Recent research at LSE into the productivity gap between which leaves the UK trailing behind the US, France and Germany has found the main problem to be family-run firms. This somewhat surprising conclusion suggests that family-run businesses suffer from poor management practices. The report author Nick Bloom was so convinced of his findings that he urged Gordon Brown to drop the 100% inheritance tax relief given to family businesses.
The problem is not passing down ownership of the business to the next generation but passing down control. Selecting a Managing Director from within the family means that the choice of managerial talent is severely limited. This is especially important in large corporations which require a skillful CEO and not someone who is young and inexperienced.
In addition, if the eldest child is groomed from an early age to be the eventual successor it can actually lead to them coasting through their education and the early part of their career due to a lack of motivation. They may feel there is no need for them to try because they are guaranteed top job, therefore they do not develop the skills to be able to do the job well. It can also lead to low morale within a company because there is a ‘glass ceiling’ that employees will never be able to be promoted above as they are not part of the family.
The report recommends that forBritain to close the productivity gap with the US , business owners should consider only passing equity stakes to their children and giving the running of the company to somebody else.
Hat-tip to Robert Moore from Business Data International Limited