Planning for the long term
Management consultant Prof. Peter May on the peculiarities of family businesses
Planning for the long term
How do you create continuity in a time of permanent change? Family companies manage it by planning over decades and averting crises. Professor Peter May, a leading expert on family businesses in Germany, discusses the strengths and potential weaknesses of family-run companies.
Professor May, you have devoted your entire professional life to researching and advising family businesses. What fascinates you so much about this kind of company?
First of all, there is a personal reason for this fascination: I myself come from a family business that my grandfather founded almost 100 years ago. This means I have experienced the peculiarities of family companies personally from a young age. And I am more and more convinced that family businesses are fascinating and clearly the best form of economic activity in a capitalist society.
What brings you to this conclusion?
These types of companies combine three elements that distinguish good capitalism. Firstly, they aim for economic success. In other words, they have a need to be better than their competitors and to continuously improve. Secondly, they have a social responsibility to employees and communities. And, thirdly, they have a strong connection to their local region, which ensures that you will find flourishing economic landscapes, even in small places like Allendorf or Blieskastel. This results in a stable social model that is supported, in essence, by family businesses.
Exactly how many family businesses are there?
In Germany, more than 90 percent of all companies are family owned. They generate over 50 percent of all sales and employ more than half of the country’s employees. Of course, most family businesses are SMEs (small and medium-sized enterprises), but some of the largest companies are also owned by families – you only have to think of Aldi, BMW or the Otto Group mail order company.
How do you define a family business?
Unfortunately, there is still no authoritative definition, as the spectrum of family businesses is very broad. A handicrafts business managed by a family over generations is just as much a family company as, for example, the stock market-listed, worldwide company Henkel, which is run by outside managers on behalf of the principle family shareholder.
I believe there are three characteristics that distinguish a family business. The company must have a dominant owner who makes all the major decisions. This dominant owner is an individual or a family and has a declared intention to maintain the family character of the company for at least one more generation. With this simple definition, you can clearly differentiate these businesses somewhat selectively from other types of companies.
What difference does it make whether a company is owned by a family or any other owners?
The difference lies in the fundamental approach to running the company. Families think differently to investors. Someone who wants to be successful in 30 years’ time will set different objectives to someone who will leave after short-term success. This became evident, for example, in the financial crisis: instead of dismissing employees, many family-run businesses were able to sustain jobs by sacrificing short-term personal gain. And because of this, our family businesses rightly benefit from greater trust from the public. Given the changes that lie in wait, this could become extremely important.
Could you explain?
We all feel that we are living in a time of global and disruptive upheaval. Digitalisation isn’t just changing the business models of our companies, the economic and social order based on labour and capital is also being visibly shaken.
Why is this?
Digitalisation will ensure that the capital required for work to be performed is less and less dependent on manpower. If machines and algorithms take on more jobs, there will not be as much well-paid work for people. Money wins, work loses. This will lead to social and political challenges, for which we have yet to find solutions.
Are family companies better or less prepared for these upheavals?
Anyone who is in charge of and working with their own money is first and foremost at an advantage. They can act more quickly and courageously than an employed manager, and do so in a more responsible way. These are clear advantages.
However, there are also specific dangers to family businesses. Many of them will have to reinvent their business models. The digital era demands revolutionary changes. However, due to their long-term orientation, family-owned companies are masters of evolutionary change. Revolution is therefore not what they do best and therein lies the major challenge.
Today, long-term orientation is rewarded by (potential) employees, so family companies are the preferred employers for young talents.
They have something to offer people. We need the protection of the community and the sense of belonging that our families, clubs and village communities have given us for centuries; yet these relationships are fading and social networks simply do not offer an adequate alternative. Our family companies, with their emphasis on continuity, reliability and security, can at least partially fill this gap. However, companies also need to be able to keep the promises they are making.
What do you mean?
If you say you are a ’family business’, you have to act like one. Families usually grow their businesses up to a certain size, above which they have to question whether they can continue to determine the future of their companies. Financially, the means for further developments are limited. There is also the fact that many family-owned companies owe their growth to one single product, with a life cycle that will come to a natural end at some point. Then there is the question of whether a company has the ability to come up with something new. And if the family is able to see such a process through to the end.
Is there any truth in saying ’the father founds a company, the son inherits it and the grandson ruins it.’?
The disintegration of a family business in the third generation – also known as the ’Buddenbrook Syndrome’ after the Thomas Mann novel – is a scientifically researched phenomenon. In addition to the life cycle of the product, there is also the life cycle of the family. While the founder doesn’t shy away from risk, the children have a lot to lose. The grandchildren, on the other hand, have mostly grown up in luxury and barely know the founder – so it is sometimes difficult to keep the old entrepreneurial spirit alive.
The research has also demonstrated, however, that the average life span of family companies is higher than that of publicly owned companies. The oldest family company in the world was founded more than 1,000 years ago. There are no non-family businesses of a comparable age. Studies show that family businesses invest more in training their employees and employ the long-term unemployed and disabled more frequently than other companies do.
How do you explain their above-average social consciousness?
People who run family businesses are not necessarily better people, but it is in their DNA to have a long-term perspective. Reinhard Zinkann, owner of Miele, once said, “…our objective is not to double the value of the company every three years, but to pass on an intact company to the next generation every 30 years.” To achieve this objective, relations with all major stakeholders, especially employees, must be good. Companies that follow this approach dismiss fewer employees and ensure that the company’s environment flourishes, for example by supporting sports clubs or sponsoring cultural life in the neighbourhood. That there are so many ‘blossoming landscapes’ in Germany is, to a large extent, down to our family businesses.
As an expert in family businesses, you have also got to know Hager Group. What were your impressions on your visit to Blieskastel?
I must admit, when the family approached me years ago, I did not know Hager Group. My excuse is that I am simply not someone who is interested in technology. I was, however, impressed by how much of a ‘dark horse’ Hager was.
I was also impressed by the down-to-earth nature of the family and how Daniel Hager, a third-generation owner, runs the company. Also, the family recognises their corporate responsibility and work together to define a framework for their objectives whilst respecting their values.
You come from a family-owned company that, among other things, produced food for Aldi, but you left the company and became a lawyer. Why?
It was clear early on that my skills and passions do not really lie in business, even if my father would have liked to see me, his eldest son, take over. I have always considered myself more of a teacher and explorer and I am grateful to this day that my father allowed me to leave, saying that the happiness of his son was more important to him than the company’s succession.
Why did you then, at the beginning of the 1990s, take over the leadership of May Holding?
Only a year after his decision to let me take my own path in life, my father became gravely ill. My younger brothers felt that they were still too young to take on the responsibility on their own, so I shared it with them. It was a clear decision and as they say, ’blood is thicker than water’. It was also a way of saying thank you to my father.I soon realised though that my place was not at the head of a company, and after a six-year long inner struggle, I gave up managing the company.
How did your family react to your decision?
The process was not an easy one and it sometimes pushed us all to our limits. Anyone who knows family businesses will know what I mean. There were emotional scars and grievances and we barely talked for a short period of time. That is in the past though now. Today we understand each other better than ever. One thing I have learnt from the experience is that conflicts are natural, and this learning has been an important driving factor in my work. Conflicts are part of family life; it is up to us how we handle them and what we make of them.