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Parmalat’s sins: an unwanted and unwarranted family business legacy

Barbara Murray is Consultant Editor of Families in Business. Guido Corbetta  is Professor of Strategy in Family Businesses at Universita Bocconi. Gioacchino Attanzio is CEO of AidAF.

The Family Business Network is the World Association for Family Enterprises. Part of its mission is to raise awareness of the societal importance and economic significance of family enterprises around the world. So when the questionable governance and dealings of a major, international family business hits the headlines, and the instinctive response of the media is to assume that if one family business misbehaves, then all family businesses are likely to misbehave, a sense of balance needs to be restored.

Parmalat: an anomalous family business case
The Family Business Network comprises 16 Chapters, many of which also function as major national associations. In addition to promoting family business education for responsible ownership, networking, and the development of next generation successors, many of these associations also have a mandate to lobby on behalf of family enterprises. Their focus is not just on improving the legal and fiscal conditions required to enable successful successions. Their lobbying focus also deals with dispelling a tiresome and undeserved myth that when a family owns, controls and manages a business, it follows that the business will be inefficient, adversely nepotistic and unprofessionally managed. Over recent years a whole body of literature has been created and a movement has gained momentum demonstrating that family enterprises are not only capable of conducting excellent governance practices, they are also able to outperform their non-family business (joint stock) counterparts. Indeed, many commentators are recommending the well-governed family enterprise as a model for best governance practice in all corporations.

The FBN Chapter in Italy takes the form of AIdAF (Associazione Italiana delle Aziende Familiari or Italian Family Business Association). Aidaf has worked unceasingly to promote the best practices of Italian family businesses. Not surprisingly, the headline news about Parmalat – and the instinctive response of some media commentators to blame family entrepreneurship in general – led to a timely response to re-set the balance. The remainder of this article sets out a reasoned approach to understanding the difference between well-governed and not so well-governed family businesses, and the wider sense of responsibility that well run family enterprises have.

Commenting on the Parmalat case in January the president of the Italian Senate told the Italian daily Il Sole 24 Ore: "There is a capitalism generated by the Italian middle-sized businesses that has been holding the Italian flag high on the world's markets, often higher than some of the bigger industries. We should trust this family capitalism because it was capable of ignoring the siren call of the current trend of the economy with regard to financing."

Earlier, Marco Vitale, a commentator who is well known for his intellectual independency, wrote in Corriere della Sera: "Parmalat is not representative of the Italian family business capitalism, but rather of that entrepreneurship that has always moved between politics and business, and international finance that has damaged our country in the past. The Italian economy is weak, nevertheless there are hundreds of businesses of all sizes in this country – some active on an international level – whose methods have nothing in common with those adopted by Parmalat, its consultants and its international bankers."

Let us highlight the differences between Parmalat (and in some respects Cirio) and most Italian family businesses. The paradox is that the strength of family-owned businesses is being rediscovered in many parts of the world, including advanced countries.

The connection with major Italian and international banks
Parmalat had developed a pathological relationship with major international banks, including Italian banks. Some of these bank managers favoured (or suggested) wild international acquisitions and collected major commissions for the proposed deals. In other cases, they participated in the funding of a company by emitting bonds with no consideration for the investor; not to mention the criminal liability derived from possible fraud, which will be left in the hands of the judiciary authorities.

Generally, the larger banks' approach to family businesses is far more cautious and tend to stipulate credit rationing, stringent negotiation of conditions, request for additional guarantees or returned payments as soon as any difficulties arise.

The international business network
How many other Italian family businesses have an international network of businesses that is as extensive and complicated as that of Parmalat? Few – most of them are not big enough to do so. Few entrepreneurs would venture into unknown business territory and jeopardise the future of their business.

The connection with politics
Only a limited number of family businesses have developed such a tight and long-term relationship with the political world as Calisto Tanzi, the former CEO of Parmalat. Family businesses have to work hard to succeed on an international level and have little time to dedicate to developing 'dangerous relationships' with a political scene which has no interest in the long-term growth of the company, but is only using it for its own political benefit.

Accelerated and diversified growth
Many family businesses are criticised not because they grow too much, but rather due to lack of growth. In our experience we have found that many entrepreneurs are so busy with maintaining their business that they have little or no time for what they see as expensive and time-demanding diversifications.

Parmalat began an imprudent growth strategy, which first weakened the financial equilibrium of the company and then brought about its collapse. There were external factors which contributed to its downfall such as the South American crisis but there was also the fact that, for reasons unknown, Parmalat chose to diversify its business into the sports and tourism industry.

Inadequate corporate governance
Parmalat was never in the rank of Italian Business of Excellence. In fact, its corporate governance and management model were never rated. The structure of Parmalat's board of directors did not qualify them as a listed company (too many family members, too many managers, few independent consultants and power concentrated in the hands of executive directors). Even Calisto Tanzi's niece remarked, when she resigned, that the managerial structure was not adequate for the company's size. An effort is currently being made to secure stronger managerial structures and encourage better governance practice for medium- and large-sized firms. Good examples of this are Merloni and De Agostini, two major family groups in Italian business.

Reacting to crisis
All companies are exposed to risk – it is why shareholder capital is called 'risk capital'. No business is permanently safe and sound. Errors of judgement and external events can jeopardise the continuity of the business. Parmalat made the mistake of reacting to their crises by concealing their errors .

Other family groups experiencing financial difficulties have reacted in a different way. Some have sold assets (for example, the sell-off of Toro by the Agnelli group); others have revamped their management structure (for example, Lucchini).

Individual and corporate ethics
It is impossible to create a ranking of people's 'level of morality'. People can surprise us by their actions. However, we can safely conclude that both the Parmalat and Cirio group of directors lacked any basic moral sensibility.

Our experience, however, confirms that many Italian entrepreneurs demand commitment and trust from both themselves and their family members.

Alberto Falk, the Chairman of AIdAF, wrote in his spiritual testament to his children: "There is a tendency to identify the behaviour of the family with that of the business. This means that family members have to behave coherently with the action and image of the business… commitment is necessary as a basis for the trusting we demand, we have to be trustworthy."

Recently, a journalist commented on the Parmalat affair by saying: "I am well aware that in Italy there are also entrepreneurs that do their job well". We want to make sure it is understood that the majority of Italian entrepreneurs operate a very different model of family business than that of Parmalat. A model that is undoubtedly better.

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