The J.M. Smucker Company (SJM), Tootsie Roll Industries, Inc. (TR): Should You Bet the Farm on Family Firms?

After the firing of George Zimmer, The Men’s Wearhouse, Inc. (NYSE:MW)‘s founder and face of the company,  hit the wires Panera Bread Co (NASDAQ:PNRA) co-Founder and co-CEO Ron Shaich posted his opinion on LinkedIn that a founder has much more invested in a company and will try his/her best to do right by their creation.

More interesting is what happens after a founder passes the baton to his family, who may not be as emotionally invested and if publicly traded, have to answer to shareholders.

A  Boston Consulting Group study as reported in the Harvard Business Review found,”…during good economic times, family-run companies don’t earn as much money as companies with a more dispersed ownership structure. But when the economy slumps, family firms far outshine their peers. And when we looked across business cycles from 1997 to 2009, we found that the average long-term financial performance was higher for family businesses than for nonfamily businesses in every country we examined.”

The family firm model

The J.M. Smucker Company (NYSE:SJM), the food manufacturer, is an example of a family-run company that doesn’t get a perfect corporate governance risk rating because of shareholder rights (the worst score of 10) and Board (again 10)  due to the generally more chummy nature of family run firms. In their case it certainly hasn’t hurt the stock’s performance despite the fact there is a Smucker as CEO and several more as executive officers.

Dr. Chris MacDonald of Ryerson University explains the concern of shareholders, “there’s a worry that the family’s influence might not always work in the interests of other shareholders. And this worry is exacerbated by the fact that family-controlled companies often don’t stick to widely-acknowledged best practices in terms of corporate governance.”

In the case of The J.M. Smucker Company (NYSE:SJM) it is not family controlled as family members don’t own 30% plus of the stock, it’s less than 5% but four Smuckers together own over 1.3 million shares.

The company was founded by a Smucker forbear who sold apple butter off a donkey cart. Still nestled at One Strawberry Lane in Ohio the company has grown to a $10.93 billion market cap.

The company offers a 2.00% yield with a forward P/E of 16.13. The J.M. Smucker Company (NYSE:SJM) trades at 2.13 times book and has a 2.29 PEG.

The main advantage of family run companies according to the Boston Consulting Group  is a frugal approach to their businesses, ” We believe it’s possible to identify one ( a family company) just by walking into the lobby of its headquarters. Unlike many multinationals, most of these firms don’t have luxurious offices.” Investing guru Peter Lynch also found fancy trappings suspect.

Contrast this to family controlled company, confectioner Tootsie Roll Industries, Inc. (NYSE:TR). Chairman and CEO Melvin Gordon, age 93, and his President and COO wife Ellen, age 81, receive over $7 million in pay between them, have almost unlimited access to the company jet, and a subsidized apartment to the tune of $10K per month. Tootsie Roll has been under control of members of the Rubin-Gordon family since the Great Depression.