Market Basket Shows the Best and Worst of Family Business

By John A. Davis

Originally published in: Harvard Business Review (August 2014)

Family businesses rarely receive much public attention unless they are in crisis. The public loves a good Greek tragedy. And periodically, families in business give them one.

Right now we have an honest to goodness Greek tragedy in Market Basket, a large family-owned grocery store chain being run into the ground by the feuding Demoulas (yes, Greek-American) family. The story is front-page news in Boston and is getting attention nationally and even outside the U.S. This drama is enhanced with antagonist-cousins, Arthur T. Demoulas and Arthur S. Demoulas, each named after the family business founder, Arthur Demoulas. You can’t make this stuff up.

At this very well-regarded family company, employees are picketing to protest the board’s firing of CEO Arthur T. Demoulas. Shelves are largely bare, and suppliers are being hurt by the slowdown. Many shoppers are not crossing the picket lines. The company’s newly appointed co-CEOs are trying to replace striking employees; some 25,000 jobs are at stake, but employees are holding the line. Politicians and government officials are weighing in.

This high-stakes, riveting story obviously teaches us a lot about the vulnerabilities of family companies — but it’s also a good reminder of their strengths. It is important to keep in mind that family business, a largely silent sector of market capitalism, is also the biggest sector, accounting for two-thirds of all businesses in the world, and about half of the largest companies in the United States. Studies done in a number of countries indicate that both public and private family companies perform, on average, significantly better than non-family businesses. They are stronger financially, have higher stakeholder loyalty, live longer, and are more trusted by the public. These company strengths have a lot to do with their family ownership and family leadership. And this is also true at Market Basket.

The now-former family leader of Market Basket, Arthur T. Demoulas, built an impressive and extremely loyal employee group. What company wouldn’t love to have frontline employees striking to support their CEO? The same goes for the cult-like loyalty of Market Basket customers.

All this goodwill pays off. In a very competitive industry where margins are low and sales are hard fought every single day, Market Basket performs well against encroaching giants and big box discounters. The company has been able to keep its prices low and highly competitive, in part, because the company, not the family, owns its real estate. Arthur T. Demoulas has championed the strategy of company ownership of real estate, and employees cheer him for it. The faction led by Arthur S. Demoulas wishes to transfer ownership of the real estate to the family. The employees are right when they predict that this transfer would result in higher store rents and higher prices in the stores; this could in turn lead to competitive problems and lower growth for the business.

Arthur T. Demoulas was able to maintain his business model as long as he had the support of the board. Board support was gained by having a majority of family owners (including one from the Arthur S. family branch) support his stewardship approach to the family business. When family business owners are largely stewards of their business — who want to grow and pass their company into the next generation and take only affordable dividends from the business — management is able to focus on customers, quality, and long-term growth. Not all family owners need to be stewards. Some family owners can have more of an “investor” mind-set and emphasize strong dividends and stock appreciation. Investor-owners usefully keep management on its toes. But to support continuity of a family business, it is better to have mostly steward-owners. In the Market Basket situation, a mostly steward-ownership group switched to a mostly investor-ownership group when one board member switched to the Arthur S. side and tipped the balance; the board subsequently fired Arthur T.

To be fair, the board may have fired Arthur T. for reasons other than this philosophical divide. Certainly, the steward-investor divide among the Demoulas owners is just the tip of the iceberg of disunity in the Demoulas family. The family ownership group has been fractured and fraught with distrust and disrespect at least since a court battle that began 24 years ago. After four years of fighting in court, in 1994 the court found that one branch had taken advantage of the other by siphoning significant company assets to itself. The court awarded the wronged branch (now headed by Arthur S.) 50.5% of the company shares and created a board with three independent directors to mediate between the branches on the board — a pretty wise solution. But it didn’t adequately address, let alone restore, family trust. With deep family wounds on both sides stemming from ugly personal attacks, and a shareholder agreement that didn’t have a clear buy-sell process or a mandated process for privately managing disputes, it was practically fated that the family would publicly battle again and again.

How is it that the conflict didn’t overwhelm the company sooner? The fact that the business held up as well as it did is a testament to the strength of the Market Basket business model, a tenuous majority of votes on the board of directors, and adequate sheltering of the management and employees by Arthur T. from the owners’ problems. But it didn’t last.

Once families turn to lawyers and courts, it is very difficult to restore trust in a family. But it is possible. My colleague Suzanne Stroh and I document in our HBS case “Clarks at a Crossroads” how family board chairman Roger Pedder helped rebuild family unity and commitment to the U.K.’s Clarks shoe company in the wake of a big, public shareholder battle. The Demoulas family could have created a shareholder agreement that mandated that future disputes be mediated and arbitrated rather than going to court. A clearer, fair process for future buy-outs could also have been negotiated. They could have tried rebuilding trust in the broader family. The independent board members could have insisted on these actions and guided the process. A neutral non-family CEO could have assumed the helm until things in the family improved.

I can’t say that these suggestions would definitely have worked with this family, but families in business have an obligation to their many stakeholders to at least try to reconcile or to peacefully part ways. Now that they have reached this point, where the company is hemorrhaging, the independent directors need to find a new ownership solution. Arthur T. has made a buyout bid which is being “considered” by the Arthur S. branch. My guess is that the Arthur S. side would prefer an outside buyer to selling to their cousins. With every day that passes, more and more industry commentators claim that the company has reached its marketing and financial limits. And yet the stalemate goes on.

It’s possible that the Arthur T. branch may be able to partner with the employee group. Alternatively, Arthur T. might be able to secure family-friendly private equity backing to regain ownership control. He would, however, be well advised to steer clear of traditional short-term, high-return private equity funding sources. Given the loyalty of employees to Arthur T., it will be interesting to see if suppliers and customers can rally around any other new owner, who will probably bring in new senior management.

No matter how this crisis gets resolved, this family business drama will play out on the public stage for a while, at least until the next family business Greek tragedy takes its place. In the meantime, I hope that the public will see beyond just the vulnerabilities of family ownership of a business in this case. Family capitalism has many natural strengths and it does a lot for the world economy. It’s just not as riveting to talk about them.