Do younger siblings try harder than firstborn sons?
Other things being equal, a firstborn son may be the worst choice to run your family business.
If you’re a family business chief executive who’s thinking about your successor, maybe you should pay more attention to birth order. Two impeccable sources—the management consulting firm of McKinsey & Co. and yours truly—recently approached the subject from entirely different perspectives and arrived at the same conclusion: Other things being equal, a firstborn son may be the worst choice to run your family business. (Lest you suspect me of a personal bias, I’m a firstborn son myself.)
McKinsey researchers, working in tandem last year with the London School of Economics, studied 700 manufacturers in France, Germany, the United Kingdom and the U.S., ranking them on productivity, market share, sales growth and market valuation (“Who Should—and Shouldn’t—Run the Family Business,” by Stephen J. Dorgan, John J. Dowdy and Thomas M. Rippin, The McKinsey Quarterly, No. 3, 2006). On average, the survey found, family firms ranked no better or worse than the average company. But when family-owned firms were broken down into those run by outsiders as opposed to those run by the eldest son, the contrast was stark. Family companies run by an outside professional CEO performed 12% better than the average. But companies run by the eldest son under-performed the average by 10%.
So the trouble with family businesses isn’t family management per se, the McKinsey authors assure us. The big problem lies in the automatic designation of the eldest son. “Someone who expects to lead a company by birthright,” the authors observe, “may put less effort into acquiring the necessary skills and education than do people who expect to compete for their jobs.”
That certainly makes sense. Some of the best family companies have been run by people who didn’t grow up expecting to run the place. For example:
• When Ratan Tata took over India’s Tata Sons from his uncle in 1991, it was a cumbersome conglomerate that owned tiny stakes in 300-odd companies; now, having sharpened its portfolio to controlling interest in a mere 96 companies, the Tata Group makes foreign acquisitions and seizes opportunities in new markets and technologies. Yet Ratan never expected to be CEO: He was trained as an architect at Cornell, slipped quietly into the family firm and wasn’t marked for succession even when his CEO uncle, J.R.D. Tata, was due to step down.
• The shy, self-described “doormat wife” Katharine Graham took charge of the Washington Post Company after her husband’s suicide in 1963. She soon exceeded her father’s and husband’s wildest ambitions, transforming the Post into one of America’s great newspapers and its parent company into a publicly traded conglomerate, standing up to a president and winning a Pulitzer Prize for her autobiography.
• Arthur O. Sulzberger was the youngest of four children, infantilized by his elder sisters. He never expected to run the New York Times, but when his CEO brother-in-law dropped dead in 1963, “Punch” Sulz-berger was thrust into the job.
Under his self-deprecating leadership over the next 29 years, the Tiimes Company diversified its holdings, won the labor unions’ agreement to install new technology, launched lucrative new lifestyle sections (like “Home” and “Living”), started a widely imitated op-ed page, won 31 Pulitzer Prizes, faced down the Nixon administration over the Pentagon Papers and increased its revenues from $100 million to $1.7 billion. As I’ve observed before (FB, Spring 2001), Punch Sulzberger may well have been the best publisher the Times ever had, which is saying a lot.
• In the 19th century Anthony Drexel built his father’s Philadelphia currency exchange into the first trans-Atlantic banking powerhouse, whose New York branch subsequently became J.P. Morgan & Co. Anthony was his father’s second son; his elder brother Francis was the firm’s titular head but deferred to Anthony in all matters.
The importance of birth order occurred to me recently in another context: while I was researching a forthcoming book about the Pony Express and Central Overland stagecoach superintendent Joseph A. Slade (1831-1864). At a critical moment in history—the eve of the Civil War, when California, the richest state in the nation and probably the world, threatened to break away from the union—this rough and seriously flawed gunfighter somehow rose to the occasion and almost single-handedly enabled the U.S. government in Washington to maintain contact with California. In the process he helped ensure that America’s fragile experiment in democracy would survive, for the world’s benefit.
One of the keys to Slade’s character, I’ve concluded, lies in this simple discovery: He was the third son of a third son of a (probably) third son. Slade’s middle-class English grandfather, shut out of the family inheritance because of birth order, followed the path taken by most English younger sons in those days of primogeniture: He moved to America, becoming a prosperous merchant and manufacturer in Alexandria, Va. His third son, having lost the birth-order lottery for the family’s Virginia properties, set off in 1816 for Illinois, where he founded the town of Carlyle, started a mill and a dry goods store, and became successively a state legislator, U.S. marshal and member of Congress. His third son—my man Joseph A. Slade—was similarly squeezed out of the family firms in Carlyle and so headed farther west to carve out his own niche.
Come to think of it, when you view things through the prism of birth order, one point jumps out at you: From the moment the Pilgrims landed, at least the first 200 years of American history were largely driven by younger male siblings. These were the men who were motivated to cross the Atlantic and then to cross the continent—because they lacked an automatic inheritance at home. To survive, they had to try harder than their older brothers, and very often they did. And still do.
Do you run your business like the White House?
Fixed terms for CEOs are found only in family firms, sorry to say.
Last fall’s congressional election results got me to thinking. President Bush’s party lost control of both houses owing to voter disillusionment with his administration. But Bush himself would remain in office for two more years. Just about everyone seems to agree that America’s quagmire in Iraq, not to mention numerous other issues, won’t be resolved until there’s a new face in the White House. Whether that face be Democratic or Republican, liberal or conservative, hawk or dove matters less than that it be new—because a new leader isn’t saddled with his predecessor’s baggage, and the rest of the world reacts to him accordingly.
Even the Bush administration itself seems to have adopted a strategy of kicking the can up the road for two years until a new president can pick it up and run somewhere with it. (Once, when Bush was asked when U.S. forces would leave Iraq, he replied, “That will be up to my successor.”)
My question: Do you know of a business that operates this way? Can you think of a professional sports franchise owner who, hoping to turn around a losing team, says, “We have to wait until the coach’s contract expires”?
When the provocative remarks of Harvard University president Lawrence Summers irretrievably shattered his rapport with his faculty, did Harvard’s governors say, “Well, he’s only halfway through the customary ten-year tenure for college presidents, so let’s keep him”?
When a baseball team runs into trouble during a game, the first thing a manager does is change pitchers. When most organizations run into trouble, the first remedy they think about is changing managers. When the Philadelphia Orchestra’s music director, Christoph Eschenbach, failed to connect with his audiences and his musicians, he left in his fifth season. In 1994, when I concluded that I was the wrong editor for a new magazine called Seven Arts, I voluntarily withdrew from the job in favor of another editor more in tune with that magazine’s audience.
In most Western democracies, even the head of government holds office only as long as he or she retains the parliament’s confidence. Members of parliament themselves may be subjected to recall elections when they least expect it. Mayors and governors in many U.S. cities and states are subject to recall provisions, as California’s Gray Davis discovered in 2003 when he was voted out of the governor’s mansion less than a year after he was re-elected.
The U.S. government remains one of the rare exceptions in which the chief executive, once chosen, is guaranteed a fixed term in office. He can be removed only for “high crimes and misdemeanors,” or with the passage of time. His job performance is irrelevant to his job retention, except when he seeks re-election.
But to answer my first question above: A few businesses actually do operate this way. And most of them, I’m sorry to say, are family firms.
Sometimes brothers of equal ability will rotate the CEO job in two- or four-year terms. The brothers J. Howard and Joseph Pew alternated in the chief’s job at Sun Oil Company for some 50 years, and Sun was probably stronger as a result—but that arrangement ended more than 40 years ago, and I can’t imagine a major oil company endorsing such a system in these more fluid times.
Rotating titles is also a great way to keep peace in the family. FB readers may recall the situation at Campbell and Sons Oil Co. in Huntsville, Ala. (Winter 2000), where three Campbell brothers rotate their titles every two years, because, according to eldest brother LaBronn Campbell, “That’s the way our daddy wants it, so no one is actually over the other.”
These instincts are understandable. But ultimately business is about making decisions. Fixed terms and rotating chairmanships are convenient ways of avoiding decisions about one of the most important business questions: Who’s the boss? In effect, such a policy tells the world, “Our jobs are not accountable to our customers, our shareholders or the ups and downs of the economy. We’re set for life.”
Consultant Stefan Doering’s “Ten Motivational Tips for Family Businesses” (FB, Winter 2004) included this gem: “A head goose breaks turbulence for the rest of the flock and rotates with the next one in line when it gets tired.” If a flock of geese can decide when to change leaders, why can’t companies?
Contrarian follow-up
Catching up on items from my previous columns.
Woes of Sumner Redstone. Last issue I reported that the Viacom founder/chairman seemed to be quarreling simultaneously with his son, nephew and daughter (FB, Spring 2007). Son Brent had accused Sumner of trying to “freeze out” Brent from the family business, National Amusements, which owns controlling stakes in both -Via-com and CBS. Brent wanted to liquidate his stake (which he valued at more than $1 billion) so he could take the cash.
Follow-up: Son Brent’s lawsuit against his dad was settled earlier this year. Terms of the settlement weren’t disclosed, but people close to the matter said National Amusements had repurchased Brent’s one-sixth share. Sounds to me like Brent got the money he wanted but lost a father. Ask yourself: Which is harder to replace?
The Sulzbergers’ stock challenge. Also last issue, I discussed the quixotic attempt by Morgan Stanley money manager Hassan Elmasry to publicly embarrass the controlling Ochs-Sulzberger family into giving up its super-voting stock in the New York Times Company. Elmasry publicly complained that the Ochs-Sulzberger family (descendants of Times patriarch Adolph Ochs) represents less than 1% of the company’s equity yet elects nine of its 13 directors. Since Elmasry’s mutual fund owns a 7.6% stake in the Times Co., Elmasry submitted resolutions (which didn’t have a prayer of passing) asking the company to switch to a one-share, one-vote system.
Follow-up: The Ochs-Sulzberger family retaliated earlier this year by pulling most of its own assets—some $640 million worth—out of Morgan Stanley. That strikes me as pettiness unworthy of a great newspaper proprietor. Elmasry was simply trying to fulfill his fiduciary obligation to his investors. Morgan Stanley would be wrong to meddle with one of its money managers on behalf of a big Morgan Stanley customer, just as the Times would be wrong to meddle with its reporters on behalf of a big advertiser. Times Co. president Janet Robinson told Fortune that the Times Co. “does not want to open its doors to the kind of turmoil that really rips apart an organization,” referring to the recent shareholder uprisings at Knight Ridder and Tribune Co. But if the Ochses and Sulzbergers want to avoid the sort of upheavals caused by investors trying to maximize their stock value, they have a legitimate solution at hand: Take the company private.