The ‘Why’ Of When Family Businesses And Countries Prosper
“And so, my fellow Americans, ask not what your country can do for you; ask what you can do for your country,” is the saying now famously associated with John F. Kennedy, though Oliver Wendell Holmes said it eight decades before.
This same statement is the precise recipe for the survival and success of family businesses too, though as far as I know, nobody put it quite this way: “And, so, my dear relatives, ask not what the business can do you for you; ask what you can do for the business.”
The parallel will prove illuminating. With baby boomers retiring in massive numbers, and a large number of countries languishing amid political upheaval, Europe included, let’s take a look at common patterns linked to succession within companies and countries.
It turns out that countries as well as family-owned businesses do well when the people and the family serve, respectively, the country and the business. Neither does well if “the country” or the business is run to serve “the family” and fails to attract and retain the “vital few”; a pattern discussed in this column, as it applied to Ireland and Greece.
On one side there are Mexico and Venezuela, Brazil and Nigeria, and the Middle Eastern countries endowed with fertile land, mines, oil, sunshine and beaches. But did these riches serve their countrymen? Some countrymen, yes, but the citizens of those countries more broadly? No.
Or, remember Zaire in the 1970s. The country had a quarter of the world’s copper reserves. With the price of copper high, and President Nixon praising Zaire’s future, the U.S. banks forwarded credit to president Mobutu. With easy cash available, he splurged on regal estates, jumbo aircraft, 500 British double-decker buses, and put money aside in Swiss banks, while Zaire remained one of the poorest countries in the world. In the more distant past Spain declined too, notwithstanding it stumbling on gold treasure. The riches served some of Spain’s elite, rather than the myriad Spaniards serving the country.
By contrast, Taiwan, Japan, Hong Kong, Korea, and Singapore are wealthy despite not being endowed with any natural resources. On the contrary, some are endowed with natural disasters.
Cuba was once rich and wealthy, but much of Cuban wealth was transferred to Florida when those with skills and education left Castro’s promised paradise; many penniless. Cuba held onto the “real estate”, but the country’s true wealth in the form of human capital left for Miami. The brains left, and Cuba’s loss was the U.S.’s gain. This is not new either.
The Netherlands are below sea level, with few natural resources. Yet this did not prevent Amsterdam from becoming the miracle of the 17th century – by being tolerant to all religion and attracting Jews, Huguenots and Italian Catholics wanting to practice banking freely, which they were not allowed to do in their homeland.
What are the parallel observations for companies?
First, there is the old proverb, variations on which exist in many countries: Three generations from shirtsleeves to shirtsleeves. The first generation, the entrepreneur, serves the business. The second generation still uses the family to expand the business. But the third generation – the Germans call it “the critical one” – takes the inherited riches for granted, and uses it – like some countrymen use the natural treasures – to serve personal interests. The family business then disintegrates.
The rise and fall of the Schwinn bicycle company provides a picture-perfect illustration of the above-mentioned proverb. In 1963, the company, a relatively small family-owned business until then, came up with a strange looking “Sting-Ray” bike.
It became a bestseller, and put the company on the map. But by 1992, after the Schwinn heirs missed both the dirt and mountain bike trends, the company went bankrupt. As Judith Crown and Glenn Coleman documented in their book about the rise and fall of the company, the Schwinn heirs were simply secure in their fortune, and did not bother either to prepare for a career in the company, or agree to merge or sell it.
True, there are exceptions to this rather well-documented regularity. Sometimes it takes just two generations to fail, not even three, as in the case of Alexander DiLorenzo Jr. Already the second generation succeeded to lose within two decades, by 1997, a Manhattan-based real estate fortune which once consisted of 200 buildings in top locations, valued at more than $600 million.
Sometimes rich families overcome the obstacles, as certainly happened with the Rothschild, Levi Strauss and Rockefeller dynasties. Yet the observation of “clogs to clogs in three generations” (as the Lancashire put it), is sufficiently widespread in countries with open financial markets, to allow the generalization.
Indeed, one of the toughest decisions countries and companies have faced since time immemorial has been succession. Eventually, some countries stumbled on the impersonal rule of law, separation of powers, and the idea that decisions based on the wisdom of the many, combined with the right institutions – democracy that is – are better than that of the few made by “genetic accidents” – monarchies, that is. Countries adopting it, properly interpreting the meaning of “wisdom of many” as implying accountable financial markets too, thrived. Those that did not, fell behind. And those that forgot what “accountability” implies – as happened in the events leading to this crisis – fell behind too.
What have been the parallel rules for companies’ long term success? One was that some managed to turn succession within a company into an impersonal business too. The way to achieve this was to allow trusted “outsiders” to settle the succession issue. When that was not done, the founders pushed their kids to head the company – and gradually the company disintegrated.
What is the solution for separation of powers in business? Family constitutions, a characteristic feature of longer-lasting family businesses, achieve this goal for families separating to some extent ownership, management and family issues.
The separation of management and family issues brings us back to the crucial role of “vital few outsiders,” be it for countries or companies – a topic addressed in last week’s column too, in the Greek context. Equality before the law, and the ability to have access to accountable financial markets based on merit rather than connections or political clout, have been the tenets of the most successful commercial societies.
The parallel in any family business is easy to spot. Few matters have been more disturbing to the fortunes of companies than promoting family members who worked much less hard than unrelated employees. Learning from these mistakes, companies, such as Du Pont, stumbled on the rule that it is better to buy out the lazy, incompetent or non-interested family members rather than allowing them to destroy the business. Families have pursued this strategy through various means: setting up charity funds, venture funds or buy-out funds to ease out a family member. These strategies reflect the precise meaning of the principle of success: family serving the business rather than the contrary.
For countries “outsiders” have often meant the influx of skilled, entrepreneurial immigrants, whether it was Ireland getting the Poles (but who left during the crisis), Israel getting hundreds of thousands of Jews from Russia; Florida getting the Cubans, Toronto getting the “anglophones” fleeing the prospect of Quebec independence, Western Europe after WWII the massive inflow of migrants fleeing communism – West Germany in particular. There is nothing new about this pattern. Hong Kong and Taiwan owe much of their prosperity to the Chinese Diaspora fleeing communism too, and, of course, the U.S. is the best example of all. Though it is true that much such successful immigration took place before the Western states offered extensive benefits to migrants who were neither skilled nor could they expected to be, be it because age, illness or other reasons.
There are a number of reasons for the well-documented and disproportionate success of these “outsiders.” One is that by moving from place to place, they brought with them new ways of looking at things. Another was that they had networks that members of the immobile tribes among whom they found themselves did not have. Still another reason has been that the migrants had less to lose: they cared less about tradition, about losing “face” in case of failure.
These parallels do not cover all the angles of what make countries and family businesses a lasting success. However, the regularities suggest precepts of successful survival.
In fact, they can be summarized in one statement uttered more than 2,000 years ago. Kung Fu Tze, better known as Confucius, wrote, “Good government obtains when those who are near are made happy, and those who are far off, are attracted.”
The above is equally true for companies as well as for countries. Family members were made unhappy, and the skilled outsiders stayed, well, outside. And the businesses fell behind.
Article originally published on Forbes.com.