While innovation and new business ideas gain central stage today, the decline of one of Europe’s greatest Renaissance banking families offers useful, cautious wisdom.
By Christian Stadler, contributor
(ManagementInnovationeXchange) -- 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 that 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 on hand for unexpected threats and opportunities, and never engage in activities that put their entire future at risk.
A trip back to the Renaissance illustrates the point.
Unless you’re a European history scholar, you’ve probably never heard of (or have forgotten) 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 Rothschilds' 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 Fuggers traces back to a decision the family made during its golden era. 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 his intention was only reflected in the reduction of capital.<!-- more -->
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.
The thread began to unspool rapidly. Frequent financial crises and the deterioration of the Habsburg family’s power brought such fundamental changes 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 it was 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.
Christian Stadler 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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