A Triumph of Family Business Governance – The Example of Merck

A Triumph of Family Business Governance – The Example of Merck
The Engel Apotheke (Angel Apothecary). [Public domain], via Wikimedia Commons

To say that Merck is one of the world’s oldest and most successful companies is akin to referring to Mt. Everest as one of the world’s more impressive hills. The German pharmaceutical company is a global corporate giant whose history dates back to the 17th century and is responsible for pioneering the modern pharmaceutical industry as we know it today.

Through it all, the company has remained a family owned entity and has avoided the serious strife and conflict that has, historically, torn apart similar family run ventures. This then begs an important question – how? How has the Merck family been able to stay on track for, literally, centuries where many others have failed?

The answer is as impressive as it is simple.

Where It All Began

The Merck family’s business roots date back to 1668 when Friedrich Jacob Merck, an apothecary, took control of the Engel-Apotheke, or ‘Angel Pharmacy’ in Darmstadt, Germany. The business was handed down from generation to generation with the older generation teaching the younger everything they needed to know about running and operating the family business. This practice was no different than it was for blacksmiths or cobblers in those times.

The company didn’t begin to take off until Emanuel Merck, a direct decedent of Friedrich Jacob Merck, took over in 1816 and applied his scientific education and training to the operation. Emanuel’s most significant breakthrough came when he invented and learned to mass-produce Morphine. In time he produced several medicines and chemicals that served as the raw materials for a host of different pharmaceuticals. In doing so, he created what we know as the modern pharmaceutical industry.

In the 1890’s George Merck set up an American branch operating out of New York under the name Merck & Co. Here he enjoyed tremendous growth and success however, following WWI, the company was confiscated by the U.S. Government and re-established as a separate American company while the original Merck continued to operate out of Germany. This post-war era proved to be a boom period for the company as they saw remarkable double-digit sales growth year after year. This phenomenon became known as “Wirtschaftswunder”, which translates as “economic miracle”.

The Governance Decision That Changed Everything

By the 1920’s, the Merck operation had grown from a successful family run enterprise to a global business Goliath. It would be right around this time when greed and infighting would infest other companies in their situation and rot it from the inside out. With the world on the brink of the Great Depression, the hard times may have led to similar strife and unrest had the Merck family not made a crucially important strategic decision. In the early 1920’s, the family decided to separate ownership from management to ensure transparency and create a buffer to protect the business from personal ambitions and agendas.

They established a unique dual-board system whereby the management is controlled by a board consisting of predominantly non-family members while a family-only board acted in a supervisory capacity for the management board.

In a 2015 interview with the Korea Herald, Johannes Baillou, chairman of E. Merck KG, the holding company of the Merck Group, and a 12th generation member of the Merck family, describes this pioneering governance system as one of the key reasons for the company’s continued success in the nearly 100 years that followed. Another is the fact that nobody in the family views the company as a personal piggy bank. They all lead relatively modest lifestyles and keep their money in the company.

“We save the money for future investment,” Baillou said. “For family members, there is simply no better investment than leaving all the money within the company.”

In a similar vein, one thing you won’t ever see is a Merck family private jet, as it goes directly against both their fiscal and philosophical belief system. “(Private jets) simply don’t make sense from the business point of view. If you travel in a private jet, you lose contact with the real world,” Baillou explained.

From inventing mass pharmaceuticals to pioneering corporate governance structures, the Merck family has been leading the way longer than anyone else in the field. By removing the day to day management out of the family’s hands directly, it has ensured that their family business will continue to succeed well into the future.