Legal & Political Trends

CHANGING VALUES THROUGH GENERATIONAL SHIFT

As Leaders Retire, the Mittelstand Is Shaped by a New Generation

As the vast majority of Mittelstand companies were founded decades ago, a change in leadership is inevitable in the near future. The new, younger leadership successors have grown up in a digital, internationally connected world, leading to different values and priorities in life. While more than half of successors come from within the family, some are long-time employees or externals via a management buy-in [95]. The new generation’s education is more interdisciplinary and – specifically in the case of Mittelstand leadership successors – more often in business administration instead of engineering [95], [96]. These differences lead to significant changes in the way Mittelstand companies operate, both internally and externally [95]. Leadership successors need to demonstrate ambidexterity, meaning they must successfully manage the company’s ongoing operations during a time of uncertainty and crises without missing out on long-term industry trends to ensure ongoing prosperity for employees and Germany as a whole. While the new generation’s values enhance the emphasis put on certain causes, such as sustainability and diversity, it also decreases the emphasis put on others, such as projects and social support on a regional level.

Facts:

■ 60% of Mittelstand leadership successors come from within the family, and 79% are under the age of 45 [95]. ■ While previous Mittelstand leaderships often valued clear hierarchical management structures, successors are adopt-

ing a flatter, team-oriented management style instead [95]. ■ Many of the most highly regarded values among Mittelstand leadership are not as important to the new generation. For example, “Heimatverbundenheit,” i.e., connection to the Mittelstand company’s – and therefore also the family’s – home region, is playing a much smaller role among the new generation [97].

Key Drivers:

■ The ratio of Mittelstand owners under the age of 45 has almost halved from 48% to 26% between 2002 and 2016, while the ratio of those over the age of 60 has almost doubled from 12% to 21%. This means that many corporate ownership/management transfers to the next generation are imminent [98]. ■ Young people are increasingly leaving their home villages and flocking to metropolitan areas in search of more and better opportunities, such as universities, and becoming

“global citizens” instead of working all their lives in the same place where they were born [99].

Challenges:

■ The combination of most Mittelstand leaderships’ desire for “a younger version of themselves” as successors and the fundamentally changing values of the next generation lead to a lack of suitable successors [97]. ■ This is particularly problematic for the 40% of Mittelstand companies without successors within the family who could have internalized the established values – like social responsibility towards employees and the region – while growing up [95].

Impact on the Mittelstand:

The Mittelstand is already facing one of the most transformational eras, with the electrification of the mobility sector, Industry 4.0, etc. In addition to handling these challenges, the Mittelstand must successfully manage the transfer of leadership from one generation to another. This is associated with various challenges, from not finding a suitable successor to the principal-agent problem of not knowing an external successor’s real intentions. At the same time, generational succession can also be an opportunity: new leaders are more familiar with upcoming technological and organizational trends and come with less entrenched mindsets.

SHIFTING THE POWER TOWARD EMPLOYEES

Social Sustainability Poses New Challenges for Mittelstand Companies

Social sustainability prioritizes the needs of individuals and society. Employees are placing new requirements on their working environment and want their individual life models to be considered [100]. Due to labor shortage, demographic change, and digitalization, their priorities shift from classic attractive features such as salary toward flexibility, mobile working, family friendliness, and corporate values [101]. Social sustainability will therefore play a significant role for the Mittelstand in attracting young employees [102]. However, these “new” values are not compromising the existing values of the Mittelstand: employees expect stability, flat hierarchies, trustful superior-employee relations, and a long-run mindset from their employer [103]. Supplementing the values already intrinsic to the Mittelstand is trending in these organizations. Finding the right balance between businesses’ needs to retain qualified workers and the inevitable economic decreases that a financial crisis brings is a challenge for Mittelstand companies.

Facts:

■ Employee satisfaction and retention were always significant concerns for the majority of the Mittelstand [104].

Setting employees’ needs higher than their own economic advantages, companies kept retaining their staff as long as possible, even in crisis times [105]. ■ Companies want to respond more to the desire for a worklife balance [106]. The majority of 30 surveyed firms started to prioritize frequent employee evaluations, work-life balance, and mental well-being [102]. ■ By 2025, the importance of flexibility and mobile working/ home office will increase [101]. Working from home and doing mobile work are becoming more common in the Mittelstand companies, but primarily when employees ask for that [100].

Key Drivers:

■ Ongoing demographic change and labor shortage force the Mittelstand companies to shift power even more toward the employees’ side to retain skilled workers that are crucial for the company’s competitiveness [103], [59]. ■ Priorities of young people, whom the Mittelstand must attract, are reorienting away from conventional appeal criteria like money towards flexibility, remote work, work-life balance, and family friendliness [101], [102]. ■ The importance of image and reputation fosters employee-oriented behavior in family-owned companies [107], [108]. The age of transparency made possible by the internet, where any employee can post a review about an employer, reinforces this factor.

Challenges:

■ Although companies wish to accommodate employees’ demands for a work-life balance, full wage compensation might not be economically feasible [109]. ■ Due to the higher proportion of manual tasks, companies might struggle to implement remote working [110]. Businesses are not as well positioned as they might think when it comes to mobile working and home office [101]. ■ The current German regulatory framework does not oblige employers to offer remote working options anymore [111].

This might reduce the Mittelstand’s aspirations to provide desired working conditions.

Impact on the Mittelstand:

Mittelstand companies are standing out with the long-term retention of personnel, which is achieved by corporate values such as flat hierarchies and a long-run mindset [103]. To attract and retain workers, the Mittelstand proposes new values such as remote work. Companies that offer mobile work and regulate them contractually are more successful than others [100]. Shifting power to employees will help the Mittelstand to mitigate the lack of human resources, contribute to long-term employee retention, and enable companies to maintain their high level of innovation successfully [103].