Podcast Summary
Family-controlled businesses in Fortune 500: A legacy of commitment and growth: Family control in businesses can lead to deep commitment and dedication, but it may not always ensure job creation and economic growth.
A significant number of companies in the Fortune 500 are family-controlled businesses, with around one third being part of this category. These businesses have a rich history, often starting as small enterprises and growing over generations. The founder's family members, especially the children, are often the ones who take over the business, ensuring the continuation and growth of the family brand. This familial connection can lead to a deep sense of commitment and dedication to the business. However, it's essential to consider whether family control necessarily leads to job creation and economic growth. To illustrate this concept, let's examine the story of D.G. Yingling and Son, America's oldest brewery. Founded in 1829 by a young German immigrant named David G. Yingling, the brewery has remained in the family for five generations. Today, Dick Yingling, the CEO, continues the family legacy, with portraits of his ancestors adorning the office walls. Despite the brewery's rich history, Yingling beer is not widely known outside the East Coast. This raises the question of whether family control is always the best choice for businesses in today's economy.
From disagreements to revival: Yingling Brewery's journey: Against all odds, Yingling Brewery was revived by its current owner Dick, who returned to save it from bankruptcy and passed down the legacy to his daughters.
The Yingling Brewery, America's oldest, has a rich history of resilience and determination. Dick Yingling, the current owner, started working at the brewery as a kid, dreaming of one day buying it from his father. However, they had disagreements about growing the business, leading Dick to leave and start his own venture. When his father fell ill with Alzheimer's, Dick returned to buy the nearly bankrupt brewery and turned it around through hard work and steady expansion. Despite having a small market share, Yingling remains American-owned and focused on longevity rather than shareholder profits. The brewery, which has been run by Yingling men for over 180 years, is now being carried on by Dick's daughters. Through thick and thin, the Yingling Brewery continues to thrive, embodying the spirit of perseverance and dedication to craft.
Family business without clear succession plan: Lack of succession planning in family businesses can lead to uncertainty and potential drops in profitability.
The Yingling brewery, while having a strong family business foundation with institutional knowledge passed down through generations, lacks a clear succession plan. The current patriarch, who is still actively involved and enjoys running the business, has not made any specific preparations for handing it over to the next generation. This approach, while common in family businesses, can lead to uncertainty and potential drops in profitability according to economists. However, the Yinglings seem content with their current situation, and the younger generations are already being prepared for future roles. Ultimately, the success of a family business relies on careful planning and a clear understanding of the future leadership and transition process.
Family CEOs who attended less selective colleges underperform: 40% of family CEOs in underperforming firms attended less selective colleges, limiting the talent pool and potentially leading to less qualified individuals running the company. Select the best candidate for the job, regardless of familial relationships.
The underperformance of family CEOs in businesses can be largely explained by those family CEOs who attended less selective colleges. According to a study by Francisco Perez Gonzalez, an assistant professor of finance at Stanford Graduate School of Business, around 40% of family CEOs in his sample attended colleges outside the top 189 in the US. These CEOs were driving the poor performance of family firms compared to those who brought in non-family CEOs. However, if you exclude these firms, there is no statistically significant difference in performance between family and non-family CEOs. This phenomenon is not a new observation, as Max Weber wrote about the need for individualistic entrepreneurship and the absence of nepotism in capitalism over a century ago. This concept is known as the Carnegie Conjecture. Economists argue that handing off a business to a family member can destroy value, as it limits the talent pool and may result in less qualified individuals leading the company. Instead, it is recommended to select the best candidate for the job, regardless of familial relationships.
Heritability vs Success in Business and Leadership: While some traits have high heritability rates and contribute to sports success, personality and intelligence, which have lower heritability rates, play a crucial role in business and leadership but can't be guaranteed through inheritance.
While some traits, like height or athletic ability, have a high heritability rate, are important in sports, and can be passed down from parents to children, other traits, like personality characteristics and intelligence, have a lower heritability rate and can't guarantee success in areas like running a business or leading a family dynasty. The Vanderbilt family, who aimed to build a railroad empire and a famous family name, is an example of how talent and wealth can get diluted over generations. Similarly, Anheuser-Busch, a brewing company with a long line of Bush family members, demonstrates the importance of hard work and dedication in maintaining a successful business, rather than relying solely on inherited traits.
Anheuser-Busch's Exceptional CEO: August Busch III: August Busch III led Anheuser-Busch to a 205-fold increase in stock value, making it the largest and best American brewer with 52% US market share by 2001, despite his intense focus, high standards, and calculating nature.
August Busch III, also known as the third, was an exceptional CEO of Anheuser-Busch with an impressive track record of business growth. His leadership resulted in a 205-fold increase in Anheuser-Busch stock value between 1964 and 2002, significantly surpassing the S&P 500's growth during the same period. Busch was known for his intense focus, high standards, and calculating nature. He took over the company by force at the young age of 37 and transformed it into the largest and best American brewer, holding 52% of the US market share by 2001. Despite his personal coldness and lack of close friends, he was a formidable and powerful businessman who left a lasting impact on the industry. However, his son and potential successor, Busch IV, lacked the same level of dedication and discipline, making him an unlikely CEO material due to his partying lifestyle and personal struggles.
The Bush family's Anheuser-Busch legacy: The Bush family's deep-rooted connection to Anheuser-Busch, founded on tradition and values, influenced the company's history and resonated with its loyal customer base, despite minimal ownership stake and eventual sale to Inbev in 2008.
The Bush family's involvement in Anheuser-Busch, starting from the first sip of beer given to newborns, played a significant role in August Bush IV's eventual rise to CEO, despite personal challenges and family dynamics. However, the family's ownership stake in the company became minimal as it grew into a $37 billion publicly traded business, with Warren Buffett's Berkshire Hathaway owning 5%. The family's legacy, represented by the iconic Budweiser brand and traditions, continued to be a source of pride for many, despite the sale to Inbev in 2008. Despite the financial success, there were misunderstandings and misconceptions, such as the belief that the Clydesdales would be replaced by Belgian workhorses. Overall, the Bush family's connection to Anheuser-Busch, rooted in tradition and values, influenced the company's history and continued to resonate with its loyal customer base.
Family disputes affect business performance: Family dynamics and personal issues can hinder a company's ability to adapt to industry changes, as seen when the Anheuser-Busch family's internal conflicts distracted them from globalization efforts.
Family dynamics and personal issues can significantly impact the success and efficiency of a business, as seen in the Anheuser-Busch family's handling of the company during its acquisition by InBev. The distraction caused by the disagreements between August Busch III and the 4th led to less time spent on addressing the globalization of the beer industry. Peter Buffett, in a separate context, shares how growing up with a famous father, Warren Buffett, shaped his perspective on the importance of doing what you love, regardless of one's background or wealth.
Children's involvement in family business not a guarantee of success: Forcing children into a family business may not be beneficial for the company or the child, and family control can negatively impact business performance in the long run.
The involvement of children in running a family business after the founders step aside is not a guarantee of success. The speaker's experience growing up with a father who had amassed significant wealth but didn't push his children into the business illustrates this point. The odds of having a child with the same passion and drive as the founder are slim, and forcing the child into the business may not be beneficial for the company or the child. The speaker's father believed in following one's passions and allowed his children to explore their interests, even if it meant not joining the family business. Economists have found that family firms tend to perform worse once the next generation takes over, and this is particularly true in emerging markets where family control is strongest. While the family effect is a common practice, it may not be the best approach for businesses in the long run.
Family firms as a second best solution in emerging economies: Japan's unique tradition of adopting outsiders as family CEOs leads to superior performance, even with strong institutions
In emerging economies, where institutions and the rule of law may not be as strong as in developed countries, family firms can serve as a second best solution. These firms often provide their own forms of trust and adherence to contracts due to the close relationships and shared values within the family. However, Japan, a wealthy country with strong institutions, presents an intriguing exception. Despite these favorable conditions, family firms in Japan still outperform professionally managed firms. The reason for this is Japan's unique tradition of adopting adult males into families to serve as CEOs. This formal adoption process allows for the integration of talented outsiders into the family and the continuation of the business. This practice, which is not common in other countries, highlights the importance of adaptability and flexibility in business structures even in the presence of strong institutions.
Adoptive Succession in Japanese Family Firms: In Japan, about 20% of family firms opt for adoptive succession, placing adopted sons in a select pool and contributing to superior performance. However, in cultures like India, adoption as a succession strategy may face challenges due to loyalty concerns.
In Japan, while there is a preference for blood succession in family firms, the adoption of non-blood relatives as CEOs is not uncommon. In fact, about 20% of family firms in Japan that hand off to a family member choose an adopted son. This practice, known as "adoptive succession," is considered an honor for the birth family, as it places their child in a select pool. Interestingly, research suggests that these adopted CEOs significantly contribute to the superior performance of second-generation managed firms in Japan. In contrast, in cultures like India, the adoption of non-blood relatives as heirs may face challenges due to concerns about loyalty and potential conflicts of interest. Overall, the use of adoption as a succession strategy highlights the importance of family values and traditions in Japanese business practices.
