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Interview: Are Family Businesses Facing a Crisis?

Our experts Prof. Dr. Peter Klein and Prof. Dr. Stefan Prigge on the special opportunities and conditions that (can) make family owned businesses more resistant to crises.

Family businesses are the predominant organisation type in Germany. As many others they also are affected in several ways by the corona crisis. In an interview, our experts from the IMF, Institute for medium-sized and family owned businesses, explain how this particular type of company could overcome the crisis and why.  

Prof. Dr. Peter Klein, Professor for Family Owned Businesses
Prof. Dr. Stefan Prigge, Academic Head MSc Global Mgmt. & Governance and Executive MBA Photo: Oliver Tjaden

Will family businesses handle the corona crisis better than non-family businesses? 

Klein: Of course, this cannot be answered in a general way. Because in addition to the presumption that family businesses have special abilities but also weaknesses, several factors must be taken into account when dealing with a crisis. It is the combination of typical strengths of family businesses and their families like management skills, industry affiliation, actual capital resources, integration in supply chains, the general conditions, e.g. access to capital, to name a few examples, that will provide the overall picture – and this varies greatly from company to company and thus also from family business to family business.

So this means that there is no inherent guarantee for success? 

Prigge: That is correct. But, we believe that family businesses stand better chances. From the fact that they are family businesses, many arguments can be derived that make this type of company appear more crisis-resistant. At least, this is one of the findings following the financial crisis.   

What do you have in mind?

Klein: First, we have to understand what family businesses are: a construct that essentially consists of three components – we call them systems – namely the family, the company and the owners. The special feature of family businesses is that these three spheres overlap figuratively. In terms of content, this means that ownership, management of the company and family are often completely or at least partially identical in terms of the people involved. Family and business are thus closely linked, so that mutual complementarities can be identified. The family becomes an additional resource for the company – proverbially the family business. 

How is this connected to the assumed crisis resilience?

Prigge: It should be obvious at first sight that the largely identical nature of the above-mentioned actors in the perception of their roles as family members and managers or owners initially justifies speed in decision-making and implementation. This is an advantage that should not be underestimated, since, for example, no formal bodies slow down decision-making processes. Secondly, a probably more pronounced sense of responsibility immediately comes to mind. An employed manager, for example, is probably far less concerned about the well-being of his employer than a family business owner. After all, for him, the family entrepreneur, all the eggs are in one basket – namely in the company – and the fate of the company equals the fate of the family. This makes it easy to understand and explain that family businesses must and do have a very special stakeholder management.

Could you explain this a little further?  

Klein: Simply said: a special characteristic of family businesses is that they do not primarily pursue financial objectives. Rather, it can be observed that immaterial, psychologically motivated factors often predominate. Studies have shown that the preservation of e.g. social ties both within the family and with customers and suppliers is a valuable asset that must be preserved at all costs (see explanation box SEW). This risk aversion is thus a consequence of the fact that intangible assets are ranked higher than financial opportunities.  

Prigge: The entrepreneurial family's stronger emotional attachment to the company and the desire to pass the company on to the next generation can lead to the entrepreneurial family fighting for their company with more heart and soul during the crisis than it is the case with non-family owned businesses. A comprehensive study on British companies supports this assertion. It states that the probability of insolvency of family businesses was significantly lower than that of non-family owned businesses in the reviewed period, 2007-2010. 

How significant is this insight for crisis situations? 

Klein: One consequence is that the management of crises is different to that of non-family businesses. For example, there are often particularly close relationships with employees that have formed over long periods of employment that equal family relationships. And this is mutual. The identification of the employees and their commitment to the company is reciprocated by care from the family. Wolfgang Grupp recently reinforced in an interview that he will not lay off any employees. As his company is expecting sales losses of over 50% this really is remarkable. In this way, a distinctive human capital is created in or for the family business, which should not be endangered or destroyed even in a crisis. We know of cases in which family businesses announced short-time working, but compensated the threatening financial losses for their employees with their own, often private, resources.

Does this imply that financial gain is not always top priority within family businesses?   

Klein: That's not the case, of course. No privately run company is uninterested in financial stability, and family businesses are no different. On the contrary: the constellation of a family business being in the hands of the family or families results in mutual dependencies, especially in financial terms: the financially healthy company virtually feeds the family, while at the same time the family is a resource for the company. It is from the latter relationship that companies can survive times of crisis better or even longer than non-family businesses. A prominent example is the failed takeover of Volkswagen by Porsche. Without substantial contributions from the Piech and Porsche dynasties, the crisis could not have been overcome financially. 

Prigge: This naturally requires that the company not only operates profitably in the long run, but that the dividend policy is also designed in a responsible manner towards family members and the company. To say it more precisely, it is therefore often a goal to keep the equity ratio comparatively high by retaining profits in order to be able to survive temporary lean periods and at the same time to guarantee a certain independence from the capital market and especially from banks. We are of course aware that such behaviour is not ideal from a business management point of view under the criterion of return on equity. But under the criterion of long-term protection of this so-called patient financial capital, this enables scope for action or even creates cushions and resources for crises.  In a crisis, a finding from our research can be helpful in this respect: one interpretation of the results of a joint essay written by our doctoral students is that family businesses find it easier to gain access to bank loans than non-family businesses. The latter must therefore have more material assets in order to obtain as much credit as family businesses. The status of a family business therefore creates so much trust that non-family businesses must first generate this trust through tangible assets.
 

What other characteristics would you name to describe the advantages of family businesses in crisis situations?

Klein: One obvious advantage that shouldn’t be underestimated, is not only the speed of decision making but also their implementation. During the corona crisis we are experiencing a lack of respirators, mouthguards and test capacities. While in the US government decisions were necessary at the highest level, many companies – and family businesses were in the front line here – have adapted and reacted quickly to this situation without seeing these measures as marketing in their own right. Bosch, for example, a family-owned company, developed new test procedures marketable in its medical division in very short time. A division that is of special importance to Robert Bosch by the way. Also thinking of Trigema and the Grupp family, which converted 80% of their production capacities to the manufacturing of textile mouthguards in very short time. Dräger from Lübeck - better known as a quality leader for respiratory equipment - is currently investing in the US to set up a plant for the production of medical protective masks. Production is scheduled to start as early as September. The VW subsidiary Seat manufactures ventilators. The list of supporters, including non-family businesses, is long.

It sounds as if the winners of a crisis are – if you want to put it that way – family businesses.

Klein: Phrased this way, this interpretation is not correct.  Entrepreneurial wisdom is not reserved for family entrepreneurs. They have – as I said – special requirements, but these are no guarantees. Overcoming a crisis is determined by many factors, including its duration. To put it simply: without sufficient income, the room for manoeuvre is limited in time when operating expenses are involved. For some there is more room, for others there is less. No network of employees, customers or suppliers is infinitely resilient. It is therefore important that in a crisis of macroeconomic proportions, the pillars of the economy – namely small and medium-sized enterprises and family businesses – shall not be forgotten. We have serious doubts whether sufficient attention is being paid to these companies. Politicians have recognised this problem, but the question remains whether words will be put into action. Against the background that over 90% of the approximately 3.4 million companies in Germany are family businesses, the question seems legitimate as to whether the financial aid programmes are sufficient to keep this economic motor running. Certainly, the individual small businesses and companies (in Germany, 3.1 million companies employ up to 9 people) may not be “systemically relevant”, using this terrible catchword. But medium-sized and family-owned businesses as a whole are. According to a recent survey by the association Die Familienunternehmer, the companies surveyed consider their liquidity to be dramatically at risk. A good quarter of those questioned believe they can persevere for up to three months, but a third only up to 8 weeks. In this respect, it is to be hoped that bureaucratic obstacles in particular, e.g. in the context of credit checks, will be lesser and above all taken more quickly. 

Thank you for this interview! 

Familiness describes the special features of family businesses from a resource-oriented perspective. It is defined as a unique bundle of resources that a company possesses due to the systemic interaction of family, individual members and the company.

Familiness is determined by three dimensions:

  • Family involvement in terms of ownership, management and control
  • Specific behaviour resulting from family influence
  • Organisational identity