OWNERTO OWNER

Flying High: A Conversation with Tyler and Rebecca Morse, Owners of MCR Hotels

FAMILY BUSINESS ISSUE TABLE OF CONTENTS 01 A Letter from Jeff Meskin 02 The Business Environment FEATURE Flying High: A Conversation with Tyler and Rebecca Morse, Owners of MCR Hotels 08 Contributors

How to Begin Approaching Formal Governance Jeff Meskin Thomas Martin, CFA as a First- or Second-Generation Family Business Grant Smith Christine Hourihan Jacob Turner Maddy Pellow 16 Travis Dunn Nick Maglio

Editors: Jacob Turner and Kaitlin Barbour

Designed by BBH Creative Services | LETTER

Dear clients and friends,

I hope you had the opportunity to spend time with family and friends over the holiday season as the year came to a close. We look forward to continuing to serve you as 2020 gets underway.

Jeff Meskin / Partner It bears repeating that Private Banking’s mission is to help our clients achieve their vision of success for their family, wealth and business. To do so, we offer clients the full suite of BBH’s comprehensive solutions for families and private companies, ranging from our multi-family office services—including investments, values-based wealth planning, trust services and family office solutions—to offering corporate finance advice and equity and debt capital to private and family-owned businesses. No matter the objective, Private Banking creates customized solutions and offers the highest levels of service to help clients comprehensively achieve their goals, while leveraging the full power of the BBH network of business owners, advisors and investors.

Within BBH’s Center for Family Business, we work with companies across industries and at all phases of own- ership from founder-owned and managed to cousin consortiums with outside professional management. We find that the lifecycle of the business often dictates the work we do with clients, whether that be management or ownership succession planning, employment policies, governance and communications, distributions or any combination of these topics.

This edition of Owner to Owner features an interview with a husband and wife duo who own and operate over 100 hotels across the United States. Tyler Morse is the founder and CEO of MCR Hotels, which primarily owns branded hotels in 27 states in the U.S., and his wife, Rebecca, is his creative partner. In addition to branded hotels, together they have also developed unique hotel properties, including The High Line Hotel, originally built as student housing for the General Theological Seminary, in Manhattan’s Chelsea neighborhood, as well as the newly opened TWA Hotel, which is housed in the old TWA terminal built by Howard Hughes at JFK Airport. In the feature interview, Tyler and Rebecca discuss leaving no detail behind in their development of the TWA Hotel, which transports its guests to the year 1962, down to the Saarinen midcentury-modern furniture, rotary phones and Tab sodas. They also cover growing and scaling the business, applying design and creativity to hotel spaces, taking advantage of multiple revenue streams in hotels and what it’s like working with a spouse, among other topics.

In addition, this issue covers a topic on which we regularly advise clients within our Center for Family Business: creating a family business governance structure for the first and second generations, written by Travis Dunn and Nick Maglio. As always, my colleagues, Thomas Martin, Grant Smith and Christine Hourihan, address the business environment on three fronts: the economy, credit markets and mergers and acquisitions and private equity markets.

We hope you enjoy this edition of Owner to Owner. If there are any family business, corporate advisory, banking, wealth-related or other topics you would like to discuss from this issue or otherwise, please do not hesitate to reach out to me or one of my Private Banking colleagues. We wish you all a happy new year.

Sincerely,

OWNER TO OWNER 1 | THE BUSINESS ENVIRONMENT

Thomas Martin, CFA / Investment Research Group Grant Smith / Corporate Advisory & Banking Christine Hourihan / BBH Capital Partners The Business Environment

In each quarter’s issue of Owner to Owner, we review aspects of the business environment on three fronts: the overall economy, the credit markets and the private equity (PE) and mergers and acquisitions (M&A) markets. The following article addresses both positive and negative economic data as of late, the continued accommodative lending environment and the fiercely competitive private equity market.

2 The Economy While the economy appears on solid footing overall, the manufacturing sector is under more stress. The ISM Manufacturing PMI rebounded The U.S. economy continues to hold up quite well despite ongoing slightly from a decade low of 47.8 in September to 48.3 in October. macroeconomic headwinds. On balance, economic data leading up However, the ISM is a diffusion index and levels below 50 are con- to fourth quarter 2019 has been positive, equity prices rose to all- sistent with contraction in the manufacturing sector. The weakness time highs and fixed income markets appear more “normal” with an in the manufacturing sector is consistent with weak global growth upward sloping yield curve. and lingering trade uncertainty.

At the end of October, the Federal Open Market Committee (FOMC) As discussed in the third quarter of 2019, we believe that the Con- lowered the federal funds rate for the third time since July, seemingly ference Board’s index of 10 Leading Indicators (LEI) provides the completing the Fed’s 75 bps “mid-cycle adjustment,” bringing over- most balanced, forward-looking gauge of economic activity. While night interest rates to a range of 1.50-1.75%. With this adjustment, many economic indicators display more noise than signal, the LEI’s the yield curve returned to its normal upward-sloping shape, and fears 10 components (shown in the nearby table) have proven to be a of a yield-curve induced economic slowdown were quelled. valuable forecasting tool over multiple economic cycles. In the past U.S. Treasury Yield Curves three recessions that began in 1990, 2001 and 2007, the LEI began

declining between 12 and 22 months prior to the start of the reces- 3.0% sion. As of September 2019, the LEI has been relatively flat, up 0.4% year over year. There is no guarantee the LEI will prove to be as good 2.5% 2.42% 08 Nov 2019 2.08% a forward-looking indicator this time around, but given its history 2.0% 1.93% and the broad base of data it includes, we still believe this index is 1.75% 1.73% 1.95% worth consulting. d

el 1.5%

Yi 1.58% 1.56% 1.47% 27 Aug 2019 1.38% Conference Board - Leading Economic Indicators (LEI) 1.0% 120.00

0.5% 100.00

0.0% 80.00 0 1 5 10 15 20 25 30 Years to Maturity 60.00

Source: Bloomberg, BBH Analysis 40.00 Economic data has been relatively positive. The economy added 20.00 128,000 jobs in October, which is impressive considering upward revisions to prior months, as well as the striking of 46,000 GM workers - 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018 that reduced monthly job gains. As of October, the trailing six-month Economic Recession LEI Index average of payroll gains stands at a healthy 156,000, and the unem- ployment rate, at 3.6%, is just 0.1% above its recent low. The last Source: The Conference Board, Bureau of Economic. time the unemployment rate dropped this low was in the late 1960s. The Conference Board Leading Economic Index® (LEI) Beyond just payroll gains, wages have been climbing at a healthy clip 1. Average weekly hours, manufacturing as well, helping to drive growth in personal incomes. Heading into the fourth quarter, the year-over-year increase in average hourly earnings 2. Average weekly initial claims for unemployment insurance has been at or above 3.0% for 15 months. 3. Manufacturers’ new orders, consumer goods and materials 4. ISM® Index of New Orders In addition to employment figures, GDP growth was more positive 5. Manufacturers’ new orders, nondefense capital goods than expected with the economy growing at a 1.9% annual clip in the excluding aircraft orders third quarter vs. an expectation of 1.6%. In line with the positive data 6. Building permits, new private housing units on employment and wages, GDP growth in the prior two quarters 7. Stock prices, 500 common stocks has been almost entirely driven by personal consumption. Personal 8. Leading Credit Index™ consumption, which we believe is a more durable form of growth than 9. Interest rate spread, 10-year Treasury bonds less federal funds investment, net exports or government expenditures, contributed 10. Average consumer expectations for business conditions 3.0% to GDP in the second quarter and 1.9% in the third quarter.

OWNER TO OWNER 3 The Credit Market U.S. Treasury Yields

The Federal Reserve’s October decision to decrease its fed funds target 3.3% range by 25 bps for a third time in 2019, represents an unexpected shift in interest rate expectations from the beginning of the year. As shown 2.8% in the nearby chart, the Fed’s last meeting of 2018 had FOMC voters’ 2.3% expectations for interest rates ending 2019 at an average rate of 2.875%

(representing only two rate hikes). However, as the year progressed, 1.8% expectations for interest rates took a more dovish tone as rate cuts were viewed as a more appropriate course of action by FOMC members, given 1.3% 1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y30Y economic data uncertainty. 10/31/2019 9/27/2019 6/28/2019 3/29/2019 12/31/2018 9/28/2018

Fed officials have largely cited three reasons for trimming rates in 2019: Source: Bloomberg. weakening global growth, trade-policy uncertainty and muted inflation. While bank, commercial and industrial lending to companies shows Meanwhile, this is juxtaposed with both a strong labor market, with growth year over year ($2.4 trillion as of October 2019, up 4.8% from unemployment at a near historic low of 3.5% in November and modest $2.2 trillion at the same time last year), total outstandings have flattened levels of economic growth, with 1.9% growth in the third quarter. The con- over the past few months, as shown in the below chart. Each quarter, the tradicting data points create some uncertainty as to the overall strength Federal Reserve conducts and publishes their Senior Loan Officer Opinion of the U.S. economy, and therefore, uncertainty in how monetary policy Survey on Bank Lending Practices. As of October, while credit standards will be conducted in 2020. Although the mixed economic data persists, continued to remain at relatively low levels, a net 4.4% of banks reported changes to policy statements made after the October Fed meeting do somewhat tightening loan standards, versus the previous three-month indicate that the hurdle has been raised for an additional rate cut in the period. When asked the reasoning for tightening standards, notable ra- succeeding year. tionale included increasing concerns about potential legislative changes FOMC Voter Expectations for 2019 Interest Rates by Meeting Date and a more uncertain economic outlook. At the same time, several banks

3.75% reported slightly weaker demand for loans. Their explanations included an increase to internally generated funds at companies, reduced investment 3.25% 3.125% in plant or equipment and customer borrowing shifting to other sources

2.875% Current Target of credit (such as nonbank institutions). While the slight increase in credit 2.75% Rate (1.50% to 1.75%) standards paired with a dip in demand for loans represent the first signs 2.375% of hesitancy in the bank credit market in some time, the majority of cited 2.25% 2.375% motives indicate both lenders and borrowers remain uncertain of the po- 1.875% litical and monetary policy landscape as we enter 2020. Nonetheless, the 1.75% low interest rate environment for both short- and long-term borrowings

1.25% coupled with still accommodative lending standards continues to make Fed Meeting Date: it an attractive time to seek debt capital. 9/25/2018 12/19/2018 3/20/2019 6/19/2019 9/18/2019 Amount of C&L Loans vs. Bank Standards Source: Bloomberg. As shown in the following chart, Treasury yields have fallen significantly $2,500 100% during 2019, particularly Treasuries maturing in the two-to-ten-year range. 80% $2,000 This eventually resulted in an inversion of the yield curve at various points, 60%

which sparked fears of an impending recession. As of October, the yield $1,500 40% curve had returned to a more positive curvature, though the reasoning 20% for which remains to be debated—some point to the potential of a break- $1,000 through “Brexit” deal, the U.S. and China trade war drawing closer to 0% $500 an agreement or the Federal Reserve’s announcement in October that -20% they intend to buy $60 billion of T-bills every month. Nonetheless, the $0 -40% 2007 2008 2009 2010 2011 20122013 2014 2015 2016 2017 2018 2019 recent, relatively flat yield curve presents an opportune time for fixed Net Percentage of Domestic Banks Tightening Standards for C&I Loans ($MM) (right axis) rate borrowers to secure low rates on loans with longer-term maturities. C&I Loans, All Commerical Banks ($MM) (left axis)

Source: Bloomberg.

4 ”Fed officials have largely cited three reasons for trimming rates in 2019: weakening global growth, trade-policy uncertainty and muted inflation.”

OWNER TO OWNER 5 The Private Equity and Mergers and Acquisitions Markets “With less exposure to the As mentioned previously, U.S. economic activity slowed in the third quarter, as GDP growth dipped below 2.0% for the first time since the end of 2018.1 However, the overall economy remains relatively strong extreme swings of the as heightened consumer activity partially offsets the effects of ongoing trade disputes. At the beginning of the fourth quarter, several stock stock market, private equity market indices reached record levels, though the market has become more volatile over the years according to some sources that measure continues to be at center market fluctuations.2 With less exposure to the extreme swings of the stock market, private equity continues to be at center stage for active investors, and fierce competition for quality assets remains. stage for active investors,

U.S. Private Equity (PE) deal activity continued at a strong pace through and fierce competition for the third quarter of the year with 3,883 deals closed, totaling $501.2 billion.3 This pace is expected to continue due to the record levels of quality assets remains.” PE capital being raised, several large deals that were set to close in the fourth quarter of 2019 and lower interest rates due to a third Fed tively inexpensive debt financing and a larger variety of PE investors rate cut in 2019. The B2B and technology industries continue to be a (sovereign wealth funds, family offices and pensions) competing for key focus for PE, representing 38% and 19% of deal volume through deals will likely keep EV/EBITDA multiples elevated for the foresee- the third quarter of 2019, respectively. While the technology sector able future. Through September, the median U.S. PE deal multiple used to be dominated by venture capital, PE firms are also attracted reached a record high of 12.9x. As such, add-ons, which are typically to innovations with the potential to transform industries. More recent lower multiple acquisitions, continue to be a rising portion of U.S. PE growth may be partly attributable to investors looking to protect their buyouts, accounting for 68% of all U.S.-based buyouts year to date downside by deploying capital in “recession-resistant” industries through September.6 such as technology and healthcare, which have seen an increase in average deal size through the third quarter 2019, by 50% and 10%, Median U.S. Private Equity Multiples respectively.4 14.0x 12.8x 12.9x 11.9x 11.5x 12.0x 10.5x 10.0x U.S. Private Equity Deal Activity by Year 9.8x 10.0x 9.1x 8.4x 8.1x Deal Value ($B) Deal Count $900 6,000 8.0x 5,334 5,177 6.0x 4,774 $750 5,000 4,460 4,445 4,273 4.0x

$600 3,571 4,000 3,443 2.0x 3,173 2,784 $450 3,000 0.0x 2010 2011 2012 2013 2014 201520162017 2018 2019* Debt/EBITDA Equity/EBITDA EV/EBITDA $300 2,000

*YTD 3Q19 Source: PitchBook.com $150 1,000 In addition to high purchase price multiples, economic and political $281 .3 $329 .2 $381 .9 $438 .4 $534 .8 $561 .4 $607 .8 $631 .2 $734 .9 $668 .3 $0 0 uncertainty continued to drive down the number and value of exits in 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019* the third quarter (248 exits valued at $67.2 billion). Through September 2019, year-over-year exit count and exit value are down 29.6% and *1Q19-3Q19 Annualized Source: PitchBook.com 19.5%, respectively, and full-year 2019 numbers are poised to be well At the end of September, global private equity dry powder rose to a below 2018 totals. There was, however, an increase in median exit new high of $1.7 trillion.5 Extremely high levels of dry powder, rela- size, which is likely due to a rise in PE-backed IPO activity.7

6 North American M&A activity in the third quarter of 2019 was robust U.S. Private Equity Exit Activity by Year with over $600 billion in total value, though much of the deal flow 9 $500 Exit Value ($B) Exit Count 1,600 was attributable to a few exceptionally large transactions. According 1,363 to Ernst & Young’s Capital Confidence Barometer survey, published $450 1,322 1,215 1,271 1,299 1,400 in mid-October, approximately 96% of the nearly 600 U.S. C-suite $400 1,136 executives surveyed anticipate domestic economic growth, and 83% 1,065 1,200 $350 expect the U.S. M&A market to improve in the next year. However, 919 1,000 $300 846 deal intentions slipped below the 50% mark for the first time in two 610 years, with just 46% of U.S. respondents saying they intend to actively $250 800 pursue M&A in the next 12 months. $200 600 $150 North American M&A Volumes 400 $100 $2,500 12,661 16,000 4 5 9 2 1 7 2 2 0 7 200 13,936 $50 12,651 13,022 10,827 14,000 $207. $228. $292. $311. $405. $424. $359. $390. $434. $259. 12,527 $0 0 $2,000 11,013 12,000 2010 2011 2012 20132014 2015 2016 2017 2018 2019* 10,459 9,987 10,000 *1Q19-3Q19 Annualized Source: PitchBook.com $1,500 8,705

The amount of PE capital raised through third quarter 2019 ($191 bil- 8,000 $1,000 lion) nearly matched the full-year 2018 figure of $196 billion. This pace 6,000 will likely continue into the fourth quarter, as several mega-funds ($5.0 4,000 billion+) were set to close by year end. This heightened fundraising $500 1 5 4 8 1 2 8 5 5

95 .3 2,000 activity is likely driven by: (i) LPs looking to allocate to GPs who employ 045. 139. 354. 218. 773. 062. 166. 991. 376. $1, $1, $1, $1, $1, $2, $2, $1, $2, $1 ,5 strategies that have historically outperformed the public market and $0 0 (ii) GPs’ sense of urgency to raise funds before a potential economic 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019* downturn. Conversely, the number of funds raised has continued to Deal value ($B) Deal count Deal count decrease. The general shift toward mega-funds has allowed large LPs *1Q19-3Q19 Annualized Source: PitchBook.com to cull the number of GP relationships they maintain and allocate more capital to a few select managers.8 Conclusion

Overall, the U.S. economy appears to be on solid footing despite con- U.S. Private Equity Fundraising Activity by Year tinuous macroeconomic headwinds during the third quarter of 2019. Following the third federal funds rate cut since July, the yield curve Capital Raised ($B) Fund Count returned to its upward-sloping shape, unemployment rates continue $300 300 265 265 to stay low and GDP was more positive than previously expected, 251 249 239 $250 250 despite its slowing rate. LEI also suggests an optimistic future, as 207 it has yet to decline going into fourth quarter. In the credit markets, 182 accommodating lending standards and a low interest rate environment $200 174 200 167 provide an attractive market for debt capital. Finally, the PE and M&A 144 $150 150 space also appears strong as dry powder reached a new record high and M&A activity is robust due to a few exceptionally large deals. $100 100

1 www.bea.gov $50 50 2 MarketWatch.com 3 PitchBook.com $5 9 $7 9 $100 $165 $174 $151 $218 $238 $196 $254 4 PWC 3Q19 PE Insights $0 0 5 Mergermarket.com 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019* 6 Pitchbook.com 7 Pitchbook.com *1Q19-3Q19 Annualized Source: PitchBook.com 8 Pitchbook.com 9 Pitchbook.com

OWNER TO OWNER 7 | FEATURE

Tyler and Rebecca Morse with their daughters, Georgia and Phoebe.

8 The year was 1962. John F. Kennedy was president. John Glenn became the first American in space. West Side Story won the Academy Award for Best Picture. The TWA Flight Center, which was commissioned by Howard Hughes and Flying designed by Eero Saarinen, opened at New York’s JFK Inter- national Airport. Nearly 60 years have gone by, but you can still transport yourself to 1962 by visiting the new TWA Hotel in the former terminal.

No detail was spared by Tyler and Rebecca Morse of MCR High: Hotels in the development and creation of the hotel, down to the Saarinen mid-century modern furniture, TWA travel poster A Conversation with Tyler and Rebecca Morse, prints by David Klein, hotel uniforms by famed designer Stan Herman – who designed TWA flight attendant uniforms in Owners of MCR Hotels the 1970s – rotary phones and Tab sodas that can be found throughout the property.

BBH sat down with Tyler and Rebecca Morse to discuss their latest passion project: the TWA Hotel. In this excerpted inter- view, we also cover growing and funding MCR, which has purchased and built 130 hotels, leadership, their investment approach and working together as creative partners. Wheels up!

OWNER TO OWNER 9 “The hotel business is very dynamic. It’s the most complicated of the real estate asset classes, and it changes every day. Its complexity is the barrier to entry. ”

Brown Brothers Harriman: Tyler and Rebecca, tell us a BBH: How did MCR come to be? little about yourselves. TM: After graduating from Harvard, I worked for Starwood Tyler Morse: I grew up in L.A. and went to college at UC Hotels and was Chairman and CEO Barry Sternlicht’s right Berkeley. I attended Harvard for business school and, after hand guy. I bought and sold a lot of hotels and a couple of graduating 17 years ago, moved to New York. Leading up to office buildings. I sold 350 acres of land in Italy and worked founding MCR 14 years ago, I worked in a variety of different on buying a billion-and-a-half dollar pub business in the UK – jobs. My experience has spanned from being a valet, ski in- everything you can imagine. One of the deals that I worked structor, airline baggage handler and even the youngest bank on was buying a company called Bliss, a spa, bath and beauty teller in the state of California to working at Ernst & Young, products company. The day before we closed, Barry Sternlicht Morgan Stanley and Warner Music Group. I’m very proud of suggested I run the business. Next thing you know, I’m the the diversity of my experience. CEO of Bliss. I didn’t know anything about bath and beauty products, but I jumped in and grew the business from $30 MCR started with a single hotel in Huntsville, Alabama, then million in sales to $110 million in sales over a three-and-a-half- another in Kalamazoo, Michigan, then we kept building – Geor- year period. It was kind of an extraordinary run: it grew from gia, Kentucky, Missouri. We bought about 110 hotels and built being unprofitable to $17 million of EBITDA over that same 20 hotels. Today, we own about 100 and have sold 30 along period. But, I decided I didn’t want to spend my career in the the way. We have around 5,000 employees and do business cosmetics business. It wasn’t my passion, so I started MCR in 27 different states. I love the hotel business. on a shoe-string budget with the Alabama hotel.

I’m also passionate about staying active. I’ve ridden my bike BBH: Did you always want to be an entrepreneur? from Canada to Mexico, along the Pacific Coast Highway and Highway One. I’ve done five marathons and have done the TM: Yes, I’ve always known that I’m an entrepreneur. It’s in Escape from Alcatraz Triathlon three times. the blood.

Rebecca Morse: Tyler and I graduated from Harvard the same BBH: What about your passion for hotels? Was there year – he from the business school and I from the college. I something deep-seated there or did it develop over was a corporate associate at Davis Polk & Wardwell for several time? years before Tyler encouraged me to pursue a career that used my creative passions. I worked as a writer for interior TM: I like hotels because I love traveling and the travel busi- design and architecture publications, eventually becoming an ness. I’ve traveled to 95 countries and have flown eight or editor-in-chief. I did everything from determining overall vision nine million miles on commercial airliners – 98% of that in and look to researching, scouting locations and styling photo the middle seat on the back of the bus. The hotel business shoots. I loved it. When MCR began developing independent is very dynamic. It’s the most complicated of the real estate hotels, I saw the chance to apply those skills. asset classes, and it changes every day. Its complexity is the

10 barrier to entry. There are about 58,000 hotels, just in the United States. I’d say that 15% of them are run really well, so that creates a great deal of opportunity.

BBH: How did you start the first one? Did you create a fund?

TM: No, it was deal by deal up until 2016. We’d find a good investment, call up some friends and family and capitalize the equity and then get a bank loan. It started with small hotels, then grew to medium-sized ones. I did a couple of individually capitalized portfolio acquisitions, then we raised a discretion- ary fund in 2016. We are almost finished deploying the fund.

BBH: You touched on this when you said that only 15% of hotels are well run. What does it take to be a well-run hotel, and how do you differentiate when there are so many of them out there?

TM: I would say it’s partly design – the creativity behind the building. You have to activate them every month – that’s what keeps people coming back. I subscribe to the European hotel model, where hotels are meeting places for communities. They are not just about the guests that are in the building; they are about the surrounding neighborhood. So, it is part design and creativity, part distribution. The distribution landscape con- tinues to change. It’s important how you manage your sales channels, and it’s really quite complicated. You can always sell A view of The Sunken the rooms, but it’s a question of what price you can sell them Lounge at the TWA Hotel. for. If you give away the rooms early at a low price, then you leave some profitability on the table. If you take more risk and hold back your inventory and wait until closer to the time of stay, you could potentially get more profits, but you might go empty. You’ve got to play that risk analysis game.

BBH: Rebecca, you worked with Tyler on The High Line Hotel. Talk about how you identified the opportunity and the development of the hotel.

RM: The High Line Hotel is a dream project – a magnificent architectural jewel in the middle of one of New York City’s most charming areas. The High Line Hotel was a former Episcopalian Seminary, turned former priest housing, which we transformed into a hotel. Our beautiful building feels like the grand dame of Chelsea, and we’ve always wanted it to be an anchor for our special neighborhood. Our seasonal events are open to all, free of charge. It has been thrilling to see our annual Halloween dog

OWNER TO OWNER 11 costume parade grow from a quirky neighborhood tradition to how we can create an exceptional guest experience so they an event attended by hundreds of people and their pets. The keep coming back. When you see yourself winning, that’s fun. first year we hosted an Easter egg hunt, I stayed up all night assembling paper Easter egg lanterns, and Tyler and I hung We say, “happy employees lead to happy guests.” The happi- them from the trees in the front yard while our older daughter ness gets passed through, so if the team is happy, then the slept in her stroller. Five years later, we have lines for blocks guests are happy. And if the team is not happy, then the guests to get into a party that includes a petting zoo and crafts. And definitely won’t be happy. our holiday tree lighting in December is a must-do – whether to see our spectacular evergreen aglow or to enjoy a couple BBH: How would you describe your investment ap- hot toddies! proach? How do you think about investing in new properties? But what I’m most proud of is the vibe of The High Line Hotel. It’s incredibly cool of course. But the feeling is one of total TM: To put it succinctly, what’s our edge? What can we do openness and warmth. I love walking through the lobby and with this hotel better than the people we are running it for? It’s seeing locals, couples, tourists, babies, dogs, grandparents – about differentiating. And how can we best our competitors? it’s as eclectic and welcoming as New York City itself. There are different languages being spoken, families visiting, novels being BBH: What would you say is your biggest success and written on laptops, meetings taking place – there are always your biggest challenge as CEO? a lot of great stories unfolding in The High Line Hotel lobby. TM: Launching the TWA Hotel was a big deal. Raising our BBH: How much of MCR operations is centralized ver- second discretionary investment fund was a big success. sus decentralized? The biggest challenge is integrating the teams when you have TM: We have about 200 people above property and about thousands of people. We have an annual general manager 4,800 people who work in the hotels. We have two offices, conference, and we are up to 500 people attending it now. one in New York and one in Dallas, and that is where revenue It’s about bringing the team together and getting everybody management, operations, e-commerce, creative acquisitions, to work collaboratively towards progress. marketing and sales all sit. We purposely don’t distribute out the IT role to individual hotels; we keep that at corporate, and BBH: You mentioned TWA. How did that project come we do the same thing with marketing. Marketing is a very to be? It was definitely unique compared to what else challenging field. Traditionally, hotels promote themselves from you had previously done. within the building. We centralize that and then push it out to our individual hotels. TM: Yes, it was. We won an RFP from The Port Authority of New York. It was a very opened-ended RFP, but we beat some BBH: How do you spend your time and think about strong competitors. People often ask me why we won, and leadership? I think it’s because we had a good financial plan, a great op- erating plan and terrific creative. The design of the buildings TM: There’s no shortage of hotels out there; they’re every- and the project, as well as the enthusiasm for the project, where. A huge part of how you differentiate your hotel com- was what won us the deal. We won it about five years ago, pany is culture. People want to have fun when they come to and then it took us about four-and-a-half years to bring it all work. We look at fun in a competitive way: doing it better than together. It’s a national historical landmark, which creates a the other guys. It’s fun to outperform the competitors. There’s lot of additional challenges and a lot of additional hurdles to a metric in the hotel business called rev-par index, which is jump through. In all, we dealt with 22 government agencies revenue per available room. It’s an amalgam of distribution and 176 national consulting firms. It’s such a stunning building, and IT and marketing and great customer service and loyalty. and I think a lot of people appreciate the care and the detail The metric lets you assess daily performance and informs that we put into it.

12 “A huge part of how you differentiate your hotel company is culture. People want to have fun when they come to work. We look at fun in a competitive way: doing it better than the other guys.”

OWNER TO OWNER 13 BBH: Tell me about how you and Rebecca became cre- ative partners.

TM: Rebecca has always been my creative partner. The High Line Hotel was when we started to work together profes- sionally. She got excited about it, and we got excited about working together. We went from The High Line to TWA, and now she runs our creative group. We have about 15 people in the group, and they do a terrific job.

BBH: What are the dynamics of working with a spouse like?

TM: There are differences of opinions in how to execute dif- ferent creative functions, but that’s standard in any working relationship. We have a mutual respect and trust that two co-workers just don’t have. That carries us through.

RM: I share Tyler’s vision of MCR as a place of integrity, re- spect, innovation and excellence. We are lucky. We have the most unbelievable people at MCR – from the property teams to the corporate staff. To me, they all feel like family.

Having shared goals is extremely efficient. Between the two of us, we can get a lot done in one day. We have each other’s backs. We really listen to each other and can both make each other laugh!

BBH: You have two relatively young kids. Do you see this becoming a family business? Would you encourage them to work with you at some point?

TM: I love what I do; Rebecca loves what she does; and I think that’s the most important thing. Our two daughters are eight and five. They are amazing. If they want to be in this business, Tyler Morse showcasing RM: I remember walking through the TWA Flight Center right we’d love that, but the key to success in life is enjoying what the collection after MCR won the deal. It had been boarded up for over a you do. I wouldn’t want to push them into this if they were of iconic 1960’s artifacts that can decade, but you could still feel the magic of the building. It not passionate about it. There are a lot of different directions be found at the was palpable. And now this wonderful American architectur- you can go in hotels and real estate development, so they may TWA Hotel. al icon is open for everyone to enjoy – whether you are an find something they love, and that’d be terrific. overnight guest, a gym member, have a dinner reservation at Jean-Georges’ Paris Café or are just wandering through. My RM: I hope our daughters pursue their own passions, whatev- favorite Friday night activity is sitting in The Sunken Lounge er those may be – just like my parents encouraged me to do. watching how delighted people are with the hotel – whether On the other hand, they already work with MCR in a way. Our twisting in the Twister Room, browsing at the TWA Shop or kitchen island has been the scene of as many meetings as any taking in the interactive museum exhibits and custom Solari boardroom, and the girls are not shy with their opinions. And Board messages. they have some great ideas. They spend a lot of time at all of our properties. I think MCR’s hotels feel like familiar and warm landing spots to them. I hope they feel like that to all visitors.

14 OWNER TO OWNER 14 No matter what our daughters end up doing, the hotel industry has been helpful in exposing them to the idea of a strong work “I share Tyler’s vision of MCR as ethic. I think it’s difficult for children to conceptualize spread- sheets being manipulated on a computer or emails being typed a place of integrity, respect, on an iPhone. At a hotel, the concept of hard work is quite tangible. It’s easier for someone young to grasp – there are innovation and excellence. ” rooms to be cleaned, suitcases to be carried, coffees to be made, cars to be parked. From managers to housekeepers to chefs, there are many roles to be filled, each quite different, BBH: Are there plans to do more unique hotels? each equally integral to a team that can only function as a sum of its parts. It is a concept that is important to us and which TM: We have some other projects up our sleeves! we have endeavored to show our daughters.

BBH: Tyler and Rebecca, thank you so much for your BBH: What the biggest risk you’ve ever taken at MCR? time and insights.

TM: Probably TWA. We were a relatively small firm; it’s a big Interview conducted by Jacob Turner and article written by project; and it was a very challenging project. It’s something Maddy Pellow and Jacob Turner. we’re extremely proud of, but there were a lot of sleep- less nights.

OWNER TO OWNER 15 How to Begin Approaching Formal Governance as a First- or Second-Generation Family Business By Travis Dunn and Nick Maglio

16 Why Consider Formal Governance as a First-Generation or Small Family Business?

Formal family governance structures are often present in multigenerational, mid- to large-cap family businesses, with dozens, if not hundreds, of family members. As companies grow larger, the need for formal governance typically becomes more palpable; however, the benefits of a formal governance struc- ture are not solely reserved for large family businesses. Formal councils and policies typically associated with larger family businesses can be translated to those with fewer shareholders – specifically, first- or second-generation busi- nesses whose family members may not number more than a dozen. Not only can effective and efficient governance structures be implemented at smaller family-run companies, but they are oftentimes critical to the ongoing success of a young, thriving family business.

What Is Governance and What Are the Benefits?

Definitions of governance vary widely depending on the goals of the family or business. Generally, governance is a set of policies, structures and values that inform or govern decision making. These policies, structures and values are intended to maximize the value of the business through an orderly facilitation of ownership and business operation.

Similar to the definition of governance, the benefits of governance are also varied. Early in the life of a family business, the benefits of discussing and con- sidering governance are largely cultural and foundational, meaning that what is really being created is an acceptance of an overarching governance framework and the discipline that accompanies it. Specifically, discussing governance early can yield the following benefits:

• Formalizing not only the decisions that need to be made, but also which stakeholders will be included. This process guides how decisions are going to be made and streamlines the decision-making process, which is especially important in times of stress or sudden change for the business or family

• Engaging the family to develop the policies, structures and most im- portantly, the values, that form the foundation for the governance can both increase buy-in to the eventual governance structure and build enthusiasm for the business and the family

• Instituting governance can help avoid potential issues through guidelines and controls, while also reducing ambiguity and potential tension

• Communicating the governance process and the process through which it was built can inform the next generation of owners and operators and give them a firm foundation off which to build a better enterprise

OWNER TO OWNER 17 Developing buy-in for a governance structure can take a generation or and family ownership group expands. In a sophisticated family business more to build. Younger family businesses have the ability to be patient, structure, four major governing bodies typically exist (family assembly, thoughtful and deliberate in crafting governance structures. Despite the family council, board of directors and family business advisory board), opportunity to delay, starting earlier than “necessary” often means that which provide formal points of engagement for the entire family and complexity and conflict levels are lower, and greater space may exist to ownership group. Understanding what a typical governance framework be more forward-thinking with governance design. looks like in a sophisticated family establishment allows the ownership team to “work backward” and create the precursors and conditions for Enhancing Communication through Governance success to build each. Most importantly, in contemplating the construc- tion of any formal decision-making process, it is critical to consider what Governance also enhances and thrives on effective communication. the family and business hope to achieve. Starting with the opportunity Without highly functional communication, the success of governance at hand will guide how the governance model is formed. bodies – and quite possibly the business overall – becomes increasingly improbable as the years go on. Beginning the dialogue on governance Setting the Foundation for Governance Bodies, Beginning early allows leadership and ownership to prioritize communication. It is with Family Meetings imperative that governance, formally or otherwise, be in place during growth or transition periods – specifically, generational, leadership or For a smaller enterprise, a family assembly and family council can be ownership transition. subsumed in informal (or formal) family meetings. To begin planning these meetings, first identify the major topics of intersection between Family Governance for the First- or Second-Generation the family and the business – including employment, distributions, debt Family Business levels, conflict resolution, succession and communications. Having a list of items to address will help surface all relevant topics for the family Whether they know it or not, every family business – large or small – members and determine the most pressing issues that need to be dis- operates under a governance structure, because every business has cussed. The first meeting agenda should not only list out these issues, a decision-making framework. The following graphic outlines how to but also provide context and background for why contemplating new begin to formalize that framework and set the groundwork for a more governance structures are important for the family and the business. The sophisticated governance structure that will be necessary as the business family business could choose to address all the issues at once with all

An Example of Family Business Governing Bodies

FAMILY FAMILY BOARD OF FAMILY ASSEMBLY COUNCIL DIRECTORS BUSINESS Gather input from Interests Channels input from Family Provides fiduciary ADVISORY all family members represented the family assembly concerns/ oversight for the Strategic BOARD (owner/non-owner, by... to the family thoughts family business plans Offers external, Committee extended/nuclear) business owners, unbiased perspective and on business and usually via the and industry Purpose non-business issues board of directors, expertise to family Transparency Key Expertise/ (e.g., phlanthropy, and prepares key business leadership; on business decisions/ guidance education, social communications processes complement activites) back to the family skillset of family management and ownership

18 “Not only can effective and efficient governance structures be implemented at smaller family-run companies, but they are oftentimes critical to the ongoing success of a young, thriving family business.”

OWNER TO OWNER 19 shareholders or instead decide to handle topics sequentially with different family members – the best course is highly contingent on the unique “Whether they know it or not, circumstances of the family and business. Critical to the latter option (covering topics sequentially) is ensuring input from all family members every family business – large is accounted for and that all conversations are open and transparent. The meetings can be informal – for example, in a family member’s home or neutral destination – or formal, such as in the corporate headquarters or an or small – operates under intermediary office. Having well-run meetings, with coordination among all relevant members and a vision among the members, for what the a governance structure, value that this group may provide now and in future generations, allows the family and owners to set appropriate agendas and include the right individuals to participate over time. because every business has a

Needs of the Ownership Group decision-making framework.”

A smaller enterprise oftentimes does not require a board of directors – or at least not one as sophisticated as one might find in a larger company. However, the current owners need a well-functioning decision-making Where to Begin framework for the ownership team, including many of the policies that are critical to running a private enterprise with family ownership. In place • Collect your thoughts: Conduct research on similar family busi- should be ownership policies, including a buy-sell agreement along with nesses that have undergone the process of developing working a valuation policy, both typically part of a shareholder agreement, an em- family boards; discuss with peers or with a group of advisors. ployment policy that addresses the role of family-member employees, a • Put together your “case:” Formalize your thoughts on why compensation policy and a succession plan. The ownership team can and you think embarking on a journey to set up a formal process is should look to the family for guidance on employment policies, conflict worth the effort; draft a vision for what the future would look resolution policies and liquidity preferences. like and the benefits that would accrue.

The Value of an Advisory Panel • Build a team: Identify “champions” in your family, the business and externally who can help usher forward this process. Advisory boards are integral to the success of many large family busi- nesses, providing knowledge and expertise, strategic idea generation Conclusion and a strong network. At an early stage, first- and second-generation Committing to a discrete set of family meetings, a well-structured owner- businesses often need this same objective, external input to guide the ship group and a regular standing advisory panel – with solid coordination development of the business. While an advisory board might comprise and communication among all of them – will put the first or second between 10 and 20 members and be appropriate for a business that generation in a strong position to foster business growth for future gen- is relatively large, an advisory panel consisting of between two and 10 erations. An important byproduct of setting up these processes early on members may be a more appropriate precursor. This smaller subset of is the cultural acceptance of objective, formalized decision-making that advisors, who are available to confer and, where necessary, meet with the suits the family’s philosophy and needs. If you would like to discuss any management team and the ownership group, can help form a powerful elements of family business governance with a member of BBH’s Center partnership that adds value to the long-term success of the business. for Family Business, we would welcome a conversation. Often, family businesses utilize an advisory board without recognizing it as such. Formalizing these roles will lay the foundation for effective governance for future generations. The family ownership group should play a lead role in determining the composition of the panel.

20 | INSIDE BBH

Interested in Other BBH Magazines? Preview our latest issues…

Magazine PhilanthropyBrown Brothers Harriman Insider

TURNING UP THE VOLUME Luis and Lin-Manuel Miranda on Amplifying Their Impact with the Hispanic Federation Tiffani Faison's INGREDIENTS FOR SUCCESS: Great Food, Inclusive Culture and a Dash of Spitfire

Winter 2020 In our special philanthropy publication, we turn our attention In our latest issue of Women & Wealth Magazine, we feature to giving with intention and impact. In our feature article, we entrepreneur and restaurant owner Tiffani Faison. Chef Faison had the great pleasure of speaking with Lin-Manuel Miranda, shares her journey from table busser to the first season of the universally-known creator of the Broadway hit “Hamilton,” Top Chef to owner of four wildly-popular, Boston-based restau- along with his father Luis. We also cover key areas of the rants. Inside the issue you can also find insights from other philanthropic journey, highlighting questions to consider when incredible women who are redefining what success looks like. thinking about how to give back and how BBH can help.

To join our magazine mailing lists, contact [email protected] or visit https://www.bbh.com/en-us/contact-us/subscription.

OWNER TO OWNER 21 Brown Brothers Harriman & Co. (“BBH”) may be used as a generic term to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries. This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners. © Brown Brothers Harriman & Co. 2020. All rights reserved. PB-03233-2019-12-13 Expires 10/31/2021