Corporate Responsibility

What America’s family-owned businesses have learned from the German Mittelstand

Kindertagesstätte für Mitarbeiterkinder
Think of the children, not profits. Source: DPA

Germany has a long culture of family-owned and privately held businesses, the so-called Mittelstand. These businesses typically have long-term growth goals and try to align commercial goals with the interests of their employees and other stakeholders, including the communities where they are located. Germans are understandably proud of their Mittelstand. The flip side of this pride is that Germans often criticize the allegedly short-term goals and practices of American companies. But a new movement in the US might change this perception.

When Germans criticize “Anglo-Saxon” capitalism, they typically point at scandals such as the fake accounts created by banking giant Wells Fargo, the price-gouging by the pharmaceutical champion Mylan, or the financial fraud by Enron. But a glance through the news reveals that such scandals are hardly an American specialty. Germany’s Volkswagen and Deutsche Bank appear to be in a tight race for which of them can generate the most – and most egregious – headlines about bad governance.

So it might be useful to look more closely at the ownership structures of German and US businesses. The US has, per capita, four times as many publicly listed companies as does Germany. Some 19,000 public companies in the US stand against a mere 800 in Germany.

More and more privately held American firms are adopting a philosophy that Germany’s Mittelstand embraced long ago.

Family-owned businesses such as Trigema, a maker of tennis shirts and other textiles, embody the values of the German Mittelstand. It promises to source most of its value chain locally, to lay off no employees, and to offer the children of staff apprenticeships in the company. This is not only a good marketing tool but also keeps staff turnover low and loyalty high.

But it is not only the German Mittelstand that subscribes to these values. Whereas public companies must have the interests of shareholders closest to their hearts, privately held companies generally tend to care more about other stakeholders. That’s why even in the US, more entrepreneurs are coming around to the view that long-term success requires taking care of their communities and staff, and defining a social “purpose” in addition to profit goals.

One of the founders of this American movement is John Mackey, the boss of Whole Foods (recently bought by Amazon). He wrote a book about finding a higher purpose for business than merely maximizing profits. Mr. Mackey argues that business is about achieving the noble, the good, the beautiful, and heroic. Companies should, he thinks, embrace all their stakeholders and try to benefit everyone they touch, not just shareholders. Strong leadership, he argues, requires not just analytical and emotional intelligence but also systemic and spiritual intelligence. In addition to a strong business plan, companies need conscious cultures that support people bringing their whole selves to work.

The ideas in Mr. Mackey’s book have even spawned a new non-profit organization: Conscious Capitalism, of which one of us is chief executive. Conscious Capitalism helps businesses to find their purpose and, as the name implies, to become more conscious.

Inspired by these ideas, for example, The Container Store (TCS) became one of America’s largest retailers by providing over 24 hours of training for employees when they start, and then ongoing training and throughout their career. Driversselect, a used-cars sales company, is another example. Its industry suffers from a bad reputation. So its founder focuses on internal and external transparency and long-term customer satisfaction. The idea is to promise customers only what they can actually get – and not to sell them something that will later disappoint them. As a result, Driversselect beats all benchmarks in its industry and is on a path of long-term growth.

In this way, more and more privately held American firms are adopting a philosophy that Germany’s Mittelstand embraced long ago. This cultural change is happening mainly among family-owned businesses in the US. Germans might therefore reconsider their blanket condemnations of Anglo-Saxon capitalism and look instead at the misaligned incentives in listed companies specifically. These are often run by mercenary executives, while the owners have little to no control or input in daily management.

If public companies want to get out of the spotlight of scandals and ongoing identity crises, they might take a leaf from their family-owned competitors. They should realign management incentives and define long-term goals that include not only shareholders but also employees, customers, and local communities. That’s neither Anglo-Saxon nor German capitalism; it’s simply good business.

To contact the authors: gastautor@handelsblatt.com

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