Chancellor Merkel explains why family business is moral

“One of the disasters of the former German Democratic Republic was that family businesses were expropriated. Their traditions were remembered only in faded lettering on the walls of buildings.”

This striking image came from German chancellor Angela Merkel earlier this week at the first European Family Business Summit in Berlin just days after Germany had celebrated the 25th anniversary of the fall of the Wall. The event was held, incidentally, at Deutsche Bank’s HQ in a part of the town that was formerly in East Berlin.

Mrs Merkel made it clear that not only are family-owned firms the economic backbone of the German economy, but that she sees family businesses as moral, saying that: “Family businesses are exemplary of what our social-economic model is all about: they combine the fundamental values of freedom and responsibility.”

She praised their prudence, admiring the way family firms often finance themselves with retained earnings rather than debt finance. The parallels with the German budget, which will for the first time in 46 years be balanced in 2015, were hard to miss, as were the Lutheran overtones.

The idea that family businesses are moral was also raised by William Pedder of the UK’s Institute of Family Business and a sixth generation member of family that control Clarke’s Shoes, in his opening speech at the conference.

He criticised “unbridled capitalism, where moral values and business ethics are no longer relevant, and greed is, too often, the sole driver”. He called family firms exemplars of “long-term patient capital” which produces stability and growth, in contrast with short-term, risky debt finance.

This idea that family businesses are moral is a powerful one, and should help explain to policymakers and the world in general just why they should be valued.

That is all very nice, but what can be done to promote these moral businesses? Pedder explained three ways that policy can help. Firstly, “active” capital which has been built up over generations should not be destroyed by taxation when ownership of a business transfers from one generation to another.

Secondly, equity capital should not be taxed more than debt capital, as it often is at the moment.

Thirdly, governments should realise that family firms are qualitatively different from others. Policy often champions SMEs, but this means that some issues unique to family ownership and structure have been ignored, and family firms are sometimes unwittingly penalised.

Family firms often struggle to articulate to policymakers and the world in general exactly why they are a good thing. With the argument that they are moral, they can make a powerful case that they should be supported.

The list of recommendations should help them make clear demands from policymakers in Brussels and beyond. Chancellor Merkel repeatedly talked about family firms’ sense of responsibility. Let’s hope that policymakers can understand their responsibility to protect some of the most valuable organisations in society.