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As the Hewletts, Packards and Fords are demonstrating, founding families often retain a surprising amount of influence on quoted companies.
Economist Staff, The Economist
November 16, 2001
The conflict has turned decidedly nasty. Walter Hewlett, son of one of the founders of Hewlett-Packard (HP) and a member of the company's board, missed a board meeting in July that discussed a proposed merger with Compaq Computer. Why was he not there? Because, reported CNET News, an online service, on November 12th, he was playing with the Bohemian Club symphony orchestra. The club's members, says the story, are "rich businessmen, politicians and some influential artists". Implication: spoilt rich kid swans off while his family firm debates its future.
And then causes trouble when the firm decides to head in a direction he dislikes. Mr Hewlett recently announced, to the consternation of HP executives, that Compaq was the wrong partner for HP. "With this transaction," he complained, "we get what we don't want, and we jeopardise the things we already have." The Hewlett family and its charitable foundation, jointly controlling 5.2% of HP's shares, will vote against the merger. So, probably, will David Packard, the only son of HP's other founder. He chairs the Packard Humanities Institute, which holds a 1.3% stake. And so perhaps may the David and Lucile Packard Foundation, chaired by another relative, Susan Packard Orr, which controls 10.4% of the company's shares.
Among the ranks of large quoted companies are a surprising number in which, as at HP, the founder's descendants still have an important voice. When a family floats a firm, it usually retains a substantial holding. Think of Wal-Mart, where Rob and John Walton (sons of Sam Walton, the firm's legendary founder) are on the board, which Rob Walton chairs; or Motorola, where Chris Galvin is chief executive of the company his grandfather founded 73 years ago; or Nordstrom, where the family controls 24% of the shares; or Coca-Cola, where the Woodruff family still exerts huge influence.
New versions of such firms will spring from some of the businesses founded in the past few decades, says Amar Bhidé, author of "The Origin and Evolution of New Businesses", as shares in companies such as Dell Computer, Microsoft, Berkshire Hathaway and Home Depot pass on to family trusts or the next generation. All told, reckons Joe Astrachan of the Family Enterprise Centre at the Coles College of Business, part of Kennesaw State University in Georgia, families wield influence at between 35% and 45% of America's 500 largest listed companies, depending on how "influence" is defined.
Most of the time, such descendant-shareholders keep their heads down. They pop up, says Andrew Keyt, who runs the Family Business Centre at Loyola University in Chicago, mainly when senior management messes up, or if it fails to uphold the family's values — as William Clay Ford has done at Ford Motor Company. In October the great-grandson of Henry Ford sacked Jacques Nasser, the chief executive, and took charge himself.
The Ford family controls 40% of the company's voting rights, and has had a history of trouble with the "hired help". The relationship seems to work best with Brits: Alex (now Lord) Trotman, a Scot, retained the family's confidence; Sir Nick Scheele, the new chief operating officer, is thick with Mr Ford; so is David Thursfield, chairman of Ford of Europe and maybe the company's next chief executive.
All businesses start out run by families, or at least by individuals who pass on a stake to their nearest and dearest. In America, the stake is often in a family-controlled trust. A couple of family seats on the board can pack lots of power, especially if they go with seats on the nominations committee, and so control over the choice of chief executive. Sometimes a family, such as the Watsons at IBM, exerts surprising influence even though its stake is tiny. A larger family stake can serve as a useful poison pill against a hostile takeover bid.
Families can retain control more easily if, as in Ford's case, the company has a share structure that gives special voting rights to a select few shareholders. Such arrangements are fairly common in media groups, such as the New York Times, where the Sulzberger family controls 88% of the votes but has a mere 17% of the company's class A shares. But in general in America, and even more in Britain, they are frowned upon by stock exchanges.
British and American exchanges also insist on fair treatment of small investors. In continental Europe and Asia, by contrast, family control of listed companies is made easier by weaker rules about treatment of minority shareholders and, argues Colin Mayer, professor of management studies at Oxford University, by a complex network of cross-shareholdings. These often allow a single family-owned holding company to control a vast array of quoted companies, as the Agnelli family controls Fiat, for example.
Perhaps because the influence of institutional investors is so much weaker in continental Europe and Asia, families there seem to intervene more often and less bashfully than in America or Britain. At Valeo, a French car-parts group, and at BMW, a German car maker, the controlling families have waded in repeatedly to change top management. In America, by contrast, there have been times when outside shareholders have stepped in to reprimand or even oust a family member. That has happened at Wang, a now-defunct technology company, and at Archer Daniels Midland, an agricultural business.
Family involvement can be bad for outside shareholders. One American academic study found that the death of a big inside shareholder typically resulted in a rise in the share price, and the larger the deceased's shareholding, the bigger the subsequent rise*. It is a myth to assume that the family understands the business better than outside managers, especially as generations pass and the business changes. At Gucci, a luxury-goods company, family squabbles almost ruined the business. The family lawyer rescued it.
But conscientious families may not feel the same about the company as do managers or ordinary shareholders. Sir Adrian Cadbury, who has written a pamphlet on corporate governance in family firms (published in Britain by Egon Zehnder, a headhunting firm) and whose ancestors created the Cadbury chocolate brand, sympathises with Mr Ford. "His name's on all the cars, so he has a position as the guardian of the company's values and reputation," he argues. "That means he's different." Marilyn Carlson Nelson, boss of Carlson Companies, a privately owned travel group, says that America has respect for family ownership, which "can help to sustain a culture [and] add continuity".
The Hewletts and Packards reflect a similar sense of family values. Rob Enderle, an analyst at Giga Information Group, points out how much the families' approval matters to the HP merger. "Without them," he says, "it would be almost impossible to make the deal happen, because so many people in the company look to them for guidance." Ironically, when Carly Fiorina took over as chief executive, she invoked HP's family origins by running a series of advertisements that featured the garage in which the firm was born. If she is now judged to have betrayed that legacy, the merger, and with it her career at HP, will be dead.
* "Ownership Concentration, Corporate Control Activity and Firm Value: Evidence from the Death of Inside Blockholders", by Myron B. Slovin and Marie E. Sushka, The Journal of Finance, September 1993
Copyright © 2001 The Economist Newspaper and The Economist Group. All rights reserved.