Bertelsmann confronts its past
An inspiring story, with one piece omitted
Germany’s 170-year-old Bertelsmann Group has long promoted itself as a family firm driven “by the desire to meld business savvy with Christian piety,” as the Wall Street Journal has put it. After World War II Reinhard Mohn, the current head of the controlling Mohn family, transformed Bertelsmann from a religious book publisher into a global empire that today embraces Random House (book publishing), BMG Entertainment (music), Gruner + Jahr (magazines) and RTL Group (broadcasting). Since 1977 the family’s charitable trust—which owns 57.6% of Bertelsmann—has donated tens of millions of dollars to promote everything from public policy initiatives to improving trans-Atlantic relations and bettering German-Jewish relations.
It’s an inspiring story, but an embarrassing piece was omitted. The Mohns obtained a publishing license in post-war occupied Germany by submitting a dossier portraying the company as an opponent to Adolf Hitler’s Nazi dictatorship. Yet far from resisting the Nazis, as the company has long claimed, Bertelsmann exploited its ties with Hitler’s regime to expand from a provincial Lutheran printing company into a mass-market publisher producing 19 million books for the German army, including some with anti-Semitic themes. The company probably also profited from Jewish slave labor at a few printing plants in German-occupied Lithuania.
Although Heinrich Mohn (Reinhard’s father) never joined the Nazi Party, he did belong to a circle of patrons who supported the dreaded SS storm troopers with monthly donations. Bertelsmann Group was indeed shut down by Hitler’s regime in 1944—not for anti-Nazi activities, but on suspicion of illegally hoarding stockpiles of paper.
When Heinrich Mohn’s false statements to the occupying British authorities were discovered in 1947, he turned the company over to his son Reinhard, who built today’s global conglomerate. But Reinhard, who is now 81, subsequently concealed his father’s Nazi collaboration and perpetuated the myth of the firm’s innocence under Hitler.
Nevertheless, when these embarrassing facts and their cover-up came to light four years ago, the company responded in exemplary fashion. After an independent German historian raised doubts about the veracity of Bertelsmann’s official history, the company commissioned a full-fledged investigation by four respected historians. Their subsequent 794-page history, released last fall, is perhaps the most unsparing and complete investigation of World War II activities undertaken by a German company. After it appeared, Bertelsmann forthrightly expressed regret for its conduct under the Nazis and for its later efforts to cover it up.
This candid response—far more than Bertelsmann’s wartime behavior—strikes me as the measure of a company’s integrity. Since no one is perfect, the true test of integrity is our willingness to acknowledge and confront our failings. As Alexander Pope put it, “A man should never be ashamed to own he has been in the wrong, which is but saying in other words, that he is wiser today than he was yesterday.”
Heinrich Mohn may not have covered himself with glory during the war, but from the safe perspective of another century it’s hard to fault him for making compromises to save his company or his family. The founder of the State of Israel, David Ben-Gurion, once remarked that “The Jews who lived in safety during the time of Hitler cannot judge their brothers who were slaughtered or who were saved.” He might have added: Nor can anyone judge those Germans who survived Hitler but felt helpless to resist him.
Little things mean a lot
Jack Welch, the much-admired CEO of General Electric, retired in 2001 with a $9 million annual pension and a personal net worth in the hundreds of millions. Yet divorce papers filed by his wife last year revealed that even in retirement GE continued to pay for Welch’s use of the corporate apartment in Manhattan, his travel on company planes, his laundry and restaurant bills, his wine tab, his computers, his opera and sports tickets, even his newspapers and satellite TV bills.
Why did Welch accept benefits that he obviously could have paid for himself? And why was GE so eager to offer them? Family business owners may find the answers intriguing.
No amount of cash can compensate for the lifestyle and perks a CEO relinquishes once he retires. As the compensation expert Bruce Ellig of New York puts it, “It’s culture shock for CEOs to go from being driven around in limousines and being recognized everywhere to suddenly not having all that care and attention.” The solution for the bereft CEO is relatively simple: Extend his trappings of power to help soften the loss of his actual power.
But what’s in this arrangement for GE? Plenty. For nearly 20 years GE profited from Welch’s charismatic public image. Without him, GE would be just another faceless conglomerate to most consumers and investors. So GE is wise to keep Welch’s identity tethered to the company—even in his retirement.
As Welch’s real corporate power recedes, GE must also work harder to sustain his charisma. For the company’s sake, Welch can’t be seen hailing taxis on the street, waiting in line at a box office or being frisked at an airport metal detector.
GE is hardly alone in this respect. At IBM, former CEO Louis Gerstner retired last March with a ten-year consulting contract that provides (in addition to his fee) an office, an apartment, home security, access to company aircraft, financial planning and reimbursement of his club fees. At Philip Morris Cos., former CEO Geoffrey Bible will for the rest of his life receive an office and secretarial services, home security arrangements, “reasonable” access to company facilities (including use of company aircraft), a phone-calling card, two cell phones and two home fax machines, as well as a company car and driver.
These three companies share one common characteristic: They’re not family businesses. Consequently, they must devote huge chunks of capital, time and psychic energy to manufacturing and maintaining their identities.
Family firms suffer no such requirement. You inherit your corporate identity along with your genes and chromosomes. It’s in the oxygen you breathe daily. It costs nothing. When you compete with the General Electrics and IBMs of the world, that’s a significant advantage.
Milton Hershey’s secret recipe
Hershey Foods is one of those rare companies that possess all the characteristics of a family company except for a family. Founder Milton Hershey owned not only the company but also the company town of Hershey, Pa. When he died childless in 1945 he left most of the company stock in a trust for the benefit of the Milton Hershey School, a private institution for poor children that’s also located in his company town. In Milton Hershey’s plan, the company, the trust, the school and the town would all benefit one another, but his own relatives were irrelevant to his scheme.
That bizarre plan has survived remarkably well. Hershey Foods has delivered consistent performance to its stockholders for nearly a century. The Milton Hershey School’s endowment has grown to $5.4 billion, greater than all but a handful of universities and even some Ivy League schools. When the trustees briefly contemplated selling the company last year (in a misguided attempt to diversify the Hershey Trust’s holdings), they set off a bidding war that attracted offers as high as $12.5 billion.
In a flight of logic that brings new meaning to the term “tunnel vision,” the trustees argued that Pennsylvania law requires them to focus solely on the needs of the school—not of the town or the company. Fortunately, they triggered an angry protest from the company’s “family” that quickly shamed the trustees into pulling Hershey Foods off the market. These “family members”—Hershey Foods employees and Hershey town residents—instinctively perceived, as the trustees did not, that the school’s fiscal health was inextricably bound up with the company and the town.
If Hershey Foods were a real family company, owned and operated by Milton Hershey’s descendants, would the company, the school and the town be better off today? I doubt it—unless Hershey’s will had stipulated the same sort of synergy that applies today.
Milton Hershey was reared on the Mennonite precept that money is not to be used for personal gratification. When he launched his chocolate factory in 1905 he wrote, “What I want to do is to find a practical use for what I have and put it to work in a way that will benefit others.” In retrospect, his altruistic approach to both business and estate planning ironically turned out to be a brilliant formula for long-range commercial success. The lesson, I suspect, is that it takes more than blood alone to sustain a legacy, not to mention a profitable business.
Vernon Hill’s toughest challenge
Vernon Hill, founder and CEO of Commerce Bank, seems to have found the key to success. From Ground Zero in 1973, when he was 28, he has expanded Commerce into a network of more than 200 branches stretching from Delaware to Long Island. In fact, only one constituency seems to have resisted Hill’s dynamic salesmanship: his own family.
A profile in the Philadelphia Inquirer (Sept. 1, 2002) reports that two of Hill’s four children work for their father. But neither is on a management track, and Hill says his children “show little interest in running a business.” Hill partly blames their indifference on his decision to send them to elite private schools, “where they learned consensus, cooperation and other ‘old Philadelphia values’” drawn from William Penn and other Quakers.
If Hill had it to do over, he told the Inquirer, he’d expose his kids to “New York values,” which “embrace change and excellence.” Specifically, he’d give them a traditional, authoritarian Catholic-school education (“common among loan officers”) that “pushes you to do your best.”
Methinks I smell a cop-out. When your kids don’t turn out as you’d hoped, it just won’t do to blame their school or their religion. As the psychologist Uri Bronfenbrenner has put it, “The social, emotional and cognitive development of children takes place in the family, in the family and in the family.”
Hill to the contrary, Quakers have produced some of the world’s great family companies, like Cadbury, Strawbridge & Clothier, and Lukens Steel Corp. Penn Mutual, one of the world’s first successful life insurance companies (and still one of the oldest), was run by Quakers for its first half-century. That center of cold-blooded business pragmatism, the University of Pennsylvania’s Wharton School of Finance and Commerce, was founded by and named for a Quaker industrialist. Quaker colleges like Haverford, Swarthmore and Earlham have produced such business giants as John Whitehead of Goldman Sachs, Gerald Levin of Time-Warner, Drew Lewis of Union Pacific, John Loose of Corning, Eugene Lang of Refac Technology Development and leveraged buyout artist Jerome Kohlberg Jr.
As someone whose daughter attended Germantown Friends School in Philadelphia, I’d readily agree with Hill on one point: Quaker schools aren’t geared to produce CEOs or loan officers. Their stated mission is to find the “light” inside each child and nurture it, wherever that light may lead her. This approach strikes me as more productive than manipulating children into careers that don’t excite them. To Hill I would say: Molding one’s children is much more difficult than attracting bank deposits. If indeed you let your kids follow their passion (whatever it may be), ultimately you may succeed with them after all.