Podcast discusses ‘Daughters in Charge’
I recently participated in the “Daughters in Charge” podcast, hosted by family business consultant Amy Katz, Ph.D.
Amy and I discussed trends related to women in family businesses. Among other topics, we talked about the various roles available to family business daughters, even if they don’t work for the family’s operating company.
Listen to the podcast here: http://daughtersincharge.com/barbara-spector/
A nuanced view of family enterprise longevity
As I have noted before, leading scholars in the field of family enterprise have debunked the notion that selling a family business -- even one that has been in the family for many generations -- represents a “failure” or that sustaining a family business indefinitely is always a desirable goal.
A landmark study published in Family Business Review in 2012 -- known as the FFI/Goodman Study on Longevity in Family Firms -- assessed more than 100 business families from around the world and found that nearly 90% owned multiple businesses, and that over their history, these families had spun off an average of 1.5 companies. In other words, these successful business families do not hesitate to sell businesses when circumstances warrant doing so.
Current thinking in the field emphasizes that value is created by a family rather than a family business. Families who are continuing to invest together profitably and harmoniously after selling their operating company -- such as the Power family, featured on the cover of Family Business Magazine’s May/June 2014 issue, or the Agnew family, who appear on our May/June 2015 cover -- represent what family enterprise is all about.
Dave Power and his family sold J.D. Power and Associates to McGraw-Hill in 2005. Dan Agnew and his family merged their beverage distributorships with another family beverage company in 2008 and then sold the merged company in 2012. Both families capitalized on attractive opportunities and are continuing to work together to create wealth, engage in philanthropy, and develop governance structures to ensure long-term sustainability
In a recent edition of The Practitioner, an online publication of the Family Firm Institute, Patricia Angus notes that the myth of the family business as monolith (that a family controls only one business) has had dangerous implications for estate planning.
Angus, a consultant on philanthropy and family governance and an adjunct professor at Columbia Business School, writes: “Trust agreements often prohibit sale of a family business, or at least relieve the trustee of the duty to diversify so that the family business can be held in trust. Provisions forcing the retention of the business can be so inflexible that they can have adverse consequences for the family and enterprise…. A mandate, even if unspoken, to keep a business intact can become quite troublesome; a little flexibility can go a long way to help the family over the long run.”
In other words, think about your real long-term goal. Is it to perpetuate a particular operating company, no matter what the marketplace conditions may be, or to continue collaborating on ventures that provide income and satisfaction to family members? Think about your family’s future entrepreneurs, and make sure you aren’t tying their hands.
Meeting shareholders’ liquidity needs
Cargill, the largest U.S. privately owned company, celebrates its 150th anniversary this year, and in recognition of the occasion the Financial Times recently profiled the giant agricultural commodities trader. (Disclosure: I was one of the people quoted in the article.)
The FT report noted that at two pivotal points in the Cargill’s history, the company -- controlled by about 100 members of the Cargill and MacMillan families, descendants of the founder -- found a way to grant liquidity to shareholders who needed it.
In 1992, Cargill created an employee stock ownership plan. Family members sold an ownership stake of 17% to the plan for $700 million. And in 2011 -- when the company’s largest shareholder, the Margaret A. Cargill Foundation, wanted to cash in its shares -- Cargill spun off its 64% stake in Mosaic, a publicly traded fertilizer company, the FT report said.
Benjamin Oehler, the former CEO of Waycrosse, the Cargill/MacMillan family office, told the FT that the Mosaic transaction would be sufficient “to meet the liquidity needs of the family, I would think, for another generation.”
Though it had annual revenues of more than $100 billion, Cargill needed to find liquidity for its shareholders. If you own a later-generation family company with owners who don’t work for the business, the liquidity issue will most likely arise for you, as well. After the third generation, family members’ lifestyles can be widely divergent. Some owners might require cash to fund a child’s education or to start a business of their own.
When family shareholders’ liquidity needs are not met -- if they are unable to extract cash from what is likely their main investment, the family business -- family conflict is apt to follow; in a worst-case scenario, unhappy owners could file suit or force a sale of the business.
There are ways to find cash for family owners (even if you don’t have a multibillion-dollar asset to spin off, as Cargill did). An adviser can help you evaluate the pros and cons of each alternative.
Former Family Business Magazine columnist Jim Barrett often referred to family shareholders with no means of cashing in their investment in the business as “prisoners.” Even a family that is committed to long-term ownership of its business, like the Cargill/MacMillans, must find a way to set its prisoners free.
Benihana founder’s tunnel vision
A recent Ernst & Young report entitled “Family Governance: The Issues, the Concerns and the Strategies to Deal with Them” lists a number of governance missteps that commonly arise in family companies.
One of the issues cited in the white paper is “tunneling” -- business ownership through cross-shareholdings. The E&Y authors note that this strategy, which usually undermines non-family minority shareholders, can damage the efficiency of the business.
In the case of the Benihana restaurant chain, founder Rocky Aoki’s tunneling strategy caused relationship problems not with non-family partners, but within his oddly blended family -- and, before his death at age 69 in in 2008, ended up undermining his own interest in the company. A lengthy feature article in the March 15 issue of Fortune spelled out the lurid story.
Rocky Aoki was married three times and fathered seven children by three women. His widow, 59-year-old Keiko Ono Aoki, is not the mother of any of his children. Today, Rocky’s kids and his widow are suing each other for control of the enterprise. As the Fortune report explained, that sorry situation is a result of an ownership structure that, while it helped the founder meet his financial needs at the time it was set up, had disastrous long-term effects.
The confusing ownership structure was rooted in Rocky’s 1983 decision to raise funds for expansion by dividing his business into two companies and taking one of them public. As Fortune explained it, Benihana of Tokyo kept 39 of the restaurants, all located outside U.S. Eleven more restaurants were moved into a second company, Benihana Inc. Rocky sold 49.1% of Benihana Inc. to the public; the remaining 50.9% was held by Benihana of Tokyo. Rocky was chairman of both companies, which shared a headquarters.
Rocky did some finagling to get his hands on the Benihana restaurant at the Hilton Hawaiian Village Waikiki hotel, his favorite. Benihana Inc. owns the Waikiki restaurant, but Benihana of Tokyo manages it, the Fortune article explained.
In 1999, Rocky pleaded guilty to insider trading. Although he was not sent to prison, his liquor licenses were revoked, the Fortune report said. In order to keep the licenses at his restaurants, Rocky stepped down from all his company positions, although he continued to be paid as a consultant. And he transferred his interest in Benihana of Tokyo (which owned a majority stake in Benihana Inc.) to a trust that was to be managed by three of his children and his attorney.
Then, in 2002, Rocky married Keiko, to his children’s dismay, according to Fortune. His two eldest children urged him to sign a postnuptial agreement, without success. Later, the children convinced Rocky to sign an amendment to the trust that put them in control and cut out Keiko. Rocky, who contended that he didn’t understand what he agreed to, then made four revisions to his will that progressively gave more control to his wife, the article said.
In 2004, fearing Keiko’s influence, the board of Benihana Inc. (which included Rocky’s eldest son) issued new stock and reduced the family’s stake from 50.9% to 36.5%. Rocky sued the company, but not his son. But in 2006, when three of his children sold more shares (further decreasing the family trust’s holdings), Rocky sued them (plus a fourth child) for breach of fiduciary duty and sought to have them removed as trustees, the Fortune report said.
By this point, Rocky was no longer a paid consultant for Benihana Inc. and “was reduced to asking his estranged children to approve his withdrawing money from the trust he had created out of his own business,” Fortune reported. Rocky revised his will again, leaving his assets in trust for Keiko. The founder “had managed to reach a place of nearly perfect contradiction: Depending on which document you looked at, two kids were guaranteed Aoki’s assets -- or [Keiko] could make all the decisions and keep a quarter for herself,” the article said.
After Rocky’s death, the trust that had given the children control of Benihana of Tokyo was terminated; Keiko became sole trustee and appointed herself CEO. The widow, who has entrepreneurial ideas that she says are in line with what Rocky would have wanted, began taking steps to revitalize the business, the Fortune article noted.
Meanwhile, according to the article, Benihana Inc. also brought in new management and made changes, which Keiko contended amounted to corporatization of the chain, according to Fortune. Lawsuits and countersuits followed.
In December 2012, investment firm Angelo Gordon bought Benihana Inc. The new owners offered to buy Benihana of Tokyo from Keiko, but she declined, the Fortune article said. Benihana Inc. now holds 79 restaurants in the U.S. and South America, including the one at Waikiki; Benihana of Tokyo owns or franchises 18 restaurants in Europe and Asia and manages the Waikiki location.
Among other legal wrangling, the two companies went to federal court over Keiko’s plans to sell a “Beni Burger” at Waikiki, a move that Benihana Inc. argued would cheapen the brand. Keiko’s company sued in December 2014, claiming Benihana Inc.’s complaints “are nothing more than attempts to get her to sell,” Fortune reported.
Between the corporate litigation and the intrafamily suits, Fortune predicted, “The battles, it seems, will continue for years.”
Most likely, your life is not as colorful as Rocky Aoki’s. Even so, you can take a lesson from his story: Trusts and ownership structures you create today will affect your family years later. Before signing any documents that represent long-term commitments for your family and your business, consider various “what-if” scenarios, and make sure your advisers explain all the potential ramifications.
A non-family leader in the interim
In February, the giant French spirits company Pernod Ricard announced that Alexandre Ricard would officially assume the role of chairman and CEO.
The announcement was not a surprise. Ricard, 42, is the grandson of Paul Ricard, who helped create the company via a merger in the 1970s. The Ricard family holds the largest stake in the company, whose brands include Absolut vodka, Jameson Irish whiskey, Chivas Regal Scotch, Malibu rum and Beefeater gin.
When Alexandre’s uncle Patrick Ricard died suddenly of a heart attack at age 67 in 2012, the company had planned that Alexandre (known as Alex) would eventually become the chairman. But although Alex had been with Pernod since 2003 (after first working at Accenture and Morgan Stanley), he did not assume the top job right away.
At the time of Patrick Ricard’s death, non-family executive Pierre Pringuet was serving as the company’s CEO; Patrick had stepped down from the CEO post in 2008 and retained the title of chairman.
After Patrick’s death in 2012, Pringuet added the role of vice chairman, and Patrick’s sister Danièle Ricard, then 73, became non-executive chairwoman. Alex was appointed deputy CEO and chief operating officer.
In February 2015, after Pringuet had reached the mandatory retirement age of 65, Alex became chairman and CEO. About a year before his elevation, the Wall Street Journal asked Alex how he felt about working with Pringuet while waiting to climb the ladder. “The success factor, I strongly believe, is if two people work together hand in hand and get along, which I’m lucky enough is the case,” he said.
A well-chosen non-family interim leader like Pringuet is an excellent option when the family wants a next-generation member to eventually take the reins but would prefer for that family member to gain more experience first. In the January/February 2013 issue of Family Business, we profiled Annin Flagmakers of Roseland, N.J., where a duo of non-family executives led the company between the retirement of the fifth-generation leadership team and the ascent of sixth-generation president Carter Beard and his cousin Sandy Van Lieu, the senior vice president of mass-market sales.
As Pernod’s CEO, Alex Ricard will pursue an ambitious goal of overtaking Diageo, the leader in the market. Only time will tell if he will succeed, but the skills he honed while working closely with Pringuet are likely to be helpful in his new role. “It’s not a question of what I think he should do,” Pringuet told industry website Just-Drinks when asked if he had advice for Alex. “I already know what he thinks.”