Sabine Klein is Research Fellow, Family Firm Initiative at INSEAD, Fontainebleu, France; lecturer, Trier University, Germany; and Associate of The Family Business Consulting Group.
It's about control: family businesses in Germany
When refering to family businesses in Germany, most people think of small- and medium-sized businesses in traditional sectors. Recently, it has become more and more obvious that families are important players in the German economy. Most of the awareness however, derives from failure of family businesses, such as with the Schmidt Bank in Bavaria or Herlitz in Berlin. Success stories, on the other hand, seldom mention the term family business. But times are changing and awareness is starting to grow. manager magazin, one of the leading business magazines in Germany, recently published an article on the better performance of family businesses during the recession period, stating that stable ownership is one of the advantages of family businesses, while restricted access to capital markets is mentioned as one of the disadvantages.
Looking at the Frankfurt stock exchange this statement is not entirely correct. More than 50% of the 250 biggest companies traded on the Frankfurt stock exchange are owned by families and/or individuals. Following the research design of Blondel, van der Heyden and Rowell of INSEAD, a similar research project was launched for Germany, initiated and financed by INSEAD.
The results of this study were surprisingly similar for both Germany and France. The majority of the companies on the Frankfurt and Paris stock exchanges are owned by families or individuals (51% in Germany, 57% in France). In the German top 20 we found three patrimonial companies in 1998: BMW, SAP and Metro. This represents only 15% of the top 20 companies. Patrimonial companies are concentrated, in both Germany and France, in the smaller range of the top 250. Only 19% of the overall capitalisation of the top 250 firms on the Frankfurt stock exchange is represented by patrimonial firms. The reason is simple: the 20 biggest German companies represent 74% of the capitalisation of the 250 companies, only three of them being patrimonial firms.
Most fascinating is the result of the development of ownership types from 1993 to 1998. Both patrimonial ownership (from 39% to 51%) and spread ownership (from 12% to 18%) grew, while single corporate ownership (companies owned by another company with no further identifiable owner) went down from 38% to 21%. This seems to be a specific German phenomenon: the breaking up of the so-called 'Deutschland AG' a synonym for German companies that over the years developed a net of reciprocal ownership and interdependence. This net secures control to a small group of managers rather than to owners. On the other hand the same development can be shown for France. There, patrimonial firms are a growing ownership type and single corporate companies are decreasing.
Patrimonial companies are found in nearly every branch but there are some branches that are more likely to be controlled by families than others. Firms operating in the luxury sector are entirely family/individual owned in Germany as well as in France (1998). Only half (55%) of the automobile companies on the Frankfurt stock exchange are patrimonial firms, while 80% of the automobile sector on the Paris stock exchange is owned by families. A total of 17% of the finance sector on the Frankfurt stock exchange and 2% on the Paris stock exchange are patrimonial, but – and this leads to one of the most interesting results – only 2% of the capitalisation of the finance sector on the Frankfurt stock exchange and 0% of the finance sector of the Paris stock exchange are patrimonial. Looking at the retail or media sectors, families control 55% or 60% of the companies on the Frankfurt stock exchange, but at the same time control 92% (retail) and 93% (media) of capitalisation. This shows that families are stronger, in terms of percentage of overall capitalisation they control in branches in which they are strong, in terms of the number of controlled companies. They are weaker in terms of capitalisation in branches where they only control a minority of the companies of the branch. There is no empirical proof but there is enough evidence to formulate a hypothesis: families tend to enter sectors where they can gain above average influence.
This hypothesis also leads to the assumption that families and/or individuals seek influence when they invest money. Looking at data of ownership structure and influence from a German sample studying more than 1,000 companies (Klein, 2000), nearly 70% of all German firms with more than €1 million turnover are family businesses; in 80% of these businesses the family owns 100% of the stock.
Looking at the Frankfurt stock exchange we find further evidence that families view influence as important. Not all family-owned companies try to secure influence as intensely as Porsche or Henkel. In these companies the family controls all (Porsche 100%) or nearly all (Henkel 90%) of the voting rights (end of 1998) while the non-voting shares are spread widely to finance the company's growth. Ensuring that influence remains within the family while they earn money via the stock exchange is a well known phenomenon in Germany.
Apart from the money families and/or individuals make from the stock market there is another reason for some family businesses going public. A family CEO explained why they decided to go public: "Never before has the company experienced such an improvement in professionalism. Going public helped to keep the non-working family members on track, while at the same time transparency and professional requirements such as looking for board members that knew the business improved the climate in the whole company".
What we learned from the INSEAD project is that the majority of publicly traded companies both in Germany and in France are controlled by either families or individuals. Families developed a whole canon of measures to keep control while going public. Individuals and families are the driving force of these two economies, often hidden behind pyramids or trusts located abroad where they can limit their tax payments and are hard to track down. So individuals and families in Germany and France use the stock exchange as an instrument while ensuring sure they still control the company in their very personal way.
If – and this is the result of the INSEAD research project – individuals and families control the majority of the biggest publicly traded companies, families and individuals are likely to be in control of the majority of all companies in these two countries. Families do not like to go public but they do. So if they have the majority on the stock exchange it is hard to deny that they will have the majority of the non- traded companies.
Therefore, in Germany and France, politicians can obviously conclude that in the future, countries that maintain an attractive climate for individually-owned and family-owned companies will attract more of them than other countries. Families and individuals seek appealing and worthwhile opportunities to invest their money. Economies benefit from their activities. Politicians should be aware of the fact that families and individuals owning and running companies will become more self-confident as they claim their piece of the pie.
Results obtained from other European countries show that the German and French results are not typical of all countries. It is too early to tell where this research will lead and we do not know yet where the differences will derive from. Hypotheses concerning the influence of history and mentality, and tax law and legal structures have been formulated but not yet tested.