Money isn't everything

What the Dillards, Boscovs and Redstones
could learn from Curtis Carlson.

“Any enterprise requires three components,” the late relentless Minnesota entrepreneur Curtis Carlson (Gold Bond Stamps, Radisson Hotels, TGI Friday's restaurants, etc.) once remarked to me. “You need a good idea; you need the talent to execute the idea; and you need the capital to pay for it. Of those three, raising the capital is the toughest part of the equation.”

This perception that capital is scarcer than ideas or talent (at least in today's marketplace) explains many things. It explains why bankers are paid more than artists or teachers. It explains why orchestras, sports franchises and publications are almost always created by businesspeople rather than by musicians, athletes and writers. It explains why, in Michael Milken's heyday as a junk bond purveyor in the 1980s, his waiting room at Drexel Burnham Lambert was always crowded, even at 5 a.m. on a Sunday.

But amid this preoccupation with raising capital, corporate executives sometimes forget that ideas and talent matter, too—as three recent family business situations remind me:

• Boscov's, a 49-unit department store chain based in Reading, Pa., fell on hard times after the founder's aging son and son-in-law turned the 97-year-old firm over to the family's third generation in 2006. Amid last year's credit and consumer crunch, Boscov's filed for Chapter 11 bankruptcy protection last August.

But four months later, in what the press hailed as “the miracle that saves his father's legacy,” the family's 79-year-old patriarch, Albert Boscov, came out of retirement with an ingenious financial package to rescue his family firm from bankruptcy. The deal includes $20 million in equity from Albert Boscov himself, $30 million in equity and loans from two of the chain's landlords, $47 million in state and federal economic development loans, and $210 million in high-interest credit lines from banks attracted largely by these aforementioned loans and investments.

In effect Albert Boscov rescued his family firm by leveraging funds from two sources—landlords and government—that would suffer disastrous losses in rents, taxes and property values if Boscov's closed.

In announcing the deal, the funders spoke eloquently about supporting the community and stepping up to the plate in a crisis. But they said nothing about making future profits from this investment. Would it be churlish of me to suggest that the sort of ingenuity Albert Boscov demonstrated in attracting this capital is what's needed to figure out how to entice shoppers back to Boscov's stores?

• Dillard's, the 70-year-old department store chain based in Little Rock, Ark., operates 318 stores in 29 states, with annual revenues of about $7 billion. But its sales have declined over the past two years in the face of more creative competition from discounters like Target and Wal-Mart, not to mention specialty apparel chains like The Gap and Abercrombie & Fitch. Dillard's has tried to respond by reinventing itself as a more upscale specialty store, but its most creative step in this direction appears to have been a change in its corporate name, from Dillard's Department Stores to Dillard's Inc.

Although Dillard's stock is publicly traded, the company has long been run as a private family firm. (Its executives only recently began talking to securities analysts and the press.) The Dillard family's control is assured by its ownership of the firm's supervoting Class B shares. That two-tier stock arrangement may well represent the high point of the family's resourcefulness.

• And of course there's the continuing soap opera involving 85-year-old Sumner Redstone, his love-hate relationship with his restive daughter Shari, and their family's controlling stakes in Viacom and CBS.

In the course of half a century, Sumner Redstone built his father's National Amusements chain of drive-in movie theaters into a vast media empire that gained a controlling interest in both Viacom and CBS. But as I've suggested before, for the past decade or two the Redstones seem to have expended their dwindling supply of ingenuity on financial maneuvers aimed at jockeying for control rather than expanding the pie. (See this column, FB, Spring 2007.)

Although the Redstone empire was valued at $8 billion last year, last fall's stock market crash suddenly revealed that National Amusements was carrying a heavy debt burden —as much as $1.6 billion, by some accounts. Under pressure from his lenders, Sumner announced plans to sell $400 million in Viacom and CBS stock in order to comply with loan covenants.

Such a move would reduce the Redstone family's holdings in both media giants by about 20%. But since all the shares being unloaded are non-voting stock, the Redstones will keep their control of CBS and Viacom intact through their voting stock.

In some quarters, I suppose, this would be considered a brilliant strategic tactic. But in the two months following this announcement—that is, two months after the big market meltdown—Viacom's shares (voting and non-voting alike) lost 40% of their value. Would it be impertinent to suggest that Sumner Redstone and his family would do themselves, as well as CBS and Viacom, a big favor by selling their controlling interest to someone more inspired?

This situation reminds me of another business family who ran out of ideas long before they ran out of capital. Under the McLean family's stewardship, the Philadelphia Bulletin became the largest afternoon paper in the U.S. But after the rival Philadelphia Inquirer was acquired by the Knight-Ridder chain in 1970, a third generation of McLeans seemed helpless to respond to the competition's journalistic innovations.

As rumors of the Bulletin's impending demise swirled through its newsroom in the late 1970s, its publisher, Robert Taylor (a McLean in-law), called a meeting to assure the staff that the family had no intention of selling the paper. His intended pep talk was interrupted by a gutsy and incisive young reporter named Ashley Halsey.

“I don‘t think you understand,” Halsey told him. “We want you to sell the paper. That's the only way it will get better.” The Bulletin was indeed sold subsequently, but by then it was too late: The paper folded in 1982.

Years ago I was moved to observe: “At any publication, when the writers begin expending more creativity on internal memos than on the publication itself, that publication is in trouble.” The recent adventures of the Boscovs, Dillards and Redstones suggest a corollary: In any business, when the controlling family begins expending more creativity on financial maneuvers than on the company's product line, that company too is in trouble.

The youngest son also rises (if you let him)

There's gold at the end of the family line.
Are you making the most of your youngest children?

Two years ago a McKinsey & Co. survey suggested that, other things being equal, a firstborn son may be the worst choice to run your family business. (See this column, Summer 2007.) At that time, you may recall, I was researching a book about the Pony Express superintendent Jack Slade (1831-1864), which led me to speculate that youngest siblings may be the best choice to run your family business.

The book has since come out (Death of a Gunfighter, published last fall by Westholme Publishing), and I offer Slade himself as my case in point. As a wagonmaster and stagecoach mail superintendent in the 1850s and 1860s, Slade organized mobs of unruly men and animals into efficient teams capable of defying floods, droughts, blizzards, outlaws and hostile Indians. In a land devoid of courts and law enforcement (present-day Nebraska, Colorado and Wyoming), he functioned as a benevolent prairie feudal lord, almost single-handedly protecting settlers, emigrants, stagecoach passengers and the U.S. mail. He remained on the job for four years at a time when other men burned out within months. In the process he helped hold the Union together on the eve of the Civil War.

The question naturally arises: If Slade was such an effective and courageous administrator, why was he denied any role in his family's businesses back home in Illinois?

The answer: He was the third son of a third son of a third son.

“At least the first 200 years of American history were largely driven by younger male siblings,” I suggested here two years ago. “These were the men who were motivated to cross the Atlantic and then to cross the continent—because they lacked an automatic inheritance at home. To survive, they had to try harder than their older brothers, and very often they did. And still do.”

Consider my grandfather, Marcus Rottenberg—the youngest of nine children. Of the three brothers in his family, the oldest and youngest were dynamic, while the middle brother was soft and gentle. Marc started out in the family knitted-goods business, but he and his oldest brother proved too stubborn for each other, so Marc went off on his own, where he flourished as an old-fashioned captain of industry for, oh, some 75 years before he finally retired at age 96.

You'd think such track records would teach family businesses to take a closer look at those younger siblings. But the number of youngest sons or daughters running family firms can be counted on the fingers of barely two hands.

Let's see. David Rockefeller, youngest of five brothers and six children, became CEO of Chase Bank—but the Rockefellers were only nominally the dominant family at Chase. Walter Annenberg, youngest of eight children, succeeded his father at Triangle Publications—but then, Walter was the only son. Arthur O. Sulzberger, youngest of four children, succeeded his brother-in-law as head of the New York Times in 1963—but then, he too was the only son. Both Katharine Graham of the Washington Post and Brian Roberts of Comcast were the fourth of five children—but they were also the only children who demonstrated interest in their father's business.

You get the idea. Other examples of “young siblings” who've headed family firms may exist (and if you think of any, please tell me). But by and large, most family firms still follow the 19th-century pattern set by the great retailer R.H. Macy & Co and the great banking house of Drexel & Co.: The two oldest brothers ran the place, while the third brother functioned more or less as their emissary.

If Jack Slade's example won't persuade you to look more closely at your youngest kids, perhaps the singing von Trapp family will. The Baron von Trapp had ten children—the last three by his second wife, Maria, who was immortalized in The Sound of Music. The family fled Nazi-occupied Austria for the U.S. in 1938 and subsequently opened an inn in Stowe, Vt. The baron died in 1947 and Maria in 1987. At that point 32 von Trapp family members held stock in the lodge, but none of them wanted to run the place.

So who stepped up to the plate? The tenth and youngest sibling, Johannes von Trapp, now 69. Johannes had a master's degree in forestry and pursued an academic career in natural resources in British Columbia and Montana. But when his siblings dropped the ball at the lodge, he returned to Stowe in 1994.

“I honestly resented the fact that none of my older siblings could've took over the business,” Johannes told the New York Times last December. “Then I could've run off and done whatever I wanted to do.”

Apparently his conscience didn't let him. Good thing for the von Trapp family legacy that his parents didn't stop after their ninth child.

A modest proposal

In the face of revenue declines and impending debt payments at the New York Times Co., members of the Ochs/Sulzberger family have reaffirmed their commitment to the great newspaper they've controlled since 1896. Instead of selling, the family will conserve cash by slashing the Times Co.'s quarterly dividend by 74%.

“They believe in the editorial independence of the journalism that is produced each and every day,” said Times Co. CEO Janet Robinson in announcing the reduction in the dividend.

“The dividend is a weighty issue for the Times,” the Wall Street Journal reported, “because it is the chief source of income for many members of the Ochs-Sulzberger family.”

That raises a question: Are these dedicated family members—these stewards of independent journalism—incapable of supporting themselves?

It was Adolph Ochs, the family patriarch, who in 1896 conceived the famous Times motto: “All the news that's fit to print.” Perhaps the family's motto today should be: “We'll do anything for the Times, except look for work.”

It's as clear as….

Germany's Porsche Automobil Holding SE last fall sharply increased its stake in Volkswagen AG to nearly 75% in a “domination agreement” that would give Porsche access to Volkswagen's cash flows. The takeover initially caused a rift between the interrelated Porsche and Piëch families, who between them own 100% of Porsche's voting stock.

Ferdinand Piëch, chairman and former CEO of Volkswagen, had abstained from a crucial Porsche board vote on this matter, to the surprise of his cousin, Porsche chairman Wolfgang Porsche, who also serves on Volkswagen's supervisory board. In addition, one report explained, the abstention “caused confusion about plans of the Porsche and Piëch families.”

I dare say it caused confusion within the Porsche and Piëch families as well. As I've suggested here before, business families aren't monoliths. (See this column, FB, August 2006.) Notwithstanding the popular notion that some families are good and others are bad, the variations within families are often greater than the variations between families.