Families Find the Principles That Keep the Business Going

By Paul Sullivan

Originally published in:  New York Times (May 2015)

PETER GORDON, a member of the family that owns Glenfiddich whisky, has a distinct memory of the workers lined up as he walked into the Scottish distillery in the 1970s. They were waiting for a dram of day-old whisky — the equivalent of a double shot. If they didn’t drink it, they rubbed it into their hands, in the belief that it toughened calluses.

Mr. Gordon was 17 at the time and had just started working at the plant on school holidays and summers. He couldn’t always drink his dram, he said this week in New York, particularly if he was given whisky made the day before as opposed to one that had been bottled the previous day, after mellowing in an oak cask for years.

“It was incredibly strong,” he said. “I couldn’t finish it all.”

Mr. Gordon, a fifth-generation member of the family, is now 56 and the former chairman of William Grant & Sons, which owns Glenfiddich and Balvenie whisky, Hendrick’s gin and other spirits. He said the free samples stopped in the 1980s when employees gave up walking to work and started driving their cars.

But he said the company had worked hard to maintain other traditions, like keeping ownership in the family, even as it has created new ones like a family council. All of this has been done to ensure that the company stays family-owned into the sixth generation and beyond.

“The main purpose of the family council is to keep ownership issues away from the board so the board can concentrate 100 percent on business issues,” Mr. Gordon said. “But there is a subgroup within the family council that works away at policy for the next generation.

Family-owned businesses are like families themselves: When they work well, they’re marvels to behold and the envy of family businesses rived by strife; when they don’t work, they usually go bankrupt or get bought by someone else.

This week, Mr. Gordon brought together some of the 11 other families featured in a new book, “Family Spirit: Stories and Insights From Leading Family-Owned Enterprises” (Chronicle Books, 2015), that have kept their companies going for generations, from Lavazza in coffee and McIlhenny in hot sauce to clothing, weaving, glassmaking and hotel families. The sample is skewed by survivor bias. Still, it’s one with interesting lessons for those thinking about passing on their companies, which, after all, represent not only their wealth, but their life’s work.

If there was one word that rang true among the successful families, it was governance. That refers to the structures a family business puts in place to address any corporate issues that crop up. While those structures can be set up by outside advisers, John A. Davis, chairman of the families-in-business program at Harvard Business School, said the most successful families abided by their own governing principles.

He found three principles in particular. The families have to think about the long term, which keeps them holding on to shares that pay annual distributions, but would bring more immediate wealth if sold.

The families are focused on internal quality controls. “Doing things right seems to be more of a cultural obsession in these companies,” Mr. Davis said.

And they are financially prudent, spending money on projects they believe have long-term value, not speculating on something unrelated to the core business.

But these principles can be hard to follow, particularly as families expand exponentially from the founder. Within a few generations, scores of people could be working in or expecting money from a privately held business. Mr. Davis said the businesses that continued to do well focused on growth, talent and family unity.

Many of the companies require younger members to work outside the family business and not expect a job straight out of college. Before working at William Grant & Sons, for instance, family members are expected to spend at least five years at another company. “We want them to be able to stand on their own two feet before joining the family company,” Mr. Gordon said.

Something similar is in place at Mitchells, an upscale clothing company that is on its third generation of owners. “We have an employment agreement where you have to work five years outside of the business,” Bob Mitchell, co-chief executive, said.

He said five of the six members of his generation worked in the business. But they also rely on nonfamily support in corporate and board roles.

“We have an advisory board with phenomenal outside advisers,” Mr. Mitchell, 49, said. “We try to have great nonfamily executive talent. But at the same time, we know who is responsible for different decision-making and have clear accountability.”

He said the company had retained the original names for its five stores — four of which were bought from other families — and striven to maintain the family-owned feel.

“We celebrate the slight differences,” he said. “People like to celebrate their own stores. If they’re not sacrificing anything, they’d rather shop with a local player who gives back to the community.”

As the generations go on and the families grow, the sheer number of heirs can test even the best governance strictures. Some family companies have benefited from buying out family members.

This happened with the Denihan Hospitality Group, a boutique hotel and real estate company. It began as an upscale dry cleaner in Manhattan in 1908, and now owns and operates boutique hotels in New York and other cities. In 2006, Brooke Denihan Barrett, the chief executive, said she and her brother bought out four other family members, from two sides of their family.

“You could call that pruning the family tree a little bit,” she said. “But then, more family starts. That’s where governance comes in.

She said she often referred to two lessons from a class she took many years ago with Mr. Davis: Family grows faster than business, and structure is your friend.

In the case of Glenfiddich, Mr. Gordon said his father and uncle led a share buyback 30 years ago that reduced the number of family members in the company by 80 percent. “Today, nine individuals represent roughly 90 percent of the shares in our business,” he said. “That’s a very low number, but it allows us to act quite quickly.”

Successful family businesses seem comfortable with concentrating on just one industry. Giuseppe Lavazza, vice chairman of Lavazza Coffee, which was started in 1895 by his great-grandfather in Turin, Italy, said the company sold off other businesses in the 1950s to focus on coffee.

When Lavazza became concerned by the limitations of the Italian market, the company started selling its coffee internationally. “It was a very good idea because the revenue of Lavazza is 50 percent in Italy and 50 percent in the international market,” he said.

Such concentration could be a risk to a family’s wealth. One way to reduce that risk is by being financially conservative. Ms. Barrett said Denihan Hospitality owned 100 percent of the operating company and its hotels in New York and Chicago, and partnered with companies in other properties.

Of course, families all have their quirks. And some family businesses have succeeded by doing things that a public company’s shareholders — or other family-owned businesses — might deem imprudent. The McIlhenny family has produced Tabasco sauce for five generations on Avery Island, 2,200 acres of marshland in southern Louisiana. It has only the one plant in this hurricane-prone area that bottles Tabasco for 187 countries with labels in 22 languages.

“It’s all made here and has been since it started,” said Tony Simmons, the seventh chief executive of the McIlhenny Company since 1868. “We have 20 family members who live on the island, and 130 family shareholders who own the company. It’s a blood stock.”

While the company has 250 employees, its ownership and management is entirely a family affair. The 10 board members are all family, and there is a process in place to test out two to three successors to be the next chief executive. This system worked when the last chief executive, Paul C.P. McIlhenny, died of a heart attack at age 68 in 2013.

Whereas other family-owned companies hire nonfamily members to run the daily operations, like Glenfiddich, or sit on the board, like Mitchells, Mr. Simmons firmly believes in drawing only from the family pool.

“I have a very strong, diverse group of people to look at as board members,” he said. “Two of our most recent board members — one is a partner at Bain & Company and is a family member; another graduated from Harvard with an M.B.A., worked for McKinsey, went back to Harvard, got a law degree and worked at the Department of Justice for a while.”

But if family members fail to live up to expectations, they are literally voted off the island.

“If we feel you can’t be a C.E.O., we’re going to ask you to leave and leave quietly,” Mr. Simmons said. “Family members are expected to be able to continue to show that they can take on added responsibility as they move through their career. They are our succession plan.”

It works for them.