The Sweet Smell of Succession

In a Family Business interview, Leonard Lauder talks about what it takes to run a company headed by a strong-willed parent: Patience. Great patience.

ESTéE LAUDER INC. was literally a mom-and-pop company when Leonard Lauder joined it in 1958, after graduating from the Wharton School and serving three years as a Navy officer. The company founded by Estée and Joseph Lauder grew under the son's strong hand from an original group of four products to 1,000 sold exclusively in fine department stores worldwide. Sales rose steadily from a modest $800,000 in 1958 to $1.89 billion last year. Just as remarkable: The ambitious son and the strong-willed parent built a successful working relationship and achieved a smooth transition.

Most observers agree that Leonard Lauder, 56, who has been chief executive for seven years, has been the driving force behind the expansion of the business (although Estée took much of the credit in her 1985 autobiography Estée: A Success Story). Leonard led the creation of subsidiary companies to market three best-selling product lines: Clinique, Aramis, and Prescriptives, which together account for 33 Percent of the business at department store cosmetics counters.

This past fall Jack Nessel, editor of Family Business, and Leonard Zweig, publisher, met with Lauder in his 37th-floor Manhattan office overlooking Central Park. Lauder talked about how he and his mother have worked things out over the years, and the role of other family members in the company. (His wife, Evelyn, and son, William, are in the business; his brother, Ronald, left the company management in 1983.)

Estée, in her eighties, remains the chairwoman and most visible symbol of the company that bears her name. According to Leonard, she spends little time in the office these days. On the day of the interview, she was in Hungary launching a new branch of the company's international division. A few weeks later, the company scored another coup when Estée Lauder products arrived in the Soviet Union under a joint venture that Leonard says took 15 years to negotiate.

FAMILY BUSINESS: You joined Estée Lauder 32 years ago, fresh from the Navy. How did you and your mother get along on the job in those early days?

LEONARD LAUDER: It was an interesting time for us both. In the Navy, where everything was structured, the captain never dealt with the crew. If the captain wanted to speak to the enlisted men he did it through an officer. I arrived at Estée Lauder expecting that things would be done the same way, that my mother would speak with me and I would in turn speak with the crew. It didn't work quite that easily. We found we had to do a lot of adjusting to our respective styles.

FB: Was it a tough transition for you?

LL: One tends to think about the good days more than the bad days, but when I really look back I marvel at how patient she was. I only hope that I am as patient today.

FB: Based on that experience, do you have any advice to give parents whose children have just joined the business?

LL: If the parent really intends to pass on the business one day, she—or he—must treat the younger family members with respect, so they are able to express themselves. Autocracy has no place in a family business. It's like bringing up a young child. You have to teach the child to have self-confidence, and the only way one can have self-confidence is to do things by oneself. The more the parents interfere, the more they say "no," the more they say "we tried that already," the greater the chance of failure on the part of the next generation.

FB: And what advice do you have for the children?

LL: They must understand that their father and mother went through the same things that they're going through now—the same uncertainties, the same new wonderful ideas that were shot down by somebody else. They should not get unduly upset. The best thing they can do is to find a bit of turf that they can handle themselves, one that the father and mother haven't dealt with before and therefore don't have easy solutions for.

FB: For example?

LL: Well, when I arrived here we just had one brand—Estée Lauder—and everything bore the founder's name. I was able to launch a new brand called Clinique. Because it didn't bear the founder's name, we were able to market Clinique in ways that we would never have been able to do with Estée Lauder.

FB: Did your mother take easily to the fact that Clinique would be treated independently? For example, that its marketing plan involved avoiding conventional advertising in the media?

LL: It took her a while to accept the idea.

FB: Your son William is in the business now, as field sales manager for your Prescriptives line. Was it simply taken for granted that he would join you and your mother up here in the executive suite one day?

LL: Nothing was ever taken for granted. I felt very strongly that if any of my sons were to come into the business, they would have to prove themselves—not to me, but to themselves—in another environment. I had the opportunity when I went into the Navy after college. I was an officer for more than three years. I told each one of my sons that I would very much enjoy having them in the business, but that it was their call, and that they couldn't do it until they'd lived in the outside world. So my oldest son, William, went to work for Macy's, and he found himself in a Macy's executive training program after three years. He became an assistant buyer, then a divisional merchandiser in the Dallas store for three years, and it was a wonderful experience for him. He knew that he was good and that he could succeed on his own without having the Lauder name or the family connection. Once you know that you can succeed on your own, then it's okay to come into the family business, but not before.

FB: So one day William decided on his own that he was ready to join Estee Lauder?

LL: We had discussed it for some time. It wasn't a matter of his saying, "I'll let you know on Monday." He wanted to join. My youngest son, though, pretty much doesn't want to.

FB: Gary.

LL: Yes, he's still in graduate school, at Stanford.

FB: And he doesn't think he'll join the rest of you one day?

LL: At this point, probably not.

FB: There are two more youngsters in the Lauder family, your brother Ronald's two teenage daughters.

LL: Much too early to tell.

FB: Getting back to William. When he came on board, who taught him the ropes? Nonfamily managers, or were you his chief mentor?

LL: No, there were people who were anxious to fill that role.

FB: How do you choose a mentor for a son or daughter?

LL: It's a matter of who is secure with family members. When William first came here, he was to go to one of our divisions. At the last minute I decided to put him in another division, and the head of the first division heaved a sigh of relief. The second division head was delighted to have him. One was insecure, one was secure.

FB: What is the insecurity in a situation like that usually based on?

LL: Well, there are people who are terrified that they will end up being replaced by family members.

FB: I teach you my job, and then you take it.

LL: Right.

FB: Well, that is sometimes a reality in a family business. Are there people outside the company with whom you discuss issues like succession and mentors?

LL: No. I have rarely gone to anyone else to seek advice because I think that my situation is probably unique.

FB: Because of the size of the company?

LL: Because of the size of the company and the complexity of the company. And the nature of the family members. But I have friends in family companies who occasionally ask me for advice.

FB: Can we talk about family versus public companies? Is there something that makes Estée Lauder a better place to work than a public company?

LL: Family can bring a sense of continuity, a sense of entrepreneurship, a sense of permanence to a work relationship. The continuity of policies can build great companies. For example, you always hear people talking about cultural differences when discussing competition between the United States and Japan. What they don't realize is that Japan is at the beginning of its industrial cycle and the United States is nearing maturity in its cycle. There is a Mr. Toyota and a Mr. Honda and Mr. Morita of Sony, but there is no longer a Mr. Ford or Mr. Durant of General Motors or a Mr. Zenith, if there was ever such a person. When you work for a family business you are usually working for a company that is a builder. If you work for a company that has emerged from the family stage and is now more mature, you are working for conservators. All of the great American companies—IBM, Ford, General Motors, Chrysler, General Electric, U.S. Steel — were started by strong individuals who ran them in a very personal way. Some of them had shareholders, some of them didn't, but they all started as family companies.

FB: Is the entrepreneur's vision and commitment enough to attract high-level, nonfamily employees? One problem common to family businesses is attracting and holding on to first-rate talent at the senior management level, because outsiders see themselves blocked from the top forever. Analysts agree that Esteée Lauder has some very good managers. How do you hire them? How do you reward them?

LL: Chances are it will be impossible to attract someone who truly aspires to be number one. But most people would rather be led than lead, and most people are happiest in a situation in which they have a lot of responsibility and authority, but not the ultimate responsibility and authority.

FB: A public company can entice people with options and shares, but the private company must come up with some other reward plan. Do you have a phantom stock plan, for instance, or ... ?

LL: There is nothing like money to get people's attention.

FB: Earlier, you said you rarely seek outside advice. You don't have a board of directors either.

LL: The nearest thing we have to a board is our finance committee, which includes some outside members. We do not have a formal board as such.

FB: How come?

LL: We have given it a lot of thought. We decided against it because you can't have a board unless you are prepared to give the board authority. Just to have a board and have them be powerless doesn't make any sense.

FB: You know it's conventional wisdom that family companies ought to have boards with outsiders on them.

LL: A board of directors is very appropriate if there are outside shareholders who need representation, or where there are inside shareholders and outside shareholders and they've got a difference in strategy that has to be sorted out. If you have a family as close as ours, all of whom are working in the business, then a board of directors seems almost meaningless.

FB: Are there family shareholders who are not involved in Estee Lauder? Your brother, Ronald, who ran for mayor of New York City last year, has been active in the business, and now manages investments.

LL: There are children, that's about it.

FB: Your wife, Evelyn, is a corporate vice-president. Many couples say their greatest problem is the difficulty of separating work life from family life. How has that been for the two of you?

LL: It's very hard for me to separate my work from my private life. I take my mail home. Many times Evelyn and I sit at the table and work together. She does her work and I do mine and we exchange things as we sit there.

FB:In the evenings?

LL: Yes. We try not to discuss too much business at night, but it does tend to creep into our conversation.

FB: When the children were growing up, did you discuss business around them?

LL: The children were always around, so they have the business in their blood.

FB: Just as it was for you when you were a boy listening to your mother and father.

LL: Right.

FB: Was there a specific moment, when you were a kid, when you decided you wanted to have a career in the business?

LL: I had always expected to. There was never any question in my mind. I worked there every afternoon when I was in high school, and when I graduated I was supposed to become the plant manager. I graduated high school in January of 1950 and didn't start college until that September. I was one of the few employees the company had in those days, so I was always around.

FB: But you never discussed your future with your mother?

LL: No. The business was very much of a partnership between my mother and my father.

FB: Your mother has been the public embodiment of Estée Lauder for 44 years. Is Evelyn Lauder one day going to replace her in that role?

LL: It will never be the same. No two people are the same.

FB: You and Evelyn have been enormously successful here. Are there any disadvantages in joining a family business?

LL: First off, if you have too much family around it can get you into a lot of trouble. Second, if there is an autocrat, whether it's the patriarch or the matriarch, who says that he or she is ready to give up the reins of power but really doesn't want to, then you have a problem. I have friends who are going through that. I decided that I was never going to have that river to cross, that Mrs. Lauder, my mother, would be acknowledged as the head of the business whether she works one day a year or 365 days a year. She feels good about that, I feel good about it, everyone else feels good about it. There's no tug of war or power struggle. I take a very dim view of younger family members who say, "Okay Dad, you're 65 and it's time that you retire and we take over."

FB: That may be why the Lauder family is so extraordinary. You run the company, and yet your mother remains head of the business. You've managed to finesse the succession issue with rare grace.

LL: It wasn't easy.

FB: Do you think it's due to the special chemistry of your family?

LL: It has nothing to do with chemistry. It has everything to do with patience.

FB: So how might a member of the younger generation in a family business end up working as well with a parent as you have?

LL: I'm saying that patience is the key. If you come into a business founded by a parent, you must remember from the day you arrive that a parent is always a parent. If the parent is 80 and you're 55 years of age, he's still the Daddy and you're still the little boy. If you can accept that and swallow it and feel good about it then there is every reason to believe that you can have a very happy coexistence. But if you expect the parent to step aside like the dutiful chairman of a public corporation who steps down at age 65 and has planned his succession very carefully, then it's not going to work. If you expect that, don't go into the family business.