Ownership structure is not a nice-to-have data point on the screen. It’s a leading indicator of long-term returns.sasirin pamai/iStockPhoto / Getty Images
When a company’s founder, a family or a chair has real money on the line, decisions get made differently. Costs don’t balloon. Capital isn’t wasted on vanity acquisitions. Bad quarters aren’t papered over to protect a bonus pool. And those firms’ stock prices outperform. That’s not folklore. It’s what the data have been saying for the better part of three decades, and the Canadian evidence is among the strongest.
National Bank of Canada Financial Markets has tracked 43 of the country’s most prominent family-controlled and founder-controlled public companies since 2005, including Colliers International Group Inc. and Quebecor Inc. A recent report shows the NBC Canadian Family Index returned 8.3 per cent annualized over the 18 years to June, 2023, against 7 per cent for the S&P/TSX Composite Total Return Index. Cumulatively, that’s 324 per cent versus 242 per cent.
The University of Toronto’s Clarkson Centre for Business Ethics and Board Effectiveness reached the same conclusion using a different sample. From 1998 through 2012, its Family Index of 23 Canadian-controlled issuers compounded at 7.7 per cent annually, compared with 6.1 per cent for more than 400 widely held peers trading on the Toronto Stock Exchange.
Two independent Canadian studies, two methodologies, one answer.
The pattern is not unique to Canada. Bain & Co. Inc., in one of the most cited studies on the subject, tracked the S&P 500 from 1990 to 2014 and found that founder-led companies delivered indexed total shareholder returns 3.1 times those of their non-founder peers.
Credit Suisse’s Family 1000 database of almost 1,000 publicly listed firms with at least 20 per cent family or founder ownership has documented an annual outperformance of roughly 370 basis points since 2006, in every region and every sector.
Ronald Anderson and David Reeb, writing in the Journal of Finance in 2003, established that family firms outperform non-family firms in the S&P 500 and that the effect is strongest when a family member is in the chief executive seat.
Why the premium exists
The reason is simple. Owners and managers want different things, and that gap is the oldest problem in corporate finance. A professional chief executive in North America has a median tenure of less than five years, according to Equilar Inc.’s tracking of the S&P 500, and a compensation package weighted toward three-year option vesting cycles.
The job, structurally, is to hit next year’s number. An owner-operator has decades of net worth tied to a single ticker. Their job is not to beat next quarter’s consensus expectations. It’s the next 20 years.
That difference shows up everywhere. Credit Suisse data show family-controlled businesses run with lower leverage, stronger cash flow conversion and returns on invested capital roughly 200 basis points above their peers. Founder-led firms in the S&P 500 generate 31 per cent more patents, according to a Purdue University study summarized in Harvard Business Review.
They invest more conservatively in research and development but convert that spending into innovation more efficiently. Put together, those advantages explain a 130-basis-point annual return premium in Canada that has held for 18 years.
How advisors can use this information
For advisors building portfolios for high-net-worth Canadian households, the practical implication is straightforward. Ownership structure is not a nice-to-have data point on the screen. It’s a leading indicator of long-term returns and a powerful filter against the agency tax that quietly erodes wealth in widely held businesses.
The question to ask of every public equity holding is the question a private buyer would ask: Who owns this and how much do they have to lose? If the answer is a manager with a three-year option grant and not much else, the alignment is thin. If the answer is a founder, a family or a chair whose net worth lives or dies with the next 10 years, the alignment is real. The TSX has a deeper bench of these names than most advisors give it credit for, and many of those companies sit at sensible valuations.
Three decades of academic and industry evidence, in Canada and globally, suggest that ownership structure deserves a place in the active manager’s toolkit alongside valuation, quality and growth. It’s one of the few investment edges supported by data that’s consistent and geographically diverse. It’s also one of the easiest to act upon.
Anthony Visano, CFA, is managing director and portfolio manager at Kingwest & Co., an independent investment management firm based in Toronto.