Networks - helping drive the UK’s Future Champions

The Government wants to see the power of the UK’s medium-sized businesses (MSB) further unleashed to grow. Policy change can play a key role as John Cridland, the CBI leader, highlighted in the Times. He offers some recommendations that Government should consider to pep up this vital sector of our economy and support our nation’s Future Champions.

The key answer however arguably lies with the MSBs themselves. What can owners do to drive stronger performance? FT journalist Chris Bryant offered a list of success factors that are commonly found in German Mittelstand organisations, acknowledging that the hardest challenge may be to imitate these values.

Being able to act swiftly and decisively is a value that MSBs commonly harness to advantage. Maintaining independence and a long-term focus in another core value plus avoiding debt. Of course, innovation is critical and MSBs are often specialists with strong intellectual property and brands focused on premium markets. The best of these companies generally avoid reliance on a single market and many concentrate on exporting and internationalisation.

Another less recognised but powerful advantage point for Germany’s MSBs is harnessing networks- leveraging their social capital. This can be anything from interacting through groups such as trade associations as well as meeting via informal networks sharing intelligence. FBN International, and its UK chapter the IFB, offer popular meeting points for successful family MSBs. In October over 750 owners and members of the FBN network will gather in London for the 23rd FBN Global Summit to debate the key drivers for “extraordinary performance” sharing knowledge and best practice.

Avoiding the exit route

http://www.ifb.org.uk/How does Germany retain its global market share in manufacturing while other European rivals such as the UK, France and Italy have gradually been losing ground to China and others.  Obvious answers include a consistent focus on achieving productivity gains through investment in equipment and human capital, as well as keeping ahead in product development through R&D and innovation. Successful Mittelstand companies prioritise the continued existence of the company- making necessary investments.

This approach starts with owners who put business growth and continuity as top priority. Eschewing cashing in on their achievements they chose to remain privately owned. These owners provide consistency of purpose and stability; making relatively small liquidity demands on the company they send a signal through their boards that the company comes first. Freudenberg Group is a typical example of this approach; where family shareholders prefer to keep their assets tied up in their successful Eur6bn firm putting family ownership as a high priority rather than letting other people manage their money.

The UK Government’s new focus on mid-sized business expressed through various reviews including the latest one led by Lord Heseltine is a sign that the UK is increasingly recognising the importance of our own Hidden Champions. As in Germany family firms are the most common form of ownership in this sector of the market- their success is thus one of the key planks for driving national growth. To win back a strong position the UK will require a new generation of owners who put the success of their companies above making short term gains through managing a quick exit.

Ownership matters

http://www.ifb.org.uk/ It was good to see the report of the Ownership Commission chaired by Will Hutton, which was published yesterday, argue for plurality of ownership models in order to strengthen the economy.

But the Commission does not see any panaceas - no one model is perfect. The economy benefits from diverse ownership types co-existing together, each with its strengths and weaknesses. Within the mix, that includes Plcs, family business, private equity, co-operatives and employee-owned firms, the report highlights the important role that family firms play in promoting corporate plurality, seeing many of the positive attributes of responsible capitalism in family businesses.

The Commission also calls for better stewardship where owners exercise a duty of care in relation to the assets they control. This is a characteristic that the IFB has already highlighted as an important performance lever in the IFB Family Business Stewardship report (2011).

Allied to this the Ownership Commission calls for greater corporate engagement by shareholders as a cornerstone for building responsible ownership, and cites the behaviours of good owners as noted in the Perspectives on Responsible Ownership guide (2007). Active and engaged family business owners challenge the status quo helping to fight the risk of a culture that kills off innovation.

The report emphasises the preponderance of family firms among the UK’s Mid-Sized Businesses (MSB) and calls for the expansion of the MSB sector. The Government has already identified MSBs as an engine for growth to potentially rival the German Mittelstand.

Boosting the performance of the UK’s MSBs however calls for better tools, including a more diverse range of sources of finance and enhanced skills at all levels in the organisation. The Ownership Commission recommends that the Government develops policies that tackle these two issues, supporting the arguments that IFB Representation has long been making on the sector’s behalf.

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.