Two wayward grandsons named Ed
The problem with Bronfman and Stern wasn’t lack of drive, but excessive drive in the wrong direction.
These are tough times for descendants of corporate legends. Umberto Agnelli at Fiat and Bill Ford at Ford Motor Co. are both struggling to sustain the huge auto manufacturers founded by their grandfather and great-grandfather, respectively. Christopher Galvin, grandson of Motorola’s founder, gave up the struggle last September and submitted his resignation as CEO.
The conventional rap against most business grandsons is that they lack the entrepreneurial drive necessary to re-invent grandpa’s company as times change. (Wall Street obviously believes this: When Chris Galvin resigned at Motorola, the ailing conglomerate’s stock rose by 9% within three business days.) But two other family business grandsons in the news lately seem to suffer from, well, maybe a little too much entrepreneurial drive for anybody’s good.
• Edgar Bronfman Jr., whose grandfather founded Seagram & Co. in 1928, became CEO of the giant liquor distributor in 1994, when he was 39. Almost immediately he sold Seagram’s sizeable stake in DuPont and used the proceeds to steer Seagram into entertainment—his preferred career—by acquiring what became Universal Entertainment. But Seagram’s subsequent poor performance as a result of this acquisition led some nervous Bronfman relatives to sell major blocks of Seagram stock.
Then in 2000 Edgar disastrously sold Seagram altogether for a large stake in Vivendi, a water utility then trying to re-invent itself as an Internet powerhouse. By the summer of 2002 Vivendi’s stock value had dropped by more than two-thirds—a loss of $2 billion. And last fall an investor consortium led by Edgar was outflanked by NBC in the bidding for control of the renamed Vivendi Universal Entertainment Company.
Bottom line: If Edgar had done nothing but hold onto Seagram’s DuPont stock, he would now be considered a genius. Instead, his family lost control of their company, and their minority stake in Vivendi Universal is worth a fraction of its former value.
• Edward Stern, grandson of pet foods pioneer Max Stern, joined Hartz Mountain Corp. fresh out of school in 1989 and was named president in 1997, when he was 32. He promptly led the company on a spate of disparate acquisitions, adding the Wardley fish foods and L/M brands and buying rawhide manufacturing plants in Brazil. Then in December 2000 he sold the family’s pet-supply business altogether and used the proceeds to fund his longtime dream: running a hedge fund, a private investment vehicle for the wealthy.
Edward’s Canary Capital Partners—named for the 5,000 singing birds his grandfather brought to America from Germany in 1926—paid a $40 million penalty last fall to settle charges of illegal trading filed by the New York State attorney general’s office. According to the settlement, Canary Capital partners allegedly obtained special after-hours trading privileges with leading mutual fund groups by promising to make large investments in funds managed by those groups.
Some observers may see in Edward the bad seed of his combative father and Hartz Mountain predecessor, Leonard Stern, who paid out well over $50 million in settlements during a tenure marked by government complaints, union battles and private antitrust suits. But Leonard’s shenanigans, however misguided, always sprang from his passion for the family firm, Hartz Mountain. And Leonard had no use for Wall Street, where Edward has wound up. “I don’t admire people who buy and sell businesses off numbers,” Leonard once told me, “because I don’t see how it’s terribly productive for society.”
The moral of these two stories? If your child’s passion is unrelated to the family business, by all means encourage him to pursue it. But be sure he pursues it outside the family business.
What’s it all about, Rupert?
Most of us wake up each morning with a clear understanding of why we do what we do: We work to feed our families, to serve our stockholders, to enhance our communities, to gratify our egos, to relieve our boredom, whatever. What fascinates me are the executives who seem to have no idea whatever as to what drives them.
For example, someone popped the question to Saul Steinberg at a Wharton School testimonial dinner back in 1984, when the greenmailing tactics of Steinberg’s Reliance Group Holdings were terrorizing Wall Street. Since Steinberg was then worth about $200 million, and since he had no stockholders to serve (he and his family had acquired 100% of Reliance stock), a questioner asked, why bother?
Steinberg replied: “Let me say this: I’m sure that many of you have experienced this—there are times in your career when you feel like you’ve been there, you’ve done it, you’ve accomplished so much, and you say, ‘Why do I get up at six and do it, and why should I keep doing it?’ And I don’t have the answer for you. But we do continue.”
In light of Reliance’s bankruptcy in 2001 and Steinberg’s fire sale of his Fifth Avenue apartment and art collection, he might well have replied, “I do it to protect myself in my old age.”
Or consider Rupert Murdoch, second-generation patriarch of the family-controlled News Corp. Over the past 50 years Murdoch has built a single Australian newspaper into a $17 billion global media/entertainment empire, the world’s fourth largest. This expansion has grown out of what The Economist calls “a virtually non-existent corporate strategy” led by “a hyperactive and authoritarian personality who has no overall objective other than constant activity and the wielding of power.” And Murdoch’s capacity to baffle the rest of us mortals has only accelerated lately. Within a few months this past fall, Murdoch:
• Cleared the way for his 30-year-old son, James, to become chief executive of BSkyB, Britain’s leading pay-TV company, which is 35% owned by News Corp. In the process he has disturbed not only BSkyB investors but also James’s older brother, Lachlan, publisher of Murdoch’s New York Post, who until this move had presumed himself to be his father’s heir apparent.
• Announced a near-threefold increase in payments to outside directors. Murdoch did this as part of News Corp.’s continuing shakeup of its board to comply with new Sarbanes-Oxley corporate governance rules and stock exchange regulations. Among the changes, Murdoch himself has stepped down from News Corp.’s nominations and share options committees.
• Proposed and then withdrew a generous options proposal for six News Corp. executives, including his sons Lachlan and James, in the face of opposition from institutional investors, even though he had the votes to approve it—a rare retreat for Murdoch.
At some point you would expect Murdoch to ask or explain what it’s all about, especially since he’s now 72 and battling cancer. No such luck. The closest Murdoch came to such introspection occurred in a rare 1999 interview when his biographer, William Shawcross, asked him, “What do you want to be remembered for?”
“I’m not really worried about the history books,” Murdoch replied. “Let the chips fall where they will…. I think that you just want to die with a good conscience and the feeling that you’ve been a force for good as you see it. I don’t say I haven’t made mistakes and won’t make mistakes in the future. I’d like to feel I made a difference. I think that in Britain we’ve been one of the forces for change and modernization, and most of the changes have been very good.” He spoke of “keeping alive a competitive press” in New York, and of making television “a lot more competitive.” But how posterity would remember him was clearly not something he thought or cared much about.
Ah, you say, but his sons—they’re his posterity. Yet Murdoch seems not so much to be grooming his sons to succeed him as setting them against each other. The Economist‘s conspiracy theory may hold the best explanation for Murdoch’s latest round of hyperactivity: “Mr. Murdoch is not anointing a successor, but diverting pressure from himself to step down.”
Where Grasso went wrong
What’s so terrible about an exorbitant salary? Here’s what.
By virtually all accounts, the former New York Stock Exchange chairman Richard Grasso was a capable chief executive who delivered good value to his stakeholders—the NYSE members who happily paid $2 million or more for the privilege of trading there. Yet when Grasso’s pay package—$39 million for the most recent year, plus $139.5 million in deferred retirement benefits—was publicly disclosed last September, the resulting public outcry forced him to resign, leaving many observers to wonder just what he’d done to deserve his fate.
Grasso was guilty of no crime; his compensation, while huge, was a matter between him and his members and technically nobody else’s business; and in any case he had never negotiated his pay package but had simply accepted, at arm’s length, whatever the Big Board’s compensation committee chose to give him.
So what, exactly, did Grasso do wrong? And what lessons does his downfall offer for family firms?
Let me suggest two cardinal rules of professional behavior that Grasso violated.
First, a professional exercises his best independent judgment on behalf of his client or his employer, even to his own short-term detriment. Meeting budgets and cutting costs is a major function of a CEO. Yet Grasso closed his eyes to the effects of one of the Big Board’s biggest expense items: his own pay package. At a time when the NYSE was imposing extra fees on its members to cope with rising expenses, he failed to see that one of the best solutions to cutting expenses was right in the mirror.
Second, in any confidential situation, a professional behaves as if he were conducting his business publicly. The key to Grasso’s compensation package was its secrecy. Once it was divulged, he was finished as a leader. His pay package flunked the “smell test”—that is, people knew it was none of their business, but they still knew it smelled fishy. Grasso consequently undermined one of the basic foundations of any organization: its integrity.
If you’re a family business CEO, ask yourself: What would my customers (or stockholders, suppliers, relatives or neighbors) say if they knew my salary? And negotiate your pay accordingly.
Did they forget something?
In their new book, The Company: A Short History of a Revolutionary Idea (Modern Library), authors John Micklethwait and Adrian Wooldridge take issue with the notion that the state or the church is the world’s most vital institution. “The most important organization in the world,” they claim, “is the company: the basis of the prosperity of the West and the best hope for the future of the rest of the world.”
Somehow, the authors overlook one other vital institution: the family. This omission reminds me of the Yiddish folk tale in which the Wise Men of Chelm—a lovable band of over-educated idiots—ask their rabbi to settle a debate as to which is more important, the sun or the moon. The rabbi, after much reflection, finally chooses the moon.
“It shines at night,” he explains, “providing light with which to see, whereas the sun shines only during the day, when there is no need for it whatsoever!”