The Agnellis and Fiat: Family Business Governance in a Crisis (A)
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9-812-128 MARCH 28, 2012 JOHN A. DAVIS BERNARDO BERTOLDI ROBERTO QUAGLIA The Agnellis and Fiat: Family Business Governance in a Crisis (A) On Saturday evening, May 29, 2004, John Elkann left the funeral of Umberto Agnelli, which took place at the family’s ornate private chapel in the Cimitero di Villar Perosa outside of Turin, saddened and concerned about the challenges facing the Agnelli family he now led. The public outpouring of affection during the day, as Umberto’s body lay in state at the Fiat museum archive in Turin, reassured him about the loyalty of many people to the Agnelli family. But these were risky times. Umberto, the chairman of Fiat Group, had died after a brief illness, only a year after the death of his older brother and family patriarch, Giovanni Agnelli. John had been designated the future leader of the family in 1997, and now it was his job to make important and difficult decisions for his family. The Agnellis had a tradition of granting complete authority over their business holdings to the family leader. That tradition had done much to give the family stability, direction, and unity. The stability was enforced by the presence of Gianluigi Gabetti, who had served Giovanni and then Umberto for thirty years as trusted advisor and chief executive of the family’s main holding company. With Umberto’s death at 70 years old, John now had this authority, and he would likely draw heavily on advice from Gabetti. But in this time of transition for the family, the family business was in trouble. Fiat Group, the Agnellis’ prized investment and the largest industrial concern in Italy, was in bad shape. Its fourth CEO in three years, 57-year-old Giuseppe Morchio, had just launched a major turnaround. As the family’s designated (but not formally confirmed) leader, John’s priority was get the Group’s many stakeholders, including the banks, to support Morchio’s plan. This would be harder now than when Gianni and then Umberto clearly had been in charge. John left the funeral and went back to his office with Gabetti to think about the challenges ahead. John had been struck at seeing Morchio at center stage of the public condolences, actively shaking hands. He was even more surprised to hear from Gabetti about a request passed on from Morchio’s assistant. Morchio had asked that Fiat’s board of directors meet in special session the very next day, a Sunday. The assistant explained the urgency of this request by citing the annual gathering of bankers and industrialists at the Italian Central Bank on Monday. With Umberto’s passing, Morchio wanted to send a strong message to the country’s economic leaders that Fiat was not rudderless, and that he was Senior Lecturer John A. Davis, Professors Bernardo Bertoldi of the University of Torino, and Roberto Quaglia of ESCP-Europe prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2012 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School. Distributed by ecch, UK and USA North America Rest of the world ecch www.ecch.com t +1 781 239 5884 t +44 (0)1234 750903 the case for learning All rights reserved e [email protected] e [email protected] 812-128 The Agnellis and Fiat: Family Business Governance in a Crisis (A) firmly in charge, endorsed by the family. Morchio, John learned, was going to ask the board to make him the chairman of Fiat. The request alarmed John because it would rush the board, whose members would still be feeling the sorrows of Umberto’s passing. More important, it would be the first time since the early years of Fiat, aside from the rebuilding period after World War II, that the same person was both chairman and CEO of Fiat. To John and his family the separation of these roles was a pillar of governance on which the family business was built. The family was comfortable with delegating operational control of Fiat to a non- family CEO. A combined chairman-CEO would be harder for the family to overrule. Morchio’s demand had come at the worst possible time. Fiat Group desperately needed a strong leader like Morchio. But giving him both CEO and chairman roles could fundamentally change the family’s ties to the business. John faced a difficult first decision. At such a dire time for the company and family, John wondered why Morchio would want both responsibilities for himself alone. It didn’t help that Morchio hadn’t bothered to walk over himself to discuss his proposal with John. Maybe Italian state television, which had covered Umberto’s funeral as a national event, was right in saying that his passing was the end of an era for the Agnellis and for Fiat. Governing the Agnelli Family Business Governance had been simpler in earlier decades of “Fabbrica Italiana Automobili Torino,” or Fiat. The first Giovanni Agnelli (1866-1945) was an ex-cavalry officer and son of a small landowner when he got interested in the new horseless carriages. He and eight other gentry and aristocrats started the business in 1899 in Turin, close to his home in Villar Perosa. Initially all had equal shares in the limited public company, with one of them, Ludovico Scarfiotti, serving as the chairman. A power struggle among the owners ensued early on. Agnelli, who had some engineering training of his own, favored products developed elsewhere, while chief engineer Aristide Faccioli preferred using his own product ideas. Agnelli won that battle (Faccioli left the company) in 1902 and became CEO of Fiat, with Scarfiotti continuing as Chairman. As the company expanded, Giovanni and two other partners invested heavily in the business and sold shares to the public. The financial panic of 1907 forced the company to reorganize under pressure from the banks, and the shareholders lost nearly all their equity. But with support from the banks, Agnelli remained in operational control. The company, which by then had developed an expertise in engineering, flourished during World War I and the boom of the 1920s. Fiat was the first European carmaker to invest in the Ford model of assembly line production, giving it a tremendous leg up on the competition. Soon it moved into manufacturing trucks, airplanes and locomotives. As part of a strategy of vertical integration, it even made its own steel and electricity and opened a financing subsidiary. By 1929 Fiat was the third largest Italian industrial company. To solidify ownership control over the rapidly expanding operation, Giovanni in 1927 set up a holding company, the Industrial Financial Institute (IFI). IFI held a majority of the Fiat shares, and Giovanni and his son, Edoardo, held nearly all the IFI shares. Two other Italian industrial families, the Pirellis (tires) and Borlettis (department stores), held the remaining IFI shares. From this point on, the Agnelli family, through IFI and other holding companies, always owned a controlling stake in Fiat. Starting in the 1990s, Italian law forced anyone acquiring 30% or more of a listed company’s stock to make an offer to buy all the remaining shares. IFI owned more than the 30% of Fiat before the law was issued, and was exempted from the rule, but anyone else trying to amass shares to gain control would 2 The Agnellis and Fiat: Family Business Governance in a Crisis (A) 812-128 have the burden of making a full bid. Since then, the Agnellis, through IFI, have kept their ownership of Fiat above the 30% level. IFI proved useful for controlling other investments as well. As Fiat’s expansion started generating returns, Giovanni Agnelli went beyond automotive and invested in a variety of industries: beverages (Cinzano), concrete (Unicem), coal (Vetrocoke), air transportation (Società Aviolinee Italiane), hydroelectric energy (SIP), publishing (La Stampa), construction (Impresit), soccer (Turin’s Juventus team) and ski resorts (Sestriere). Fiat itself owned all operations related to auto making, while IFI held the controlling shares in other enterprises as well as Fiat itself. IFI was thus the nerve center for controlling all of Agnelli’s investments. As his holdings prospered, Giovanni Agnelli became a kind of industrial prince like the Borromeos, Medicis and the Savoias during the Italian Renaissance. He was knighted and made senator for life in the Italian Republic, an honorary position that gave him the nickname of Senatore. Akin to the feudal estates of old, his autocratic role brought extraordinary loyalty from the management, who became a kind of gentry themselves. Like many Italian family companies, Fiat developed a tradition of lifetime employment and promotion through the ranks, cementing this loyalty. Added to that was the excitement of working on world-class engineering in a modern industry. Starting in 1920, Senatore delegated operating responsibilities of Fiat and the other companies to a series of non-family CEOs. He remained in full control as chairman of Fiat, with a board of directors consisting of his son Edoardo, company managers and other shareholder representatives. Senatore’s concerns about control extended to his family. Himself an only child, he had a daughter, Aniceta, as well as a son, Edoardo. Senatore groomed Edoardo as his successor by putting him in charge of Juventus starting in 1922, when he was 30.