Family values still important in capitalism

Harold James, Professor of History, Princeton University, Project Syndicate

In the war of values between America and much of the world, corporate governance plays a big role. Different visions of how capitalism is run both reflect and in some cases fuel resentment of the U.S. In the 1990s, it looked as if the rest of the world wanted to do business the American way, with active capital markets and company bosses responding to shareholder interests. This Americanization was often described simply as "globalization."

Then came a backlash, fueled in large part by the Enron debacle and other corporate scandals. Much of the world began to turn away from the American way of doing business. Europeans and Asians claimed with renewed vigor that their capitalist model involved a greater commitment to long-term values and a long-term vision. Shareholder value was dismissed as a fad and a fraud.

In continental Europe and parts of Asia, there has always been a vision of core business values centered on long-term institutions, especially the family. The extended family, indeed, remains central even in the large-enterprise sector. According to one recent calculation, 17 of the biggest 100 companies in Germany are in family hands, 26 in France, and 43 in Italy.

At the beginning of the 21st century, family interests reasserted themselves in continental Europe in a surprising way, ousting managers who seemed to have become too Americanized. In Germany, the Mohn family dismissed the lead manager of Bertelsmann, Thomas Middelhoff, who wanted to turn a family company into an almost denationalized enterprise. In France, Jean-Marie Messier was deposed from Vivendi Universal for similar reasons, and the Lagardhre dynasty tried to regain control. Unlike Messier, the Lagardhres were seen as deeply French. President Jacque Chirac's wife, the Prime Minister, and five ministers attended the funeral of Jean-Luc Lagardhre in 2003.

Just as Europe was recovering its confidence in its version of capitalism, however, the Parmalat scandal hit. The scandal looked like an obvious weapon to be used in the war of rival models of business organization: Critics portrayed Parmalat as the latest manifestation of a crisis of European-style family capitalism.

Indeed, in Italy, Fiat had long been in a sad decline. Mediobanca, the financial institution long at the heart of Italian family capitalism, was struggling since the death of its founder Enrico Cuccia and the removal of the man he had designated as his heir apparent. It tried to redefine itself as a more normal financial institution, less committed to holding long-term strategic stakes in companies.

So are both types of capitalism discredited by a mire of deceit and bankruptcy? Historically, the resilience of family firms was rooted in the fact that they were good at managing trust when other institutions -- the state or the market -- were shaky. The upheavals of the French Revolution and the Napoleonic wars produced great uncertainty, but they also produced business dynasties such as the Rothschilds.

In the aftermath of defeat in World War II, family links provided a way for Japan and Germany to reconstruct business quickly. They provided a highly efficient means of obtaining information about markets, suppliers, and sources of finance. This capacity remains attractive whenever a crisis strikes. But the attraction depends on seeing what is at the core of the family tradition.

The two styles of capitalism can be contrasted as the family firm versus the post-modern firm. The U.S.-style post-modern firm sees market dominance in terms of branding, or a manipulation of images that gives intellectual hegemony and can lead to market dominance.

As consumers, we recognize the big brands because so much has been invested in them, and we are invited to trust them. New brands can assert themselves by acquiring symbolic capital.

In the corporate landscape, there is the old, say, Coca Cola, but also alongside it the new, say, Microsoft or Amazon. Enron aimed at getting a dominant position as the premier energy trader. Parmalat wanted to do the same for the long-life milk market. In this vision of how corporations work, the company that isn't globally dominant is an also-ran.

The family firm has a vastly different logic, and often does not want to become too big. Its strong point is that it aims to be there in the future, while a company with a more flexible ownership structure may more easily disappear. In the past, the concern with long corporate life was criticized for restricting growth. If big is better, then it is better to become a post- modern company than remain a traditional one.

Parmalat was a family firm trying to be a post-modern firm, and which simply cheated on the way as it tried to expand fast. Its problems should not be seen as a test of family capitalism, but rather of the dangers that come from the temptation to break out of the old order.

As the future shape of global capitalism grows increasingly uncertain, family values are as relevant as ever. Family ownership builds trust and promises a commitment to long-run income and employment. That, surely, is a model that is beneficial in Europe, Asia, and beyond.

The writer is author of The End of Globalization: Lessons from the Great Depression.