How family capitalism shatters the myth of the "richest 1%"

The virtues of family capitalism are back in the news today, in a context where classic financial capitalism, which supports the creation of shareholder value, seems to be mutating towards a capitalism that supports the creation of value for all stakeholders.

In the United States, 181 leaders of major companies, including JPMorgan Chase, KPMG and Blackrock, pledged in August 2019 to pursue value creation for "all Americans". This declaration by the "Business Roundtable" is part of an announced break with the "Friedmanian" paradigm of social responsibility for shareholders. It brings the aspirations of these companies a little closer to those of family capitalism, represented by companies whose capital is controlled by a family and which have a long-term perspective.

This shift in posture seems to make perfect sense in the face of current ideological discussions around the distribution of wealth around the world, with the measures of US President Donald Trump, the advent of Brexit, the "yellow vests" in France or other anti-elite movements.

Business Roundtable announces the release of a new Statement on the Purpose of a Corporation signed by 181 CEOs who commit to leading their companies for the benefit of all stakeholders – customers, employees, suppliers, communities and shareholders. https://t.co/ZWMRTDZRqA. pic.twitter.com/8Kd4IVFjva

— Business Roundtable (@BizRoundtable) 19 août 2019

Published a few weeks later on the other side of the Atlantic, the book "Capital et idéologie" (Éditions du Seuil) by economist Thomas Piketty advocates participatory socialism instead, putting forward proposals from the angle of the causal link between political ideologies and the reduction of inequalities, following on from his "Capital du XXIe siècle". In that book, Piketty had already succeeded in putting illustrative images at the service of hard data, invoking with creativity and elegant irony legendary characters from the prodigious pens of Jane Austen and Honoré de Balzac. He had demonstrated that the profitability of capital had risen faster than economic growth, thus fostering the concentration of wealth in what has come to be known as the "richest 1%".

SMEs at the heart of the 1% program

On this subject, Thomas Piketty continues to advocate taxing the "richest 1%", which reveals a confusion about the contours of family capitalism. Indeed, wouldn't a tax increase aimed at combating inequality actually destroy value for all stakeholders, as it would directly threaten many SMEs and ETIs, which are the heart of family capitalism?

To understand this, we need to demystify the expression "1%", which has become part of the vocabulary not only of politicians and demonstrators, but also of entrepreneurs themselves, and gradually of ordinary citizens in France and around the world.

Our colleagues, Michael Carney and Robert Nason from Concordia University in Canada, have investigated who makes up the 1% in the USA - who, according to former President Barack Obama, account for 40% of the country's total wealth.

Based on data from the US Survey of Consumer Finance, they argue that the "1%" is made up of around 1.6 million working households with average assets of around $29 million. The main source of income comes from the ownership and active management of small and medium-sized businesses (according to that country's classification of SMEs), corresponding for the most part to family businesses with average sales of $13 million and around 30 employees.

Thus, 76% of the "1%" own and manage at least one business, and 87% have an equity stake in an active company. On average, each family holds a portfolio of almost five companies. As a rule, they directly control three companies and are passive investors in two others. All in all, this represents over 90% of US business assets.

Far from the Forbes rankings

This prevalence of SMEs seems a far cry from the commonly accepted image of the "1%", which in the imagination includes overpaid CEOs, retired annuitants, celebrities, rock stars, "masters of the universe" financiers and digital-economy wunderkinds. Adding to the surprise effect is the fact that most SME owners are in no way qualified for inclusion in the Forbes or Fortune billionaire lists. Rather, they are family businesses with modest lifestyles. One thinks of the Mittelstand, the nebulous group of family businesses that have become world champions in some of the highly specialized technical niches at the heart of the German economy.

The facts therefore help to demystify the 1% of wealth, showing that it does not necessarily represent tycoons and wealthy luminaries, easily admired or hated, but rather ordinary working families, with the difficulties, challenges and expectations of any citizen operating in an ever-changing context. Ultimately, it is these SMEs and ETIs that create jobs, contribute to the national economy and to communities at large.

With its inclusive approach to all stakeholders, it's hardly surprising that family capitalism is currently inspiring the revival and quest for meaning of traditional or widely-held financial capitalism, which is reaching its limits.

Assets for all sizes

While the durability and resilience of family capitalism in the face of major crises no longer needs to be demonstrated, it operates mainly in the form of SMEs and ETIs, as a form of capitalism founded on a human and long-term vision, civic action and a territorial anchoring that plays a decisive role in community development.

Large family businesses, recognized as the biggest contributors to philanthropy, are also an integral part of this vision.

In this way, large groups rub shoulders with SMEs and ETIs in their representation of a modern capitalism combining responsibility and performance. By aspiring to the continuity of the family business through the generations, family owners work towards the sustainability of the ecosystems with which they interact, over and above the individual short-term interests that characterize financial capitalism.

French companies of all sizes can testify to this.

The LISI Group, for example, is one of the world's leading manufacturers of assembly solutions and high value-added components for the aerospace, automotive and medical sectors.

Présentation de présentation du groupe LISI (2017).

While operating in 13 countries around the world, the group remains attached to its historical origins. The head office of its holding company, Viellard Migeon, is based in the Belfort region where the family business began. The company contributes to the region's competitiveness and dynamism by infusing its entrepreneurial spirit, attracting talent and contributing to employment.

Another example of a sustainable SME is the Lacquemant company, renowned for six generations for the quality of its waffles, croustillons and crêpes, which can be found today in Lille, rue de Béthune, or at funfairs and local markets. The company intends to perpetuate the family know-how through the generations, while remaining firmly rooted in the local area, maintaining the quality of the relations the family has with its stakeholders: customers, with their proximity and friendly atmosphere; employees, who have been loyal to the company for many years; and the surrounding communities, with the voluntary acts that have even earned it the medal of the Ordre National du Mérite.

Presentation of Établissements Lacquemant (2018).

As for the Baudelet Environnement group, an intermediate-sized local company in its third generation, it has succeeded in creating a regional ecosystem in the Hauts-de-France region around its waste, scrap metal and materials processing activities. The result is local jobs and long-term collaboration with public authorities, communities and other local partners, positioning the company as a leading player in resource recovery in the greater region north of Paris.

Baudelet Environnement Group presentation (2015).

These examples of family capitalism are bound to have an impact on ideologies that are potentially linked, if we accept the assertions of Piketty's latest book, to the reduction of global inequalities. As Christine Blondel and Anne Dumas reminded us some ten years ago in their book "L'entreprise familiale sauvera-t-elle le capitalisme?", our family businesses do indeed embody an antidote to the drifts and excesses of capitalism

The challenge of transmission

To sustain capitalism around family businesses, however, they must be able to rise to the challenge of succession. This is a delicate process that directly threatens their survival, particularly in view of both psychological and fiscal dimensions. In particular, taxation has a significant impact on family businesses in France, where intra-family transfer rates are among the lowest in Europe.

When business is going well and tax constraints are not an issue, these businesses handed down to new generations will continue to grow, diversify and create jobs over the long term. When all is said and done, their success will impact not only their loved ones, but also all stakeholders and the wider economy.

When we push aside the ugly caricatures, we can truly weigh up the importance of family businesses and the appropriateness of the State recognizing, promoting and reinforcing their professionalism and growth through creative, dynamic public policies resolutely favorable to entrepreneurship and harmonious transmissions. The new winds of capitalism blowing across the Atlantic are sending us signals, encouraging us not to unintentionally condemn these family businesses, which are classified in the edifying category of the "1%", when their vocation is to promote the social well-being of the "99%"!

This article is co-published with  The Conversation under Creative Commons license. Read the article on The Conversation.