Financial communication in family firms

In this article, Cynthia LIN (ESSEC Business School, Global BBA, 2018-2022) presents the importance of financial communication in family firms.

Introduction

Financial communication is mainly used by companies that publicly trade their shares on a stock exchange, to interface with actual and potential financial stakeholders such as retail and institutional investors and financial analysts. The prevailing belief is that unlisted, family-owned companies do not need to publish financial information, except for their statutory accounts. This leads us to ask to what extent this is the case.

Communication within the firm is an integral part of communication in a family, as the family is the primary unit that makes up the firm. Also, family businesses can only be operated by a direct relative. While family firms are usually successful, they are still family businesses, and therefore, the family is not likely to share the fruits of its success.

Thus, family firms need to have a clear communication strategy in place. The purpose of a family business communication strategy is to ensure that the core members of the company stay in communication. The family firm communication strategy is also crucial because each firm has different communication needs. Some may need more face-to-face communication, while others may need more written communication or phone or email communication.

Financial communication

In general, the framework that organizes the financial reporting process has several elements. The most important element of financial reporting is the content of the information. There is a natural tension between the desire of managers to provide complete information and the need to be cautious about the extent of disclosure. Historical quantitative financial data is generally not a concern, as companies are legally required to provide such data in their financial statements. Despite increasing attempts to limit companies’ discretion, the regulations still give them considerable leeway in reporting their results. Therefore, companies should go beyond the basics and provide useful supplements and interpretations.
Family businesses are generally more reluctant to disclose forward-looking information, which can help to highlight the impact of a new strategic decision on financial data, because they need to protect themselves from litigation in case, they provide ammunition for stakeholders to take legal action, or because they fear that information will leak to competitors.

Another important element that has a significant impact on financial reporting is the composition of stakeholders. Companies interact with many stakeholders, and the objective of financial communication is to inform these stakeholders about the economic situation of the company. The optimal method of communication depends on the composition of the stakeholders, although equity investors are often considered to be the main recipients of such communication.

Two other factors can potentially influence financial communication. These factors are the visibility of the company and the credibility of the management. Low visibility of the company, due to low awareness of its existence, limits the group that can be influenced by a disclosure package. Even a perfectly designed information package is ineffective if it does not reach the target group. On the other hand, a lack of credibility on the part of management can reduce the response to financial communication, even if the problems of information content and visibility have been overcome. When outsiders have confidence in management, they are much more likely to accept management’s interpretation of the company’s current situation.

Why communication is important in family firms?

Good communication is not just a matter of transmitting information between interested parties. It starts with a clear understanding of the family business’ objectives, strategies and roles, relayed through the most acceptable and effective channels to convey the desired message, and follow-up to ensure that understanding.

The family narrative, for example, is an important, relatively formal communication tool that links family history, culture, goals and strategy.

The unique characteristics of family businesses, including concentrated ownership in the hands of a controlling family and family involvement in the management or running of the business, limit the need for detailed financial disclosure. Influential shareholders (the controlling family) have all the information they need to assess the risk and return of their investment in the company and to make investment decisions. Family-controlled companies usually provide little external information, as the main investor (the family) already has this information. In addition, family shareholders generally act like entrepreneurs who want to keep their competitive advantage secret.

Family business: the case of Auchan

The Auchan holding company, for example, is an unlisted company and is heavily owned by the family. The company must regularly refinance itself on the debt markets and has a credit rating from Standard & Poor’s. Financial communication at Auchan is done regularly on a voluntary basis in order to give the financial community a better view of the company and its plans.

In general, management has a wealth of information on the company’s activities and economic situation. They must decide what information should be included in the financial communication and how to communicate it in the most transparent way to a wide range of internal and external stakeholders. In family businesses, concern for the reputation and long-term viability of the business requires particular attention to financial reporting. It is therefore worth examining whether the components of financial communication in family businesses differ from those in non-family businesses.

Conclusion

In conclusion, family businesses can benefit from a communication strategy, and family members must be made aware of the strategy. Additionally, to be effective, the communication strategy must be communicated, and family members must adopt the strategy simultaneously. Also, family firms’ communication strategies must consider the communication needs of the different family members. The information must be delivered to the right people, in the right way, at the right time, with the appropriate level of detail.

Useful resources

Ferramosca, S. and Ghio, A., 2018. Accounting choices in family firms. An Analysis of Influences and Implications. Cham: Springer International Publishing.

Campden FB (Family in Business)

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About the author

The article was written in March 2022 by Cynthia LIN (ESSEC Business School, Global BBA, 2018-2022).