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Five rules for family businesses to thrive

Adrian Wooldrige
Adrian Wooldrige9/29/2022 02:49 PM GMT+08  • 9 min read
Five rules for family businesses to thrive
King Charles III, the latest head of "The Firm" / Photo: Bloomberg
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Nobody does dynasty better than the British royal family. The recent days of pomp and circumstance have not only been a celebration of a life well lived. They have been a celebration of the power of the family to transcend death and to link the past to the present and hence to the future. Individual monarchs may die. The institution lives on because of the fusion of biological and social inheritance. The Queen is dead. Long live the King!

It is easy, particularly after watching days of soldiers in red jackets and bearskins, marching bands and union flags, to see the Windsors as an expression of the peculiarities of the British. To a man and a woman, social theorists have predicted that modernity would mean the end of the dynastic principle in the face of democracy and meritocracy. And they have been able to point to the demise of great royal dynasties such as the Romanovs and the Habsburgs. Queen Victoria’s funeral in 1901 resembled a gathering of crowned heads of state, many of them her relations. At Queen Elizabeth II’s funeral on Sept 19, most state leaders were commoners.

Yet, dynasty remains a surprisingly powerful force. Dynastic families keep popping up in countries founded in revolt against the British monarchy: Think of the Kennedys and the Bushes in America and the Gandhis in India. The Philippines is run by a Marcos and Canada by a Trudeau. The “stans” of Central Asia are virtually family fiefs.

Meanwhile, China is a land of “princelings,” the children of senior Communist Party leaders, starting with Xi Jinping, who is about to become president for life. North Korea is on its third Kim in a row, with a fourth on the launching pad.

Family ties can be found at their most vital in business, and not just in small and medium enterprises. Giant companies in almost every area of business are either owned or controlled by families: Car-making (Ford Motor and BMW), media (News Corp and Bertelsmann), tech (Samsung Electronics and Hutchison Whampoa), fashion (LVMH and Estee Lauder), pharmaceuticals (Johnson & Johnson and Merck & Co) and supermarkets (Walmart and Aldi Stores). A third of S&P 500 companies and 40% of the 250 largest companies in France and Germany can be defined as family companies because a family owns a significant share of the company and can influence the appointment of the CEO or chairman.

Upsides and downsides

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The dynastic principle injects a collection of problems into the heart of a business that is all too familiar from the history of royal dynasties, not least that of the Windsors or TV soap operas about families. The HBO series Succession has won two best-drama Emmys for portraying an ageing company founder who refuses to hand over power and plays off his children against each other. Anybody who thinks this portrait is exaggerated should look at the history of family patriarchs. Henry Ford terrorised his son and grandson, Edsel and Henry Ford II. Arnold Maersk Mc-Kinney Moeller, the boss of AP Moeller-Maersk, retired at 80 but cast a long shadow over the shipping giant until he died in 2012, aged 98. Sir Run Run Shaw, the chairman of Television Broadcasts (TVB), waited until he was 104 to announce his retirement — and then handed his position to his 79-year-old wife. Cyrus Mistry (who died on Sept 4 in a car accident) found it hard to establish control over the Tata Group because his predecessor, Ratan Tata, kept second-guessing him and was eventually ousted by the board. Albert Darboven, a coffee tycoon, pushed his son, Arthur, out of J.J. Darboven and tried to adopt a friend as his heir and successor.

Sibling rivalry and family feuds can convulse every family. They are even more poisonous when they are linked to great wealth and great responsibilities. Two of the world’s leading shoe companies, Adidas and Puma, were founded by two warring brothers who set up rival factories in their German hometown of Herzogenaurach. Mukesh and Anil Ambani were at each other’s throats for years after their father, Dhirubhai, died without a will.

Koch Industries, the Wichita-based oil, gas and commodities giant, was plagued by a feud between Charles, the CEO and David, his right-hand man, and two other brothers, Bill and Fred, who felt that they were marginalised. If the history of mankind is a history of crimes, follies and misfortunes, as Edward Gibbon said, then the history of family companies is a history of slights, resentments and feuds.

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Family feuds are even more poisonous when patriarchs have several wives and mistresses. Stanley Ho’s gambling empire in Macau has repeatedly been convulsed by fights over inheritance between the children of his four wives. “Dynasty” prepared the way for a follow-up by suggesting that the patriarch was preparing to have more children because he did not think the ones he already had were up to it.

Given the tangle of emotional problems that family companies can often entail, their survival might seem remarkable. Yet they are not only surviving but thriving. I would venture that family companies will account for an even more significant proportion of the capitalist system in the future than they do today.

Family companies have all sorts of upsides that make up for their downsides. By their very nature, they overcome two of the biggest problems of modern capitalism: The “agency problem” and short-termism. Family members keep a vigilant eye on the performance of professional managers. They also habitually take a longer-term view of the good of the company. What do quarterly results matter if you have been in business since 1385 (like the Antinoris) or 1526 (like the Berettas)? In the rich world, family companies excel at curating high-quality products that require a lot of patience. The world’s best newspapers, like the New York Times and the Wall Street Journal, are owned by families. In the emerging world, they excel at making bets on new technologies.

Traditions and loyalties

Family companies are repositories of family traditions and family loyalties. They also have better political connections than other companies, most notably in the emerging world. They also have two critical things on their side.

First, they are prevalent in the most fast-growing areas of the global economy, such as India, Indonesia and the Philippines. Families like Rothschild and Baring played a leading role in creating modern capitalism during the era of Western dominance. Families with names like Godrej and Lee will play an equally prominent role in recreating it in the age of Easternisation.

Secondly, they are developing ways of minimising their weaknesses (particularly the “clogs to clogs in three generations” curse) and capitalising on their strengths. Family companies are undergoing a revolution in their management capacities similar in size and scope to the process that regular public companies underwent 100 years ago.

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Here are some of the emerging rules of successful business families and family companies:

• Decide what they want from their businesses rather than dithering between contradictory models. The Boston Consulting Group argues that families can adopt three approaches to their companies. They can be owner-managers who occupy executive roles. They can be activist investors who provide broad strategic guidance and selective intervention. Or they can be passive owners — living off dividends and nominating professional managers who are left to run the company free from interference. The 680 members of the Haniel clan (who once owned Metro supermarkets) have even adopted a self-denying ordinance which stipulates that no family member can work for the company, not even as an intern.

The correct approach may change over the years: First-and second-generation family members may demand to be owner-managers, whereas third- and fourth-generation members may prefer a more distant relationship.

• Establish specialised institutions to manage functions within the family company once bundled together — for example, family offices to work the family fortune and family foundations to manage charitable activities. Family philanthropic activities can be crucial to preserving family values and keeping family members involved in the family project.

• Adopt legal measures to deal with potential conflicts of interest and personality clashes. They have family constitutions that lay down the rules of engagement, shareholder agreements that regulate what shares they can sell, family assemblies that provide forums for the family at large and family councils that oversee the running of the business, and even family codes of conduct which prescribe how family members should behave.

• Getting these constitutional arrangements right is particularly important for prominent, sprawling families with many branches and generations, all of which might have diverse interests and differing perspectives.

• Reinforce “hard” measures with plenty of soft ones. Some families put aside a house for family reunions, often the home of the family founder, or organise regular holiday camps where their children mingle. Some families employ chief emotional officers or external councillors to address soft issues. Others bring psychologists or psychiatrists to untangle some of the most difficult emotional tangles. In Boston, a group called SOBs (sons of bosses) has come together to discuss their “daddy issues.” Even the hard-bitten media mogul Rupert Murdoch has organised a group therapy session for his children and their spouses, presided over by a counsellor who specialises in dynastic families.

• Embrace meritocracy, insisting family members meet demanding standards. If you are cursed with sub-optimal heirs, bring in professional managers. Some companies restrict family members from working under direct supervision. Others provide their children with seed funding to start a new venture.

Elizabeth II liked to refer to her family as “The Firm” because it went about the business of majesty in such a business-like way. There are millions of other firms out there that try to combine rational demands of interaction with the emotional ties of family life.

The Windsors are undoubtedly unique, born to immense privilege but also condemned to live their lives in a gilded cage. However, they also sit on the top of a pyramid of dynastic families that have inherited their positions because of the luck of their genes — or the “lucky sperm club”, as Warren Buffett once dubbed it. Nevertheless, they play a vital role in keeping the modern economy rolling. — Bloomberg Opinion

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