Archive for the ‘Family Business’ Category

by Professor Ernesto Poza

Serious ethical issues have been raised recently regarding several News Corp. properties. Several of its British media outlets stand accused of illegal wiretapping and voice and email eavesdropping. Should these prove to be true and indicative of a culture that is truly about corporate irresponsibility, both the Murdoch family’s reputation and News Corp’s institutional footprint and brand will be irreparably damaged. I am of the opinion that this will not happen. There is overwhelming research evidence suggesting that family business owners care about their reputation and their companies’ with a zeal unknown to mere executives and top managements. There is also plenty of anecdotal evidence that in the newspaper business, the legacy is not just the business but an institution that represents a public trust. Historical accounts at the New York Times, the Washington Post, the Seattle Times and El Nuevo Día certainly all claim these newspapers to be a public trust. Yes, there is always Martha Stewart, but is that not more the exception than the rule?)

Time will tell whether I am right or wrong on my assessment of James and Rupert Murdoch and the culture of News Corp. But News Corp. and the Murdochs are newsworthy on another very important subject; their strategic behavior, which is profoundly different from that of most S&P500 companies and decidedly long-term oriented.  News Corp.’s controlling Murdoch family stands in sharp contrast to the strategic behavior of shareholders of most large U.S. companies where the average shareholding period is down to nine months. In other words, these days shareholders are renting, not buying an ownership stake.

The Murdochs’ strategic behavior is also profoundly different from the actions of the Bancroft family, previous owners of The Wall Street Journal.  Just prior to their decision to sell Dow Jones and The Wall Street Journal to Rupert Murdoch, the Bancrofts squabbled over their legacy and their sense of responsibility towards the institution that their family had founded and built. Crawford Hill, a Bancroft family member in Spain at the time, spoke by phone with his cousins and other members of his family on the eve of the vote to approve the $60/share offer by News Corp. He said: “With all due respect, it is time for a reality check. What is missing from this discussion about Dow Jones and the Bancrofts is a sense of historical perspective and evolution…What most of you do not know is that the very same Jessie B. Cox that is mentioned at every turn as “family matriarch” and to whom many of us owe “the legacy” forced her incredibly talented husband, William C. Cox, top student at Milton and Harvard luminary, to retire prematurely from Dow Jones at age 40 so he could be full time in the social swirl of Cohasset. He was a star at the company! As to promoting legacy, neither she nor her daughter Jane, my mom, ever spoke of the legacy of Dow Jones, much less the possibility of actually working there or what it meant to be a steward of the business. There was no effort at promoting legacy, or educating the next generation, whatsoever…We talked about everything under the sun…but never Dow Jones…We never had, by the way, conversations that Sulzbergers (The New York Times), Grahams (The Washinton Post) and, yes, Murdochs, had every day! There has absolutely never existed any kind of family-wide, cross-branch culture of teaching what it means to be an active, engaged owner and more crucially, a family director. ¹

Meanwhile, in New York, Rupert Murdoch remained committed to the purchase of Dow Jones and The Wall Street Journal and appeared endowed with a sense of optimism in its long term value (at a time when media and newspaper entities were in crisis) that the Bancrofts could no longer fathom.

Across the Atlantic, James Murdoch (Rupert Murdoch’s remaining son in top management) was also behaving like a committed owner and making significant investments in expanding British Sky Broadcasting’s bundled services to subscribers. This at a time when nonfamily shareholders (BSky Broadcasting in London is Murdoch family-controlled but publicly-traded) fretted over the company’s debt. Here is how a Financial Times of London report in 2005 described it: “A chip off the old block – If investors in British Sky Broadcasting Group think that James Murdoch is spending too much money, they only need to look to Rupert. Just as Rupert Murdoch had done on many occasions, James has been incurring short term losses in search of a winning long term strategy. This time he has decided to invest 1.33 billion euros in an expansion to the Internet, broadband and telephony. The strategy appears to be crucial to the extent that competition has increased in the cable, satellite TV and telecommunications industries. He wants to offer customers a bundle of services. Even though his actions promise to reduce profits by 760 million over the next three years, the Murdoch family is very willing to bet on these long term strategies. But many of the nonfamily investors have their doubts.”

Why are two different classes of shareholders at odds over the strategy of the enterprise? Why are the Murdochs and the Bancrofts opting for such different futures? What role is the Murdoch family’s control playing in News Corp.’s strategic decision-making?

For that matter consider several other well-known family-in-business cases:

• The Ford family values its independence and long-term investment horizon. The Ford Motor Company did not need to sign up for US government bailout funds in early 2009 when both Chrysler and GM did. The company had secured private loans to see them through the worst recession for the auto industry since the Great Depression.
• Back in 1930, in the heels of the Depression, the family owned DuPont boosted its R&D spending in the interest of future innovative products.
• More recently in China, it is private ownership and free-market finance, not state control, that according to Yasheng Huang, an associate professor at the MIT Sloan School of Management, writing in McKinsely Quarterly, Q1, 2009, has led to China’s economic dynamism.

The strategic behavior of owners matters. The long-term family capital perspective exhibited by the Murdochs, the Fords, the Marriotts and millions of families that own and run smaller family enterprises throughout the world, makes a difference; it makes capitalism sustainable. Perhaps economic policy-makers in Washington should listen. And a hint to policy-makers, look at Germany; a country that is shouldering the European bailout and is still creating jobs and wealth. All of this largely on the backs of mid-sized family enterprises that make up the bulk of the world renowned German Mittelstand.

1. Wall Street Journal, July 27, 2007, p. B12.

About the author:

Ernesto Poza is a professor of global business at Thunderbird School of Global Management and director of Thunderbird’s Global Family Enterprise Center. He is the author of Family Business, 3e (2010) and has advised top managers of privately-held and Fortune 500 companies in strategic management, intergenerational entrepreneurial activity, succession planning, and governance.

 By Ernesto Poza

 In a world where only 32% of family businesses make it to the second generation and only 12 percent survive to the third still controlled by the founding family, it is worth looking at  family enterprises that have beat those odds and grown into multimillion-dollar companies. What are these long-lasting family businesses doing to survive and even thrive? How are they transferring the accumulated business wisdom and the spirit of enterprise from generation to generation?

 A few years ago, I examined the adaptability and continuity of family-owned and family-controlled companies by interviewing fourth-, fifth-, and sixth-generation leaders of companies that were at least 100 years old around the world. Those included 16 companies with annual revenues ranging from $18 million to $5 billion, and operating in industries including newspapers, textbook distribution, brick and tiles, food and beverage, wine producers, insurance, baked goods, leather accessories, farm equipment distribution, and automotive sales.

 It became clear that regardless of industry or home country, the common ingredient to success was advocacy of change by the next generation. This change was driven either by strategic planning, by promoting a spirit of entrepreneurship or by relying on a continuing series of entrepreneurial ventures; what I call “interpreneurship” or intergenerational entrepreneurial activity.¹  Every one of the companies had elements in their culture that enabled them to reinvent themselves with every generation.

 Guy Renkert, fifth-generation CEO of Ironrock Capital in Canton, Ohio, explains that since its founding in 1866 by his great-great grandfather, each generation of his family has paid close attention to the customer to adapt the business to the changing market. The company began as a manufacturer of paving bricks, becoming the largest such company in the world. As the demand shifted to concrete and asphalt, the company moved into producing structural bricks. In the 1960s, it exited the brick business and used its knowledge of clay extrusion and firing to enter the unglazed quarry-tile business, again becoming a market leader. In the 1980s, Guy’s mother convinced the company to add glazed decorative tiles with an American motif; much like Italian, Spanish and Mexican tile makers have successfully done. Now, under Guy’s leadership, the company still produces quarry and decorative tiles, but has returned to brick manufacturing, producing a “thin brick”, that allows architects and builders to construct buildings with all the richness of real brick, but with the speed and cost-effectiveness of bare steel structures.

 These NeXt Gens remind all family members that what is good for the business is good for the family. And what is good for the business is change. The premise is systemically elegant and robust: To the extent that next generation leaders bring more variety inside an organization, the company will have more resources to deal with the increasingly varied and changing marketplace outside. That often means NeXt Gens hire new people with new skills, implement new information and social media technology, take the company global, add younger independent outsiders to a board, and adopt team structures of work.

From this perspective, the conflict that is inherent across generations of owner-managers is often key to the survival of the family business. It provides the wake-up call needed to reinvent the business as conditions change.

 Sometimes that call comes from the family’s inability to sustain enough income to support, via dividends or distributions the living standard the younger generation expects. In the early eighties, McIlhenny, makers of the famous Tabasco sauce, was seeing a slow-down in growth. Edward McIlhenny Simmons, the fifth generation CEO of the Avery Island, Louisiana, company posed this question to family shareholders during a family retreat: Should we invest in growth so as to expand the profit-generating capacity of the firm or invest in a family assistance program aimed at helping family members adjust to their new, less affluent, reality? Naturally, the family members voted to support reinvestment in growth. New products, such as a steak sauce, and a Bloody Mary Mix, were created and revenues increased. The company currently ships over 175,000 two-ounce bottles of a variety of peppery sauces daily.

 Successful centennial family companies chose to change both family dynamics and business strategy in order to continue to realize, across generations, the value of their particular competitive advantages, advantages that were often rooted in the unique culture of a family-owned company.

 They did this by:

 1. Making next generation members that are active in management responsible for bringing their own vision for the enterprise in their generation. Samuel Curtis Johnson III did this at S.C. Johnson, a family company, when, as a junior chemist he brought with him his dream of a new class of insecticides and insect repellents that would become Raid and Off and grow the company from annual revenues of $60 million to yearly sales of $4 billion.

2. Creating a family venture capital company or bank that reviews and sometimes funds business plans by next generation members. These new ventures either took the business in new directions or facilitated the formation of separate entities for which next generation family members had entrepreneurial passion. (After all, what is the point of forcing or incentivizing a family member with a future as a world-renowned gourmet chef into the family’s construction company? And what is the long-term value of having the company remain the most recognized national brand if most of the sales growth will be taking place in other markets?)

3. Capturing the legacy and identity of the firm and its brand from previous generation leaders before they retire. While this used to be captured in special anniversary books, today’s digital media makes video recordings and multimedia collections a much more attractive way of engaging younger generation family members in the continued spirit of enterprise. Stories of wisdom plus innovation, coming from two generations with a common purpose, nurture the spirit of continued family enterprise.

4. Having well-qualified next generation members serve on the board of directors. And having this board hold management, which could be increasingly nonfamily in larger family companies, accountable for change and adaptation. Success often lulls professional management into the proven way of doing things. It often takes alert, responsible young owners to question the status quo and provide a needed wake-up-call as new technology, new supply chains and new customer preferences emerge. Next generation Hewlett and the Packard family members did this for a slumbering Hewlett-Packard while they were still active controlling shareholders.

5. Restructuring ownership and control of the company and pruning the family tree. Ownership structures don’t transfer well across generations. The speed and agility advantage of many entrepreneurial companies is easily dissipated as founding families and their businesses grow. Ownership is not an exercise in democracy. And loving all family members equally is no excuse for fair/equal distribution of company stock among the many heirs.

References:

¹Poza, Ernesto. A la Sombra del Roble, Editorial Universitaria, 1995 and Smart Growth: Critical Choices for Family Business Continuity, University Publishers, 1997.

Ernesto Poza is a world renowned expert on family enterprise. He is a clinical professor of global entrepreneurship at the Walker Center for Global Entrepreneurship at Thunderbird School of Global Management in Glendale, Arizona and the author of Family Business, 3^rd edition.    Follow him on twitter @familybusiness

By Professor Ernesto Poza

I am on my way to Bogotá, Colombia. And just back from a trip to Guadalajara and Mexico City. So I may be thinking Latin America right now. But the thoughts that follow apply equally well to family businesses globally.

Family businesses in Latin America are generally quite good at keeping family unity and preserving the family legacy alive. They are often not as proactive on promoting continued business growth or re-structuring ownership across generations in order to ensure corporate control and a continued spirit of enterprise across generations.

From an ownership standpoint, it is within the rights of owners of stock to focus on individual gain and to retain the right to immediate liquidity. However, multigenerational family-controlled businesses, even those with some exposure to public markets, are largely illiquid enterprises. This lack of liquidity and need for selfless interest can be a burden for family members operating in a society that tends to focus on the short term, the last quarter, the day trade. They will bear this responsibility willingly only if opportunities to acquire information, education, and engagement with important family values of stewardship are plentiful. Investing sweat equity in disseminating information to family members and encouraging multiple avenues of participation gives rise to trust, a spirit of service, and a sense that everyone is in the same boat on the same long journey.

Because of the myriad ways in which us-and-them behavior can manifest itself, multigenerational families are fertile ground for zero-sum dynamics. Zero-sum dynamics in relationships are characterized by exchanges in which one party’s perceived gain is the other party’s perceived loss. For example, if family members in top management are to be compensated at a fair market rate, those not active in management assume that they will have to settle for lower dividends to accommodate those higher salaries. Even more critically, if those active in top management agree on a growth strategy, family shareholders employed elsewhere may see reinvestment in the business as a forced  reduction in dividends or distributions. This us-and-them zero-sum dynamic can be triggered by any perceived difference: active–inactive,  male–female,  richer–poorer branch, better educated–less educated, older–younger, blood relative–in-law. Zero-sum dynamics become rooted in reality when as the family grows, the enterprise or family wealth stops growing or is in decline—that is, when the pie is not getting any larger. Members of multigenerational families that operate on the assumption that another family member’s gain is their loss are fertile ground for the development of family conflict.

The best treatment for the zero-sum ailment: a growth strategy, plenty of family communication about the company’s strategy and its finances and an ownership structure that prunes the family tree in the next generation. Family unity is the single most important and unique resource of a family business. And not just because family harmony is good, but because family unity gives rise to patient family capital, and these days shareholders with a long-term investment horizon are few but important allies in successful and sustainable businesses.

Ernesto Poza is a world renowned expert on family enterprise. He is a clinical professor of global entrepreneurship at the Walker Center for Global Entrepreneurship at Thunderbird School of Global Management in Glendale, Arizona and the author of Family Business, 3^rd edition.

(Photo of downtown Bogota by David Garzon.)

By Professor Ernesto Poza, written from Hong Kong.

Family firms are complex enterprises. The superimposition of family and ownership on the management of a business gives rise to significant challenges. How family businesses manage these challenges equip many of them to be long-lasting engines of economic growth and true models of long-run sustainability. These firms represent the leading-edge of business management and not the economic dinosaurs that family business stereotypes would have us believe. Their financial results prove it.

Smucker’s, S C Johnson, News Corp.,Toyota, Grupo Modelo in Mexico, Reliance Industries in India and New World Development in Hong Kong, have all faced challenges successfully recently.  They are all family-led companies, companies that on a 5 and 10-year performance basis, are outperforming other forms of enterprise by between 6.65 and 16% annually on return-on-assets and return-on-equity. The returns vary by country. The research has been carried out in the US, Japan, Poland, Chile, the EU, and individual members of the EU like Germany, France and Spain. Recent studies also show that family businesses carry much lower debt levels (which helped them tremendously during the global financial crisis) are more responsible citizens in their own communities and remain patient investors for more than a generation versus the average share holding period on Wall Street of only 9 months. Oh yes, their CEOs lead for a longer period too, about 18 years, versus the 3 year average for S&P 500 companies these days; which could be a conservative estimate since a full 34% of the S&P 500 are family-controlled.

There may be some lessons here for management-controlled firms.  Shareholder trust, patient capital with a long-term horizon, longer-term CEO leadership, lower administrative cost structures and risk-management rooted in focus and deep knowledge of the industry rather than the more fashionable diversification, may all be part of a globally successful and quite sustainable business model; the family business- business model.  It creates jobs, generates wealth and is the darling of faster-growing emerging economies all over the world.

Professo Poza is one of the world’s leading experts in family business and a professor of family business and entrepreneurship the Walker Center for Global Entrepreneurship at Thunderbird School of Global Management.  Ernesto Poza is the author of Family Business 3rd edition.

By Ernesto J. Poza, Clinical Professor of Global Family Enterprise

You may be among thousands of families in business that attempted to hold informal family meetings over the holidays with business topics like succession planning and estate taxes. Are you happy with the outcomes?  Not likely. In most cases family members are cordial and enjoy sharing in the spirit of the holidays. But does anything really change?

Things took a turn for the worse for the three Turner brothers, who inherited a manufacturing business from their father more than 30 years ago. They are barely speaking to each other after their attempt at an informal holiday meeting. “The phone is for you,” is about all they have to say to each other.

It hasn’t always been like this. For most of the past three decades, they have gotten along rather well. They’ve had their differences and arguments, but important decisions were discussed until a consensus was reached.
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From Professor Ernesto Poza at the World Family Business Forum in Buenos Aires, Argentina

650 family business leaders from all over Latin America congregated in HSM´s Foro Internacional de Empresas Familiares.  I had the distinct honor of addressing these leaders in the opening and closing keynote presentations of the day. I collaborated on this impactful event with Professor Guillermo Perkins of IAE Business School in Buenos Aires and Professor Josep Tapies of IESE Business School in Barcelona, Spain.

Here is some of what was said:

• Family firms are complex enterprises.
• The superimposition of family and ownership on the management of an organization gives rise to significant challenges – how family enterprises manage these challenges in turn, equip many of them to be long-lasting engines of economic growth and true models of long-run sustainability.
• Family firms represent the leading-edge of business management and not the economic dinosaurs that family business stereotypes would have us believe.
• The required adaptations for the family firm lead many of these firms to deploy idiosyncratic strategies that shed light on what company leaders can do to promote the sustainability of both family-controlled and management-controlled companies.

The keynote addresses I delivered were anchored in a longitudinal quantitative research study of 79 firms whose results were published in a peer reviewed journal in 2004. My remarks reflected the most recent findings of global research on the financial performance of family enterprises. These findings were confirmed by a centennial family company qualitative research effort begun in 2005( that includes companies like Smucker’s, Timken Company and American Greetings in the US, Osborne and El Caballo in Spain and Grupo Ferré Rangel in Latin America. Preliminary results of this on-going study have been published as a chapter in a book (Hisrich, R., Global Entrepreneurship, Sage, 2010).

1. Family enterprises are financially outperforming management controlled enterprises all over the world. Research done in the US, Spain, France, Germany, Chile, Poland, Japan and most recently China, show a 6.65% to 16% annual outperformance in return-on-assets over a ten-year period by family enterprises.
2. They constitute 80% of all firms in the developed economies and 90% of all enterprises in the emerging economies. And account for between 64% and 80% of the GDP of the free economies of the world.
3. While continuity across generations, particularly beyond generation III remains a challenge, family enterprises are lasting longer and display a model of corporate sustainability marked by long-term investment horizons, 18-year CEO tenures (versus the 3-year tenures now common in corporate America) and numerous displays of generosity and corporate social responsibility in their respective communities.

In closing, I had the opportunity to call these leaders to action. Because family enterprises are the source of great societal wealth and not just owning family wealth in Latin America, two leadership imperatives awaited them on their return home:

1. Growing the family business – whether by taking it global, through digital strategies or product line extensions. In the absence of business growth, growing extended families run the risk of zero-sum dynamics that destroy an owner family´s capacity to sustain the enterprise.

2. Communications, financial transparency and family unity – because family unity is the source of the “patient capital advantage”. Patient family capital gives rise to a family firm´s ability to compete differently, idiosyncratically, and win (as shown above) in a hypercompetitive world economy.

Ernesto Poza is a world renowned expert on family enterprise. He is a clinical professor of global entrepreneurship at the Walker Center for Global Entrepreneurship at Thunderbird School of Global Management in Glendale, Arizona and the author of Family Business, 3^rd edition.

By Ernesto Poza, Thunderbird Professor

What do Wal-Mart, S.C. Johnson, Hallmark Cards, Grupos Femsa, Bimbo and Cemex (Mexico), Hermès (France), Salvatore Ferragamo (Italy), Bacardí (Puerto Rico), BMW (Germany), LG Electronics (Korea) and Zara (Spain) have in common? For one thing, they are all family-owned or family-controlled businesses. All of them have proud entrepreneurial traditions, and many of them confound management experts by continuing to enjoy success after several generations of ownership by the founding entrepreneurial family. And this in an era when, according to a recent Bain and Company study, the lifespan of the average U.S. corporation has shrunk to 14 years.
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By Ernesto Poza, Clinical Professor of Global Entrepreneurship

As even the smallest companies become more global in their operations, many family-owned businesses are seizing opportunities to expand overseas. But others are resisting and, in turn, missing opportunities that could sustain their success. Much of their reluctance is due to the conservative fiscal management and risk avoidance that characterize many family businesses. Expanding overseas takes capital, often a loan with a long payback period. Currency fluctuations also are a hazard. So business owners find themselves looking hard for easier, faster domestic growth opportunities.
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By Ernesto Poza, Thunderbird professor

Family businesses that are both long-lasting and successful have managed to beat stiff odds. Only 32 percent of family businesses are passed down to the second generation, and 12 percent are still controlled by the founding family by the third. To find out what makes some multigenerational family businesses more resilient, I interviewed fourth-, fifth-, and sixth-generation leaders of 16 companies that are at least 100 years old.
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Family business leaders looking for a smooth transition to the next generation can start planning today with six guidelines outlined in an ongoing study from Thunderbird’s Walker Center for Global Entrepreneurship in Glendale, Ariz. “Silence or denial of the succession challenge is not the answer,” said Thunderbird Professor Ernesto Poza, co-author of the study prepared for the Dubai International Financial Centre in the United Arab Emirates.
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