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christian-stadler's picture

Worth Preserving: What Business Leaders can learn from the Renaissance

As the global economy slowly turns around, we have embarked on a new era of growth. While innovation and new business ideas gain central stage, we should remember that some old-fashioned management practices are worth preserving.

By “old-fashioned” I mean: Companies should build a solid capital and reserve base, only grow if they can do so profitably, and avoid overleveraging at all costs. In simple terms, corporations should have some spare cash at hand for unexpected threats and opportunities and never engage in activities which put their entire future at risk.

A trip back to the Renaissance illustrates the point.

Unless you’re a student of European history, you’ve probably never heard of the Fuggers, a German merchant and banking family. In the 16th century, though, they were the reigning masters of the universe. The Fuggers bankrolled Europe’s greatest empires; their political influence was comparable to the Medici in Italy, and their wealth was matched only by the Rothschild’s a century later. Originally merchants of fine clothing, they diversified into banking in the 15th century. Their closest dealings were with the Habsburg family, which provided mining rights as securities against loans from the merchants. As the Habsburgs repeatedly defaulted on those loans, the Fuggers gained a virtual monopoly in mining and the trading of silver, copper, and mercury across Europe.

The eventual decline of the family traces back to a decision the family patriarch made during the golden era of the Fuggers. In 1546, Anton Fugger and sons had a working capital of 5 million guilders—the highest in the firm’s history. Anton Fugger, came to the conclusion that none of his successors had the necessary qualities to lead the business empire in the future, so he started to withdraw substantial amounts of the capital to distribute among his heirs with the intention of winding down the firm’s activities over time. Yet, that intention was only reflected in the reduction of capital.

The Antwerp office continued to write large loans. And when Charles V started a new war against France, the Fuggers were fully back in business providing large funds from 1553 onward. Similar deals in the past had given them the confidence that they could handle such business successfully. But there was a crucial difference this time around: the capital base was substantially smaller. Sure enough, an unexpected financial crisis in Antwerp delivered a harsh blow to the Fuggers. Meanwhile some of their customers, including King Philip II of Spain, were no longer able or willing to repay their loans. The Fuggers racked up substantial losses. For a while, the reputation of the firm allowed them to continue to borrow on favorable terms to meet other obligations, but soon their difficulties became public knowledge and interest charges began to climb.

From that point, the thread began to unspool rapidly. Frequent financial crises and the deterioration of the Habsburg family's power brought such fundamental changes to the commercial environment that only businesses with a strong capital base and a highly capable management team could have weathered the storm. The Fuggers, of course, lacked that crucial first element because of the family's deliberate decision to reduce its capital base.

In a study of 18 long-living European corporations, I have found that a conservative financial approach is as important today as during the Renaissance. In fact, we only need to recall the not-so-distant fate of Lehman Brothers to remember what happens when companies are overleveraged. Managers today might face new challenges that require new management practices, but they should not forget that some things never change. The bottom line is the bottom line. Without the necessary cash on hand, no innovation will see the light of day.

Editor's Note: Christian Stadler is a contributor to the Fresh MIX. He teaches strategy at the University of Bath School of Management. His research focuses on long-living corporations--how they grow, adapt, and consistently beat their competitors--and is chronicled in his new book Enduring Success: What We Can Learn from the History of Outstanding Corporations.

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christian-stadler's picture

Krishnamurthy, thanks for your thought provoking comment. You pose two very interesting question. 1) whether I think my idea applies in different cutlures and related to this 2) whether in a place like India you should rather take risks than be conservative. Let me answer them in turn.

The research I mention above covers 18 companies over a period of more than 100 years. Cultures obviously shifted dramatically during the observation period. The companies I cover also operate in many different countries. Throughout their history the 9 companies which are more successful act more conservatively when it comes to their finances than their comparison companies. Hence I am confident that the idea to have some spare cash is valid regardless of the culture in which you operate.

The second question is slightly more tricky. We often see risk taking and conservative finances as opposites. I am not sure whether this is correct. The great companies I studied were prepared to take risks but they were smart about which risks they took. They did not bet their entire company on one particular outcome. I understand that in an economy like India you might be forced to take greater risks (particularly when you are a small entrepreneur) than an established player in the US or Europe. This does not mean that you should put all eggs into one basket. Growth is probably slower if you hedge your bets but the chance that you fail completely reduces too. Also, don't forget that the companies I studied started of as small entrepreneurial units once and they were more conservative about their finances than their comparison companies already.

Hope that helps. christian

krishnamurthy-prabhakar's picture
Thank you very much for sharing information on Fuggers and long living coroporations. Do you think that there is commanalities that can be shared across cultures? Do you think the ideas epoused by you can be adopted in India? Here in the era of Billions of Entreperneurs in India and China; what is your suggestion? Try to be conservative or risk taking. Thanks for your thoughts.