Families in the Boardroom: Under the Influence

As the Hewletts, Packards and Fords are demonstrating, founding families often retain a surprising amount of influence on quoted companies.

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 Misfortunes

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.


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