Family Businesses as a Guarantor and Engine of Modern Societies

Report on the results of “Family Business as a Guarantor and Engine of Modern Societies” Roundtable held at the 11th Rhodes Forum on October 4, 2013

By Adrian Pabst, Senior Lecturer in Politics, School of Politics and IR, University of Kent; Visiting Professor, Institut d'Etudes Politiques de Lille (Sciences Po)

This roundtable was organized together with the German-Russian Forum and focused on the role of family businesses in the economy and society. Based on 8 presentations, around 30 participants from various countries discussed the experience of family entrepreneurs and possible lessons for emerging markets such as Russia.

The debate revolved around five themes: first, the nature of family businesses and their distinct characteristics; second, the contribution of family businesses to the socio-economic development of both advanced economies and emerging markets; third, challenges to family businesses in an increasingly globalised world; fourth, the potential and limits of creating family businesses in emerging markets; fifth, policies to support the creation and flourishing of family businesses as well as possible forms of cooperation between family businesses across borders – with a specific focus on Germany and Russia.

I. The nature of family businesses and their distinct characteristics

If family businesses include all those companies that have a share of family ownership and/control, then they are the most widespread form of private enterprise. Indeed, according to this broad definition, 9/10 of all private companies in Germany are family businesses. Likewise, in countries such as Italy family businesses stretch from micro enterprises with 2-3 staff to corporations such as the Fiat Group, which is largely owned by the Agnelli family.

However, there are number of defining characteristics that tend to apply to most family businesses. Broadly speaking, we can distinguish general principles and specific features. The general principles include the following:

1) personal stake and leadership of a company (including both family ownership and family involvement in management)

2) handing on assets and a workforce from generation to generation (but succession is also fraught with difficulties, including the [non-]suitability of heirs, tax issues, etc.)

3) managing a business as a member of a community with duties (knowledge of employees and their personal circumstances)

4) a culture of cooperation and consensus based on high levels of social trust and dense social networks (e.g. in Italy this is connected with the notion of ‘territorio’, which encompasses land, heritage and cultural ties)

Among the specific features of family businesses, there is

1) long-term investment, not short-term profits – linked to the absence of a ‘corporate culture’ of quarterly reporting

2) efficient and effective decision-making – based upon a ‘lean’ chain of command with quick responses and reliable feedback loops and without any complex, corporate structures

3) competition and consensus (i.e. competition at home but modes of cooperation to gain a share in export markets abroad)

4) close relationship with local and regional banks (including cooperative banks and credit unions which decide on loans based upon trust, reputation and loyalty)

II. The contribution of family businesses to socio-economic development

In line with their specific characteristics (as outlined in section I), family businesses make a distinct contribution to socio-economic development. Their contribution is both quantifiable (in terms of economic results) and non-quantifiable (in terms of wider social and cultural outcomes).

The economic results include

1) personal responsibility, not profit-maximisation at all costs

2) fair treatment of workers, not a policy of hire & fire

3) salary restraint for managers, not excessive remuneration and bonuses; linked to this is higher risk aversion and more responsible management

4) creation of sustainable jobs (specialised workforce with high levels of both human and social capital)

5) careful use of capital equipment (e.g. specialised machines for high-tech manufacturing)

6) re-investment of profits into the business (either no need for external finance or close cooperation with cooperative banks and credit unions)

7) motivation and innovation

The wider social and cultural effects include:

1) giving back to society, e.g. by setting up foundations that channel money into specific good causes (educational, social, cultural and charitable)

2) social cohesion as a result of investing in local and regional economies, not relocation to lower-wage countries

3) a culture of interpersonal trust and loyalty to both people and place

III. Challenges to family businesses in an increasingly globalised world

In light of the global financial crash and the ensuing recession around the world, it is crucial to highlight the numerous challenges to family businesses:

1) the periodic crises of global capitalism lead to the destruction of small- and medium-size enterprises (including family businesses) and also to structurally higher unemployment, which undermines vibrant local economies on which family businesses significantly depend

2) financial shocks and the global ‘credit crunch’ have bequeathed a banking crisis; lending has dried up, especially to the SMEs

3) due to fierce price competition and global pressures to cut cost amid fledgling demand, businesses relocate elsewhere in search for lower wages

All this undermines mutual trust and the dense social networks on which family businesses rely.

4) lack of resources to engage in branding and marketing activities on a similar scale as multinational corporations

5) training and maintaining the standards of a fast-growing workforce (lack of personal knowledge)

6) the mounting pressure on the second/third generation to succeed (in both senses of the word)

7) the danger of becoming ‘too big’ and therefore a potential prey to larger competitors

8) the lack of loyal suppliers and customers (connected with the rise of unscrupulous behaviour)

IV. Potential and limits of creating family businesses in emerging markets

Despite destructive revolutions and Communist rule for many decades, emerging markets such as Russia and China exhibit tremendous potential for the creation and flourishing of family businesses in a wide variety of sectors.

The potential for family businesses is based on the following features:

1) large, dynamic and growing economies with increasing domestic demand

2) a culture of start-ups (e.g. in the IT sector in Russia)

3) a substantial pool of talents and skills (linked to science education during Communist rule)

However, there are many more limits and obstacles to the creation and flourishing of family businesses in emerging markets such as Russia:

1) absence or lack of dense social networks and/or stable family structures (certainly a lack of social trust in people and institutions)

2) lack of individual initiative and self-organisation (‘old mentality’ of top-down, command-and-control economy and society)

3) lack of training for managers and other staff of family businesses (both academic and vocational)

4) the monopolistic structure of the Russian economy and the dominance of state corporations or large, private businesses, which reduces competition and raises the barriers of entry for SMEs and family businesses and also prevents their effective cooperation across different sectors

5) the lack of trust in law enforcement agencies (strong state, weak institutions, lack of rule of law)

6) the lack of adequate child care provision and other ‘support services’

7) both ‘soft’ and ‘hard’ corruption (i.e. favouritism/nepotism but also corporate racketeering)

8) legislation and regulation in favour of state corporations and large corporate businesses

9) lack of chambers of commerce and businesses associations that can lobby local, regional and federal government

V. Policies to support family businesses and possible forms of cross-border cooperation

There are a number of policies that would benefit most family businesses in both developed economies and emerging markets:

1) promoting both knowledge and training with a focus on high-tech goods and services; linked to this is the creation of new networks bringing together research universities, businesses and organisations that could provide investment (including cooperative banks, credit unions but also venture capital)

2) creating new sources of finance (including creating new types of cooperative banks and/or credit unions as well as public investment banks constrained to lend within certain regions and/or sectors)

3) reducing the tax burden on SMEs and family businesses as much as possible

4) boosting vital infrastructure (transportation, communication, etc.)

5) reducing the regulatory burden that is biased in favour of large, corporate businesses and against SMEs and family businesses at all levels (local, regional, national, supranational and global)

6) promoting cultural change and a new mentality of taking initiative and self-organisation

Among the specific policies that would favour the cross-border cooperation of family businesses for countries such as Germany and Russia, there are:

1) improving the operation of chambers of commerce

2) creating economic-social councils that bring together different stakeholders (federal and local government, business associations, trade unions’ representatives, consumer associations, etc.)

3) creating a cross-border, German-Russian associations dedicated to family businesses that brings together entrepreneurs from both countries who can share good practice and jointly call for supportive policies

4) introducing a Russian equivalent to the German IHK


There is no doubt that family businesses and/or SMEs are the backbone of some of the most vibrant economies in today’s world. Family businesses have many virtuous characteristics including a sense of entrepreneurship (high personal passion and commitment), a fair business culture that rewards long-term success, a strong sense of mutual loyalty (between employers and employees, businesses and suppliers, producers and consumers, savers and investors, etc.) and a sustained contribution to society (via foundations).

Family businesses face a series of fundamental challenges and need both public recognition and specific support if they are to thrive in an increasingly globalised economy.

Dr Adrian Pabst