Viewpoint: Why educating family shareholders is a top priority for Germany’s Mittelstand

Germany’s family businesses are increasingly being owned, but not operated by their owners. The difficulty with this development is that ownership without knowledge of how to run these businesses could pose a threat to many of them. Given the seriousness of the problem, it is more important than ever for family shareholders to be educated in the responsibility of owning these businesses.

It is well documented that the global transition of wealth is happening rapidly and the consequences of that transfer will be immense, not least in Germany. Here we are seeing many of the next generation of owners content to take on ownership of these businesses, but less happy to work on the operational side of them. And if the next generation has no experience on the operational side, it’s probably right to ask the question whether any of them can be appointed to the supervisory board of a German family business, given their skill levels.

Many of these businesses are so big and complex that it becomes increasingly difficult for family members to know what’s going on – even when they have been groomed to work in them. Indeed, the traditional path for the next generation to enter the business – university and gaining outside experience for a number of years before joining the family firm – might not be enough to understand how they work.

Added to these pressures on the next generation of owners is the growth in the number of family shareholders. In the past, the person from the family going into the business got all the shares or the majority of them. But today there is a tendency for every member of the next generation to get the same share allocation. This follows the fairness values of a 21st-century family, which is equality in ownership of everything inherited.

Connected to this is that business families tend to have more children – they reproduce higher than average in Germany. So often we see the number of shareholders going up by a factor of three from one generation to the next. If the business has five shareholders today, when it’s owned by the next generation it will likely have 15.

Given the growth in the number of shareholders and the complexity of running these businesses, there is likely to be a greater probability of conflict among shareholders. And if these conflicts can’t be resolved then the pressure to sell the business will rise.

The Stewardship Mentality is Being Eroded

There is a tendency for family members that are just shareholders of the business to have a different mindset than previous generations. Non-operational family shareholders are more likely to think of their business as an investment – to take dividends from them on an annual basis. In fact, many of them have become less influenced by the concept of stewardship than past generations, which says to family owners that they have inherited the business, but that doesn’t entitle them to sell the business.

So, with the growth of non-operational family shareholders, the practice of stewardship is threatened with erosion in Germany. It’s a potential scenario that many of these next generation owners think more like Anglo-Saxon owners of businesses. They have become more short-term in their outlook.

How do family businesses address these issues? Indeed, how can they continue to foster stewardship against the background of non-operational family ownership? It will require more from family shareholders than to just being able to read a balance sheet. They need to understand how the business family works and how that is interconnected with the operational business – and this should be a detailed and ongoing process.

Today in Germany perhaps 20% of family businesses realise the need to educate their shareholders in a systematic manner and are doing something about it. Research done by the Witten Institute for Family Business on the subject a few years ago has helped to raise the profile of the issue. Some businesses like the pharmaceutical company Merck, which has around 180 family shareholders, has also set a good example. They have set up an academy to teach family shareholders about the responsibility of their ownership and what it entails. Others are following their example.

But that still leaves around 80% of German family businesses with no program in place. Clearly, if these businesses don’t take this issue seriously they face the prospect of a greater conflict among shareholders and ultimately the demise of their ownership.

Dr Tom Rüsen is head of the Witten Institute for Family Business at the Witten/Herdecke University in Germany