The specificity of financial communication in family firms

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Financial communication is mainly used by companies that publicly trade their shares on a stock exchange, to interface with current and potential financial stakeholders such as retail and institutional investors and financial analysts. A prevailing belief is that unlisted firms with a closed family shareholding community has no need to publish financial information, apart from its statutory accounts. This leads us to question to what extent is it the case?

As an example, Auchan holding stands as an unlisted firm with a strong family ownership culture. The company needs to regularly access the debt-capital markets and is assigned a credit rating by Standard & Poor's. Financial communication at Auchan is conducted regularly on a voluntary basis in order to give the financial community a better visibility of the company and its projects.

Broadly speaking, managers possess a large set of information regarding the firm’s activities and economic position. They must determine what information is to be incorporated in the financial communication and how they can communicate financially, as transparently as possible, to a wide range of internal and external stakeholders. In family firms, concerns over reputation and long term viability of the firm require paying particular attention to financial communication. Therefore, it is worth examining whether the financial communication components of family firms differ from those of non-family firms.

WHICH FRAMEWORK FOR FINANCIAL COMMUNICATION?
In general, the framework that organizes the financial communication process contains several elements. The major element of financial communication is the information content. There is a natural tension between the managers’ desire to provide full information and the need to be careful about the level of disclosure. Historical quantitative financial data are not usually an issue because firms are mandated by law to provide such data in their financial statements. Should then firms simply communicate results and let those results “tell the story”? In spite of increasing attempts to limit companies’ latitude, regulations still give them considerable scope in presenting their results. That’s why firms need to contribute beyond the basics, giving some meaningful amplification and interpretation. Financial reports by their very nature are background looking, and they are inadequate for gauging performance, especially in industries undergoing dramatic change. Family firms are usually more reluctant to disclose forward-looking information that can help to clarify the impact of a new strategic choice on financial data because they need to protect themselves from litigation in case they provide stakeholders with ammunition for lawsuits or they fear leaking information to competitors.

Another important element impacting considerably the financial communication is stakeholder composition. Firms interact with a diverse set of stakeholders and the goal of financial communication is to inform these stakeholders about the economic status of the firm. The optimal method of communicating varies with the composition of the stakeholder base although equity investors are often considered as the primary audience for these communications.

Two other factors can potentially influence the financial communication. These factors are firm visibility and management credibility. Low firm visibility, due to limited knowledge of the firm’s existence, narrows the group that can be influenced by an information package. Even a perfectly designed information package will be ineffective if it does not reach its intended audience. On the other side, lack of management credibility can reduce the response to financial communication even if information content and visibility issues have been overcome. When outsiders have faith in management, they are much more willing to accept management’s interpretation of the firm’s current situation.

Financial communication in family firms: a controversial issue
The unique characteristics of family firms including the concentrated ownership in the hands of a controlling family and the involvement of the family in the governance or the management of the firm, limit the need for elaborated financial communication. The influential shareholders (the controlling family) have all the information they need to assess the risk and return of their investment in the company and take investment decisions. Companies controlled by a family tend to provide little external information since the main capital provider (the family) already has this information. In addition, family shareholders generally act as entrepreneurs who are keen to keep the secret of their competitive advantage. However, companies should be also clear in communicating what their overall philosophy is in respect to other stakeholders. Firms should mainly consider non-financial market stakeholders who use firms’ financial communication and often have quite different goals from equity investors. They should consider other equity financing providers (employees), debt financing providers (bondholders & banks), trade creditors, customers and other stakeholders. If family firms “think and act differently” then we expect differences in their financial communication practices when compared to non-family businesses. The impact of their unique characteristics and the relevance of non-economic factors such as reputation and the long-term survival for family firms is significantly higher, in this regard, than in the case of non-family firms.

Par Elie Salameh (Associate Professor and member of the EDHEC Family Business Centre, EDHEC Business School)