Tradition of family business

Small and medium-sized firms have deservedly been described as the backbone of the German economy

Experienced master carpenter transferring knowledge to his younger colleagues

They are of utmost importance for the German economy, standing for innovation, quality and long-term-vision: Germany´s family-enterprises. The Germans call it the “Mittelstand” – and the unique structure of Germany’s strong sector of family-owned companies has become a synonym for technological strength, innovation and entrepreneurial spirit all over the world. In fact, the Mittelstand not only accounts for the overwhelming majority of all businesses in Germany (over 3 million), it also provides some 60 percent of all jobs and over 80 percent of all apprenticeships.

Depending on its specific definition, the family-owned companies range all the way from small craft workshops to hidden champions worth up to a billion euros. Their range expands from wellknown companies as Volkswagen or Bosch to players that are worth billions as Henkel, Merck or Dr. Oetker, and often includes Hidden Champions as Brose, Eberspächer or Harting.

The central feature of the German family business is the amalgamation of strategic and operative levels, of ownership and entrepreneurship

Small and medium-sized firms have deservedly been described as the backbone of the German economy. They are a driving force behind growth and employment. The central feature of the German family business is the amalgamation of strategic and operative levels, of ownership and entrepreneurship. The family is the owner as well as the manager of the company. Thus specific conflicts which regularly arise in anonymous business partnerships between the supervisory board responsible for the strategic orientation (principals) and the directors (agents) who run the day-to-day business activities disappear. Not only do families provide capital for the company. They also provide manpower.

Therefore discrepancies between management and workforce are usually less significant. Company owners assume a duty of care for their personnel similar to the way parents do for their children. In family businesses responsibility and liability, direction and execution, and supervision and correction lie in the hands of few. This is an enormous advantage as it expands time horizons, reduces distances, increases flexibility and creates awareness for the big picture.

The danger that managers pursue their own interests rather than those of the firm does simply not exist. However, the damage is significantly bigger should individual family members lose sight of the company and primarily care for the needs of their own ego, begin to fight other members of the family or present themselves publicly for their own cause. In that case values otherwise inherent to the family business like indigenousness, authenticity and as a result trust may be jeopardised. The exceptional advantages of family businesses are also the biggest risks. Amalgamation of strategic and operative levels and the blending of owner and manager interests within a family may quickly turn into a business catastrophe. Exactly because of the dangers of an unsuitable division of responsibility within the family the best solution may be to keep these levels separate.

Many (larger) family businesses have become public or limited liability companies. The highest grossing German family firms, Metro and BMW, are public companies, Robert Bosch and the Schwarz Group limited liability companies. The company continues to belong to the family or a family trust and managers are employed for the day-to-day business. The family, often sole and usually dominant shareholder, focusses on setting the strategic direction. The family itself or the appointed supervisory board merely stipulates long-term goals. How these should be aimed for is up to externally appointed directors whose salary is partly made dependent on their achievement.

The separation between ownership and day-to-day business allows family businesses to put the management in the hands of specialists with much experience in project development, product and process innovation, personnel, marketing, but also finance, insurance and – with growing importance – the communication with the critical public eye. The employment of management does not exclude the possibility to allocate individual functions to family members who then as chairman of the board, manager or consultant participate in the daily business. This, however, requires clear arrangements on leadership and assignment with the management external to the family.

The highest grossing German family firms, Metro and BMW, are public companies, Robert Bosch and the Schwarz Group limited liability companies

Another solution often chosen by smaller family businesses is the appointment of advisory boards. Committees that comprise experts from outside shall give advice to the family. This is sought to provide impulses for innovation, ideas for future business areas, help in the recruitment of management and the embedding of networks. The problem with advisory boards lies in their non-binding nature. Because consultants are not directly liable, they cannot be equally made responsible for the quality of their advice as managers. The janus-headed nature shows that family businesses can be both: A vital asset that an economy should always strive to make the most of, but also a burden, if mismanagement, inability or simply human shortcomings lead to the ruin of a previously thriving family enterprise and endanger thousands of jobs, as was the case with the company Karstadt. Family businesses become guarantors for economic stability, sustainable responsibility and future-oriented actions where the closeness within a family has a positive effect. It is thought in generations and acted with longevity, particularly where the professional qualification and social competencies of the family members correspond with the manifold management and leadership responsibilities and duties.

This cannot be taken for granted in a global and thereby growingly complex economy. Accordingly, the continued qualification of family members needs to be in a wide area of subjects. Like in many other aspects of life the law of specialization equally applies to the management of a firm. A respected owner is not necessarily a successful entrepreneur, a good investor not necessarily a smart innovator. To own a firm does not necessarily amount to knowing how to manage and motivate people, to initiate new projects and make them succeed, to market products and gain customers. This is particularly valid where children inherit the business of their parents. A key issue is therefore the timely succession plan. It influences the course of a business long before the actual changeover and a lot sooner than is expected by most family businesses. This is very much the case for the thousands of retail trades, bakeries, grocery stores or corner shops. All of them ensure the daily encounter with the family business. Almost all restaurants and manufacturing businesses are family enterprises (which is why the advent of fast-food chains was a cultural drift not only in terms of cuisine but also of structure). But also global market leaders for machines, equipment, instruments and vehicles have been in the hands of a single family for generations. Banks and offices have been led by the same family for centuries.

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