John L. Ward Clinical Professor in Family Enterprise; Executive Director of the John L. Ward Center for Family Enterprises
Most family firms do what they can to maintain control of their destiny.
Still, some firms eventually find themselves at a difficult inflection point: considering whether to stay a private family business or to go public. These inflection points often occur around generational transitions, exit of family branches from ownership, or external events such as seismic shifts in an industry—and the difficulty of the decision is often compounded by the family’s close emotional connection to the business.
But even in the best of times, these decisions tend to be complicated.
“Going public as a family-owned business can open up Pandora’s box,” says Jennifer Pendergast. “You may start out by taking 10 percent of the shares public so the family still retains control, but you’ve opened the door to public ownership and all that comes with it.”
Even when a family retains effective control through ownership of voting shares, which allows them to elect the board and make other significant strategic decisions, they are still beholden to information-disclosure requirements and scrutiny of public-market investors.
While most family firms view offering shares in the public markets as a negative, there are upsides to consider. Doing so gives firms access to growth capital, the opportunity to buy out disinterested shareholders, a liquid market for family-owned shares, and more rigorous governance standards.
Pendergast, a clinical professor of family enterprise at the Kellogg School, offers three pieces of advice for families who may be weighing the decision to go public.
While each family business has its own dynamics, the reasons those firms might consider going public fall broadly into two areas: strategic adjustments or changing family priorities.
Companies seeking to grow aggressively, make large capital investments, or reposition themselves in relation to their competition may make the strategic decision to go public.
Pendergast recently consulted to a family-owned media company. In recent years, it has become clear that the days of small regional players in media are over and that economies of scale are crucial to media firms’ survival. The company had two choices: they could decide to get out of the industry or find the capital to consolidate and grow.
“The New York Times, for example, is publicly traded but family-controlled,” Pendergast says, “which is common in media and other industries where the business models have changed and it’s no longer feasible to rely solely on private capital.”
Family businesses also have to contend with the potential for changing priorities and visions from generation to generation. This could mean a new generation desires to leave a business segment that doesn’t align with its values or it could mean a branch of the family no longer wishes to be involved in the business.
“Most family businesses try at all costs not to go public.”
— Jennifer Pendergast
“Part of the family may no longer be interested in being owners,” Pendergast says. “If you can’t afford to buy them out through a debt instrument—or you choose not to do it that way because it will constrain the company’s ability to grow—you can use a public offering as a way to fund buying them out.”
She advises making sure all family stakeholders fully understand the reasons why a public offering is on the table. With alignment on the motivation, discussions can focus on the best decisions to achieve the strategic or family goals going forward.
Keeping private ownership of family enterprises has a lot of advantages: it allows the family to control the vision, values, strategy, and culture of the company. As a result, family-held businesses often deliver superior returns.
“This is largely due to these firms’ ability to focus on long-term investment in people, products, and community, which leads over time to superior profitability,” Pendergast says. “Family enterprises also have more stable leadership and engender greater trust from employees and customers.”
While a public offering may be necessary or valuable to the vitality of the organization, going public comes with risks. For one, going public may push family members who may not otherwise be interested in selling their shares to consider cashing out to investors outside the family. And, it can open the door to activist investors, as Campbell Soup had to navigate recently.
But the greatest risk is loss of strategic control.
“Most family businesses try at all costs not to go public,” Pendergast says. “Family leadership may be willing to relinquish the economic benefits of a public offering for the sake of stability and growth. But even if they choose to go public, they still want the business to maintain the hallmarks of family-owned enterprises—broad stakeholder focus, alignment with family values, and long-term vision.”
Family firms that choose the public route can minimize the risk of losing strategic control by preparing family members to take on leadership roles in the business, ensuring that the family controls the board, and maintaining voting control through the issuance of dual-class shares. In fact, in a data set managed by Brown-Forman collecting more than 130 NASDAQ- and NYSE-traded family-controlled firms, 55 percent have a family CEO and 84 percent a family chair.
The billboard company Lamar Advertising saw the opportunities inherent in economies of scale as the industry embraced digital technology. They went public to raise capital so they could buy up smaller regional firms.
“They have become a national player in the industry, and while they don’t have total control, there’s still a Lamar family member as CEO of that business,” Pendergast says. “And there likely will be in the next generation, too.”
Family businesses have a lot of options that can help them take advantage of public ownership while retaining strategic and operational control.
In addition to keeping family control over the board by issuing dual-class shares that grant the family increased voting rights—by as much as 10 votes per share in some cases—Pendergast recommends adapting the board’s structure to address any potential areas of concern.
This might mean changing the board composition to include a higher percentage of independent directors. This can open communication channels, which may be complicated by potentially fraught issues such as executive succession. Adding independent directors also offers the opportunity to introduce additional skill sets to the board. And independent directors send a signal to nonfamily shareholders that the company is committed to good governance.
If there is a family CEO, Pendergast also recommends a nonfamily board chair or Lead Independent Director, who can provide additional oversight and accountability for both the family itself and the public investors.
“While the family may retain control, they should balance their influence by incorporating strong independent directors,” says Pendergast.
Similarly, only the most insightful family members should be entrusted with seats on the new board. “Family board seats should not be an honor or perk but a place where the most capable family members can influence the company direction,” she says.
Moreover, families should keep an eye toward balancing continuity with turnover. Research shows that family boards tend to retain directors longer than nonfamily boards. Boards that are loaded with long-serving members risk stagnating or having subsequent family generations either lose interest or reach the board unprepared to govern. Including term limits can help keep balance.
Average tenures of independent directors of family-controlled firms mirror their nonfamily-controlled peers at 10 years. But family directors average 20 years’ tenure.
“Set term limits or a retirement age,” Pendergast says. “Family members who don’t see opportunities to contribute will become less engaged over time, which may make them more likely to sell their holdings, reducing family-ownership stake.”
By taking a thoughtful approach to going public, families can experience a “best-of-both-worlds” scenario, marrying the long-term vision of the family structure with the oversight of a publicly traded company and the access to capital to grow and ensure an aligned ownership group.
“The good governance that you put in place for a publicly traded company is good for a family company, too. There’s great value in having an engaged board with independent directors who are going to bring outside ideas and keep the family from being too insular.”
Fred Schmalz is the business and art editor of Kellogg Insight.