Building a family company that lasts
Conversations with third- through sixth-generation family business leaders reveal that in order to maintain continuity, a cultural revolution may be necessary.
The speed at which myriad changes have stormed through the economy in the last decade—in the areas of technology, financial and capital markets, global competition and more—is unparalleled in human history. So it should not be surprising that the life cycle of the corporation seems to have shortened. The 90 companies on the original Standard & Poor's Index of major U.S. companies, created in the 1920s, remained there for an average of 65 years. By 1998, the expected tenure on the larger S&P 500 list was a mere ten years, and in 2001-2002, 25% of Nasdaq companies were delisted.
On the other hand, among family businesses there are hundreds of examples of commitment to continuity from generation to generation. Whether in the U.S., Europe, Latin America, Asia, Australia or the Middle East, there is compelling evidence of families' dedication to building businesses that last. Yet family businesses, too, are morphing or disappearing as family-controlled entities at an alarming rate—through IPOs, business sales, mergers, bankruptcies, etc.
In 2004, I set out to investigate the question of resiliency and continuity among family-owned and family-controlled corporations by speaking to third- through sixth-generation presidents and CEOs. In a world where entrepreneurship is becoming more important and corporations seem unable to last, what are these venerable family companies doing to survive? Are they promoting a continuing spirit of entrepreneurship, are they relying on serial entrepreneurship, or are there elements in their culture that enable them to reinvent themselves with every generation?
The companies I investigated are headquartered in the U.S., Latin America and Spain. They range in size from $18 million to almost $4 billion in annual revenues and operate in a variety of industries. While the later-generation presidents and CEOs I interviewed have spearheaded important change efforts, they also express great appreciation for their predecessors' accomplishments.
Continuity through products and values
“From a product point of view and a service point of view, we believe that we are the best at what we do,” says Tim Timken, the fifth-generation president of the steel division at the Timken Company in Canton, Ohio. The company, a publicly traded S&P 500 firm, operates in 29 countries, generates $4 billion in annual revenues (2004) and employs 26,000 people. The Timken family retains a controlling share in the company, and a family member has been active in top management in every generation.
Consistent values have guided the company since its founding in 1899, Tim Timken says. “The Timken Company has always believed that our four values—ethics and integrity, quality, innovation and independence—are central,” he says. “We have been consistent with them for over 105 years.” Innovation has been another guiding principle, he adds. “My great-great-grandfather [company founder Henry Timken] invented the tapered roller bearing as a solution to friction problems in carriages at the time. So going back 105 years, the company has been dedicated to creating value for our customers through innovation. That is still true today, whether it is in our automotive business, our industrial business or our steel business. Unless we can find a way to create value through innovation we are just a commodity player, and that's not a position we feel we can win with.”
What role does Tim Timken envision himself playing regarding the company's core values? “My belief is that as a family member and a member of the operating committee, my role is to make sure we don't lose sight of them,” he says. “Fortunately, the professional management that we have in place has experienced these core values firsthand in the field, and so their commitment to them is there. My role, I guess, is more as the conscience—to make sure those values don't slip away from us.”
Professional managers help shape the company vision, Timken says. “Family members will play a very prominent role in setting the course,” he says, “but this isn't my show. The head of automotive is a very, very qualified woman out of the automotive industry. The head of my industrial business grew up inside our company and has seen every aspect of it. These are people who understand what it takes to compete in the industries that we are in. So I find myself as part of that team, vs. the guy who's always charging out in front. That's just not the role that family members have taken over time. We want to be there with a hand on the steering wheel, wanting to help chart the path, but it's not a solo exercise.”
Guy Renkert, fifth-generation CEO of Ironrock Capital, a ceramic tile manufacturer also based in Canton, Ohio, believes that the driver of his company's longevity is embodied in an ongoing question, “What's the next new product?”
Renkert explains that since the company's founding in 1866 by his great-great-grandfather, Jacob Renkert, each generation has leveraged the business's core competencies to reinvent the company and adapt to the changing demands of the market. About 100 years ago, the company began as a paving brick maker, Royal Brick. Through hard work and perseverance, it became the largest paving brick manufacturer in the world, according to Renkert.
As the demand for paving bricks gave way to concrete and asphalt road surfaces, the company, helmed by Renkert's grandfather, shifted production from paving brick to building brick and block. By the 1960s, competition and other factors led the company to exit the brick business and use its experience with extrusion and firing to evolve into unglazed quarry tile. Through the leadership of Renkert's father and uncle the company, under the name of Metropolitan Industries, became the leading quarry tile manufacturer in the U.S., Renkert says. Its products can be found in such places as Atlanta's Hartswell International Airport and national chains like Dunkin' Donuts, Denny's and TGI Friday's. In the 1980s, with the help of Renkert's mother, the company expanded its quarry production processes to capitalize on the growing demand for high-quality glazed decorative tiles. The decorative tile division was named The Meredith Collection. By the 1990s, Renkert says, it had developed into a premier decorative tile line.
Today, under Guy Renkert's leadership, the company still produces quarry and decorative tiles but has also returned to brick manufacturing, with a twist. Ironrock workers are now producing a “thin brick,” which is used predominantly by the precast concrete industry. Concrete panels embedded with thin brick allow architects and builders to construct buildings with all the richness of real brick but the speed and cost-effectiveness of precast construction.
“I want to keep the quarry operation growing and continue building the decorative tile business, which my mother started nearly 20 years ago,” says Renkert, noting that this business has grown 500% under his leadership over the past ten years. “The market potential is huge” in the thin brick business, he says. “Ultimately, I want to leave the business in a better place than I found it. This is a family asset, and I want to make sure the sixth generation has the same opportunity to take it to the next level.”
A wake-up call for change
Ignacio Osborne, sixth-generation CEO of Osborne, a Spanish wine company founded in 1772, recalls that as he and his cousin Tomas (now the chairman) prepared to take over in 1996, competitive conditions had changed. The company needed to change its culture and its strategy.
“Up until the fifth generation,” he explains, “at least some of the Osborne family members could live from the dividends generated by the company. In the sixth generation, none of us could live from the dividends. I know this is not very romantic, or very family-business-orientated, but in practical terms this was very important.
“What we did to create the needed fundamental change was to present very early in our leadership of the company a series of alternatives to the board and describe eloquently what the challenged situation of the company was. The contrast between our vision and the current situation set the task out for the board and the company. We also described to the board how our generation thought the company had to be managed in order for it to have a future.”
His relatives at first were skeptical about the need for change, Osborne says. “The biggest source of resistance to any change may have been that the family name is on every product label. So we had to try to explain to family members who had been managing the company that in business today you have to focus on the customer. And you have to forget a little bit about the vineyards, the countryside and the craftsmanship in production and look more into the market and what is going on in the world.” But his relatives, he says, reasoned, “After all, the company has been very successful with the original business model for many years, so why change?”
Under Ignacio Osborne's leadership, the company evolved into a customer-focused organization. “It used to be that the taste of Osborne family members, sophisticated as it was, determined the taste of our products and defined what quality in wines meant,” he says. “Not anymore. Now we conduct market research, do focus groups, pay attention to trends and changing consumer tastes.”
Though his generation's vision for the business represented a departure from the model of the past, Osborne objects to the characterization of the change as a revolution. “Even though my family has been in the south of Spain for more than 230 years,” he says, “the British calm is still in the veins of most of the family. It was not easy—it was complicated—but there were no big conflicts or disagreements with the fundamental change process that my generation was leading. There were many meetings, many sessions. I had only been with the company for three years; it was hard. We listened to the disagreements and comments, but there was no conflict or revolution.”
He notes that the previous generation's work smoothed the transition. “They anticipated a lot of problems,” he says. “Once I got the responsibility for the company, I only had to think of the business and of the next generation. When the next generation gets into the company and, for the first two or three years of their term, all they are doing is trying to repair conflicts and problems that they have inherited from the previous generation, then a lot of time is wasted. When we started working, we worked on the present and the future. The past had all been settled.”
The fundamental change in the way Osborne does business may not have been revolutionary. But the change needed to reclaim a successful entrepreneurial past at El Caballo, a leather accessories company in Sevilla, Spain, certainly was. José Pineda, now the CEO, joined the company in the early 1990s after earning a law degree and an MBA. He was invited back by his father, who was concerned about the company's performance. The company was experiencing serious financial difficulties during a period of high interest rates and constrained liquidity in the Spanish economy. His older brother, 15 years his elder, was nevertheless still the CEO. “Within a year my older brother and I started to have big problems,” says Pineda, “because in one year I started to see and understand how impossible our situation had become. The relationship with my brother got worse every day. He rejected my ideas, considered them stupid and asked that I forget what I had learned in the MBA program because, he said, ‘The real world is different.' But by then I knew that not just the operations, but even the strategic direction, was wrong.”
Pineda could not stand the situation any more; rather than be at the center of a family feud, he was willing to quit. He confided in another brother, an architect, who spoke to their father (the retired CEO) about the situation. José, his architect brother and their father decided to call a meeting of the whole family and put an end to the paralyzing conflict. The father called for a family meeting at his daughter's home, a setting that was deemed neutral. There, he told the elder brother that he was fired. “In the beginning, it was very hard on all of us,” José Pineda says simply.
Between 1992 and 1994, dramatic changes were implemented at El Caballo, and positive results began to emerge slowly. “During the first two to three years we didn't grow at all because of our financial problems in the midst of the problem with the general economic situation in Spain,” Pineda says. But in the ten years since that crisis, a very different picture emerges. “Revenues are six times what they were in 1994,” says Pineda, who represents the third generation of his branch of the family to run the company. (They acquired the firm from another branch who had led it for two generations.) “We now have 54 shops, up from six in 1994, and we have embarked on an aggressive internationalization strategy.”
Preserving the entrepreneurial spirit
The Grupo Ferré Rangel is predominantly a media group operating in Puerto Rico and the U.S. mainland. Now in its fourth generation, the company has 1,600 employees and generates annual revenues of $300 million. El Nuevo Día, the flagship newspaper, enjoys 50% market share and commands 80% of the newsprint advertising in Puerto Rico. The family, controlling shareholders of the NYSE-listed Puerto Rican Cement, approved the sale of that earlier-generation business to Cemex in 2002. That company itself had $250 million in annual revenues.
The family's first business was a foundry. As the company grew, it added paper and cement to the mix. Over the generations, the company expanded to Florida, Panama and Cuba and then lost some of those businesses—in some cases, for obvious political reasons; in others, because the businesses were mismanaged. In the 1960s, the second-generation leader, Luis A. Ferré, entered politics and became the governor of Puerto Rico. Soon afterward, the company confronted a financial crisis that led to its restructuring and breakup. Some of the businesses, now owned by individual third-generation family branches, survived; others did not.
One of Luis Ferré's sons, Antonio L. Ferré, became the CEO of the cement company and bought a little daily newspaper in Ponce, Puerto Rico's southernmost city, for $400,000 from his father. The purchase of El Día, as it was named then, took place at a time when the northern and most populous city, San Juan, was controlled by two other papers, El Mundo and El Imparcial. In one generation, Ferré's little paper from a secondary city ended up taking 80% market share in the most important market on the island!
In collaboration with fourth-generation family members, Antonio Ferré grew the company by, among other things, launching a new publication—Primera Hora, a USA Today-style newspaper. The Grupo Ferré Rangel now consists of these two major papers plus a couple of smaller city newspapers, a Hispanic newspaper in Orlando, Fla., a printing company, an Internet company, a direct-marketing company and a recycling company.
“Our success with continuity in this generation comes from learning from the failure of the second- and third-generation transitions,” says María Luisa Ferré, fourth-generation president of the Grupo Ferré Rangel. “My father [Antonio L. Ferré] really set out to do it differently, and he approached it very conscientiously, with a lot of discipline, having learned in his generation that a group of entrepreneurially prone individuals without a coherent structure can get into a lot of trouble.”
Perhaps because of the journalistic culture that runs in the family, the opinions of each of the children, however different, were constantly sought and appreciated as they grew up. “Our success in continuing the entrepreneurial spirit is a result of five professionals who know they complement—they need—each other, to be successful,” says María Luisa Ferré. “We respect each other and our differences. The siblings have selected me to lead them. We are entrepreneurs with a coherent structure among us. So the major distinction between us and the previous generation is the sense of confidence that comes from knowing that we now have a coherent structure to govern the relation between people who are naturally entrepreneurial.”
She says that after the fourth generation joined Antonio in the top management team, its first value-added function was “the identification of problems and opportunities in the paper that Antonio did not see because his parallel responsibilities as CEO of Puerto Rican Cement made him overcommitted. As a fourth generation, we also fundamentally bought into the idea that we have to grow, experiment, create new business plans, or we would end up becoming our own enemies.”
A new shared vision
The secret of these later-generation leaders' success appears to be the emergence of a new shared vision as a response to customers' needs through innovation. This re-energized vision drives the strategic regeneration process. Family shareholders are a part of that process—they are not kept away, even if they do not work in the company or regularly attend family meetings. There is extensive acknowledgment of family interest in the family council or family meetings, which are linked to the family's board agenda through at-large representation of the family on the board.
These next-generation leaders have paid a lot of attention to critically reviewing and restructuring their boards. They all say that a lot of communication and education must take place beyond what is deemed traditional board work and strategic planning.
Ignacio Osborne notes that a board “ends up doing a lot of the lead work in this process of adapting the corporation to its new competitive reality.” At his company, Osborne had to put the right people in place before this work could be done. “In the span of two years,” he says, “I took 12 years out of the average age of our board.”
At Ironrock, says Guy Renkert, who succeeded his sister, Amelia Renkert-Thomas, as CEO (FB, Spring 2004), “I unwound the advisory board that my sister had created, both my parents retired from the board, and I added three independent board members to it.” He is proud of the fact that he has secured his sister's support for the new strategy. “I also make presentations to shareholders, communicate my enthusiasm about the new strategy and maintain their trust,” he says.
José Pineda at El Caballo says his biggest contribution has come through the board and hundreds of informal conversations with shareholders over the past five years. “My family now knows the difference between family and business, realizes the value of management and professionalization,” he says. “My family now understands, in depth, what a company is. Now we talk about dividends, and the way we have that discussion is totally different from five years ago. Besides the board meetings and the hundreds of informal conversations, we established a new holding company structure four years ago and began to have meetings where the financial information is very transparent to all shareholders.”
These next-generation leaders have built institutions that will effectively govern the relationship between family management and ownership. Yet, as Ignacio Osborne notes, in the end it boils down to the successors' own leadership capabilities. “An important part of our success,” he says, “comes from having quickly set the new goals and having quickly shown shareholders positive results against these goals. You cannot come to every board or shareholder meeting and announce what you are going to be achieving next year. You have to show them what you achieved this year, or people start not trusting you.”
Ernesto Poza is Professor for the Practice of Family Business and director of the family business program at Case Western Reserve University in Cleveland (firstname.lastname@example.org).
Lessons from the journey so farWhat can more recently established family firms learn from the experiences of these fourth-, fifth- and sixth-generation leaders? Here are some key points, adapted from a conversation with members of the Ferré Rangel family:
1. Being a family does not guarantee unity or good relations. On the other hand, disagreements may be the creative spark needed for adaptation and continuity.
2. If the family is not doing well, the business is hurt.
3. Family unity is the ultimate resource.
4. Spouses are critical, and their interest is necessary.
5. Planning by the current generation for the benefit of the next is essential.
6. Without a new vision by the next generation that pulls the company into the future, there is no commitment to continuity.
7. World-class key non-family managers are essential to the process.
8. External assistance from consultants and board members may also be essential.
9. The previous generation must build the governance infrastructure for a positive family-business interaction.
10. The previous generation must be generous in the transfer of power. The next generation would do well to appreciate the previous generation’s efforts and struggles in the process.