There once was a time when certain businesses seemed more suited to family ownership than others. For instance:
• Retail jewelers (because whom can you trust with tiny precious gems, other than your relatives?).
• Funeral homes (because who else would go into such a gloomy business?).
• Department stores (because a family’s name and style may be the only thing that differentiates one store from another).
• Breweries, restaurants and vineyards (because a secret recipe may be the firm’s most valued asset).
• Newspapers (because the pressure of noble family traditions is the surest counterweight against ignoble pressures from advertisers and local politicians).
• Professional sports teams (because only rich families are willing to sink capital into expensive toys).
• Cable TV companies (because the need to simultaneously build market share, upgrade systems, raise capital and cope with government regulations requires a synergy that close-knit families are best equipped to deliver).
But times change. Chains now own many retail jewelers and funeral homes. In the news business these days, the Sulzbergers, Grahams and Murdochs are the exceptions rather than the rule. Ditto for the Nordstroms and Dillards in department store retailing. After five generations under the founding family, Anheuser-Busch last summer agreed to a takeover by InBev of Belgium for $52 billion. Most sports teams are now owned by partnerships and syndicates rather than families. And as the cable TV industry matures, you’re likely to witness the same process there as well.
(Comcast, America’s largest cable operator, is still controlled by the Roberts family of Philadelphia, but the firm’s acquisition spree has diluted that control and will likely continue doing so in the future.)
This evolution isn’t cause for alarm. Families will always enjoy advantages in certain businesses, especially in places where a strong family may be more stable and reliable than the government (think Korea, India, Turkey or Mexico). But yesterday’s “family industry” may not be family-friendly tomorrow.
My question is: Precisely how and when does this evolution occur?
Maybe it begins one morning when a family patriarch wakes up to find himself thinking, “Hey! My friends are more trustworthy and exciting than my relatives!” Or: “Our secret family recipe actually matters much less than our access to good distribution and marketing networks.” Or: “My children can’t cut the mustard. Now’s the time to sell.” Or: “My kids can cut the mustard. But everyone else in my industry has sold out to chains or conglomerates. If we don’t do the same, our firm will go down the tubes.”
I call this the “Aha!” moment. Accumulate enough of these moments and family control ceases to be useful for a given company. If enough companies take this route, family ownership stops making sense for an entire industry.
Consider what happened this year to the Pittsburgh Steelers, a pro football franchise owned for 75 years by the Rooney family. (The five sons of founder Art Rooney own 80%, and their cousins, the McGinleys, own the remaining 20%.) It’s one of the last family-owned franchises in the National Football League, now that pro football has moved from the realm of expensive toys to lucrative businesses. But some Rooneys love the Steelers more than others.
Dan Rooney, Art’s eldest son and chairman of the team since Art died in 1988, is one of the most respected and influential owners in the league’s history. (He’s in the NFL Hall of Fame.) His son Art II has been president of the Steelers since 2002. They wanted to stay in the football business. But some of Dan‘s brothers wanted to get out of the NFL to concentrate on the family’s racetracks and other interests.
In the best of all worlds, Dan Rooney would buy his brothers out —which is what Dan proposed to do last summer. The last time the Steelers were sold, the buyer was Dan’s father, who paid $2,500 for the franchise in 1933. But today the franchise is worth at least $800 million and perhaps as much as $1.2 billion—more money than any single brother can pony up without outside help.
Some of Dan’s brothers and third-generation family members worried that Dan’s proposed buyout plan undervalued the team and took on too much debt. So they sought an independent analysis from another Wall Street investment bank to see whether a better deal could be structured. This contention brought to a head the emotional issues that come into play whenever parents and/or siblings must work together. Dan was forced into the realization that buying out the Steelers (1) could leave him financially strapped or (2) could wreck his relationship with his brothers or (3) both.
Looming estate taxes became an issue as well: Dan Rooney is 75, so even if he succeeded in buying the Steelers, his son might have to sell the club to pay the estate tax on a billion-dollar property.
(That’s precisely what happened to John Kent Cooke, president of the Washington Redskins, after his father—the real estate developer Jack Kent Cooke—died in 1997. It’s also what happened to the Chicago Wrigleys, who owned baseball’s Cubs for 65 years before selling the team in 1981.)
The result: As of this writing, the Rooneys are shopping the Steelers.
It was the NFL’s own rules that forced this issue. One rule stipulates that at least one person must own at least 30% of a franchise; currently the five Rooney brothers each hold 16%, so Dan must buy out at least one of his brothers. Another rule forbids NFL owners from holding gambling properties, and three of Dan Rooney’s brothers own racetracks that include casino gambling.
One day last year, I suspect, several of the Rooneys woke up realizing they had too many reasons to sell the team and not enough reasons to hang on to it.
Aha!
Some things money can’t buy
To borrow Winston Churchill’s comment about democracy, family ownership is the worst possible way to operate a business—except for all the other ways.
A new study has concluded what I suspect you already knew: Chief executives recruited from outside a company earn significantly more in their first year than those promoted from within.
Equilar Inc., an executive pay consultant, found that external CEO hires in 2007 and early 2008 received median compensation of $6.6 million, or 65% more than the median of $4 million for internally promoted CEOs. This strikes me as no great surprise. A company must offer an outsider big bucks to offset the risks and costs of leaving one company for another, including lost benefits and stock equity. And it must offer an outsider large upfront equity grants to ensure that the new boss’s interests are aligned with those of the stockholders.
I suspect this pay disparity would have been even greater if Equilar had surveyed CEO salaries at family companies. Family firms are more likely to find their CEOs in-house, if only to maintain the family’s control. And with a few exceptions—the lavishly overcompensated Saul Steinberg at Reliance Insurance comes to mind, as does the Roberts family at Comcast—family CEOs are less likely to demand king-sized salaries. For them, the job offers more than monetary compensation.
We hear a great deal about the advantage of “patient capital”— family stockholders who keep their money in the family firm even though they could get a better short-term return by investing it elsewhere. Maybe we should also appreciate the benefits of “patient talent”—executives who stick with a family firm through thick and thin for psychological reasons, not financial ones.
Follow-ups of Contrarian follow-ups
Question: What’s the difference between business and fiction?
Answer: In business (and families too), there’s never a final chapter; instead, the story continues without end. In each issue I try to provide follow-up to some items that have appeared here previously. Now, it turns out, some of my follow-ups require follow-ups. Read on.
Daddy’s former ally (again): “Sumner Redstone [CEO of Viacom Inc. and CBS] … appears to be quarreling with his presumed primary family ally: his 52-year-old daughter, Shari, whom he designated seven years ago as his likely successor.” —This column, Spring 2007.
First follow-up: “Redstone, 84, reportedly has decided he no longer wants Shari to succeed him as CEO and controlling shareholder…. People close to the family say father and daughter are barely on speaking terms.”— This column, Winter 2008.
Latest follow-up: In an interview last July, Redstone said flatly he would buy out Shari’s interest in both companies and that she would leave the board as part of an agreement he had reached with her.
The bickering Ambanis (again): Dhirubhai Ambani built Reliance Industries into India’s largest conglomerate but somehow neglected to leave a will when he died in 2002. His sons Mukesh and Anil, who’d already been feuding, fell out so badly after their father died that they didn’t meet for more than a year and subsequently broke the empire into two pieces. —This column, Spring 2005.
First follow-up: “Will or no will, both Ambani brothers are managing just fine. Thanks to India’s sizzling stock market, the two brothers’ combined net worth recently approached $100 billion, analysts say.” —This column, Spring 2008.
Latest follow-up: Last summer the Ambani brothers’ bitter rivalry scuttled negotiations to combine two of the world’s largest mobile-phone carriers. Reliance Communications, run by Anil, was set to merge with South Africa’s MTN Group, a deal that would have created a company worth $50 billion with 110 million customers. But Mukesh alleged that his Reliance Industries had the right of first refusal over any change of control in Reliance Communications. Net result: No deal.
A CEO’s egregious secret compensation (again): When Richard Grasso’s pay package as chief executive of the New York Stock Exchange—$39 million, plus $139 million in deferred benefits—was publicly disclosed in September 2003, the resulting public outcry forced him to resign, leaving many observers to wonder just what he’d done to deserve his fate. I deduced this lesson: “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 accordingly.” —This column, Winter 2004.
First follow-up: After a lawsuit, “Grasso was ordered to repay tens of millions in retirement pay. And the continuing litigation revealed that, some years, Grasso made almost as much as the institution he was paid to run.” —This column, Spring 2007.
Latest follow-up: After nearly five years of litigation, a court ruled last summer that Grasso could keep the $139.5 million he was paid. But my lesson above still applies.
The pampered heir apparent (again): From childhood on, Comcast CEO Brian Roberts never strayed far from his father, founder Ralph Roberts. Last year, under pressure from outraged stockholders, Comcast was forced to eliminate a benefit that would have paid Ralph’s salary to his wife or his estate for five years after his death. Ralph, then 88, also agreed to take $1 a year as chairman, as compared to the $1.85 million he got in 2007. “What was Brian Roberts thinking before the force of public opinion embarrassed him into changing course?” I asked rhetorically. —This column, Summer 2008.
Follow-up: I’m still wondering. Last summer the Wall Street Journal revealed that a similar pay arrangement remains in place for Brian Roberts himself. Comcast is committed to paying Brian’s salary for five years after his death in office, along with his bonus for five years—a potential payout currently valued at more than $60 million. Brian’s heirs would also receive $223 million from his company-funded life insurance, whose premium costs Comcast $415,000 a year. Such life insurance is a widely used strategy for paying inheritance taxes in order to maintain family control after a major shareholder dies. But in most publicly traded family businesses, such premiums are paid by the family, not the company.