Late last year, the sovereign debt crisis spread to Italy and removed Silvio Berlusconi from power. As Europe’s leaders feted his replacement, ex-commissioner Mario Monti, a revolution was taking place, almost unnoticed outside the peninsula. Fiat, the country’s biggest private sector firm, was threatening to quit and take its automotive business overseas.
Sergio Marchionne, the Canadian-Italian chief executive who has rescued the company, pulled Fiat out of Confindustria, Italy’s biggest employer body. In a related move, he put FIOM, the once-militant union, on notice that he was scrapping national collective bargaining on pay and conditions. And he refused to tell Italian market regulator Consob his real plans for the company’s five loss-making (-€1 billion) auto plants in Italy.
Fiat is, like surprisingly many auto companies, a family firm. Family owners provide sorely needed continuity in a highly cyclical industry subject to peaks and troughs of demand. They take many, if not most, of the strategic decisions and they think along longer time-horizons than managers and shareholders in non-family companies.
However, over the generations, they have been forced to bring in outsiders – professional executives and institutional investors – to re-generate the business.
Over the last few decades the relations, often tensions, between the original ‘insiders’ and these ‘outsiders’ have helped to determine the success or failure of the company in a volatile environment. The better the relations, the more value is created.
“Over the last few decades the relations, often tensions, between the original ‘insiders’ and these ‘outsiders’ have helped to determine the success or failure of the company in a volatile environment.”
Fiat, for instance, is controlled by the Agnelli family, which has 30 per cent of the equity through its Exor investment vehicle and a third of the voting shares.
Its recently restored health after near-death owes everything to a sound insider/outsider relationship. Marchionne was appointed in June 2004 when Fiat was (again) on its knees after the deaths of both Gianni (‘Avocato’) Agnelli and his cousin Umberto – and the family decision a month earlier to make John Elkann, a fifth-generation Agnelli born in New York and educated in the UK, Brazil, France and Italy, vice-chairman at the age of just 28.
Elkann, now 35, is chairman and, together with Marchionne, is plotting an entirely different course for a company founded by his great-great-grandfather in 1899 and recently split it in two to create greater value. Through its current 53.5 per cent holding in pro table Chrysler, Fiat is going global: to Brazil – where it already makes much of its earnings – to Asia, and, of course, to an expanded base in the US.
‘Economically, financially, Fiat is already out of Italy,’ an investment banker told Automotive News in November 2011. But politically, it may be difficult, nay impossible, simply to abandon more than a century of industrial, corporate and cultural history (Agnelli also owns Juventus FC and La Stampa).
In the auto industry, we have seen, the family provides continuity/stability: it is the brand and is guardian of that reputational heritage – the name on the corporate door is often the name on the front of the car (Ford, Toyod(t)a, Peugeot, Suzuki). But the family, as share- holders, also have a duty to maximise sustainable profits for all stakeholders and to plan for the future.
“In the auto industry, we have seen, the family provides continuity/stability: it is the brand and is guardian of that reputational heritage”
As Thierry Peugeot, chairman of PSA Peugeot Citroen, has put it (at a 2008 family business conference in Lisbon): the family’s role is to find professional managers to run the company at the highest level and then support them. He said: ‘Family control is exercised via the supervisory board, which I chair, and comprises five family members out of 12. We don’t manage but we remain the skipper(s).’
But that is a recipe for tensions and these arise: the family and the executive board/committee often fall out. Bill Ford, Henry’s great-grandson and Ford chairman, memorably sacked Jac Nasser, his mercurial Australian-born CEO, took over as chief executive, got completely out of his depth and brought in Alan Mulally from Boeing to steer the car firm away from the reefs of bankruptcy and federal government bailout.
In 1978, when the ‘blue oval’ firm made $2 billion profits, Henry Ford II, his grandfather, sacked Lee Iacocca as president ‘because I don’t like you.’
Alex (Lord) Trotman, an ex-pat Scot (Ford likes Brits) and ex-CEO/chairman in the 1990s, said he had two jobs: running the company and managing relations with the family members on the board. (The family owns 2 per cent of the stock but controls 40 per cent of the votes).
M Peugeot – whose family has 30 per cent of the equity and 45 per cent of the votes – had a similar experience when he brought in Christian Streiff to run the business and, three years later, after presiding over billions of cost-savings and thousands of job losses, he fired him in favour of Philippe Varin (from Corus/Tata Steel).
Streiff rubbed the Peugeots up the wrong way with his abrasive manner. He said later: ‘No doubt I committed the error of having under-estimated the specific nature of this family group I didn’t talk enough to the family in all its different shades as I was focusing on operational matters.’ He also lacked a clear strategy: a process reversed under Varin who, with the Peugeots, is echoing the Agnellis by going global (with an executive director now stationed in Shanghai) and axing a further 4,000 jobs in France.
Unions complain PSA has cut 23,000 French jobs and created 12,000 overseas since the crisis. Europe’s second-largest car group (after Volkswagen) has suffered the most in the sector from that crisis, losing €800 million in the first half of 2011.
However, like Fiat, it could never leave its home country entirely – for political and cultural, if not commercial, reasons. The Peugeots hail from Sochaux, in the Doubs department near the Swiss border and home to a big car plant of theirs – and this Protestant family has been active in industry there for 200 years.
Family loyalty to heritage may sometimes be contrary to shareholder value but it protects other, overarching values, such as the long-term interests of stakeholders or corporate strategy.
Akio Toyoda, the first of the founding family to run Toyota as president for half-a-century, was brought in to restore the brand’s reputation after the senior management team pursued global number one status in sales so obsessively that they ended up neglecting quality.
“Family loyalty to heritage may sometimes be contrary to shareholder value but it protects other, overarching values, such as the long-term interests of stakeholders or corporate strategy.”
He told Automotive News that, when he testified to the US Congress, he felt like a feudal rear-guard warrior ‘who staked his own life to fend off attackers so his own people would have time to flee.’ As a ‘cars guy’, he has to ‘defend and protect the company when all the chips are down’ and do the same for customers, partners, dealers and employees.
He was, he said, ‘the one taking full responsibility for the entire company for the past, present and future.’
This extraordinary identification with corporate heritage and future suffuses, albeit in a less dramatic fashion, the thinking of the Quandt family – mother Johanna, son Stefan and daughter Susanne (Klatten) – which together owns 46.7 per cent of BMW and is worth £22 billion (Sunday Times rich list).
As inheritors of the stake bequeathed by Herbert Quandt, who rescued BMW from takeover by Mercedes (Daimler-Benz) in 1959, Stefan and Susanne ensure the company’s stability and sustainable expansion from their seats on the supervisory board. They – in the face of a seriously divided executive board – ended the marriage with Rover and fired both Bernd Pischetsrieder as CEO and Wolfgang Reitzle as his likely successor. They have ensured continuity under Norbert Reithofer, the more conservative CEO, who has taken BMW into India and China but retained a solid domestic base to avoid over-reliance on foreign forays that can go badly wrong.
In a rare public appearance in late 2010, Stefan spoke of the ‘long-term common will’ to keep BMW as ‘an independent producer with a strong financial base’ and spoke of the ‘flame of enthusiasm’ for the company he and his sister shared.
The Quandts have, indeed, been instrumental in denying the hopes of outside investors by, first, holding on to their stake and, secondly, rejecting all takeover overtures. And this may well be another key role played by the founding families in listed cars groups: putting the kibosh on unwanted mergers. There is, however, one caveat: they have to be united in their wish to keep the firm that bears their name.
The recent (2008-09) debacle at Porsche is a cautionary tale. Run by Wendelin Wiedeking for 16 years, who rescued the legendary sports car-maker from bankruptcy in the early 1990s, the company was split between two warring factions of Austro-Geman Habsburg heritage: the Piechs and the Porsches.
After making billions from hedging transactions, Wiedeking won the backing of Wolfgang Porsche, his chairman, for an audacious, reverse takeover of Volkswagen. After a prolonged and bloody feud, Ferdinand Piech, VW chairman, saw off cousin Wolfgang and his protégé and is taking over Porsche instead as part of his master vision of making Volkswagen the world’s biggest auto group.
Fiat’s Marchionne, like VW’s CEO, Martin Winterkorn, predicted in 2009 a global industry containing at most six big players as mammoth over-capacity is finally eradicated. But family pride and commitment to heritage will, more likely than not, try to scupper that vision. Fiat/Chrysler, thanks to the effective alliance between the chief executive and chairman, will now probably survive; Peugeot will probably not because operational freedom for senior managers has come too late; BMW will definitely thrive because, in a niche market, its owners and managers have defined and conserved a strategic and operational consensus. Indeed, it is only when family insiders and non-family outsiders can resolve tensions and marry short- and long-term interests that, in an industry infamous for its low margins, value can be created.