Why We'll Never Go Public

By Samuel C. Johnson

The fourth-generation leader of Johnson Wax praises the enduring advantages of the privately held family firm: Secrecy. Stability. Flexibility. And, yes, generosity.

There are distinct advantages to being a family corporation, especially when you are competing against public firms. Public companies do have some advantages, principally, unlimited access to the public equity financial markets and the ability to make acquisitions with stock. Also, in some cases the public market is the only way minority family shareholders can diversify investments or settle their estates. But the burden of dealing with thousands of shareholders with diverse expectations, as well as worrying about a potential takeover, encumbers the chief executive of virtually every public corporation.

The preeminent edge for a family firm, if it is totally private, may well be secrecy from your competition, a cherished privilege among private CEOs. You can even liken this to a game of poker. Take a public and a family corporation that are roughly the same size, with comparable market shares for competing products: the private firm can hold each and every one of those cards tight to its vest, right through the betting and until it's time to lay them down. But the public firm has to expose the majority of its cards almost from the start, keeping only a proprietary ace or two until its hand is called.

The private company can see many of the strengths and weaknesses of its public competitor and act accordingly. Curiously enough, the private player doesn't even have to show much of its hand when the moment of truth arrives. And if it wins, it simply takes the money off the table, with the public company never really knowing the amount.

Some people assume that public companies represent the benchmark of better business — that if you want profits to soar, it's best to operate as a public enterprise. But it is difficult to compare earnings between the two. A public company does its utmost to enhance short-term earnings, those numbers that appear in quarterly and annual reports, those columns of black ink that keep shareholders content and quiet. But a family-controlled company measures its success in terms of years and decades, not merely quarter by quarter. It can accept lower earnings in lieu of stiff tax liabilities; certain tax writeoffs are viewed as long-range opportunities, not as drawbacks. Comparing the performances of public and private firms — given the different arenas in which they function — can produce dubious results.

Logically, one might think public companies would show higher profit margins. But a study of public and private earnings conducted by the University of Southern California business school — one of the few ever attempted since acquiring data on private firms is so difficult — concluded that private companies had earnings margins substantially higher than those of public corporations. The private outfits also earned higher returns on assets.

Essentially a private company can conduct its business free from public scrutiny. Your competitors, moreover, have little idea of how strong you are, where problems might lie, or even if you're winning. They can figure your share of a given market though Nielson and SAMI reports, but they don't have any notion of your bottom line. More important, they don't know how other parts of your enterprise affect the company, positively or negatively. In sum, you are a downright mysterious entity.

A CEO of a public company is beholden to literally thousands of individuals and interests. The time he spends actually managing the business, trying to make money, is cut appreciably by the necessity of taking to the road to pump the company's stock, meeting with security analysts, talking to investment bankers, and informing Wall Street journal reporters and other newsmen. He must also spend countless hours with government agencies. And when shareholders call to complain about the company's quarterly earnings report, or even to compliment the CEO, he's forced to talk with them.

The outright financial costs of SEC compliance are also high. Indeed, were we totally public, we clearly would be forced to spend hundreds of thousands of dollars every year on legal fees, registration fees, filing requirements, publishing quarterly and annual reports, and so forth. When Congoleum Corp. was public (it went private in 1980), its chairman figured that all the requirements of being a public corporation cost his company in the neighborhood of $7 million a year!

A private company is also free from the vagaries of the stock market — ups and downs that sometimes, through no fault of the management, can send shudders through a corporation. How well these fluctuations are accepted depends a lot on the common sense of the shareholders. A large number of public shareholders are a more volatile audience than a few members of one's family.

The best situation, in my view, occurs when the majority of the stock in a private company is concentrated in the hands of one family member, who is then free to make the decisions that are in the best long-term interest of the company. If there are periods of poor performance, one hopes the family and employee shareholders are understanding, aware that short-term profits must sometimes be sacrificed for the firm's future health.

A truly public company that has thousands and thousands of shareholders is a different matter. Most of the time the inside management group has enough control: shareholders supportively sign their proxies, inside managers and board members control nomination committees as well as the agenda of the annual meeting, and so on.

Nonetheless, they do take lumps from dissidents, suffer serious inquisitions if earnings don't meet expectations, and are picked at by securities analysts and government agencies, if they are not taken over by a hostile raider or even one who seems friendly. But usually the management endures.

A better scenario is a public company controlled by one or a small group of family or management shareholders where there is access to the public market for acquisitions or additional capital, but no fear of internal strife or outside takeovers. The worst situation I can imagine is being CEO of a public company that is heavily family-owned, in which no more than 5 percent of the stock is concentrated in any member's hands. There you have the disadvantages of public scrutiny without concentration of control. Not only do you have to argue with Wall Street, but also with uncles, cousins, and nieces.

While we at Johnson are free from the uncertainties of the stock market and the family bickering that's described above, we do care about the value of our stock. Shares are sold to our key executives on a select basis; a formula regulates the value according to the company's performance. We don't get the huge upward or downward swings that you see in the stock market, but then I genuinely feel that the performance of the company is a better measure of long-term stock value than the psychological enthusiasm of the market.

Family ownership of a company is usually an advantage over public ownership, provided there is enough concentration of ownership in one or two members. Management of such private organizations can, to be sure, take several forms. Professional management, brought in by the family owners, often serves a company's interests best.

In a family enterprise that does not bring in outside management, one hopes that ownership — and perhaps more important, control — is vested in the most talented member of the family. Should this go on for generations, it results in a continuity of management and management philosophy. When good things are passed along, they gain even more credibility with age.

Johnson Wax was one of the first companies to institute profit sharing, a practice established by my grandfather. My father initiated a no-layoff policy during the Great Depression of the thirties. For many years the company has been committed to giving 5 percent of pre-tax profits to charity. My father followed through with those ideas, as have I.

Not long ago I received a letter from one of our employees, a mechanic I, frankly, had never met, who had been working for the company for 23 years. He said he had been reading about the layoffs at companies in our area in the local newspaper, the Racine (Wisconsin) Journal Times. "I just felt moved to write you a letter and say 'Thank you' for all the good years that I've had at the company." I don't believe that kind of feeling is engendered in many public companies.

The vast majority of our people know we're not going to change direction and abuse them. And in turn, I know I can count on their loyalty. There have been only a couple of times when I've had to go in front of the employees and ask them for exceptional efforts, when I've said, "Honest to God, help us and pitch in." Invariably, they have responded.

They also know that competitive realities at times require restructuring, and while no one wants to be among those whose jobs are cut out, everyone knows that those affected will be treated fairly.

Of course, if the company founder is a miserly, tough old goat, and his disagreeable ways are genetically and psychologically transmitted to the next generation of management, then you're talking about continuity with no redeeming social value.

However, when a family member is placed in control of a company, and everyone knows clearly who the boss is, and who will still be the boss five or ten years hence, then there's a palpable air of stability.

When it comes to hiring at S. C. Johnson & Son, having the owner-manager's name on the building is a big plus. Since the average tenure of a public CEO is a little more than six years, a skilled, next level professional manager in search of a secure position can't be sure whom he will be working for several years down the line. A new CEO is likely to change the way a company does its business, making his mark as quickly as possible. Professionals are aware of this. Moreover, they know when they join a public company they risk being the victim of a takeover and purge a year or two later. But in a private company, they can settle into their jobs, work steadily with the same top management, use their talents to the fullest, and see a well-functioning relationship stay that way.

There's an old and often repeated scenario that goes like this: The first generation starts the company, the second builds it up, and the third generation screws it up. Well, I represent the fourth generation at Johnson, and my father certainly didn't screw it up during his turn.

My great-grandfather, who was in his fifties when he started the company, got the enterprise rolling. My grandfather was really the initial builder; he diversified the fledgling product line of waxes and polishes. My father took a regional manufacturer of waxes and polishes and turned it into a international company. If there is any major contribution I've made, you might say it's diversification, expanding the product line even more — into insecticides, personal-care products, industrial products, financial, commercial, and home services — and expanding foreign operations from 11 to 45 countries.

Not only is it important that the next generation bring something new to the enterprise, it is equally important that they feel the great personal satisfaction that results from contributing a new dimension to the business, which they often do in spite of those who prefer the status quo.

None of us were clones of our fathers or mothers in management style, the scope of our ideas, or any facet of our lives. Yet each of us built upon what we believed to be the positive parts of the family heritage. In a public firm, or even a private one controlled by professional management, a successor is less likely to build on the heritage of someone he worked for and may not even have liked, to boot. Change may be refreshing, but a company that makes radical shifts every five years, without foundation or consistency, grows schizophrenic and suffers.

Untalented, misdirected, and poor CEOs of public corporations do not, however, last as long as similar managers in a family company. If the CEO of a public company is doing a terrible job, Wall Street is going to drive him out. The stock will fall so low that some raider may be tempted to make a bid or come in with a lineup of opposing shareholders' votes at the annual meeting and simply chuck the CEO (that is, if the directors don't do it first — it doesn't happen often enough). Strangely, a family corporation can likewise end up placing a family member in control who turns out to be — putting it mildly — incompetent.

This is why I believe that one of the prime requirements for a healthy, family-owned company is a strong and independent board of directors. It should contain members who are well-recognized professionals, high-level business people who are not family members. If I go around the bend the day after tomorrow, and as a result the company begins to suffer, my independent board can say, "Sam, we think it's time to turn it over to the next generation, or give your seat to professional management until the next generation is properly groomed."

One can't forget that I could, in turn, just call a special board meeting and fire all the independent directors. But this is unthinkable and would incur the wrath of the rest of the family and the management — not to mention possible lawsuits. Successful boards are collegial bodies, and the practical point of the matter is that a CEO/owner simply doesn't fire a group of people of the caliber chosen for the board of a respected private company.

However, a family company can reach a point in its history when the lines of succession are not clear. Our firm has been fortunate in that there has been only one logical successor in each generation. (The fact that the stock was concentrated by archaic male-chauvinistic or age-biased principles won't hold today, but that — offering no apologies — is how it has been up until now, a situation that may change after my tenure is over.) When a strong leader departs, and several people fight to take that place, it's obvious how messy the situation can become.

A public company may indeed have the edge in succession over a private, family-managed business, unless the private company can hand concentrated control from one individual to another.

This will not be the case with the next generation of Johnsons. There are two boys and two girls in our family, and we face the risk of losing that "concentration." But today I can add an important caveat: Our business has become diversified, and even though there are several family members who may take leadership roles, I envision no major problems, primarily because of that business diversity. Authority — and in some cases, ownership — can be split along the lines of the greatest talent or interest on the part of our children. While it isn't the easiest trick to manage, it can be done. For example, we spun off Johnson Worldwide Associates, a group of companies that makes products for the outdoor leisure market, which has become a family-controlled, public company.

I don't believe, though, that it's sound to have siblings competing. This can be avoided by spreading authority to various parts of the operation. Our firm currently has some existing separation of businesses; unit companies each serve as bases of operation, reporting all the way to an executive vice-president. There is some sharing of manufacturing facilities, but the system works well. So, should the family need to "break up" the company, either in terms of spheres of management authority or ownership, the structure is already in place. We may take more segments of the company public to allow family shareholders to diversify, to bail out their estate, or to allow that segment to acquire additional companies for stock. In any event, family control should prevail.

The family-controlled firm also has the mechanics to make decisions faster than public corporations. This again goes back to having one person, with clear authority, in charge of each major unit of the company. It's the mark of a well-run company.

A good example is our decision in 1975 to take fluorocarbons out of our products. We had done some homework on the matter, but when it became apparent that keeping them in the products would harm our reserve of consumer trust and loyalty, we made the commitment to remove the propellant within a week. Bang.

On occasions when we have been beaten to the market for a new product — as in the case of lemon scented furniture polish — we have been able to come up with a quick counter-punch. I would have preferred to be the innovator of the lemon idea, but you can't always be the first. We ultimately won that battle, though. Sometimes you have to play catch-up, and it's important to do that as well as being an innovator.

Lastly, a family firm can do things of social or cultural value that a public company might be reluctant even to consider, if only for fear of shareholder fury. Granted, many major public companies give millions of dollars to the humanities, the arts, charity, education, and public television, among other causes. This has been recognized over the last decade or so as necessary "corporate responsibility."

However, public firms that are about the size of Johnson Wax frequently have shareholders who don't view philanthropy as necessary; they don't see funding an art exhibit as anything but a cut in their dividend check. We, on the other hand, can do things that enhance the communities in which we live and work without having to explain it to thousands of people.

Being part of a family company compels you to think of the community. You certainly do not want to dump toxic wastes on a site that your children or grandchildren may one day occupy.

As I explained, the private company has an edge over public firms because of secrecy. But this can be taken too far. You don't need to cloak your operation as if you're in the Kremlin. I read where an official of one private corporation said: "It will be a cold day in hell before [his company] talks to the press." That's ridiculous. A CEO can talk about his business without giving away secrets. Isolating oneself and belligerently refusing to become part of the greater public does a disservice to the corporation and the community.

Each generation in a family-owned company probably adapts to and creates change, to win under the conditions of the business and society of the day. The one constant is the family focus on the long-term success of the company, for the next generation and ones even further down the line. It can be said that this is more a matter of pride than success for the family pocketbook. And its a luxury that public corporations-with all the pressures that being public creates-simply cannot afford.

A father's question: Where's the wax?

I can remember when I was the first new-products director of the company back in the fifties. My father, who recognized the need for new products because the wax business wasn't growing, told me, "Sam, it's up to you to find something new."

After a few months, I came up with a proposal for a new product-a Johnson's aerosol insecticide. He looked skeptically at the prototype can and commented, "Don't you know we don't make any product without wax in it?"

"We could put some wax in it," I answered, "but I doubt if it will improve the insecticide."

"What's better about it than the competition's products?"

"It's an aerosol," I noted.

"There are other aerosols on the market" he responded.

"Well," I said. "We've got a nice label."

"There are other nice labels out there. What's really better about it?"

"It's a very good formulation, but I doubt that it's better than what's out there," I admitted. His final comment was, "When you come up with something that's really better, then we'll talk about getting into the insecticide business."

It was a great lesson. I went back to the lab, authorized further research, and discovered that all of the insecticides then on the market were solvent based, and they smelled bad. Also, if you used them near house plants, the solvent (not the insecticide) killed them. We reformulated the insecticide into an aqueous system that could be used safely on plants and didn't smell like kerosene. We named it "Raid House and Garden Insecticide." It was a winner, and we're now the world's largest producer of insecticides. If you're going to get into a new field, you have to have a better product, one the consumer recognizes as demonstrably superior to that of your competitors.


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May 1990


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