Family businesses stabilize economies by adjusting their dividends to trading conditions. Isn’t that simply good governance?
It is premature to speculate which family-owned enterprises will emerge intact from the economic effects of the coronavirus pandemic, but some will do better than others.
EU governments are throwing significant resources at cushioning the effects of the downturn, yet it’s unclear whether some nations fully appreciate the economic contributions of family businesses.
Germany has launched a €1.1 trillion rescue package to steer its economy, Europe’s biggest, through the coronavirus-induced recession. The measures include state-backed loans, cash injections, and programs to put millions of workers on reduced hours to avoid layoffs.
The plan targets Germany’s powerful Mittelstand of family-owned manufacturers, tens of thousands of SMEs that form the country’s economic backbone.
There are no guarantees the measures will work and the stakes are arguably higher for the nation’s top 500 family businesses, which generated $1.8 trillion in revenues or almost 43% of the country’s GDP of $4.2 trillion in 2018.
The EU, as with many trade blocs, is in recession. This should underline the significance of the family enterprises as economic engines.
After imposing one of Europe’s strictest lockdowns, France expects its economy to shrink by 11% this year, an economic shock Bruno Le Maire, the finance minister, rightly predicts will be “brutal.”
Perhaps over-optimistically, Le Maire foresees a perky rebound in 2021, thanks to the country’s sweeping recovery plans: the French government has spent €450 billion ($490 billion) – equal to 20% of the country’s GDP – on a raft of fiscal aid measures to help the economy withstand the impact of the pandemic.
The Economist Intelligence Unit is less sanguine. Citing France’s particularly generous fiscal support package, the British analyst does not see the French economy recovering to its end-2019 size until 2023.
Where does that leave family enterprises? It is often said in France that 200 families control the economy, and what a burden that would be if it were true.
The actual number is far higher, according to Cyrille Chevrillon, author of Les 100,000 familles – a vigorous polemic in which the financier posits that some 100,0000 families own more than 80% of French businesses and produce around 60% of the nation’s GDP.
Chevrillon has often stated that the French government should do more to promote family firms because they are more honorable than non-family enterprises by virtue of their long-term vision, impact on the local economy, and their freedom from financial markets.
If the financier’s numbers are indeed accurate, France’s family enterprises will be more than instrumental to an economic upturn – they will be the recovery. Yet ignorance and contempt towards entrepreneurial families has frustrated past efforts.
Back in Germany, signs of state interventionism are appearing in what looks like frantic efforts to contain the pandemic’s economic carnage. Such measures could ultimately reshape larger family-held enterprises.
Will a Statist Approach Help a Recovery?
Angela Merkel’s latest plan, a rescue program totaling €600 billion ($679 billion), is ambitious. By the time she’s finished, the German chancellor will have installed a kind of state capitalism that gives officials in Berlin new powers to intervene in the economy.
Last week’s landmark €9 billion ($9.8 billion) bailout of Deutsche Lufthansa – including the government’s 20% stake and the right to block unwanted takeovers – could set the tone for how Berlin intends the economy to be run in the post-pandemic era.
Germany’s Mittelstand companies have attacked the plans as a slavish nod to big business, while critics within Merkel’s own party are less than comfortable with protectionist elements of the legislative package.
So, who will emerge healthiest in the post-pandemic EU? If British fund manager Terry Smith is any guide, family enterprises stand a strong chance of leading a recovery because their governance policies are more adaptive than non-family enterprises.
Adaptive Economic Drivers
It’s no secret that family-owned enterprises tend to pay reliable dividends because they adjust nimbly to trading conditions and take a long-term view.
Writing in the Financial Times, Smith points out that out of 47 stocks in the Stoxx Europe 600 that are family influenced only three have canceled or postponed dividends.
It’s also why Pictet Asset Management, the investment arm of Swiss wealth management giant Pictet Group, has unveiled a new equity strategy focusing on family-owned businesses, which routinely outperform their non-family owned peers and global equity markets.
The fund takes positions in successful family-run names where a founder or family hold a minimum of 30% of voting rights. Think Shopify, H&M, Hermes, and Heineken.
If Berlin can take a stake in Lufthansa, what is to stop it from tinkering with other crown jewels such as family-owned Volkswagen AG?
Would investing in a family-held enterprise, backed by a heavily-indebted government, running record deficits in a severe recession be a good idea? Maybe. Maybe not.
Surely the pressing issue for governments is to empower family enterprises as economic drivers, to enable them to thrive, and help create sustainable growth over the long term? Creating jobs will require investing in people and educating shareholders to the promise of social dividends.
Yes, our times are uncertain. What is certain is that family enterprises are agile and, when given the authority, are a stabilizing force in the world.