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The ECGI - SSE Riga Conference on 'SMEs, Families and Capital Markets' took place (online) on 19 June 2020, bringing together policymakers, academics and practitioners to explore some of the key issues throughout a number of sessions.

Strengthening SMEs in Europe.

The conference opened with a keynote address by Executive Vice-President of European Commission, Valdis Dombrovskis. Mr. Dombrovskis emphasised how important SMEs and family businesses are to the economy, with family businesses, both large and small, making up around 70% of enterprises in Europe. Europe's economy, along with its citizens' livelihoods and their income, relies greatly on its 25 million SMEs and their 100 million employees. Mr. Dombrovskis outlined the measures which have been put in place to provide short-term emergency support since the current crisis began and went on to discuss the longer-term ambitions for rebuilding the economy as fairly and inclusively as possible while also strengthening its resilience and investing in the future, in line with the digital and green transitions. He reiterated that SMEs and family businesses would find it much easier to do business around Europe with fewer barriers and obstacles to deal with. There are many longstanding issues for smaller companies that hold back growth and prevent them from reaching scale. One of the key elements of the European SME strategy is to find ways of cutting more red tape for SMEs and making it easier for them to access finance. The Late Payment Directive is one example. The InvestEU programme will focus on supporting SME access to debt and equity-type financing, which financial markets either do not provide, or not sufficiently. SMEs need alternative financing sources to complement bank lending, such as crowdfunding, venture capital, private and public equity, and the Capital Markets Union (CMU) Action Plan will be delivered in early autumn 2020. The development of local and regional capital markets will remain a focus as they are the basis for deeper cross-border capital markets in Europe. Of note is the regional stock exchange alliance between Tallinn, Riga and Vilnius, which allows all Baltic companies to appear in a joint list with integrated services through the Nasdaq Baltic Market. The three Baltic countries are preparing legal changes to complete alignment of their national laws on covered bonds and securitisation by the end of 2020. They also want leading index providers to reach a single pan-Baltic classification. This will allow for a more productive and innovative use of private capital, with more diversified funding for smaller companies.

A resilient model with the power for good.

Professor Morten Bennedsen (The Wendel Center, INSEAD, University of Copenhagen and ECGI) began the academic sessions by exploring why we study family firms, what are the family assets and roadblocks, and whether family firms can be a force for good. Prof. Bennedsen outlined six key elements to their longevity, observing that they are persistent and ubiquitous. He noted that family assets are relation-specific and underpin the difference between the firm with the family and the firm with exactly the same activities, but without the family. He demonstrated findings that value based leadership (VBL), which is correlated with honesty, altruism, trust and political interest, is higher in family firms. High VBL can reduce conflicts, provide more organizational efficiency, and increase performance in family firms and larger firms. Prof. Bennedsen examined marriage and political networking as a family asset, but noted the regional variances. He also pointed to their resiliency, being 'on average' less leveraged, with better labour relationships, more crises experience, a flexible leadership style, and an eye for opportunities. On the other hand, family firms can have weak corporate governance, with fewer checks and balances, or challenges to charismatic family leaders. He expressed concern for when family members stop being accountable, pointing to the Sackler family as an example, while also noting that to be a force for good, there has to be a consistency between how money is earned and how it is spent. He concluded that there are many drivers for good in family firms and business families but also many challenges towards being good.

As listings decline, the importance of equity markets does not.

The ensuing panel, comprising Kārlis Urbāns (KPMG Baltics), Ivars Bergmanis (LHV), Vikas Mehrotra (Alberta School of Business, University of Alberta) and Anete Pajuste (Stockholm School of Economics (Riga) and ECGI), considered what capital markets can offer SMEs and Family Businesses, with a comparative review of family businesses in the Baltics. They further discussed why so few family firms are choosing public listing in the Baltics and what some of the main preconditions are for more SMEs and family firms going public. Previous studies were cited indicating that higher valued firms and those seeking to finance investments are more likely to issue external equity. Passive and active dilution of shares, and the M&A market as a substitute for public listing were also discussed. It was further noted that somewhat paradoxically, even as listings have declined in the US, the importance of equity markets has not. A similar pattern is seen in CEE and the Baltics, albeit equity represents a lower fraction of these economies than in Germany, though the trajectory of equity as a fraction of the economy is similar.

Mr. Bergmanis explained that this is a complex top down problem (mainly demand side driven), in the Baltics, with various structural items to address, such as the dominating impact from market standard indexation processes whereby the Baltics are classed as a frontier market (implied capital flow restraints) despite memberships of the EU, eurozone, NATO and OECD. Moreover, MiFID II research requirements have instilled further limitations in terms of the visibility of these markets to institutional investors combined with a dominating source of financing coming from banks (market cap to GDP ratios among the lowest in Europe). Private investors have also been encouraged during past decades to avoid stockpicking and focus on no load mutual funds / ETFs, hence a different investing concept would be applicable. Lastly, he offered that there are incorrect perceptions to resolve about the extreme complexities in order to become listed (the first supply side factor), particularly if the alternative market (First North in the Baltics) is the ultimate home for the lion’s share of SMEs.

Personal liquidity concerns for shareholders and financial concerns for the firm should be analyzed jointly.

Professor Janis Berzins (BI Norwegian Business School) presented his co-authored paper on "Shareholder illiquidity and firm behavior: Financial and real effects of the personal wealth tax in private firms" which suggests that shocks to household finance propagate to corporate finance, as explained by the finding that when the controlling shareholder experiences a negative liquidity shock that is unrelated to the firm’s situation, the firm’s subsequent dividend and salary payments to the shareholder increase, while the firm’s cash holdings, growth, and performance decrease. The evidence also suggests that the effect of personal liquidity concerns for the shareholders and financial concerns for the firm should be analyzed jointly. This perspective is particularly important in private firms with concentrated ownership and moderate size, where both the owners’ liquidity constraints and the firm’s financial constraints are likely to be strong. From a policy point of view, the results suggest that taxes strictly related to the personal sphere may have important spillover effects on the corporate sphere through the ownership channel.

Control does not mean ownership.

In the next academic session, Professor Vikas Mehrotra (Alberta School of Business, University of Alberta), presented his co-authored paper "Family Control without Ownership: Evidence from Publicly-traded Japanese Firms". In a series of case studies, he showed how in each of the companies, founding families are able to exercise control despite having little ownership. The mechanisms employed may differ, but the end result is the same. In Casio, the founding members lost ownership via growth and retained control via talent; for Toyota, the control comes from a web of cross-shareholdings and; for Suzuki, succession involved a series of Adult Adoptions. Families don’t appear to exit their firms altogether. Rather, he identified three distinct exit modes: (1) The most common involves giving up day to day management to a professional manager, while retaining material ownership; (2) The second most common form of exit is a dilution of ownership to insignificant levels, but a retention of the firm’s top management reins; (3) Finally, the least popular form of exit is families selling out ownership and packing their bags from the firm as well. Dynastic CEOs with little family ownership are more common than often thought. In fact, in the literature on family firms, they are conspicuous only by their stand-alone absence. The study takes a deeper look at the definitions of family businesses and more specifically at the transitions between four 'types' of firm based on their ownership and management compositions.

Managing the firm's earnings when it counts.

In the next session, Professor Marc Goergen (IE Business School and ECGI) presented his co-authored paper "Earnings Management around Founder CEO Re-appointments and Successions in Family Firms" which studies earnings management around CEO re-appointments and CEO successions in listed family firms from France, Germany and the UK during the period of 2001 to 2016. Using a definition of a family firm as a firm whose major shareholder is a family holding at least 25% of the voting equity and having a family member as its CEO, their study supports the theory that family firms practice less earnings management than equivalent non-family firms. However, they also find consistent evidence of upward earnings management preceding the re-appointment of founder CEOs, suggesting that founder CEOs, keen on being re-appointed given their socio-economic attachment to their firm, may be tempted to manage their firm’s earnings to avoid dissent from their minority shareholders.

In his discussion of the paper, Bogdan Stacescu (BI Norwegian Business School) found the paper to be a rich and well-executed empirical exercise confirming that family firms engage in less earnings management than other firms, along with the novel finding that founder CEOs in family firms are likely to engage in earnings management prior their potential re-appointment, which together with the recent work of Anderson et al. (2017), helps to build a more complex picture of founder-controlled firms, beyond just the well-known “founder premium”. The authors suggest the concern about preserving the family’s socio-emotional wealth is the incentive behind founder CEO behavior, which seems a promising avenue for further research.

M&A activity along with the development of private equity markets are the major driving forces for the decline in listings.

In the final session of the conference, Tanya Panova (European Commission) and Jonathan Haynes (Oxera) presented some initial factual findings from Oxera’s ongoing study for the European Commission on the functioning of primary and secondary equity markets. This study is providing the evidence base to inform the Commission’s plan to further advance the Capital Markets Union with policies that aim to provide a better environment for listing of companies of different sizes. The study takes stock, looks back at the trends, and assesses how European equity markets have been performing over time.

Mr. Haynes presented some data on the stocks and flows of listings across Europe, based on new data collected from stock exchanges, and some feedback from issuers (including SMEs and family-run companies), about the costs and benefits of listing. The top benefits reported were the exit route for existing shareholders, facilitation of acquisitions, and access to additional equity. Listing also signals commitment to governance standards. At the aggregate level the Oxera data showed that the inflows of IPOs are not outweighing the number of outflows via delistings, mergers, or company failures. He indicated that the analysis shows an overall reduction in the number of listed companies in Europe, with M&A activity along with the development of private equity markets as major driving forces for the decline in listings. However, there are some differences across markets – for example, UK’s AIM market has seen a fall in the number of listings, while Nasdaq’s First North Stockholm markets has seen a rise.

SMEs face particular challenges with public markets. Feedback from market participants indicates that over the last decade it has become less attractive for companies, particularly mid-sized corporates, to seek funding from the public markets. One element is that the fixed cost of listing is a larger share of the issuance size, meaning things like regulatory costs and fees have a disproportionality large impact for SMEs. For family-run companies, issues around control and agency costs appear to be important reasons not to list. Oxera are still working closely with the Commission on policy recommendations. At a high level, some important policy considerations are around: issuer costs, investor appetite; the role of intermediaries, fund structures and the advisory ecosystem; and governance issues. The study is expected to be published later this year alongside the European Commission’s Capital Markets Union Action Plan.

The conference concluded with some final words from the organisers, Marco Becht (Solvay Brussels School, Université libre de Bruxelles and ECGI) and Anete Pajuste (Stockholm School of Economics (Riga) and ECGI). 

A summary video is available to view here on YouTube.

The videos of the sessions are available to view here. Some of the slides are also available at the same location.


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