2007 Kellogg Family Business Conference

Best Practices and New Ideas May 15–16, 2007 2007 Kellogg Family Business Conference

Sponsored by Kellogg School of Management Northern Trust Corporation McDermott Will & Emery Kellogg Center For Family Enterprises Professor Lloyd E. Shefsky Clinical Professor of Entrepreneurship The Center for Family Enterprises grew out of a request Founder and Co-Director, Center for Family Enterprises by a group of Kellogg M.B.A. students nine years ago [email protected] to start a club and attend a class focused on the unique aspects of owning, governing and/or managing family Professor John L. Ward businesses. The center deliberately concentrates on Clinical Professor of Family Enterprises family enterprises with a focus that includes family Co-Director, Center for Family Enterprises businesses, family foundations, family offices, family [email protected] investment companies and family wealth management. Carol Zsolnay Center Mission: Assistant Director Center for Family Enterprises • Provide thought leadership to the field of family [email protected] enterprise Dana Levit-Geraci • Contribute to the body of knowledge through cases, Center Assistant research and publications Center for Family Enterprises [email protected] • Serve student needs through courses, informal workshops, personal counsel and a resource library Center Website: www.kellogg.northwestern.edu/familyenterprises • Build a family business community among Kellogg students, faculty and alumni Phone: 847 467-7855 Fax: 847 491-5747 • Develop a global network of successful business Kellogg School of Management families who can learn from each other and connect Donald P. Jacobs Center with each other through Kellogg, Kellogg partner 2001 Sheridan Road executive programs and conferences Evanston, IL 60208

• Stimulate awareness and research by other Kellogg faculty on the special issues and opportunities for family firms Best Practices and New Ideas May 15–16, 2007 2007 Kellogg Family Business Conference

You can carry on a family enterprise if you Estate planning is a topic that just can handle three things: greed, jealousy, doesn’t, at least initially, lend itself to and a sense of entitlement. This is very comfortable decision making. easy to talk about but very difficult to do. Dick Lang

Lester Crown On the difficulties encountered when trying to help clients plan for the transfer of wealth between generations. On the challenges of maintaining a successful family enterprise across generations.

In the past few years, I started to appre- All the difficult times we went through ciate that I have a part to play in forming together have enabled us to be stronger. the culture and the values of our business. I think the real heroes in our story are the ones who restarted the business the Liz Stein lauf

On being a member of the Invisible Organization within the family business. first time after the Revolution.

Priscilla de Moustier

On her family remaking their 300-year-old business numerous times dating from the French Revolution.

Contents

Welcome from the Center for Family Enterprises 5 Next Generation Making a Difference 93

Moderator: Greetings from Northern Trust and 6 John L. Ward, Kellogg School of Management McDermott Will & Emery Panelists:

Photo Array 8 Ramya Bharathram, Thirumalai Chemicals Company J.P. Rhea, Rhea Cattle Company Issues and Answers 13

Facilitator: Next Generation Reflections from the Workplace 103 Lloyd E. Shefsky, Kellogg School of Management Moderator: Dustin Marshall, Kellogg Student Family Enterprise Club Adventuresome Spirit 21 Host: Keynote speaker: Barry Merkin, Kellogg School of Management Bertrand Piccard, M.D., Explorer, Pilot, Humanitarian

Panelists: Long-Term Thinking 31 Andrea Paiz, La Fragua Speaker: Gregory Touret, Touret Family Investment Group John L. Ward, Kellogg School of Management Carrie Meek, Meek’s Lumber and Hardware

The Invisible Organization 45 Kellogg Award for Special Contributions 121

Moderator: to Family Business Carol Zsolnay, Kellogg School of Management Presenters: Lloyd E. Shefsky, Kellogg School of Management Panelists: John L. Ward, Kellogg School of Management Liz Steinlauf, Edmunds.com, Inc. Marilyn Ofer, Ofer Group Recipient: Jamie Crane, Crane Group Co. The Wendel Family

Speaker: Wealth Transfer Planning 63 Priscilla de Moustier, WENDEL Investissement Moderator: John L. Ward, Kellogg School of Management Participating Family Companies 136

Panelists: R. Hugh Magill, The Northern Trust Company Kellogg Student Conference Volunteers 139 Richard Lang, McDermott Will & Emery LLP Appreciation 140

Enterprising Families 77

Moderator: Lloyd E. Shefsky, Kellogg School of Management

Panelists: Robert Abt, Abt Electronics, Inc. Lester Crown, Henry Crown and Company Larry Levy, Levy Restaurants, The Levy Organization Jeffery Vincent, Laird Norton Company, LLC

Welcome

We are pleased to invite you to take a look at the 2007 We would like to thank our corporate co-sponsors, Northern edition of the Kellogg Family Business Invitational Trust Corporation and McDermott Will & Emery, for their Conference Proceedings Book. generous support of the conference and publication. We The conference focuses on different topics of interest are very grateful for their assistance and collaboration. to the wide range of constituents who make up a family This publication is dedicated to the many models of enterprise. It is our hope that this volume serves as a family enterprise, and the roles within each, that lead the resource when you consider the following subjects: way for industry and business worldwide.

Long-term focus in a family business Lloyd E. Shefsky Keeping one’s family business enterprising through Co-Director the decades Center for Family Enterprises Kellogg School of Management Recognizing the positive business impact of family members not working in the business John L. Ward Co-Director Awareness of the human aspects of wealth transfer Center for Family Enterprises Kellogg School of Management How up-and-coming family business leaders view their opportunities Carol Zsolnay Assistant Director Leadership, philanthropy and global awareness of the Center for Family Enterprises next generation Kellogg School of Management

Making adventure an aspect of the enterprise in every generation

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Issues and Answers

The Sixth Annual Family Business Invitational Conference welcomes family business members from around the country and around the world. In this opening session, participants are asked a series of questions such as their role within the family enterprise, and their feelings on important issues like growing their business and family wealth. The questions and responses lay out the broader themes to be covered during the conference.

FACILITATOR: Lloyd E. Shefsky Founder and Co-Director Center for Family Enterprises Clinical Professor Kellogg School of Management

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 13 Issues and Answers

LLOYD E. SHEFSKY: (Some of the following questions include comparative responses from the 2007 Family Business Conference held at the IESE business school of the University of Navarra in Barcelona, Spain, which was held in June of 2007. Many of the issues presented to the Spanish family business people are similar to the ones addressed at the Kellogg Family Business Conference. While the Kellogg conference is international in make-up, it does have a dominant American influence making the comparison to the Spanish conference all the more interesting. Unless noted, all of the other responses are from the Kellogg conference.)

Audience Poll

Welcome to our sixth rendition of the Kellogg Family Due to rounding, responses do not always equal 100% Business Invitational Conference. Some of you have been here all six years, while some of you are new to our conference. We know all of you will find much that is worth- Who is here? while presented by our panelists over the next two days. Percent answer Kellogg IESE Thank You to Our Co-Sponsors 22% 53% Senior generation in the business We have been very fortunate to partner with two wonder- 8% 16% Senior generation not in the business ful co-sponsors, Northern Trust and McDermott Will & 42% 12% next generation in the business Emery. They have worked very hard alongside us in pre- 15% 9% next generation not in the business paring this conference for you. We’re also fortunate to 13% 9% Non-family advisors, directors, family have terrific speakers and knowledgeable panelists who office managers will share their expertise with us.

Who Is Here? When did your family business start? There are registrants from 16 countries and 23 states who Percent answer come here to share best practices and new ideas. You have 4% Since 1990 told us that you learn as much from each other as you 44% 1945–1989 learn from us, and we don’t take that as an insult. After 28% 1907–1944 all, this conference is really about you; it is a celebration 24% Before 1907 of family enterprise. We’re going to find out a little about you and some of In a similarly worded question, it was determined that the family your feelings on issues that are important to family busi- companies at the IESE conference tended to be younger than ness. The voting technology is confidential and almost those attending the Kellogg conference with 24 percent started instantaneous. Here is our first question. since 1980 and 48 percent started between 1940 and 1980.

14 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e Which one leadership trait do you think is most Since your original business was founded, what important for keeping a family business growing number of new businesses has your company or significantly? your family attempted to build inside or along- Percent answer side your original family business? Kellogg IESE Percent answer 8% 4% adventuresome Kellogg IESE 50% 39% ambition 10% 13% 0 36% 56% Creativity 24% 13% 1 or 2 7% 2% Curiosity 32% 52% 3–5 35% 23% 6–10 When you are dealing with important matters, e.g., strategic planning, how far ahead is your How many of the businesses became quite suc- business-thinking time horizon? cessful, creating at least a 10 percent increase Percent answer in family wealth? Kellogg IESE Percent answer 38% 32% 0–3 years Kellogg IESE 29% 51% 4–5 years 17% 9% none 21% 18% 6–10 years 29% 22% a couple 6% 0% 11–20 years 27% 34% Some 6% n/a More than 20 years 16% 22% Most 11% 12% nearly all

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 15 Which family member not in the business, do you Primarily, how have you tried to grow? believe makes the greatest contribution to the con- Percent answer tinuing success of your business? Kellogg IESE Percent answer 49% 34% Natural extensions of original business 13% a living grandparent who was never really 16% 19% new internal start ups in the business 25% 19% acquisitions 36% a direct descendant aunt or female sibling 5% 15% partnerships and joint ventures not in the business 4% 7% New external start ups with different 17% a direct descendant uncle or male sibling who family ownership is not in the business 1% 7% not applicable 11% a male in-law who is not in the business 19% a female in-law who is not in the business 0% a niece or grandniece or female cousin who (Asked only of the Kellogg audience.) is not in the business What are your personal feelings about passing wealth 4% a nephew or grandnephew or male cousin to the next generation? who is not in the business Percent answer 12% Very concerned Thank you for your candid responses. You will notice that 33% Cautious a number of these questions will emerge as themes as we 10% neutral move further into the conference. 25% Comfortable 20% Very positive

16 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e LLOYD E. SHEFSKY Clinical Professor; Founder and Co-Director, Center for Family Enterprises Kellogg School of Management

Lloyd E. Shefsky is clinical professor of entrepreneurship, founder of the Center for Executive Women and founder and Director of the Center for Family Enterprises at Kellogg School of Management. He teaches entrepreneurship courses at Kellogg. Thirty-six years ago, he founded the law firm where he is now Of Counsel, Shefsky & Froelich Ltd., which specializes in advising entrepreneurs and families and their companies at every stage of development. He is also a certified public accountant. Professor Shefsky is the author of Entrepreneurs are Made Not Born, a book that has been translated into eight languages and is on reading lists at major business schools. He is director and president emeritus of the Sports Lawyers Association, an organization he founded in 1975 that currently has 1,200 members who represent professional athletes and sports entities. In 1995, he received the Entrepreneur of the Year Award for his support of entrepreneurship from Ernst & Young LLP, Inc. Magazine, and Merrill Lynch. He has a J.D. degree from University of Chicago Law School and a B. S. degree from DePaul University.

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 17 2007 IESE SURVEY RESULTS—BARCELONA, SPAIN

In addition to the survey questions reported in the main We have a business culture that promotes coherent part of this article there were a number of questions asked values and our mission. of the Spanish audience that have been considered at this Percent answer conference in prior years. The views of the IESE partici- 35% totally agree pants are reported here in an effort to encourage families 39% partially agree in business to reflect on the shared values and mission that 8% neutral often permeate family enterprises across cultures. 13% partially disagree 5% totally disagree

Our values through time are: Percent answer 14% immutable and permanent 5% Must be modified in all aspects 80% Modified some but not in the essentials

Our business strategy and structure are designed to promote our mission and our values. Percent answer 28% totally agree 54% partially agree As a family business, we have a clear, concise and 5% neutral exciting mission. 9% partially disagree Percent answer 4% totally disagree 42% totally agree 34% partially agree Our teams are imbued with our values. 3% neutral Percent answer 10% partially disagree 21% totally agree 10% totally disagree 58% partially agree 8% neutral Our mission is transmitted to and inspires all levels of 10% partially disagree our business. 4% totally disagree Percent answer 21% totally agree Of the following values, which is the most important? 46% partially agree Percent answer 6% neutral 36% enterprising initiative 13% partially disagree 25% excellence 15% totally disagree 18% Hard work 13% Simplicity 5% austerity 3% none of the above

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Adventuresome Spirit Through The Generations

In 1999, Bertrand Piccard and Brian Jones became the first people to successfully travel around the world in a hot air balloon without landing.

Dr. Piccard is part of a family of Swiss pioneers. His grandfather and his father each achieved acclaim for setting world records in their areas of exploration.

In his keynote address to the conference, Dr. Piccard shares stories from his life and the personal philosophy that has helped him to achieve great success as an adventurer and a humanitarian. His talk explains why some people succeed where others fail and what makes certain people take risks that seem insurmountable.

His creative ideas and “never give up” attitude are traits of an adventurous spirit often exhibited by entrepreneurs and family business leaders as well. His insights resonate with anyone trying to search out better ways to succeed and survive in a challenging environment.

Included here are excerpts from his talk.

KEYNOTE SPEAKER: Bertrand Piccard, M.D. Explorer, Pilot, Humanitarian

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 21 Adventuresome SPIRIT THROUGH THE GENERATIONS

Bertrand Piccard and Brian Jones in 1999 after their successful around-the-world flight.

Dr. Bertrand Piccard, a medical doctor living in Switzerland, is BERTRAND PICCARD: the son and grandson of men who personified the adventurous spirit. His grandfather, Auguste, a professor of physics, was a Challenging Common Assumptions friend to Albert Einstein and Marie Curie and was the first per- I had quite interesting role models between my grandfa- son to explore the stratosphere. In 1931 he accomplished this ther and father. I learned many things from them, such in a balloon by ascending almost 52,000 feet above the earth’s as, if you want to create something new and successful, it’s surface. His father, Jacques, in an equally daring achievement, not enough to just have ideas. First, you need to be will- made the first dive to the deepest part of the ocean (a dive ing to fight against common assumptions and you need of nearly seven miles) to the Marianas Trench in 1960. to fight against certainties. For example, my grandfather Dr. Piccard made his own mark in the field of ballooning in wanted to go into the stratosphere to study cosmic rays. 1999 when, along with Brian Jones, he made the first non- There was a common assumption at the time that it was stop, around the world balloon flight.T oday, he continues to completely impossible to fly above 20,000 feet because practice medicine, has set up a foundation that fights diseas- there was not enough oxygen and not enough pressure. So es of poverty in remote regions of the world, and is preparing he invented a pressurized cabin allowing him to take along to pilot the first solar powered airplane around the world. He his own atmosphere, pressure and oxygen up over 50,000 often lectures about his ventures and the reasons for his suc- feet. And, he invented the stratosphere balloon to go up cess. Here are excerpts from his talk which opened the Sixth there. Before the flight he was told that he was suicidal, Annual Kellogg Invitational Family Business Conference. but after he was successful, he was admired.

22 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e I believe that pioneers are always What their successes showed me was that the goal of admired afterwards, not before, exploration is not to make records, not just to be the first to do something, but to be useful, to change the lifestyle, because pioneers threaten the comfort to improve quality of life, to improve knowledge, and to zone and the ordinary way of thinking. explore new horizons.

I believe that pioneers are always admired afterwards, not Being in Control before, because pioneers threaten the comfort zone and I chose to become a medical doctor, but I was still trying the ordinary way of thinking. to explore life a bit so I also became a hang glider and an ultra light pilot. These activities helped me to develop a philosophy of life, especially when I became an aerobatic hang glider pilot. When you fly in an aerobatic hang glider, you are completely taken out of a normal life situation where you are very often on automatic behavior. In aerobatic hang gliding you have to be extremely aware every moment, if you aren’t, you have an accident. I learned to control my emotions, concentration and fears. I learned to control every parameter of the experience. In life, as in hang gliding, everything moves, turns, and is unstable. You have to learn how to control what you do in order to land on both feet without breaking your neck. I felt that I wanted to share what I had learned with people who were unable to connect with them- My father made the deepest dive in the Marianas Trench, selves, unable to concentrate or control their lives and were which was a joint venture between my family, who built the therefore unhappy and unfulfilled. This ultimately led to submarine, and the U.S. Navy. His dive shattered another my decision to become a psychiatrist and psychotherapist. commonly held assumption: that it was safe to throw radioactive waste into the deepest parts of the ocean I learned to control my emotions, con- because there was no life down that far. But my father centration and fears. I learned to control and his co-pilot, Don Walsh, saw fish seven miles below every parameter of the experience. the surface. Their discovery meant that there was oxygen …Then I noticed something that made at these very deep levels. And if there was oxygen down there, it meant there was a current bringing the oxygen me look at things differently. I noticed from the surface. And, of course, that meant there was a that learning to control is not enough counter current bringing the oxygen back to the surface because there are many situations that again. So, if you throw anything down there, one day it are impossible to control. will come back to the surface. My father’s dive was one of the big milestones for the protection of the environment. Then I noticed something that made me look at things differ-

ently. I noticed that learning to control is not enough because The goal of exploration is not to there are many situations that are impossible to control. make records, not just to be the first People use all of their resources and power to achieve success to do something, but to be useful. but sometimes still fail, so I started looking for other answers.

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 23 Giving Up Control BERTRAND PICCARD: As I began to fly hot air balloons, I learned that when you are up in the balloon you have no power to control your speed or direction, but are prisoner of the wind. I began to see many corollaries with life. We have trends, fashions, expectations, political decisions, health, accidents, sickness- es, love, failure, crisis, success. All these things are exactly like the wind in that they push us toward the unknown and they come up suddenly in our lives. We want to resist. We want to keep what little control we think we have. However, ballooning obliges us to play with the unknown and to understand how useful it is to go with the unknown rather than try to resist it. I learned that you make better progress by going with the wind than by fighting it. A Willingness to Explore I learned that you make better Adventure is the moment of rupture when suddenly we progress by going with the wind understand that everything we have learned before was very good before, but is completely useless for now and for than by fighting it. the future. Adventure is when we are obliged to produce— if we want to survive or just to succeed—other strategies, Ballooning came into my life when I was invited by a other solutions, and other behaviors than the ones we Belgium balloonist to participate as co-pilot in the first learned previously. ever trans-Atlantic balloon race. There were five balloons The magic of adventure occurs when we understand scheduled to take off in Bangor, Maine with the goal to be that the unknown, the doubts, and the question marks the first one to reach Europe. Because of the precedence of are not always dangerous. Most of the time, these uncer- my grandfather in ballooning, the organizers of that race tainties can be incredibly powerful stimulations for our felt I would be a good co-pilot. Even though I was not creativity. They oblige us to explore not only the outer very confident, we won the race. world, but our inner world, too.

Dr. Piccard went on to explain that during this flight he began Adventure is not so much what we to expand and develop a more wide-reaching philosophy not do but how we do it. We don’t need only applicable to ballooning, but life as well. The many challenges he and his partner had to face, such as being lost over a balloon in the middle of the Atlantic the Atlantic with no idea of what to expect, forced them to to live an adventure. live with the unanticipated and become comfortable with it. For over five days they existed at a heightened emotional Adventure is not so much what we do but how we do it. level that enabled them to make decisions with the realization We don’t need a balloon in the middle of the Atlantic that the outcome was beyond their control. And, according to to live an adventure. What we need is to be able to play Dr. Piccard, this experience allowed him to feel much more with these moments when we lose control in life and use confident and connected than at any other time in his life. them to stimulate our creativity. We need to use these Next, he went on to explain some of the personal insights moments to wake up from our normal habits and our he gained during this experience. automatic ways of behaving.

24 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e I think a good definition of adventure is “a crisis that we very accurately and that is your flight altitude, which, as a accept.” And at the same time, a crisis can be an adventure balloonist, is the first thing you learn. The atmosphere is that we refuse. It is up to us to decide which vision of the made up of several different layers of winds; all have dif- world we want. Do we want a vision of the world where ferent directions and different speeds. So each time you every problem is here to destroy us or do we want a vision are stuck in one direction the only freedom the balloonist where every problem is here to challenge us to be more has is to change altitude and, hopefully, find an altitude efficient and more creative? where the wind is better. In life, very often we have winds that don’t push us in the direction we wish. There is a study that has shown that about 20 percent of life can be planned and orga- nized very accurately. But 80 percent is unpredictable. Yet we use 100 percent of our energy to plan and control 20 percent of our lives. Clearly, 20 percent of life needs only 20 percent of our energy and that leaves the remaining 80 percent to be balloonists in our lives. Being a balloonist means learning how to change altitudes in the winds of life. Change altitude in our education, in our profession; change altitude psychologically, philosophically or spiritually in order to catch other influences, other ideas, other strategies that will push us in new directions. In the 1990s Dr. Piccard put a team together that would become the first to travel around the world non-stop in a Being a balloonist means learning how balloon. At the time, there were many others vying to to change altitudes in the winds of life. achieve this same goal, often with more financial resources. Dr. Piccard’s team, like all the rest, met with failure after Change altitude in our education, in failure. On the first attempt, they suffered technical failure our profession; change altitude psycho- and crashed into the ocean; on the next attempt, they met logically, philosophically or spiritually political resistance to flying over China and were forced to in order to catch other influences, other land in Burma. At this point Dr. Piccard began to question ideas, other strategies that will push us his theory of flying and doubted himself. in new directions.

BERTRAND PICCARD: Following a Third Path Control and Acceptance When my balloon was the first to go around the world, the But I discovered that in moments of doubt, you have new first question at every press conference was, “How did you ideas. In moments of certainty, you don’t, because you are manage to beat these big competitors with your small team?” completely sure of everything. In the balloon, you cannot I’d like to speak a little bit about the team because I change the winds. You cannot control nature. You can- think it is really the key factor that brought us success not control the people on the ground. You are a prisoner in the balloon flight around the world. When my father of the situation. But there is one thing you can control built his submarines, when my grandfather built his

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 25 stratospheric balloons, they could mostly do it by them- We were successful because every team meeting was like a selves. In our world now, everything is much more com- brainstorming session where each one knew that the others plicated and we need teams. We need people who can be would welcome his point of view, his experience, and his put together to invent new ways of solving problems. new solutions. This is something our competitors never understood. Most of them asked me, “Why in the world do you have two weathermen? If they agree, you don’t need to have two. And if they disagree, you don’t know which solution to take.” We never had one or two solutions. We had two weathermen comparing their different models and building a third solution from the combination of both. They always gave us solutions that helped us to succeed where all of our competitors failed.

A Perfect Example I think the best example of this strategy in action occurred on our third flight, which was successful. We finally obtained permission to fly over China, but it was I believe that in a team it is not about sharing ideas; it is only for the extreme southern part of China. When we much more about comparing experiences. Because when we were ready to take off in Switzerland, we needed winds compare experiences, we begin to understand that each of that would take us from Switzerland in a straight line to us is the result of our own life experiences. And if we want southern China. Statistically speaking, these winds come creativity, if we want to invent new ways of doing things, every month, three, four or five times. We were confi- then we have to learn from the experiences of one another dent and started to wait for the right conditions. But, instead of always trying to teach what we think is certain. probably due to climate changes, the winds were never The goal should not be to teach, but to learn something of blowing in the direction we wanted. They were always value from one another. When you can do that, you can blowing far too much to the north through central and build a relationship where one plus one equals three. northern China or even toward Russia where we had no permission to fly. And when we were at the end of the If we want creativity, if we want to winter—it’s only in winter that you can fly around the invent new ways of doing things, then world in balloons—we were stuck with the worst crisis of we have to learn from the experiences the project. We were still on the ground. of one another instead of always trying to teach what we think is certain. We were stuck with the worst crisis of the project. We were still on the ground. Our entire team was composed of people as different as possible, different backgrounds, different experiences, It was then that the weathermen came to us and said, different behaviors, with one common denominator— “It’s completely stupid to fight in order to find winds that respect for the value of the other person’s point of view. don’t exist. The only thing we can do to succeed is to take

26 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e the winds that exist, even if they are absolutely not the if we want big success, we have to take big risks. So we ones we have planned.” They showed us that if we took took off, but we did not fly the 20,000 miles in the 10 to off when there was low pressure in the northern part of 15 days as originally planned. We flew 30,000 miles in 20 Africa, the balloon would start by going backward to days. This became the longest flight ever in the entire his- Mauritania and Morocco and from there turn around the tory of aviation for both distance and duration. low pressure system. Then it would fly at the same speed as the low pressure system and go over southern China Perseverance is when you understand where we had permission to fly. that the only way to be absolutely certain to fail is to give up. And giving up was Taking a Big Risk But the problem was it added 10,000 kilometers and not in the program. another week to the flight. The balloon was not built for that. So what could we do? We could take off and prob- After three weeks in the air, we put our balloon down ably ditch somewhere short of our goal, or stay on the in the sands of Egypt. We took off with 3.7 tons of liq- ground and not have any chance of success. Sometimes uid propane. We landed with 80 pounds left. This was

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 27 not good calculation on our part because we had no That is why I have a team developing a solar powered air- idea in advance how fast the winds would blow. This plane that we plan to test in the summer of 2008. We call was perseverance. Perseverance is when you understand it the Solar Impulse. The airplane, powered by a load of that the only way to be absolutely certain to fail is to lithium ion batteries, will take off from the ground and give up. And giving up was not in the program. By the climb to 40,000 feet, spend a night in the air and reach time we left Mexico we had a really crucial decision to the next sunrise before the batteries are empty. If we can make. We had burned 28 out of our 32 gas bottles. There do that, then we can make the next day, the next night, were 6,000 miles left to Africa. In other words, we had and so on. The goal is not only to fly around the world on an eighth of the gas to travel a quarter of the remaining solar power but to make a perpetual flight with no fuel. way. Was it feasible or not? Well, of course, if you make a risk assessment, it is not feasible. So why did it work for If we don’t invent new technologies to us? Because we tried. And so many things remain forever save energy, if we don’t find alternative impossible because we don’t try them. It’s only because sources of energy, we will never give we tried that in the middle of the Atlantic we found a new jet stream that took us at 160 miles per hour toward the planet to the next generation with- the coast of Mauritania and we succeeded. out a major disaster. Each time we have a new situation, each time we have to make decisions, I think what’s really important is to Our airplane is an effort to show how attractive renew- see if we have any action to take in the situation or not. able energies can be. But, of course, it’s quite difficult to If we have an action, let’s try it. But that’s not enough. build. The airplane has a 250 foot wing span, that’s 40 We need the ultimate strategy, the ultimate philosophy of feet bigger than the jumbo 747. And it is difficult to fund, being a balloonist. When we cannot change the things in though we have raised 65 percent of the budget which the winds of life, when we are lost, then we have to be at allows us to make the first plane. ease with seeking out other altitudes and other directions If we don’t invent new technologies to save energy, if that we may not have chosen for ourselves at first. we don’t find alternative sources of energy, we will never give the planet to the next generation without a major The Next Adventure disaster. The price of energy will be so high that it will When I look at the airplanes and rockets in the Air and destroy our economy and the productivity of our indus- Space Museum, I think that in a couple of years the price tries. We see the Solar Impulse as more than an airplane; of the oil will be so high that we will have to change things we see it as the embodiment of the way to use technology for the future. What else could we do? What type of to improve the future. adventure can we plan that would be completely sustain- able and that could at the same time improve the quality of life? As a medical doctor, that is always the thing that I have in the back of my mind: It has to be useful and it has to improve the quality of life.

28 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e BERTRAND PICCARD, M.D. Explorer, Pilot, Humanitarian Lausanne, Switzerland

Dr. Bertrand Piccard specializes in psychiatry and psy- chotherapy for children and adults. His medical thesis, Ordeal: A Learning Experience, received an award from the University of Lausanne Medical Faculty. He lectures and supervises at the Swiss Society for Medical Hypnosis. Piccard is president of Winds of Hope, a humanitarian foundation that fights diseases of poverty in remote regions. He is a Goodwill Ambassador for the United Nations. In 1999, he was commander of the first non-stop, round-the-world balloon flight. His next goal is to pilot the first non-stop, round-the-world flight of a solar-powered airplane.

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 29

Long-Term Thinking in a Short-Term World

The ability to think and act over a relatively long time horizon is one of the biggest advantages that family businesses have over non-family businesses. While the rest of the non-family business world is employing shorter and shorter timelines, family businesses are much more prone to stay the course and take the long view.

In this talk, John Ward examines some of the faulty logic that is spurring the short-term thinking frenzy and looks at the reasons why family businesses are more likely to buck this trend and how this makes them superior performers in the marketplace.

SPEAKER: John L. Ward Co-Director Center for Family Enterprises Clinical Professor Kellogg School of Management

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 31 LONG-TERM THINKING IN A SHORT-TERM WORLD

JOHN L. WARD: More and more researchers have studied the performance of family-controlled companies on the stock markets relative to the non-family-controlled companies on the stock markets. And if you accept the research of these people, which is quite significant, you’ve just learned how to make money: buy a mutual fund, if you will, or make your own mutual fund of a collection of family-controlled, publicly-listed companies. And if the next 10 years is like the last 10 years, you will outperform the market index by five to 10 percent per year each and every year on average cumulatively.

Make your own mutual fund of a collection of family-controlled, publicly-listed companies. And if the next 10 years is like the last Long-Term Thinking a Powerful Advantage 10 years, you will outperform the market I believe that the long-term time perspective of family-controlled companies and business families is one of the most index by five to 10 percent per year each powerful competitive advantages you have. If you agree that and every year on average cumulatively. your long-term time horizon, your long-term thinking, your long-term time orientation is a distinct advantage of Greater Longevity for Family Companies a closely-held, privately-held, family-controlled company, Just this year, I finished a study where I looked at the 1,000 then doesn’t it make sense for us to think about emphasiz- largest publicly-listed companies in the world, 80 of which ing our long-term perspective? What does long-term think- are family-controlled, which is about eight percent. We ing mean? And how do we manage to take advantage of our know that there is about one private, family company for long-term competence? That’s the subject I’ve been very every publicly-listed, family-controlled company in the interested in for the past several months. I will share some upper tiers. That tells us that about 15 to 16 percent of the of the research we’ve been doing and some of the research largest companies in the world are family-controlled. We of others and have you reflect on the long-term perspective can study the performance of those 80, and what I found in your company from a strategic point of view. for 2005—the only year for which I’ve finished my statis- tics—is that they outperformed the largest non-family- Superior Performers controlled companies in the world by a 30 percent return There’s an increasing amount of research that demon- on invested capital. These are substantial differences in strates the superior performance of privately-held, family- companies of all different sizes and ranges and geographies. controlled companies. It goes back to a study I did many years ago when I was fortunate to have access to a database About 15 to 16 percent of the largest of both publicly-listed and private companies. I found that companies in the world are family- the return on invested capital in the family-controlled or controlled. …for 2005…they outper- privately-controlled companies was 26 percent, and the formed the largest non-family-controlled average return on invested capital of non-family-controlled companies was 21 percent. That’s a substantially signifi- companies in the world by a 30 percent cant difference in performance. return on invested capital.

32 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e For a long time my studies were centered on the longevity to interview all of you in this room, I suspect the vast challenges of family businesses. I wondered why they didn’t majority of you would say, “The purpose of our company last longer. I determined that about 20 percent of all once is to continue, to endure. Continuity is our purpose, not successful family-controlled companies remain within maximizing the return or current shareholder value.” their owning family for 50 years or more. I always thought, I think when an organization thinks that way it has a “Woe is the family-controlled company. It has such a vul- huge, positive effect on the behavior of the business’s nerable life, only 20 percent last 50 years. How can we performance and longevity. help the other 80 percent?” Then just a couple of years ago, somebody asked, “Well, how long do non-family- When we interview family-controlled controlled companies last as independent companies?” companies for case studies they hardly And it turns out that family-controlled companies not ever say that the purpose of their com- only outperform from a profitability point of view, but family-controlled companies outlive the non-family-con- pany is to maximize shareholder value. trolled companies. If you had bought every single stock on the Standard and Poor’s 500 in 1957, 40 years later you would have found that only 15 percent of those companies still existed as independent companies. So the fact that only 20 percent of family businesses last 50 years isn’t as negative a finding as I was assuming.

It turns out that family-controlled companies not only outperform from a profitability point of view, but family- controlled companies outlive the non- family-controlled companies. The other thing we can’t measure is adaptability. We have a wonderful example of adaptability in the Wendel family, In my study of the 1,000 largest family companies in our Kellogg award recipient for 2007. They have survived the world, 30 percent of them are over 100 years old. as an enterprise by being able to adapt to unfavorable Therefore, it wasn’t surprising to me when those of you at conditions for over 300 years. There are many qualities this conference report that 24 percent of your businesses in a family-controlled company’s culture that give it some are over 100 years old. Family companies have figured out advantages in terms of adaptability to external shocks and a lot of things about success and about longevity, giving to changes in the world. family companies a true competitive advantage. But quantitatively, we can measure what you do stra- tegically different, which accounts for about two thirds Differences Equal Success of the advantage in your performance. About one third There are four essential ingredients to family business of your performance advantage is attributable to what success; two we can measure and two we cannot. We you do different culturally. We will focus on strategy cannot measure the philosophical purpose of the com- from the long-term point of view and long-term invest- pany. When we interview family-controlled companies ing. From a cultural point of view, we will look at the for case studies they hardly ever say that the purpose of time-oriented mind set in the organization and in the their company is to maximize shareholder value. If I were leadership of the company.

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 33 find is that in the more successful new product or business The Differences launches, on average, they break even in Year Five and have a life that’s much more profitable, both in terms of Purpose Culture (1/3) profits and cash in the long-term. • personal Values I love the story of IKEA, the furniture company. IKEA, Strategy (2/3) • time Orientation a private family business, went into Russia and announced • unconventional • prudence to the world and to the organization that it did not expect • Contrarian to break even for 15 years. Now imagine yourself working • long-Term Adaptability for a publicly-listed company with shareholder analysts and saying, “I’ve got this brilliant idea. Let’s dominate © 2007 John L. Ward Russia with a new market concept. Be patient. In 15 years we expect to start breaking even on a cash flow basis.” Long-Term Strategy First, let’s ask how much we invest today for long-term pay- Time Orientation off. I believe—I can’t prove—but I believe that family busi- Time orientation and leadership influence how far ahead nesses invest more in people consistently over time. We do family businesses think when raising and allocating know that family-controlled companies have a more stable resources. We think about how much money we need and workforce than non-family-controlled companies. According for how long. Secondly, how far out do we think in terms to my research, family companies are far more stable in their of our business objectives? How far out do we think in R&D work. In other words, when the business cycle goes making commitments? How far out do we think in moni- down, family-controlled companies cut back less on R&D. toring our strategic environment? And finally, how far Family-controlled companies tend to make a more signifi- back do we think in terms of post-auditing our previous cant, stable, long-term investment in their R&D. strategic investments? Not many companies are willing to look back a year or two and see how strategic invest- Family-controlled companies tend to ment decisions have panned out versus assumptions. But make a more significant, stable, long- imagine going back even further and asking “What can we term investment in their R&D. learn from the last five years of strategic investments about our assumptions, about how they inform our future?” In new product strategies, we know some interesting Imagine asking, “What can we learn things. We know that, in general, top management typically forces a new product or a new business unit to from the last five years of strategic reach break-even in Year Three. The traditional behavior investments about our assumptions, observed in the business world is: Year One, let’s start about how they inform our future?” something new. It’s going to be expensive but is a good idea. Year Two, we’re losing money but it’s still a good We know from surveys of CEOs that about 75 percent of idea. Let’s be patient. Year Three, it’s time to break even. all CEOs of publicly-listed companies will say their time This is the cultural mind set of most businesses. horizon is less than three years, even zero to two years. But in family businesses, overall, we don’t force new About 25 percent will say that their time horizon in plan- products or new businesses to break even in the third year. ning is about three to four years. And only nine percent We think about nurturing them. Because of this, what we will say that their time horizon is greater than four years.

34 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e One interesting answer on the CEO survey said that 78 percent of all public company CFOs in the United States would give up economic value in exchange for smooth earnings. Eighty percent would cut R&D to meet earnings expectations. I’ve had an opportunity to survey 200 non-family CEOs and 100 family CEOs of equivalently sized companies. And from those two groups of people, many interesting answers emerged. One answer that tells us a lot about how family businesses behave was a response to the statement: There is no doubt in my mind who will control this company in five years. Eighty-two percent of family-controlled Ninety percent of family companies said they felt the companies say there’s no doubt, but in publicly-listed com- future will be better than the past, as compared to 68 per- panies, only 40 percent say there’s no doubt. cent of the public companies. Our optimism about the future influences our behavior as well as our time horizon and our decisions. CEO Survey Results Factors Affecting Time Orientation Non-Family Family When we look at the time orientation of a business, it’s a Business Business function of at least three elements: the culture of the coun- 43% 8% i believe my company try, the time orientation of the leadership, and the time under invests in the future orientation of the organization. What we know from studies of others is that the time 84% 59% Our planning horizons are orientation of the leadership substantially controls the getting shorter time orientation of the company. It starts at the top. I offer that if we mixed together the personal orientation of time 40% 82% there is no doubt in my of the leadership with the culture of the country in which mind who will control this the business is primarily located, the combination of those company in five years two things would give us an idea of the time-orientation culture of the business. 74% 47% if I see a near-term problem, I shift my focus Sometimes, long-term time orienta- to it to the detriment of tion isn’t always right for a company. long-term initiatives …Longer is not always better; the

68% 90% the future will be better timeline has to suit the environment than the past in which the company exists.

21% 75% in our company, we Sometimes, long-term time orientation isn’t always right actively promote the past for a company. What is right is that the time orientation has to fit the market. Some businesses and industries are © 2007 John L. Ward

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 35 in situations where, for them, a long timeline might be Individual Time Orientation two years. And other businesses might be in situations An individual’s time orientation between past, present where a long timeline might be 10 years. Longer is not and future substantially influences his/her behavior and always better; the timeline has to suit the environment in decision making. In other words, if we really want to which the company exists. understand how a person makes decisions, we need to But we are not passive to our environment. What we see have an insight, or an assumption, on how that person from case studies of family-controlled companies is that thinks about time. What is the balance between how the they choose their environment. Take Hoffman-La Roche, person thinks about the past, the present, and the future? which is a fantastically performing, family-controlled Here’s a little playful experiment you can do at a cocktail pharmaceutical company. They are not in every product party. Just listen to the words people use and what direc- that companies like them could be. They deliberately focus tion their conversation naturally goes. Some people are on products that have very long R&D cycles that are mak- constantly talking about history and the lessons of history, ing major breakthroughs in basic science, and the minute about things that happened five years ago. “Isn’t it inter- their product goes generic, they get out. They’re constantly esting how so and so turned out?” Some people are con- investing in basic science. So they’re designing their strate- stantly talking about the here and now. “The Bulls won gic plan around their time orientation rather than letting last night.” And some people are talking in the future. “I the environment control their time orientation. wonder where things are going. What do you think?” People have a fundamental, personal time orientation. And what the psychologists are telling us is that this ori- Thinking Long-Term entation is probably the most important thing that influences decision-making and behavior. Personal Business Orientation E environment People have a fundamental, personal

+ Organizational time time orientation. …This orientation is Culture Orientation probably the most important thing that

Country influences decision-making and behavior. Culture Let’s just take a little example. You are responsible for © 2007 John L. Ward two people. They both—because they work for you and because you trust people—know more about your busi- What do we know about a country’s time orientation? ness than you do. Otherwise you wouldn’t have hired What we know is that countries in Asia have a time ori- them. They’re experts. They’re specialists. You have a little entation markedly different from the more Anglo Saxon planning meeting and one of them comes up to you and countries, with Asia having a considerably longer time ori- says, “I think we can grow $500 million over the next five entation. The cultures of countries really matter. Different years.” The second person says, “I think we can grow $250 countries have different orientations to time. But we also million over the next five years.” What are your assump- know, and maybe underappreciate, that individuals also tions about these two people? They’re more knowledgeable have a time orientation. We know that different people than you are about the specifics. They come to you with think in different ways, process information in different two very different comments. How do you understand the ways, and interact with people in different ways. differences between these two people?

36 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e What if I told you that the person who projected the lower People whose time orientation is based more in the past number has a deeper sense of the past and that her behav- are better predictors of the future. They feel more control ior reflects that? The person with the higher projection is of destiny. They are more motivated by the goal. They living in the present. One of the things we know about maintain more commitment and perseverance and they people who live in the present is they are likely to rely on take more calculated risks, not speculative risks. extrapolated planning. They feel more confident in uncer- The top management teams of the non-family-con- tainty. They perceive more organizational consensus than trolled companies we studied are mostly oriented to the exists. They act more speculatively. present. Curiously, the many dozen family-controlled executive teams we’ve studied have an orientation that is both past and future. That’s a fascinating paradox. The more you are anchored in the past, the more accurate and more willing you are to think in the future. How can family businesses live this paradox where organizationally they have one foot in the past and one foot in the future and very little focus on the present?

Short-Term Behavior

From a strategic point of view, we are in an era of big transformational strategic changes being all we think about.

Let’s consider short-term behavior. What are the factors that are driving short-termitis? I’m going to argue that there are many demands on business which are forcing us and encouraging us to think increasingly more short-term, therefore, giving an increasingly competitive advantage to those who think long-term. Most businesses are now mostly owned by funds. Most funds have an average hold of less than a year. There is a 100 percent turnover per year in most funds that own most companies. We know that the trading volume is going up exponentially. This doesn’t People whose time orientation is based even include hedge fund behavior. The marketplaces are more in the past are better predictors of getting increasingly short-term. the future. …That’s a fascinating paradox. Second, if we open up the business section of our newspapers, what articles do we constantly read? In busi- The more you are anchored in the past, ness school, what topics do we constantly talk about? We the more accurate and more willing you talk about transformation strategies. We talk about revo- are to think in the future. lutionary strategies. We talk about massive outsourcing.

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 37 We talk about massive consolidation. How much time do we read, think about, admire, and hear about compa- Discounted Cash Inevitable nies that believe in organic growth? Incremental change? Flow Analysis Disinvestment Patent brand building? Evolution? Adaptability? From a 1. you have a higher discount rate than your strategic point of view, we are in an era of big transfor- competitors mational strategic changes being all we think about. Our 2. you think the future is less promising than the past organizations are getting more decentralized. We’re hiring 3. your hurdle rate is higher than current returns people who are more like athletic free agents. Incentives 4. you fudge cost of capital for “over optimism” are increasingly short-term with a higher percentage of 5. you rank IRR investments compensation. Our advisors are increasingly motivated 6. you believe acquisitions are better investments by transactions, not time. than internal growth In addition, CEO turnover is going up at a rapid rate. 7. you include inflation in cost of capital but not in In the United States, the average term expectancy of a future revenues CEO of a publicly-listed company is 4.2 years. In Europe it is 4.4 years. Since 1995 the rate of CEO turnover has © 2007 John L. Ward increased 300 percent in North America and Europe and 250 percent in Asia. When CEOs are let go from publicly- A second flaw is most people do discounted cash flow listed companies today, their economic performance is as if the time horizon doesn’t matter. But what we know only half as bad as CEOs who were being let go five years empirically is the longer the time horizon, the level of ago. So the pressure on CEOs for immediate performance relative risk goes down because the balance in the mar- and survival is powerful. ket becomes more and more average. But very few people use a time adjusted discount rate or cost of capital when Flaws in Discounted Cash Flow Thinking they’re making decisions like this. How many of you use discounted cash flow and expected Let me illustrate this idea. If your planning horizon is four monetary values as regular parts of your management years, your risk is one half. If your planning horizon is nine tool bag? A certain percentage of you do, but if we ask in years, your risk is one third, or 16 percent less. If it is 25 years, one of our M.B.A. classes, every hand would go up; this your risk is one fifth, or 60 percent less. Mathematically if is the gospel of decision-making analysis. But there are your risk is 60 percent less, then your cost of capital is a dif- two major flaws with discounted cash flow and expected ferent number. And if your cost of capital is a different num- monetary value thinking. ber, you will be making more long-term investments. First of all, the more you rely on discounted cash flows for your analysis, the more likely you are to be thinking Family-controlled companies have short-term. And if your cost of capital assumption is a two basic instincts that actually lead little bit below the average of market, or if your cost of them into less speculative positions. capital is a rationing thing, or if you rank your IRR invest- They think long-term, and, over time, ments, you will increasingly move to shorter and shorter relative risk goes down. Also, at the term decisions. Just think about private equity funds with the internal rate of return calculations. It increasingly end of the day, family companies say to forces you to think more and more short-term. themselves, “Let’s do the right thing.”

38 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e I think family-controlled companies have two basic many of you would change your mind? I see some hands instincts that actually lead them into less speculative go down, yet all of you said $20/$30 would be the exact positions. Number one, they think long-term, and, over same return and you would wait but $200/$300 changed time, relative risk goes down. Also, number two, at the your behavior. What if it was $2,000 today or $3,000 in end of the day, family companies say to themselves, three years? How many would say, “I’ll take the $2,000 “Let’s do the right thing. Let’s not necessarily just fix it now.” I’d probably lose the rest of you. But mathemati- fast.” The more you think about fixing fast rather than cally, that’s the identical question. So why, as the number doing the right thing, the more risk you are taking. The gets bigger, does your behavior change even though ratio- more you say to yourself, “Let’s do the right thing,” the nal economic theory says it shouldn’t? Your pay-off is the less risk you are taking. same. But your behavior changed.

Human beings have a lot of irrational interpretations when they make decisions.

Let me change something else. Let’s say that it’s not $2,000 today versus $3,000 in three years but $2,000 in five years or $3,000 in eight years. How many would take eight years? A lot higher percentage took this than took the 20/30, 200/300. Why? Mathematically, $2,000 today versus $3,000 in three years or $2,000 in five years versus $3,000 in eight years is identical, right? But people changed their minds. The bottom line is we are not ratio- nal. Human beings have a lot of irrational interpretations Irrational Human Behavior when they make decisions. And one more irrational deci- Now let’s look a bit at human behavior and how we sion is if you had lost $100 to me today on a coin flip behave as decision makers and as people. I need a many of you would have gone double or nothing. What volunteer who has a business card and wants to make an we know is that people will risk more in losses and risk less absolutely positively guaranteed $20. Okay, you’ve got a in gains. In other words, if you were losing money to me very simple choice to make in front of all your friends and I give you a double or nothing option, you’ll say yes. and witnesses. You can take this $20 right now or you If you’re winning money from me and I give you a double can give me your card and I will mail you $30 in three or nothing, you’ll say maybe not. So we know some things years, guaranteed. Most chose to take the $20 now. What about human behavior: you will be irrational in favor of was the discount rate he put on that $20? It was around immediacy; you’ll be irrational in favor of certainty; and 16–18 percent. That’s a high discount rate. Economic you’ll be irrational in your behavior to protect your gains. return is compromised for short-term result. Let’s have fun. How many of you said you would rather Lessons Learned wait the three years and get a higher pay off? Keep your There are a number of lessons we can learn from our hands up; I want to keep my eye on you. What if it wasn’t study of time and long-term thinking. First, the more you $20, but it was $200 today or $300 in three years. How promote the past, the more accurate you are in projecting

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 39 the future. The more you promote the past in your com- Third, define a purpose for the business. The stronger pany, the more the company thinks both accurately and your sense of qualitative purpose as a business, the more willingly about the future. the organization will think long-term and the more Second, stretch your time horizon. When thinking adaptive it will be. about our little experiment, getting you to go from one Fourth, think about people who have different time year to three years was really tough. Getting you to go orientations and think about that from a managerial from five years to eight years was quite easy. Once I got point of view. For example, how do you think about who you thinking into the future, it was very easy for me to you put together on teams? Do you think about putting get you to stretch even further into the future. The insight people on teams that are a mixture of past, present and here is: Stretch into the future and people will be more future thinkers? When you listen to people and you hear likely to stretch even further into the future. their decisions and their assumptions ask yourself from what basis are these decisions coming? Think about it also Define a purpose for the business. in your hiring and training. How much do we talk about The stronger your sense of qualitative the past? How much do we talk about the future? How much do we talk about the purpose? Think about it in purpose as a business, the more the terms of how we evaluate and incentivize people. Almost organization will think long-term and every performance review system asks what you did last the more adaptive it will be. year and what you will you do next year. Very few of those

40 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e dialogues say: “What happened over the last three to five there’s a 50 percent chance you’ll get $50, which is 25. years that we can learn from today? What do you think You’ve got to give a year of time. Let’s say we discount will be going on, not just in the next year, but beyond it 10 percent; so the return on this mathematically is 90 that, and what will be your responsibility or interest in instead of 100. You still don’t go. it?” This way we can stretch time horizons and perfor- But let’s say you think this way: you’ve got the exact mance reviews and incentives as well. same two choices but you now have a third choice. The If your issues are short-term problems and you believe third choice is you can spend 10 more dollars to get that the market risk is probabilistic, e.g. there’s a 40 percent more information and that new information will give chance of one outcome and a 60 percent chance of a differ- you certainty one year from now about this 50/50 deal. ent outcome, then conventional decision-making tools are I won’t belabor it. But if you do this, by spending $10 valuable. And if the time horizons are short, then absolutely more today to give you the opportunity to make a deci- rely on discounted cash flows and expected monetary value. sion a year from now, the decision we just talked about But if your time horizons are longer, and you believe the flips. It becomes a “go” instead of a “no-go.” So think risk is uncertain and can’t be quantified, then discounted options, not just choices. cash flow and expected monetary value techniques are much less valuable and we need a substitute. You think options because you tend to And what are the complements to that? One, of course, be more limited in capital. …Also, by is scenario planning. The more you do scenario planning, nature you are prudent. the more you’ll be getting beyond the range of certainty and probability and short-term results. Family-controlled companies think options naturally. Think Options That is a part of your make-up as people that lead fam- How do we think about preserving the opportunity to ily-controlled companies. You think options because make different or new or better decisions into the future? you tend to be more limited in capital. So you keep Assume, for example, your choice is to either construct a thinking about how you don’t have to make a quick building or not to build it. Options thinking might lead commitment now but can make it in pieces. Also, by you to say, “Well, maybe we lease it and then decide if we nature you are prudent, and you think incrementally. want to purchase it.” What about deciding to enter a new All of which, I think, gives you a natural orientation to market or not. Options thinking might say to enter with think about options. an experienced party and learn some things. What about Thanks for being part of our conversation on the doing the R&D project or not doing the R&D project? question of: If it’s true that long-term time orientation Options thinking would encourage us to see if we can do is important to your strategy, your success, and to your some experimentation in R&D and get more information, competitive advantage as a private company, how would even though it costs some money in the meantime. you manage differently? Let’s look quickly at a mathematical decision tree. Let’s assume you make a $100 investment today and your analysis says there’s a 50 percent chance that it will pay off $150 in one year and there’s also a 50 percent chance that it will pay off $50 in one year. Do you do the deal? No. There’s a 50 percent chance you’ll get $150, which is 75;

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 41 JOHN L. WARD Clinical Professor and Co-Director Center for Family Enterprises Kellogg School of Management Evanston, IL

John L. Ward teaches family enterprise continuity and is an active researcher and writer on strategy, ownership, governance and philanthropy. He serves on the boards of four companies in the U.S. and Europe and is the author of many books that are leaders in the field:K eeping the Family Business Healthy, Creating Effective Boards for Private Enterprises, Strategic Planning for the Family Business (with co-author Randal Carlock), Perpetuating the Family Business, and Family Business Key Issues (with co-author Denise Kenyon-Rouvinez). His most recent publication is From Siblings to Cousins: Prospering in the Third Generation and Beyond for the Family Business Leadership Series. He has a B.A. degree from Northwestern University, M.B.A. and Ph.D. degrees from Stanford Graduate School of Business.

42 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 43

The Invisible Organization

In almost every family enterprise there are family members who are “invisible” or not formally in the business. Yet their impact on the business is noteworthy. In this panel, three family business members talk about the importance of their behind-the-scenes roles in fostering family values and providing balance between the business and the family.

Also included are the views of conference participants on their invisible organizations.

Moderator: Panelists: Carol Zsolnay Liz Steinlauf Assistant Director Edmunds.com, Inc. Center for Family Enterprises Marilyn Ofer Ofer Group

Jamie Crane Crane Group Co.

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 45 THE INVISIBLE ORGANIZATION

CAROL ZSOLNAY: When you are married to an entrepreneur you may not realize that you’re going to be in a family business right away. But Liz now has two offspring who are in the business full-time, making them a genuine family business. Our next panelist is Marilyn Ofer, the spouse of the second generation leader in the business and the daughter-in- law of the first generation leader. She may not have realized what she was getting into when she married into the family. Our third speaker is Jamie Crane. She is from a third generation family business, the granddaughter of the founder. Her father and uncle were leaders of the company and now it is Jamie’s sister who is the current leader.

LIZ STEINLAUF: The People Behind-the-Scenes We know from some fairly recent research that the invisibles, people who are invisible in the business but not in the family, are very likely to make substantial positive contributions to the success and continuity of their family’s business. But this is often informal, not always recognized, and not always quantifiable. Sometimes these people are not even aware of their contributions. To talk about this subject we have three fantastic panelists. It should come as no surprise that none of them called us up and said, “I’ve got this great idea for a panel. And I want to be on it.” What they said when invited was, “What do I have to offer? This seems a little like bragging. I’m kind of behind- the-scenes.” But let me assure you, all of our panelists were Edmunds.com, Inc. recruited because they have something very special to say. I was very surprised when asked to participate. I’ve instinc- tively always felt I had a role, but I really felt my role was We know from some fairly recent as wife and mother. In the past few years since I’ve come to research that the invisibles, people who this conference and met other women who work behind the are invisible in the business but not in the scenes like I do, I started to appreciate that I have a part to play in forming the culture and the values of our business. family, are very likely to make substantial A little bit about our family business, Edmunds.com. positive contributions to the success and It’s an on-line resource for automotive information, help- continuity of their family’s business. ing to empower the consumer seeking to buy a car. My husband, Peter, and I originally bought Edmunds when it Liz Steinlauf is the spouse of a first generation leader of a was a print publication in the late 1980s; this was after sell- family business. When you’re a spouse of the first genera- ing an outdoor advertising company that we had started. tion leader it’s often because that person is an entrepreneur. In 1995 we launched our first website and now we have

46 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e three additional websites: one for car enthusiasts, one for main store every single day to check on her sons. Every social networking, and one for the industry. Saturday afternoon, the family would gather in her home When we first bought Edmunds, we worked out of and in the evening they would open the mail that had our home. Today we have 350 people working at our accumulated over the week at her dining room table. I headquarters in Santa Monica. Peter and I have three guess that was the original board room table because they children. The oldest, Avi, is a Kellogg graduate and he would discuss strategy for the coming week at that table. is Edmund’s COO. Joanna, is also a Kellogg graduate I often think about her and the role that she played. but not in the business. My youngest, Alison, just started Although I never thought of her as being a business working for Edmunds as the marketing coordinator. All woman, she really did have an influence on her sons and of them are married with children. the way they conducted themselves.

Family Businesses Galore Unshakable Family Strength I need to tell you a little bit about our background in order Then the Second World War came. Many, many mem- for you to really understand what our values are and how bers of our families were lost. My parents, who were each they filter through to the business. Peter and I are both chil- married to other people before the war and had families, dren of Holocaust survivors. My father was a master story lost them all. They met after the war, married, and even- teller and he often told us stories of the families, both mine tually moved to Los Angeles where I was born. In my and Peter’s; he knew Peter’s family before the war. He told mother’s family, seven of her siblings survived the con- us about the various family businesses. My mother’s family centration camps. This was rare for so many siblings to was in the lumber business. My mother-in-law’s family survive; but they lived through it because they had each was in the lumber business. My father-in-law’s family other. The brothers and sisters all moved to New York in was in the hosiery business. And my father’s family was freezing winter. They decided they weren’t staying in that in the china and porcelain business. It was established in climate and moved to L.A., where, starting from scratch, 1802 in a town called Munkacz, which was a part of the they went into the construction business building homes Austrian-Hungarian Empire, Czechoslovakia, and today is in the San Fernando Valley. in the Ukraine. My father would tell how his father died of a heart attack at a young age and how he and his broth- Between my grandmother and my ers ran the business. They all had very defined roles. mother, I’ve had amazing role models who showed me what this invisible The Dining Room Table organization is all about. My grandmother…was not a business- I grew up seeing how the family—the brothers and broth- woman, but she made the block and a ers-in-law—worked together, how they fought, and how half trip from her home to the main store they met challenges and supported one another. And I saw every single day to check on her sons. the role my mother played as peacemaker. She really was the glue that held a lot of her family together. Between my My grandmother, who was a very religious and pious grandmother and my mother, I’ve had amazing role models woman, was very involved in charitable organizations who showed me what this invisible organization is all about. in the community. She was not a businesswoman, but I do have an official role at Edmunds. I’m a member of she made the block and a half trip from her home to the the board of directors so I go to quarterly board meetings,

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 47 which I find very interesting. And even though I don’t Another said I center Peter because he is so focused on the have a business degree, I hear and understand a lot about business that if I wasn’t there to pull him out of it and the working of the company. If somebody asks me what help him get a better perspective for what’s going on in the I do, I say that I’m a wife, a mother, a grandmother, and business, it would be lacking. Finally, the best came from that we own Edmunds. I really feel that we own Edmunds. one of our board members who said I’m like the valve in a I live with Peter who lives and breathes Edmunds 24/7. car—a conduit to let the steam escape! This, considering He’s a real entrepreneur and his passion is contagious. we’re in the car business, is apt. He’s not a teacher so anything that my children and I have So, I’m an advocate and I’m very concerned for how the picked up through the years is really through osmosis, just business decisions will affect our family. being around him and asking questions. Next Generation Enters the Business When Avi graduated from Kellogg in 1998, the question came up of where he should work. He had many job opportunities and had prior work experience before graduate school. You might think that he would want to work outside the family company before coming to work for his father. But, at the time, we were at such a unique point in our business—we were and are at the forefront of our industry. The internet was starting to boom. The learning curve was tremendous and Avi didn’t want to miss out on those opportunities. We had an office in New York in those days, which was a great place for him to start because he had some independence. What Others Say When I was asked to speak on this panel about my role in From the beginning, there were plenty the business, I talked to some of our key employees and of challenges. …Many times I would board members who have known me for a long time. One find myself in the middle. I was hear- told me that I’m a unifier and that I have direct impact on the two key decision makers. I impact the critical and ing this and that and trying to put it all strategic operational direction of the company. I did not together and direct the comments in expect that one! Others I asked said that I have people such a way that wouldn’t be objection- skills and I add a woman’s perspective. I’m sympathetic to able to either of them. people’s problems and reactions. I impact the employee welfare. I have a calming effect and am in a unique posi- From the beginning, there were plenty of challenges. Peter tion to advise without any hidden agendas. I’m a balancer, and Avi’s styles are different. Their personalities are different. an arbitrator and a sounding board. Many times I would find myself in the middle. I was hearing this and that and trying to put it all together and direct the I’m like the valve in a car—a conduit to comments in such a way that wouldn’t be objectionable to let the steam escape! This, considering either of them. But with time, they’ve managed to gain tre- we’re in the car business, is apt. mendous mutual respect and they now work well together.

48 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e Our youngest daughter, Alison, just started working for to build a sense of extended family among them. I like to the company this year. It was a very difficult decision for think of our home as an extension of the office and the her as well. She had been teaching and really enjoying office as an extension of our home. it. But Peter always wanted her to come and work for the business, the same as he did with Avi. Peter respects MARILYN OFER: Avi’s tremendous work ethic and he sees that Alison shares this same ethic. She was nervous about working for the company because she knows how Edmunds can take over everything. Still, she made the decision to come work at Edmunds and she’s really enjoying herself and it’s working out well.

Chief Emotional Officer At home I’m the family cook, the glue, and the chief emotional officer—I have broad shoulders. I try to prevent family conversations from always being hijacked on Edmunds topics. We’ve started something called pizza night. My grandchildren are all very young. But they know that Thursday night is pizza night and they come to Ofer Group my house. On pizza night we try to keep the conversations First of all, I really am the invisible organization. I have family oriented and not business oriented. nothing to do with the business on an everyday basis. I do not sit on the board. I just get the highlights when people I try to prevent family conversations come home from the meetings. from always being hijacked on Edmunds What is our family business? Our core businesses are shipping and real estate. My father-in-law’s father was a topics. …On pizza night we try to keep ship chandler and he taught my father-in-law, Sammy, the conversations family oriented and about ship chandelling. Ship chandelling is when you not business oriented. supply ships. This was in the late 1940s and ’50s in Palestine. My father-in-law was in the British Navy in Family Values Palestine and after that in Israel. He and his younger We are a religious family. We were a religious family before brother saved up to buy their first ship, which then grew the war and we remain a religious family now. Because we to a dozen small ships. The business was then national- lost so many people during the war, people are very, very ized by the Israeli government through their state-run precious to us and we hope that this filters down to how company, ZIM, and my father-in-law decided to move we value our employees and the way we do business. to England and start again and grow his own shipping We help those in need and we’re involved with the company. By the 1980s he had grown the company and community. And hospitality is very important to us. We my husband joined the business. He expanded into real constantly have an open home. We treat our employees estate in New York and Royal Caribbean Cruise Lines. the way we treat our family. We’ve got a very young com- We went into tankers in Hong Kong. And in the 1990s, pany. Most of the people who work for us are in their we went into European real estate, container ships, a early thirties with young families themselves. We try hard bank, and a chemical company. Today, we’re probably

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 49 the largest private shipping company. And in 1999 we the people they would like to tell what to do. That is said bought back ZIM when it was privatized by the Israeli often because we have very good people in our business. government, going full circle. Who is my immediate family? My husband, Eyal, is the Interest in the Business older of two brothers. We have four children, Jonathan As a family, we tried to have dinner together when we who is 28, was lucky enough to come to Kellogg and do could. We gave each other daily updates. We created his JD/MBA and he is now working in the business. So interest in each other’s lives and in the story of the busi- we have three generations working together. Our sec- ness. The children were invited to business meetings so ond son, Daniel, is at London Business School. We have they were exposed to what was happening. We even had another son, David, who works for Goldman Sachs, and a small chair in the board room where the children would our daughter, Olivia, is at the University of Pennsylvania. sit; I think that gave them a sense of pride and belonging. Our children had a trans-Atlantic, multi-cultured child- My husband’s greatest passion is business and I think the hood. They lived and were educated between London children, as a way to bond and connect, would talk to him and New York. Naturally, I think that gives them an about business when they could. advantage; they feel comfortable with all sorts of people from all milieus of life. We created interest in each other’s lives and in the story of the business. The topics I want to talk about are: instill- The children were invited to business ing values from a young age, cultivating meetings so they were exposed to the children’s interest in the business, what was happening. and unifying the siblings as a team. Unifying the Sibling Team If I have any expertise, I would say it lies in the raising of I think unifying the siblings is my main job. Many years children. The topics I want to talk about are: instilling ago, my husband gave the children a match stick. And he values from a young age, cultivating the children’s interest said, “Break it.” It’s very easy to break a match stick. But in the business, and unifying the siblings as a team. then he tied four match sticks together with a piece of cot- ton. And he said, “Okay, break this.” They couldn’t; it was Instill Values from a Young Age too hard. And he said, “That’s you. If you stick together, We try to be a very low key family. We don’t give inter- no one will break you. You will be great. If you go one by views. In fact, we don’t give speeches. This is my first one, you’ll be broken like the single match stick.” speech. We try to teach by example. We never talked about material possessions at home. Money was never a I think unifying the siblings is my main job. focus. The kids traveled on public transportation. They …I’m looking forward to working with my flew economy and still do. We taught respect for everyone regardless of their background. My husband never children’s spouses in the future to instill believed in pocket money for the children. He said it was the same unified feeling in them, too. not a good concept to hand out money and if the children wanted money they needed to do a job or errand to We always punished them equally, no matter who was earn it. The children were taught that playboys or play- right or who was wrong. I especially did that. So in the girls are unacceptable. And if they ever want to come into end, they unified in being angry at me, which was perfect. the business, they better make sure they’re smarter than At least they unified!

50 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e We had a tutor system at home. The older ones taught one that actually lived to tell the tale. And the only reason the younger ones. They shared in their successes and it lived to tell the tale was because in 1950 he recruited failures. Even today, if someone has a paper to write or my father to come in and work with him, along with my a business decision, there are conference calls and wher- father’s life savings of $1,000. And that pulled the busi- ever they are in the world they get together. Problems ness through at that time. were solved by the family. We didn’t go to friends or psychologists or things like that. We always relied on each My grandfather started the business other. It’s a two way street—the parents rely on children in 1947, having lived through the and children, hopefully, rely on us. For example, my Great Depression and many business kids helped me write this talk. start-ups that all went bankrupt. Crane Changes Plastics was the first one that actually Our eldest son, JJ, is getting married, so we’re not such lived to tell the tale. a hard group to break into. The dynamics are changing and the unit is getting much more complicated. I’m look- Ten years later, my uncle joined the business. This team of ing forward to working with my children’s spouses in the brothers ran the business for the next 25 years. Today we future to instill the same unified feeling in them, too. have 1,300 employees, 800 in the Ohio area. We have facil- In conclusion, we’ve all seen great parents with prob- ities mostly in Ohio but also in Chile, Poland and China. lem kids and not so great parents with terrific kids. The And we have nine business units; our primary business late Chicago native, Jay Pritzker, once said to me, “Better is building products. Our core business, Crane Plastics, to be lucky than smart.” I think that not only applies to makes plastic parts for companies like Andersen Windows, child rearing but to everything in life. Pella Windows. We also make vinyl siding and vinyl fenc- ing. We make a composite wood and plastic deck called JAMIE CRANE: Timber Tech. We have regional businesses that do roofing and structural steel, and another one that does security systems. We also make wood door frames and doors in China. Another aspect is the investment side of the business, which has grown over the years. We have a real estate arm that invests in condominiums, marinas, and water parks. We have equity in bonds and then we also have private equity where we invest passively in other companies such as a furniture company, a juice company. We have a minor- ity share in a hockey team and in a pro soccer team.

Anti-Nepotism Stance Softens In the early years, the brothers had a very strong anti- nepotism policy. I think there was some expression like, Crane Group Company “It will be a cold day in hell before you’ll work for us.” My grandfather started the business in 1947, having lived And that went all through our childhood. In my dad and through the Great Depression and many business start- uncle’s view, discouraging us from working in the business ups that all went bankrupt. Crane Plastics was the first was the right thing to do.

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 51 But as my dad and uncle started to age they looked challenges and some people were feeling frustrated, so around and said, “Now what do we do?!” They had not we began a process of creating formal structures. We really thought about succession planning. And they created a family office that manages taxes and invest- really liked the idea of the business staying in the family. ments. We created a family council that includes So they started recruiting their children. All of those everyone over the age of 18, whether they are blood or children, thinking they would never work in the family non-blood. We’re now up to 28 members. The purpose company had gone off and done other things and got- of the family council is to educate, particularly the G4s, ten great work experience. First they recruited my sister, to provide information, and to get input. In addition, a Kellogg graduate, who was working in Chicago for we do a lot of family team-building activities. Quaker Oats in brand management. She joined the busi- We also have a shareholders group, which is just for ness and worked her way up and is now the president the blood family members. We discussed this for a long and CEO of our company. time and when we were forming the shareholders group Next they recruited one of my cousins who also worked several of the non-blood members were getting divorced his way through the company and is now the president of so we decided not to include them. The group includes an operating group. They recruited another cousin to work all of the G3s and as the G4s turn 30, they will become in investments, and last, but not least, 14 years ago, my members of the shareholders group. The shareholders go father recruited my husband to come in as general counsel. into much more financial depth in company business and they approve major decisions of the company. We elect The Formal Invisible Organization one shareholder member to our board of directors. Our invisible organization consists of quite a few people We are very involved in our community. We have a beginning with my grandmother who supported my charitable contributions committee of family members grandfather through many failures and always believed in who meet bi-monthly to determine our corporate gifts. him. My mother and my aunt have supported their hus- Our family has also started doing family service projects; bands in the business, too. And at the G3, or generation a group of the family is going to Louisiana next month to three level, we have eight blood siblings, or blood mem- help rebuild down there. And that’s a good way for them, bers, and eight married-in or non-blood members. And particularly G4s, to get to know each other and work that’s how we refer to ourselves—as blood and non-blood. together on a common goal. And we’ve created a family Finally, G4 has come along with the oldest being 27 and website to keep connected. the newest family member to be born next month. Lastly, G4s are asked to intern with the company. So far, five of them have, the rest are still a little bit young. As our family has expanded, we found Interning is a great way for them to come into the busi- it necessary to formalize the invisible ness, learn what we do, and grow to be better participants organization. This all began about six in the family council and the shareholders group. years ago when the family was facing The Informal Invisible Organization some challenges and some people were Now I’d like to focus on the more informal roles of the feeling frustrated. invisible organization. First and foremost our family is concerned about community. We’re located in Columbus, As our family has expanded, we found it necessary to Ohio so that’s our primary community. At this point, our formalize the invisible organization. This all began family collectively holds 38 different board positions on about six years ago when the family was facing some charitable organizations—everything from the United

52 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e Way to Planned Parenthood, the Women’s Fund, the Art website, an activity that he pushed us to create. As a doc- Museum, the AIDS Taskforce, to public and private edu- tor, he’s become very interested in a smoke-free world cation, and, of course, Ohio State University. Many of my and he pushed our company to become smoke free very cousins and family members have special interests and early on. And we’re proud of that. skills that they bring to the company. For example, one of Next is my sister-in-law Susan. She’s a daughter-in- my cousins is a journalist and she is writing a book about law, a wife, a mother. She’s a social worker by profes- our company and our family that will be used at the cel- sion and currently runs a migrant worker labor center ebration of our upcoming 60th anniversary, in Northern California. In family meetings, her first I’d like to look at some examples of different invis- questions are always: “How do we treat our employees? ible organization family members and talk about what What’s their work environment like?” And “What’s their each of them provides. Since my father passed away, my satisfaction like?” A couple of years ago, we built a plant mother, Loann Crane, controls 51 percent of the com- in China. I remember my husband spending about two pany. She has a board position but no formal business weeks researching what the working conditions would experience other than what she learned from my father, be like, and how many employees we would be able to which was quite a bit. This requires my sister, who is our employ. A lot of time was spent thinking about that, CEO, to put together board presentations in such a way knowing she would ask these questions. I think that that my mother understands them. And that pushes my helped us make better decisions. sister to think things through in a different way. And I My cousin’s wife, Meredith, is a small-business owner think that’s very helpful for her. by profession and has two deaf children. She’s really helped push for our business environment to be deaf friendly. We employ many deaf people in our business.

I am the granddaughter of the founder, the daughter, the sister, the niece, the cousin, the wife and the mother. I fulfill a lot of roles between my father, my sister, my cousins, my husband, my mother and my children.

And last, but not least, there’s me. I am the granddaughter Second is my oldest brother. He took the anti-nepotism of the founder, the daughter, the sister, the niece, the cousin, policy quite seriously, went into the medical field and the wife and the mother. I fulfill a lot of roles between became a doctor. Being the oldest brother, and being a my father, my sister, my cousins, my husband, my mother doctor, he knows absolutely everything. So, of course, and my children. Having a Kellogg background, I’m he questions his little sister, the CEO, non-stop. And it’s often asked to look more in depth at the financial part really very annoying, but also really helpful for my sister of the business and look at the business side. My sister to have to look at things through his eyes and see things frequently calls me and e-mails me saying, “Look at this from a different viewpoint outside of the business per- and see if you can explain it to Mom.” When we’re doing spective that she has. I think that has really helped her our strategic planning, I’ve been asked to sit in on that. grow in her role. He’s also very involved in the family And that’s been fun and helpful.

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 53 I hope that this summary of our business and our family think that we bring in a real balance, especially when the and, particularly, the invisible organization, has helped organization’s run by men. you think about the invisible organization in your companies and how they make an impact. Being the invisible organization and having children who are in the business, what would you say were the Audience Questions key elements that you used to instill a good work ethic in your children? Since you are all women, have you had to face conflicts Marilyn: I think they emulate what their parents do. with the “boys club” or more masculine aspects of the And we’ve spent a lot of time talking about how they business? just can’t expect to come into the business. If they want Liz: I think the male attitude is: “We have a problem. Let’s to come into the business, they really have to contribute. solve it. This is the answer and we’re finished.” And the They all worked outside the company and the first one female attitude is: “Well, let’s look at this from all direc- has come back now and the second one will be coming tions. Why do we have this problem? What’s the impact back. I don’t know what the others will do. I suppose on the people, and why are they reacting that way? What’s they are proud of the business and would love to join in going on in their lives that made them react that way?” I and belong at some point.

54 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e conversations around the family table. Avi obviously knows what’s going on day to day. But my daughter Alison said to me, “Many times there is so much going on that I don’t have a good grasp of things.” That’s my challenge to address because I know that Peter and Avi are not going to do anything about it. It’s going to come from me saying, “We need to meet so that Joanna and Alison and I really have a clear understanding of what challenges Edmunds faces and what we’re going to do about them.”

How much responsibility should the next generation take in developing the structure? Or should they look How much of your influence comes from being behind to the older generation for guidance? the scenes and will you lose influence if you’re out in Jamie: When we formed both the shareholders group front and actually building an organization? and the family council we had fourth generation mem- Jamie: I think it’s a good question. We struggled with bers, typically college kids, go out with a third genera- this about seven years ago when the family did not feel tion person and interview different companies that had connected around the business. Everybody had their family councils. We had them travel to four or five dif- own point of view and would call my sister indepen- ferent companies to see what they were like and what dently. It became very clear that we needed to formalize they were doing, and talk to the heads of their family so that everyone felt as though they had a voice. Does councils. We really wanted the fourth generation to that make them less effective? I think it makes them buy into what we were doing and understand it and be more effective because they have a formal opportunity enthusiastic. So we had them form the family council. to state their views, where before they weren’t sure that We had them present it to the family. I think it’s very they were being heard. important that you involve the next generation.

It became very clear that we needed Sometimes the view is that blood counts more than to formalize so that everyone felt as non-blood. Have you had to deal with that and how have you resolved that to get to the place where your though they had a voice. Does that invisible members can be respected? make them less effective? I think it Jamie: I think that that’s a lot of the reason the family makes them more effective. council and shareholders group came about because, particularly the in-laws, or the non-bloods, felt as though Liz: I think one of the challenges for me right now is they weren’t being taken very seriously. It was very organizing family meetings where we specifically talk important that they be part of the business, but it was about what’s going on at Edmunds and not just assume also important that they understand that the blood line that everybody knows what’s going on because of the controls the business.

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 55 LIZ STEINLAUF MARILYN OFER Family Member, Shareholder, Director Family Member and Shareholder Edmunds.com, Inc. Ofer Group Santa Monica, CA London, England

Liz Steinlauf is the spouse of an entrepreneur who, in 1988, Marilyn Ofer is the daughter-in-law of the founder of the purchased a three-person company that sold automotive Ofer Group. Born and raised in London, she is the mother guides and turned it into the first ever automotive web-site of four adult children, one, a Kellogg J.D./M.B.A., is mak- in 1995. Today, Edmunds.com, Inc. publishes four award- ing a career in the family business. She studied at Tel Aviv winning web-sites for automotive consumers, enthusiasts University and the Parsons School of Design in New York. and insiders: True Market Value, Inside Line, CarSpace Her interests include impressionism, modern art, ballet and AutoObserver.com. Liz grew up in California, and then and history. The family’s first company was started by attended Stern College in New York where she and her hus- Marilyn’s father-in-law in the maritime shipping sector in band met. She is the mother of three adult children, two the 1940s. Since then, the business has grown into one of have M.B.A. degrees from Kellogg and two of her children the largest privately held shipping groups in the world with are making careers in the family business—one is currently over 300 ships. In addition, the enterprise has developed a the COO and the other is the marketing coordinator. She is diversified portfolio of global real estate assets and active also an active grandmother of six grandchildren. interests in banking, leisure, logistics and energy. Ofer has over 10,000 employees around the Americas, Europe and Asia, and currently has three generations of family members working together in the business.

56 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e JAMIE CRANE CAROL ZSOLNAY Family Member, Shareholder, and Family Council Member Assistant Director Crane Group Co. Center for Family Enterprises Columbus, OH Kellogg School of Management Evanston, IL

Jamie Crane is the granddaughter of the founder of Crane Carol Zsolnay is assistant director of the Center for Family Plastics, Inc. established in 1947. Today, Crane Group Enterprises. She manages and coordinates activities Co. is a private family-held portfolio of operating busi- including the conference, case-writing, resource center, nesses and passive investments. Jamie has a sibling, database, visiting scholars, meetings with prospective a spouse, an in-law, and two cousins in the business, applicants, students and alums. She has authored family including her sister who is the CEO. She is very involved business case studies available through the Kellogg Case in the family council, the shareholder group, and the char- Collection and HBS Press including: Murugappa Group, itable foundation. In addition, she is an active volunteer Johnson Family Enterprises, Freedom Communications, and leader in Columbus area non-profits including the Buddenbrooks, Keddeg Co., and Wang Industries. She Children’s Hospital, Planned Parenthood, United Way, is an academic advisor to students in the Kellogg Global education, housing, and arts groups. Before she started Initiatives in Management program. Her B.A. in Asian stud- her family, she worked at Kraft Foods, Quaker Oats, and ies is from Northwestern University and her M.B.A. is from American Hospital Supply. Her B.S. degree is from Indiana Kellogg School of Management. University. She and her sister both have M.B.A. degrees from the Kellogg School of Management.

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 57 BREAK-OUT DISCUSSION SESSION

After this session, conference attendees broke into dis- who do not work in the business yet play significant behind- cussion groups to consider the impact of the invisible the-scenes roles in their family enterprise. Very often, espe- organization within their own family enterprises. While cially in the early development of the business, these players almost all talked about having an invisible organization, are women; most likely spouses, mothers, grandmothers, people acknowledged that as their businesses grew and and daughters of the active business family members. These changed, these behind-the-scenes family advisors under- women, especially if they are mothers, often provide a bal- went a transformation, too, from loosely informal to ance between family life and the business. They provide a more structured bodies. sounding board for new ideas and help when conflicts arise The questions participants were asked to consider were: among family members who work together. One group • are there people in your family who are not in the put it this way: “The mom is like gravity, holding everyone business who play or have played significant roles together but operating in subtle, undramatic ways.” behind-the-scenes as part of the invisible organization of your enterprise? • How has the make-up and influence of the invisible organization changed over the generations of your business? • How do you expect this to change in the future? • up to now, where has your invisible organization had the most positive impact or been most beneficial to the enterprise?

Main Conclusions • the most significant behind-the-scenes players are most often women, e.g. wife or mother, especially in the early stages of the business’s development. Invisible Organization Changes as Business Matures • as both the family and business grow, new structures As the business ages, the make-up and influence of the such as family meetings and family councils are often invisible organization begins to change over the generations. needed to accommodate the subsequent generations Members of the younger generation and their spouses, and and their spouses. in some cases their young children and their cousins, begin • Continued growth means creating more and more formal to create a different dynamic as they become interested in structures to meet the needs and interests of an increas- influencing the family business. This, in turn, may lead to ingly multi-generational, multi-branch family enterprise. a more outward/charitable focus. The behind-the-scenes • the invisible organization is a source of many positive people may subtly shift from their nurturing/conflict res- outcomes: mainly, it fosters a sense of family togeth- olution roles within the family to being concerned with erness, provides different perspectives on important issues outside of the family and in the wider world. issues, and helps to codify family values. As the business ages, the make-up and Important Role for Women Regardless of age or status within the business, virtually all influence of the invisible organization of the discussion groups were in accord that there are people begins to change over the generations.

58 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e As more and more members are added, the roles of family groups become more official they may begin to address members become more formalized with the creation of ideas like family values, the education of the upcoming a family assembly or council and the holding of family generations, and community outreach and foundations. meetings. The advice being given by the behind-the-scenes people becomes more sophisticated as the structure for Continue to Evolve the conversation becomes more formal. Succeeding gen- When the attendees were asked how they saw their erations are sometimes more vocal than their predecessors invisible organizations continuing to evolve, they most and formalizing a role for them is often a first step toward commonly responded that they foresee them growing in helping them find a legitimate voice when addressing importance and influence in the future as the addition of family business issues. At this point, with more formal- new generations mean more members and require more ization and more structures being put into place, the formal constructs to accommodate them. One discussion members of this group become increasingly visible. As the group pointed out that the family dynamic will continue

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 59 to change with the addition of spouses and “non-blood” of outside advisors to these formal structures can benefit family members to family council and foundation seats. the growing family. In particular, bringing the younger generation into to the family enterprise adds another important respon- While growth is necessary, as the invis- sibility to these invisible groups, that of educating the ible organization continues to grow in next generation in the responsibility of being a family numbers and influence it is always wise business owner. As one group put it, they want the next generation to see the family business as an entity beyond to be aware that sometimes this can “a source of money.” In addition, these structures can have a negative impact on the family, be used to help keep the family involvement strong as especially in the early stages. generations continue to increase and branch out into different family groupings. The discussions often pointed Finally, two discussion groups pointed out that, while to structures like the family council, foundations, and growth is necessary, as the invisible organization contin- family meetings as being positive influences on building ues to grow in numbers and influence it is always wise to stability in the company and family. Also, the addition be aware that sometimes this can have a negative impact

60 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e • enumerating and maintaining family values • Building a sense of security and loyalty among employees • acting as peacekeepers or providing a calming influence • providing emotional support and compassion • Bridging the generations • Helping the enterprise to be more outwardly focused on community concerns • Focusing on strategic and cultural development

One group of respondents said that as the behind-the- scenes groups become more formalized they encourage members of the next generation “to feel valued without being directly involved in the business.” These organizations serve to “remind everyone that they are in this together and not lone wolves.”

One group of respondents said that as the behind-the-scenes groups become more formalized they encourage members of the next generation “to feel valued without being directly involved in the business.” on the family, especially in the early stages when trying to develop formalized structures and roles for family mem- Overall, the view of where their individual invisible orga- bers within them may increase family tumult. nization is heading is very much colored by the age of the business and the number of generations in the enterprise. The Benefits of the Invisible Organization In the end, what all of the respondents seemed most The respondents said the most common benefit of the concerned about was: keeping the family strong and invisible organization is that it fosters family togetherness together while promoting the growth of the family busi- through various collaborative endeavors such as the educa- ness. And this is where they felt the family members not tion of the up-coming generations and charitable activi- active in the business could provide the most support. ties. They also saw great benefit in their ability to provide an outside perspective on important business/family issues. Other areas of positive influence include:

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 61

The Human Side of Family Wealth Transfer Planning

How do families feel about passing on wealth to their children and grandchildren? And just how do they, or should they, go about transferring assets? These are two of the questions considered by this distinguished panel.

In this session, Professor Ward asks a series of questions of the audience about their own feelings on wealth transfer. The session then transitions into a discussion by representatives of two of the top estate planning companies in the country. Our experts draw upon their considerable experience to provide insight and advice to the audience.

PANELISTS: MODERATOR: R. Hugh Magill John L. Ward Executive Vice President Co-Director The Northern Trust Company Center for Family Enterprises Clinical Professor Richard A. Lang Kellogg School of Management Partner McDermott Will & Emery

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 63 THE HUMAN SIDE OF FAMILY WEALTH TRANSFER PLANNING

The Delicacies of Wealth Transfer HUGH MAGILL: What are the objectives and assumptions of wealth transfer, estate planning, and succession of control? The session began with audience members using confidential voting machines to share their views on these topics anonymously, and honestly. After the questions, Hugh Magill from Northern Trust, and Dick Lang from McDermott Will & Emery, shared their collective wisdom on some of these issues. Finally, the floor was open to all to ask questions of the panel.

Some Unexpected Answers

I think the spouses of inheritors should have a nest egg of financial independence under their personal control. Percent answer 26% yes 26% if affordable What are the human dimensions 48% no involved in the transfer of wealth, control, independence and liquidity As you think about passing on your assets, what between generations? best describes your vision? Percent answer The audience—particularly those from America, France 33% i only want to give it to my children and let and Japan—were instructed to absolutely suspend the them decide what to do for future generations idea that there is a world with taxes. They were asked to 25% i want to personally assure some direct pretend that there are no transfer taxes, gift taxes, inheri- benefit from me to my grandchildren tance taxes or estate taxes. Then they were asked to con- 42% i want to assure a substantial benefit for sider the following questions: How much should they generations after my grandchildren give of what, to whom, when, why and how? What are the human dimensions involved in the transfer of wealth, control, independence and liquidity between generations? I was very surprised by the answer to the question about They were asked not just to consider the money or the providing a nest egg for spouses, because in constructing controlling shares, but also consider how they share the an estate plan, I am very rarely asked to provide any spe- information about the money and the controlling shares. cific nest egg for spouses. Yet over half of you responded that you would provide some financial independence for Complete answers to polling questions appear at the end of spouses, either outright or if affordable. this article.

64 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e My non-family business clients are who are more inclined to ask the question: How much is almost always interested in passing enough? Most clients approach that issue from the charitable side first. They ask themselves what amount they assets just to the next generation. want to set aside for charitable purposes and then look at …It must be something specific to busi- the balance to determine how they want to disburse what ness owning families that cause you to is left and when they are going to leave it to their chil- have…an interest in passing a legacy on dren and other descendants. Increasingly, however, there beyond just the existing generations. are some families who flip the question around and ask first about how much to set aside for family. They want to figure out what is necessary for the family and how much I also found the response to the question about what is enough. And then they look at leaving the balance to best describes your vision for passing on your assets to be charity. A lot of clients have taken some very progressive unexpected. Perhaps because taxes were taken out of the approaches to their estate plans and may have already equation, or maybe because I deal with a lot of non-fam- transferred assets to children and grandchildren, with ily business clients, I was amazed at the large number of a wide range of results. It’s a little like The Three Bears. you who would assure financial benefit for your grandchil- Sometimes it turns out to be too much. Sometimes it’s too dren and later generations. My non-family business clients little. And sometimes it’s just right. are almost always interested in passing assets just to the next generation. When I talk to them about the benefits An Interesting Example of passing to succeeding generations, they’re generally not A very interesting example is one of a young entrepre- interested. It must be something specific to business own- neur who had, with a partner, created a very substan- ing families that cause you to have different views and a tial wealth pool through an IPO. Prior to the IPO, he different culture and an interest in passing a legacy on created some irrevocable trusts for descendants. At the beyond just the existing generations. time he was not married and had no descendants. This was a very interesting phenomenon for him to take such How Much Is Enough? progressive, and, in a sense, aggressive wealth transfer We tend to see that there is a fairly steps when he didn’t even have a family yet. Also, very interestingly, there was no cap on what was going to be high correlation between the magni- provided for those descendants. But, for those families tude of wealth and the propensity to who are contemplating that issue, who are struggling limit inheritance. with the relationship between wealth and how much is enough, we’ve seen as little as zero in some unusual Warren Buffet was widely quoted when he said he wanted circumstances. Usually, in cases like this, there are some to give each of his children enough to do whatever they issues about maturity and well-being. In general, I see a wanted to do with their lives, but not enough to do noth- range of between $25 and $50 million set aside for each ing. That observation has stimulated a lot of dialogue child. Sometimes the wealth transfer planning has been about wealth transfer. We tend to see that there is a fairly so successful, often through the investment prowess of high correlation between the magnitude of wealth and the the principals, and the children have so much money, propensity to limit inheritance. So if there’s a very, very that some clients come to us and say, “Could we get the substantial amount of wealth, we see those are the families kids to give some of that money back to charity?”

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 65 Sometimes the wealth transfer plan- adolescent to begin understanding concepts of financial ning has been so successful…that some management, wealth transfer, and the responsibilities that are imposed with the inheritance and the management of clients come to us and say, “Could we financial wealth. These concepts are part of a very broad- get the kids to give some of that money based education the children should have so that they can, back to charity?” with the help of professionals, learn to navigate the legal and tax issues involved with wealth; but I think those are How Not to Begin the Conversation of the least interest to younger family members. From my experience, families are often reluctant to begin the conversation about transferring wealth. It’s a difficult conversation to have with your children. One way to surely start off on the wrong foot however, is to open the discussion with talk of a pre-nuptial agreement. If the parents want to talk about a pre-nuptial agreement right away when a child gets engaged, that’s going to send an unintended message. Another way to kill the conversation is to present a document to a child and say, “Here. Sign this.” That usually doesn’t tend to bring about a real robust conversation, though you may bring about some robust thinking. Another conversation stopper would be, “By the way, you’re trustee.” Don’t surprise them with fiduciary duties. A Better Way to Begin I like to start an estate planning discussion from the inside Another thing that is important to avoid out. What do I mean by that? It starts with the family’s per- is what I call a brain dump, which is the spective on wealth. I would define wealth here very broadly expectation that you can sit down and to include not only a family’s financial and business assets, but also the intangible aspects of their family’s well-being: have one conversation and be done their practices in philanthropy, reputation, character and with it. This is a topic that benefits from traits. I use that to set a context for the discussion about a series of conversations and probably wealth. That’s one of the ways to break the ice and get into a series of conversations over years. a discussion. It can be disconcerting to recognize that our descendants will be dealing with these issues, managing Another thing that is important to avoid is what I call a these assets, and living their lives when we are gone. brain dump, which is the expectation that you can sit down and have one conversation and be done with it. This is a The Old Way of Estate Planning topic that benefits from a series of conversations and prob- I will oversimplify by saying that this is how estate plan- ably a series of conversations over years. Very interestingly, ning was often done: The first generation, in essence, did in the survey we just took, there were quite a few who said estate planning to the second generation. The second that 21 was a good age at which to inherit the bulk of generation did its estate planning because of what was one’s financial assets; this suggests you’ve got to start the done to them. And the third generation said, “What, us conversation with your children well in advance of age 21. worry about estate planning?” Of course, there were many It raises some very interesting issues about the ability of an exceptions to that.

66 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e The first generation, in essence, did ways to stimulate that kind of collaborative consideration estate planning to the second genera- is to work very closely with your professionals and to make sure that they‘re working together as well. tion. The second generation did its estate planning because of what was done to DICK LANG: them. And the third generation said, “What, us worry about estate planning?”

Getting the Family On Board Today, there are a range of approaches. One very good approach is to make estate planning a topic of discussion at a family meeting or conference. At the conference you could cover education and training about estate planning—not only about its importance but about the why and the how. It has to be very age appropriate and it has to be well done so that these complex issues of tax law and the legal structures can be understood. I think it’s important to deal with some of what I call the show-stoppers or the show-starters in estate planning. What a Difference a Day Makes One of the great show-stoppers for young families is: Who Yesterday, when the question was posed about your views is going to be guardian of the minor children? That’s often on passing wealth to the next generation, only 45 percent a discussion that immediately gets a couple into a dead- of you were very concerned to cautious. Today, it’s 50 per- lock because they can’t decide. There are some great ways cent. Somehow we’ve done something to make another to work through that issue with the aid of advisors and five percent of you get a little concerned about that. We’d counselors. There are some show starters. A lot of folks like to see that number go down after this conversation. suffer from what I like to call vacation estate planning syn- Like Hugh, I, too, was struck by the large number of you drome. They say: “We are going on a plane and there’s a who are interested in seeing assets secured for future gen- risk the plane could go down. It’s time to get the estate erations. Now the pessimists would say that’s because you plan updated.” And that’s okay. I remember when I was in already know what your children are like. But I think this private practice, I used to say, “When the plane doesn’t go demonstrates your true desire—if we could take taxes out of down and you come back, let’s revisit your estate plan.” the picture. However, as we all know, at least in the United I think another way to approach it is to develop a con- States, taxes are a substantial disincentive to being able to sensus on some principles or expectations. For example, set assets aside for future generations. But in your hearts should the business stay in the blood line or is it permis- and minds, 42 percent of you said you wanted to have a sible for shares to go outside the blood line? Should assets substantial benefit set aside for those future generations. stay in trust to protect against divorce, against creditor issues, or should assets go outright? What are the views on Treating Inheritors Equally pre-nuptials? Around all of this, I think it’s important to Let’s look at the question of what percent of our clients make sure that your advisors—legal, financial, and family treat each of their offspring equally, and if they don’t treat office members—are working together. One of the best them equally, why not? In my experience, there are a small

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 67 percentage of clients who will actually disinherit a child or leave him or her a drastically reduced share. But the majority of our clients generally leave their estates equally to their children, or per stirps. But what is considered equal in each family will vary. For example, you may have a business owner who has a child who is working in the business. And the business owner decides that that child is going to get the shares in the company and the other children are going to get the financial assets. The business owner will, in his or her heart, feel that he or she is treating all of the children equally, even if there is disparate value. The business owner feels that the child working in the business has added value and because of this added value he or she has earned a bequest so he or she is not really getting more than the other children. However, the siblings sometimes take a very different view of that. Overcoming Initial Reluctance Very often people are reluctant to think about estate plan- Sometimes, the child in the business, ning and talk to the next generation about their intentions. perhaps the CEO, gets the voting shares I see it as part of my job to help people overcome their impediment to estate planning. Having interviewed people and the other children, who are either on this subject many, many times, I think one of the prime not involved in the business or who have reasons is that people just don’t like to think about their different roles, get the non-voting shares. mortality. Actually talking to somebody about it imbues it That can be a disastrous situation. with a reality that makes many people very uncomfortable. This makes the topic a non-starter right there. Occasionally, there is the situation where the business is divided into voting and non-voting shares. Sometimes People are frequently reluctant to think the child in the business, perhaps the CEO, gets the vot- about estate planning. …people just ing shares and the other children, who are either not don’t like to think about their mortality. involved in the business or who have different roles, get the non-voting shares. That can be a disastrous situa- If you can get over that hump, I think people quickly real- tion if the business does not do well, or if the siblings ize, once they start thinking about these issues, that they don’t get along, because the person in control may reap are being asked to make some really hard decisions. They significant benefits from having that control. The other are going to have to make decisions that are going to have siblings may be very dissatisfied and they may have been a lasting effect, and they may not have all the data they better off if they had been treated unequally and received would like to make the correct decision. These are general- financial assets, even if less valuable initially. They might ly people who are decision makers, who are used to getting have prospered by being able to go their separate finan- the data and information that they need and then are sat- cial ways. Yes, everybody believes they leave it equally to isfied with the decisions that they make. Estate planning their children; but what is equal? It can have very differ- is a topic that just doesn’t, at least initially, lend itself to ent meanings in the different contexts. comfortable decision making. I think the combination of

68 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e not wanting to face death and not knowing how to solve Audience Questions the problems that this might create makes people uncomfortable and encourages them to put off thinking about it. At what age is it best to begin involving the younger generation in estate planning? Planning with Younger Generation’s Help Hugh: It’s a great question. I suggest it’s very important to Sometimes estate planning is a collaboration between begin to involve them in financial education at an early age. I two generations, or even delegated to the junior gen- think there’s probably an age when the prospect of a parent’s eration, as opposed to being totally in the hands of the mortality is pretty disturbing. So that is too young and you senior generation. Usually that is due to the age of the have to be sensitive to your children’s emotions. Beginning a client. As the client, who is preparing the estate plan, broad-based, financial education and teaching children about gets older it’s more likely that the next generation is assets and involving them in philanthropy lays a wonderful going to be involved in the process. The circumstance foundation for estate planning discussions at the right time. where we see the most involvement of another generation in the planning process is where there are some Beginning a broad-based, financial special assets, like a family business or other important education and teaching children about family assets such as a family compound or family art. assets and involving them in philanthropy And that’s where it’s very critical to bring in the next lays a wonderful foundation for estate generation. If the senior generation thinks that this family compound is just absolutely the greatest way for the planning discussions at the right time. family to stay together and the next generation really doesn’t like going there, then everybody’s going to be a Dick: I’d say over 21 is a good age to involve the next gen- lot better served if there is a discussion about it. eration. I have not had any experience with children under 20 or 21 dealing with estate planning. The circumstance where we see the If it’s purely financial wealth, do you think it’s easier to most involvement of another genera- give it to philanthropy? Because if there is a business, tion in the planning process is where you probably feel more obligated to pass it on to the there are some special assets. next generation. Hugh: There is a big difference depending on whether And, finally, delegation will occur in those situations the assets are primarily financial or whether there’s a busi- where the senior generation has some disability and can no ness involved. Where they’re purely financial, people feel a longer cope. Maybe they have diminished capacity. They lot freer to be more creative, to give more to charity than still have testamentary capacity but they have diminished where there’s a business. capacity to deal with all of the complexity and they just say to the kids: “You guys figure it out. The most impor- How many of your clients have buy/sell agreements? tant thing to me is that you’re going to be happy with Dick: Buy/sell agreements are prevalent in any business sit- the plan. And I’ll go along with whatever the program is.” uation and clients are very interested in having them. The However, there is always going to be the one requirement difficulty is often in deciding what the price is going to that the senior generation has in mind, a piggy bank with be, and what the trigger is going to be; that’s a subject that X dollars in it. And that number’s going to vary. But that’s requires a lot of discussion over time. But the short answer a requirement that the next generation needs to respect. is it’s prevalent in the business situation.

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 69 Hugh: I would add that a subset of the buy/sell is a share- My feelings about passing wealth to the next genera- holder agreement. As the family increases in size, issues of tion are best described as: whether shares can go to spouses or must stay in the blood Percent answer line can be dealt with there. A shareholders agreement is 8% Very concerned really a vital tool to be able to manage your capital struc- 42% Cautious ture and to deal with that in light of life’s vagaries. 10% neutral 25% Comfortable Audience Poll 15% Very positive

Fifty percent of you are concerned or cautious, about 40 percent comfortable or positive, and 10 percent fairly neutral.

Attitudes about Inherited Wealth by Generation With the answers you’ve given thus far, we can look at the relationship between your generation and your attitude towards inherited wealth. And what we find is that the first generation, which has all the control, does not seem to be overly concerned, perhaps cautious but not overly con- Following are the complete audience polling results with cerned about passing wealth to the next generation. We also comments by Professor Ward. see that the later your generation, the more comfortable and positive you are about the influence of wealth on future John L. Ward: generations. This is very interesting and powerful data.

Who is here? Percent answer Results by What Generation Are You 27% Senior generation IN business 11% Senior generation NOT IN business My feelings about passing wealth to the next gen- 37% next generation IN business eration are best described as? 13% next generation NOT IN business (founder/creator) 1st 21% 29% 8% 21% 21% 12% non-family executive/director/advisor 2nd 8% 46% 16% 22% 8%

This tells us that over 60 percent of you who are family 3rd 9% 30% 14% 23% 23% members are in the business, 24 percent of you are not in 4th 11% 29% 4% 36% 21% the business. Very concerned

What generation are you? Cautious

Percent answer Neutral

17% First (founder/creator) Comfortable 28% Second Very positive 34% third 21% Fourth

70 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e What’s your age? If we break down that question by generation, 73 percent Percent answer of you who are in the founder generation say you abso- 19% 35 or younger lutely believe your children will enjoy your standard of 34% 36–50 living while only 36 percent of the second generation feel 35% 51-65 that way. So the founders are saying “sure,” their children 12% over 65 are saying “maybe, at best.”

The next question is only for those in the senior generation. This question is only for those of the next generation.

Do you believe your children’s generation will be able Do you believe you will be able to enjoy at least the to enjoy the same standard of living that you have same standard of living as your parents? enjoyed in your life from an economic point of view? Percent answer Percent answer 71% yes 69% yes 19% no 17% no 10% unsure 14% unsure

Over two thirds think that there will be enough resources Results by What is Your Age available to the children of the next generation to sustain the same standard of living as yours. One third doesn’t Of next generation: Do you believe you will be think so or are not sure. able to enjoy at least the same standard of living as your parents in their lifetime? Standard of Living by Generation Break-down 35 or younger 59% 22% 19%

36–50 77% 21% 2%

Results by What Generation Are You 51–65 75% 13% 13%

>65 100% Of senior generation: Do you believe your children's generation will be able to enjoy at least Yes

the same standard of living as you will enjoy in No

your lifetime? Unsure

(founder/creator) 1st 73% 23% 4%

2nd 36% 36% 29% As you think about passing on your assets, what best 3rd 73% 7% 20% describes your vision?

4th 93% 7% Percent answer 33% i only want to give it to my children and let Yes them decide what to do for future generations No 25% i want to personally assure some direct benefit

Unsure from me to my grandchildren 42% i want to assure a substantial benefit for generations after my grandchildren

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 71 I think this is the first time this question has ever been asked and it is very revealing because what we see are three different wealth transfer visions followed by roughly equiv- alent numbers of people. We’re always talking about your business vision or your ownership vision, but I think your wealth transfer vision is the foundation under those visions.

If you had enough money to leave each of your children at least $3 million, at what age would you give them their first million under their own personal discretion? Percent answer 4% @ 21 21% @ 25 It seems like the senior generation and the advisor/direc- 50% @ 35 tors are much more likely to think about giving financial 15% @ 45 discretion at a younger age. And it seems like younger 4% @ my death generations are less likely to do this. It would have been 6% never interesting if we had prepared the question of how many of you actually did it. But a huge percentage of you say Distribution of Assets by Generation and Business Role you are willing to give assets to children between 21 and Let’s compare these results against each generation and your 25, which is very interesting. relationship to the business to see if there are any revelations. At what age would you give the bulk of their financial asset inheritance to the next generation under their Results by Who is Here own discretion? Percent answer If you had enough financial assets to leave each 2% @ 25 of your children at least $3M, at what age would 5% @ 30 you give the first $1M to them for their own per- 26% @ 35 sonal discretion? 17% @ 40

Senior Generation 25% @ 45 2% 30% 40% 19% 9% in Business 23% @ my death Senior Generation 5% 11% 53% 16% 11% 5% nOT IN Business 2% never

next Generation 5% 19% 61% 8% 5% 2% in Business This next question is only for business owning families. next Generation 9% 9% 48% 22% 4% 9% nOT IN Business

Non-Family Advisor Executive/Director 25% 50% 17% 8% At what time would you pass on the voting control of the operating company to the next generation? @ 21 @ 45 Percent answer

@ 25 @ my death 84% Before seniors’ deaths

@ 35 never 12% at seniors’ deaths 4% never—to trustees

72 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e What standard of living would you intend to assure for What Other Families Do your children’s generation? When Dick, Hugh and I first met to think about this ses- Percent answer sion, one of the things that each of them said was that 52% about the same as mine in real terms clients come to them all the time, and say, “Tell us what 24% More than mine as the world will expect other families do.” Of course, they said, “Everybody’s dif- more from them ferent.” Now you’ve had an opportunity to get a glimpse 21% less than mine as I want them to determine of what other families do for their estate planning. We their lifestyle from their own work hope you have found it informative. 3% less than mine as there isn’t enough to do otherwise

At what age do you feel it is generally appropriate to tell the next generation the specifics about their inheritance? Percent answer 62% @ 25 29% @ 35 7% @ 45 1% @ my death 1% never

I think the spouses of inheritors should have a nest egg of financial independence under their personal control. Percent answer 26% yes 26% if affordable 48% no

If you were to have enough financial assets, which of the following would you fund as a first priority? Percent answer 68% Family education fund 16% Family philanthropic foundation 7% Family new venture fund 6% Family member welfare fund 3% endow family office

Do you have a prenuptial agreement? Percent answer 26% yes 74% no

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 73 R. HUGH MAGILL RICHARD A. LANG Executive Vice President Partner, Private Client Department The Northern Trust Company McDermott Will & Emery Chicago, IL Chicago, IL

Hugh Magill is an executive vice president at The Northern Richard A. Lang is a partner at McDermott Will & Trust Company where he serves as chief fiduciary officer Emery LLP where he is a member of the Private Client and national director of Trust Services. He is responsible for Department. He joined the firm after 20 years at Kirkland fiduciary and philanthropic services to private clients nation- & Ellis, where he headed the estate planning practice. ally. He is a member of the Chicago, Illinois, and American His specialties include wealth transfer and income tax Bar Associations, the Chicago Estate Planning Council, planning for venture capital and entrepreneurs as well the Christian Legal Society and is admitted to practice as counseling for family offices. He is a fellow of The before the United States Tax Court. He is a faculty mem- American College of Trust and Estate Counsel (ACTEC), ber of the American Banker’s Association National Trust a lecturer on estate planning subjects and co-author of School and lectures at the Illinois Institute for Continuing zCalc™, an Excel add-in of spreadsheet functions for Legal Education and many bar associations. He is on the estate planners. He also chairs the Professional Advisory boards of Creator Arts Center, Block Museum of Art, and Board of the Chicago Community Trust. His degrees are several foundations. He is a member of the Site Council from Harvard University (B.A.), John Marshall Law School for the Gaylord Building of the National Trust for Historic (J.D.) and Boston University School of Law (L.L.M.) Preservation and a Scoutmaster with the Boy Scouts of America. His B.A. is from St. Olaf College and his J.D. is from the University of Minnesota Law School where he was named a distinguished alumnus in 2005.

74 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 75

Enterprising Family Enterprises

This panel takes a look at four family enterprises. All of these enterprises are multi-generational businesses that have achieved great success by creating new growth opportunities for their businesses over the years.

After short presentations, the panelists share their vast expertise with the audience during an extensive question and answer segment.

MODERATOR: PANELISTS: Lloyd E. Shefsky Robert Abt Larry Levy Founder and Co-Director Chief Executive Officer Co-Founder and Chairman Center for Family Enterprises Abt Electronics, Inc. Levy Restaurants Clinical Professor Chairman and Chief Executive Officer Kellogg School of Management Lester Crown The Levy Organization Chairman Henry Crown and Company Jeffery Vincent President and Chief Executive Officer Laird Norton Company, LLC

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 77 ENTERPRISING FAMILY ENTERPRISES

LLOYD E. SHEFSKY: grew from a single restaurant into an empire, and the Levy Organization, which is involved in real estate and hospitality. The fourth panelist, Jeff Vincent, brings a different perspective from the other panelists. Jeff has been a CFO and a CEO and is now working for the family business Laird Norton Company as its first non-family CEO. Those of you who were here last year will remember Laird Norton as a company that sold its primary businesses. Jeff is now leading the initiative to reinvent the company for the third time in its 152-year history through investments in a new family-focused private equity enterprise, a private REIT, and strengthening its position in financial services.

ROBERT ABT: Four Different Family Stories Today we are going to hear about four very different family business situations. We will hear from Bob Abt of Abt Electronics, Inc. For those of you who are out-of-town- ers, I have a recommendation, as you head out to the air- port, get off the expressway and stop and see Abt’s store. The store is well worth the visit. Those of you who are from this area may know that Abt was started in a little store by Bob’s mother. It’s come a long way since then. It’s clearly one of the most unique stores of its kind with various facets that transform it from an appliance store to an entertainment center, in the fullest sense of that word. And now Bob has his sons involved in the business, each doing somewhat different things within the organization. From Rutabagas to Radios Second, we have Lester Crown, who we are proud to Our business was founded in 1936 as a small “mom and say is a Northwestern alum. Lester leads the family interest pop” store. My mother had been in the grocery store in companies like General Dynamics, Maytag, and Hilton business with her five brothers—they had about five as well as the family’s considerable civic and philanthropic stores—when the brothers decided there were enough activities. He has seven children, plus sons-in-law, daugh- family members in the business to each run a store and ters-in-law, and grandchildren, some of whom are involved they didn’t need their sister’s help. So, out she went. My in the family organization. father was selling crystal radios at a department store in Larry Levy is an alumnus of Kellogg and founder/bene- Chicago when my mother suggested that they open their factor of the Levy Institute for Entrepreneurship at Kellogg. own electronics store. And into business they went. They He started two organizations, Levy Restaurants, which worked very hard to make the business succeed.

78 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e My father was selling crystal radios at a LESTER CROWN: department store in Chicago when my mother suggested that they open their own electronics store.

We’ve probably grown 12 percent per year for the last 60 or 70 years with a single store. Just like my parents, I see the way to thrive is to work hard. My wife and I have four sons who are all in the business, so our whole family works hard to make the store a continuing success.

The Vegas of Electronics and Appliances My idol in business is Steve Wynn who is known as the premier entrepreneur of Las Vegas. The atrium in our A Difficult Beginning store was designed after the Bellagio atrium in Las Vegas. I’m one of two in the second generation and if you count We try to make our store an electronics/appliances ver- everyone, including third generation spouses, there are 29 sion of Las Vegas. We have flowers and fountains in the of us, seven involved in the family business now. My dad store and we just put in a 220-inch overhead video pro- and his family started, like most refugee families, with abso- jector for our customers to enjoy. It’s probably five years lutely nothing. He went to school until eighth grade and beyond high definition and can show four pictures at once then had to go out to work full time and didn’t even have in unbelievable quality. We are family friendly. We bake the 50 cents to buy a picture of his graduating class. He did cookies for the kids on weekends and have Santa and the have one member of his family who was considered really Easter Bunny in the store during the holiday seasons. well educated because he was able to go to high school.

We have our own installers and do our My dad and his family started, like most own service because we’ve found that refugee families, with absolutely nothing. if we give the job to somebody else, He went to school until eighth grade and they just don’t care like we do. then had to go out and work full time.

We carry almost every brand in existence from a $30 radio After working just to put food on the table for some time, to a million dollar home theater system, and we do every- my father and his brothers formed a small company called thing ourselves. We have our own installers and do our Material Service Corporation in 1919. So we’re now talk- own service because we’ve found that if we give the job to ing about, as far as family enterprises, 88 years within the somebody else, they just don’t care like we do. family. It was a company that bought sand, gravel, and stone from producers and then resold it to contractors.

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 79 By dint of tremendously hard work and tremendous ability and ingenuity, they built that company into something of moderate size that was able to withstand the Great Depression, though business went up and down until the Second World War. Dad was really the leader of his family; there were seven of them—two boys were in the business full-time. Another one became a doctor but spent part of his time involved in the business. During the Second World War, my older brother went into the Navy in the Pacific and Dad volunteered for the Army and became chief of procurement here in Chicago for the Army Corps of Engineers, which bought half of the supplies for I think the third generation, which the Corps. He was probably the best purchasing agent started coming into the business in they’ve ever had because he literally saved the United the 1980s, has had a very different States government tens of millions of dollars. experience than we did. The one thing we learned is that we’ve I think the third generation, which started coming into been lucky because we lived in the right the business in the 1980s, has had a very different experi- place at the right time, not because we’re ence from ours. First, we insisted that they all get outside so darn smart. jobs after completing school. We never asked any of them to come back. We said, “If you want to join the family In my opinion, after the war was the Golden Age of busi- business, we’ll have a job for you.” We figured that after ness. From 1946 to 2000, the opportunities were abso- a few years of working for someone else they would learn lutely tremendous. You had to take advantage of them, if about their capabilities and limitations. We told them that you did, you could prosper unbelievably. The one thing we definitely had a position for them but that we would we learned is that we’ve been lucky because we lived in determine what that would be, just as we do with any the right place at the right time, not because we’re so darn employee. This is not a monarchy with the oldest male as smart. If we’d been three times as smart and lived in France successor. Hopefully, leadership is based on ability. in 1300, we’d have died behind the plow at the age of 31. Third Generation Takes the Lead Growing Up in the Business The third generation began an effort to involve the fourth My two brothers and I, plus my uncle and one of his generation about 15 years ago. They began bringing daughters, have lived the family business from the time we everyone, including spouses, to town twice a year to learn were born. I went to work as an office boy at age 12 and about our business and philanthropic activities. They started working in the quarries at 16. And so, the idea of take a full day on Saturday for their programs. Every so staying in the family business was something that wasn’t often, we, of the second generation, are invited to come ever discussed. We were all lucky to have a job and knew in for an hour and talk about something. In essence, it. We also had the opportunity of being part of helping what we’ve tried to preach, not only to the third but also the business grow for the family. the fourth generation, is that you can carry on a family

80 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e enterprise if you can handle three things: greed, jealousy, things. I started a delicatessen in Chicago when Water and a sense of entitlement. This is very easy to talk about Tower Place was built because I thought the market but very difficult to do. Following our lead, this is what needed that and I happened to love that kind of food. the third generation attempts to pass on to their cous- Most entrepreneurs follow their passions to become suc- ins, brothers, sisters, and children. They’ve done this very cessful and that’s what I did. I’ve always pursued both successfully. Their activities have also helped encourage the real estate and restaurant businesses. a sense of comfort for those of the third generation who Levy Restaurants was a restaurant concept creator, if are not in the business. you will, and it became a company that other restaurateurs came to see. But it was a really bad model because it’s a very You can carry on a family enterprise dangerous business; if you do one-of-a-kinds, there are no economies of scale of management, materials, or anything. if you can handle three things: greed, jealousy, and a sense of entitlement. Sports Catering When Jerry Reinsdorf bought the Chicago White Sox in Let me add that economically we handle everyone who is 1982, he built sky boxes and convinced us to do the cater- not in the business the same as those who are in it. There is ing. He was having trouble marketing them and asked no real additional economic benefit to spending your life us to come and cater the boxes from our restaurants. We in the business, though there may be more psychological resisted but he got us to do it by saying: “The Sox are benefits. We really try to spread the assets equally through- going to be a really good team. I’ve spent a lot of money out the whole third and fourth generations. on players. And you’re going to get great seats for the World Series.” So we agreed, and 24 years later, when the LARRY LEVY: White Sox won the World Series, I missed it since I had booked a trip to China because I knew that no Chicago team ever gets to the World Series.

When Jerry Reinsdorf bought the Chicago White Sox in 1982, he built sky boxes and convinced us to do the catering.

We used that opportunity to assess the market for sports catering. At the time, there were five companies in the sports business, all basically hot dog and beer vendors. We thought that there would be a new wave of sports stadium and arena construction around the world and wound up An Entrepreneur at Heart riding that wave to a 40 percent market share. We built the I’m a first generation entrepreneur. I started as a real company into a market leader which I sold last year to the estate developer, shortly out of Kellogg, but always largest international catering company, Compass Group. thought of myself as an entrepreneur, not as a real estate Once again, by following my passion for food, wine and developer. I always knew I wanted to do a variety of hospitality, I wound up with a terrific business.

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 81 I was still doing real estate, but it confused people. I found Remaking the Family Enterprise that as an entrepreneur, people expect you to do one thing. For those of you who were at last year’s conference, you So I low-keyed my real estate activity and became a backer heard Laird Koldyke, chairman of the Laird Norton of other real estate developers, quietly. Company, talk about the recent sale of the company’s core business. Today I’m going to tell you about what we are A Family of Entrepreneurs doing for an encore as we re-invent ourselves once again at Thirty years ago, I married a woman with three boys and the Laird Norton Company. then we had a boy. We are a very close family. My wife First, we are a family investment holding company is an entrepreneur; she owns, with a partner, two retail headquartered in Seattle, Washington. Second, we have stores called Material Possession here in Chicago, and she approximately 380 family members and growing. At this loves her business. All four of our sons are active with year’s family summit in Tucson, we will celebrate our me on the investment side of our business. We also have 152nd year with 260 family members in attendance. Our family meetings, which I’m still invited to, so far. But, I family currently spans four generations—generations four think the day is coming when I will turn over the busi- through seven. We have only six family members working ness so I’m preparing them to take over. Two of the four within the family enterprise, but eight out of eleven board boys control the investment committee; I’m not on it. members, including our chairman are family members. I I conceded to that because I don’t find, other than real am not a family member. I was hired six years ago to work estate, that I’m that good at it. And they are. Our young- with the family to re-position the company and take it est son is a top five percent hedge fund performer at 27 into its next phase of growth. years old. Our second son is a very successful comedy writer in Hollywood. We’re backing our third son’s busi- The family exited its original core ness, which is a fast food chain from Guatemala called business more than 100 years ago. Pollo Campero, and we plan to bring it to the United In fact, the Laird Norton Company States. And our oldest son is the managing partner of a has re-invented itself twice during its boutique law firm. He is getting more and more involved in managing the family office. 152-year history and we are currently re-inventing ourselves for a third time. JEFF VINCENT: Unlike most of you in this room, the family exited its original core business more than 100 years ago. In fact, the Laird Norton Company has re-invented itself twice during its 152-year history and we are currently re-inventing ourselves for a third time. The family enterprise got its start in 1855 in Winona, Minnesota. The family’s original business was logging and milling lumber in the upper Midwest. Then 50 years later, at the turn of the 20th century, the family closed its Midwest operation and partnered with the Weyerhauser family to buy land in the Northwest and form the Weyerhauser Company, Boise Cascade, and Potlatch. This kept the family busy for the next 50 years.

82 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e Around 1960…the family leadership consists of businesses in the financial advisory and invest- decided that if the Laird Norton Company ment management segments. Our real estate entity is a recent addition due to the fact that we spun out the Lanoga was going to exist another hundred real estate prior to its sale, and we now oversee proper- years we needed to maintain a business ties in 23 different states. Finally, our newest platform is purpose by pursuing new opportunities. Winona Capital Management, which is a private equity initiative that we created last fall to pursue new business Around 1960, with Weyerhauser and Boise Cascade now opportunities that we hope will translate into several legacy public companies, the family leadership decided that if businesses for us and other families who partner with us the Laird Norton Company was going to exist another in the initiative. Winona Capital’s primary office is here in hundred years we needed to maintain a business purpose Chicago, with three proven executives leading it and with a by pursuing new opportunities. This decision led to satellite office in Seattle. the formation of the Lanoga Company—the third largest building materials distribution company in the U.S. Winona Capital prior to its sale—several financial services companies, and a variety of other investments that we moved in and out of over the years. Then as Laird told you last year, at Winona Capital Management is the our 150th anniversary, we decided to sell Lanoga, by far Cornerstone of Our Future Growth our largest asset, and re-invent ourselves once again and pursue new opportunities. Winona Capital Investment Objectives • Create future legacy businesses Building for the Future • Partner with other family enterprises with similar investor profiles • Address current deficiencies in private market and Laird Norton Company Today achieve attractive after-tax returns • Build outstanding investment capability Laird Norton Company LLC

Financial Next Generation Real With the formation of Winona Capital, we really laid out Services Investments Estate four primary objectives. First, as I mentioned, we have a Laird Norton Tyee Winona Capital Management timber River goal of creating legacy businesses. We hold the idea that Properties Wentworth, Future Legacy Businesses we want to be invested for the long term. We believe that’s Hauser and Violich Investment Counsel how you generate the best returns. These businesses will be directly owned by us and other family enterprises. As a Nothern Lights Ventures LLC family, we get excited about building great businesses, and creating long-term value. Second, we hope to do this by partnering with other Today, 15 months after the sale of Lanoga, the Laird families who also want to make money and build business- Norton Company has three business platforms on which es for the long term. The Laird Norton Company has had we are building our future. Our financial services platform its greatest successes when it has partnered with others.

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 83 Third, we want to address what we believe are current deficiencies in the private equity market place, at least for high net worth families. And we have a focus on after-tax returns. We have an ability to own the companies directly and to time our own exits. We have a renewed focus on investment returns. Family owned businesses really do have an opportunity to earn superior returns.

We want to build an outstanding investment capability which will allow us to find unique opportunities.

Finally, we want to build an outstanding investment capability which will allow us to find unique opportunities. As we re-invent the company, we’re also finding new and And we believe that we have done this with the team that old ways to involve our members in creating this enter- we now have in Chicago. prising spirit. The slogan that we’ll be using at this year’s We are focused on investing in businesses which family summit is: “Rising to the Challenge; Be Part of It.” are based on definable consumer trends and consumer Our goal is for the family to feel more a part of the process spending. This is our area of expertise. We are focused as we transform the company, and also for them to find on lower, middle market companies that primarily need new ways to bring an enterprising spirit to their own lives. growth financing. We only use debt selectively. And we are focused on excellent management because, at the end of Empowering the Younger Family Members the day, it’s all about the right people. Some examples of this empowerment process for our younger family members include Camp Three Tree, which happens every year at the family summit, where kids basi- Rising To The Challenge cally from birth through the age of 13 get together and learn about the Laird Norton Company and its values, its Laird Norton Enterprise culture and also have fun. We have an Associate Director Creating an Enterprising Spirit Program that allows our next generation to get involved (a work in progress) in our various boards and do a two year rotation and really Laird Norton Company Laird Norton Members sit and learn about what it means to be a board mem-

Camp Three Tree ber, and hopefully prepare them for future stewardship. Associate Directors and Directors We have an Associate Opportunity Fund which provides Associate Opportunity Fund Laird Norton Financial Academy start-up capital for family members who have business Next Generation Initiative Analyst Positions plans that they’ve put together, and also provides them advice and counsel as they start those businesses.

84 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e We hold an annual Laird Norton Financial Academy at people can have very diverse views about their needs and the family summit. And this year, for the first time, we’re where they feel the business should go. I had to learn that having a luncheon session at the family summit focused it was not just about putting my strategy in place, but it on becoming an enterprising family. When we put this on was also about getting people within the family to buy the agenda, which was my idea, I thought that maybe 25 into that strategy. We went through a lot of change within people would show up. Right now, we have more than 100 the Laird Norton Company and the family was kind of people planning to attend. struggling with questions like: Who is this guy and why As you contemplate the future of your own busi- is he putting us through all this change? I recognized that nesses you may want to consider: If you have the will was not really their issue; it was my issue. I wasn’t com- to persevere, you can create something unique for your municating well enough. And then, as a board and as grandchildren and your great grandchildren. Coming a management team, we got out in front of the family, from outside the family I feel I can say: You can create a and explained what we were trying to do. When we sold sense of community and common purpose built around Lanoga in 2006, 98 percent of the family rallied around a business where one plus one truly equals three. Finally, that decision and are on board with what we’re doing if the Laird Norton family was here today, they would now. It’s very important to communicate well in order to tell you: Keep the faith. It’s worth it. get everybody to buy-in on the direction we want to go.

Audience Questions We went through a lot of change within the Laird Norton Company and the family was kind of struggling with questions like: Who is this guy and why is he putting us through all this change?

Bob, I understand you have a philosophy that if a customer asks for something that’s reasonable, you will do everything possible to make the customer happy. Could you talk about how it developed in your business and how you continue to implement that today? Bob: As was said earlier, we want to do the right thing for the long term. This philosophy has evolved because when Jeff, what has been your experience as an outsider I first entered in the business if I really felt I was right, working in a family business? I would do anything to win. But I found out winning Jeff: Before I came to Seattle to work with the Laird usually loses. We have signs all over the place, almost on Norton Company, I worked with another family company every desk: “The answer is yes to any reasonable request.” here in Chicago. So I had some experience with business We try to bend over backwards to do anything for a cus- families. However, the Laird Norton Company, with 380 tomer within reason. Doing the right thing in the long family members, has a feel sometimes of a public company; term is a winning strategy.

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 85 Doing the right thing in the long term is So we moved one office eight blocks away and gave it a a winning strategy. different staff. And that worked out very well for us.

When do you get to a point where you need to bring Bob: We’ve evolved a bit, too. We’ve also gone into various enterprises under one umbrella? home construction. We currently have condominiums in Lester: When to make that decision really depends on the Libertyville called Wanish Park on 22 acres, but everything capability you have within your own organization. We have comes out of our current Glenview location. brought everything under one umbrella as a holding company. The associates who work with us are the point persons Jeff: I think it probably has to do with the number of busi- on particular projects or business issues and they report to nesses that you’re involved with. If you’re trying to make what we call a central council of the family business. sure you have a similar investment philosophy and family values, you start thinking about bringing them together. Larry: I did something a little bit different from that. Five Especially if the family starts not being involved as much years ago I started a family office because I had the real in the day to day activities, you want your management estate and the restaurant group in one location, but it team to stay focused on the day to day activities within confused people that I was spending time on investments those businesses. You want to step back out, look across and learning how to handle what I had created financially. the portfolio at the things that you’re doing and really

86 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e make sure they’re being managed and handled in a similar I have always loved building buildings. Five years ago I felt way. It happened for us after about the first 50 years. it was going to be a tremendous time in real estate, so I started devoting more of my personal time to that. Now Larry, how do you get to a point where you I have selected a CEO replacement for myself who took know it’s time to sell something that you worked over and is doing a much better job than I did. so hard to build? Larry: I started my business with my brother, but our rela- How have you handled the transfer of leadership tionship became strained over our different outlooks on and power? Did you work with someone outside the the future of the business. I thought it was going great and family on making that transition? that we would be able to defeat these giants we were com- Lester: That is the most important question of all. You peting against; he did not. So I bought him out for what know, in a public corporation, it’s very easy to designate a even he would say was a ridiculous price because I wanted successor. In a family business, we have all kinds of emo- to keep him as a brother. Because of that, I had tremen- tions involved. It really is a very, very difficult thing to dous financial pressure and about two years later I sold half do. Those of you involved in leadership transfer know of the company, eventually selling the rest off, too. Some that you usually hesitate and you defer doing something of it was from necessity, although I thought that I made a that you ought to do. Ordinarily the people within the wonderful deal. I also can tell you that I got tired of going company know full well who the successors ought to to the same meetings pitching for business and doing all be. But the family itself is never as clear cut. It usually the same things that I had been doing for so many years. I doesn’t have the gumption to make that designation and would come home and say to my wife, “I don’t know how announce it publicly. much longer I can do this.” In a public corporation, it’s very easy I got tired of going to the same meet- to designate a successor. In a family ings pitching for business and doing all business, we have all kinds of emotions the same things that I had been doing involved. It really is a very, very difficult for so many years. I would come home thing to do. and say to my wife, “I don’t know how much longer I can do this.” What we found very, very helpful was to work with outside advisors who have experience with succession in philanthropic organizations. We had them come in and what they did was to force us—sometimes not so gently—to face the problems that we’re talking about. The outside advisors started with a survey that asked just about every question in the world concerning leadership qualities. And they gave that survey to each person and had him or her pass a copy of it to whomever they wished—people above them, their peers, those who worked for them—the surveys were filled out anonymously and returned to the advisors who compiled them. The results went back to the individuals who could see what their peers and the people

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 87 who work for them thought of them. It was absolutely the business. In the meantime all of our sons are gaining amazing. It changed people’s attitudes about themselves; confidence and that is nice to see. someone who really thought he was great might have heard back that people thought he was really arrogant. Bob: One thing that I certainly agree on is to have non- Those surveys prompted us to finally make the leadership family people involved in the business and decision-mak- determination and announce, both internally and exter- ing processes. We have non-family personnel who are very nally, what all the internal people knew beforehand. involved in the business.

The outside advisors started with a survey Jeff: When you get to the size of the Laird Norton that asked just about every question in Company with 380 family members, you feel the need for a formal structure to make certain decisions. One of the the world concerning leadership qualities. ways that we select people for leadership is by peer review. …The results went back to the individuals We have a nominating committee that keeps profiles on who could see what their peers and the people and knows who’s interested and knows their capa- people who work for them thought of them. bilities. Chalan Colby is the family president. She oversees our family activities, and spends a lot of time talking about the next generation and looking at who might be the next board member coming out of the sixth generation. We’re always trying to look 10 to 15 years from now and determine who might be possible leaders of the family.

One of the ways that we select people for leadership is by peer review. We have a nominating committee that keeps profiles on people and knows who’s interested and knows their capabilities.

How do you handle the issues of greed, jealousy and Larry: We don’t think of ourselves as a family business. entitlement? Each of our kids has his own activity. We meet and we Lester: We tend to have role models and we start with the look at the investments together and we look at phi- first generation. My dad’s generation was completely, abso- lanthropy together. We are trying to prepare for the lutely unselfish. And as they acquired any wherewithal, transition, and people are emerging who might take a they passed it down to the second generation; that’s exactly leadership role. Our hedge fund son, obviously, is good what they wanted to do. We try to emulate that in the sec- at securities and that kind of thing. But no one seems ond generation because we have been so fortunate and we to have the aptitude in real estate so I’m preparing an try to do it as equally as possible. I mentioned before that external person who’s going to take over that aspect of we handle the business accounts for all, first, second, third

88 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e generation members, and handle them evenly. Whether Is the business driving the family or the family driving you work for the company or you don’t work for the com- the business? pany, your kids have the same assets as the kids that are Larry: I think the business is helping to build the family in the company. Because we’ve been fortunate, we’ve also right now. For example, my daughters-in-law are doing said to everyone who operates within the company, “You’re a great job in philanthropy and we’re all very excited working for the next generation. You’re not working for and proud. yourself.” And we pay the third generation who work in the business exactly the same amount; the compensation Bob: I agree. We get together all the time, talking about the is very nominal because of our belief that we are working business to everyone, discussing a new venture. Everybody for the next generation. We feel that we’ve given family participates and it really is heartening to see. I always like members enough for a very high living standard and they my family to be together instead of running in different can live on that. The living standards within the family are directions in different locations. very different but everybody has enough. We also feel that we have to absolutely assure the spouses Jeff: As we were getting ready to sell Lanoga, we had that they are members of the family and that helps limit this whole discussion about whether family meet- economic greed. Jealously is something they have to over- ings and philanthropy were enough to keep the family come themselves. And, hopefully, the sense of entitlement together. And the board of directors said no. The fam- will diminish with knowledge. That’s the reason for these ily has always had a true sense of business, of being in twice a year meetings, though we talk with them far more partnership together. We felt that there really needed than just twice a year. We try to keep them as involved and to be a business purpose for this family if the goal is to knowledgeable about what we do as we possibly can. The be around for another 150 years. We’ve added a greater entitlement issue is a part of character, I guess. By the time focus on philanthropy, but the whole business partner- you’re 19 or 20, you’re your own person and you develop ship is really critical as we look to the future. your own character. So, how you actually limit a sense of entitlement I really can’t say. The best advice is to just We felt that there really needed to be a attempt to be as fair as possible in everything. business purpose for this family if the

Lester, could you expand on your wife’s role in all of this? goal is to be around for another 150 years. Lester: In every generation, there is a central figure that really bonds the whole family. In the first generation, it How do you get people involved in the family enterprise? was my grandmother. In my parents’ generation, it hap- Lester: What we’ve tried to do is have family members pened to be my mother. My dad was fine from the busi- involved to the extent that they wish to be involved in the ness standpoint, but bonding the family was the job of my philanthropic determinations. It’s not just coming into a mother. And in our generation, it is my wife. She has been meeting and saying, “I’d like money for this or money the central figure everyone leans on and comes to and for that.” They have to come to the board prepared with believes is fair. She has a basic sense of fairness and doesn’t their homework done if they want something funded. show a prejudice of treating one better than another; she The family business can bring the family together in tries to treat them all the same way. many ways. I don’t think there’s any question about that.

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 89 ROBERT ABT LESTER CROWN Chief Executive Officer Chairman Abt Electronics, Inc. Henry Crown and Company Glenview, IL Chicago, IL

Bob Abt has presided over the growth of Abt Electronics, Lester Crown is chairman of Henry Crown and Company, Inc. for the past 45 years. Before that, the business was run a family holding company founded by his father, Henry by his parents who started with an $800 investment during Crown, that includes real estate, joint ventures, security the Great Depression. He credits them with passing on to portfolios, and diversified manufacturing operations. He him and his four sons their values of a strong work ethic, is a director of Yankee Global Enterprises LLC and an indi- integrity, honesty, attention to detail and total customer sat- rect owner of the Chicago Bulls basketball team. He is a isfaction. The company, with more than 1,000 employees, director of: the Children’s Memorial Medical Center and has experienced double-digit growth almost every year of its foundation, the Lyric Opera of Chicago, the Chicago the company’s existence. Abt has outgrown four locations Council on Global Affairs, the Commercial Club of Chicago, and now resides on 37 acres occupied by a single 350,000 the Aspen Institute, and the Jerusalem Foundation. He is square foot, state-of-the-art showroom and warehouse a life trustee of Northwestern University, a trustee of the facility, and will soon open a free-standing design center. Michael Reese Foundation, member of the board of trust- The company’s largest asset is its loyal customers and their ees of the Jewish Theological Society, board of governors word-of-mouth referrals. Less than one percent of revenue of Tel Aviv University, Weizmann Institute of Science, and is spent on advertising. Abt also does a substantial amount a member of the American Academy of Arts and Sciences. of electronics and appliance business on the Internet. He also chairs the Advance Gifts Campaign at the Jewish Federation of Metropolitan Chicago. He received his bach- elor of science in chemical engineering from Northwestern University and his M.B.A. from Harvard Business School.

90 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e LARRY LEVY JEFFery VINCENT Co-Founder and Chairman President and Chief Executive Officer Levy Restaurants Laird Norton Company, LLC Chairman and Chief Executive Officer Seattle, WA The Levy Organization Chicago, IL

Larry Levy is co-founder and chairman of Levy Restaurants, Jeff Vincent is the non-family leader of Laird Norton and chairman and chief executive officer of his real estate Company, a more than 150-year-old family-owned enter- development company, The Levy Organization. Founded in prise with current focuses on financial services, real estate, 1978, Larry has built Levy Restaurants into a dynamic culi- and next generation investment. His responsibilities include nary and hospitality business known nationwide for award- oversight of current investments, development of new winning restaurants, and as the innovator and market leader investment opportunities, and day-to-day management. Jeff of sports and entertainment dining. His vision for real estate has more than 20 years of business experience in the roles has guided many of Chicago’s major real estate projects in of CEO, CFO, corporate development officer, and strategy the last three decades including One Magnificent Mile. He consultant. During most of this time, he worked with pri- has been recognized by his industry and peers with numer- vately-held family companies where he guided growth in ous awards. He and his wife founded the Levy Institute of the area of manufacturing and distribution. He has restruc- Entrepreneurial Practice at Kellogg School of Management. tured business operations, bought and sold more than 15 He is a trustee of Northwestern University where he earned companies, and directed a variety of strategic initiatives in his undergraduate and M.B.A. degrees. such areas as product development and international expan- sion. Jeff received his undergraduate degree from Drake University and his M.B.A. from Harvard Business School.

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 91

Next Generation Making a Difference

If you could give the future leader of your business the most powerful leadership development experience, what would it be?

Our panelists illuminate this very question when they share their compelling experiences assisting rural Indian villagers start up businesses aimed at helping themselves and their communities.

PANELISTS: MODERATOR: Ramya Bharathram John L. Ward Family Member Co-Director Thirumalai Chemicals Company Center for Family Enterprises of India Clinical Professor Kellogg School of Management J.P. Rhea KSM class of 2006 Consultant Marakon Associates Family Member Rhea Cattle Co. of Nebraska

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 93 NEXT GENERATION MAKING A DIFFERENCE

JOHN L. WARD: RAMYA BHARATHRAM:

Imagine I’ve got ask you to stretch your imaginations because one of our scheduled panelists, J.P. Rhea, was called away unexpect- edly by his company and is now in London. I’m going to ask you to imagine that he is here with Ramya Bharathram in person. Though J.P. could not physically be here, he sent us a DVD of his talk that we will be viewing in his stead.

A Deeply Caring Family I will start with a brief introduction about my family and the business we are in and then go on to describe the project that I participated in with seven other people from around the world. In 1945, my grandfather and his three brothers started their first venture, an international chemicals trading agency, which operated out of England, India and post- war Germany. They were active hands-on managers, while I also want you to imagine one more thing. Imagine that retaining a strong sense of strategic insight. They shifted you know a 25- or 30-year-old with a high probability of from trading in the 1940s and 50s to manufacturing in becoming a future leader of a significant family company. the 60s, first in pigments and colorants in a joint venture What would you do to develop that person as a busi- with the German company Bayer, and then into petro- ness leader, a community leader, and a global citizen? At chemicals in the 1970s. Kellogg, we teach 1,600 M.B.A. candidates a year. What My father, three uncles, three aunts and three cousins percent of them are ever going to lead a company? They work in the business today. We have more than 50 share- are all learning general management but only a frac- holders. The group is now in the manufacturing and tion will become CEOs or leaders of major institutions. services industries. We manufacture detergents, chemi- However, in the world of family business, the probabilities cals and food additives, and we also provide services for are very high that the people we’re instructing between the publishing companies and law firms in the US. We sell our ages of 25 and 30 will be the leaders. And so, if we know products and services in 35 countries. Two of the compa- that they’re going to lead a business, how do we prepare nies are publicly listed. them? That’s a question we’re going to ask all of you to reflect upon during this session. After a decade of giving money to vari- First, let’s hear from our panelist. Ramya, thank you for coming all the way from India to share your ous health and educational causes, my experience with us. family decided to start a foundation.

94 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e After a decade of giving money to various health and edu- Failed monsoons have resulted in dry farms and river beds. cational causes, my family decided to start a foundation They do not have enough water for cultivation so most in 1970 and set up the Thirumalai Charity Trust (TCT), of the farmers have given up their lands and gone off to which helped set up a school and two colleges affiliated towns and nearby cities to search for better-paying jobs. with Bombay University. In Ranipet, which is in south Those who remain make a very poor living from produc- India and is where my sisters, I and our cousins all grew ing charcoal. They cut down wild brushwood and slowly up, my aunt, Bhooma Parthasarathy, started an enterprise burn it in such a way that they get small charcoal pellets, within the TCT aimed at women’s empowerment. It is which are used as fuel. working in nearly 600 villages assisting in areas of micro- credit, alcohol prevention and treatment, AIDS education, The Jatropha Plant disability rehab, and health services. Before their land dried up, the farmers cultivated cot- ton, rice, chili peppers and vegetables. But now all that The Leadership Project is wasteland. In order to help re-develop this wasteland, The “Make a Difference in India” project was conceived we identified a plant called jatropha which has seeds by Theirry Lombard of Lombard Odier Darier and used to make bio-fuel. Jatropha requires very little water Hensch; M.V. Subbiah of the Murugappa Group; and and has a productive life of 25 years. It brings in about Professor John Ward. The idea of this project was to bring 215 U.S. dollars per acre per year, which could help together next generation members of business families supplement a farmer’s income. from around the world to learn from one another’s different cultural and social perspectives as well as to experi- In order to help re-develop this waste- ence rural India firsthand. land, we identified a plant called jatropha Our team consisted of eight members from Brazil, which has seeds used to make bio-fuel. Belgium, Sweden, the U. S. and India. The team members who were not from India lived with Indian families during …I am very happy to say that this project their stay so that they could experience local family life. is now moving ahead. Our project was located in a village called Kathanpatti, deep in rural south India. It is a village of about 700 peo- We spoke to an expert at a bio-diesel company in India ple in about 150 families. They all turned out to welcome who assured us that the plant was suitable for cultiva- us upon our arrival. We chose this village mainly because tion in Kathanpatti. We had the expert come and talk to one of the members of our team, Ramkumar, had a textile the farmers. The soil was tested and found suitable. In mill in that area, and it would be easy for him to help con- addition, the bio-diesel company agreed to provide the tinue the project once we returned to our homes. saplings, the technology, and also buy back all the seeds from the farmers at market price, They do not have enough water for A farmer in the village agreed to grow jatropha on two cultivation so most of the farmers have acres of his land as a pilot project. Our team was invited to plant the first saplings. I am very happy to say that this given up their lands and gone off to project is now moving ahead. towns and nearby cities to search for better-paying jobs.

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 95 If each of the women could make two sets of uniforms a day, they would be able to earn about $110 a month, more than twice what they are currently making. The women are now going through a brief training program and hope to start commercial operations very soon.

Offering Children a Chance The village has a primary school but for high school the children must go to a neighboring village, and when they finish school they immediately go to work as unskilled teenage labor because of the extreme poverty of their families. We wanted to help these children develop skills that Additional Income Sources Sought would help them earn higher incomes. In order to do that, Farming is, of course, a seasonal occupation. In the dry we asked members of industrial training institutes to come months, the villagers have to make money through alter- and talk to the villagers and the older children about the nate methods like cattle and goat rearing. But because of options available. Soon after finishing their local school- the extreme shortage of water and extremely high mainte- ing, the children could go into a training facility for about nance costs, these activities were also abandoned. Because two or three months; this would automatically improve of this, it was important for us to try to introduce other their income-generating capacity. Some of the courses alternate income generating methods. offered were plumbing, wiring, welding, television and radio repair. These were all presented to the villagers as Five of the women had gone through options to be pursued after school. training as tailors and wanted to start up a garment production facility to We got members of industrial training supplement their families’ incomes. institutes to come and talk to the villagers and the older children about In this connection, we were approached by a group of the options available. some very young women of the village. Five of the women had gone through training as tailors and wanted to start up A Tough Sell a garment production facility to supplement their families’ We also met a group of women in the village involved in incomes. They came up with a plan to make garments, but five micro-finance groups, which have savings and lending the market for this was erratic and revenues were very low. programs. Some of the groups have been able to save as Because of this we had to tell them that it was not pos- much as $2,100 U.S. over the last five years. sible for us to fund their idea, although we were willing to We wanted these women to utilize these funds in a more look at alternatives. One of the suggestions was to make profitable manner. We invited a trainer to come and present uniforms for employees of the industries in the surround- them with various options for small businesses like candle ing areas. In India, a lot of industries have uniforms for and incense making, or pickle production. They have a lot their employees at all levels in the organization. There is of vegetables grown there so they could pickle and sell their a need for about 8,000 uniforms a year in that area alone. own produce. The women were very interested in learning And Ramkumar, our team member who owns a large tex- how to do this but they refused to consider selling their tile mill there, was willing to provide contracts to these products in an open market. They didn’t want to sit in the women to make uniforms for his company. hot sun for a small return; they wanted a guaranteed profit.

96 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e Understandably, they are very risk averse to putting their and party tent hire project. We were feeling very positive money and effort into an idea with no local model. It has about all that we could come up with in such a short time. been hard to fight these ideas and get the villagers to do something that would improve their own livelihoods. Health and Animal Check-ups To end our visit, we hosted a health camp. Doctors from They didn’t want to sit in the hot sun an eye hospital came and examined all the villagers. They for a small return; they wanted a guar- performed eye surgeries on 75 people free of cost. We had doctors from the neighboring village come and conduct anteed profit. …It has been hard to health and diabetic checks for the villagers, too. We had fight these ideas and get the villagers a veterinary camp where their animals were tested and to do something that would improve treated by a local vet. their own livelihoods.

We also tried to persuade local farmers to start up a neem tree plantation, which would generate additional income for them. Neem is a hearty tree that thrives in many climates and produces valuable oil with numerous healing uses. The farmers showed an extremely high reluctance to take advice on agricultural issues from us even though we assured them that after three years they would have a profitable crop. They said: “Who are you to come and tell us about farming? We have been doing agriculture here for generations.” There are proven models of neem tree plantations in the surrounding areas so we suggested that It was a great experience for all of us. We were very happy they talk to those farmers but they said no. Their pride that we were able to develop viable projects during our is phenomenal. They are not willing to talk to somebody one week stay in the village. But it wasn’t to be quite that else about their agricultural practices. easy. I will come back to talk about how the projects have fared over the last six months in a few moments. But first, The farmers showed an extremely I would like to introduce you to J.P. Rhea who joins us high reluctance to take advice on agri- through the wonder of computer technology. cultural issues from us. …Their pride J.P. RHEA: is phenomenal. At this point, J.P.’s taped segment was shown to the audience. Young Have Big Ideas Here is the content of his talk. In contrast, the younger men were very enterprising, initially. They wanted to start up an audio hire business: My name is J.P. Rhea and I graduated from the Kellogg audio systems, party tents and the like for village func- School of Management in 2006. I am currently in the tions. They put together a strong business plan that we “outside experience” phase of my journey in a family thought was viable so we decided to go ahead and fund it. enterprise. I’m working for Marakon Associates, a global After just a week in the village we had three projects: consulting firm with an office in Chicago. We work in jatropha, which we had already planted; the women’s uni- strategy consulting, mergers and acquisitions, customer form tailoring project; and the young men’s audio systems value, and other areas.

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 97 Unfortunately, my company asked me, on a day’s notice, impacted the people, the families and the culture. We had to work in London on a project. I am learning that some a chance to see the true economic impact that the busi- of the benefits of being in a family business, like flexibil- nesses have on that area. Visiting other countries with a ity and more control over your schedule, are not as read- local sponsor is probably the best way to experience dif- ily available in other businesses. I’m disappointed that I ferent business cultures. can’t be there to join you. A family business is a family business Family Cattle Business anywhere around the world. My family has been involved in agriculture in the great state of Nebraska since 1872. We have a cattle feed lot, One of the things that I found most interesting is we raising cattle for beef. We also have a mail order steak tend to have much more in common than we might business, farm several thousand acres of land, and have a expect. A family business is a family business anywhere small feed mill where we make rabbit food and horse feed. around the world. I was asked to talk a bit about my recent experience this past summer in India with the Make a Difference Program in India. It was an absolutely fantastic experience and a great way to experience the culture, the way of life, and the way of doing business in India. And I got to do it through the unique bond of family business.

A Chance to Study Local Businesses The trip was comprised of several days of visiting businesses in and around the city of Chennai in southern India, a city of about four million people. We stayed with host families and during the day we made visits to local businesses, mostly family-run businesses. At the end of the trip, we spent a week in a rural village developing micro- finance economic development projects. Not Always about Money For me, I feel the most important part of the trip was While we were in Chennai, we got to the philanthropic experience. I saw some very successful peer really deep inside the businesses families in India who make a real commitment to sustain- we visited. able philanthropy. There definitely are some very severe economic issues in rural India: devastating poverty, lack While we were in Chennai, we got to peer really deep of resources, lack of infrastructure; but there is hope. The inside the businesses we visited. We had an opportu- families that we were staying with have developed a great nity to see some of the more traditional businesses that sense of what they can do to make a difference. But it we think of when we consider Indian outsourcing, such was not about giving money, not about writing a check as the textile industry, manufacturing of auto parts and to somebody. Money is not the limiting factor in most automobiles, appliances and the like. And we saw the of these situations, which was most surprising for me. more modern, cutting-edge type of outsourcing such as In some of the different savings schemes that the groups business process and IT outsourcing. We got to see more have, some of the women have a surprising amount of than just the business itself; we also got to see how it money saved up already.

98 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e What they need more than money is By the middle of January, the whole exposure to outside thinking and cre- project was in the process of falling ative ideas to help them use their talents flat on its face. to make a difference in their own lives. The young men who wanted to start an audio systems and What they need more than money is exposure to outside party tent hire project also lost interest in their idea. They thinking and creative ideas to help them use their talents came to us and said, “We’re having too much of a conflict to make a difference in their own lives. They need to be among ourselves and we don’t want to go on with the proj- exposed to people who have already been successful in ect any more.” By the middle of January, the whole project business and are willing to share that collective wisdom and was in the process of falling flat on its face. thought. And that’s something that we, as a group of young professionals in family business, were able to facilitate. Failure not an Option So we went to Mr. Subbiah, who, as mentioned, is advis- A Call to Act ing us in this project. He’s been a great mentor. He got For me, this experience was a source of great satisfaction us all together and asked us what we wanted to do. We because I got to share some of my knowledge with oth- said we really didn’t know what to do. We just wanted to ers. Those of you with philanthropic organizations already close up the project and get out of it. Then he said: “Well, know that it is not just about giving out money, but also that’s fine. But remember one thing. If you don’t go ahead about sharing our time, resources and wisdom with those with this project, there will be a whole village of young who have not had as many opportunities. Family business- Indians who are never going to get this kind of an oppor- es, above other kinds of businesses, offer us the chance to tunity again and you will have failed all of them.” After he truly make a difference in the lives of others. said that, failure was not an option. So we had to think of other ways to get the project moving forward. RAMYA BHARATHRAM: I decided to visit the village more often. We identified a social worker in that area. We spoke to her and devel- Things Fall Apart oped ideas on working together. We hired her to monitor Now, I will update you on the outcomes of the various and manage the project full-time. We gave her one specific projects thus far. Our visit was in June of 2006 and that task: to get the tailoring program up and running in one August we bought two sewing machines and arranged for a month. This was in mid-March. The eight of us who were tailor to give the women instruction. Unfortunately, there part of the Make a Difference in India project put some were 10 women and only two machines. We were hoping funds together to support the program and told her to do to get more machines but were eager to start the training whatever she could to get it started. so that we could, hopefully, start commercial operations by the beginning of 2007. Our only onsite follow up of Failure was not an option. So we had the training program was through a point-person in the to think of other ways to get the project village. I used to call once a week to find out what was moving forward. going on. Although I visited on and off, none of our original group was able to spend quality time in the village. By the end of November, two of the village women, who I’m very proud to say that on the 12th of April, 2007, were leaders, got married and went away. The rest of the we inaugurated the tailoring training project. Training women were very skeptical about continuing and did not is in full swing and in six months we hope to start com- want to go on without their leaders. mercial operations.

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 99 is always resistance to change because the risks are very high for them. Very few people are open to new ideas. But this is only understandable if we consider the impact of failure on them. Though the villagers’ earnings are barely enough to sustain them, on the whole, they are a very happy and independent people, like most village folk in India. That was probably one of the reasons for the barriers to change. Now when we return to the village we see smiles and feel a sense of hope. There is an expectation that we are doing something that could impact the people positively and make a difference in their lives.

The pilot program to grow jatropha plants is also mov- Meeting the President of India ing along. The land is still dry but farmers have been able In a proud moment, we had the opportunity to meet to get the water required for the initial phase of cultiva- the President of India, Dr. Abdul Kalam, in Delhi. We tion. We are also trying to start more model farms around spoke to him about our project and ideas. He was very this village area and hope to build a community of farm- interested. He heard each of us individually. He himself ers involved in the cultivation. At the end of three years— is deeply involved in various rural development projects with the success of these pilots—we hope more farmers and explained his plans and ideas to us. It was a sublime will want to take up cultivation of jatropha. experience for all of us.

Lessons Learned We had the opportunity to meet the What did we learn from this project? Well, working with President of India, Dr. Abdul Kalam, economically backward communities requires the full in Delhi. We spoke to him about our time and attention of at least one person in the field at the project and ideas. managerial level. We had been trying to do this long distance because those of us who live in India all come from Firsthand Experience the Best Chennai, which is about 500 miles away. That just doesn’t Instilling philanthropic ideas in the younger generation work. That is why we have had to hire a social worker can be done in various different ways. I’m sure it’s done who is there full time. in most families. But, doing it through the participatory philanthropic method, where you actually go and do it We must build a consensus, which firsthand, is probably one of the best ways to experience takes time, but without consensus, it. It is also extraordinarily effective as a means of build- nothing goes forward. ing leadership skills.

We also learned that when dealing with people and their JOHN WARD: problems, we have to take the time to relate to them, to understand their problems and their environment before we Thank you, Ramya. And, remote appreciation to J.P. We provide solutions. We must build a consensus, which takes hope their experience stimulates thought on how to best time, but without consensus, nothing goes forward. There develop the next generation of family business leadership.

100 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e RAMYA BHARATHRAM J.P. RHEA Family Member Family Member, Rhea Cattle Company Thirumalai Chemicals Ltd. Lincoln, NE Chennai, India Consultant, Marakon Associates Chicago, IL

Ramya is a third generation member of her enterprising J.P. Rhea is a fifth generation member of his family’s 135- family, currently busy raising two children and exploring year-old Rhea Cattle Company where he is involved in the new opportunities for the businesses. The family has two governance and management of the trusts. After earning publicly-listed companies in the chemical and pigment seg- an undergraduate degree in agribusiness at the University ment and some small companies in IT and BPO operating of Nebraska-Lincoln and a Fulbright Research Scholarship in India, Malaysia and Singapore. Up to half of the business in Dijon, France, J.P. worked in auditing for ConAgra Foods. volume is generated outside of India and their main busi- He also completed internships at Chicago Mercantile nesses rank in the top five worldwide in their respective Exchange and Koch Beef Company. He earned his M.B.A. categories. Philanthropically, the family helped found and at Kellogg School of Management in 2006 and now works actively manages schools and colleges in Mumbai and as a consultant for Marakon Associates. In his spare time, Ranipet. They run an NGO in the Vellore District that sup- he organizes and plays on basketball teams and is also ports micro credit, health services, micro businesses and active in competitive barbequing. veterinary services to poor residents in 700 villages. Ramya’s B.A. degree is in commerce and she has her articleship for the chartered accountants’ course. Her past work experience includes focus on customs, anti-dump- ing and safeguard laws at an international trade law firm as well as work in the audit and assurance division of Deloitte and Touche.

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 101

Next Generation Reflections from the Workplace

What attracts the younger generation to work in the family business? How are the challenges of being a business family handled from their point of view? This panel, composed of three KSM graduates now working in their families’ businesses, offers some very personal insights on these and other issues important to their generation.

MODERATOR: PANELISTS: Dustin Marshall Andrea Paiz Carrie Meek KSM class of 2007 KSM class of 2003 KSM class of 2004 Co-chair General Manager Vice President of Sales Kellogg MBA Student Family Specialty Brands Holding Company Meek’s Lumber and Hardware Enterprise Club La Fragua host: Gregory Touret Barry Merkin KSM class of 2001 Clinical Professor of Entrepreneurship Chairman Kellogg School of Management Touret Family Investment Group

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 103 Next Generation Reflections from the Workplace

BARRY MERKIN: DUSTIN MARSHALL:

Why Entrepreneurs? The Club as Resource for Students Many people ask me why the interest in entrepreneur- I’m a second year Kellogg student and a co-leader of the ship at Kellogg. My general comment is that if you study Family Enterprise Club here on campus. The Family the employment figures in America, they have remained Enterprise Club at Kellogg consists of about 80 to 100 consistently steady and healthy while at the same time big Kellogg students, the vast majority of whom come from companies are laying off tens of thousands of employees. a family business background. Through the club, we try The bulwark of America’s strength in job creation is it’s to provide a forum for these students to network with entrepreneurs and private businesses, and that is my gen- one another. We also organize speaker events, one-on-one eral response to the question. A more specific response to lunches, and invite prominent family owners and knowl- this audience is that most of you would not be sitting here edgeable people in the field to come and meet with stu- today were there not a successful entrepreneur in your dents to answer any questions they may have. family at some time. It may have been a great-great grand- Another initiative we sponsor that is near and dear parent, but there’s got to be one of those entrepreneurs in to my heart is called the Kellogg Family Business your family’s history to bring you here today. Organization (KFBO); this is essentially a forum that Kellogg has consistently been rated one of the world’s provides a confidential small group setting for students to best business schools. The reasons are many, including meet once a month with a group of their peers to share our outstanding faculty, administration, and students. concerns or questions that they may be confronting in We have students who really are the leaders of tomor- their family businesses. row. They are ambitious, hardworking, energized, and on the move. And they have, of course, put together a A Spunky Family Founder number of student clubs one of the most vibrant of all is In addition to being the co-leader of the Family Enterprise the Kellogg MBA Student Family Enterprise Club. I’m Club, I’m also a third generation family business owner. here to introduce to you, with great pleasure, one of their My grandmother founded our business in Texas as a 50- leaders, Dustin Marshall. year-old single woman with, literally, not a dime to her

104 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e name. And as if that didn’t stack the cards against her The business today has evolved into a specialized niche, the enough, she actually went into the freight industry, which expedited freight market, which is focused on speedy or is traditionally very male dominant. In the beginning, emergency deliveries. My mom joined the business in the to gain business, she went through the phone book and early 1990s and has been working with my grandmother called on people and asked if they needed any deliveries since then helping to run and grow the business. But our made. If they said yes, she got in the truck and made them business is reaching a crossroads. My mother is interested herself. She is quite a remarkable woman. in pursuing other activities and my grandmother is near- ing retirement age. We have quite a small family and I am My grandmother founded our business the only third generation family member. I personally have been confronting a lot of the same questions that our pan- in Texas as a 50-year-old single woman elists were confronting a few years ago about whether or with, literally, not a dime to her name. not to return to their family business. Needless to say, I’m …She is quite a remarkable woman. particularly interested to hear what they have to say.

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 105 Panel Introduction The Family Business in Transition Our panelists consist of recent Kellogg graduates—two I’m a third generation member of a family business which of whom were actually on a panel similar to this one four started as food retailing with supermarkets and hyper- years ago at this very same conference. At that time, they markets in Central America. In 1999, we formed a joint were asked to let us know what their plans were for the venture with Holland-based Royal Ahold and in 2001 we future, where they felt their careers were headed, and were joined by Costa Rican-based CSU, becoming the where their family businesses were headed. We have the largest retail operation in Central America. As of March rare opportunity now, four years later, to take a look back 2006, Wal-Mart bought out Royal Ahold’s interest in the and see what happened to these folks. company and further increased their investment, becom- We have with us Carrie Meek, a KSM graduate from ing 51 percent owners of what is now Wal-Mart Central 2004, of Meek’s Lumber in California. Carrie was pursu- America. Additionally, our family has diversified into ing a career in media management but recently left that other business areas such as franchise management, com- profession to join her family business. Second, we have mercial real estate and banking. Greg Touret of G.I.F.T., his family’s investment group. His family is relatively small and is primarily focused Many Opportunities in the Family Enterprise in real estate. They’re based in Paris and Greg is a 2001 After graduating from Kellogg in 2003, I worked at my graduate of Kellogg. And finally, we have Andrea Paiz, a uncle’s distribution company for one and a half years. I 2003 Kellogg graduate, who joins us from Guatemala. began feeling like I needed a change in my professional Her family is quite large by comparison and is focused development and searched for ways to enter the family primarily in the retail sector. Her family recently sold a business. I was clear I did not want to join the core busi- controlling interest in their retail food stores to Wal-Mart ness, but rather one of the smaller investments. I saw an and became Wal-Mart Central America. What we would opportunity to lead the family’s specialty retail operations. like to hear is what our panelists have learned since they I now manage eight Benetton stores in Guatemala and last sat in these chairs, where their family businesses have until November 2006 also managed a smaller Italian fran- moved, and what surprises have happened to them since chise called Sasch with two stores. I continue searching for they last spoke to us. franchising opportunities for the region.

ANDREA PAIZ: Four years ago, I participated in this same panel as I was about to graduate from Kellogg and begin working at my uncle’s company. At the time, in getting ready to start working with the family, I said I was excited, but I was also nervous and afraid.

In addition to my full-time job with the family, I am also a director in the ownership board, which oversees our interest in Wal-Mart Central America, I am a member of the family council, and I am on the team in charge of writing our family constitution.

106 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e Four years ago, I participated in this same panel as I was As a member of the next generation, if about to graduate from Kellogg and begin working at my you want to be part of the family busi- uncle’s company. At the time, in getting ready to start ness, you must create opportunities for working with the family, I said I was excited, but I was also nervous and afraid. Up until then, I had not worked yourself. …you must ensure that you in the family business but had begun asking to be included deliver on your offerings. in family-related activities, business or non-business. Managing Change Today, I can honestly say that I feel The management of the process of collective change in a challenged; I have learned; and I am diverse multi-generation family business is crucial. There exhausted. are times in life when you have to make crucial decisions that will forever change the business and the family. The Today, as you can see, I could not be further involved in choices you make in themselves are not as important. my family’s business. I have gone from being completely What will truly determine the success of your decisions removed to being involved in several dimensions of the is how you manage the process of change, understanding family business. Today, I can honestly say that I feel chal- that it will affect many; thus, it is a collective change. lenged; I have learned; and I am exhausted. I decided to You are dealing with emotions and needs that vary across join my family’s business at a time of great change. generations. The behaviors of family members during times of change play a crucial role in determining the Create Your Own Openings future of the business, but also the unity of the family. I would like to share with you some key issues that I have It is important to keep the greater picture in mind, to identified as I’ve gotten involved in my family’s business. determine what you want family members to take away, As a member of the next generation, if you want to be and remember it in the long run, rather than to focus on part of the family business, you must create opportunities individual or immediate needs. for yourself. As the family grows and changes, figuring out where you belong within the family business becomes Selling the family business creates a challenge. As a member of the generation trying to emotional issues across all levels of enter the family business, I realized that I needed to fig- the family. …When the business is sold, ure out where I wanted to be and then make it happen for you quickly realize that everybody has myself. You must be creative! Look past current or available spots and create an opportunity for yourself. In my different needs and different views as case, this even required changes in my sister’s position, to how to continue. who at the time, along with several other responsibilities, was looking after the businesses I now manage. Opening Selling the family business creates emotional issues across up opportunities will require negotiation skills to gain all levels of the family. Typically, a family business keeps a support from family members, and also leadership skills family united and working towards the same goal. When as you seek to gain respect from the people with whom the business is sold, you quickly realize that everybody has you’ll be working. Once you’ve talked to several family different needs and different views as to how to continue. members and received support to join the business, you The generation in control typically finds renewed com- must ensure that you deliver on your offerings. fort because they receive the wealth from the sale of the

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 107 business. They have worked hard for many years to make dation on which the next generation has grown up and the business what it is today and now they can happily what it has believed throughout their lives has completely enjoy their retirement. The controlling generation has changed. Adapting to this change can be very difficult devoted their lives to the business and so spending some and can cause feelings of uncertainty for their future. of the wealth created in order to enjoy their later years in life makes complete sense. The next generation has never known a life without the family business and thus, the sale of the business can leave members of the next generation feeling uncomfortable and somewhat lost.

In selling the business, I believe it is important that the controlling generation be transparent with their children, involving them as much as possible in their plans for the future. A great idea is to start working with your children in investments or small businesses so they start working with you and among siblings to prepare for a future in which they are close enough to continue working together. The next generation grew up with the business, their lives It is important that you share with your children how you have been defined by the business, their experiences and will go about managing the wealth created by the sale of opportunities have revolved around the existence of the the business. While this may be a hard topic to talk about, family business. The next generation has never known and while the controlling generation may feel they have a life without the family business and thus, the sale of the right to enjoy the wealth they generated, it is impor- the business can leave members of the next generation tant to recognize that to the next generation, they were also feeling uncomfortable and somewhat lost. This genera- a part of the family business, and they will most likely be tion has been taught that their responsibility is to take preoccupied with what their futures will be like now that care of the family patrimony, to make it grow and pass the business has been sold. What will I work in? Where do it on. They have been taught that the family patrimony I belong? How do I guarantee that my children have the does not belong to any one generation; it is for them to same opportunities that I had growing up? keep safe and grow in order to be able to pass it on to the next generation. However, when the business is sold, Realignment within the Family Branch what happens to the family patrimony? The comfort of In a multi-generation family business, when the business knowing that the younger generation will be taken care of is sold, the dynamics within each of the branches becomes as they get older because the family business is there is no very important again. Once a family has grown in size, as longer true. And the notion that the patrimony is there to the family business is sold, it is common for each branch pass on to subsequent generations may also be lost as the of the family to re-group, forming a new unit made up controlling generation now holds the family wealth, and of parents and children. Dynamics within the branch what they do with the wealth is up to them. So the foun- become crucial, because how siblings relate to each other

108 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e and how they are able to work together will determine the I would guess that if we’re all here, it is because we recog- success with which they are able to work in the future as nize the value of family. Defining whether you are a family a unit. Friction may arise among siblings, because with business of a business family will help you make decisions fewer people participating, each person’s contributions during hard times. Does the business come first? Or does affect the unit in a greater way. When there were more the family come first? The business, you can always bring people involved, one individual’s contribution carried less back to success. The family, sometimes it’s very hard to weight. However, among siblings, agreeing on the man- heal wounds. In my mind, family should always come agement of their unit, how to manage their wealth, what before business. Is it worth it to choose a faster route businesses to get into, and where to invest can all be very to business success by looking only at the business per- difficult. I believe that at that point, it is important to pay spective, even though it could hurt the family or break it special attention to the dynamics within the family group, apart? Or can you take it a little slower, making sure the helping siblings understand each other’s personalities and family sticks together? needs, so that they can work together and become a strong team. This will help in the transition from working in the Ask yourselves and your family members, larger family to working in a smaller sibling group. are you a part of a “family business”? Or do you belong to a “business family”? What As the family business is sold…Dynamics is more important—business or family? within the branch become crucial, because how siblings relate to each other and GREG TOURET: how they are able to work together will determine the success with which they are able to work in the future as a unit.

The Choice is Yours Through all these experiences, I have come to understand that being in business as a family is a choice. Being part of the family is the greater gift. Some family members may choose to continue in their own path rather than remain in the family business, and that’s okay. Those who stay really want to be there and new opportunities will arise to continue succeeding in the business. But, most important is to continue finding ways to oil the family relationships, whether members are involved in the business or not. Family togeth- In the Express Lane to Leadership erness makes for an enriched life full of love, support and a As Dustin told you, I graduated in 2001. I’m also from network of people who will stand by your side through life. a family first type of business. To give you a little bit Ask yourselves and your family members, are you a part of a of background on our family business, my grandfather “family business”? Or do you belong to a “business family”? started a small furniture shop near our home in Paris What is more important—business or family? with his three sons; my father was the eldest. After the

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 109 death of my grandfather, all the family split, and, as I arrived in Paris, and you can imagine that after two years sometimes happens in families, they were stripped of all at Kellogg I was eager to apply the lessons I had learned the assets. My father decided to start a family business there. But between theory and reality, there’s a big gap. with me. Entrepreneurship is very strong in our family. And even facing death, entrepreneurs don’t want to let go My grandfather was an entrepreneur and my father was of the power they have gained. When you let go of a busi- also an entrepreneur. All together, they started about 50 ness, it’s good to have some kind of sports or other activi- companies in the last 30 years. ties to interest you, but our father was handicapped and What I really want to talk about today is the difference the only thing he could do was business. between theory and reality. We’ve heard in theory how to organize succession, estate planning, and when to let go. Father Puts Sons to the Test My case is a little bit different and that’s what I’m going We had to become a family centered around work and to try to illustrate. our handicapped father. As I told you, entrepreneurship was deeply ingrained in our family business. Our father My father was diagnosed with ALS, decided that, just to be challenging, he wanted to send us Lou Gehrig’s disease…This was a very to Asia. And we ended up in Viet Nam. As you can imagine, having a handicapped father in Paris and wanting to big hit to our family. be entrepreneurs in Asia presented a definite problem. We acquired a down stream supplier of Pier One When I got admitted to Kellogg in ’99, the goal was to Imports in Viet Nam. It was a big factory, with 3,000 help us create a family business, a whole new type, with employees and manufacturing chairs, tables, and little my father and my younger brother, who was 18 at the products you can find in every shop in America. time. Unfortunately, after I was here a couple of months, my father was diagnosed with ALS, Lou Gehrig’s disease, Our father decided that, just to be chal- which is a neuro-muscular illness that puts you in a wheelchair and gives you a life expectancy between three months lenging, he wanted to send us to Asia. and 10 years. This was a very big hit to our family. And we ended up in Viet Nam. When you know that life is going to change, you want to get really prepared for it, and it’s not theory but The funny thing about this story is that our father wanted reality; you need some advice. When I came to Kellogg, to keep control of the business but he hadn’t seen the I was given very good advice by the professors to help factory. My brother spent a lot of time in Viet Nam, and prepare for what I would need to do when I returned to it was a real challenge to create a family business with a the family business. company 4,000 kilometers away from our headquarters. After two years at Kellogg, I came back to Paris, and even though my father was in a wheelchair, he still wanted Sons in Charge to control everything. We had a very big paradox. The Unfortunately, our father passed away a year ago. And estate planning was done perfectly; he gave away all the that’s when reality comes into action. My brother and I shares in the family business to my brother and me, a had to make decisions and plan heavily. On the family 50/50 percent partnership. But he kept the reins and the side, our mother, who was the real invisible partner in the control of the business. business and who never worried about anything, started to

110 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e worry a lot because her husband was gone and it was only making decisions and then you yourself making deci- her two sons in charge. She wanted to know about every- sions—and living with them—especially at night. thing that was happening. So we had to catch her up on 25 years. We managed to give her the information she needed I had to learn to share the decision-mak- so that she didn’t stress. And above all, we chose some ing process with my younger brother, counselors who were friends of our family with whom she which we had never done before. could talk without her sons being present. Twice a year we hold meetings with friends of our family who are entre- The contradiction of having my father give all the com- preneurs or business people or lawyers, and who are also pany shares to my brother and me but not let us make friends of our mother. Our mother gets feedback on how decisions while he was alive led us to a situation where her sons are doing, which is very important to her. we had to catch up in the first month after his death on how to make decisions and how to live with them. I Our mother, who was the real invisible had to learn to share the decision-making process with partner in the business and who never my younger brother. worried about anything, started to As far as our business in Viet Nam, we never had to worry a lot…We chose some counselors decide what we would do about it because our business who were friends of our family with partner effectively took it away from us the week after we buried our father. Very quickly we had a large dose of what whom she could talk without her sons reality in the business world can be. In any event, now we being present. are able to concentrate our efforts in Paris, which is where we are needed the most by our mother and the business. Taking Care of Family First We are a very small family, just my brother and me and CARRIE MEEK: our mother. So, first things first, we had to take care of our mother, and we had to take care of my younger brother, Edward, who was spending a lot of time in Viet Nam. Unfortunately, we have had to leave Viet Nam and concentrate more on the business in Paris. My brother has now applied to business schools in part to re-create our father’s dream of having a family business with his two sons with business degrees. We found that the best way for us to become a team and to communicate at the same level was for him to earn the same diploma as I have.

Learning to Live at the Top When a parent has dreams for his children and is their mentor, he thinks that his son or his daughter is ready A Fourth Generation Business to take over. But from my point of view, there is a big We own retail lumber yards in the Midwest and on the difference between witnessing your father or your mother West Coast. Our family business was started in 1919 by

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 111 my great-grandfather Pappy, who bought a lumber yard sales. So there’s a pretty strong balance between the two that he was managing from a family wanting to get out divisions. We own our own wholesaler so we’re able to of the business. Pappy had one son, my granddad, who offer low prices, particularly on lumber and paneled sheet also went into the business. In the 1940s my grandfather goods; 75 percent of our business is with contractors. was having trouble getting a steady supply of lumber into Missouri so he took a train to northern California, Redding specifically. He absolutely fell in love with California so he bought a ranch and a mill and a lumber yard. He found a partner to manage the business there. And that’s how it comes to be that Meek’s Lumber and Hardware is in two distinct geographic locations: the Midwest, in Missouri and Arkansas; and California and Nevada on the West Coast.

My father decided that he would go to the West Coast and manage the business from that end and my Uncle Terry could manage the Midwest. Gaining the Requisite Skills My granddad had four sons, two of whom went into My background is in the business side of media, mostly the business. That was my Uncle Terry and my father. in on-line media before I came to Kellogg. I got laid off After my granddad died in 1975 my father and uncle and decided it was the perfect opportunity to go back to immediately became the co-presidents. My father was business school. I graduated from Kellogg in 2004 and 30 years old and my uncle was 32. In the early 1980s, was recruited by Knight-Ridder to work for the San Jose there was a decision to be made because the partner we Mercury News. For the last two years, I ran their local retail had in California was ready to retire. My father decided advertising group, which was a team of about 50 people that he would go to the West Coast and manage the busi- and I managed about $40 million in sales. ness from that end and my Uncle Terry could manage the Midwest. When I was eight years old, we moved out This last job gave me a lot of experience to California and that’s how it still stands today. very quickly. …I gained important sales My uncle’s two sons have gone into our family busi- experience and very valuable know-how ness but not his daughters. I have one sister who is not in the family business. She is older than I am, married on the performance management side. with three children and lives in Portland. Her husband is also in his family business. This last job gave me a lot of experience very quickly. I We have 44 stores today; 14 in California and 30 in had a great mentor there. I gained important sales expe- the Midwest. Each region does about the same amount in rience and very valuable know-how on the performance

112 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e management side because my entire sales staff was to two years. I didn’t know what was going to happen unionized. It was important that we be very clear in but I have this very vivid memory of driving from San terms of our performance standards and expectations, Francisco to Walnut Creek as the sun was setting on particularly when it came to hiring and terminating. that Sunday evening and the sky was pink. It was very And that experience got me up to speed in an area that clear. And I had this very distinct feeling that my life turned out to be very helpful. was about to change. I went to dinner with my father and we had a very long and serious discussion about the Never Say Never possibility of me coming into the business. For those of you who heard me speak on the student panel four years ago, I think an appropriate title for this I had this very distinct feeling that my presentation would be “Never Say Never,” because at that life was about to change. time I had no intention of entering the family business. The short-term strategy of selling was off the table at this My father and I had a number of point mainly because lumber prices have been declining conversations about whether or not since the summer of 2004. For several reasons, supply was going up while housing starts were going down. All I would go into the family business. of a sudden we have a situation where today our lumber …The timing was either never right prices are down 50 percent from where they were three for me or never right for him. years ago. That put us in a position where the short-term idea of sale was not viable. My father and I had a number of conversations about whether or not I would go into the family business. And A Very Personal Decision frankly, it was just always an issue of timing. The timing I was also at a turning point in my career and personal life. was either never right for me or never right for him. This I was about to take on a larger role at the newspaper. My was particularly so as I was coming out of Kellogg. At boyfriend, Jeff, was in the process of looking for a job in that time, the thinking on our side of the business was San Francisco and thinking about relocating. Everybody really short-term. I was unsure of what my role would be was up in the air and trying to figure out which direction in that situation. In addition, I really didn’t have much of they were going. And I had a decision to make. So I talked an interest in moving to Sacramento as a single person. to three people. I spoke with my former Kellogg professor. And I know that my father didn’t have much interest in I spoke with my sister to get her take on the whole thing. me moving to Sacramento as a single person either. And I had a conversation with Jeff, who was very inter- Then last October, I was having dinner with my ested in me moving to Sacramento because he had just mother in San Francisco. We talked about how my taken a job that he loved in the area. That conversation father was feeling pretty frustrated with the business. went very well and now we are engaged. We talked about how he was starting to think about retiring and I said to my mother, “Well, I wonder if Timeline of Personal Development it’s time to have another conversation.” My dad and I When I was in my twenties, I was really interested in mak- seem to have a serious conversation every 18 months ing my own way, finding my own path. I loved media. I

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 113 loved working in advertising. I enjoyed finding this path game in meaning for me too. I’m thrilled and I love for myself. But as I got into my thirties, I started to feel the experience. Being in the family business gives you that I was putting all my resources and time into some- an opportunity to feel like you’re helping to pass on one else’s company, not my own where I have a personal the legacy and that you’re participating in a part of vested interest. My father also seemed very ready to bring your family history. me in and to have me play a very significant role, which was important to me. And then, of course, there is the Audience Questions personal piece, which has worked out.

When I was in my twenties, I was really interested in making my own way…But as I got into my thirties, I started to feel that I was putting all my resources and time into someone else’s company.

I joined the company two and a half months ago. My outside experience has been extremely helpful, both in establishing my credibility within the organization and in adding to what I’m able to bring to the table. The sales background has been very valuable because ours is Have you felt any negative external judgments or had an operations driven company. I’ve been able to bring any internal emotional struggles with entering your a different perspective along with me which has been family’s business? very helpful. And the M.B.A. has also been especially Carrie: I haven’t felt any negative judgments either from useful in terms of my being able to get up to speed friends or outsiders. They’ve actually been extremely more quickly. I’m now calculating inventory turns and supportive. However, working with the people who have doing things I never thought I would actually do. been with the company for a long time and have known me since I was eight has definitely made me feel pressure. Being in the family business gives you I want to establish credibility and show that I’m capable an opportunity to feel like you’re helping of stepping into a large role. to pass on the legacy and that you’re par- Andrea: I second what Carrie said originally about the ticipating in a part of your family history. advantage of having worked in another company before entering the family business. That is actually a policy One thing that I did expect, but did not realize to what in our family that you cannot enter the family business extent, is the amount of pressure that I feel being in a unless you have experience elsewhere as well as a college family business where I’m personally invested, where degree. I think it is a great experience to be an employee my sister’s wealth is personally invested, and where my in somebody else’s business, especially if you do well. It father’s 40-plus years are personally invested. That’s gives you great confidence that would be hard for you to just a whole different ball game when it comes to pres- gain if you automatically went into the family business. sure. The flip side of that is that it’s a whole new ball For me, having had success somewhere else plus the

114 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e M.B.A. made me unafraid to walk in there. And I think Carrie, in what capacity did you enter into the company? the confidence shows. I am a boss to two managers who Are you anointed heir apparent? Or are you coming in are much older. I’m sure they were worried about what I at the bottom? was going to be like. But I’ve proven that I was well pre- Carrie: I’m not coming in at the bottom. I think my deci- pared and well educated, and the financial statements sion might have gone a little differently if that was the show the difference. So I think they’re convinced. scenario offered. I’m actually coming in with two roles. I’m coming in as the vice president of sales, managing I think it is a great experience to be an the outside sales force. Each yard has four to seven out- employee in somebody else’s business, side sales people who are building relationships with the especially if you do well. It gives you contractors. I’m responsible for performance management and training on the sales side. From an operational great confidence that would be hard for standpoint, I’m also a district manager of our mountain you to gain if you automatically went district. I oversee five yards, which gives me the day-to- into the family business. day operational experience that will be very helpful.

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 115 My father has made it very clear that his intention is that be able to work together. My father’s testing us, I think, he will start taking a smaller role and that I will start because he wants us to prove that we can work together. stepping into his position. We’ll do it gradually but I We’re starting to invest together and to do things together think we’ll start that process in probably a year or so. He and to prove that we can remain together, which I think is was very clear with his team up front. And I think that what he’s looking for. the way we’ve talked about structuring the leadership will not limit the opportunities for the other executive staff- If you had the choice of selling the company and having ers, even as I step into a bigger role. the cash or being involved with the company as an oper- I think my father is feeling like he’s ready to take a smaller ating business, what choice would you make and why? role soon. I think he has quite a bit of confidence in my abil- Andrea: Operating the business. Even though we sold ities. The transition will probably happen over the period of to Wal-Mart because of the market circumstances, we’re a year. And then at some point, he’ll just go to the office finding ways to go back into business together. Once you two to three days a week and focus mostly on strategy. start working for your family, you could never go back. You work harder. You have 10,000 hats. You can never Andrea, what did the sale to Wal-Mart mean to you say no. But at the same time, there are perqs. You have a personally? lot of freedom and support. You’re not punching in time Andrea: I grew up in the business. I grew up with a lot cards, or counting the number of vacation days a year to of opportunities that I would have liked my children to be able to participate in seminars. It’s fun to share with have. In our family group, there are five siblings in the sec- your family. You grow together. ond generation. My father is a humanitarian, has worked his whole life to make Guatemala a better country. And Greg: That’s the same with me. I would never go back. he has no other companies. So, among our sibling group, If the choice appeared for us to sell the business and to when you sell what you’ve been holding onto for your become investors, this would never fit the culture of the whole life, there’s a lot of uncertainty. And in the past, family. And this would never bring the family together. he was always very secretive. He did not involve us in his I’m a big believer that operational activity brings a family decision-making process. If we’d ask he’d say, “Oh, well, if together; it allows you to share and allows you to build a I’m not here, then ask the accountant. Or ask the lawyer.” stronger family. That also adds to uncertainty. We have done a lot of work and he has opened up a lot. Whether we like the decisions I’m a big believer that operational he’s making or not, it’s better to know the decisions he’s activity brings a family together; it making. And we certainly appreciate that he’s opened up. allows you to share and allows you to build a stronger family. When you sell what you’ve been holding onto for your whole life, there’s a lot Carrie: I think it’s a little more difficult for me to say only of uncertainty. because my sister hasn’t gone into the business and my cousins are based in Missouri. I’m not working with the In my family group, we have felt the uncertainty. But family except for my father, and once he retires, it will be we have also felt a willingness to open up and to change different. So I don’t have as much of the family connection on my father’s part. We’re working hard, as siblings, to at work. I’d say I have mixed feelings.

116 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e ANDREA PAIZ GREGORY TOURET General Manager Chairman Specialty Brands Holding Company Touret Family Investment Group (G.I.F.T.) La Fragua Paris, France Guatemala City, Guatemala

Andrea Paiz is a third-generation family member and a Gregory Touret is Chairman of the Touret Family Investment general manager of her family’s Specialty Retail Holding Group (G.I.F.T.), a family office that specializes in commercial Company. She manages the Benneton franchise in real estate and private equity. When his father became ill, Guatemala and evaluates new franchise opportunities for he joined the family business after earning his M.B.A. from the region. Her prior experience includes brand manage- the Kellogg School of Management in 2001. Before Kellogg, ment at New Zealand Milk and operations for a family- Gregory founded Eurochange, the first company to distrib- related distribution company. Her B.A. degree is from ute Chinese-made Euro converters in Europe. He also set Babson College and her M.B.A. is from Kellogg School of up a buying office in Hong Kong that specialized in back-to- Management. Her family’s food retail business grew to be school merchandise and small electronics. With his father, the largest operation in Central America with 374 stores. he started two companies that they later sold: Concileo, In 2006, a 51 percent share was purchased by Wal-Mart one of the first companies in France to offer community to become Wal-Mart Central America, in which the family management and consulting on the web; and Meubles. is still an investor. The family has diversified into other com, the French version of Furniture.com. In 2003, Gregory ventures including managing United Colors of Benetton and his brother bought out and modernized the leading stores, developing shopping centers and investing in Vietnamese furniture manufacturer and exporter—formerly Cuscatlan Bank & Trust. The family foundation, "Fundación a state-owned conglomerate. He and his father consolidated Paiz", promotes art and education. It hosts “Bienal de Arte the family’s real estate portfolio into a fund with over 30 M$ Paiz,” the largest art competition in Central America, and under management. After the death of their father in 2006, “Festival de Arte Paiz,” a performing arts festival, with Gregory and his brother sold the furniture business in international and local talent. Viet Nam and started Blue Syntax, one of the first to position itself as the ultimate geomarketing solution on mobile phones using Bluetooth® technology.

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 117 CARRIE MEEK DUSTIN MARSHALL Vice President of Sales Co-Chair Meek’s Lumber and Hardware MBA Student Family Enterprise Club Sacramento, CA Kellogg School of Management Evanston, IL

Carrie Meek is vice president of sales at Meek's Lumber Dustin is a second-year student at the Kellogg School and Hardware, a major lumber retailer founded by her of Management majoring in marketing management, great-grandfather in 1919. The company operates more management & strategy, international business, and than 45 lumber yards in two divisions, the Midwest and social enterprise. Prior to attending Kellogg, Dustin was West Coast. In her role, Carrie leads the strategy, train- a strategy consultant at Bain & Company and at the ing and performance management of the sales force. She Alliance Consulting Group in Boston. He also worked for also oversees operations of the mountain district which Fidelity Investments as a member of their new business includes five lumber yards in California and Nevada. Carrie development group. Dustin’s family owns and operates joined the family business in 2007 after eight years in an expedited freight company in Dallas, Hazel’s Hot media management, first at Reuters, then at TheStreet. Shots, that was founded in 1977 by his grandmother. com, next at a media consulting firm and most recently at The company is currently run by Dustin’s grandmother Knight Ridder’s San Jose Mercury News where she ran the and mother. Although Dustin has not yet worked in the retail advertising group. Her undergraduate degree is from family business, he plans to return in the coming years Georgetown University and her M.B.A. is from Kellogg to take on a leadership role at the firm. School of Management in 2004.

118 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e BARRY MERKIN Clinical Professor of Entrepreneurship Kellogg School of Management Evanston, IL

Barry Merkin joined Kellogg after 30 years in business including chairman and CEO of Dresher, Inc., president and director of Charter Communications, president and director of Pan American Paper Bag Company and president of Procon Pump Company. Merkin has served on numerous boards, including Follett Corporation, Transmedia (NYSE), Barker Bros, Bruener Furniture, DuoDesign, All-Phase Electric and VOCA. His professional activities have included the Young Presidents’ Organization, American Furniture Manufacturers Association, the Institute of Laryngology and Voice Restoration at Harvard Medical School, Chicago World Presidents’ Organization, American Association of Entrepreneurs, Boys Clubs, Eagle Scouts, Chicago Harvard Business School Club, Chicago Crime Commission, National Conference of Christian and Jews, and the Rush Presbyterian St. Luke’s Cancer Institute. His B.A. degree is from Brown University, and his M.B.A. is from Harvard Business School.

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 119

The Kellogg Award for Special Contributions to Families in Business Presented to the Wendel Family of France

The 2007 recipient of the Kellogg Award for Special Contributions to Families in Business is the Wendel Family who began business as an iron forge in 1704. The family has displayed remarkable resilience through time in remaking their business during periods of war and other unfavorable political climates. They freely share their story for the benefit of other family businesses through published case studies and academic writings as well as through the Wendel International Center for Family Business at INSEAD, an international business school in France.

RECIPIENT: AWARD PRESENTERS: The Wendel Family Lloyd E. Shefsky John L. Ward WENDEL Investissement Founder and Co-Director Co-Director Paris, France Center for Family Enterprises Center for Family Enterprises Clinical Professor Clinical Professor FAMILY REPRESENTATIVE: Kellogg School of Management Kellogg School of Management Priscilla de Moustier Board Member Family Holding Company WENDEL Investissement

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 121 THE KELLOGG AWARD FOR SPECIAL CONTRIBUTIONS TO FAMILY BUSINESS

Lloyd E. Shefsky: come during the last three centuries. But that is not why we give our award. We give our award, not for success in A Three Century Family Business your own family business, but for helping the success of The Wendel family business is unique for several reasons; other family businesses. And in that regard, the Wendel it is over 300 years old; it has around 900 family share- family has been truly special. holders; it has remade itself from the ashes numerous times dating as far back as the French Revolution and as recently as the 1970s when the French government nationalized the family’s iron and steel business. Through all this the family has remained exceptionally strong and close with a culture of shareholder entrepreneurship that has helped them to reformulate their family business from an iron and steel company to a private equity company with diversified holdings in technology, manufacturing, and services.

Opening Their Door to Others The Kellogg School of Management and its Center for Family Enterprises are pleased to name the Wendel Family of France as the 2007 Recipient of the Kellogg Award for This family has opened their inner Special Contributions to Family Business. The family has secrets to us so that we might learn from championed and reached out to family businesses in a their experiences…And they’ve worked variety of important ways. They were the founding support- tirelessly with the French government ers of research and teaching at INSEAD business school’s Wendel International Center for Family Business. The and the European community to help family has openly shared their business history in published family businesses in a variety of ways. case studies used in M.B.A. and executive education programs worldwide. Both the family and business have been This family has opened its inner secrets to us so that we the subjects of published academic writing about family might learn from their experiences; in addition, they have capitalism in Europe. Family members have been frequent helped to develop facilities and resources for other family contributors to events at the global Family Business businesses. And that is why we honor them—for their Network (FBN), and to events in France. The family’s con- example, for being pioneers in supporting family business, tinuing leadership in the business community has provided and for the research being done at what is now known as a role model and guidance to others in family enterprise. the Wendel International Center for Family Business at INSEAD. They were among the founders of the Family JOHN L. WARD: Business Network chapter in France. And they’ve worked tirelessly with the French government and the European A Deserving Family community to help family businesses in a variety of ways. The Wendel Family has an amazing history, one that They are generous with their time, speaking on family deserves an award for all that they have achieved and over- business matters around the world.

122 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e Therefore, it is my pleasure to introduce one of the family to be the one representing my family. I’m very proud to be members, Priscilla de Moustier, who is here to accept the here on behalf of all of them. award on behalf of the Wendel family. Priscilla is a Russian What I would like to share with you today is some and Eastern European scholar; she was a McKinsey con- insight I’ve accumulated because of my involvement in sultant and is a dynamic business person now with her helping to develop the INSEAD Family Business Center. own business career. In addition, she’s been active in the Because of this involvement, I’ve been exposed to many leadership of the family for many years and now sits on other family businesses and I’m fascinated by the subject. the family holding company board of directors. And I’ve tried to identify what elements within our particular history have allowed us to last for such a long time. Priscilla, to you and your 900 family members and your colleagues, we present this award to thank you and your History family for all you’ve shared. And thank you also for being Our history is divided into two main parts. For 270 years willing to offer some of your family’s experiences with and eight generations, we were an iron and steel business us, over 300 years of experience in family business with in Lorraine, which is in the east of France. We were very a huge family. I said there are 900 family members but committed to this part of France; it was, in fact, a part of I understand that is only the shareholders. How many our lives and a part of our family. And then, the two largest family members are there in the rest of the family? French companies in the iron and steel sector, ours based in the east of France and one in the north, were both nation- PRISCILLA DE MOUSTIER: alized in 1977. Because of nationalization, we had to start again, almost from scratch. Now our business is completely different. After being a holding company for a few years, we are now a family-controlled investment company.

For 270 years and eight generations, we were an iron and steel business in Lorraine…Because of nationalization, we had to start again, almost from scratch. Now our business is completely different.

Nine Generations in Business The following chart starts where we began in 1704 and I don’t really know but I suppose counting spouses and continues nine generations to my first cousin, Ernest- children we have around 2,000 family members. Antoine Seillière, who is now the family CEO. My First, I would like to thank all of you here for this won- father, Pierre Celier, was the previous CEO, with his derful award for which I’m exceedingly grateful. It is a cousin, Henri de Wendel. But, of course, this is just a great honor to be chosen from among so many other busi- streamlined version and can’t possibly show all 900 ness families for this award. And it’s a great honor for me shareholders or other family members.

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 123 Wendel Family Tree

Jean Martin Wendel 1665–1737

Charles I Wendel de Hayange 1708–1784 + Marguerite d’Hausen 1720–1802

Ignace de Wendel louise de Wendel 1741–1795 + Alexandre de Balthasar 1736–1808

François I de Wendel 1778-1825 + Joséphine de Fischer de Dicourt 1784–1872

Marguerite-Joséphine de Wendel Charles II de Wendel + Theodore I de Gargan 1809–1870 1791–1853

Theodore II de Gargan Henri I de Wendel Robert de Wendel 1827–1889 1844–1906 1847–1903

François II de Wendel Humbert I de Wendel Maurice de Wendel Charles III de Wendel Guy de Wendel 1874–1949 1876–1954 1879–1961 1871–1931 1878–1955

Marguerite de Wendel Henri II de Wendel Renee de Wendel France - Victoire de Wendel + Emmanuel de Mitry 1913–1982 + Jean Seilliere + Pieree Celier 1892–1983 1918–

Ernest-Antoine Seillière 1937–

A History of Meeting Hardships The first major crisis occurred during Geographically, being located in the east of France, we the French Revolution…That’s when we were very close to the German border and that alone had our first woman leader, Marguerite will explain quite a lot of our history. Our history is not the sort of beautiful story with wonderful things hap- d’Hausen; she did a very good job. She pening and the company growing nicely over the years. was quite old, but she stayed and kept Our history is much more one of ups and really very, the factories going as long as she could. very difficult downs. And I think maybe that is what has been one of the elements that has given us the strength The first major crisis occurred during the French and the togetherness to carry on. Revolution in 1789 when the men in the family were

124 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e forced to go into exile. That’s when we had our first woman And, of course, everyone knows that iron/steel is a very leader, Marguerite d’Hausen; she did a very good job. She cyclical as well as highly capitalistic business. And the was quite old but she stayed in France when her family European steel crisis in the 1970s was very bad. After had to emigrate and kept the factories going as long as she World War II the family business was very burdened by could. Then she was arrested and put into jail and that was debt to the government because the government decided the first time everything was nationalized. In 1800 her son that iron and steel were basic commodities like bread, for came back from exile and repurchased the business. instance, and that the price of steel had to be decided by As I said, we were located very close to the German the government and not by the companies. Prices were, of border so each time there was a war between France and course, set at a very low level, which means that while we Germany the armies would cross over the borders. This could make some profit on exports, in the French market didn’t do much good for our mills, which were almost we couldn’t make any profit. So we had less reserves. But completely destroyed each time. In 1939, the mills were the government said that didn’t matter because they would dismantled and we found them a few years after WWII lend us money when we needed to make the investments, in Bohemia. They were still in boxes, but they were quite which they insisted we make. But of course, at a certain rusty and there was nothing much we could do with them. stage, they said, “Oh, now you’ve got so much debt towards Once again, we had to rebuild the business. us we must just take your little business.” They nationalized us. And that is what happened to us in the 1970s. My father was the CEO at this stage and he had man- Adversity Met aged to negotiate with France’s Prime Minister Raymond • French revolution in 1789 Barre, who was a good economist. He decided the gov- • 1870, 1914 and 1939 Franco-German wars ernment might be a good shareholder/stakeholder • iron ore crisis in the 19th century for big iron and steel mills but probably not for all of • european steel crisis in the 1970s, resulting in their upstream and downstream businesses. So we were nationalization of the company allowed to keep the smaller upstream and downstream assets that were related to steel but we did not have direct interest in the steel business. These assets were in rather There was also a more technical reason for the business’s bad condition because we had always concentrated on precarious position. The iron ore in the east of France the iron and steel and we had not invested much in the contains a very high amount of phosphorous and with the other related businesses. We reorganized the whole thing advent of new technical devices used to make steel, phos- and brought it back to profit—sold some, kept some. phorous was very detrimental to them. So we couldn’t Finally, we gradually sold everything. We became a hold- make good steel and we had to look for and find a coming company with completely new investments. And pletely new technology. That was another major crisis. now, our business is an investment company.

After World War II the family business Surviving Adversity Makes Strength One thing that I’d like to point out is that I believe all the was very burdened by debt to the govern- difficult times we went through together have enabled us ment…in the French market we couldn’t to be stronger; they’ve provided the cement for us. I think make any profit. …They nationalized us. the real heroes in our story are the ones who restarted the

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 125 business the first time after the Revolution. I think after that, when we had really bad times, we’d always think, “Oh, they’ve had bad times before and they started again. So we can do it again, too.” That is the inspiration that has kept us going ever since.

I believe all the difficult times we went through together have enabled us to be stronger; they’ve provided cement for us. I think the real heroes in our story are the ones who restarted the business the first time after the Revolution. Besides a strong sense of togetherness, over those 300 years, we have built a very strong sense of trust in one Commitment and Values another, which has in several cases enabled us to make While we were still in the iron and steel business, we had a decisions very quickly. There have been times when the very, very strong commitment to the industry, to the region board would tell the CEO, “Well, maybe we don’t under- of Lorraine, to its entire people. We built whole towns over stand but if you really believe in this, you can do it.” And there—the hospitals, the schools, the churches—everything. that has worked very efficiently for us. And we had the feeling of extended family which included the 45,000 workers we had in that region. If your father or Family Charter Defines Roles Early On mother had worked for the company, you would be sure to For a really long time, our family has been quite clear have a job. We had this feeling of family, a very, very large as far as who can own shares, who can participate in the extended family. We’ve always had quite strong ethics; work business, the role of in-laws, and the role of women. This is very valued. And there has always been a family tradition goes back to the great-great-grandmother, Joséphine de of education. Even very early in the 18th century when aris- Dicourt, who was left a widow, then survived her three tocrats did not study technical or business related matters children. By 1872 she had nine grandchildren, and she and very seldom worked (iron and steel and glass were the realized that if she didn’t do something there was a big only sectors they could work in while remaining aristocrats) risk of the company being split into bits and sold out to and when people didn’t value technical education, the sons various competitors when she died. In 1872, just after of the family always were among the first to go to new uni- the Franco German War, there were lots of German versities or technical schools, and they always studied really companies wanting to buy us out. Joséphine had a very hard. They went abroad to see what technologies were being strong patriotic spirit and she didn’t want the family developed there. There has always been a great emphasis in company to be sold across the border. So she established the technological and educational aspects of the business. the family business charter, which is very basic, very simple and clear, and still functions. It kept the family together. She kept those nine grandchildren of hers Besides a strong sense of togetherness, together in what is still the family business. And the over those 300 years, we have built a actualization of the family holding company still reflects very strong sense of trust in one another. those very principles today.

126 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e Joséphine de Dicourt, was left a widow, kind of go-between connecting his branch of the family then survived her three children…By and the company. We have a nominating committee and we interview all the candidates and we try to have a board 1872, she had nine grandchildren…She that is well balanced with people from various professional didn’t want the company to be sold to horizons as well as generations. It is important that board another country. So she established the members are able to relate well to their family branch and family business charter, which is very that they convey the information from the board down- basic, very simple and clear, and still ward as well as relay the concerns of the family up to the board level. This system is working quite well. functions. It kept the family together.

Company Structure Today Factors of Continuity: Our structure is the following: We have the family • Role of in-laws and women acknowledged as early holding company which owns over 33 percent of the as the 18th century listed investment company. The family holding com- • a family charter established in 1872, and still pany is where the 900 family shareholders are. In order functioning, defines roles and relationships to have some kind of liquidity we created an internal • More recently, an internal market allowing family market about 30 years ago so shareholders could buy members to buy and sell shares and sell shares among themselves. The company was • Constant flow of information regarding both prepared to buy back shares but, interestingly enough, business and family matters we’ve never had to do it because there are always more • the influence of the board of the family holding people wanting to buy shares than people wanting to company sell shares. And we’ve also found that when people actually sold out completely, because they needed to help a son or daughter buy a business or a new apartment, I also think there is an element of luck involved with usually they would come back and buy shares again the right people turning up in the family at the right so as to remain part of the whole system. Of course, time. We just have to be able to identify and recognize we keep our family shareholders very well informed. them. Like Marguerite d’Hausen, the lady who looked We’re informed about family events (births, deaths, after the business during the Revolution, and Joséphine weddings), and about all the movements in the fam- de Dicourt, the lady who created the family charter ily portfolio on the business level. We’ve recently also and others like Henri and François de Wendel, and my created a website. We want to create a closed internet father, Pierre Celier, who managed the steel crisis and that will be a family forum and we hope that the next Ernest-Antoine Seillière, who successfully managed generation is going to be interested in using it to com- the transition during the last 20 years. And finally, our municate among themselves as well as with the other first non-family CEO, Jean-Bernard Lafonta, whom generations. We hope that will help enhance the feeling we recruited in 2002, has turned the holding company of being a family together. into a high growth investment company. I think there’s At the board of the family holding, on which I sit, luck involved because all those people were available, there are 18 of us, which is a lot, but we have a very large but there must also be the ability to recognize them and family and we want every member of the board to be a identify them and make the best use of them.

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 127 A Move Towards Simplification and Internationalization We have been moving towards simplifying our structure Wendel Investissement 2002 over the last several years. In 2000 we had two family hold- Company % Interest ings and our structure was rather complex. There were too many discounts at every level. So we began simplifying. Capgemini 12 %

We have been moving towards simpli- Valeo 20 % fying our structure over the last several bioMérieux 34 % years. …In our present structure, we Bureau Veritas 33 % have the family holding controlling the listed investment company. Wheelabrator Allevard 100 %

Oranje-Nassau 100 % In our present structure, we have the family holding controlling the listed investment company. We are very active Trader Classified Media 30 % in all strategic aspects of the businesses we invest in. Stallergènes 47.5 % We are moving toward diversified investments where we have very strong positions. We bought Legrand a few Neuf Telecom 4.2 % years ago and we’ve now done an IPO on the stock market. Editis, France’s second largest publishing company, acquisitions Maintenance disposal we own 100 percent. And even though we are very French we are starting our international diversification. Stahl is a Dutch company that makes high performance coatings Wendel Investissement 2006 and we bought them last year. Deutsch is an American company that used to be family-owned. I think our being Company % Interest a family company was one of the elements that made Bureau Veritas 99.5 % things easier for them to sell to us. I think they were happy finding people who were a family group and who share Legrand 29.9 % the same long-term vision, and they were sure that even Editis 100 % though we are an investment company we would stay for a much longer time than classical investment companies. Materis 76 %

We have a very long-term view of our Deutsch ~ 89 % investments. Because we are a family Stahl ~ 48 % group, we don’t have the pressure of Stallergènes 48.2 % typical investment companies. Oranje-Nassau 100 % We have a very long-term view of our investments. Neuf Cegetel 2.9 % Because we are a family group, we don’t have the pressure of typical investment companies. If we don’t want to sell Capgemini, Valeo, bioMérieux ~ 1 % or if we don’t think it’s the right moment, we can keep the investments for 10 or 15 years, so that’s quite different Evolution towards control from most non-family investment groups.

128 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e Future Challenges initiate this study. It’s been very enjoyable and very inter- What are our future challenges? As I was mentioning, esting for us and has led to this wonderful day and this now we’re going after the international market, so we wonderful award for which I’m very thankful to you. have to prove ourselves and see how we do in the USA and in Europe, and we’re studying Eastern Asia. Of course, we have now had a non-family manager since 2002, which has been an interesting challenge. He has made us reflect quite a lot about the family role, the role of the family board, both at the unlisted level and at the listed level. Thus far it’s been working really well and we’re very pleased we made that move.

More to the Story Our business is not one continuous story; it’s really a story of renewing entrepreneurship, of seeing the possibilities and taking them. But also as important is our sense of commitment not only to our business but to our coun- JOHN WARD: try, its economy, its politics and society; including today, where the head of our family, who was formerly leader of I dare say we’ll probably never have another opportunity to the MEDEF (French Employers Association), is now head ask questions of a company that has lasted 300 years and of UNICE, which encompasses all Europe. a family of close to 900 people. I’ll begin with a couple of questions that I’m sure are on everyone’s minds. Priscilla, Our business is not one continuous around 1997, as we all read in the advance case, the com- story; it’s really a story of renewing pany was considering the acquisition of Valeo, a very significant auto parts company. What happened? entrepreneurship, of seeing the possibilities and taking them. Priscilla: We bought it. And then we sold it. It was one of those cases where trust was really important because Another way we showed our commitment to the cause of basically we had to make, very rapidly, a highly political family business was by the 1996 creation of the Wendel decision. Here we had an opportunity but there were also faculty for Large Family Businesses, which was the first other suitors. In fact, there was quite a lot of pressure to faculty at INSEAD to study family business and became at have a French owner otherwise it seemed the company the occasion of our tri-centennial in 2004, the WENDEL might be sold to some other entity from another country. International Center for Family Enterprise. It was my The decision had to be taken very quickly. The board was father who insisted that the money we gave to the school not convinced that the spare parts for the automobile sec- should go towards studying family business. The professors tor was really a good business but finally they came to my were not interested at first but he insisted and now they are cousin, Ernest-Antoine, and said, “Look, we’re not really in love with the topic of family business; they’ve become convinced but if you really, really believe in it, go for it.” big specialists of family business. Here, you’ve been study- We sold it gradually after a few years, but we re-structured ing it since 1975, but in Europe it only started at the end it before selling. The company remained French and we of the 90s and we were among the first people in Europe to made a profit from the sale.

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 129 John: You said that the company has transformed substantially into something almost like a private private equity company. As a private private equity company, do you feel you’ve got a competitive advantage against other private equity companies that have nothing but money?

Compared to other private equity, we do not need to sell our investments after three or four years. We can keep them for as long as we want. Audience Questions Priscilla: Yes, definitely. Not only do I feel it but it has been proven by some of our acquisitions. Compared to other How do you value the shares that are bought and sold private equity, we do not need to sell our investments after among the family? three or four years. We can keep them for as long as we Priscilla: We have a formula which is based on the valua- want. So it’s known by the managers that we would not put tion of all our different assets and a mix of various sorts of the same type of short-term pressure on them as another valuations; a formula we use every year. We never change investor might. Then there is the element of vision. Long- it. It’s always quite difficult because in France we have the term vision is one of the key aspects of family companies. wealth tax, so that makes the issue much more complex. Our target companies are very aware of our long-term On one side, people don’t want the valuation to be too vision as are their management groups and this is really a high because they pay tax on the basis of that valuation. very positive element during negotiations; companies tend On the other hand, when they sell, they love the valuation to want to be acquired by us. Then there’s the family ele- to be quite high. Unfortunately, we cannot change valua- ment because we are approached by family companies that, tion twice a day. So it’s a bit of a difficult issue. for one reason or another, have to sell out and would be much more comfortable by selling to a family owned com- How do you choose the non-family members of your board? pany that shares their long term vision. We have family Priscilla: We choose excellent businesspeople who meet capital, which means that we have lower cost of capital. So, certain criteria and whom we trust for their competence on the whole, we do have a competitive advantage. and the advice they can give us.

Long-term vision is one of the key Have you decided to have a family office? If not, why not? Priscilla: We don’t actually have a family office because aspects of family companies. Our target people manage their own affairs, but we have a little companies are very aware of our long- unit which manages all the tax issues that are related to term vision as is their management and the family holding and organizes the internal market. this is really a very positive element But, for most of us, the family holding is not our main during negotiations; companies tend asset. We all have jobs and other assets, houses and other investments. The company just manages the part that is to want to be acquired by us. related to the family business.

130 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e What is it besides money that holds the family together? we can sort of capitalize on it. But I think before that, it Priscilla: That’s a very good question. I think being was all done in unconscious ways. together and being part of something big with all our shared history helps. Our 300th anniversary celebration You talked about values, education, togetherness, with an exhibition and book certainly helped to bring trust, entrepreneurship. How important have those everybody together. We took a family portrait and lots of principles been in regenerating your business year after people came to the family meeting, about 450. But more year and keeping the family together? than that, about a thousand family members turned up Priscilla: I think they’ve been very important up till for the anniversary party. We have parties and dances now. Before, the family felt a great responsibility to the where the name of the game is to get to know as many people of the Lorraine region; it was very obvious and new people as possible. very evident and very clear. Now, we have a challenge because our agenda is more varied. It’s more financial How have you been able to take the moments of crisis and than industrial; but it’s still very important to keep all hardship and use them to teach the future generations? those values alive. The 300th anniversary was certainly Priscilla: I don’t think in the past it was a conscious ele- a good reminder of these values; we talked about them, ment. I think the family history is so much in the cul- celebrated them and, wrote books about them. But we’re ture that we have been born into that it was promoted going to have to find other ways of reminding the young subconsciously. Now, we’ve become conscious of it and generation of all those values.

A large segment of the Wendel family celebrate their 300th anniversary in business.

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 131 PRISCILLA DE MOUSTIER Family Holding Company Board Member WENDEL Investissement Paris, France

Priscilla de Moustier is a member of the Wendel family and a board member of the family holding company which controls over 33 percent of Wendel group. She is also vice-president of the French chapter of the Family Business Network (FBN). Starting in 1996, she supervised the development of the faculty at what is now the Wendel International Center for Family Business at INSEAD business school in France. She has undergraduate degrees in math and economics and a master’s degree in political science, has done post- graduate work in Soviet and East European studies, and has an MBA from INSEAD in Fontainebleau, France. She has worked as a project manager for Creusot Loire Enterprises, exporting turn-key pulp and paper mills in the USSR, and in Central and Eastern Europe; as a consultant for McKinsey; and for Berger-Levrault, a 350-year-old family publishing and printing business. She also ran the Joint Venture Club, an association of French companies operating in the newly formed CIS. On the home front, she has three college-age children. She is currently involved in a contemporary art gallery in Paris and in the development of micro-financing, thus hoping to help create future family businesses.

132 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e PAST RECEIPIENTS KELLOGG AWARD FOR SPECIAL CONTRIBUTIONS TO FAMILY BUSINESS

2006 The Richard Owens Family R.O.I. Pty Ltd. Sydney, Australia

Three generations of the Richard Owens Family

2005 The Johnson Family Johnson Family Enterprises Racine, Wisconsin

Two generations of Johnson Family members: Fisk Johnson, Imogene Johnson, Sam Johnson (late), Winnie Johnson-Marquart, Helen Johnson- Leipold, Curt Johnson

2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e 133 2004 The Bonnier Family Bonnier Group Stockholm, Sweden

Some Bonnier Family owners in the 5th through 8th generations currently guiding the business.

2003 The Puig Family Corporación Puig Barcelona, Spain

Three Generations of the Puig Business Family of Barcelona, Spain

134 2 0 0 7 K e l l o g g fa m i ly b u s i n e ss co n f e r e n c e

J.L. Kellogg School of Management Center for Family Enterprises Donald P. Jacobs Center 2001 Sheridan Road, Room 5228 Evanston, Illinois 60208-2001

Phone: 847 467-7855 Fax: 847 491-5747 Email: [email protected] www.kellogg.northwestern.edu/familyenterprises