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The New Capitalism and Family Enterprise

By John L. Ward, Ph.D.

On July 19, 2007, the Financial Times published a comprehensive full-page analysis of trends in global financial markets, authored by regular contributor Martin Wolf.  (See www.ft.com/wolfforum).  He precisely outlined the reasons that our world has recently shifted from “managerial capitalism” to “financial capitalism.”  Peter Drucker, just before his death, referred to the same phenomenon as “speculator’s capitalism.”

In short, more and more of the world’s assets are held in short-term financial instruments (derivatives) by short-term institutions (mutual funds).  Even governments and pension plans are joining the trend.  The goal of these instruments and their managers is not to build long-term value in a sustainable institution but to generate short-term financial returns.  

Wolf says, “The new financial capitalism represents the triumph of the trader in assets (e.g., the fund manager) over the long-term producer (e.g., the business owner).”  He goes on to add, “With the orientation toward trading come explicit, rather than implicit, contracts and arms-length dealing rather than long-term relationships. Gone is the value of building a relationship based upon standing by your word with customers, employees and other stakeholders.  This value is replaced instead by a written contract providing legal guarantees, but no sense of obligation to stakeholders or desire to build a reputation for standing by one’s word.”

How does this affect the world of enterprising families?

Surely for those investing financial assets as part of their portfolios, understanding this world is essential. Those who manage these investments are very different people from those with whom business-owning families are normally comfortable.  And the compensation plans for their investment officers and family office leaders will stretch the business family’s sensitivities, particularly for families who believe that some of the benefit of working for a family institution is not paid out in dollars but in the opportunity to work in a culture that values people.

But more fundamentally, I believe that the global focus on financial capitalism will open up more attractive opportunities for enterprising families.  In the direct-investing market (i.e., private equity), families can offer an increasingly distinct “product” – investments for five or more years.  Increased returns always come from finding places others avoid. Business families have always been good at this.

The same increase in opportunity and long-term gain comes in owning companies.  The less investors value “relationship” investing and strategy, the more relatively promising it is for business families.  The long valid family business competitive advantages of loyal partnerships, brand building, doing the right thing, market development, service quality and vertical integration become even more valuable as other businesses become less willing to make these investments.

As the 21st century becomes the era of financial and trading capitalism, the appreciation for the distinctiveness of family business heightens. Enterprising families will want to be even more conscious of their relative advantages and vigilant not to join the herd of conventional wisdom.

Resisting the temptation to be avant-garde will be challenging.  Everyone around us wants to ride the new wave. Political activists note that our “market economy” is becoming a “market society.” Whether or not that is good for society, it is challenging to the confidence and consistency of enterprising families to do what they do best: invest long-term in relationships, reputation and real assets.
 

 

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