Germany's Pioneering Corporate Managers

by Sean Silverthorne, Editor, Working Knowledge

When you think about which countries have produced the greatest management innovations, the United States and Japan are likely to top your list. But it was Germany in the late 1800s and early 1900s that was a cauldron of innovative and entrepreneurial spirit admired by the rest of the world and led by such great managers as August Thyssen, Alfred Krupp, and Werner Siemens.

Professor Jeffrey Fear's book Organizing Control: August Thyssen and the Construction of German Corporate Management overturns some of our preconceptions of German business leaders as autocratic, rigid, and backward. In this interview he discusses the development of the German corporation and what modern managers can learn from that history.

The book was edited by Thomas K. McCraw, the Isidor Straus Professor of Business History at HBS, and was researched in part at the School's Baker Library.

Sean Silverthorne: Why did you write this book?

Jeffrey Fear: This book began as a very different project. One problem in German history is that a good deal of literature understandably focuses on discrete time periods: Imperial Germany 1871-1914; World War I 1914-1918; the Weimar Republic 1918-1933; the Third Reich 1933-1945; the Federal Republic (West Germany) or German Democratic Republic (East Germany) 1945-1989. In terms of political or economic history, these divisions make a lot of sense, but in terms of individuals' experiences or business development they do not.

I once met a ninety-year-old woman who remembered the Emperor. People's lives have been shattered by these huge upheavals in German history, yet they also have moved on. Businesses too have been destroyed and have come back. A good many of the top German firms today have their roots in the nineteenth century. Thyssen, Krupp (now ThyssenKrupp), Siemens, the Deutsche Bank, Dresdner, Bosch, BASF, and so on, all managed to somehow reconstruct and reinvent themselves after these upheavals.

So I intended to write a long-term study about a company or factory with a focus on its relationship to its surrounding community or region. I could make business-government relationships very concrete and personal by examining business and government officials at a local level. Hartmut Berghoff accomplished just such a study of Hohner, the harmonica maker. I chose Thyssen & Co. because of the extent of its archives, which could enable such a long-term study. Now owned by Mannesmann, the factory itself still manufactures large-diameter pipes today.

Before the 1920s, German firms were often messier, more haphazard, less decentralized than many American corporations.

However, instead of looking at one of August Thyssen's ancillary operations (most literature focuses on the August Thyssen-H¼tte, the largest firm), suddenly I ended up in the headquarters of the Thyssen-Konzern. As my advisor once said: If you go into the archives and find just what you are looking for, you've done something wrong. So I radically revised the project. Thyssen himself paid an immense amount of attention to issues of organization, accounting, and control, so in many ways the book reflects those interests. It became clear that Thyssen and his managers were doing many innovative things in terms of organization. Having been greatly influenced by HBS's own Alfred Chandler, it became clear that Thyssen was developing many features of the "visible hand" of management that paralleled U.S. methods without aping them, including the seminal multidivisional form.

Q: Many of us have a stereotype of the German enterprises as unrelentingly bureaucratic and autocratic, generating a heavy flow from the top downward. Your research on Thyssen contradicts this notion. In general, what did you discover about German management that is in opposition to what we thought we knew?

A: This stereotype has always irked me. I don't doubt that nowadays the board system in Germany is more cumbersome than the U.S. system. Germans are more formal in their interpersonal behavior inside corporations than Americans, which often leads to an appearance of stuffiness or stiffness. The use of titles or formal addresses is certainly not the American "Hi, Jack." German entrepreneurs were autocratic and paternalist, but it is by no means clear that they had a particular lock on this sort of behavior. How many American CEOs would like to have labor representatives on their boards?

We also tend to forget that many German companies are run quite collegially, rather than autocratically. Even August Thyssen, a classic autocratic entrepreneur, acted quite collegially with his senior managers, who were granted wide-ranging autonomy. The official term of the "CEO" of German companies today is the "Spokesman" or "Speaker" of the executive board. In certain senses, the speaker is the primary representative of the executive board, not an all-powerful executive. Naturally, the power of the speaker varies enormously from firm to firm. Some are more autocratic than others. We should also remember that the cult of the celebrity or cult of the CEO was "Made in America."

But the main point is that we tend to forget that American firms pioneered a vast, bureaucratic, middle management apparatus. As a trick, I've posted General Motor's organizational chart without the title in classes explaining the decline of communism as a result of too many layers of bureaucracy and not enough market (true enough). But I then tell students that I made a mistake and that this chart actually represents the managerial organizations of one of the most successful corporations in the world before the 1970s. American firms pioneered the vast amount of paperwork required by modern firms, which innovations such as the Hollerith punchcard machine (a predecessor to IBM) only multiplied. At DuPont, a manager was required to submit eight copies of the application form, Number 16822 (!), to receive position for funds under $500. If these were German firms, interpreters would quickly claim that these represented a particular German tendency to bureaucracy. Prior to 1945, many German firms actually resisted the expense and burden of implementing these innovations in the interest of more flexibility and autonomy (though at the loss of control and precision of information).

Before the 1920s at least, most German industrial firms did not have an extensive middle management staff. Large German firms remained much more diversified and decentralized than unitary, functional American corporations with a commitment to small batch production and "customization" of materials. The engineering or applied science-based culture of many German firms kept power and authority closer to the factory or subsidiaries. Craft production meant skilled workers also retained a good deal of autonomy, so power often remained more decentralized within the organization, rather than moving up into middle management. With the merger movement around 1900, many companies retained their historical roots inside larger firms; they, too, resisted full organizational homogenization. In short, before the 1920s, German firms were often messier, more haphazard, less decentralized than many American corporations.

By the 1920s, American corporations began to diversify heavily but immediately ran into the problem of how to manage diversified product lines (scope) inside one organization—thus facing managerial problems that German firms wrestled with for years. German firms needed more scale and centralization—and looked to American examples in the great "rationalization" mania of the 1920s. Americanization and the bureaucratization of German corporations went hand-in-hand. However, German firms did not adapt American methods unquestioningly. While Americans pioneered the multidivisional firm (divisions within one legal entity), for instance, Germans still preferred Konzerne (multisubsidiary operations). The fact that they were subsidiaries also kept power more decentralized. Line managers and skilled craftsmen often retained a considerable degree of authority within management.

Before Hitler discredited Germany, Americans often looked to Germany for at least some part of inspiration.

We also forget how bureaucratic Tayloristic scientific management is, which is predicated on highly specific controls of supervision. While Thyssen delegated tasks and expected managers to achieve certain objectives, Taylor's management principles had managers and workers run through a checklist of motions or functions to be fulfilled in order to achieve a certain objective. By analogy, the Prussian military tradition has long been based on the principle of delegating tasks to subordinate officers (take the hill without specifying how, leaving it to the judgment of the relevant unit commander—called Aufgabentaktik), while the American army tends to follow a chain of command often specifying exactly how and with what procedures (Befehlstaktik) objectives should be achieved. Under this viewpoint, American methods were more authoritarian and controlling. Thyssen's managerial style clearly followed this Prussian military tradition. He delegated, then supervised through his reporting system. A top-down command hierarchy did form (Thyssen hardly ran some sort of democracy), but one that accorded a space of responsibility and decision-making flexibility to subordinate managers.

In spite of the fact that he was personally very authoritarian and it was literally "his firm," it was surprising how collegially he worked with senior managers whom he trusted. They could contradict him. Although he had ultimate veto powers, he let his executives overrule him at times. But they had to convince him of their arguments. Initiatives often came from the middle management, who were often quite young. He regularly promoted young executives—often around thirty years of age—to run whole companies. The chief auditor of one of the premier machine engineering companies in Germany in the early 1920s was barely thirty years of age. Thyssen kept trying to turn engineers into respectable businessmen. When they failed to generate profits, he threw them out.

To be clear, large German firms definitely do not move as quickly today as many American firms. The German economy is going through fundamental structural changes because of Europeanization and globalization. Corporate governance and industrial relations institutions are in flux. Many of the large German firms have huge legacy costs and entrenched corporate cultures that must change. Remembering August Thyssen reminds people just how entrepreneurial corporate Germany once was. I think Thyssen is more comparable to those thousands of owner-entrepreneur controlled Mittelstand (small and medium-sized firms) that remain very entrepreneurial, though in a quiet fashion. Germany remains an export leader today because of those secretive firms. They have made widespread adjustments because of globalization, especially taking advantage of new locations in eastern Europe. We tend to forget this sort of entrepreneurialism, somewhat blinded by the light of the start-up culture of the United States and Silicon Valley.

Q: Some great but autocratic German entrepreneurs including Alfred Krupp and Werner Siemens foundered in the 1880s, while Thyssen was able to reform his company and continue successfully. What did Thyssen see that the others couldn't?

A: Well, I would hardly say that Krupp or Siemens foundered in the 1880s, but they certainly faced a profound leadership and management crisis at that time, largely because they had difficulty delegating responsibility to other people and preferred a more informal means of organization. Krupp constantly intervened, questioned, and meddled in his executives' decisions. Siemens evinced a disdain for commercial organization, even calling one of his sons (who became one of the leading board members of the Deutsche Bank): "My son, the clerk." In the nineteenth century, the elder DuPonts also had trouble initiating a more sophisticated managerial organization—so it is not just an autocratic "German" quality, but one that all successful entrepreneurs face. They must come to terms with growth and that means relying on others.

Thyssen realized this more easily than the others because he was always interested in commercial organization. He was often away drumming up business and could not remain on site to micromanage. He and three of his most senior executives at the time put their heads together and created a supervisory/reporting system that permitted Thyssen to check the monthly "results" as he called them. He conscientiously checked those figures and intervened when he saw profits suffering. He did not try to tell them how to run their businesses, but intervened ruthlessly (and sometimes unfairly) when he saw profits suffer. After thirty years, when his little seventy-person firm became one of the largest industrial operations and employers in Germany, he again established a central auditing office for the whole Konzern (multisubsidiary operations), which acted essentially as an in-house management consultancy and auditing firm. He personally composed the statutes as to its authority. This was one of the first offices in the world that began a task of standardizing accounting methods and supervising to ensure that he received the best information possible.

Again, Thyssen realized that information and oversight was more critical for managing a large-scale enterprise than his personal interventions. Constant personal interventions from above lame personal initiative and hinder quick problem solving. Even mid-level managers must have autonomy to react to new problems or take advantage of new opportunities and make themselves heard. Delegate but supervise.

Q: As you point out, it is not well understood that today's multidepartmental organizational structure was pioneered in Germany and Japan.

A: Ultimately, I think it is profoundly irrelevant which country developed this form (or another product or whatever) first. All three of these countries' big businesses began independently arriving at rough versions of the same structure as they faced similar challenges of managing scale and scope. But the more important point is that we actually have a lot to learn from one another, rather than setting one country's management practices up as a standard to which others should conform—or else they do not measure up or are somehow "backward." A good deal of diversity remains in business practice, even within one country, and we should take that diversity seriously rather than trying to find a one-size-fits-all management prescription.

Moreover, if you look at Baker Library's historical collections before 1933, it is clear that they were collecting a huge amount of German management literature. British, American, and German management literature was most represented. Before Hitler discredited Germany, Americans often looked to Germany for at least some part of inspiration. They kept themselves at least informed. The transatlantic dialogue was much stronger and more two-sided than after WWII. We have forgotten that interaction.

As a metaphor, the German company Mannesmann invented the seamless pipe process, which was eventually licensed to American companies. Thyssen sent two engineers, one at the turn of the century, the other at the beginning of the 1930s, to study American techniques and bring them back to Germany. However, they improved on the process, patented it, and one of the engineers moved back to the United States to introduce the innovations back there. The one who had gone in the 1930s remained in Germany and licensed the improved process, which was purchased by British, French, and U.S. firms. We have forgotten how much a transnational dialogue management and manufacturing innovation once was, instead of the one-best-way.

Q: What could the modern business leader learn from a better understanding of the German corporation and entrepreneurs such as August Thyssen?

A: Well, I think one of the things that made Thyssen such a great entrepreneur (but a lousy father, a point I'll come back to later) was his ability to combine apparent opposites throughout his business career. Management books are filled with prescriptive platitudes that often contradict one another; conventional wisdom at one period of time changes swiftly in the business world. I think the best entrepreneurs manage—and it's a lifelong struggle—to balance apparent opposites. Thyssen exemplified the classic, individualistic entrepreneur, yet built one of the more sophisticated managerial hierarchies in the world for the time. He established and managed a centralized but decentralized organization along the managerial principles more famously seen at DuPont or General Motors. Thyssen saw the great virtues of ever-larger mergers, yet kept his own firm distant from the great mergers of his day until his death. He saw the virtues of more scale, yet diversified greatly into a whole range of goods including gas and electrical turbines (an area that challenged Siemens). He always thought in terms of scale, but self-consciously limited his financing practices in the interests of family control.

By contrast, his son, Fritz, intervened impulsively and erratically in firm operations to the chagrin of his subordinates; yet his other son, Heinrich, acted with the hands-off approach of a merchant-financier. August Thyssen Sr., however, delegated yet paid close attention to matters of organizational control. Thyssen Sr. could criticize Heinrich as "only a banker," while criticizing Fritz for his "spendthrift" ways and outsized, overindebted investment strategy.

Thyssen balanced continuous technical advancement with a strong commercial orientation so that any new investment or innovation still had to justify its existence through profits. He hired the best engineers available, yet expected them to run their areas of responsibility with commercial acumen as "ordinary businessmen." He despised cartels and gained a reputation as a trust-builder, but utilized them when it fulfilled his interest. Thyssen Sr. had a reputation for being an "American" yet was deeply "German." He was among the first to use American methods of production, yet pioneered typically German Konzerne.

That sort of balancing act, combining apparent opposites rather than simple prescriptions, is essential to any entrepreneur. Managing those tensions (among others) successfully appears key. Unfortunately, such a viewpoint is difficult to advocate [with] hard and fast principles of management or entrepreneurship without devolving into platitudes.

Thyssen's great career also reminds us of some of the qualities needed to succeed in a rapidly changing capitalist world (a world in the nineteenth century that was changing just as fast as today's business world filled with new technologies, products, and communications). His favorite phrase was "If I rest, I rust." He obsessively followed changes in the business world. His correspondence with Hugo Stinnes (another famous German entrepreneur) showed how much he paid attention to the business world around him. They could quote steel prices for every major good in every major market almost automatically. Thyssen knew every twist and turn of the business world. He had his ear constantly to the ground for information from both inside and outside his business.

Unfortunately, this obsession had its costs. In a sense, Thyssen had little trouble with work-life balance, because his life was his work. But it cost him his family. Only at the end of his life did he admit those costs. It is a little like Jack Welch admitting that he should have spent more of those Saturday mornings with his family.

Q: Many great German companies—Siemens, Daimler-Benz, Deutsche Bank—sustained success over generations even as their country underwent violent political upheaval. What was it about these companies that allowed them to thrive amid such domestic uncertainty?

A: The most important reason is that they remained highly entrepreneurial. The many crises actually forced them to improvise and take advantage of the opportunities that they did have. The relative inflexibility has crept in since the 1970s—and not just for reasons internal to the company. The second reason is that they had the human capital, knowledge, and skills to take advantage of the opportunities that presented themselves. The human capital skills, I think, were the most important over the long haul. The third reason is that [they] developed relatively coherent managerial organizations with a strong sense of belonging and identification to the business—a tradition. This "tradition" today is being challenged by globalization.

Q: Could you compare and contrast corporate governance as it exists in Germany with the American model(s)?

A: This is too broad a question to answer adequately in this context, but let me highlight one point. Most businesses are run by owner-entrepreneurs or by families. The Thyssen story, with its ruthlessly long-term oriented entrepreneur (and involving an admittedly extreme problem of succession), is more typical than atypical around the world. Even some of the most famous names in European business still have founders or families involved. The widely dispersed shareholding of the U.S. or U.K. or that of the DAX 30 (but not much more) is the exception to the rule. That means potential global investors in such companies will have to deal with actively involved owners or families, rather than managers. For such family-controlled firms, they will have to deal with more mobile outside or institutional investors. One successful German Mittelstand entrepreneur, Martin Kannegiesser, declared: "We as owner-entrepreneurs will have to acquire the perspective of investors.… Suddenly, we'll feel ourselves to be investors too and not as much as entrepreneurs.… Whether that is good for the German economy, is an open question."

As business historians, we need to know more about the managers as living, breathing human beings.

What this distinction between owner-entrepreneurs and investors means for individual business is somewhat unclear, but this tension between active owners and new outside investors will be one of the central tensions of our time, and not just in Germany. One of the reasons why big firms offer stock options is to make managers think like owners or to align their interests with those of the owners (sometimes with perverse results), but what happens in firms that have owners still involved? Aren't owner-entrepreneurs' interests aligned with the long-term interest of their firm? Such owners are worried about the alleged short-term viewpoint of "fickle" investors, yet investors are worried about their shareholding rights. Families and investors will have to come to terms with one another, and it will not always be easy.

Q: We often view business history through the actions of a towering figure. But even though August Thyssen is a principal figure in Organizing Control, the real subject is the evolution of business management and managers inside the company. Your colleague, HBS research fellow Marcelo Bucheli, took a similar approach in his recent book on the United Fruit Co. in Latin America, judging that company's actions from a business perspective and paring away the socio-political cloud that often obscures the United Fruit story. As a former HBS research fellow yourself, do you think there is enough attention paid by business historians to the business DNA of the enterprises they study?

A: I agree. Business historians do not pay enough attention to the internal organization of companies. There is a wealth of insights from the organizational theory and behavioral literature that business historians have not adequately tapped into. Part of the problem is that historians often have to speak to dead people, who naturally are not as forthcoming. We cannot sit inside a business of the early twentieth century for a year to listen to the life of an organization like an anthropologist or OB theorist today. We have to piece together disparate records. They are necessarily incomplete. But we should and can do more.

The focus on the great entrepreneur effaces the organization. Then, we should not reduce organization to its formal design nor to a set of bureaucratic functions. Instead it is a particular social space in which people live and work—and that means the intersubjective dimension and collective behavior that a workplace creates is extremely important for the success or failure of a business. Anyone who has worked in any organization knows this. As business historians, we need to know more about the managers below the entrepreneur—as living, breathing human beings rather than as functions or executors of the entrepreneur or senior management. Unfortunately, those intangibles are mostly lost to history. But we could still do better.

Q: What are you working on now?

A: I am working on a broad synthetic survey on the history of German capitalism. It should be an extended version of the article in Creating Modern Capitalism that was previously taught in Foundations here at HBS.

In the English literature, we still operate with a sort of history of the commanding heights of German capitalism. For instance, we all know about the Deutsche Bank, Dresdner, or Commerzbank. Yet the Big Four banks have a market share (measured on total assets) around 14 percent. The savings banks control 50 percent of German deposits, yet their story is less well known. A lot of misconceptions about the German business world are out there or a good portion of it is not well understood. Its management practices remain an "enigma," as one German business historian put it. We all know that German big business works with a two-tiered board—a supervisory and executive board—but the story why that is the case and the reasoning behind such a corporate governance structure is not well known. I always find it surprising among the American corporate governance literature that the whole idea of bringing in outside directors and separating the CEO from the President is actually the logic (if not quite the reality) behind the German two-tiered board. As before 1933, I think we have a lot to learn from one another.