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Best of the Best, Newsweek

Por: Ricardo Mejia Cano.

Not so long ago Jean-Marie Messier and Bernard Arnault seemed to have much in common. Both CEOs were using buoyant stock prices to buy out rivals and expand their French empires worldwide. They served on each other’s boards. Yet Messier, a civil servant with the right pedigree for a French corner office, borrowed heavily to turn the Vivendi waterworks into a global media empire, capped by the purchase of Universal Studios in Hollywood. The strategy failed, and Messier is out of work. Arnault was born into the family real-estate business and built it into Louis Vuitton Moet Hennessy, spending its billions only on small fashion houses that could not sink the mother ship. He remains one of the most admired men in French business. “I sometimes said to my friends running [Vivendi], ‘You know, are you sure you would do it with your money like this?’ ” says Arnault. “It’s a different game when it’s your money.” He says he never posed the question to the headstrong Messier, “because it would not have made any difference anyway.” The reckless gambling of other peoples’ money is exactly the kind of thing that has made Europeans cynical about the Anglo-Saxon style of capitalism. Consumed for a decade by the conviction that they had to copy the cutthroat American model and focus on quick profits, corporate Europe still takes some satisfaction in the ongoing Wall Street scandals. Now, as gurus cast about for a better model, it turns out that Continental Europe already has a perfectly good one right under its nose. Across the world CEOs have rediscovered business principles like focusing on what a company does best, eschewing fads and creating an ethical corporate culture with the power to guide and inspire. If these qualities sound more like homegrown family values than the greed that drove the rise and fall of Tyco and Enron, the following will perhaps come as less of a surprise.

A striking new analysis by Thomson Financial for NEWSWEEK shows that family companies are outperforming their rivals on all six major stock indexes in Europe, from London’s FTSE to Madrid’s IBEX, and often dramatically so. Thomson created a unique index for both family and nonfamily firms in each country, and tracked them over 10 years through December 2003. It also produced a list of the top 10 fastest-growing family-company stocks (chart). In Germany the family index soared 206 percent, led by BMW, while the nonfamily stocks climbed just 47 percent. In France, the family index surged an equally breathtaking 203 percent, led by the likes of Sanofi-Synthelabo, L’Oreal and LVMH, while its counterpart rose only 76 percent. Families also outperformed the pack in Switzerland, Spain, Britain and even Italy after the scandalous collapse of Parmalat, run by the Tanzi family.

Indeed, this analysis runs counter to recent headline-grabbing scandals in Europe that portray family businesses as a confederacy of scoundrels. The Erb Group, a private Swiss conglomerate, collapsed in December after its founder’s death revealed a lack of accounting controls. Investors came down hard on Rupert Murdoch in October for promoting his 30-year-old son James to run the publicly traded BSkyB satellite network. The Tanzi family outdid even the Americans by losing $18 billion at Parmalat. Yet even factoring in Parmalat’s share-price plunge late last year, the group of listed Italian families still outperformed the rest of the Milan exchange by 18 percentage points over the decade.

The truth is that incestuous double dealing is the exception rather than the rule at big family companies. The most successful of this group are family-controlled but publicly traded, which means the firms have to meet stock-exchange guidelines and reporting requirements. That enforced discipline helps keep family feuds from ruining a company, and gives managers a good excuse to keep the idiot uncle off the board. “In many ways, publicly traded family-controlled firms have the best of both worlds,” says Joachim Schwass, director of the Family Business Center at IMD, the business school in Lausanne.

One way or another, the 10 best-performing family companies in Europe all share this combination of family strength and market discipline. Some, like Serono biotech and Kudelski digital security of Switzerland, or Acciona construction in Spain, are still run by their founding families. At others, such as BMW and French cable operator TF1, family owners serve as standard setters for professional managers. Still others, like L’Oreal or Sanofi-Synthelabo, have little direct contact with the owners but are influenced more subtly by their stable presence. Schwass says family owners give all 10 companies on the NEWSWEEK list strong leadership and a long institutional memory. “Everyone knows where the buck stops,” says Schwass. “It gives them credibility, and that’s a huge competitive advantage.”

That’s more true in some industries than others. A 1998 study by insead, the French business school, found that among the 120 largest public French companies, family owners are common in the luxury, automobile, media and retail sectors, all of which depend on image and people skills, but rare in insurance, energy or utilities, which require a lot of capital. NEWSWEEK’s results support that conclusion, with luxury consumer companies like BMW, L’Oreal, LVMH and PPR all high on the list. Run by Arnault’s billionaire archrival Francois Pinault, PPR owns designer labels such as Gucci and Yves Saint Laurent. All these companies are well positioned to exploit the “mass luxury” trend, or the desire of the growing global middle class to buy a little blueblood cachet of their own. Arnault, for one, is disdainful of “masstige,” or prestige for the masses. Yet Michael Silverstein, a consultant who documented the phenomenon in his book “Trading Up,” says, “Even Louis Vuitton is mass luxury these days.”

It is no coincidence that family companies are particularly strong in France, arguably the epicenter of the mass-luxury trend. On the CAC index of France’s top 40 firms, 17 are family controlled, including famous names like Danone, Carrefour, Michelin and Peugeot. A detailed study by UBS in October showed that French family firms not only outperform others on the Paris bourse, but also are better managed. One reason: while France’s privatized state companies tend to draw talent from a small pool of former civil servants with degrees from the elite schools, family firms recruit professional executives from all over the world. Tellingly, the formerly state-owned bank Credit Lyonnais was recently replaced in the top 40 by Pernod Ricard, run by the second generation of the founding family.

The textbook assumption is that family owners are problematic because they keep independent voices off the board, says Philippe Tibi, author of the UBS report. In fact, such stewards more often act as forceful independent board members, keeping a tight check on the kind of misbehavior that led to scandals at Enron and Ahold. Far more than Americans, Europeans consider it a tremendous failure to pass on a company worth less than when they inherited it. In companies such as Acciona, where the CEO is a member of the Entrecanales family, the risk of blunders caused by such coziness is outweighed by the care devoted to safeguarding the family money. Jose Manuel Entrecanales, who becomes the third-generation CEO this month, says the family dinner table can become a corporate advantage: “Decisions can normally be taken faster than in other companies.”

BMW is a good example of a productive balance of power between family owners and professional managers. The German postwar economy was built on the backs of hardworking entrepreneurs who created thousands of small- and medium-size industrial companies. Collectively called the Mittelstand , they tapped into storied German engineering to design world-class machinery, and to this day they are the primary creators of jobs and growth in the economy. BMW may have a certain snob appeal for yuppies around the globe. But at its heart, says Garel Rhys, director of the Centre for Automotive Industry Research at the Cardiff Business School in Wales, “it is very much a Mittelstand company.”

And family is the heart of the Mittelstand. In 1959 wealthy businessman Her–bert Quandt rescued the ailing carmaker from management’s plan to sell it to Daimler Benz, and his family still owns 47 percent. From the start, the Quandts teamed up with labor leaders and today enjoy some of the most flexible work rules in Germany; their new Leipzig plant will be staffed anywhere from 60 to 140 hours a week, depending on demand, and BMW still gets 20,000 applicants for every opening in Germany. Both of Herbert Quandt’s children hold business degrees and sit on the board: Stefan, 37, and Susanne Klatten, 41, who met her husband while working under an assumed name at BMW (so no one would know she was a Quandt). “It gives us stability because the family has always mentioned over the decades that they do have an emotional tie to BMW,” says CEO Helmut Panke.

The Quandts, who have avoided all publicity since a foiled 1970s attempt to kidnap the children, do not grant interviews. But Stefan told NEWSWEEK through a spokesman that the family defines itself as “entrepreneurial shareholders” who regard their holdings as long-term investments. While the management board is the key driver of success, says the spokesman, they “shape the development of the company through their mandates.”

In February 1997 BMW was in a slump, hemorrhaging money from the ill-advised purchase of Rover three years earlier. The Quandts called an emergency board meeting and eight hours later tossed out both Bernd Pischetsrieder, the CEO who had bought Rover, and his rival who had opposed it. Merger mania was sweeping the auto industry, but the Quandts rebuffed all the vulture offers to buy a stake. Today BMW is thriving as one of the few independent carmakers left in the business, and one of the most profitable. The two Quandt children and their mother, Johanna, are each among Europe’s top 30 billionaires. “Absolutely, BMW has an advantage,” says a senior executive at an American automaker. “They could hold out when everyone else was in a feeding frenzy.”

It is even easier for a hands-on owner and manager like Arnault, whose family owns 59 percent of LVMH, to stare down fads. He recalls hot-shot twentysomething M.B.A.s telling him a decade ago to sell off his wine and spirits division and concentrate on fashion because it made more money. He thought it was “stupid” to ignore the power of such brands as Dom Perignon. Now champagne is one of his most profitable businesses. Despite a stormy relationship with Wall Street analysts (he recently won $30 million in a suit accusing Morgan Stanley analysts of biased coverage), Arnault says it’s still better to be listed even if he doesn’t need to raise money. “It gives the group very clear rules to follow,” he says, and stock options help attract better talent.

The patience to nurse famous old brands is one reason European family firms are leading the global mass-luxury phenomenon. A Boston Consulting Group study last year found that consumers increasingly tend to shop for basics at Wal-Mart or Aldi, yet will pay up to a 200 percent premium for technology, functionality or emotional appeal. About one third of such goods come from Europe, and that number is growing as homeowners and foodies learn about European brands, from the high-tech vacuum cleaners of Sweden’s Wallenberg empire to olive oil from the Nunez de Prado family in Spain.

Europe’s family empires are an increasingly hot topic, particularly following studies last year that showed similar firms account for one third of the Fortune 500 in the United States, and tend to outperform the others in both profit and productivity. U.S. economists Ronald Anderson and David Reeb found that American family firms tend to have a higher return on assets, in part because they have a strong incentive to keep overly ambitious managers in check. Anderson and Reeb are now conducting a similar study of Spain, France and Germany, and while “it could go either way,” says Anderson, he expects similar results. “If you want to boil it down to one sound bite: someone’s minding the store,” he says.

The Thomson Financial study for NEWSWEEK is the first to confirm that family firms also outperform the pack all across Europe, at least as measured by the stock indexes. But many others are on the trail. In Finland, the world’s most competitive economy by many surveys, there are 10 doctoral theses on family business now in the works. Spain, Europe’s hottest economy, has a dozen university chairs devoted to the topic. As Europe casts about for the secret to success, it makes sense to start looking under its own family tree.

Mass Luxury: Firms like BMW and Vuitton are benefiting from a desire for cachet

Secretive: Johanna and Stefan are two of the Quandt-clan billionaires

By Karen Lowry Miller
Newsweek International

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