Leadership and performance: When a financial partner benefits family businesses

The Italian economy is characterized by smaller businesses compared to its major European partners, which risks undermining the country’s overall competitiveness. In a landscape marked by the widespread presence of family businesses, the reluctance of owning families to open up capital to external investors—due to fears of losing control—represents a significant barrier to investment and growth.

But what happens to a family business when it chooses to open its capital to external investors?

Last year, the Sustainable Growth, Internationalization and Capital Opening Monitor analyzed the effects of capital opening on corporate governance, particularly on the composition of boards of directors. The findings showed an increase in younger, foreign, and independent directors but also a decrease in the number of women. This led to greater internationalization and a stronger push for mergers and acquisitions (M&A).

This year, the analysis shifted focus to leadership (CEOs and Presidents) and corporate performance.

The research focused on family businesses that opened their capital between 2016 and 2022, with a turnover of at least €100 million at the time of the deal. We compared their leadership models and financial performance with those of similarly sized family businesses that remained privately held and had at least one external leader during the same period. The sample included 188 companies that opened their capital and 184 for comparison.

As with board members, the new leaders are younger than their predecessors. Three years after the deal, they are on average five years younger. However, the number of female leaders significantly decreases, alongside a drop in family member leaders.

Family member leaders nearly halved, dropping from 30% pre-deal to 16% post-deal, while female leaders decreased from 7% to 5%.

The profile of new leaders post-deal differs from their predecessors and is characterized by:

• Higher levels of education (MBA: 26% vs. 20%; degree: 93% vs. 89%), though there is room for improvement in executive training;
• More frequent international educational experiences (43% vs. 36%);
• Greater managerial experience, though less leadership experience (consistent with their younger age, the appointment often marks a turning point in their careers);
• More experience within the same company or industry.

Compared to leaders of closed-capital companies in the comparison group, the differences are similar to those post/pre-deal (in terms of executive and international education). However, in closed-capital companies, there are more women and family member leaders (unsurprisingly).

In terms of corporate governance structure, between the year before and the year after the deal, there is a drastic reduction in sole directors (from 5% to 1%), executive presidents (from 17% to 13%), and multiple CEOs (from 33% to 30%), with a corresponding increase in sole CEOs (from 45% to 56%). As a result, the Corporate Governance Index, created by SDA Bocconi’s Corporate Governance Lab, increased from 3.19 to 3.25.

The Corporate Governance Index measures the quality of a company's governance based on five parameters: the presence of a board of directors; individual leadership (sole CEOs instead of multiple); the board’s openness to outside directors; the separation of the roles of Chairman and CEO; and the board’s diversity in terms of gender, age, and geographic origin.

It is noteworthy that the CG index is already higher in open-capital companies than in closed ones before the deal (with average index scores of 3.18 and 3.08, respectively). In closed-capital companies, the incidence of multiple CEOs is higher (46% vs. 30%).

Comparing Performance:

• Companies that underwent a deal show higher revenue growth than closed family businesses five years after the deal. This effect is slightly more pronounced when only considering companies that changed at least one leader during the analyzed period. Meanwhile, closed-capital companies tend to have higher short-term revenue growth.
• EBITDA is higher for open-capital companies, while ROA is lower due to greater investments aimed at supporting medium- to long-term growth. However, it is interesting to see that in closed-capital companies with leadership changes, EBITDA shows a growing trend.
• Employment increases in open-capital companies, less so if leadership changes, but with a greater impact compared to those that do not open their capital over the medium term.

The study offers insights into the role and benefits of opening capital and the importance for companies that open up to prepare for this profound change by having already advanced governance, with unified leadership open to change. On the other hand, the number of female leaders decreases, posing a challenge both for companies that open up and for their partners, as well as a topic for further exploration.

In contrast, closed-capital companies show lower but still positive performance, especially when leadership changes occur.

In summary, the focus on evolving governance remains a critical factor for continuity and success.

Naturally, many questions remain open: among other things, we intend to further explore the characteristics of post-deal leaders compared to those who remained in charge, as well as the new leaders of closed-capital companies compared to those still at the top. We will also look into the evolution of governance and performance beyond five years post-deal. Stay tuned!

Daniela Montemerlo, Joao Pedro Bastos Castilho, Simone Oddo. Apertura del capitale e dinamiche di leadership: profili, percorsi e performance.