Are patriarchs The Better Bosses?

Family-owned companies in Germany have their sights set on their publicly traded counterparts – By Alexander Hagelüken

The reputation of big corporations in Germany has suffered. Now, family businesses are taking over DAX stalwarts like VW, Continental and Metro. Time will tell whether it’s the right move.

The news hit most Germans out of the blue. Few people had ever even heard of the industrial family Schaeffler and even fewer could tell you exactly what a “rolling bearing manufacturer” does. But that all changed in mid-July when the Schaeffler family, which made its fortune in rolling bearings, launched a takeover bid for the famous tire- and systems-maker Continental.

It was the first time a family-run company set it sights on buying a major DAX player. Smaller firms may constitute the majority in the business landscape in Germany but they usually fly below the radar. And here was one that wanted to break into the top league, into the ranks of companies that – as far as most of us are concerned – control what happens in the business world.

It was a bombshell but one that keen observers might have seen coming. Family businesses have been making headlines increasingly more in past years. In 2006, the Merck family pharmaceutical company tried to buy out its listed rival, Schering. Porsche, which has two dynasties at the helm, has spent the past two years gradually taking control of Volkswagen, Europe’s largest carmaker. And the Haniel Group, previously known to only a handful of people, now runs Germany’s largest retailer, Metro.

As private companies start to play in the majors, one has to wonder whether they might be the better businesses.

The rise of family firms comes at a time when listed corporations and their managers are losing credibility by the day. The meteoric pace of globalization in recent years, the outsourcing of jobs and the greedy quest for greater returns, astronomical executive salaries and solid gold parachutes mean that only a (shrinking) minority of Germans believe that contemporary capitalism is a fair system.

Family-owned businesses, on the other hand, seem apt to move at a slower pace, be less obsessed with profits and better understand and deal more fairly with the interests of their employees. “Family businesses are not investment companies that only want to hold a company for a limited time and then sell it at a profit,” said Brun-Hagen Hennerkes, founder of an association for family companies. “They buy businesses in order to maintain them for the family and for the employees. They think in generations, not in quick euros.”

Many Germans seem to intuitively believe that sentiment. Surveys show that a large majority of them would rather work for a privately held company. Nevertheless, the rosy, (self-) congratulatory picture painted by Hennerkes is a bit of a black-and-white illusion that doesn’t quite square with reality. Family-run companies sometimes act just like the big corporations and investors that so many Germans vilify as cold capitalists.

Schaeffler is one example. The family crept up on Continental like a stealthy fund manager. Through a series of banking swaps, it secured a majority share without its prey’s executives and shareholders noticing. The idea behind the coup, carried out in a gray area of securities law, was to take the Continental board by surprise and prevent the share price from exploding, as it would from an official takeover bid.

Even before that, the Schaefflers and their CEO Jürgen Geissinger had few friends among unions. Geissinger tried to push through a 40-hour workweek with no corresponding wage increase and the workers’ councils felt they were kept completely in the dark regarding the strategic orientation of the €10 billion ($15 billion) company.

It was a similar situation at VW, where the councils and shop stewards, accustomed to having control of the floor, felt that Porsche was curtailing their rights.

In terms of jobs, the privately held companies are not beyond reproach. According to a study by IW, a leading German economic research institute, family businesses did create more jobs than other companies between 2004 and 2006 but only by one percent.

The image of a family business is one of a strict but fair company patriarch who watches as an absolute ruler over his flock of employees. It’s an image inherited from the era of the early industrial barons and is more appropriate to the 19th century, when companies were democracy-free zones.

To protect their interests, modern-day workers rely more on unions and labor law than on the uncertain goodwill of a patriarch. Not all company fathers are created equal and their treatment of employees varies from one to the next.

And yet, stripping away the exaggerated myth of fundamental goodness from the idea of a family business still leaves no doubt that they could teach capitalism a thing or two. A strong proprietor is, in fact, in a better position to sit out a slump – unlike companies listed on the DAX, which are increasingly dominated by international investors who demand returns every quarter.

Short-term thinking leads to frantic behavior, with jobs among the first victims. Family companies can distinguish themselves from the stock-driven economy with long-term strategies that can also benefit their employees. Not because they can avoid restructuring (no firm in a market economy can). They can simply better balance the interests of shareholders and other parties.

The key word in that sentence is “can.” As family businesses move into the spotlight of large-scale takeovers, the next few months will show whether they can live up to their reputation.