CHAPTER FOUR
Managing the Family Business
THE MAJORITY OF BUSINESSES everywhere—including the United States and all other developed countries—are family-controlled and family-managed. And family management is by no means confined to small and medium-sized firms—families run some of the world’s largest companies. Levi Strauss, for instance, has been family-controlled and family-managed since its inception a century and a half ago. DuPont, controlled and managed by family members for 170 years (since its founding in 1802 until professional management took over in the mid-1970s), grew into the world’s largest chemical company. And two centuries after a still obscure coin dealer began to send out his sons to establish banks in Europe’s capitals, financial firms bearing the Rothschild name and run by Rothschilds are still among the world’s premier private bankers.
Yet management books and management courses deal almost entirely with the publicly owned and professionally managed company—they rarely as much as mention the family-managed business. Of course, there is no difference whatever between professionally managed and family-managed businesses in respect to all functional work: research or marketing or accounting. But with respect to management, the family business requires its own and very different rules. These rules have to be stringently observed. Otherwise, the family-managed business will not survive, let alone prosper.
The first rule is that family members do not work in the business unless they are at least as able as any nonfamily employee, and work at least as hard. It is much cheaper to pay a lazy nephew not to come to work than to keep him on the payroll. In a family-managed company family members are always “top management” whatever their official job or title. For on Saturday evening they sit at the boss’s dinner table and call him “Dad,” or “Uncle.” Mediocre or, worse, lazy family members allowed to work in the family-managed business are therefore—rightly—resented by nonfamily coworkers. They are an affront to their self-respect. If mediocre or lazy family members are kept on the payroll, respect for top management and for the business altogether rapidly erodes within the entire workforce. Capable nonfamily people will not stay. And the ones who do soon become courtiers and toadies.
Most CEOs of family businesses know this, of course. But still, far too many try to be “clever.” For example, the mediocre or lazy family member gets the title “Director of Research.” And a highly competent, nonfamily professional is brought in at a lush salary as “Deputy Director of Research,” and is told by the CEO, “My cousin Jim’s title is a mere formality, and only meant to keep his mother off our backs—she’s our second-largest shareholder, after all. Everybody else, including Jim, knows that you are in charge of research. And you’ll work directly with me and need not pay attention to Jim.” But this only makes things worse. With a mediocre Jim actually in charge, the company might still get mediocre research. With a deeply resentful and jealous Jim having the official authority but no real responsibility, and an equally resentful and totally cynical outsider having the responsibility but no real authority, the company will get no research at all. All it will get are intrigues and politicking.
DuPont survived and prospered as a family business because it faced up to the problem. All male DuPonts were entitled to an entrance job in the company. Five or six years after a DuPont had started, his performance would be carefully reviewed by four or five family seniors. And if this review concluded that the young family member was not likely to be top management material ten years later, he was eased out.
The second rule is equally simple: No matter how many family members are in the company’s management, and how effective they are, one top job is always filled by an outsider who is not a member of the family. Typically, this is either the financial executive or the head of research—the two positions in which technical qualifications are most important. But I also know successful family companies in which this outsider serves as the head of marketing or as the head of personnel. And while the CEO of Levi Strauss is a family member and a descendant of the founder, the president and COO is a nonfamily professional.
The first such “inside outsider” I knew, almost sixty years ago, was the chief financial officer of a very large and completely family-managed business in the United Kingdom. Though otherwise on the closest terms of friendship with his family-member colleagues, he never attended a family party or a family wedding. He did not even play golf at the country club where the family members played. “The only family affairs I attend,” he once said to me, “are funerals. But I chair the monthly top-management meeting.”
There is need in the family company, in other words, for one senior person—and a highly respected one—who is not family and who never mixes business and family.
The world’s oldest “family business,” the Mafia, follows this rule faithfully—in its native Sicily as well as in the United States. As anyone knows who has seen a Godfather movie or has read a Godfather book, in a Mafia family the consigliere, the lawyer, who is the second most powerful person, might even be a non-Sicilian.
Rule three is that family-managed businesses, except perhaps for the very smallest ones, increasingly need to staff key positions with nonfamily professionals. The knowledge and expertise needed, whether in manufacturing or in marketing, in finance, in research, in human resource management, have become far too great to be satisfied by any but the most competent family member, no matter how well-intentioned he may be. And then, these nonfamily professionals have to be treated as equals. They have to have “full citizenship” in the firm. Otherwise they simply will not stay.
The first of the great business families to realize that certain outsiders need to be granted “full citizenship” was the tightest of all business clans, the Rothschilds. Until World War II, they only admitted family members to partnership in their banks. During the nineteenth and early twentieth centuries, the nonfamily general manager who reached his late forties was given a huge severance pay—in one case a million dollars—so that he could set up his own banking firm. Since World War II, however, nonfamily members have been admitted to a partnership in a Rothschild firm—the best known of them being Georges Pompidou, who later succeeded Charles de Gaulle as president of France.
Even the family-managed business that faithfully observes the preceding three rules tends to get into trouble—and often breaks up—over management succession. It is then that what the business needs and what the family wants tend to collide. Here are two brothers who have built a successful manufacturing business. Now that they are nearing retirement age, each pushes his own son as the next CEO. Thus, though they have worked together harmoniously for twenty years, they become adversaries and eventually sell out rather than compromise. Here is the widow of one of a company’s founders who, in order to save her daughter’s floundering marriage, pushes her moderately endowed son-in-law to be the next CEO and successor to her aging brother-in-law. Here is the founder of the fair-sized high-tech company who forces an unwilling son to give up his career as a university scientist in order to take over the management of the firm—only to have the son sell out to a big conglomerate within six months after his father’s death. Anyone who has worked with family companies could forever add to the list.
There is only one solution: entrust the succession decision to an outsider who is neither part of the family nor part of the business.
Benjamin Disraeli, the great Tory prime minister, played this role for the Rothschilds in the 1880s, when the “cousins,” the third generation of the family, began to die off. He persuaded the entire family to accept the youngest—but ablest—of the next generation, the Viennese Leopold, as the effective head of all three Rothschild banks, the one in London, the one in Paris, and the one in Vienna. On a much smaller scale, I have seen this role being played successfully by a CPA who had been the outside auditor of a medium-sized food retailer since the business was started twenty years earlier. A university professor who for ten years had been its scientific adviser, saved the fair-sized high-tech company—and the owning family—by persuading two brothers and two cousins and the wives of all four to accept as the new CEO the daughter of one of the cousins who was the youngest but also the ablest of the next generation.
But it is usually much too late to bring in the outsider when the succession problem becomes acute. By that time the family members have committed themselves to this or that candidate. Furthermore, succession planning in the family business needs to be integrated with financial and tax planning, an integration which cannot be done overnight. More and more family-managed businesses, therefore, now try to find the right outside arbitrator long before the decision has to be made and, ideally, long before the family members have begun to disagree on the succession.
Sixth- or seventh-generation family businesses, like Levi Strauss, DuPont, the Rothschilds, are rare. Few businesses remain family-managed into, let alone beyond, the fourth generation. The biggest family-managed business around today, Fiat in Italy, is run by the third generation of Agnellis, who are now in their sixties and seventies. Few people in the company, I am told, expect Fiat still to be family-managed twenty years hence. The fourth generation of a family owning a successful business is sufficiently well off, as a rule, for the ablest of them to want to pursue their own interests and their own careers rather than dedicate themselves to the business. Also, by that time there are often so many family members that ownership has become splintered. For the members of the fourth generation, their share in the company is thus no longer “ownership,” it has become “investment.” They will want to diversify rather than to keep all their financial eggs in the family-company basket, and they therefore want the business to be sold or to go public. But for the second and even for the third generation, maintaining the family company may be the most advantageous course. Often it is the only course, as the business is not big enough to be sold or to go public.
And to make family succession possible is surely also in the public interest. The growth dynamics in the economy are shifting fast from the giants to the medium-sized businesses, and these latter tend to be owner-controlled and owner-managed. Therefore, to encourage entrepreneurship requires encouraging the family-managed business and to make possible its continuation. So far, however, the family-managed businesses that survive the founder—let alone those that still prosper under the third generation of family management—are the exception rather than the rule. Far too few family-managed businesses and their owners accept the four management rules and the one basic precept that underlies all of them: Both the business and the family will only survive and do well if the family serves the business. Neither will do well if the business is run to serve the family. The controlling word in “family-managed business” is not “family.” It has to be “business.”
1994