Blood is thicker than water – Governance and Succession in Family Businesses

The Center of Family Business of the Corvinus University of Budapest held an international conference on 22 March entitled „Governance and Succession in Family Businesses – Where are we now and what can we learn from international practice?”

The conference focused on the strategic governance and long-term prosperity of family businesses and was organized by the Corvinus Center of Family Business that operates with the professional and financial support of the German Stiftung Familienunternehmen and the Péter Horváth Stiftung. The event offered an excellent opportunity for networking among business practicioners and academic researchers as lecturers and participants represented both groups.

The opening addresses were delivered by Prof. András Lánczi, Rector of the Corvinus University of Budapest and by Mr. István Lepsényi, State Secretary of the Ministry for National Economy. The speakers included the managers and owners of a number of significant Hungarian and German businesses. Among others Dr. Werner Conrad (Conrad Electronic SE), Johannes Baillou (E. Merck KG), Dr. Ulrich Stoll (Festo AG), as wells as Dr. József Béres (Béres Pharmaceuticals), Dr. Sándor Kürti (KÜRT information management and data recovery company), László Bárány (MasterGood Group) and Dávid Boros (Oázis Horticulture) shared their thoughts with the audience. On behalf of the founders and sponsors of the Center Prof. Dr. Péter Horváth and Prof. Rainer Kirchdörfer gave opening lectures. The Director of the Center, Dr. György Drótos presented their findings in his lectured entitled ‘What does our recent large-scale survey show about govenrnance and succession in Hungarian family firms?’.

In his presentation, Dr. Werner Conrad, Chairman of the Board of Conrad Electronic founded in 1923 spoke about the challenges that family businesses face relying to a large extent on tradition in the age of distruptive innovation. Their company introduced major changes with catalogue marketing and with the establishment of webstores. Competition, however, forces everyone to identify new, more innovative solutions in the retail market. Tradition in this case means the transfer of best practices, beliefs and convictions. Although, as Woody Allen pointed out, tradition is no more than „the illusion of permanence”. If a company wishes to remain on the market, it must be able to build on its traditions as well as benefiting from the opportunities of the often disruptive innovation. Dr. Conrad thinks that in the bind of these two dimensions family businesses confront four challenges. First, they should cope with the wrong assumption changes does not affect them. Second, they must create a change-friendly corporate culture. Third, they should adjust their internal structure and processes accordingly. Last, but not least, they should not forget about their customers. As a takeaway, he suggested to the managers of family businesses that they themselves should be fostering changes in their own organizations. They should never think that they can escape change, they should implement digital company management and they should be out of office as much as possible to see, hear and understand what is happening in the world.

Johannes Baillou, Chairman of the Board of the pharmaceutical giant E. Merck KG and Vice-President of the Merck Family Board took up the question of how to make sure that a business-owner family functions over several generations. The Merck company, which was established in 1668, had undergone numerous generational successions. Mr. Baillou believes that their secret lies in the modesty of the family and its members. The Merck family is known for taking out only small dividends, they reinvest a large part of the profit and do not display their wealth. All this is supported by setting a good personal example and in the conscious education of successors. The Merck family has addressed the problem of succession and the maintenance of family property through a complex governance system in which an asset management holding plays central role. It disposes of the family share capital, family members may have a stake only in the holding, and this stake may be transferred to family members only. Thus, family shareholders will always vote together, the wealth is not fragmented and does not get in the hands of strangers.

After the lunch break, the participants listened to two panel discussions featuring managers who shared their thoughts on succession and governance. The overview presented by Dr György Drótos contained key messages for the Hungarian scientific community: the latest representative survey of the Family Business Center conducted on a large sample was the first such comprehensive assessment on Hungarian family businesses and, therefore, could serve as a reference for defining future research topics. On the other hand, the creation and maintenance of a large-scale database may provide key information to researchers and decision-makers. Dr. Drótos revealed that in designing the survey, they considered companies as family businesses that looked upon themselves as entities in which family control was dominant and where over 50% of shares was owned by family members. The objective was to explore the distribution and characteristics of Hungarian family businesses, to understand the needs and internal processes of the various groups, and furthermore to use the findings for the purposes of conducting targeted research projects later. They had two questionnaires filled in by the companies: in the first core data on the company, its economic performance and the variables of family influence were assessed (with the participation of 1400 enterprises). In the second questionnaire, they touched upon issues of socio-emotional capital, succession, governance and professionalization (with the participation of 250 enterprises). The survey showed that 91.24% of Hungarian family businesses is a small enterprise, around 7.7% is a medium enterprise and the proportion of large enterprises is just surpassing 1.06%. For decades, the problem of the Hungarian economy has been the lack of medium enterprises similar to the German Mittelstand. With respect to family influence, the majority of existing medium family businesses behave as if they were small enterprises: although they are able to employ slightly more family members than small ones, they are less capable of involving external experts than large enterprises. Hence one can assume that one of the obstacles to becoming larger is due to the lack of professionalization.

As opposed to Western European history, the history of Hungary and the region did not favour the accumulation of capital, a factor that explains why only around 20% of family businesses – mostly medium and large enterprises – have antecedents of enterpreneurship. The research hypotheses, however seem to be refuted by the finding that entrepreneurial antecedents only have a positive influence on the economic performance of a company if they cannot be traced back to earlier than 1990. The survey suggests that the majority of family businesses intend to choose the traditional form of succession, that is to hand over both the management and the ownership of the company to successors within the family.

Baksa Máté