Sir Terry Leahy: Public companies can learn lessons from family firms

Tesco's chief executive considers the values that big business needs to stay ahead of the game
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All great businesses start the same way: someone has a simple idea and is brave enough to give it a go. Tesco started after the First World War with Jack Cohen being prepared to risk his money in setting up a stall in the East End.

But as businesses grow, life becomes more complicated. The challenge companies face is not just how to fund and manage expansion. But how to keep their edge. How to hold on to the vision and values which first inspired the business. How to avoid becoming bogged down in bureaucracy and back-covering mediocrity.

At first sight, you might think publicly owned companies should be much better at this than family businesses. After all, they have easier access to capital to invest in growth. They are run on far more meritocratic lines. With promotion being based on ability rather than blood, they have a much bigger gene pool in which to fish.

They are more open and transparent, with independent scrutiny, so there are fewer opportunities for the capricious or inadequate owner to damage the business. Or for the third generation, brought up to a life of ease, to squander what the first generation created.

This is pretty much the picture painted by recent research from the LSE into family firms in the UK. However, work by Professor John Ward at IMD into the performance of family firms around the world points to a different conclusion.

His findings provide compelling evidence to support the case that on a whole range of measures - return on capital, profitability, growth, sticking power over the years - family firms around the world outperform publicly owned companies. Why should this be? What magic ingredient X do they have which outweighs some of the more obvious drawbacks they face? And what can publicly owned companies such as my own learn from them?

His research shows that there are big cultural differences which stem from the fact that in family firms, ownership and management are in the same hands. So they tend to have a far longer time horizon. Family owners think in terms of the next generation rather than the next quarterly market update.

As a result, they do not have to float with the tide of market sentiment. They can be braver about what they do and say. They can dare to be quirky. Or they can dare to be traditional. They can stick to long-term values established over many years, building up loyalty and trust in their customers and staff.

A good illustration of that is the language they tend to use to describe their values. A family-owned business will use words such as courage, loyalty or authenticity to capture what they stand for. In a public company, you are more likely to find management speak - words such as efficiency, innovation and added value. It is also often the case that in family businesses, personal relationships are more important than process in getting things done. In publicly owned companies, by contrast, elaborate systems of oversight have been constructed. Statutory process and legal requirement are used as proxies for trust.

Of course, we need accountability, but the danger is that this way of thinking can easily lead to a culture that does more for back-covering than it does for risk-taking. Indeed, in attempting to codify trust, there is a danger that you end up destroying the very thing you are seeking to preserve.

Managers need the confidence to manage. They need to know that they can make mistakes. If they have to spend all their time looking over their shoulder because they have to satisfy a finickety box-ticking mentality, they are far more likely to take shelter in the short term and the conventional. If it is safer for their career prospects to be wrong with the rest of the herd than to risk being right on their own, what can we expect?

It seems to me the ideal company would therefore be one which combines the strengths of the publicly owned company with the strengths of the family business. One which is open and transparent and built on meritocracy yet is also distinguished by clarity, bravery and long-termism. Is this a pipe dream?

You can't pretend that a publicly owned company is the same as a family firm. I don't dream of lines of little Leahys working for Tesco for generations to come. But we have learned that it is possible to import some of the values and characteristics of a family firm into the way we try to run a big public company.

For example, we have learned the importance of having a set of long-term, fundamental values to which we always try to remain true.

We have learned the importance of continuity. We have been lucky at Tesco in having had only two chief executives in the past 20 years. Of how many other FTSE 100 companies is that true?

We have learned the importance of bringing management and ownership closer together by spreading share-ownership as widely as possible among the managers and staff. Through our share incentive schemes, more than 160,000 of our people have a personal stake in the future of Tesco.

We have learned about the importance of fighting committee-itis and bureaucracy by devolving management down as far as possible so that decisions are taken on the ground and not in some far-off HQ.

And we have learned the importance of remaining true to our roots. We like to remind ourselves at Tesco that we started out as traders. We don't try to pretend to be what we're not.

We have come a long way from Jack Cohen's market stall, and as a public company we have been able to do things that he could not have done.

But if he came back today, I would like to think he would still be able to recognise many of the values and much of the spirit he built into his family firm all those years ago.