Family Business = Good Business

Family Business = Good Business

Kevin Curran
Wednesday Nov. 5, 2003

The secret to a company’s success may lie with the strongest bond possible among corporate management: family ties.

A survey of the Standard & Poor’s 500 companies conducted by Business Week magazine and executive search firm Spencer Stuart found companies in which the founder or founding family have a say in management outpace other firms in shareholder return, return on assets, income growth and revenue growth.

It turns out 177 of the 500 have family members on the board of directors or in senior management positions. They have a unique responsibility to improve what they inherited for the next generation, and an inborn reflex to put the company’s interests above their own.

Wrigley had a return on assets of 20.3% in the last 10 years, more than double that of Hershey and 4 times the S&P average. "The family name is on the door," explained CEO William Wrigley, Jr., great great grandson of the founder, when discussing long-term performance, "it’s more than just a job."

Cintas chairman Richard Farmer, grandson of the company’s founder, won a fight with his father of over the direction of the company. The firm switched from reclaiming industrial rags to providing employee uniforms. The battle was worth it as net revenue and income have gone up almost sixfold since 1993.

Brian Roberts succeeded his father as president of Comcast in 1990. He took the cable company from number 3 to number 1 and masterminded its $47.5-billion merger with AT&T.

Rupert Murdoch has his two sons, Lachlan and James, in very high positions in his company News Corporation’s interests: publisher of the New York Post, and new CEO of Britain’s 18th largest company, BskyB, respectively. News Corp. recently posted an almost 70 percent leap in quarterly earnings.

The person who started the company is still active in more than 100 of these family firms. Business Week ranked Dell, eBay and Oracle numbers 2, 6 and 8 among the family corporations. They outperformed the companies run by successor generations in shareholder return, revenue growth and income growth.

Blood is thicker than options, according to those who analyze family firms. American University’s Ronald Anderson said CEO’s at nonfamily companies often convert their shares into cash. Family members have amassed millions of shares and created a, "huge economic incentive to pay attention."

The proof is in the numbers. Looking at the last 10 years, Business Week found annual shareholder return at family companies averaged 15.6% compared to 11.2% at nonfamily firms. Return on assets was 5.4% for family companies and 4.1% for the others. The difference in annual revenue growth is an amazing 23.4% vs. 10.8%. Income growth was also substantially different at family firms, 23.4% compared to 12.6%.

The picture among family firms is not entirely rosy. Motorola lost 80% of its market value while founder grandson Christopher Galvin was CEO. Adelphia communications founder John Rigas spoke of family values when the company took over cable systems and removed adult-oriented channels. Rigas and his two sons were arrested on fraud charges after federal authorities accused them of misappropriating company funds.

What is the secret to the success of family companies? Business Week found five reasons these companies do so well.

Each generation grows up around the company, takes responsibility for the family fortune and is driven to exceed the previous generation’s performance.

A company run by a small family group can make decisions faster than corporations with large bureaucracies.

Family firms demand, and reward, loyalty in employees. They resist layoffs and provide better benefits.

Family companies reinvest more in their business. They put their profits into expansion, research and development or new markets rather than dividends.

Family ownership of large blocks of shares gives members incentive to keep management in line and knowledge of the company outsiders lack.

Marrying into a family with a large stake in a corporation presents an opportunity and a challenge. Alberto-Culver is a $2.7-billion a year consumer products company Business Week ranked 84th among family firms. Founder Leonard Lavin has been board chairman for almost 50 years, his wife and daughter, Carol, also sit on the board. The family has a $700-million stake in the company. Carol’s husband, Howard Bernick, became the firm’s CEO.

Bernick said he has to weigh all his decisions very carefully, "I don’t consider it company money…I feel that I’m playing with my own money." That does not mean Bernick is not interested in outsider’s opinions. He has added two nonfamily members to the board in the last two years.

There may be no better example of a family planning for the future than the Waltons of Wal-Mart. Survivors of founder Sam Walton have two seats on the board and control 38% of company stock. Over the last 15 years, the company has added 4,700 stores and boosted annual sales to almost $250 billion. Dividends paid to shareholders total just $1.5-billion, while capital projects will take out $11.5-billion in fiscal 2003.

Explained board member John Walton, "we view (the company) really more as a trust, or as a legacy that we’re responsible for, rather than something we own."

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