Family Business Magazine looks back
Family Business Magazine made its debut in the autumn of 1989, and our September/October 2014 edition celebrates our 25th anniversary. In this issue, we revisit some of the family businesses we’ve profiled in the past to see how they’ve fared over the years and how they envision their future.
Some of these family firms have weathered hard times, including a tough economy, deaths in the family and natural disasters. A few of the families sold their legacy companies and are now pursuing other interests. But for the most part, the folks we interviewed confirmed what researchers in the field have found in study after study: Family business owners are optimistic.
Here are some common themes that emerged from our follow-up profiles:
• Several families whose companies were hit hard by the recession opted to hang in there rather than sell out. The “family factor” likely was at play in these decisions. It’s questionable whether a non-family ownership group would be as committed as these families to riding out a rough patch.
• The companies we revisited exemplify family businesses’ innovation and adaptability. Five of the profiled companies significantly changed their product offerings, moving out of a declining market and into a more promising one. Several others added new products or services or made major acquisitions. One business even changed its name; the healthcare resource management company known as Coalition America when we featured its founders, twin brothers Scott and Sean Smith, in 2002 is now Stratose Inc.
• The business owners we interviewed who are thinking about succession are taking a systematic approach to educating the next generation and eventually selecting the future leader. Susan Gravely, for example, the CEO of tableware importer Vietri Inc., is grooming a team of executives, include her nephew and non-family employees. “We did a lot of consulting with board members and outside experts,” Gravely told reporter Deanne Stone, who originally wrote about Vietri in 1996 and revisited the company for our 25th anniversary issue.
Unpacking the Market Basket saga
The Boston.com website dubbed the summer of 2014 “The Summer of Market Basket” -- and, indeed, every day seemed to bring new headlines in the saga of the ousted company leader, his rivalry with his similarly named cousin, the employees who staged a walkout to support their fired boss, the lost business and eroding company value as a result of the work stoppage, and the protracted intrafamily negotiations. In the end, the family of the ousted CEO, Arthur T. Demoulas, bought the 50.5% of the company they didn’t already own from the branch led by Arthur S. Demoulas, returning Arthur T. to the helm.
Amid the flurry of news reports describing picketing workers and depleted store shelves, some important points might have been missed:
• Media reports that portrayed Arthur T. as the hero and Arthur S. as the villain were misleading; the real family story is much more nuanced. A court judgment in the 1990s found that Arthur T.’s side of the family fraudulently transferred shares belonging to Arthur S.’s side to entities Arthur T.’s side controlled. The court awarded 50.5% ownership in the company to Arthur S.’s family “as repayment for bad-faith dealings,” a Boston Globe report pointed out. This background makes it easier to understand why Arthur S.’s side advocated so strongly for using profits to pay higher dividends to family members.
• Arthur T., so beloved by Market Basket employees that they risked their jobs to support him, has “a tougher side” and “appears to be at his worst in interactions with relatives,” the Globe report noted. Transcripts of Market Basket board meetings published by the Globe revealed a toxic boardroom environment, with both Arthurs, and the directors who supported them, often using disrespectful language when speaking to each other.
• Rafaela Evans, widow of Arthur S.’s late brother Evan Demoulas, played a pivotal role in the family saga, though she owned only a little more than 4% of the shares on her own and was a shared trustee of just another 1.5%. Although she was related by marriage to Arthur S., for years Evans had voted with Arthur T.’s family. In June 2013, however, Evans -- who lives in London and has not granted interviews -- switched sides, resulting in a realignment of the board in favor of Arthur S. This chain of events shows the power that one family member can have.
• Each day that the sale negotiations dragged on, the company racked up more losses; some estimates put the figure at up to $10 million per day. Arthur S. wasn’t opposed to selling his stake; in fact, a Globe report said he had discussed a sale with private equity firm Cerberus Capital Management in 2011. Kevin Griffin, publisher of the Griffin Report on Food Marketing, told the Globe, “It just seems like [Arthur S.] wants to sell to anyone but Arthur T.” The holdup late in the talks reportedly concerned the Arthur S. faction’s refusal to agree to seller financing. Arthur T. ended up funding the $1.5 billion deal through a mortgage loan secured by the company’s real estate and private equity financing.
• Arthur T. has a long road ahead of him. A Boston.com article noted that Market Basket’s traditional ability to generate higher profits than its competitors despite low prices and generous employee benefits was partially attributable to the company’s lack of debt. “With Arthur T. and family now taking on debt to make the deal work, all eyes will be on whether it is possible for the company to operate as it has and still satisfy the terms of a financing plan,” the article said.
• Arthur T. won his CEO position back, and seems to have won the P.R. war. Arthur S., for his part, walked away with a big pile of money. But Boston Globe columnist Tom Keane suggested that the real winners were Market Basket’s employees who staged the walkout and the customers who stayed away from stores during the standoff. “Their argument was that if they did return, if things went back to normal, then the pressure to resolve the family feud would be off,” Keane wrote.
Whatever happens with the stores, it’s tough to imagine the family branches reconciling after the explosive summer that culminated 30 years of toxic relations.
Tapping the next generation’s energy
In a recent article posted on the Harvard Business School Working Knowledge website and on Forbes.com, Michael Roberts and John Davis asserted, “Families that want to stay in business for another generation don’t have a choice except to encourage entrepreneurship in and out of their company.”
Roberts (a retired Harvard Business School faculty member who was executive director of the Arthur Rock Center for Entrepreneurship) and Davis (a Harvard Business School senior lecturer and a family business adviser) pointed out that there are both business and family reasons why family firms’ long-range success depends on entrepreneurship. On the business side, they wrote, “You must be nimble and, as certain lines of business wane, be able to identify growth opportunities in and out of the core industry and pursue them in experimental, cost-effective ways. For that, you need the risk-taking, resourceful attitude of an entrepreneur.”
On the family side, Roberts and Davis noted that not every family member will end up working for the family firm, and “investing in family entrepreneurs can … keep talented members contributing to the broader family’s wealth and mission.”
Family Business has long emphasized that next-generation members can be a vital source of innovative and entrepreneurial ideas. For example, Kyle York, 31, who spoke at our Transitions East 2014 conference, works outside his family’s business, sports gear company Indian Head Athletics. But York and his brothers have developed a plan to license the Indian Head brand from their parents and transform the family firm into a fashion and lifestyle company.
In a 2013 article in Family Business Magazine on her family business, Menasha Corporation, fifth-generation member Sylvia Shepard noted that each succeeding generation has transformed the business model. Menasha, which is more than 160 years old and generates over $1 billion in annual revenues, originally made wooden pails and now provides packaging, logistics and marketing services.
Whether they work in your family business or outside it, your next-generation members’ perspectives on technology, current business-school theory and social networking can add value to your business. These young men and women can bring energy and innovation to family governance and business planning. Set aside your memories of changing their diapers and seek out their opinions.
An unsavory succession plan
What should you do if there are no next-generation family members to take over your business? Many business owners sell their companies. Others appoint non-family successors and continue as passive investors after their retirement. But a Japanese business owner appears to have found an offbeat approach.
Phuket Wan Tourism News, a website that reports on tourism, property, restaurants, nightlife and employment on the island of Phuket in Thailand, reported that the man apparently fathered nine surrogate children born within six months of each other “to create a group of youngsters who can take over his business.”
The report did not give the name of the man or his business, nor did it say what type of business it was.
According to the report, military police and welfare workers raided a condominium in Bangkok and found the babies, ranging from one month to six months old, with Thai and Japanese nannies. Also found in the condo was a woman who was about four months pregnant, who said she was a surrogate mother. A Japanese woman said the was planning to travel with the babies to Japan.
Two of the babies had fevers and were taken to a hospital, the article said.
A lawyer for the man said the father plans to sue for the return of the children, according to the report.
This man’s desire for family successors apparently has led him to develop a plan that seems disturbingly close to sex trafficking.
Someone should tell him that, even if the court awards him custody of the children, there’s no guarantee that they will grow up to become a competent, harmonious successor team -- or have any interest in working for his company.
Loving your kids and setting them free
In 2010, billionaire investor Warren Buffett proclaimed that he plans to give more than 99% of his wealth to philanthropic causes. He famously said, “I want to give my kids just enough so that they would feel that they could do anything, but not so much that they would feel like doing nothing.”
In a recent interview with the Daily Mail, Sting -- the bass player and singer who first became famous with his band the Police and then grew more wealthy as a solo artist and film actor -- also publicly proclaimed that his kids shouldn’t expect a large inheritance. Sting, 62, who was born Gordon Sumner and is the father of six children ranging in age from 18 to 37, told the Daily Mail:
“I told [my children] there won’t be much money left because we are spending it! We have a lot of commitments. What comes in we spend, and there isn’t much left. I certainly don’t want to leave them trust funds that are albatrosses round their necks. They have to work. All my kids know that and they rarely ask me for anything, which I really respect and appreciate…. They have this work ethic that makes them want to succeed on their own merit. People make assumptions, that they were born with a silver spoon in their mouth, but they have not been given a lot.”
You may not agree with what the rock star is doing with his fortune, but his frank conversations with his children are undeniably admirable. As Jayne Pearl and Richard Morris -- co-authors of Kids, Wealth and Consequences: Ensuring a Responsible Financial Future for the Next Generation -- wrote in Family Business Magazine in 2010:
"It’s important to communicate with your children so they don’t base their own decisions -- about spending, education and career -- on what may be false assumptions. Otherwise, they will be not only surprised (and probably resentful) to learn they’re not destined for Easy Street, but also unprepared to support themselves and their own families at anywhere near the level they expected."
Sting also said in the Daily Mail interview:
“With my children there is great wealth, success -- a great shadow over them -- so it’s no picnic at all being my child. I discuss that with them, it’s tough for them.”
Family business advisers recommend that senior-generation members of prominent families talk to their kids about how to respond to their peers’ comments, questions and speculations about the family’s wealth. Pearl and Morris wrote, “Many parents also emphasize that the family is fortunate in ways that have nothing to do with money: We are lucky to be healthy, to have a close family, to have such an interesting history, etc.”
Our Transitions West 2014 conference -- taking place November 12-14, 2014, in Marina del Rey, Calif. -- will include a session entitled “Raising Kids Successfully in a Successful Family Business.” Panelists in this session will discuss how parents can help their children earn credibility, appreciate the family legacy and understand the value of wealth.
One essential lesson the panelists will impart is the importance of open and honest communication between parents and children. Next-generation members who aren’t prepared to function independently are likely to be stung by life’s consequences.