Credit Suisse’s recent troubles can partly be put down to a series of scandals that have eroded confidence in this banking giant. Indeed, a company’s reputation can be totally ruined by the uncovering of accounting irregularities. If all companies wish to preserve their image, are they all in the same boat?
Family firms: Not just economic concerns
Among the more than 600,000 companies in Switzerland, family firms are undeniably in a class of their own. They regularly make the headlines for their exceptional longevity and ability to withstand shocks. Their long-term vision ensures a resilience that many might envy. In family-run businesses, management teams are committed to preserving both the company’s financial interests and its socio-emotional aspects over the long term. From this perspective, theory suggests that management decisions aim to protect two types of ‘wealth’: economic wealth, as it is usually understood, and social-emotional wealth. The latter leads to the pursuit of non-financial objectives aimed at strengthening the sense of belonging to the family, enabling the transmission of family values and ensuring intergenerational succession. Socio-emotional wealth depends to some extent on the reputation of the family business. This reputation can be tarnished by a number of events: a governance crisis, a health scandal, accounting manipulation, etc.
Eponymous family firms: Strong identification with the founder
Among family businesses, eponymous companies are those that bear the name of their founder or founding family. Examples in Switzerland include Bobst, Kudelski, Meier Tobler and Zehnder. This type of company is well known to the general public. The names Gucci, Guinness, Michelin and Rothschild in Europe, and Disney, Heinz and Hewlett-Packard in the United States immediately spring to mind. As Switzerland has one of the highest concentrations of large family businesses in Europe, this makes eponymous companies particularly visible, and therefore mindful of their socio-emotional wealth. This was not the case for Gerald Ratner, known for publicly criticizing the products sold in his eponymous jewelry stores in 1991. Ratners, renamed ‘Crapners’ by the press and whose image had considerably deteriorated, had to abandon the name of the founding family in the hope to make up for the affront!
An exchange attributed to the Sackler family illustrates their desire to protect the family and its name, at a time when OxyContin was in the spotlight due to the opiate addiction created in the USA.
Uncle Arthur never kept a single company in his own name for exactly this reason.
We’ll put up a firewall between the name and the product. From the Painkiller series on Netflix, S01E04
The aim is to ensure that the company’s legal troubles do not reflect negatively on the clan’s members or tarnish the philanthropic actions undertaken by the Sackler dynasty. In this case, naming the family company Purdue Pharma appears highly beneficial!
In a recent study, a group of international researchers (Canada, France and Switzerland) therefore asked whether the greater reputational concerns of eponymous firms prompt them to manage their income less, for fear that the discovery of such a behavior might tarnish their image and thus their socio-emotional wealth. The answer is: yes, but not all the time.
Earnings management: Eponymous companies avoid it, but not all the time
In their recently published study1, researchers show that Swiss-listed eponymous family firms distinguish themselves from other companies in that they are indeed less tempted to manage their earnings (i.e., they disclose less manipulated and therefore better-quality earnings). This means these companies are less inclined to voluntarily interfere with the profit and loss reported annually. Why is this? The explanation lies in the very strong identification of the owners with the company when they gave it their name.
However, there are two cases that undermine this behavior. The first is the voluntary switch from IFRS to Swiss GAAP accounting standards. In this case, the eponymous family businesses take advantage of a break in the comparability of accounting data and manage their earnings, as the risk of detection is lower. The second situation arises when a family member chairs the board of directors or leads the management team. In this configuration, other incentives come into conflict with the preservation of socio-emotional wealth, such as the need to demonstrate one’s ability as a leader.
In conclusion, the current research on Swiss eponymous companies shows that they generally disclose better-quality earnings. Given the importance of earnings in financial analysis and valuation, this information is a factor to be considered when allocating capital. A contextual assessment of the company is also crucial, as certain situations, such as a change in accounting standards or the presence of family members on the executive committee, can undermine this positive link between eponymous family firms and earnings quality.
1. Cédric Poretti, Tiphaine Jérôme and Carl Brousseau (2023) Family identification and earnings management in listed firms, Accounting in Europe, DOI: 10.1080/17449480.2023.2231964.