A friend asked about the impact of wealth on the children of families owning significant assets. What’s the secret, he asked, to helping such children achieve reasonably well-adjusted adulthood? Indeed, I was reminded of one client who shared his fear that making his kids rich would make them “poor” human beings.
Here’s the answer I offered — recognizing the complexity of the challenge: Parent’s must help their children understand that wealth — while it may provide ease — does not provide easy answers. Only through work — meaning only through the investment of one’s self — does life gain substance and meaning. Work does not necessarily mean “working for pay.” It means working for achievement and it means working at relationships. If one doesn’t work at fulfillment through achievement and relationships, then things don’t work — and life doesn’t work very well either.
A recent article in Forbes magazine made the following points: stocks listed on U.S. stock exchanges have declined from 7400 to 3600 in the past 15 years; public companies earn less than half of business profits in the U.S. economy today; and the part of the business sector that is not listed outperforms that which is listed. Obviously, family businesses make up a substantial portion of the non-listed universe (and the publicly traded universe as well). These data speak once again to the size and importance of family business in the economy and the comparatively better results of private companies over public companies.
In a static or relatively stable socio-economic system, the ability to identify, sustain, and defend a niche in the marketplace creates tremendous value to pass from generation to generation. When the socio-economic system is in ever accelerating flux, creativity and adaptability rather than defensive stability may be the key to longevity. The specific corporate form of the enterprise may be far less the issue than the values, knowledge and assets passed from generation to generation.
Research pointing to the fact that family businesses outperform their non-family peers have also shown that performance in subsequent generations of family businesses does not tend to be as strong as it is in the founder generation. In a Forbes Magazine piece pointing out the challenge confronting Steve Jobs’ successor Tim Cook, Scott DeCarlo observes that successors to iconic company founders generally don’t fare that well. During Bill Gates tenure as CEO of MicroSoft, for example, the company’s annualized total return was 58%. In the five years after he left the CEO slot, the company’s annualized return was –11%. Bernie Marcus at Home Depot had an annualized return of 47% but his successor managed “only” 25%. Other examples are also given.
It is not just the next generation successors in family businesses that are challenged by the record of their business’s founders. All successors face that issue. Being compared to one’s parent, however, can make the comparison seem more dramatic and even painful. Being a successor is no easy job.
This from the most recent Bloomberg Business Week:
“Last year revenue at the company grew 12 percent, to a record $9.7 billion, and while the Great Recession slowed rivals Neiman Marcus and Saks, Nordstrom gained market share. Nordstrom, it seems, is that rarity in American business: an enterprise run by a founding family that hasn’t wrecked it.”
Marriott, Smucker’s, Huntsman, Enterprise Car Rental and many more, often less well known enterprises, continue to be run quite successfully by founding families .As with Nordstrom, all businesses can learn from such families’ accomplishments. We urge Bloomberg Business Week to continue to tell the instructive stories of outstanding family firms and to lay off gratuitous criticisms of what remains a crucially important aspect of our economy and society.
The family of Wal-Mart founder Sam Walton continue to be a powerful force in that business. Son Robson Walton continues as board chairman of the $190,000,000,000 annual sales company. When Sam Walton died nearly 20 years ago, the family retained about 38% ownership of the company. Since 2003, the company has used spare cash for a series of significant stock buybacks. Family shareholders continue to hold their positions which public shareholders have opted for the money. As a result, the family’s holdings have grown to 49%. Recently, a new $15 billion buyback was announced. At current share prices, assuming the family neither sells nor buys additional shares and that the offer is fully subscribed, the family’s share will climb to 53%.
When a family owns a majority of a listed company’s shares, New York Stock Exchange rules no longer require that the majority of the board be independent. Some investors and pundits are complaining that the family will in effect be saying “trust us,” preferring a larger dividend rather than making funds available to repurchase shares. Of course, those who are unhappy with the situation can be among those who accept the offer.
In growing the largest company in the world (barring fluctuations in oil prices that impact energy company revenues), the Waltons have shown themselves to be outstanding stewards. Investing along side of them have made lots of folks lots of money. Betting on this family company’s success has given investors a ride from an Arkansas variety store, to the biggest business (and the biggest family business) there is.
By “letting go” we mean relinquishing control and leadership of a family business, and it can be one of the most emotional difficult experiences of a individual’s life. He or she has the power to handle the shift roughly or smoothly,reluctantly or reassuringly. They set the tone for the rest of the company. Yet more often than not CEO’s find this difficult to do well. It is so difficult in fact, that many can’t bring themselves to do it at all. Research shows that about 11 percent of incumbent family business leaders say they will never retire and about 23 percent say they will “semi-retire.” That means that a third of all family business leaders aren’t going anywhere and therein lies the trouble with many attempted succession plans. Craig Aronoff, in his book Letting Go: Preparing Yourself to Relinquish Control of the Family Business stated “if leaders truly want their company to last into the next generation and beyond, the out going generation must remember that their main job is to relinquish the company—and support successors in their new positions.” Business leaders who actually look forward to retirement handle successions much better than who don’t. Key to this attitude is enthusiasm for some new activity. This may be real estate development, writing a book,starting a new business venture or just going fishing. Whatever the new activity is, it needs to be planned for in advance of leaving the company. John Ward has suggested “that a good transition plan may take five to seven years.” The outgoing leader should be willing to set a final date and stick to it. There should also be a date set for the transfer of voting stock. When it is over, it should be over. The wisest senior generation leaders embrace the necessity of letting go and the responsibility and preparation that it requires.They find joy in knowing that they have built businesses that not only will outlast themselves but that also have been preserved for the next generation of their families.