Philippa Kaur

HOW BEST should managers be incentivised? In the biblical parable of the talents, a master divides his property among three servants before going away. Two put his money to work and double its value; the third buries it in the ground. The first two servants are rewarded and the third is punished.
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The biblical story is an early example of the principal-agent problem. When delegating authority, how can a principal be sure that their agents will act responsibly? The problem is usually discussed in terms of the potential for the agents to be greedy, and take money for themselves. The unfortunate servant in the parable acts out of fear, declaring: “Master, I knew you to be a hard man.” Sure enough, the servant is cast into the “outer darkness” where there will be “weeping and gnashing of teeth”.

In the corporate world, some say, fear plays as big a part as greed in distorting manager incentives. Critics claim that managers are unwilling to invest in long-term projects because they fret this will damage the company’s profit growth in the short term. If that happens, the managers may worry that they will be fired by the board, or that the company will be subject to a takeover bid.
Companies have several layers of agents. The board is worried about pressure from fund managers who are themselves acting on behalf of the underlying investors, and fear losing clients if they do not deliver above-average returns.
Lucian Bebchuk of Harvard Law School argues that there has been too much focus on the role of institutional, and particularly activist, investors in driving short-termism. Writing in the Harvard Business Review*, he notes that managers at both Amazon and Netflix have been able to pursue long-term growth at the expense of short-term profits without experiencing any significant pressure from shareholders. Indeed, growth stocks in general (defined as those where the value depends on the expectation of future increases in profits) have been very much in fashion in recent years.
Mr Bebchuk says this short-termism “bogeyman” has been enlisted to argue in favour of insulating managers from shareholder control using restricted voting rights, special shares and the rest. Some think executives may be constrained by the concentration of ownership in a few institutional hands, as the fund-management industry consolidates. Mr Bebchuk believes it is foolish to think back to a “golden era” when share ownership was dispersed. Managers may have felt no pressure to produce short-term results. “But”, he says, “they felt no pressure to produce long-term results either.”

Perhaps the problem lies not with investors, but with the incentives used to motivate executives. Andrew Smithers, an economist, has calculated that the proportion of operating cashflow paid out to shareholders by non-financial American companies was just 19.6% between 1947 and 1999. By the end of that era, share options became a popular means of motivating managers. Subsequently, the proportion of cashflow paid to shareholders averaged 40.7% between 2000 to 2017, while cash used for investment fell.
To examine the effect of incentives, Xavier Baeten, a professor at the Vlerick Business School in Belgium, studied the Stoxx Europe 600 index of big European companies between 2014 and 2019. When he compared individual firms’ returns on assets with the chief executives’ remuneration, he found a positive impact of high pay on performance over the short term, defined as the next 12 months. Yet no such relationship showed up over a three-year period, implying that the initial gains soon dissipated. (The study controls for variables including a firm’s size.)
Mr Baeten then examined the composition of the executives’ packages. He found that short-term performance was better when incentives were more than 200% of base pay than when incentives were less than 100%. He also found that after the first 12 months, the impact switched. Executives with incentives of more than 300% of base pay performed significantly worse in the next two years than those who received less than 100%.
This is not proof that executive incentives have led to an excessive short-term focus. But it suggests the need for carefully designed incentive schemes. The principal-agent problem requires eternal vigilance by shareholders. Get the formula wrong and weeping and gnashing of teeth will follow.
*https://hbr.org/2021/01/dont-let-the-short-termism-bogeyman-scare-you
This article appeared in the Business section of the print edition under the headline “Talent management” More

IF A FOOTBALL match is played but no fans watch it, either in the stands or on television, did it really happen? The quandary might once have amused Albert Camus, a fine goalkeeper who dabbled in philosophising. It is also existential, in another way, for French football clubs. First, covid-19 has deprived them of live supporters. Then the top league’s broadcasting partner skipped town without paying. Teams that once feared relegation now worry about bankruptcy.
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This year France’s Ligue 1 had hoped to kick off its journey to the European elite. Though the national team won the most recent World Cup, the domestic championship in which many of its stars compete is, financially speaking, outplayed by richer leagues in England, Germany, Italy and Spain. A whopper broadcasting deal starting this season, worth over €1bn ($1.2bn) a year, up by 60% on the previous arrangement, would help it level the playing field.

The deal proved too big a whopper even for Mediapro, the Spanish broadcasting group with Chinese backers that snapped up most of the matches. The channel it had set up to show Ligue 1 clashes attracted few punters. Stretched for cash, it made just one quarterly instalment in August, then stopped paying entirely. By December the contract was voided.
On February 1st an auction was held to replace Mediapro. No credible buyer emerged. Canal+, a pay-TV group controlled by Vincent Bolloré, a ports-to-media tycoon, unexpectedly stayed away. Having lost the main football rights in 2018 after several decades, Canal+ says it can live without Ligue 1 (it still shows a handful of matches). Many think it may rejoin the fray, but offer much less than Mediapro did. Amazon has also shown interest in streaming rights, but has offered stingier terms than traditional broadcasters. TV channels may bid for one match at a time.
For now, French football has no broadcasting deal for most matches—a catastrophe for clubs that rely on such rights for a third of their income (often more for smaller teams). They are already facing an entire season with no gate receipts. Pandemic-hit sponsors have less money to throw around. Player transfers, a traditional source of cash, are tricky in a depressed market. The league has already indebted itself to tide teams over; struggling clubs have been able to tap banks for state-backed loans. But a public bail-out of an industry that rewards its stars with multimillion-euro contracts would look unseemly.
Other European leagues are also ailing. Some, like the English Premier League, offered rebates to broadcasters during the covid-19 crisis. An auction for Italy’s Serie A rights in January fell short of expectations. A group of European clubs estimates 360 teams will need financial help to survive. The main concern in France is which channel will be airing the showdown on February 7th between Olympique de Marseille and Paris Saint-Germain—if any. French football wanted to be viewed as the most competitive in Europe. Now it would be happy just to be viewed.■
This article appeared in the Business section of the print edition under the headline “Goalless defeat” More

“WE AIM be the most customer-obsessed company in the world,” declares the opening line in the 700-page prospectus from Kuaishou, a Chinese video app. The firm, launched a decade ago by a former software engineer at Google and another at Hewlett-Packard, boasts more than 300m daily active users, up from an average of just 67m in 2017. On February 5th Kuaishou listed in Hong Kong to great fanfare: share prices surged by 161% after the first day, valuing the company at a cool $159bn. That instantly lifted it above better-known social-media titans like Twitter (worth $45bn) and Snap ($87bn). Kuaishou’s shares were more than 1,200 times oversubscribed by retail investors—a record for the city’s bourse.
Kuaishou’s revenues have soared in recent years, reaching 25bn yuan ($3.6bn) in the first six months of 2020, up by nearly half on the previous year. Just over two-thirds of this came from what the firm calls “live-stream gifting”. It hosted nearly 1bn live-streaming sessions in that period, taking a cut on “tips” that viewers shower on their favourite live-streamers. A tip can be as small as 10 fen (1.5 cents) or as generous as 2,000 yuan. Performers film themselves singing, dancing, otherwise prancing or just sunbathing. (Pornography is strictly prohibited.) New stars can expect to fork half of their tips over to the platform.

Amid this exuberance two threats loom. The first comes from China’s increasingly hands-on regulators (see article). In November they mandated that video apps like Kuaishou impose daily and monthly limits on the amount that users can tip live-streamers. Moreover, to prevent impressionable minors from being coaxed into sponsoring cunning broadcasters, platforms have been instructed to perform tougher background checks on users with such tools as facial-recognition technology. Bureaucrats in Beijing have yet to work out precisely what Kuaishou’s daily and monthly ceilings ought to be. But growth will probably slow down once the details are hashed out.
Douyin, TikTok’s Chinese sister app and Kuaishou’s arch-rival, is better insulated from the regulatory crackdown. Like Kuaishou, it operates a live-streaming business. But unlike its competitor, it earns most of its revenues from online ads, which the new rules do not affect. For comparison, adverts accounted for just 28% of Kuaishou’s revenue mix in the first half of 2020. The company may now try to raise that share. To do so Kuaishou will have to overcome the somewhat outdated perception that its users are disproportionately folk living in small cities and rural areas with less money to buy advertised wares.
The second threat is the potential for a price war between Kuaishou and Douyin. For both platforms, user growth is largely a function of the appeal of their video content, which in turn depends on the calibre of the producers behind it. A race to the bottom, whereby each firm lowers its “take rate” on tips and ad sales to lure popular broadcasters from the other app, would depress margins.
At the moment neither company has a particular incentive to shatter the cosy duopoly, points out Jeffrey Young of Smart Grandly Asset Management, an investment firm. But the possible arrival of a big competitor—not inconceivable in China’s effervescent e-economy—could disrupt this equilibrium, Mr Young suggests.

Despite its domestic challenges (or maybe because of them), Kuaishou is proceeding apace with its global ambitions. The international version of its app, Kwai, claims “tens of millions” of users in markets from Brazil and Colombia to Malaysia and Vietnam. It still lacks the name-recognition of TikTok, though that may prove to be a blessing in disguise. Kwai has thus far avoided the sort of political scrutiny that its better-known rival has attracted in many foreign markets. ■
Editor’s note (February 5th 2020): This story has been updated after Kuaishou’s IPO. More

SELDOM HAS a tech giant excoriated another as Apple did Facebook. “What are the consequences of prioritising conspiracy theories and violent incitement simply because of their high rates of engagement?” asked Apple’s boss, Tim Cook, in a speech on January 28th. “A social dilemma”, he thundered, “cannot be allowed to become a social catastrophe.” Facebook was singled out without being named. Last year it complained about its portrayal in “The Social Dilemma”, a hit Netflix documentary.
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Mr Cook’s warning came in response to Facebook’s own broadsides against Apple’s forthcoming “app-tracking transparency” measure. Soon a pop-up from Apple will start asking users of the latest version of iOS, its mobile operating system, if they want named apps such as Facebook to track their digital activity across other companies’ apps and websites. Huge numbers are expected to demur. That is likely to damage Facebook, possibly Google and a wide range of other ad-tech businesses.

Mr Cook’s righteous wrath makes it easy to forget how in the early days, Apple enabled ad tracking. In the 2000s app developers and advertisers learned to use its “unique device identifiers” to follow users around the internet. These UDIDs, as they were known for short, were permanently attached to every iPhone or iPad and made it easy to keep tabs on individuals’ online activity. Then in 2010 a privacy furore erupted around Apple and Google. Two years later Apple responded by banning app developers from using UDIDs. For a brief few months advertisers could barely track its customers at all.
The sixth incarnation of iOS introduced a new, less intrusive tool called “identifiers for advertisers”. Unlike UDIDs, these can be blocked, and do not identify users personally; any data collected are aggregated before being used. But they still allow tracking, which is switched on by default on iPhones, and fiddly to turn off. Apple’s aim back then was to help app developers earn revenue in iOS.
Now privacy is more central than ever to Apple’s brand. Four years ago it stopped tracking users on Safari, its web browser. Google, too, has announced plans to eliminate third-party tracking “cookies” from its Chrome browser by 2022. Ad-industry insiders find it odd that identifiers for advertisers are still around; last year some in the mobile-ad industry reckoned Apple was going to kill them off. With app-tracking transparency at least some users will presumably allow cookies to stay.
Facebook has nevertheless fought back hard. In December the social network took out newspaper ads claiming that Apple’s changes would hurt small businesses. Announcing Facebook’s earnings on January 27th Mark Zuckerberg, its boss, explained how his firm gives tiny firms ad-targeting tools that in the past only large companies had the resources to employ. This echoed other ad-tech types’ warnings of a return to a “spray and pay” world where, once again, half of all ads are wasted but no one knows which half. Moreover, Facebook argues, Apple is trying to shift the internet’s business model from one that is chiefly ad-supported to one that is increasingly paid for. In this view, Apple’s stance on privacy is not selfless but self-serving.

Facebook’s campaign against Apple could go beyond public admonishments. Last month rumours swirled that Mr Zuckerberg’s firm might sue the iPhone-maker over alleged preferential treatment given to its own apps in its App Store, while it imposes restrictions on third-party developers like Facebook. Apple’s App Store is already under scrutiny by America’s Department of Justice and the European Union’s competition watchdog.
Of course, Facebook’s own protestations are not exactly disinterested. It may want to divert attention from the antitrust lawsuits it itself faces. And the company will probably take a hit to its top line as a result of Apple’s move. In late January it named the latest iOS changes as a headwind for its ad business this year.
Most people will welcome Apple’s privacy proposal. But its ability to impose it on a big industry has underlined its power in a way that may not be entirely helpful for it. As for Facebook, its task now is to come up with its own pop-up to reassure people that its ad-tracking is harmless—even for the most talented ad creative, a tough brief. ■
This article appeared in the Business section of the print edition under the headline “Cook v Zuck” More

FEW LIFE stories are as soap-operatic as Lai Xiaomin’s. The fallen state financier dallied with more than 100 mistresses, according to Chinese media. He was subsequently caught with three tonnes of cash in one of his dozens of homes. The sheer scale of his thievery—1.8bn yuan ($279m) in kickbacks, the largest bribery case since the founding of the People’s Republic of China in 1949—justified the death penalty, a judge opined. In a tragic denouement, Mr Lai was executed on January 29th.
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The moneyman’s most serious offense—and the one that ultimately cost him everything—may have been something else. Under Mr Lai’s control, Huarong Asset Management, a state-run financial group, became the lender of last resort to China’s riskiest corporate borrowers. When state banks said “no” to loans, Huarong said “no problem”. Its lending helped private conglomerates get around capital controls and scoop up assets overseas. This enabled some of them to enlarge their balance-sheets—occasionally to breaking point. These strains put the broader financial system at risk. And that perturbed the communist regime’s paramount leader, Xi Jinping, who prizes stability—including the financial sort—above all else.

The latest example came within hours of Mr Lai’s execution. HNA Group, a sprawling conglomerate with interests in airlines, finance, logistics, property, tourism and much else besides, said that its creditors had applied to a local court to initiate bankruptcy and restructuring proceedings. Huarong was among the groups seeking to claw back lost loans from the bankrupt concern.
HNA became known for amassing more than $80bn in debts and large stakes in Hilton, a large American hotel operator, and Deutsche Bank. But in recent years it often found itself short of cash. In 2019 it was in effect taken over by a state-backed management team, installed to stop the rot infecting the rest of the financial system. To make matters worse, disclosures made public on January 30th by HNA’s listed units, such as Hainan Airlines Holding, revealed that an internal investigation had found that some existing shareholders and associates had misused around $10bn of company money.
HNA’s demise, like Mr Lai’s, marks the end of an era for China Inc’s overseas ambitions. The conglomerate’s rise to prominence began in 2015, when it paid $7.6bn for Avalon, an Irish aircraft-leasing business. Such transactions fuelled a boom in outbound Chinese mergers and acquisitions. In 2016 Chinese firms splurged $218bn on foreign deals, more than twice as much as the year before, according to Dealogic, a data-provider.
Some purchases looked strategically sound—for instance ChemChina’s $43bn acquisition of Syngenta, a Swiss chemicals firm. Less disciplined buyers picked up trophy assets, such as the Waldorf Astoria hotel in New York (bought by Anbang, which started out in insurance) and Club Med (purchased by Fosun, another unwieldy holding company).

The globetrotting bonanza was short-lived (see chart). By 2018 Chinese authorities had grown wary of the domestic financial repercussions of reckless overseas adventures. At the same time, officials in America and Europe began to fret about the national-security implications of some Chinese investments.
In April 2018 Mr Lai was detained by the Chinese authorities. Three months later HNA’s co-chairman, Wang Jian, fell to his death in the French countryside. The incident was deemed an accident by local police. After that his group began to sell assets. Earlier that year the chairman of CEFC Energy, a conglomerate with interests in oil and finance and another of Huarong’s clients, was also detained, after attempting to buy a $9bn stake in Rosneft, Russia’s state-controlled oil giant. Chinese regulators were forced to take over Anbang. After more than two years they are still trying to offload its blingy assets, many of which have lost their sheen.
Not all of the era’s acquisitions were duds. Volvo, an iconic Swedish marque, seems to have thrived under Geely, a Chinese carmaking giant which bought it in 2010. In 2016 Midea, a white-goods manufacturer, bought Kuka, a German robot-maker, for $5bn and absorbed its valuable know-how. ChemChina appears to be a decent custodian of Syngenta. On February 2nd Alibaba reported 37% year-on-year growth in revenues for its international retail business; this, China’s e-commerce titan said, was mainly thanks to the strong performance of Lazada, a Singapore-based online-shopping platform it snapped up five years ago, and of Trendyol, a Turkish retail group in which it purchased a large stake in 2018.
These quiet success stories are, however, overshadowed by spectacular failures like that of HNA. They may be the last winners for a while, at least in the West, where governments and the public view Mr Xi’s unconcealed authoritarianism with growing anxiety. In 2020 Chinese firms spent just $32bn on foreign acquisitions, the lowest figure since 2007. ■

This article appeared in the Business section of the print edition under the headline “Too close to the sun” More

GOTTLIEB DAIMLER and Carl Benz built the world’s first motor cars at the same time in 1886, not far apart in Germany. Their names have been tied together since a merger of their firms in 1926. Daimler is the parent company of Mercedes-Benz. Yet the two men never met. So perhaps they would not have minded that on February 3rd it was announced that their names would go their separate ways.
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A majority stake in Daimler Truck, the group’s lorry-and-bus business, will be spun off to existing shareholders and listed in Frankfurt later this year. The luxury-car arm, to be renamed Mercedes-Benz, will retain a minority stake. The manoeuvre has set pulses racing in the staid lorry business. Ola Kallenius, the group’s boss, called it an “emotional and exciting day”.

The split is an acknowledgement that making cars and lorries are not the same business. Mr Kallenius noted the different “customer groups, technology paths and capital needs”. Car buyers care about brands, styling and plush interiors. Businesses with wares to ferry are concerned with the total cost of ownership, not what the badge says about them as a person. Electric lorries will probably run on hydrogen, not batteries, which are too expensive.
Splitting also has the advantage of giving investors a clear choice between which business they favour. It could unlock hidden shareholder value. Daimler Truck is the last of the world’s biggest lorry-makers to do so. Sweden’s Volvo split apart in 1999. Volkswagen spun off a 10% stake in its lorry division in 2019 and may go further. Bernstein, a broker, reckons Daimler Truck, which delivered around 500,000 commercial vehicles in 2019, more than any rival, could be worth €35bn ($42bn). That is around half of the undivided company’s current market capitalisation. Mr Kallenius hopes that the car business will also “significantly re-rate”.
The car division needs all the help it can get. Operating profits of $6.6bn in 2020 comfortably beat analysts’ expectations in a year blighted by the pandemic. Its has plans for an impressive range of electric vehicles and is on course to cut costs by 20%. But the car industry is changing. Tesla and other newcomers without the legacy of the internal combustion engine will make the business ever more competitive.
Lorries are a different matter. Yes, the challenges of electrification and self-driving remain. Tesla and other startups are snapping at the incumbents’ exhaust pipes. But the big three have a tight grip. Bernstein reckons they control 75% of the market in important regions, aside from China. Martin Daum, current chairman of Daimler Truck, says that by going it alone his business will be more nimble in “shaping its own destiny”. He can build on an illustrious legacy. In 1896 Gottlieb Daimler also constructed the world’s first lorry.■
This article appeared in the Business section of the print edition under the headline “Driving apart” More

ON FEBRUARY 2ND Amazon, America’s third-most valuable public company, announced its best-ever quarter. Propelled by the covid-19 pandemic, which has confined consumers to their homes, the firm reported that quarterly sales had risen 44% year on year, and exceeded $100bn for the first time. It was a barnstorming performance. But it was not the main story. On the same day the firm announced that Jeff Bezos, its boss and founder, will step down as chief executive this summer after nearly three decades in charge.
Mr Bezos will not depart the company. He plans to boot himself upstairs to become executive chairman. That role, he said, will allow him to remain “engaged in important Amazon initiatives”, but also give him more time to focus on other interests, notably space travel, fighting climate change and the Washington Post, a newspaper he bought in 2013. His replacement as CEO will be Andy Jassy, a long-serving Amazon employee who built and runs Amazon Web Services (AWS), the firm’s highly profitable cloud-computing division.

The news prompted gushing tributes to a man who began selling books online in 1994 with a recycled wooden door for a desk. Bernstein, a broker, described Mr Bezos as the “greatest of all time”. Mr Bezos has certainly made a mark. In 2019 Amazon delivered 3.5bn parcels, one for every other human being on the planet—and that was before the pandemic turbocharged online shopping. His rigorous, tight-fisted insistence that Amazon’s employees treat every day as if it were “day one” at a hard-pressed startup has helped the firm move into new lines of business, from smart speakers and video-streaming to advertising and cloud-computing. Its valuation has risen 3,000-fold since its market debut in 1997.
Mr Jassy, in other words, will take control of a firm in an enviable position. Amazon is not without problems—it has struggled in some overseas markets, and faces attention from trustbusters in America and elsewhere. But few companies are in better nick to face those challenges down.
Founders often find it hard to let go. One immediate question is therefore how much control Mr Bezos will actually cede. “I think it’s inevitable that there will be at least a bit of back-seat driving for the first few years,” says Nick McQuire of CCS Insight, a research firm. But Mr Bezos may not need day-to-day involvement to see his company carry on in his image. “Amazon has the most codified culture of any big tech firm,” says Aaron Levie, the boss of Box, a cloud-computing company. “It is built to outlast its founder.”
Mr Jassy is in any case more of a continuity candidate than a revolutionary. Brian Olsavsky, Amazon’s finance chief, reassured analysts on the earnings call that “he’s been here almost as long as Jeff”. Mr Jassy joined in the year Amazon went public and has been close to Mr Bezos since. He comes across as detail-oriented and more than a little nerdy—much like Mr Bezos in his first couple of decades in charge.

That does not mean that nothing will change. Bernstein expects Amazon’s combined revenues from AWS and online advertising to surpass those from its retail division in 2023. By 2024 digital adverts may be the company’s biggest source of profits, and retail may actually add to the bottom line (see chart). Last year Jeff Wilke, who ran the mammoth retail arm, said he would leave the company, depriving Mr Jassy of an able lieutenant.
Customers in America are beginning to grumble that Amazon is becoming a flea market, with ever more shoddy products juiced with faked reviews. This has yet to stop them shopping there, as the latest results attest. But it could turn into a problem. Abroad, where sales grew briskly last year, the incoming boss will have to decide whether to pursue expansion in places like South America and India, where Amazon faces stiff local competition.
At least one investor worries that Mr Jassy’s background in cloud computing may leave him struggling to direct the firm’s retail arm. Meanwhile, those who would prefer to see the money-spinning AWS hived off into a separate company may wonder if the man who created it has any more appetite for such a radical move than Mr Bezos did.
Those aren’t the only dilemmas in Mr Jassy’s in-tray. Amazon’s demands on workers in its warehouses and at times intrusive surveillance have come under scrutiny. The firm has spent heavily on improved working conditions and pays a $15 minimum wage in America. But it continues to attract criticism, especially as it resists unionisation among logistics workers. Many of AWS’s well-paid programmers empathise with their colleagues on the warehouse floor. In May Tim Bray, an AWS executive, quit in disgust over what he described as Amazon’s “chicken-shit” sacking of workers who had complained about poor safety during the pandemic.

Amid a general souring on the Utopian promises of big tech, Amazon’s success has also attracted attention from American trustbusters. They worry it may be using sales data from the third-party sellers on its platform to inform the development of in-house products which then drive those sellers out of business. A congressional report in 2020 cited claims that Amazon used the juicy profits from AWS to subsidise its unlucrative retail operations—but said that the firm had not provided the data necessary to decide one way or another. Some politicians have talked of barring Amazon from competing with its third-party sellers, or even of splitting it up. Amazon denies doing anything wrong.
Some speculate that such looming political awkwardness may have influenced the timing of Mr Bezos’s decision to stand back. Perhaps. Mr Bezos, for his part, gives every indication of being a man with a higher calling. When Bill Gates stepped down as the boss of Microsoft in 2000, he threw himself wholeheartedly into the Gates Foundation, which, as the world’s biggest private charity, funds everything from malaria-prevention to AIDS research.
Mr Bezos, whose near-$200bn fortune is even larger than Mr Gates’s, may be planning a similar change of focus. He is sympathetic to at least some environmental concerns: he has said before that growing resource consumption is not compatible with a finite planet. Of his many other businesses, Blue Origin, his rocketry firm, is widely reckoned to be his favourite. Like Elon Musk, who this year overtook him as the world’s richest man, Mr Bezos is a fully paid-up space cadet. Blue Origin is already involved in America’s plans to return astronauts to the moon.
In 2019 Mr Bezos sketched out a vision of the future in which a trillion humans live in gigantic, artificial space-going habitats, relieving the pressure on a crowded planet. It is an apocalyptic idea—and, to put it mildly, a bold one. To Mr Bezos it may seem more fun than running an online department store with a sideline in server farms and virtual billboards—even one as era-defining as Amazon. More

GERMAN FIRMS have, like their country itself, a reputation for being staid. Look closer, though, and many brim with intrigue. Albert Darboven, a coffee tycoon, pushed his own son Arthur out of JJ Darboven and tried to adopt a friend as his heir and successor. The five children from the first marriage of Rudolf-August Oetker, grandson of the eponymous founder of a pudding dynasty, and the three offspring from his third have been at each other’s throats for years. The feud among the billionaire scions of the Tengelmann retail empire led to speculation that Karl-Erivan Haub, the group’s fifth-generation CEO, faked his own death in a skiing accident. This month his brother, Georg Haub, reportedly withdrew the application to have him declared dead.
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Apart from ripping families apart and tearing down reputations, such feuds destroy shareholder value—including that accruing to the warring clans. Hermann Simon, a management consultant to many powerhouses in Germany’s Mittelstand of medium-sized firms, says succession is their biggest problem. Families that quarrel risk a split, a sale to a rival or bankruptcy. With early planning and discussions many rows could be avoided. Yet most founders prefer to keep their options open. And few wish to contemplate retirement.

Dynastic dissonance
More than 90% of German firms are family companies. Unusually, that includes many multinationals across a range of industries: appliances (Miele), carmaking (BMW, Continental and Volkswagen), chemicals (Henkel), engineering (Bosch, Heraeus, Knorr-Bremse), food (Oetker), media (Bertelsmann), medicines (Merck) and retail (Aldi and Schwarz, which owns Lidl grocers). Fully 30% of companies with more than 500 employees are in the hands of their founding clans.
The profusion of family companies is partly a function of inheritance tax. This has historically been high in America and France but modest in Germany—and, crucially, waived for heirs who keep their family business running for at least seven years, and protect jobs and wages. Another explanation is culture. Whereas Americans admire self-made men, Germans respect old money. Neureiche (newly rich) are dismissed as arriviste vulgarians.
Whatever the reasons, the upshot is ubiquitous strife. For conflict is built into family businesses, says Arist von Schlippe of the Wittener Institute for Family Companies, a think-tank. Each is a paradox, he says, combining the inclusive logic of a family with the selective logic of business. As an example, he recalls advising a founder who wanted each of his four sons to inherit one-quarter of the family concern, while also encouraging all of them to strive for the qualifications to become its next boss. That is a recipe for discord.

Succession is easier when there is only one descendant, or when others show little interest in business. It gets complicated in dynasties with plenty of children from multiple marriages. Ferdinand Piëch, a former boss of Volkswagen Group and grandson of the carmaker’s founder, Ferdinand Porsche, had six daughters and seven sons from three marriages and a couple of liaisons. Ever since Piëch died in 2019 his 13 children have been fighting in court with his last wife. An estimated €1.5bn ($1.8bn) in family wealth is at stake.
The trickiest succession is from the first generation to the second. If a family can pull that off without bad blood, subsequent handovers are likelier to succeed, says Kirsten Baus of the Institute for Family Strategy, a think-tank in Stuttgart. In America 70% of family firms fold or get sold before the second generation gets a look-in. Just 10% remain privately held going concerns into the third generation, according to a study in the Harvard Business Review. In Germany 16% of small or medium-sized companies say that they will probably close down when the boss retires (though this does not count firms that go bust). Most would like to stay in the family but are unable to persuade a relative to take over.
Conflict is often not chiefly over money. Relatives spar because they have different aspirations for the business, or feel they are being mistreated. Arthur Darboven was pushed out by his father, and stripped of a part of his stake. Among other things, Mr Darboven reportedly disapproved of his son’s launch of a racy new brand called Coffee-Erotic. At the age of 83 Albert Darboven remains at the helm of his firm. (After a court denied his adoption strategy, he is reportedly pondering creating a foundation to control the firm.)
To avert such to-dos, some clans organise an annual family day, holiday camps for their youngsters and even dedicate a house to family reunions, often the home of the founder. Most also draw up codes of conduct, says Herbert Wettig, an adviser of family companies. The 680 members of the Haniel clan (who until recently owned Metro supermarkets) have an 80-page code, which stipulates that no family member can work for the company, not even as an intern. The Reimanns, billionaire owners of JAB, a coffee-to-cosmetics group, have a similar rule. The Trumpfs have a code that covers succession and the sale of shares in the firm, but also includes guidelines for religious tolerance, modesty and respect for others.
No charter is foolproof; the Oetker codex did not stop them clashing. Some families unable to find agreement decide to sell out or, if they are large enough, go public. In 2017 Wirtgen, a construction firm with annual sales of €3bn, was sold to John Deere for $5.2bn. The founder’s sons worried they would be too old to run a company by the time their children could take over. After falling out bitterly with his only son, Heinz Herrmann Thiele listed one-third of Knorr-Bremse, the company he built into a leading purveyor of train and lorry brakes, on the Frankfurt stock exchange in 2018. He and his daughter raked in €3.9bn with the flotation.
Or quarrelsome clans can go their separate ways. Some of corporate Germany’s biggest names are the result of break-ups. A fight between the shoemaking Dassler brothers led in 1948 to the creation of Adidas and Puma, each of which now makes pricey trainers. A feud in 1960 between the Albrecht brothers over whether to sell cigarettes also resulted in a bifurcation: Aldi Nord operates in northern Germany and a number of other, mostly western and central European countries; Aldi Süd covers southern Germany, remaining parts of Europe, plus Australia and China.
A split may make sense for groups with diverse interests, says Klaus-Heiner Röhl of the German Economic Institute, another think-tank. But it weakens specialist firms of the sort that populate the Mittelstand. The latest generation of Aldi Nord heirs has fought over money and power for a decade. The row is preventing a sensible re-merger of the Aldis. Never mind that it would help both businesses. ■
This article appeared in the Business section of the print edition under the headline “Mittelstand-off” More