHALLA: It is. And so, when we looked at the same data in the emerging markets, that number is 50% to 80% of the larger companies, as you would expect. And these are not just your mom-and-pop companies, these are really the brands and companies that are growing out of emerging markets and also trying to come to the more mature markets. They are a really important part of the global economy. And therefore, they do require their own lens on how to succeed.

Most family businesses that we work with are thinking about long-term wealth creation. They are worried about succession and transitions. They are worried about the role of the family in the business. I think some of those probably are consistent themes as we look across the world.

KACHANER: Yes, but there are also differences. In mature markets, what we see is quite a focus on longevity, ensuring that the business will be sustained for future generations. And we’ve conducted a study of over 400 companies in seven countries. What we found consistently is that family businesses tend to outperform their nonfamily business peers in periods of recession, but they also underperform, slightly, in periods of expansion. They tend to be prudent.

And they do a number of things to get to this result. First of all, they tend to be more frugal. They are more cost conscious in both good times and bad times. They have lower debt. They are quite cautious with acquisitions. They like diversification, both in terms of sector and geographies.

BHALLA: I think this is probably the one area where the differences are very stark. Inspired by your work, I replicated some of the research for emerging-market companies. And we found the answers to be exactly the opposite.

What we found in emerging markets was that the family businesses always grew faster than the nonfamily businesses—in good times or bad times. And we also found that they were actually less profitable in good times or bad times. They were actually willing to spend their profits to invest toward growth. I liked what you said about prudence. We don’t see that. Not that they’re imprudent, but actually they take on as much or more debt. They are willing to do much larger mergers and acquisitions in the emerging markets than the nonfamily businesses. That’s pretty interesting—a completely contrasting style and approach to growth.

I think I’d put that down to the fact that, in the emerging markets, these companies are a lot more focused on growth and mission and becoming globally relevant players at this stage in their evolution. But one challenge that comes out of all of this, and maybe this is consistent across the world, is the concern about succession and transition, right?

KACHANER: Very much so.

BHALLA: And so when we looked at the data, we found that if you don’t manage and plan your succession and transition, you will destroy between 15% and 20% of market value. And that destruction of value lasts for several years.

KACHANER: One good practice that I’ve seen and that usually helps is to put on paper the values and the rules of behavior for the family and also the long-term vision for the family and for the business. Some companies put it in what they call a family charter or family constitution. It’s not so much the paper itself that is important but rather the process and the discussion that this exercise is stimulating. Because that forces the family to articulate what they stand for, what is important for them, and how they should behave with each other on issues that could create problems in the family.

BHALLA: I think your point on the process is a really important one and very relevant, probably across the globe.

And the related consequence of that is the challenge that comes with high growth in these emerging-market companies. Because they’re growing so fast, we find very soon that the professionalization of these companies becomes a real challenge. So you have the family business leader, the superman entrepreneur who created the business. And soon the business grows bigger than he can manage. And he has to bring in professional managers to help.

Then I find sometimes we can make a mistake. Sometimes companies go from one extreme of being entrepreneurial and single-person-led, to the other extreme of having all kinds of systems and processes and metrics.

KACHANER: And in an ideal world, they want to keep being an owner-manager, keep the family running the business, and to be able to do that as you grow. To get there you need to surround yourself with a dream team of managers, not necessarily in the CEO position, but around it, the CFO, the head of HR.

And another area where professionalization is very important is wealth management. And that’s often, you know, something that is too much dealt with on the side. Families have the biggest part of their wealth in the business, but they have also other things. And often, these other things have been created by opportunities, chance, history. And at some point, it’s important to pause and think through what they want to do with these different assets.

What I found in the US is that often they create a family office to do that. Initially, it was created for tax reasons. But in fact, it served a good purpose, because then you can think through your wealth strategy, you can provide services—wealth management services—to the family.

BHALLA: I see that also picking up in the emerging markets. And I think that gets to the theme of our discussion, in a sense. There are very stark differences. And therefore, not everything that is done in the mature markets applies to the emerging markets. You need to recognize those differences. But, at the same time, there are a set of learnings on things that families should be doing across the world. With the right kind of learnings, you can retain the magic of the family business while dealing with all the anticipated and somewhat predictable challenges it will face, so that you’re prepared for what’s going to come your way.

KACHANER: Right. I like this idea of retaining the magic. And I think that’s an issue in mature markets. Some family businesses have lost the magic. They have lost the entrepreneurial spirit, the ambition for growth. And I think I would like to bring some of our family business clients in mature markets to visit you guys in India and Brazil and see the dynamic there. And I’m sure they will learn a lot.

BHALLA: I think that’s a great idea, because that way, you can learn from each other. But I just would keep reiterating the same point. Sometimes I find we blindly try and copy, and that’s what we’re arguing doesn’t work, because the situations are so different. So I think the exchange is important, but recognizing how to apply it might be quite different.

KACHANER: It’s a matter of inspiration, not copying.

About Vikram Bhalla and Nicolas Kachaner