Are professionally managed companies safer for common shareholders?

The debate whether family-owned businesses are better & safer than professionally managed companies is never-ending. In this article, we will have a look at both the scenarios in detail, their pros & cons, warning signs, and returns comparison.  

Family-owned business:  

In India, family-owned businesses have a dominant presence. About 73 per cent of the top 500 companies listed on BSE are family-run. This kind of ownership comes with its own advantages and disadvantages from the common shareholder’s perspective. The most crucial benefit is that the promoters have skin in the game. A business is more than just a corporate entity when it is run by families. It takes lesser time to come to a decision. The value of the business directly affects the promoters. And so, a common shareholder’s interests and promoter’s interests are more or less on similar tracks. Also, through generations, the home-grown expertise and value chain are passed down to the next generation. On the other hand, such businesses might turn risky as well. The board of directors, when it is comprised mainly by the family and their kins, with fewer independent directors, might turn out to be a warning sign. In such cases, the lalaji (next generation of the family) might tend to direct the funds in trendy and fancy businesses with hardly any synergies for the company. A common shareholder needs to be watchful of the salaries being paid to them. Pledging of shares is another risky matter along with related-party transactions. In small-caps or SMEs, shareholders need to be extra alert as chances of manipulation increase there.  

Professionally managed companies:  

The professionally-managed companies may or may not have a significant stake in the business. Usually, the people on board are the experts in the areas where the company operates. It might turn out well to bring new ideas and strategies to the business. There is more of a democratic side to the company, which is beneficial for the common shareholders. In comparison to family-run companies, business decisions take a longer time. Many a time, management tends to focus on short-term goals to show off the company’s performance unlike family-run companies, which usually have long-term plans. The management might take on huge salaries and benefits in the form of employee stock ownership plans (ESOPs).  

To conclude, both types of businesses come with their own risks and benefits. I think a family-owned company, which welcomes expert management on board can be a good combination. And a professionally managed company, which puts the company’s interests first and has a good history of efficient management can lead the business to its optimum level.