The photo (source) shows a painted inscription on the neck of an olive oil amphora found at Vindolanda, a small Roman garrison town on Hadrian’s Wall. The most visible part reads Aemiliorum et / Cassiorum, referring to the shippers of the olive oil, the firm or firms of the Aemilii and Cassii.
The only business firms at the time were family ones. Shipping posh olive oil from Provence (1600 km by cart and barge) or Andalusia (ca 2500 km by ship) to an officers’ mess at the cold northern edge of the Roman Empire was a risky business,
absent banks, insurance, or bills of exchange. [Update 4/12: I badly underestimated Roman trade finance; see comments.] To spread the risk, it made sense for the Aemilii and Cassii to join forces.
Family firms are popular with the writers of soap operas, in Brazil as much as the USA. (The best British example, the mordant Steptoe and Son about anachronistic rag-and-bone men with a horse-drawn cart, was satire with no pretence at economic realism.) The familiar emotional conflicts within a family are heightened and given wider repercussions by the less familiar but comprehensible context of lots of money. It’s only recently that soaps have ventured into the technically much more difficult environment of the modern bureaucratic corporation (Mad Men, The Office).
Art draws loosely on life, but doesn’t reflect it statistically. It’s said that Victorian novels frequently used both adultery and quicksands as exciting plot devices. From independent evidence, we know that adultery is very common and quicksands are very rare; but you would not learn this from the novels.
In this case the soaps get it more right than the economics textbooks. The vast majority of the world’s capitalist firms are family ones, even leaving out family farms. In the US, 80% of all firms are family-controlled; and “in about 65% of firms with 1993 revenues of over $5 million, at least 50% of the ownership was concentrated in a single family”. And not just small ones: “about 35% of the Fortune 500 firms are largely controlled by family interests”. (Gomez-Meija et al, pdf page 3, paywall; h/t Nadia Tronchoni in El Pais; thanks to Mike O’Hare for forwarding me the paper.)
My daughter Sarah works in one of the many family businesses in the Lille area. The grandest of these are the Mulliez dynasty: the 550 descendants and inlawsÂ of a fertile 1920s patriarch between them control a retail empire guesstimated to be worth â‚¬30 bn. It includes 3,051 Auchan supermarkets and hypermarkets (now in Russia and China), hundreds of Leroy-Merlin DIY superstores, and half of the Decathlon sportsgear shops.
You would suppose that family control makes a difference. You would be right. The CW is that family controlled businesses are risk-averse. The paper by Gomez et al has shown that this is only half true.
Their sample was a large and very homogeneous one: 1,237 olive-oil mills in Jaen province of Andalucia, the global centre of gravity of the industry. It’s basically the same business as in 500 BC – grow olive trees, harvest the olives with a stick, crush them in a press, package for shipping in amphora, tin can, glass or PET bottle. The researchers didn’t have records for Roman growers, but they did have them for Spanish ones since 1944, well back into the Franco era. The other thing that makes this a tidy dataset is that the alternative to independence has stayed the same: joining the local co-op, which successive governments have encouraged through tax breaks and a clear legal status.
What Gomez and collaborators found is that Kahneman and Tversky’s prospect theory applies, on condition that the reference point is the continuation of family control. The firms were risk-averse upwards, as the CW proposes, but risk-seeking downwards. They would take considerable risks to survive independently, even when the economically “rational” decision was to join the co-op.
This only makes sense if family control has value independently of the money involved. Gomez et al coin the faintly squishy term “socioemotional wealth”, with less squishy components of identity, independence, and authority.
Let me coin a term myself. In homage to Jean Bodin, the French Renaissance scholar who applied the term to Muscovy and the Ottoman Empire in contrast to seigniorial Europe, let’s call the embedded culture of such family firms patrimonial. The guiding aim is to maintain and if possible grow the patrimony embedded in the firm, and pass it on to family heirs, typically children. It’s closely parallel to the values of the landed aristocracy and gentry in Western Europe. The concept does not extend to all family firms, though. Many family firms – Mom-and-Pop shops say – are too small and ill-capitalised to be patrimonial; their aim may be to allow children to escape the firm into higher-status jobs, rather than take it over.
Why do patrimonial firms survive? If they are risk-averse upwards, and returns are correlated with risk, shouldn’t these firms be supplanted by joint-stock corporations, with their greater capacity to assume and distribute risk in new ventures?
There are several answers. I won’t try to weight them.
- The principal-agent problem
The joint-stock corporation comes with its own negative baggage of principal-agent problems. Family members are likely to be loyal to the family, pace the soaps. Hired managers may well be normally competent and honest workers. However, others may be crooks (whose aim is to fleece the owners before bailing out), moochers (looking for a comfortable and high-status life at least effort), gamblers (risk-seekers with somebody else’s money), toadies (needy personalities seeking dependence), or bullies (interested in the sadistic exercise of power over lower-ranked employees). These can do much more damage than a simply inadequate family member.
There is nothing new in the principal-agent problem. The Gospels have several parables of unworthy stewards, as a metaphor for mankind’s unsatisfactory relationship to God -Â which assumes that the situation and its problems was a commonplace in first-century Palestine. Jesus’ solution was repentance. That of the business schools is stock options and bonuses. These encourage effort, but also short-term optimisation, manipulation of indicators, and cronyism, for example through remuneration committees of closed circles of peers. Fiddling with the incentive mechanism can improve matters a little, but does not make the problem go away.
A large patrimonial firm like the Mulliez operation, which hires many professional managers, can’t avoid principal-agent problems entirely. But it does have two great advantages in reducing them. The first is the intensity and continuity of the supervision the owners can exercise, compared to the sporadic and distant interest of typical shareholders. The second is the possibility of using a network of strategically placed family members to provide a parallel reporting backchannel, rather like the role of Party members in government and business organizations in Communist states. Whatever incentives the Mulliez put in place to align the interests of hired managers with the family’s, they are going to be much harder to game.
The “wisdom of crowds”, embodied in the stock market price, can be discounted. It’s true that it reflects many more different opinions; but it compresses them into a single, horizon-free and very noisy binary signal (share price up = good: share price down = bad). Compare that to the wealth of information available to patrimonial owners. Why, say, are our supermarkets losing market share in white goods in Romania?
The family firm has another winning strategy here: exogamy. If there is no competent son to take over, a daughter can be married to some capable young Dick Whittington. At a pinch, a successor can be adopted, as Julius Caesar did with Octavius. Wealthy bourgeois won’t have the intense snobbery that used to handicap landed aristocrats. The marriage of Prince William to the well-grounded daughter of a self-made businessman and miner’s son, okayed by the Firm after the sobering experience of his father’s disastrous marriage to a neurotic aristocrat, suggests that this may have gone entirely.
- Innovation born of desperation
Patrimonial firms in really bad trouble become, according to the study, extreme risk-takers. The owners gamble the family wealth to secure the survival of the company. They thus become like venture capitalists. Of course, most such gambles are doomed. But not all. Sometimes the struggling firm comes up with a killer new product. I’m sure this happens; but I’d be surprised if it happens often enough to influence the overall numbers much.
- Life-cycle business demography
Marx famously came up with the plausible hypothesis of increasing concentration of capitalist firms leading to inevitable monopoly, as in the board game. If you only look at the 100 largest firms in any industry, this makes sense. Over time their ranks thin and they tend to consolidate. But as a long-term historical trend, it doesn’t work. The reason we do not see the large-scale Marxian trend to monopolization is that small firms are being born all the time in great numbers. They die like tadpoles, but enough survive and flourish to keep the distribution roughly constant. These new firms are also, almost entirely, family firms, so the same explanation holds for the survival of patrimonialism.
In some sectors, the traded joint-stock company actually does dominate: where you need massive amounts of risk capital, combined with economies of scale. Their initial heyday came from railways, and later waves came in steel, cars, electricity, telecoms, chemicals, aircraft, pharmaceuticals, and computer hardware. This looks like a list of the innovative sectors over the last century: but that’s an illusion. Software, music, design, medical care, restaurants, lawyering and machine tools have also done well and innovatively, and don’t need the enormous scale where patrimonialism becomes infeasible. There is also no law that over time the capital-intensive sectors grow faster. On the contrary, the faster growth of services in recent decades has been a lifeline for family firms.
The problem child is finance. There are still a few boutique private firms like Marley & Scrooge (for instance in private equityÂ five out of the top ten are themselves unquoted). Still, insurance companies and banks are almost entirely quoted public companies. Their responsibility for the global financial crisis does not lend much support to the doctrine of the historic superiority of this corporate form. It looks more like a dangerous anomaly.
Two parting thoughts.
The deeper problem with patrimonial firms has nothing to do with the fictitious superiority of the upstart joint-stock corporation. It’s that they embody an incredibly old-fashioned, almost Roman, concept of the family itself. The model is patriarchy – even when the boss is a matriarch. The Industriels du Nord are usually conservative Catholics, with a social conscience underpinned by Catholic social doctrine. (I’ve shopped in Leroy-Merlin stores in France, Spain, and Brazil, and always been impressed with the courtesy of the staff: a value that very probably comes from the top.) There’s a tension with the modern concept of marriage as an affective partnership of equals, and with childrearing for moral autonomy rather than filial obligation. Somebody should write a book on how the Mulliez manage this.
Second, the model supports inequality by design not accident. The failure of General Motors to support the socialised medicine enjoyed by the workers of Volkswagen and Toyota has always looked the triumph of cultural solidarity over economic calculation. But for a patrimonial firm, offloading the cost of medical insurance would also mean a substantial loss of authority over employees – one of the core components of its socioemotional wealth. Patriarchs need the employment tie to be a feudal exchange of loyalty for protection. Similarly, they will generally be conservative in politics. The threat from left-wing politics is far more through death duties than income taxes.
Title reference is to the famous lines in T.S. Eliot’s The Waste Land:
Phlebas the Phoenician, a fortnight dead,
Forgot the cry of gulls, and the deep sea swell
And the profit and loss.