A refuge for values
Successful family businesses are often more agile and dynamic and less risk-averse than many people might think. Peter Bartels, member of the executive board of PwC and head of the Family Businesses and Middle Market business unit, and Professor Peter May, owner of Peter May Family Business Consulting and strategic advisor at PwC, discuss the importance for businesses of retaining their values and defining them clearly.
- What capital market-oriented companies can learn from family businesses.
- How technological development is changing the business focus of family businesses.
- How family businesses redefine "Heimat".
The economic upheavals that we have experienced since the financial crisis are symptoms of a disconnect between the success of companies and national economies on the one hand and the acceptable level of benefits for society on the other. What is the position of family businesses in this scenario?
Peter Bartels: Family companies focus on their own long-term survival. That is their main objective. To ensure that they do survive, they need to have strong roots in society, because their employees come from the local region. If the benefit the businesses offer to society is not obvious, they will have difficulties in surviving.
Professor Peter May: One of the main problems of unbridled capitalism is that many people lose their sense of connection. While some of them worry that their jobs will disappear, others become increasingly rich, because they are in possession of capital or perhaps have simply inherited it. This calls into question the fundamental consensus on an economic and social order based on work and capital. For family businesses, the situation is quite different. They always have to focus on retaining jobs. This is why they do not necessarily move to areas where the cost of production is lowest.
A short-term focus, which is driven in particular by shareholder value, contributes to this disconnect between work and success. To what extent can family businesses, which have a tendency to think in terms of generations, act as a counterbalance to this trend? What can publicly traded companies learn from them?
Professor Peter May: Our family businesses have always acted as a counterbalance to the approach based purely on shareholder value, as a result of their fundamental structure. There is a natural tension between Anglo-Saxon capitalism, which puts the shareholder center-stage, and Rhine capitalism, where the focus is on the stakeholder. The objective of family businesses is not to double their value every three years, but instead to pass on a healthy company to the next generation every thirty years.
Peter Bartels: The possible lessons to be learned can be seen most clearly in hybrid companies, in other words, large listed firms with a family as the main shareholder. One good example of this is Henkel, where one of the five key corporate values is its tradition as a family company. The family acts as the anchor shareholder, has regular in-depth meetings with the management team, works to ensure the long-term loyalty of the managers to the company, and combines family and corporate values to create the organization’s one central success factor.
„Family companies are conservative innovators. They take entrepreneurial risks, fundamentally reinvent themselves in the process, achieve large-scale inorganic growth, and reinterpret their values.“
Will businesses of this kind that are designed for long-term survival, sustainability, and social responsibility find life more difficult in future?
Professor Peter May: We live in an era of very rapid change. The question is whether companies can adapt to these changes quickly enough. In the past people often said “one company, three generations” in reference to the life of the business. Today what is needed is “one company, three business models.” If a company has had success across several generations with a single product, it will now find that it needs new business models from one day to the next. In addition, in an age of increasing individualization, the coordination processes within the family that owns the business will become increasingly time-consuming and complex, if the company does not, as has been the case in the past, follow the decisions made by a patriarch, but instead aims to involve all the shareholders. The trend toward urbanization also represents a challenge for family companies, which are often based outside major cities. Nowadays, well-trained specialist staff with a wide range of interests want to live and work in the city, because the infrastructure there is more appealing to them. However, some companies are already a good example of how production at the traditional headquarters can be combined with working in the city. It is in all our interests to achieve a healthy balance between the town and the countryside. Family entrepreneurs generally see this as an important responsibility. Nevertheless, we need to understand that the environment of family companies is changing drastically.
How do well-established family businesses contend with the new, agile, and flexible startups on the market?
Peter Bartels: In family companies the employees are much closer to the products and the customers. This is their main advantage over startups, which often have not yet acquired any customers, but instead have interesting business models. The competition between the two is based on how successful startups are in attracting the customers of established companies via digital platforms. However, a decisive factor for large corporates in Germany will be the extent to which the successful middle market with its outstanding niche suppliers can work together with startups on an equal footing and cooperate to establish new companies and business models. The prerequisite here is that both sides must be prepared to learn from one another. In my view, this form of cooperation is the right route into the future. With the help of startups, medium-sized companies can discover which part of their business can be standardized and transferred to a digital platform. When compared with other countries, in particular China and the USA, each type of company on its own is either too small or too slow. In an increasing number of cases, firms are beginning to understand this and to recognize that their competitors are not in Germany, but outside its borders. More and more often we find ourselves advising traditional medium-sized companies about how to identify the right startups to cooperate with on developing a strong digital business model. The job of the new federal government in Germany is to create a suitable regulatory framework and to set up business clusters in order to ensure the success of this approach. After all, Silicon Valley is primarily a cluster of innovative companies.
Digitization is forcing many firms to innovate. How are family companies dealing with the increasing pressure to change?
Professor Peter May: Two main approaches are currently emerging. One is exemplified by firms like Viessmann, where Max Viessmann, a representative of the next generation, has taken responsibility for digitizing the business. These companies are confronting the challenge of digitization with a clear strategy and redesigning their business models themselves. I would like to see many family companies adopting this approach. However, there are still a lot of businesses that are behaving as if the challenges of digitization simply do not exist to any great extent. The third group consists of family companies that turn themselves into family offices. These are family investment banks, which are not particularly entrepreneurial. Instead they manage assets and increasingly become financial investors. This can be the right thing for certain families to do, but a company of this kind does not create many jobs.
Family businesses often have regional roots. How does this fit in a globalized world? Is a strong attachment to home a value in itself and what does it involve?
Professor Peter May: We need to redefine the concept of an attachment to home. In the past, a company’s home was seen in regional terms. The production facilities were in rural areas where labor was plentiful and the means of production were cheap. In the digital era, this “home” no longer plays such a crucial role. Any family business that wants to survive must identify a new form of home and community for itself using values like a sense of belonging, solidarity, team spirit, and reliability. In the age of digitization, a sense of belonging can create a new type of home. The younger generation is redefining its values: finding individual fulfillment, living your own dream, participating in exciting activities in a team, being taken seriously, and identifying the right work/life balance. In this area, good family businesses have as much to offer as startups.
Peter Bartels: I still see regionality as an advantage for family companies, because many of their existing employees have strong local networks. This involvement in personal networks is what makes a home. However, digitization gives employees new flexibility in this respect. For example, they can have strong roots in the region with a global impact or alternatively a workplace away from the head office, but with close links to it. Medium-sized enterprises need to set up sites in different locations. One example is Ottobock, the manufacturer of medical devices based in Duderstadt in Lower Saxony, which has recently established a science center in Berlin. In any case, middle market firms often earn more than half of their revenue outside Germany.
„The objective of family businesses is not to double their value every three years, but instead to pass on a healthy company to the next generation every thirty years.“
Financial figures are no longer an adequate means of measuring success. It is important to establish social objectives as well. Can we learn from family companies in this respect?
Professor Peter May: Alongside their financial targets, family businesses often have emotional objectives that relate to their social obligations. A dominant owner will find it easier to set objectives of this kind than a management board in a listed company, which makes it difficult for public companies to learn from family businesses in this area. However, it is always worthwhile for them to take family companies as their role model with regard to corporate social responsibility.
Are family businesses really “a refuge for values” when compared with publicly traded companies? What is this belief based on?
Peter Bartels: In the study we identified ten key factors that link together all the successful family businesses we analyzed and that determine their long-term success. Successful family companies can be described as conservative innovators. They take entrepreneurial risks, fundamentally reinvent themselves in the process, achieve large-scale inorganic growth, and reinterpret their values. In addition, they remain true to their basic principles and to the idea that they must keep the company in the hands of the family and preserve its independence. They take an active approach to dealing with disruption, their leadership style is visionary and authentic, they interpret their values in a contemporary context, and they combine experience with young thinking, to mention just a few points. All of this makes them highly attractive to skilled staff.
Professor Peter May: Values are also subject to change as the zeitgeist changes. This means that company management teams must regularly review the values that form the basis for their business, in just the same way as the shareholders must ensure that the guidelines for managing their stake in the company are up to date. If necessary, the company’s guiding principles must be adapted to changes in its operating conditions, but without having a negative impact on the fundamental values of the family that owns the business.
What impact does this approach have on the company’s day-to-day activities and its employees?
Professor Peter May: Entrepreneurs have to become even more powerful role models who motivate and inspire their employees. The greater the sense of certainty and security that companies convey, the more successful they are perceived to be.
Peter Bartels: In particular with regard to digitization, in the company’s daily business this means moving away from large-scale strategies with a broad impact and instead introducing small, customer-related projects that give the employees confidence. The more experienced entrepreneurs should get involved in the projects themselves so that older employees feel that it is not too late for them to learn about the digital world. For example, special workshops could be held to develop a small app as a platform that is easy to use. This will change the mood very quickly and bring more impetus into the organization. It is important to deliver something tangible that allows employees to use their existing knowledge. The staff must feel that they are appreciated and understand their own value to the company.
How can values be reinterpreted and put into practice from generation to generation?
Professor Peter May: This process must always begin with the right question. This is not: What values does my company have and why? Instead, the company owners should be asking: What changes have there been in our environment and what does that mean for our values? They need to understand why certain values once played a central role and why others have become less important or need reinterpreting.
What part does the head of the family play in putting values into practice in family businesses?
Professor Peter May: Dominant patriarchal figures are becoming increasingly rare, but the head of the family is usually still the head of the company. Many of the family members often follow the lead of this person, who is responsible for shaping the business. The way they act and their approach to corporate values and social responsibility are therefore particularly important.
Peter Bartels: This is precisely where credibility comes in. Authenticity is one of the key values. If the values of family companies are not put into practice and if the family does not set a good example, the whole house of cards will come crashing down. As a result, values are the starting point for both the company’s strengths and its weaknesses.
Future images for familiy businesses
Even family businesses cannot elude the shift from industrial capitalism to digital capitalism. Fast and eveny sometimes radically they have to adapt to the new circumstances. Which challenges they face, explains Prof. Dr. med. Peter May in this piece about "next 20 years" (in German).
Photo credit: Arand/GettyImages, PR, PwC