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The Stark Downside of A Family-Owned Business

Photo: NY - http://nyphotographic.com/. Cropped. Licence: https://creativecommons.org/licenses/by-sa/3.0/

Family-owned businesses are common in Asia, but they can have their fair share of problems.

It’s not hard to see why. Within a family-owned company, dissatisfaction can arise when the founder’s family members are favoured for important positions based on their bloodline rather than on their performance. CEO succession is another issue. The family scion might not always be the best choice to lead the company into the future.

On the other hand, there are family-owned businesses that do well. And there are good reasons. The CEO who bears the family name could enjoy job security and thus face less pressure to meet quarterly earnings targets. He or she can focus on building long-term value. The CEO is also likely to go above and beyond the conventional CEO’s role in order to preserve the family’s crown jewel.

Two sides of the same coin

The tale of American automaker Ford Motor Company provides an interesting window into the best and the worst of family-owned businesses.

Ford Motor was founded over a century ago by Henry Ford. The automaker is best known for the Model T, which is widely acknowledged as the world’s first affordable car for the masses. As Ford Motor grew over the years, it became one of the three dominant US automakers.

Today, the Ford family still holds nearly 40% of the voting power in the company.

It wasn’t always smooth sailing for Ford Motor. The automaker had to endure its fair share of ordeals.

In 1998, Bill Ford, the founder’s great-grandson, took the helm as the automaker’s chairman. Within the first few years, Bill grew frustrated with the lack of progress within the company and decided to take matters into his own hands.

In 2001, Bill took on the role of Ford Motor’s chief executive in an effort to reinvigorate the company. His timing was good. As he took over, the US economy was picking up. It was a good time as any to sell more cars.

But it was not to be.

Soon, Bill found out that leading America’s second largest automotive firm was no walk in the park. Even as the US economy boomed, Ford Motor’s US car and light truck sales fell by one million vehicles between 1999 and 2005. The company’s US market share also shrank from 25% to less than 20% during the same timeframe.

Bill bore the family name, but he was unable to implement his ideas at Ford Motor.

The situation reached a nadir when Ford Motor reported a pretax loss of around US$7 billion in the first nine months of 2006. The situation needed urgent change.

The first story part of the story above shows how a family owned business can go awry. The story does not end here, but will be continued in my next article, so stay tuned.

Shades of grey

In investing, there are not many things that can be easily painted as black or white. Just like it’s not as simple as to label a family-owned business as good or bad.

As investors, we have to learn to live with shades of grey. At Stock Advisor Singapore, our premium stock recommendation service, we are on the lookout for the best qualities of a family-owned business while casting a wary eye on the less savoury behaviours.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.