The Hermes Style of Governance

By Monica Wagen, Joachim Schwass

The French maker of luxury items from luggage to scarves has never compromised its brand image over six generations, and it has protected family control like Fort Knox gold.

Hermès SA, the French manufacturer of upscale silk and leather goods, is known as one of the world’s most elegant businesses. Through five generations, the family owned company has carefully protected its brand image, earning a reputation for combining quality materials with time-consuming hand craftsmanship. Hermès scarves are considered collectable works of art by some observers. Its perfumes, handbags, and ties command premium prices.

Like other old and distinguished European family companies, Hermès has learned many lessons in ownership and governance over generations. Under pressure from some factions of the extended family, the company made its first stock offering in 1993. But over 80 percent of the equity remained in the hands of 56 members of the Hermès-Dumas family, six of whom have stakes of between 5 and 10 percent each.

Last year Hermès won the Distinguished Family Business Award given by the International Institute for Management Development (IMD) in Lausanne.* The award, given each year to a European company with a worldwide profile, recognized the French company for its remarkable geographic expansion in recent years under its current managing director, Jean-Louis Dumas, the fifth-generation leader. From 1986 to 1996, Hermès has enjoyed average annual sales increases of 24 percent.

The award also recognized the family’s ongoing dedication to family ownership and management, which has been preserved by strong values, passed down through generations by word of mouth, along with governance institutions designed to maintain their control. In the family’s eyes, going public increased the company’s stability while still keeping the dominant family influence in Hermès. Jean-Louis Dumas says they consider themselves a public company with a “Fort Knox type” family culture.

The history of Hermès is a case study in how to extend brand image over time to new products and respond to changing consumer tastes, as well as how to govern a company with complex family ownership.

From saddles to silks

Hermès’ trademark—a horse-drawn carriage—harks back to its original saddlery business. Founded in Paris in 1837 by Thierry Hermès, a harness maker, the firm gained a reputation for saddles that were custom-made for European noblemen. Each saddle required 20 to 40 hours to craft. The functional and decorative “saddle stitch” to join pieces of leather came to represent the attention to detail and elegance of the Hermès brand.

In the 1870s the founder transmitted the business to his son, Charles-Emile Hermès, who moved it to the rue du Faubourg St. Honoré, a site that became one of Paris’s prized pieces of real estate. For a number of years Charles-Emile ran the business together with his oldest son, Adolphe, but his youngest son, Emile-Maurice, showed more entrepreneurial flair. Before he was 30, Emile-Maurice was off to conquer new markets. Hermès became a supplier to Czar Nicholas II as well as the emperor of Japan, and the kings of Spain and Rumania.

The business was run by the two brothers after their father’s death in 1916. During World War I Emile-Maurice was sent to North America where he purchased leather for the French cavalry. The trip taught him much about the shape of things to come. He was critical of mass production techniques used on Henry Ford’s assembly lines, but foresaw that an expansion in means of transportation after the war would lead to more travel and a demand for leather luggage. As a result of his travels in North America, Emile-Maurice also bought a two-year patent from the Canadian inventor of the zipper and brought it back to France. The zipper became so closely associated with Hermès handbags, jockey silks, and leather goods that Frenchmen called it La fermeture Hermès.

Emile-Maurice bought out his brother’s shares in 1922. By then the automobile was replacing the horse-drawn carriage, and Hermès extended its product line into travel and sport-related goods. The company never abandoned its “horsey heritage,” however. It continued to make its classic saddles well into the 20th century. However, saddle bags gave way to luggage, wallets, and handbags. The company produced the first Hermès scarf in 1937. The scarves soon became heirlooms in European families, further burnishing the Hermès brand. The famous “Kelly bag,” named after Princess Grace of Monaco, who was often photographed with it, became an accoutrement of royalty and celebrities. (A Kelly purse set today costs about $3,500.)

After Emile-Maurice’s death in 1951, the business passed to his son-in-law, Robert Dumas, which meant that for the first time the CEO no longer carried the Hermès name. Dumas, a former architecture student, was a creative man known for his own imaginative drawings and for further developing the art of silk scarf design. He worked closely with his brother-in-law Jean-Rene Guerrand, who is credited with developing the firm’s perfume, Eau d’Hermès.

Changing strategy

During the 1970s, some observers feared that Hermès’s profitability was being sacrificed on the altar of quality. The company remained committed to classic high-fashion and natural materials such as silk and leather, but the trend was to easygoing styles and man-made polyester and other plastic materials. Changing tastes hurt Hermès even in its upscale market. It could no longer maintain its usual 5 percent in annual sales growth.

When Robert Dumas died in 1978, Jean-Louis Dumas, the fourth of his six children, took over as chairman and managing partner. A graduate of the school of political science in Paris, Jean-Louis had worked as an assistant buyer for Bloomingdale’s in New York before returning to the family firm in 1964. He and his cousins in the fifth generation brought youth and enthusiasm to the venerable company. Led by Jean-Louis, they engineered a sweeping turnaround.

The company hired new clothing designers to revitalize the apparel line. They created new items such as motorcycle jackets and fantasy jeans. A new generation in France was introduced to the brand through an advertising campaign featuring young women wearing a Hermès scarf. This move was designed to change the Hermès label from the object of an older generation’s nostalgia to the focus of young people’s dreams. Overall sales of scarves increased in volume from 200,000 in 1978 to 1.2 million in 1989. By the mid-1980s, Hermès was unveiling a dozen new designs a year. By 1990, its line of merchandise included 30,000 different items.

The company’s strategic moves under Jean-Louis Dumas brought explosive growth. Annual sales rose sharply from $50 million in 1978 to $460 million in 1990, and net profit grew even faster. The company took advantage of the resurgence in the popularity of its brand by expanding abroad, opening new stores and licensing boutiques in the U.S., Japan, and other countries. The number of Hermès-owned stores quadrupled in the mid-1990s, and its worldwide outlets grew to 225. Although more than 50 percent of annual sales were still generated in Europe, the Asia/Pacific region contributed nearly one-third of annual revenues and the United States, 11 percent. While luggage and other leather goods remain its strongest product category, about 36 percent of sales now come from silk goods, 12 percent from ready-to-wear clothing, and 7.5 percent from perfume.

To avoid financial dependence on banks, Hermès has through the years been self-financing, reinvesting approximately 15 percent of profits in the business annually.The public offering of stock in 1993 grew less out of the need for added capital to expand overseas, however, than out of pressures for liquidity from some factions of the family. The offering generated more excitement than the semiannual Hermès sales in France. A total of 425,000 shares were floated at $55; 4,000 outsiders acquired shares and the offering was oversubscribed by a factor of 34. The equity sale helped lessen family tensions by allowing some members to liquidate their holdings withing having to argue over price. At the same time, the family shareholders remained in firm control.

The governance of Hermès is designed to ensure that control continues. Jean-Louis, now 59, explains that Hermès’s organization as a limited partnership—in France called the Commandite par action— affords much the same protection for family ownership as Fort Knox safeguards gold.

The family firm is organized along the lines of what the leaders describe as a “democratic monarchy.” Its family character is maintained through:

 

  • Strong leadership in the person of a family CEO. A total of four members of the fifth generation are in top management, and five members of the sixth generation hold executive positions.
  • A board of directors composed mainly of family members. Ten of the 12 directors are descendants of the founders.
  • A family constitution and written company regulations with rules for buying and selling shares that were established after the company went public.
  • Only family stockholders own voting shares. About 20 family members hold significant amounts of these shares. Outsiders and divorced family members cannot own voting stock.
  • A 75 percent majority is needed to change the company statutes or to replace the CEO.
  • A total of 17 family representatives sit on committee responsible for monitoring the CEO and making sure he follows the agreed-upon company strategy.

The “Fort Knox” governance structure is supported by values passed on over generations. From an early age, members of the next generation are im mersed in company traditions through regular organized tours of Hermès facilities, subsidiaries, and suppliers. More stress is placed on the obligations of family members than on their rights. Chief among the family’s values is a respect for people and for nature. Toward nature they feel not only respect but gratitude. Where would Hermès be without the silkworms to spin their cocoons or the cattle to provide leather? As befits an enterprise in the fashion industry, moreover, the company shows a profound respect at every level for creative ideas and innovation.

Pride in the Hermès tradition binds both the family members and the company’s employees. “The secret of our company lies in a job well done,” says Jean-Louis Dumas. “Everyone should be proud of doing his best. This type of pride is not arrogance but shared enthusiasm, tempered by humility. You are more proud when you think that the fruit of your labors will be harvested by your grandchildren. The only valid measure of [the family’s] satisfaction is whether if, thanks to some miracle, their grandfather could return to life, he would give them a pat on the back and praise for a good job....The main idea is that yesterday’s ship is ancestral, and it is our duty to conserve it. Today, every family member is responsible for pulling one of the oars.”

* The IMD award was sponsored by Lombard Odier & Cie, private bankers since 1798 in Geneva, Switzerland.Monica Wagen is a research associate and Joachim Schwass a professor at the International Institute for Management Development in Lausanne, Switzerland.

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Issue: 
Winter 1998

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