Fiat Capitalism

John Elkann is on a mission. The fifth-generation owner and manager of one of the biggest industrial groups in the world wants capitalism to change. With his boyish face, soft voice, reserved – even diffident – style he might make an unlikely evangelist, but he is deadly serious.

In a nutshell, what he wants to do is to move capitalism’s emphasis away from shareholder value and reduce the role financial markets play in propping up the whole system of shareholder value, or at least the more extreme version of it. It’s a radical vision – especially from a man in his position.

“There is an alternative to financial investors and professional investment managers, and that’s what we want to be,” says Elkann, wearing an elegant light grey suit and with a youthful face and curly hair that make him resembles one of Michaelangelo’s cherubs. “You need to be able to portray business to society in a favourable way. All the emphasis has been on shareholder value, not stakeholder value. One of the benefits of family businesses is they focus on all stakeholders.”

Stakeholder capitalism, according to Elkann, means thinking about all the parties involved when making business decisions – the workers, the government and the community the business is operating in, as well as the shareholders – and then aiming for the best outcomes for all these stakeholders, not just shareholders.

When listening to this, you have to remind yourself that this man is the boss of Exor and chairman of Fiat, the 26th biggest company in the world in terms of revenue, and has been running it with plenty of aplomb for some time.

It’s idealistic stuff, the sort of thing you are more used to hearing from the tech gurus of California than the heirs of tough northern Italian industrial magnates. It puts him on a level, in terms of vision, with Facebook founder Mark Zuckerberg, who reckons connecting the world through the internet can address economic disparities and create a fairer society. And Google’s Larry Page and Sergey Brin who want “to solve really big problems using technology”.

But what can sound like egotistical grandstanding from some quarters demands to be taken seriously when a hard-nosed realist like Elkann starts saying he wants to change the world.

And there is another difference. Facebook, Google, Twitter et al are already changing the world. Okay. But on the other hand, they are not visionaries. Whatever the techno-idealists say, they’re not challenging the system that gave rise to their vast fortunes and tech success, the system of shareholder value capitalism. That has come under scrutiny like never before since the financial crisis.

Critics of the shareholder value system say it’s all about promoting outcomes that benefit just a few – investment bankers, hedge fund managers and private equity groups – while the rest of society benefits little. Elkann’s critique of it is a direct challenge to the entire financial ecosystem that has grown up around the shareholder model.

Of course, Elkann is no naïf and doesn’t believe you can achieve some nirvana-like capitalism by following such an approach. Businesses run on stakeholder values, he readily admits, aren’t without their problems and can come with inefficiencies. And he’s certainly no socialist. But he reckons the greater efficiency that supposedly comes from the shareholder approach – its great benefit, according to its advocates – can damage society as a whole. “I feel strongly that what is important is for business to act as a positive force in the world,” he says.

These are worthy aims to be articulated by a man who, although still only 37, has already been at the top of one of the world’s greatest family business dynasties for a decade and a half. Elkann was appointed to the board of Fiat at 22 and then to run Exor – the family-controlled holding company that is Fiat’s biggest shareholder and also has stakes in a host of other businesses – only a few years after the death of his revered grandfather Gianni Agnelli (pictured, left). Most Italians would agree that Gianni was Italy’s greatest industrialist of the post-World War II period.

Taking over Italy’s biggest company so young might have led some to question his meteoric rise to the top of the Agnelli tree. Was he, as some felt at the time, just another family business arrivista ultimately destined to fail? One thing wasn’t in doubt, when his grandfather died, Fiat was close to going under with massive debts, angry workers and an Italian government unable to bail it out.

Something had to be done and Elkann was now in charge. So he took his now famous business decision to appoint Sergio Marchionne as Fiat’s new boss. The one time head of a small Exor-owned business, Marchionne started turning things around at Fiat and later Chrysler, in which Fiat has built up an increasing stake since 2009, when the Detroit-based carmaker was declared bankrupt.

Elkann and Marchionne (pictured, right) went about fundamentally changing Fiat to, among other things, a business much more dependent on markets outside of Italy. Fiat – nearly as symbolic of Italy as pasta – now generates less than 10% of its revenue from its home country, compared with more than 40% a decade ago. They’ve also deleveraged the carmaker massively and improved profitability.

Last year, Fiat notched up net profits of €1.4 billion, up from €1 billion the year before – although the rise was entirely due to a much improved performance at Chrysler; Fiat’s carmaking unit actually made a loss in 2012. Exor, where Elkann is chief executive and chairman, and where the Agnelli family really exert their power, had revenues of $142.2 billion in 2012 and consolidated profits of just under €400 million.

The working relationship between Elkann and Marchionne has been crucial to the revival of Fiat and Exor’s fortunes. Marchionne now sits on the board of Exor and it’s clear that his influence at the family business goes beyond just Fiat and Chrysler. Elkann appreciates the relationship hugely and says it underlines the importance of this arrangement within a family business. “I see that a combination of a very strong leader and a strong family is very good and works for family businesses,” he says.

That said, it’s obvious who is boss. Guido Corbetta, a professor at Bocconi University in Milan and a family business expert, says there is one fixed rule in the Agnelli family and that is to have one leader, and only one leader. Elkann was chosen as that leader and he’s more than putting his mark on it.

Corbetta adds that one of the biggest achievements at Exor – and one that sometimes isn’t sufficiently recognised – is the management of the succession to Elkann from his grandfather. Gianni wasn’t just one of the Europe’s greatest industrialists; he was also one of its greatest playboys, connected to a host of glamorous women, including actresses Anita Ekberg and Rita Hayworth – a hard act to follow for any next generation.

“He was dominant,” says Corbetta. “Anyone succeeding him would have huge shoes to fill. But the fact that Elkann has done so and managed to beat his own path, distancing himself a lot from his grandfather’s particular style of running businesses and being successful, is a great achievement for Fiat, the Agnelli family, and even more so Elkann.”

Elkann, whose father is a prominent author and journalist in Italy who married into the Agnelli family, has obviously inherited some traits from his grandfather. Wearing beautifully tailored suits and his air of sprezzatura – the art of making the difficult seem easy – are classic Gianni traits. Elkann also acknowledges the role of his grandfather in a “if I have seen further it is by standing on the shoulders of giants” way.

At a recent presentation, he ended by referring to his grandfather’s words: “Groups like ours typically go through three stages in their development: a time of strength; a time of privilege and a time of vanity. For me the first is the only one that counts.” Elkann always keeps this Agnelli-ism close to his thoughts.

But as Corbetta says: “His grandfather was part of the Italian system. Elkann is part of the international system.” Elkann has much less time than his grandfather had for the politicical machinations in Rome, and his attitude is much more global – both men were products of their times.

Elkann’s success at navigating the intricacies of a family business means he’s in demand. He now sits on the board of News Corporation, controlled by the Murdoch family. Members of great family dynasties are sitting or have sat on the Exor board, including Jay Y Lee, the heir apparent to the Samsung dynasty, and Ratan Tata, the great Indian industrialist, sat on the board of Fiat until 2012.

Exor has made investments and sold stakes in a host of businesses with great family dynasties behind them, including the Rothschilds, the Frère family in Belgium, the von Finck family in Germany, and the Keswick family in the UK and Hong Kong. He also has links to Bill Ford Jr, chairman of the Ford Motor Company. The relationship with Ford goes back to the early part of last century when Fiat’s founder Giovanni Agnelli visited the Ford factory in Detroit and was inspired by the possibilities of mass production.

This nexus of family businesses that Elkann has nurtured is possibly one of the most powerful informal business groupings in the world. His close contact with the current heads of these dynasties gives Elkann an unprecedented amount of knowledge to call upon when making decisions. “To be able to speak directly at any time with the likes of Bill Ford, or a member of the Rothschild family on some aspect of running a family business, or for that matter anything, has helped to build Elkann’s resolve and business acumen,” says Corbetta.

No doubt all these family business relationships have helped him to formulate his views on stakeholder capitalism. But what does stakeholder capitalism really mean in practice at a business like Exor or Fiat? Do the stakeholders actually feel he’s listening to their concerns and making decisions that benefit them? Can it be anything other than an aspiration that will be tempered out of all recognition by the reality of running a global business empire?

That’s a question that needs to be put to a worker at a Fiat factory like the one in Cassino in southern Italy, which feels vulnerable to cuts or even closure after Marchionne made the decision to shut down Fiat’s Termini Imerese plant in Sicily in 2011. It’s probably fair to say that at best most staff at Cassino, and indeed most of the factories operated by Fiat, would express an ambivalent attitude towards Elkann’s views on stakeholder capitalism. (A worker at Fiat's factory outside Naples in Italy, pictured right.)

Given the immense pressures on carmakers in Europe, Elkann and Marchionne have some big decisions ahead of them. But they are doing their best to keep production in Italy. Marchionne recently said the carmaker plans to invest up to €1 billion to ensure top brands like Maserati and Alfa Romeo continue to be made on home soil. “It matters to them, and it is never going to be an easy decision to cut investments anywhere, but especially Italy,” says Corbetta.

These days, with big public relations teams working behind the scenes at multinationals, most chief executives are going to express remorse whether heartfelt or not about making mass redundancies.

There’s little doubt that the pressures on Elkann are immense. He has to oversee a multinational with one of the biggest workforces anywhere – Fiat has more than 214,000 employees – plus manage the business’s family members, at least 250 of them (pictured left), and deal with governments’ desperate attempts to stop unemployment levels rising by blocking factory closures. Non-family shareholders also have to be placated. That’s much more than most chief executives of multinationals ever have to contemplate. He, as members of any family company will know well, can’t walk away from the business as easily as non-family business leaders can.

So far, most analysts think he’s done a pretty good job. But the next 10 years are likely to be crucial for the likes of Fiat, as technological changes – like driverless cars – and overcapacity issues in the auto industry will test all car manufacturers to near breaking point.

The business pressures are great. In the brief interview CampdenFB had with him, Elkann argued numerous times that the future is about stakeholder value – he’s clearly serious. Of course, he is also a realist, and as he said in the interview and his presentation on family capitalism at Bocconi beforehand “returns are ultimately what you are measured on”. Resolving this tension will be the challenge of the next decade, and perhaps what will define his career. If he can square this circle, then John Elkann will deserve the accolade of “visionary” just as much as his grandfather – and maybe even more so.

Shareholder vs stakeholder
Stakeholder capitalism looks likely to make a big breakthrough in how businesses are run in the years ahead. At least, that’s the view of one of the world’s most respected experts on the subject.

“I’ve been talking about stakeholder values since 1978,” says Edward Freeman, a professor at the Darden School of Management at the University of Virginia. “Back then it was treated like some typo in the middle of an academic paper. But since the financial crisis many more corporations and academics are taking it seriously.”

The financial markets obsession with shareholder value, says Freeman, ultimately led to the crisis of 2008 and 2009, which saw many western countries close to economic collapse. “That, as you can imagine, did much to invigorate the debate how to improve capitalist outcomes,” he says.

In its most basic form, stakeholder capitalism involves taking into account the interests of a wide section of society that is affected by business decisions. Primary stakeholders are internal groups associated with the company like employees, shareholders and customers. Secondary stakeholders are external and include governments, and local and global communities.

Freeman says that he’s been swamped with inquiries from corporations and other business school professors for his expertise on stakeholder management. But he adds that Main Street increasingly gets it and is following more stakeholder agendas when running their businesses. “I think in 10 years’ time it will be mainstream.”

Freeman says that family businesses are a natural place for stakeholder values to flourish. “The stakeholder is enmeshed in the whole world of family businesses.”

But do Wall Street and the financial sector get the concept? On the basis of previous behaviour the answer is an emphatic no.
Yet, Freeman is noticing some changes even among hardcore Wall Street types. “Some are beginning to see that by following stakeholder management processes, shareholder value can also be maximised. So some money managers are beginning to consider creating funds that invest in firms that adhere to stakeholder values.”

But Freeman is not sure governments and regulators understand it. “They are still making policy linked to shareholder value,” he says. “And with most governments concerned about short-term outcomes that isn’t going to change in a hurry.”
Stakeholder capitalism looks likely to make a big breakthrough in how businesses are run in the years ahead. At least, that’s the view of one of the world’s most respected experts on the subject.

“I’ve been talking about stakeholder values since 1978,” says Edward Freeman, a professor at the Darden School of Management at the University of Virginia. “Back then it was treated like some typo in the middle of an academic paper. But since the financial crisis many more corporations and academics are taking it seriously.”

The financial markets obsession with shareholder value, says Freeman, ultimately led to the crisis of 2008 and 2009, which saw many western countries close to economic collapse. “That, as you can imagine, did much to invigorate the debate how to improve capitalist outcomes,” he says.

In its most basic form, stakeholder capitalism involves taking into account the interests of a wide section of society that is affected by business decisions. Primary stakeholders are internal groups associated with the company like employees, shareholders and customers. Secondary stakeholders are external and include governments, and local and global communities.

Freeman says that he’s been swamped with inquiries from corporations and other business school professors for his expertise on stakeholder management. But he adds that Main Street increasingly gets it and is following more stakeholder agendas when running their businesses. “I think in 10 years’ time it will be mainstream.”

Freeman says that family businesses are a natural place for stakeholder values to flourish. “The stakeholder is enmeshed in the whole world of family businesses.”

But do Wall Street and the financial sector get the concept? On the basis of previous behaviour the answer is an emphatic no.

Yet, Freeman is noticing some changes even among hardcore Wall Street types. “Some are beginning to see that by following stakeholder management processes, shareholder value can also be maximised. So some money managers are beginning to consider creating funds that invest in firms that adhere to stakeholder values.”

But Freeman is not sure governments and regulators understand it. “They are still making policy linked to shareholder value,” he says. “And with most governments concerned about short-term outcomes that isn’t going to change in a hurry.”

Images copyrighted to Press Association 

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