Hartmut Berghoff, Ingo Köhler

Varieties of Family Business

Germany and the United States, Past and Present

Edited by the Foundation for Family Businesses
(Stiftung Familienunternehmen) in Munich

Campus Verlag

Frankfurt/New York

About the book

Familienunternehmen sind in Deutschland und in den USA zentrale Bausteine der jeweiligen Volkswirtschaft. Und doch gibt es signifikante Unterschiede in der Unternehmens- und Familienkultur sowie der institutionellen Umwelt. So wird Deutschland in den USA um seine leistungsstarken Familienunternehmen, vor allem die Hidden Champions, beneidet. Zudem bestehen deutsche Familienunternehmen im Durchschnitt deutlich länger. Wie kam es zu diesen Divergenzen? Die von der Stiftung Familienunternehmen herausgegebene historische Langzeitbetrachtung analysiert die Ursachen und Auswirkungen der Unternehmenslandschaften in beiden Ländern von der Industrialisierung im 19. Jahrhundert bis zur Gegenwart.

Vita

Hartmut Berghoff is an economic and business historian and the director of the Institute of Economic and Social History at the University of Göttingen in Germany. He has been the director of the German Historical Institute in Washington, D.C. from 2008 to 2015. He held various visiting positions at the Center of Advanced Study in Berlin, at Harvard Business School and Maison des sciences de l’homme in Paris, and the Henley Business School in the UK.

Ingo Köhler is an economic and business historian at the Humboldt University of Berlin. He has been Interim Professor for Economic History at the Universities of Goettingen (2013–15) and Bonn (2016), and Fellow of the German Historical Institute in Washington, D.C. in 2007.

Acknowledgments

This book offers readers a comparative history of family businesses in the United States and Germany. Its findings are based on a research project conducted by the Institute for Economic and Social History at the University of Göttingen, a project that was initiated, in many ways supported and financed by the Foundation for Family Businesses (Stiftung Familienunternehmen) in Munich.

The foundation enabled us to develop a research concept that pursues new methodological approaches and perspectives. A review of the research landscape in the history of family businesses shows that case studies have been the primary approach used on both sides of the Atlantic. Most academic publications—and popular studies as well—have focused on individual companies and families. In contrast, we were less interested in individual cases. Instead, we approach the topic from a macro-perspective that allows us to observe the fundamental historic transformation processes that occurred in these two economic systems and cultures. Our guiding question is: To what extent did dissimilar institutional structures affect the existence, success and shape of family businesses in the United States and Germany over the long term? Our comparison of economic, socio-cultural and political conditions uncovers both distinctions and similarities in the historic development of family businesses. The common goal of the foundation and the authors is to outline a historical matrix that will allow future research to better place the individual company histories into the general development contexts. This serves two purposes: the much-debated differences between US shareholder and central European stakeholder capitalism can be seen in a new light, and the motives, path-dependencies and decision-making processes of companies and their owners become historically transparent.

In particular, we would like to express our gratitude to the Executive Board and Advisory Board of the Foundation for Family Businesses, which made this project possible. We would like to say a special word of thanks to Professor Rainer Kirchdörfer and Stefan Heidbreder, both of whom take a great interest in historical questions. We have pleasant memories of the stimulating discussions during our many meetings. Their knowledgeable notes and constructive questions contributed significantly to the quality of this study. We would also like to express our sincere gratitude to Dr. Bettina Wurster and Georg Blaha of the department of research and programs at the Foundation for Family Businesses. They supported us in many ways and patiently acquainted themselves with the work approaches that we apply as historians. Sibylle Gausing shouldered a number of rigorous editorial rounds. Her careful reviews of the manuscript, her valuable assistance with preparations for printing and the translation of the work into English lent the text the right form and gave it a finishing linguistic touch. We would also like to thank Charline Köhler of the foundation team for her tireless work in searching for historic photographs. Finally, the external proofreaders Jutta Pulter and Christel Schikora spotted many a linguistic or spelling mistake. Mary Tannert, Ph.D. skillfully translated the German version of this book into English with great professionalism and attention to detail.

Many people at the Göttingen Institute for Economic and Social History also contributed to the success of this project. Yassin Abou El Fadil worked very patiently and thoroughly to compile a large number of data and literature sources, generated statistics and offered insightful comments. Our student assistants made many trips to the library and tirelessly provided us with books, scans and copies. Sören Windeler did a tremendous job in preparing the index.

Finally, we would like to express our special thanks to Jürgen Hotz of the publishing company Campus Verlag GmbH, who turned our bare-bones study into two beautiful books published in German and English. He patiently assisted us with the selection of the design, title and illustrations, and drew on his design know-how and experience to make a valuable contribution to many details.

Family businesses embody history as no other form of company does. We hope that you enjoy our book and gain some new insights into the history and current state of family businesses from it.

Hartmut Berghoff and Ingo Köhler

Göttingen/Berlin, October 2020

Preview: The Key Results

Family businesses play an important economic role on both sides of the Atlantic. In addition to some parallels, there are also significant differences between Germany and America in terms of corporate and family cultures as well as the institutional environment for, and the lifespan of, family businesses.

This study investigates the differences and similarities between the development of family businesses in Germany and the United States from the mid-19th to the early 21st century. It analyses the causes and effects of the different corporate landscapes using a long-term, historical view. The focus is on the position of family companies in the two countries and the legal, structural, political and cultural environments that have emerged historically and influence the strategies of businesses and the families who own them. At a general level, the study concludes that the institutional fabric in Germany favored the development of multigenerational family businesses, while that of the United States tended to promote the dynamism of young companies, whose owners sold off all or parts of them after relatively short periods of ownership. German family businesses are, on average, much older than their US counterparts and more often focus on achieving intergenerational continuity.

Chapter A clarifies terminology and the statistical basis, while Chapter B provides a quantitative chronological overview. In Chapter C, the authors examine in detail the history of inheritance law, which for a long time was substantially less advantageous for family-business owners in the United States than for their German counterparts.

Chapter D compares the financing models of businesses in both countries. The German system of bank-based financing was diametrically opposed to America’s capital-market-based system, which favored the rapid shift from family control to listed companies with a broad shareholder base. In Germany, on the other hand, long-lasting relationships between family businesses and their house banks were the order of the day, tending to promote continuity and a long-term mindset. Major differences in antitrust law pointed in the same direction. In the United States, there was a strong concentration of gigantic listed companies, whereas founder families continued to play a key role in some of Germany’s biggest industrial companies for a very long time.

Politically, the German state played a role in ensuring the fortunes of the country’s economy, especially the Mittelstand (small and medium-sized firms). This reflected Germany’s economic model of cooperative capitalism. In the liberal market economy of the US, on the other hand, faith in market self-regulation remained strong. As Chapter E shows, state interventionism in this area did not start to increase until the second half of the 20th century and, in contrast to Germany, was relatively moderate and always controversial. Only after the crises of the 1970s did industrial policy in both countries tend to converge.

The differences in the two countries’ corporate landscapes reach in part far back in history and are based on deep-rooted cultural characteristics—as Chapters F and G demonstrate. In Germany, the legacy of feudalism and the craft tradition left a lasting mark. A culture of continuity and quality, of balance and family associations, arose. In the US, individualism was much stronger, with the self-made man—not the preserver of family traditions—becoming the ideal. Uninterrupted immigration provided a steady flow of entrepreneurial talent: the US truly had no shortage of business founders. This energized the business community, but also made for cut-throat competition.

In Germany, a variety of factors—from the country’s relative lack of raw materials to its multiple political upheavals—underscored the importance of solidarity within founding families, leading to a search for stable anchorage in the family in general and in family businesses in particular.

As multigenerational projects, family businesses were on the defensive in both countries throughout the 20th century—initially in the United States, where a modern consumer society arose much earlier than in Germany, offering potential successors options beyond traditional family roles and the world of family businesses. In general, however, since the last third of the 20th century, processes of convergence have been observable in a number of the areas examined here, processes that have worn down existing divergences without eliminating them altogether. The path dependencies attributable to the different types of capitalism in the two countries thus not only reach far into the past, they also have tremendous power to shape both the present and the future.

A.Introduction. Current Observations and Historical Questions

Across the globe, there are more family-owned enterprises than any other type of company. Regardless of their size or legal form, they are defined as companies under significant family control—usually through majority ownership of the company’s capital, but occasionally also through multiple voting rights or pyramid structures. In the case of listed corporations, a blocking minority of 25 percent held by a single family or related families is often sufficient for the company to qualify as a family business. Owner-managed companies, i.e. those in which family members perform management duties, are a smaller sub-group within this broad definition of family businesses.

According to the Family Firm Institute of Boston, which largely follows this definition, in the second decade of the 21st century around two-thirds of all companies worldwide were family businesses, generating 70–90 percent of global gross national product (GNP) and providing 50–80 percent of jobs. These ratios are much higher in certain countries.¹ Figures like these initially reflect the enormous significance of small businesses and micro-enterprises: “Mom and pop stores […] tend to be owned by mom and pop”² and—statistically speaking—make up the majority of family businesses.

Family businesses as such are no better or worse than companies constituted in other ways, and are strongly represented in both dynamic and stagnating economies. Family businesses are trust-based, highly innovative entities in which employees, owners and management alike exhibit exceptionally high levels of loyalty and intrinsic motivation. They benefit from low transaction costs, good reputations, the mobilization of family resources, the transfer of knowledge and skills within the family, and a long-term perspective. Researchers with a different perspective, on the other hand, emphasize the lack of both transparency and efficiency in family businesses, in which insiders are free to act without external control and nepotism crowds out the principle of merit. They say that oligarchs have a tendency towards political corruption and “rent-seeking”. In their opinion, family businesses are conservative, averse to competition, and exhibit poor corporate governance.³

The advantages and disadvantages of family businesses certainly cannot be weighed up against each other wholesale, as they are visible only in individual cases. The objective of this study is thus not to pass judgement on the strengths and weaknesses of family businesses. Rather, it examines the hypothesis that the role of family businesses is a key distinguishing feature between the USA and UK on the one hand, and western and southern European countries on the other, between capital-market-driven Anglo-American capitalism and a model of capitalism in which not only social security schemes, but also family businesses play a bigger role.⁴ This study focuses in particular on the United States and Germany, which are the most important exponents of these disparate systems, and uses a long-term historical comparison to investigate the extent and the causes of the contrasting status that family businesses enjoy in these two countries.

The first step is to thoroughly examine the key differences between the two economies today, taking that as a basis to look at their differing historical developments. If we compare the proportion of family businesses to the total number of companies in both countries, we initially see that they are closely matched.

In percent of all companies

In percent of all employees

Revenue in percent of GDP

USA

80–90

57

57

Germany

95

56

63

Table 1: Quantitative significance of family businesses, 2014

Source: Economic Impact of Family Businesses and Family Firm Institute, Global Data Points.

The figures published by the Family Firm Institute (Table 1) show a similar presence of family businesses in Germany and the US in 2014. In the categories “in percent of all companies” and “revenues in percent of gross domestic product”, Germany has a slight lead over the US and occupies the top position worldwide. When it comes to employees of family businesses as a share of all employees, the corresponding figures of 57 percent and 56 percent are virtually identical. On the basis of statistics published by the Mannheim Enterprise Panel (MUP) of the Centre for European Economic Research (ZEW) in 2014, the Foundation for Family Businesses calculated somewhat lower figures for Germany in 2013—91 percent (percentage of all companies) and 48 percent (revenue percentage)—while the employee percentage was the same, at 56 percent. The figure for owner-managed family businesses as a percentage of all companies in Germany was 87 percent.⁵

UK

France

Germany

USA

Family is largest shareholder

30%

32%

30%

10%

Family is largest shareholder, business is owner-managed

23%

22%

12%

 7%

Family is largest shareholder, business is owner-managed plus primogeniture

15%

14%

 3%

 3%

Founder is largest shareholder

14%

18%

 5%

18%

Founder is largest shareholder and CEO

12%

10%

 2%

11%

Number of companies examined

152

137

156

290

Table 2: Percentage shares of different forms of family businesses in the UK, France, Germany and the US, 2000–2003

Source: Bloom and Van Reenen, “Measuring”, p. 58.

Consequently, family businesses are by no means a marginal phenomenon in the US. Indeed, they constitute a substantial share of the economy. Nonetheless, their significance differs considerably between the two countries—as a glance at medium-sized and large companies reveals. A representative sample of 735 selected medium-sized manufacturing companies in France, Germany, Great Britain and the US for the period 2000–2003 was, in the authors’ opinion, “reasonably representative of medium-sized manufacturing firms” (50–10,000 employees). This sample makes it possible to compare the significance of family businesses in this segment (which, expressed more precisely, comprises medium-sized and small major companies). An analysis of these, more precisely, medium-sized and small major industrial enterprises with their differing legal forms and ownership structures (see Table 2) shows that the percentage of family businesses in this category was significantly lower in the US. The corresponding figures for European countries were, on the whole, quite comparable to each other and higher than in the US. This was the same for both family-controlled and family-managed companies. In both categories, German companies had a much higher percentage share than the US.⁶

It is notable, however, that the US had a substantially higher percentage of first-generation (= founder-generation) companies than Germany, meaning that founders played a much bigger role in the economy than family businesses of the second or later generations. There are comparatively many business founders in the US, but over successive generations, there is a pronounced movement away from family ownership—one not evident to the same extent in Germany. In other words, the lifespan of American family businesses appears to be shorter and the probability of their transformation into other types of company is higher.⁷ One could also—and this is a key argument—speak of a comparatively strong start-up culture in the US and a relatively strong culture of multigenerational family businesses in Germany.

100 largest companies

200 largest companies

absolute

in %

absolute

in %

USA

 7

 7

13

6.5

Germany

21

21

42

21

Table 3: Share of family businesses among the biggest companies in the US and Germany, 2013–2015 (in absolute and percentage terms)

Sources: Own survey on the basis of statistics from Fortune 500 (see Note 8), Top 500 Unternehmen (see Note 9) and the Global Family Business Index (see Note 10).

Striking differences are also observable if we leave the segment of medium-sized and small major enterprises, and turn to the family businesses among the very largest companies. The largest US and German companies by revenue in 2014 and 2015 respectively were recorded using the figures in the Fortune 500 list⁸ and the Top 500 Unternehmen (Top 500 Companies) list published by Die Welt, a German daily newspaper.⁹ In order to calculate the share of family businesses among the top 100 and top 200 biggest companies in both countries, these two lists were then compared with the Global Family Business Index (GFBI)¹⁰ published by the Center for Family Business of the University of St. Gallen.¹¹ The analysis revealed quite pronounced and stable differences.

Photo 1: Sam Walton’s single-price business (5&10 store) in Bentonville, Arkansas—the origins of Walmart, the largest family business in the United States. The company museum is now located in this building.

In Germany, family businesses made up a good fifth of the top 100 companies by revenue during the survey period (2013–2015) and exactly the same share of the top 200 companies. In the US, family businesses accounted for only seven and 6.5 percent of these two groups. In other words, once US companies cross a certain growth threshold, they are much less likely to remain family-controlled. In both countries, only a minority of the very largest enterprises are family businesses. So, while there is a general correlation between size and the transition to external control, it is much more pronounced in the US. Conversely, large family businesses in Germany display much longer lifespans and greater continuity.

If we look at lists of the 25 largest family businesses in both countries, we mainly notice similarities, such as the wide variety of different industries covered (though retail is strongly represented). In both countries, a number of family businesses occupy positions at the very top of their economies. Tables 4 and 5 include global players and household names, strong automotive brands such as BMW and Ford as well as powerful media groups like Bertelsmann and 21st Century Fox. The biggest family businesses in the US are more likely to be active in the service sector and generally generate higher revenues than their German counterparts, which is why they usually outrank the latter.

The differences are even more pronounced when we shift our focus from the largest companies to the top performers in the medium-sized segment. The term “hidden champions”,¹² coined by management consultant Hermann Simon in the 1990s, is used today to refer to companies with annual revenues of up to five billion euros that occupy one of the top three positions internationally in their segments (often niche markets). The majority of these companies are family-owned and many of them owner-managed.¹³ They boast strong capital ratios, are extremely specialized, display a high degree of vertical integration and invest heavily in research and development. They are also highly protective of their independence, continuity and high quality standards, and maintain close relationships with their customers. They often have closely meshed distribution and service networks in many foreign markets, and are, in Germany, part of historically strong clusters. Due to their compact size and their restraint in the public sphere, the majority of these companies are not well known.

Of the 2,734 hidden champions across the globe that Simon identified in the latest edition of his book in 2012,¹⁴ 1,307, or 48 percent, are from Germany. Other surveys conducted in 2015 even identify as many as 1,620 world market leaders among Germany’s small and medium-sized enterprises (SMEs).¹⁵ Figure 1 is based on Simon’s figures and shows that, despite the sheer size of the US market, the absolute number of companies of this type in the USA is not even one-third that of Germany. Compared with other countries, the US still fares relatively well, with a clear lead over all other nations. Yet Germany boasts a uniquely high concentration of such companies.

Name

Position in global ranking

Founded in

Revenue (in USD billion)

Employees

Owner family

Family’s share of capital

Volkswagen AG

  2

1937

261.6

572,800

Porsche

32.2%

BMW AG

  8

1916

101.0

110,351

Quandt

46.7%

Schwarz Group (Lidl, Kaufland)

  9

1930

 89.4

335,000

Schwarz

100%

Continental AG

 24

1871

 44.3

177,762

Schaeffler

49.9%

ALDI Group

 32

1913

 37.2

100,000

Albrecht

>50.0%

PHOENIX

Pharmahandel GmbH & Co KG

 45

1994

 29.4

 28,555

Merckle

100%

Heraeus Holding GmbH

 59

1851

 23.5

 13,716

Heraeus

100%

Henkel AG & Co. KGaA

 65

1876

 21.7

 46,800

Henkel

58.7%

Bertelsmann SE & Co. KGaA

 66

1835

 21.7

111,763

Mohn

100%

Marquard & Bahls AG

 68

1947

 21.1

  9,281

Weisser

100%

C. H. Boehringer Sohn AG & Co. KG

 79

1885

 18.7

 47,500

Boehringer

100%

Rethmann SE & Co. KG

 97

1934

 15.3

 30,600

Rethmann

100%

Dr.  August Oetker KG

100

1891

 14.9

 26,907

Oetker

>50%

Schaeffler AG

101

1883

14.9

77,359

Schaeffler

100%

Porsche Automobil Holding SE

107

1931

14.3

19,456

Porsche-Piëch

98.4%

Merck KGaA

109

1668

14.2

38,154

Merck

70.3%

Adolf Würth GmbH & Co. KG

120

1945

12.9

63,571

Würth

100%

HELM AG

122

1900

12.8

 1,431

Schnabel

100%

dm-drogerie markt GmbH + Co. KG

135

1973

11.5

52,062

Werner

98.8%

Tengelmann Warenhandelsgesell. KG

142

1867

10.7

83,437

Haub

100%

WISAG Dienstleistungsholding GmbH

151

1965

10.0

39,674

Wisser

100%

Droege International Group AG

156

1988

 9.8

59,700

Droege

100%

C&A Mode AG

177

1841

 8.8

35,672

Brenninkmeijer

>50%

Beiersdorf AG

188

1882

 8.2

16,708

Herz

50.5%

Voith GmbH

200

1867

 7.5

43,134

Voith

100%

Table 4: The 25 largest family businesses in Germany, 2013–2015 (by revenue)

Source: Global Family Business Index (see Note 10). The revenue data relates to 2013 or to the most recent status in 2015.

Name

Position in global ranking

Founded in

Revenue (in USD billion)

Employees

Owner family

Family’s share of capital

Walmart Stores, Inc.

 1

1962

476.3

2,200,000

Walton

50.9%

Berkshire Hathaway

 3

1955

182.2

330,745

Buffett

34.5%

Ford Motor Comp.

 5

1903

146.9

181,000

Ford

40%

Cargill, Inc.

 6

1865

136.7

143,000

Cargill/MacMillan

90%

Koch Industries Inc.

 7

1940

115

100,000

Koch

84%

Comcast Corp.

16

1963

 64.7

136,000

Roberts

33.6%

The Long & Foster Companies, Inc.

20

1968

 56

11,500

Long and Foster

>50%

Enterprise Products Partners LP

22

1968

 47.7

6,600

Duncan

36.9%

Bechtel Group Inc.

31

1898

 37.9

52,700

Bechtel

40–100%

Sears Holdings Corp.

33

1886

 36.2

226,000

Lampert

48%

Tyson Foods, Inc.

36

1935

 34.4

115,000

Tyson

27.1%

Mars, Inc.

38

1891

33

72,000

Mars

100%

Pilot Travel Centers LLC.

40

1958

 32.1

21,000

Haslam

>50%

21st Century Fox

41

1979

31.9

27,000

Murdoch

39.4%

Publix Super Markets, Inc.

47

1921

29.1

166,000

Jenkins

68.6%

Love’s Travel Stops & Country Stores Inc.

50

1964

26

10,500

Love

100%

Reyes Holdings L.L.C.

64

1976

22

16,500

Reyes

100%

C & S Wholesale Grocers Inc.

67

1918

21.7

17,000

Cohen

100%

H.E. Butt Grocery Comp.

72

1905

20

76,000

Butt

100%

Penske Corp.

77

1969

19

39,000

Penske

>50%

Paccar Inc.

86

1905

17.1

21,800

Pigott

>50%

Enterprise Holdings Inc.

90

1957

26.4

83,000

Taylor

98%

The GAP

91

1969

16.1

137,000

Fischer

45.4%

Cox Enterprises Inc.

95

1898

15.3

500,000

Cox

99%

CBS Corp.

96

1986

15.3

19,490

Redstone

79%

Table 5: The 25 largest family businesses in the United States, 2013–2015 (by revenue)

Source: Global Family Business Index (see Note 10). The revenue figures relate to 2013 or to the most recent data from 2015.

A partial explanation for the lower number of family businesses among large and medium-sized enterprises in the US compared with Germany is that the latter’s capital market has always been substantially smaller, both in absolute and relative terms, than in both the US and the UK—even though it has gained considerably in magnitude since the second half of the 1990s. In other words, going public was always much more difficult in Germany than in the US, making it less likely that family businesses would make the transformation to listed companies or be sold to investors from outside the founding family. Conversely, one could argue that in Germany, fewer companies wanted to go public and that the reason for the relatively low level of market capitalization was that family businesses were less interested in changing their status. In the US, by contrast, the sale of shares in a company forms part of a conscious strategy of asset diversification. The role of business owner is more often perceived to be a temporary phase in an entrepreneur’s life and less often an obligation spanning generations.

Figure 1: International comparison of number of hidden champions, 2012

The US capital market is liquid enough to accommodate a high number of company shares due to its size and maturity alone—not just in absolute figures (which reflect the sheer size of the country), but also relative to gross domestic product (GDP). The ratio of the value of all listed domestic companies to GDP is a good indicator of a capital market’s liquidity (Table 6).¹⁶

1975

1990

2000

2015

USA

41.7%

51.7%

101.0%

140.0%

Germany

10.5%

20.1%

 65.1%

 51.1%

UK

35.5%

77.7%

106.0%

    n.a.

Table 6: Market capitalization of domestic listed companies, 1975, 1990, 2000 and 2015 (as a percentage of GDP)

Source: World Bank, http://data.worldbank.org/indicator/CM.MKT.LCAP.GD.ZS (accessed: August 12, 2018).

In Germany, founder families tend to retain control of their enterprises for longer and ensure that the family holds a relatively large share of the company’s capital—even though family stakes definitely do decrease over time and as the company grows. A random sample of 592 German family businesses in the late 1990s revealed that founder families retained an average capital stake of 95 percent. Of these companies, 465 were even wholly owned by the family in question. The larger and older the companies, the lower the percentage of enterprises that were still wholly owned by their founding families. However, the ratio was still 60 percent of all the family businesses analyzed, even in the category of companies with annual revenues exceeding deutschmarks (DM) one billion.¹⁷ Consequently, there is nothing inevitable about the transfer of company shares from founding families to external investors. As a rule, shares in family businesses in Germany—or at least the majority of those shares—are likelier to remain with the families than is the case in the United States, which is a country more strongly geared to the capital market.

The advanced state of financialization in the US¹⁸ is associated with the much greater role of institutional investors, whether in the form of hedge funds, pension funds or private equity investors. On the lookout for worthwhile acquisitions, they can offer family business owners attractive conditions for the sale of their firms. The market for corporate control is thus larger and stronger in the US. This more advanced state of financialization in the US also triggered a shortening of time horizons at the expense of long-term strategies: in 1960, the average holding period for shares listed on the New York Stock Exchange was still around eight years; by 2015, it had fallen to eight months.¹⁹

A longevity comparison of the 80 largest German family businesses included in the St. Gallen index for 2013–2015 revealed an average age that was over one-fifth (22.4 percent) higher than in the US: the average age of the German companies was 107 years, as opposed to 83 years in the control group in the US.²⁰

Even if we ignore large enterprises, the higher longevity of German family businesses compared with those in the US is obvious. Two regional case studies—which do not permit an exact comparison due to their differing methodologies and time frames—nevertheless indicate that medium-sized German family businesses are older on average than their US counterparts. John Ward chose a random sample of 200 family businesses in Illinois that had at least 20 employees in 1924 and had been in existence for a minimum of five years. By 1984, 80 percent of those businesses had disappeared. Only 13 percent were still in the ownership of the same family as in 1924. Seven percent had been sold.²¹

A German sample compiled by Christina Lubinski analyzed 161 family businesses based in Munich and Düsseldorf in 1960 with at least 250 employees each. Of this sample, 100 companies (62 percent) were more than 50 years old, while 29 (18 percent) were even more than 100 years old. In 2009, 41 of them were still independent family businesses with an average age of 130.²² An analysis of 408 German family businesses with annual revenues of 50 million euros and more revealed an average age of 84 years in 2012, with the average age for industrial enterprises in this segment even reaching 91 years.²³

In general, German companies have long lifespans, with family businesses being slightly older on average than other corporate forms. Of the 270,000 companies registered across Germany in 1995 with annual revenues of over DM two million, 28.5 percent were established prior to 1945, and the corresponding figure for family businesses was even higher at 31 percent. Of the 8,575 companies that existed before 1871, 6,388 were family businesses.²⁴ In general, the founding families hold very large capital shares in German family businesses, but with older companies, the share tends to be higher than with younger family businesses: a study of 1,014 family businesses with annual revenues of DM two to 50 million in 1995 revealed that 94–96 percent of the shares in companies established before 1959 were still in family ownership at the end of the 20th century, in some cases in the third or fourth generation. The figure for companies founded later was still between 90 and 94 percent.²⁵

These statistics give rise to a number of key questions for the following historical analysis, which begins in the 19th century. What effective, long-term economic, sociocultural and legal factors explain the greater significance of family businesses in Germany, especially among medium-sized and large companies? Why do they have longer lifespans and remain family businesses for longer periods? Are there major national differences in the underlying conditions for family businesses in general and, in particular, for the transition between generations? Where are the parallels and similarities? We will also look at the political acceptance and/or promotion of family businesses in both countries, and consider similarities and differences in how the key challenges facing family-based companies (including financing, succession and innovative strength) are tackled.

Special attention must be paid to points of divergence in inheritance and competition law, in the training systems, the nature of the capital markets, demand structures as well as in the cultural and political appreciation of family businesses. A further point concerns the mindset and make-up of the founding families: What were their priorities and goals? What attitude did they have in dealing with their property?

Chapter B of this study begins by examining long-term trends as reflected in statistical findings. Despite many insoluble problems with regard to definitions and data, it attempts to describe historical trends, highlighting not only clear differences and points of divergence, but also similarities. Chapter C looks at the history of inheritance law. Here, clear national differences are apparent that have had a profound effect on the probability of intergenerational continuity. Chapter D analyses the growth of capital markets in both countries and explores how those market structures interact with the respective forms of corporate governance and modes of corporate financing. The focus here is on the size and composition of the capital market and its impact on family businesses.

Chapter E examines the extent to which the government’s economic policy may potentially have promoted or hampered family businesses. The next two chapters deal with highly complex issues of cultural history. What corporate cultures became dominant and when? How did families perceive their roles? What written—and, above all, unwritten—rules existed? What are the origins of certain attitudes and mentalities? Chapter F looks at historical path dependencies that had a long-term impact. As a legacy of the 19th century they have shaped the cultural framework for family businesses and their owners to this day. Chapter G analyses the different historical paths taken by corporate culture in the US and Germany. It asks what general cultural factors influenced families and explain the average—though not necessarily individual—differences in behavior of business families on both sides of the Atlantic.

B.Long-term Trends. Structural and Institutional Change

Any statistical analysis of family businesses is fraught with difficulty since there is no agreed definition of a family business and the necessary data is not available or does not match the definitions. This problem manifests itself all the more in the case of a long-term historical study, because the official statistics it draws on have repeatedly changed their criteria over the decades.

Let’s take a look at the plethora of definitions. The Witten Institute for Family Businesses (WIFU), one of a number of pioneers of academic research into family businesses, uses the following restrictive definition: “The transgenerational aspect is essential to a family business. For this reason, it is strictly speaking only correct to refer to a company as a family business if the family is planning to hand down the company to its next generation. Start-ups and owner-managed companies are therefore not yet family businesses in their own right.” At the same time, another definition is presented which emphasizes the connection between ownership and management: “We use the term family business when an enterprise is owned wholly or partly by one family, several families or family associations and the latter have a determining influence on the development of the company based on entrepreneurial responsibility.”²⁶

Apart from the fact that the two definitions contradict each other, the first one eludes statistical analysis because plans and intentions cannot be reliably captured. The other definition published by the Witten Institute is similar to our own (Chapter A), but can also be operationalized only to a limited extent. Coalitions of families or business associations may be particularly opaque, and this is exacerbated by the fact that details of ownership are often kept strictly confidential.

Even today there are major problems in statistically capturing the significance of family businesses in the USA and Europe. According to Shanker and Astrachan, all empirical and quantitative attempts at doing so are based on fictitious accounts or street lore, more or less educated estimates, extrapolations based on small samples or facts on individual companies that are generalized.²⁷ In order to render such analyses more precise, they propose classifying family businesses into three groups based on the degree of family involvement in the business—from a broad definition (effective management control, significant ownership) through a middle-ground definition (founders or descendants run the company and have legal control of the majority of voting rights) to a narrow definition (multiple generations, family directly involved in running and owning the business, more than one member of owners’ family has significant management responsibility). However, the available data remains problematic even for an analysis based on these criteria: depending on the definition you use the results will be completely different. If you sort the numerous studies conducted for the USA in the 1980s and 1990s on the basis of the broadest and the narrowest definition, you find that, depending on your choice, as many as 3.2 million (approximately 60 percent) of all partnerships and corporations could potentially be considered family businesses, or as few as 1.1 million (approximately 21 percent).²⁸ In comparison, a range of 78.5 percent to 15 percent for the proportion of family businesses in the United Kingdom has been determined by researchers in the UK using similar data records.²⁹

Any attempt to contrast this—already heterogeneous—data from the Anglo-Saxon legal and economic system with the situation in Germany creates additional challenges for the task of finding a definition. Management analyst Sabine Klein has come up with another way of approaching the problem, which complicates the matter further. In her research, she expands the concept of family business yet again by also incorporating sole proprietorships and partnerships as potential multigenerational projects. Her definition is: “A family business is a company that is influenced by one or more families in a substantial way. A family is defined as a group of people who are descendants of one couple and their in-laws as well as the couple itself. Influence in a substantial way is considered if the family either owns the complete stock or, if not, the lack of influence in ownership is balanced through either influence through corporate governance (percentage of seats in the Aufsichtsrat [Supervisory Board], Beirat [Advisory Board], or others held by family members) or influence through management (percentage of family members in the top management team). For a business to be a family business, some shares must be held within the family.”³⁰

This approach can be attacked from several angles: even when looking at an individual entity, there are often only sketchy details of which groups of shareholders or owners have how much influence in the company. This applies specifically when, to determine whether family influence is relevant under the definition, the analyst must consider ownership interests that are so small that they can hardly be identified. What is more, it is impossible to capture companies that are established and owned as a collective by several (lines of) families. In general, there is controversy among researchers about the issue of whether founders or sole owners can consistently be attributed to the group of family business. Klein justifies their inclusion in the statistical-empirical analysis by introducing the status of “‘potential family businesses’ but clearly not non-family businesses”. We agree with the finding that the term family business is a higher-level catch-all category for “family-owned, family-managed and family-controlled firms”, which can occur in all sizes and legal constructs.³¹ In reality, therefore, we are dealing with many overlapping and grey areas. It seems more than vague, for example, to include all sole proprietorships and partnerships in the definition as future family businesses and to assume that anyone establishing a company will want to pass it on to future generations. However, since the statistics produced by government and industry associations as well as the accessible historical data series and registers documenting the corporate and industry landscape only distinguish companies according to basic criteria such as legal form or size, this approach is, for all its imprecision, the only feasible solution. The problems with the definition and the way data is collected are the reason that we can only provide rather crude statistical approximations and describe general trends.

The longevity of family businesses yields the most accurate comparison between the two countries. Successful family businesses that have established themselves at the top among the largest companies in their respective country tend to be significantly older in Germany than in the USA. For the German case, the Institute for SME research and entrepreneurship at the University of Mannheim conducted a study in 2015 in which it collated the years of establishment of the 500 largest family businesses by revenue and workforce size. It shows that 70.5 percent of family businesses were formed before 1950, and 31.7 percent of them before 1900. In 4.4 percent of the cases, the year of establishment was even before 1800. The average age of the German family business included in the study was therefore 101.8 years.³²

Est. before 1800

Est. in 1800–1899

Est. in 1900–1949

Est. in 1950–2009

Median

Average age

Germany

4.4%

27.3%

38.8%

29.5%

1923

101.8 years

USA

0.7%

15.5%

39.7%

44.0%

1939

74.5 years

Table 7: Comparison of average ages and founding periods of family businesses

Legend: The data for Germany comprises the top 500 family businesses by revenue and workforce. For this reason, the country sample is based on a total of 587 companies. For the USA, the foundation dates of the 277 largest companies by revenue on the Forbes List were analyzed. The base data relates to the years 2013 to 2016.

Source: Own compilation based on Global Family Business Index (see Note 10) and the Forbes List of America’s Largest Private Companies 2016, https://www.forbes.com/largest-private-companies/list (accessed: September 2, 2018). For data on German family businesses, see Stiftung Familienunternehmen, Bedeutung, pp. 55 et seq. Details were kindly provided to the authors by Foundation for Family Businesses.

Figure 2: Founding decades of German family businesses

The oldest large family firm is apparently the Coatinc Company, a surface finisher based in the northwestern German city of Siegen that employs about 1,500 employees at 22 locations. The company traces its roots back to 1502, the year in which a forge operated by Heylmann Dreseller, a master steel smith born in 1460, was first mentioned in records. The family has been active in the mining, iron and steel industries since that time. In 1945, ownership of the company passed to Werner Niederstein, the son of Alfred Niederstein and Luise, the daughter of Heinrich Adolf Dresler, and the Niedersteins have stood for family continuity ever since. Klaus (1936–2017) belonged to the 16th generation. His son Paul Niederstein (born in 1974) now heads the company in the 17th generation.

Photos 2 and 3: Family entrepreneurs in the 16th and 17th generations: Klaus (1936–2017) and Paul Niederstein (born in 1974), owners of the Coatinc Company, Siegen

With the exception of its extremely long history, Coatinc typifies many qualities of family businesses: the organic rise of a highly specialized industrial company from the craft sector; its role in helping shape technical progress over a long period of time from the pre-industrial production of iron to the creation of today’s high-quality special steel; and its lasting roots in one of Germany’s oldest mining regions, which have not prevented the internationalization of the company’s activities since the 1970s. Today, the company has holdings in firms in Europe, Turkey, California and Mexico. The family is part of the local elite and has, in the past, exercised significant political influence: Family members from the 5th to 10th generations served as mayor of Siegen. The family’s pride in its company is expressed in part by the way it fosters its own history. A “History of the Dresler Family” was published in 1918 as a gift to celebrate the 85th birthday of Heinrich Adolf Dresler. Even today, the company and family members express pride in a long tradition from which family members, according to their self-image, draw their values. As Paul Niederstein put it in 2019: The family has “a deep understanding of our history and of steel as a material” and “also of our down-to-earth region, which is unconventional and raw in a very special way. We find all of the values that guide us every day right here […]. Furthermore, our actions […] are shaped by our Christian values.”³³

Photo 4: Pride of the city. The entrepreneurial Dresler family of Siegen (undated)

William Prym GmbH & Co. KG of the North Rhine-Westphalian city of Stolberg is considered to be Germany’s second-oldest company. Its predecessor was established in 1530 in Aachen as a guild member of the skilled trades that produced brass and copper. In 1642, during the Thirty Years’ War, the family, which was Protestant, lost its guild rights in the Roman Catholic city of Aachen, joined the exodus of skilled trades from the city and set up operation in nearby Stolberg. The history of this company is characterized by its roots in the craft sector, by exceptional technological adaptability and innovativeness, by specialization and high-quality production. The company’s internationalization already began in the late 19th century with direct investments in the Habsburg Empire.

Today, Prym produces haberdashery such as press fasteners and knitting needles as well as electronic components and contact elements. The company has a presence in Italy, France, England, Sri Lanka and China through acquisitions, investments and joint ventures. In 2016, the Prym Group employed 3,300 people at 32 locations around the world and generated revenue of € 380 million.³⁴ For 475 years until 2005, the company was exclusively owned and led by members of the Prym family, after which a minority stake was acquired by a group of unidentified entrepreneurial families and family offices. Today, the 19th generation of the family serves on the Advisory Board and is represented among the shareholders.

Moreover, the group of the most long-lived German companies counts a large number of pioneers in the manufacturing sector. They include Zollern GmbH & Co. KG in Laucherthal, a company in the metal industry established in 1708, Merck KGaA, which opened as a pharmacy in Darmstadt back in 1688 and now operates in the pharmaceutical and healthcare sector, the printing product and roller manufacturer Felix Böttcher GmbH & Co. KG in Cologne, which has been in business since the first third of the 18th century, or the Bielefeld-based plastics specialist Möller Group GmbH. These companies are rich in tradition and have in common that they have adapted their strategies to new fields of business and methods of production on several occasions, and have benefited from their stable local roots as family businesses when developing into global players. Other salient examples of particularly old family businesses are the gingerbread and chocolate manufacturer Aachener Printen- und Schokoladenfabrik Henry Lambertz GmbH (Aachen, 1688), Harry Brot GmbH (Hamburg, 1688) and Alois Dallmayr KG (Munich, 1700) in the food processing industry.³⁵ In the banking sector, they include two private banks, Joh. Berenberg, Gossler & Co. KG (Hamburg, 1590) and B. Metzler seel. Sohn & Co. Holding AG (Frankfurt a. M., 1674), which emerged as merchant banks from trading firms specializing in the exchange and lending business during the early years of industrialization. Especially in the banking business, a personal business style was beneficial for building relationships of trust with loan and industry customers. Families of bankers that were able to look back on several generations of financial stability were particularly adept at creating the necessary reputation and stable networks of business and private contacts.³⁶ Only when large modern joint-stock banks started to emerge at the end of the 19th century did their significance wane as the most important financiers of German industrialization. Today, both Berenberg and Metzler focus on investment banking and private wealth management.³⁷ Many entrepreneurial families continue to be customers of these family businesses in the banking sector.

Figure 3 shows a benchmark group of 277 US companies which were included by Forbes in 2016 in the list of America’s Largest Private Companies on the basis of revenue and/or appeared in the Global Family Business Index for the USA of the University of St. Gallen for 2013 to 2015. An analysis reveals that 55.9 percent of the companies included here were founded before 1950, but only 16.2 percent of them before 1900. In only 0.7 percent of the cases was the company established prior to 1800. The two oldest companies are the brewery Molson, today Molson Coors Beverage Company (Colorado), established in 1786, and Sweet & Maxwell Legal Publishing, which was founded in 1799. After many intermediate changes, this company eventually became Thomson Reuters (New York/Toronto) in 2008. The average age of the US companies included in the study was 74.5 years, a significant 27.3 years less than in Germany.

Figure 3: Founding decades of US family businesses

A dominant pattern in the USA since the 19th century has been to establish spin-offs to accommodate children and create flexible network structures. This form stands for the fact that there was a marked preference for the establishment of new entities rather than continuing businesses across generations.³⁸ A detailed case study of small and medium-sized enterprises (SMEs) in Poughkeepsie in the State of New York provides evidence that families are of major significance for the local economy, but also demonstrates a clearly discernible tendency towards diversified investments, instead of multi-generational companies. In many cases, fathers gave their sons money to allow them to build new companies. According to the economic historian David Landes, this approach is typical of US “capitalism without a feudal past”,³⁹ which he contrasts with European family capitalism that was dominated by pre-modern values such as the honor and dynastic obligation of families as well as the independence and longevity of family businesses. In the USA, by contrast, the focus was on individual achievement and independence.⁴⁰

In Poughkeepsie, many of the mostly small family businesses were short-lived. The study refers to a “Darwinian jungle of small business in the United States”.⁴¹ Unlike in Europe, bankruptcies were not dishonorable, but even took place with a certain amount of ease: failed entrepreneurs were given a second or third chance without being socially stigmatized. 60 percent of all companies disappeared between 1843 and 1873. In the minority of cases where sons joined the business of their fathers, around 20 percent left again after a certain period of time. Partnerships of brothers likewise did not last very long, with 53 percent of them dissolved within the first five years. Only 13 percent lasted 15 years or more. The same applied to larger companies: with only one exception, by 1900 all companies in the local manufacturing industry of the 1860s and 1870s were no longer owned by the founding family, i.e. they had been either sold or closed down.⁴²

The family strategy consisted of the hope “that the sons would increase the family fortunes through diversification”. This often applied to sons-in-law, too, who joined the existing family business less frequently than in Germany and instead, with the father-in-law’s help, established their own companies in a different industry: “A son-in-law might reasonably hope to receive financial aid from his wife’s family while remaining separate and independent in business.”⁴³ This echoes the observation made by the sociologist Daniel Bell: “The son does not succeed the father but strikes out for himself.” A cultural preference like this was naturally not observed in all families, but Bell attributes its popularity to the existence of vast areas of free land, and it prevented the USA, unlike Europe, from developing a “full system of family capitalism”.⁴⁴

This high rate of start-up activity persisted for a long time. A study of small companies entitled “Characteristics of Business Owners 1992” conducted on the basis of an official survey by the US Census Bureau concluded that over half of all entrepreneurs who had grown up in families of entrepreneurs had opted against working in their ancestors’ companies. It was extremely rare that these businesses were passed on from one generation to the next by way of gifting, inheritance or other methods: only 8.2 percent of the companies surveyed changed hands this way. Nevertheless, socialization was an important factor in entrepreneurial families to create an interest among the descendants in looking for ways to achieve independence. The proportion of children of entrepreneurs in the USA who became entrepreneurs far exceeded the average for the population as a whole, although most of them did so outside their own family collective.⁴⁵

Another factor that shaped the business landscape in the USA is the country’s status as a land of immigrants. Prior to 1914, the massive influx of immigrants from Europe and all over the world ensured an endless supply of entrepreneurial talent. In the country’s ascent to becoming the world’s leading economic power, immigrants were an extremely positive resource.⁴⁶ On the other hand, the high levels of social mobility also hampered the creation of stable structures: fluctuation and competitive pressure were high and developed a sometimes destructive force, especially among SMEs. For example, in 1899 the rapidly expanding jewelry manufacturing industry in Providence/Rhode Island had around 200 companies with 7,000 employees. A mere ten years later, 290 companies employed 10,000 people. In 1914, the number of employees stood at around 18,000. Many individual companies were established. Some survived and prospered, while others were unable to withstand the competitive pressure in the new industrial district and vanished after a short time. A typical scenario was that some entrepreneurs failed repeatedly and tried their luck again with new companies.⁴⁷

A typical representative of this fluid business community was Harry Cutler, who was born in Russia in 1875. His mother fled with him to the USA in 1885 to escape anti-Jewish pogroms. In 1890, when he was 15, Cutler began to work for a number of jewelry manufacturers. In 1899, at the age of 24, he struck out on his own, having mastered the technical skills required. With very little capital and two employees, he quickly rose to success, and within three years of establishing the business, he employed 75 to 100 people. In years that followed, Cutler became a local dignitary and was elected to his country’s parliament. Although it was possible to climb the social ladder in a spectacular fashion in Germany, too, it could not be done at this speed or in such high numbers. In the USA, the prospect of starting one’s own business quickly also led to a large drop in the significance of the traditional apprenticeship. It was also the reason that the Rhode Island School of Design, the vocational school specifically established for the jewelry district, only attracted few enrolments for its classes. For the workers, there was hardly any incentive to seek further training: they encountered an open labor market with high levels of demand, one that offered many employment opportunities even for those with little practical experience. Business owners did not encourage further qualification either. They quite rightly feared that well qualified specialists would quickly strike out on their own and increase the number of competitors.⁴⁸

Low entry barriers and the constant influx from outside at times created a very dynamic environment, but also led to the medium-term demise of the jewelry industry in Providence, which critics compared to a “black hole in Calcutta”. The industry there was marked by a cut-throat price war and atrocious working conditions; brand piracy and design theft were frequent occurrences. Everyone fought everyone else, and intermediaries drove prices to rock bottom levels. The industry association was unable to prevent these conditions and instead focused successfully on anti-union policies, resisting any kind of regulation of working conditions, such as the abolition of child labor or limits on working hours for women. Otherwise, its members believed in the blessings of unbridled competition and were “deeply wedded to the virtues of rugged individualism and free competition. Like many other small-scale producers, their brand of capitalism was robustly anti-trust and against price fixing.”⁴⁹

In Germany, the institutional framework that has emerged for SMEs since industrialization is completely different. During the monarchy, the attention of policy makers was attracted by constant complaints from the Mittelstand that they were at risk of being economically displaced by the growing industrial groups and wholesalers. Craft, industry and commercial sector enterprises, most of which were owner or family-managed, regarded themselves as the traditional backbone of the German economy and felt they were being marginalized in the competition and battle with the new anonymous corporations. Strong industry associations, trade guilds (Innungen) and chambers of commerce, trade and industry that had emerged from the guild tradition acted as their mouthpieces. In 1897, amendments to the Trade, Commerce and Industry Regulation Act (Gewerbeordnung) confirmed the chambers as institutions under public law, thus politically recognizing their demands for social protection and preservation of the status quo as being in the general interest and underpinning the self-regulatory interests of the Mittelstand.⁵⁰ The protection of the Mittelstand came, however, at the expense of a partial restriction of the freedom of enterprise. The state continued to meet their protectionist ambitions in the German Empire by imposing special taxes on department stores. The privilege of master craftsman training was retained, and this ultimately allowed the chambers and guilds to decide which new companies could enter the market. Industry associations thus retained a sustained influence over the regulatory shape of coordinated capitalism, with the priority of limiting price competition in order to ensure stable growth for small and medium-sized enterprises.⁵¹

As in the USA, cluster-like centers of new industries came into being in Germany in the 19th century. In the jewelry industry, Providence had its counterpart in the Golden City of Pforzheim. Mechanical engineering districts developed in Chemnitz just like in Cincinnati.⁵² The cutlery industry concentrated around Solingen, the Märkisches Land around Wuppertal expanded its position as a location for the textile industry, Düsseldorf became the “Manchester of the Rhine” for the steel and metal construction industry, and industrial activity in Tuttlingen specialized in medical technology—to name but a few of the up-and-coming industrial and commercial regions. Yet even if similar synergies from sharing knowledge and creating joint support and training organizations were identifiable in business networks in the USA and Germany, they differed on one key point: in Germany, industry associations took on a far more influential role in coordinating the structural development of the clusters. Managed competition, fewer price wars, regulated market access and, not least, occupational qualification and training organized within the bounds of traditional instruction through chambers and guilds allowed greater continuity in both ownership and labor relations. The business landscape was significantly less fluid. Innovation was driven within the businesses, because major bureaucratic hurdles stood in the way of potential spin-offs. As a result, talented employees were less motivated to seek self-employment. This made it easier for companies to become multigenerational while pursuing a core workforce policy based on long-term employee loyalty. This trend was still being reinforced in the Weimar Republic, when the ideal of a social economy, moderated by the state or jointly by associations and trade unions, became the dominant regulatory concept. Here, too, protective measures intended to preserve the Mittelstand as well as their access to the training system continued and were even expanded in some cases.⁵³

But what were the economic consequences of the multigenerational structures that were so widespread in Germany? Does it really matter whether a business is in its first or fifth generation of family ownership? To have more people starting new businesses, as happens in the USA, could well be an advantage over a large number of descendants inheriting one business. A general assessment is not possible, because the economic functionality of multigenerational structures depends decisively on the sector to which they belong. Continuity is a comparative advantage where experience and expertise for the manufacture of industrial quality products have been built from a skilled crafts base over extended periods and technical change is incremental. Examples can be found in mechanical engineering or instrument making, where German family businesses have a particularly strong presence. But where barriers to market entry are low, companies tend to be short-lived. And where disruptive innovation is the order of the day, such as in software development or other high-tech sectors, multigenerational structures can often be an impediment.

A study of 456 large German family businesses established before the First World War, with revenue in excess of 50 million euros in 2003, found that multigenerational structures produce additional motivational resources. The business owners interviewed emphasized the long-term perspective of their strategies, to which they attributed characteristics such as more restrictive dividend policies and lower risk appetite. “None of the family members surveyed considers the business to be a pure investment.”⁵⁴ Although a continuous stream of income was very important, stability and a sustained increase in capital were more important still; they were the keys to ensuring family cohesion and building on the legacy of the ancestors by delivering business success. Responsibility to future generations was also named as a major issue. In addition, the company’s long years of loyalty to its employees and its location played a major role. These factors gave the businesses and their workforces a specific identity and cohesion. The fact that employees identified with the company and enjoyed greater job security translated into higher productivity. Many of those interviewed indicated that, for them personally, these factors were great sources of strength and intrinsic motivation. Conversely, there was also something like a sociocultural or emotional dividend consisting of reputation and influence, especially in local and regional contexts. Direct access to holders of public office and recognition by the citizenry are some of the additional personal benefits.⁵⁵

In the market, multigenerational businesses inspire confidence among business partners and customers and lay the foundation for strong brands. People know that to ensure their sustained existence, these businesses will continue to meet quality standards and keep promises such as warranties and customer service levels. In many cases, the success of German hidden champions is down to these kinds of reputational factors—even if it has not been possible so far to measure these symbolic and emotional effects. For one thing, family businesses exist in many shapes that cannot be distinguished clearly from one another, and ultimately there is simply not enough (historical) data to allow us to compare the economic performance of family and non-family businesses. Then, too, the effects that may help family-based networks of trust, business goodwill or corporate image to unfold depend on the respective systemic environment and the institutional framework applied to the economy. In the case of Germany, Ehrhardt, Nowak and Weber examined the financial performance of family businesses with a history of more than 100 years, and found that companies that have consistently retained the status of family business since 1903 have been financially more successful than those that transformed into corporations (with less than 50 percent of the shares held by the family) or even stock corporations with dispersed share ownership in the course of the 20th century. Especially in technology-based sectors, these family companies demonstrated greater persistence, higher innovative capabilities and better business performance. In addition, the authors speculate that lending banks tend to reward the transfer of ownership and management to a subsequent generation with favorable interest rates.⁵⁶

A small number of more recent studies on the USA argues that listed family companies with a continuous presence of founder families achieve higher profits, if at least one member of the family remains involved in the company as CEO. However, this effect diminishes with each subsequent generation and performance of these businesses soon falls below that of companies that work exclusively with external managers.⁵⁷ What is more, family influence has no noticeable effect on market capitalization.⁵⁸ On the contrary, studies have found that the opposite is true: the financial markets tend to react negatively to an announcement that a family member will continue to exercise significant control after a generational changeover. This is a manifestation of the fact that US investors and market players consistently assume that strategic management and financial performance will deteriorate if management appointments are based on non-economic criteria such as family origin instead of skills. This is a clear sign that skepticism of family influence has become deeply embedded in the culture and mentality of the US economy.⁵⁹

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