Patient capital - the elephant in the room

http://www.ifb.org.uk/ I was part of a delegation of family business owners that met with Mark Prisk MP, the Business Minister, on Monday, together with other mid-sized business (MSB) leaders for a roundtable discussion on growing the MSB sector. In the recent Government report on MSB firms (turnover £25 - £500M) family businesses accounted for nearly half, (5,000 firms) making them critical to the success of the sector. The report also highlighted the strength of many of these companies as engines for growth, but also the challenges competing with countries such as Germany with its Mittelstand of mid-sized companies.

One of the lesser known values of MSBs is their belief in the benefits of “patient capital”. At the meeting John Cridland, Director-General of the CBI, which has published Future Champions - its own report on MSBs - described the issue of ‘patient capital’ as the elephant in the room. By mobilising this capital the CBI estimates that there is the potential for MSBs to contribute an additional £20bn to the economy by 2020 creating new ‘national champions’.

Critics could argue that a speed-dating culture has emerged in business where short-termism predominates - entrepreneurs start up ventures, grow them and exit at the earliest opportunity. Quoted Plcs have also been accused of taking short-term decisions driven by the stock market’s focus on quarterly results. Short-termism has become embedded in our DNA.

On the other hand the values associated with stewardship and long-termism have been less fashionable. Successful MSB family businesses often embody ‘patient capital’ values supported by stable ownership that prioritises long-term investment, progressive employee relations and a culture of continuous improvement within their businesses. The MSB Growth review is focusing Government’s attention on this vital part of the economy – and family buisnesses will be at the forefront of this drive for growth.

Business leaders and good stewardship

Cover via Amazon

www.ifb.org.uk Ken Costa, Gresham College Professor and Chairman of Lazard International, addressed an IFB Forum this week on the need for business leaders to act in a morally, spiritually and financially responsible fashion. Leaders who act as good stewards develop the people they are chosen to lead—the opposite of old-fashioned coercive leadership.

Speaking at a meeting hosted by Saunderson House in London, Costa, who is also author of God at Work, emphasised the importance of values and how leading up to the financial crisis society had arguably been sidetracked by self serving principles. Adam Smith’s system flourishes best where it focuses on delivering profitable enterprises, long-term sustainability and retains a strong regard for impact on communities. To remain healthy capitalism has to remain a servant and not become the master.

Capitalism however requires checks and balances to help to regulate the behaviour of the human actors involved.  The rebuilding of trust is an important factor in emerging from the crisis – indeed you can’t operate the capitalist system without a strong degree of trust.

Family firms have a strong role to play and the best of them have avoided the traps of the crisis by not chasing short term gains. A minority were lead astray by leaders who borrowed heavily following the fashion of the times. On the other hand many of the best family businesses are largely detached from both the debt and equity markets and take the long term view.

Costa sees a strong confluence of emotional and patient capital at work in business families, citing Harrods as an example. Successful family businesses are able to leverage their emotional and financial capital and deliver a robust performance.