Managing Family Businesses

Managing Family Businesses

Edited by

Rajendar Singh Rathore Icfai Business School Case Development Centre

Icfai Books # 71, Nagarjuna Hills, Punjagutta, Hyderabad – 500082 Andhra Pradesh, INDIA Phone: 91 - 40 - 23435387/91, Fax: 91 - 40 - 23435386 e-mail: [email protected], [email protected] Website: www.books.iupindia.org, www.ibscdc.org

©

2008 The Institute of Chartered Financial Analysts of India. All rights reserved.

No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means – electronic, mechanical, photocopying or otherwise – without prior permission in writing from The Institute of Chartered Financial Analysts of India. While every care has been taken to avoid errors and omissions, this book is being sold on the condition and understanding that the information given in the book is merely for reference and must not be taken as having authority of or being binding in any way on the authors, editors, publisher or sellers. Product or corporate names may be registered trademarks. These are used in the book only for the purpose of identification and explanation, without intent to infringe. Case studies are intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. Copies of individual case studies are available for purchase from www.ibscdc.org

ISBN: 978-81-314-1482-8

Editorial Team: Devi Rajnikanth and Lalitha Jayaprakash Cover Page Artist: Romi Designer: P. Damodara Siva Prasad

Contents Leadership and the Family Business Areas of Consideration for the Effective Executive 1–10

Interview with John A. Davis 11–16

Understanding Family Business Dynamics The Strategic Issues 17–24

Family Business Growth Intelligence? 25–32

Interview with Prof. Kelin E. Gersick 33–38

Family Business Solutions Transitions in Management Succession Planning 39–56 Case Study

Nordstrom The Fourth Generation Expansion Strategies

57–64

Estée Lauder The Family-Owned Cosmetic Manufacturer’s Growth Strategies

Case Study

65–82

Case Study

The Reliance Group Split-up What Went Wrong with the Indian Conglomerate? 83–93

P R E L U D E When “Family Business” (starring Sean Connery, Dustin Hoffman and Matthew Broderick) was released on December 15th 1989, it carried a tagline, “There’s nothing like a good robbery... to bring a family together.” Hollywood’s another blockbuster, “Godfather” (released in 1972) also reflects what happens in a ‘family’ business. The games continue with different players. Coaches? The parents. Umpires? No. They wish rather to build empires without umpires. The rules of the game? Self-made. The issues involved in managing a family are “Succession, wealth multi-fold. Succession, wealth management and management and governance are three governance are three very important issues very important issues concerning family concerning family businesses. Fewer than one in three businesses.” survives to the second generation. Family businesses are primarily of two different types. The first type is a business having only the family members as principals as well as agents. Outsiders are suspected and sullied. Generally, these types of companies do not see exceptional growth. Not that they cannot. Rather, they do not wish to. Why do they wish not to grow? It’s a trade-off. The conscious choice made seems to be in favour of remaining small for fear of dilution of control. No one buys Henri Fayol’s ‘subordination of individual interest to general interest’ principle. Avedis Zildjian Co. (1623), Laird & Co. (1780), George Ruhl & Sons (1789), Loane Bros. (1815), Bevin Brothers Manufacturing Co. (1832), Antoine’s Restaurant (1840), Verdin Co. (1842), Baumann Safe Co.(1843), AE Schmidt (1850) and Hicks Nurseries (1853). What are these 10 companies known for? These are the 10 oldest surviving family businesses in the US. The parenthesis indicates the year in which each of these companies was founded. Today, on an average, fifth-generation descendants run each of these businesses. Aren’t they obscure? That’s the choice made. The second type of business is where a family has a majority stake and therefore controlling power over the company. Wal-Mart, Fiat, Cargill, Ford, News Corp., Hyundai, Nike, Viacom, Virgin, Reliance Industries,

WIPRO, etc., are companies with a predominance of family ownership. Managing these companies is a daunting task. The principal-agent relationship makes the job of a CEO really challenging. The Economist (March 15th 2007) observed, “The “The late Alex Trotman, who held the top job at Ford in late Alex Trotman, who held the top 1993–1998, used to say that job at Ford in 1993–1998, used to to be successful, the boss of say that to be successful, the boss of Ford needs to manage the family as well as the Ford needs to manage the family as company.” well as the company.” Of late, quite a few positive changes are noticed in many family businesses. Having a ‘constitution’ or a family governance system is by far the most important step in this direction. In their book, Practical Strategy for Family Business, authors Michael K. Allio and Robert J. Allio highlight five virtues and five vices of family businesses. The five virtues identified are loyalty, deep pockets for growth, focus, speed and follow through. Blind loyalty, tunnel vision, good $ after bad, impulsiveness and tactics are the five vices of family businesses according to the authors. However, the importance of family businesses cannot be discounted. The findings of the University of Southern Maine’s Institute for Family-Owned Business are quite revealing: some 35% of Fortune 500 companies are family-controlled. Family businesses account for 50% of US’ GDP. They generate 60% of the country’s employment and 78% of all new job creation.