Family, Inc.

Surprise! One-third of the S&P 500 companies have founding families involved in management. And those are usually the best performers

For William Wrigley, Jr., the 40-year-old scion of a century-old family business, the past lives on inside the castle-like Chicago landmark that bears his name. His father, his father's father, and his father's father's father before him are the unseen force powering Wm. Wrigley Jr. (WWY ) Co., a $2.7 billion-a-year chewing-gum business that has run rings around larger rivals. Steeped in company lore his whole life, Wrigley knows how his forebears nurtured the operation, handled challenges, and anticipated problems.

That may be his biggest asset. With one eye on honoring the past, and the other on safeguarding the future, family informs every decision CEO Wrigley makes. Memories of expansion attempts temper his determination to expand beyond gum but to stick closely to confectionery. That determination to stay the family course, he says, is responsible for the company's outstanding long-term performance. Since 1992, Wrigley has reported an average annual return on assets of 20.3%, far outpacing Hershey Foods (HSY ) Corp.'s 9.8% and the Standard & Poor's 500-stock index average of 4.5%. On net income growth and sales growth, it has also trounced Hershey, which Wrigley tried to buy last year. "The family name is on the door," says Wrigley, who will add the title of chairman on Jan. 1. "It's more than just a job."

Forget the celebrity CEO. Look beyond Six Sigma and the latest technology fad. One of the biggest strategic advantages a company can have, it turns out, is blood lines. BusinessWeek has found that a surprisingly large share of Corporate America -- 177 companies, or a third of the S&P 500 -- have founders or their families still on the scene, in most cases as directors or senior managers. And, in what may be Corporate America's biggest and best-kept secret, they're beating the pants off their nonfamily-run rivals.

That comes as no surprise to American University's Ronald C. Anderson and Temple University's David M. Reeb, the professors whose research prompted our own. Their study, published in the June issue of The Journal of Finance, concluded that the performance of family companies in the S&P far outstripped that of non-family companies.

To find out for ourselves how much family matters when it comes to corporate performance, BusinessWeek, with the help of Chicago executive-search firm Spencer Stuart, identified the family companies in the current S&P and tracked their performance over the past decade. By and large, we defined family companies as those in which the founders or their families maintain a presence in senior management, on the board, or as significant shareholders. (In a few of the companies included, the "founders" actually acquired the companies and substantially remade them.) For our group of family companies, the annual shareholder return averaged 15.6%, compared with 11.2% for nonfamily companies. Return on assets averaged 5.4% per year for the family group, vs. 4.1% for nonfamily companies. And the family outfits trumped the others on annual revenue growth, 23.4% to 10.8%, and income growth, 21.1% to 12.6%.

So what is it that gives family companies their edge? In part, it's having managers with a passion for the enterprise that goes far beyond that of any hired executives, no matter how much they are paid. That's especially true for the more than 100 companies in our ranking that still have a founder on the scene, including such tech highfliers as Dell (DELL ), eBay (EBAY ), and Oracle (ORCL ), which came in at Nos.2, 6, and 8, respectively, in our ranking. Among family companies, these 100 had the best performance of all, beating out nonfounder companies by healthy margins on shareholder return and growth in revenue and income.

Youth, of course, also helps to turbocharge performance. By definition, if a founder is still involved, the company has to be fairly young. Many of the founder companies in our ranking have soared to the tops of their fields because they brought to market important products, technologies, or services -- and starting from a smaller base, they're able to rack up sizable percentage gains. But while a handful of outfits run by founders lofted our numbers sharply upward, they don't totally account for the family edge. Take out the 10 best-performing founder-run outfits, and the remaining family companies nevertheless handily beat the nonfamily group on all four performance measures.

That founder advantage, however, may diminish over time -- as it has at Nordstrom (JWN ) (No. 148) and Campbell Soup (CPB ) (No. 129) -- as later generations lose the "fire in the belly" that inspired the original entrepreneur, succumb to squabbles, or head companies that simply grow too big to sustain double-digit growth. Or they may simply run short of management talent, as seems to have been the case at No. 172-ranked Motorola Inc. (MOT ), where CEO Christopher B. Galvin, grandson of Motorola's founder, recently announced his departure. During the last half of his seven-year tenure, the company lost 80% of its market value. Still, at companies where the founder has passed the torch to a new generation -- generally the oldest and most mature outfits in our group -- the median performance beat or matched the nonfamily companies in all four of our categories. The average performance beat the nonfamily group in return on assets and was within a point or two on the other three measures.

Plenty of companies with long family pedigrees did even better. No. 74-ranked Wrigley, where later generations have built on the accomplishments of the past, is a good example. Another is the McGraw-Hill Companies, parent corporation of BusinessWeek. Led by Harold W. McGraw III, great-grandson of the founder, the No. 73 ranked company beat the nonfamily average on three out of four measures.

It may seem odd, in an era of vagabond capital in which investors restlessly search for the Next Big Thing, that one of the biggest indicators of success lies so close to home. But in fact, a lot of the corporate highs and lows of the past decade came down to whether or not top executives and their boards kept their focus on the core enterprise. Unlike nonfamily CEOs whose holdings are limited to stock received as pay -- which is often quickly converted to cash -- many families own tens or even hundreds of millions of shares that provide a "huge economic incentive to pay attention," says American University's Anderson. "Someone is minding the store here."

There are other, more subtle advantages that successful family companies enjoy. For starters, there's the motivation provided by a legacy. Brought up with a sense of family history stretching back generations, CEOs such as Wrigley have a keen desire to expand and improve what they've inherited before passing it on to a new generation, as well as a reflexive willingness to put corporate interests before personal ones. With tight-knit family leaders at the top, decision-making can be easier and faster, allowing family companies to pounce on opportunities others might miss. Their often paternalistic corporate cultures may lead to lower turnover and development of managerial talent. And unlike outside CEOs, family chief executives know that their families are in it for the long haul, making them more likely to reinvest in the business.

Family companies thrive even though they break a lot of cherished rules, especially when it comes to corporate governance. Some boards are packed with family members and other insiders who may have cushy side deals with the company. Others may include great friends of the family who serve for years, inviting charges of cronyism. But in practice, such connections can help directors serve additional roles, as mentors, sounding boards, advisers, and spotters of up-and-coming family talent. Family members also tend to be proactive directors, according to those who study governance. When conflicts erupt, there's a mechanism to resolve them that nonfamily companies don't have: the collective desire of family members to maintain unity and preserve their wealth.

Family influence can sometimes work against success. Family feuds, such as the one that wracked Campbell Soup in the late 1980s, while infrequent, can be devastating. The insularity of family outfits sometimes breeds an apparent disregard for outside shareholders verging on contempt -- Exhibit A being founder John Rigas of Adelphia Communications Corp. (ADELQ ) and Michael and Timothy, his sons, who are waiting to stand trial over charges of fraud at the company. CEO succession is often chaotic, with families either failing to groom successors or unwilling to show an underperforming family member the door. "That's the tragic impact of having families in leadership," says Michael Treacy, a former Massachusetts Institute of Technology professor who consults with family businesses. "In many cases, they don't get to choose their managements. They sire them."

But to a great extent, the companies in our survey overcame the limitations of family ownership. BusinessWeek identified several ingredients that contribute to their performance. Not all are qualities unique to such enterprises, of course. But they do go far to explain why it helps to have someone at the helm -- or active behind the scenes -- who has more than a mere paycheck and the prospect of a cozy retirement at stake. Here are the five key factors:


Work at a company from your teenage years, or before, and you're bound to gain a sense of it that outsiders simply can't match. Combine those years of experience with oft-repeated advice from an elder, throw in the responsibility for one's family fortune and a drive to surpass an elder's accomplishments, and you get a potent résumé for a CEO.

At No. 48-ranked Cintas Corp. (CTAS ), a Cincinnati company that rose to become a giant in the business of providing uniforms for everything from refinery workers to casino staff, Chairman Richard T. Farmer has built a powerhouse by drawing on the legacy of his father and grandfather. Forty-five years ago, Farmer duked it out with his father over whether to expand into uniforms from the business of reclaiming and cleaning industrial rags. He won and turned Cintas into a $2.3 billion-a-year rocket whose net income and revenues have jumped nearly sixfold in the past decade. Farmer and Scott, his son, who became CEO in July, take extraordinary care with the business -- attending to details, such as uniform fabrics, that many a nonfamily CEO might delegate to an underling. "This business would strike most people as pretty mundane," says Dale Anderson, an investment adviser at Steginsky Capital LLC in Princeton, N.J., whose clients own Cintas shares. "But it just takes your breath away to see the kind of care they have for it."

For an even more dramatic example of family ties paying off, consider Comcast Corp. (CMCSK ), the $19 billion-a-year cable giant that came in at No. 118 in our rankings. CEO Brian L. Roberts, the only one of five Roberts children working in the business their father Ralph J. founded in 1963, learned it working for his dad: installing cable in the summers, selling HBO subscriptions door to door, and managing the company's Trenton (N.J.) system after school. Brian calls his father "my closest confidant, my mentor."

Indeed, the dealmaking skills the elder Roberts taught his son have landed Comcast a place at the table for some of the biggest cable deals of the past decade. Roberts the elder has been a relentless trader. But Brian, who took over as president in 1990, has ratcheted up the wheeling and dealing, capped by a $47.5 billion takeover of AT&T (T ) Broadband last year. In just eight years, Roberts catapulted Comcast from the nation's No. 3 cable outfit to No. 1. And he has done so while retaining a sizable family stake. During negotiations over AT&T Broadband, the Robertses resisted pressure to trim their 63% voting stake to 20%, holding out for a 33% position. Their argument: As long as they deliver for shareholders, their percentage shouldn't matter.


Family corporations, when run by a few tight-knit family members, can almost always move far faster than corporate bureaucracies. Indeed, that's one of the great advantages of family ownership, says John A. Davis, who chairs a families-in-business program at Harvard Business School. Says Davis: "Their hearts are engaged in what they're doing."

A case in point: Clear Channel Communications Inc. (CCU ), No. 29 in our rankings. When Mark P. Mays joined his dad, L. Lowry Mays, full-time at the San Antonio radio outfit in 1989, it boasted just 16 stations. Today, the company owns more than 1,200 radio stations, along with 36 TV stations. In 10 years, it has posted income growth averaging 67% a year, the third-fastest profit growth among all family companies. A big part of the reason, says the younger Mays, the company's president and chief operating officer, is that "we have always stressed speedy decision-making."

Just how fast does Clear Channel move? After persuading Hicks, Muse, Tate & Furst Inc., the major owner of several hundred radio stations at AMFM Inc., to sell out to them in late 1999, the Mays team had a signed $23.5 billion deal in little more than five days. "Once we had the ability to move, we moved like lightning," says Mark Mays.

That fast growth has made Clear Channel something of a whipping boy in the debate over media concentration. Clear Channel has been blamed for homogenizing the airwaves and has been criticized for using their stations as a bullhorn for the Mayses' conservative Republican stances. Mark Mays says the attacks haven't even disturbed family dinners -- although he admits that's chiefly because his mother, Peggy, bars all business talk at the table.


Family companies demand a lot of their employees -- but they often give plenty back. By doing so, they're frequently able to win their employees' loyalty, which can pay off later in reduced turnover and higher productivity. They often are leaders in providing benefits such as day care and scholarships for the children of workers, profit-sharing, and even old-fashioned fixed pensions, instead of riskier defined-contribution plans. Most important, they're more apt to resist layoffs in a downturn. "Family firms see employees as a long-term resource," says John L. Ward, co-director of the Center for Family Enterprises at the Kellogg School of Management at Northwestern University. "They just believe it's the right way to go."

J. Willard Marriott, who went from running an A&W root beer stand in 1927 to building the foundation for today's sprawling global hotel chain, urged his managers to "find, hire, and train good employees and treat them like your family." That philosophy endures today with his son, CEO J. Willard Marriott Jr. Instead of indulging in deep payroll cuts during the recent three-year downturn in the hospitality business -- which is largely responsible for Marriott International Inc.'s (MAR ) poor showing at No. 140 in our ranking -- he limited layoffs to less than 1% of the company's North American lodging workforce. Hours were trimmed, but he maintained health-care benefits, extending them even to people working as few as 18 hours a week in the year following the September 11 attacks. Says Marriott: "When they come to work in the morning, we want them to know, 'Hey, we're glad you're here."'

Does it pay off? Consultants who study Marriott say its way with employees results in lower turnover, better customer service, and higher profitability. In the past decade, the $8.4 billion-a-year company has managed to increase its income by an average of 12.6% a year, nearly double the rate of rival Hilton Hotels Corp. (HLT ), ranked No. 135.

Respecting employees and fostering loyalty among them -- quaint as the notions seem today -- are ideas often passed down through generations. At No. 49-ranked Walgreen Co. (WAG ), founder Charles R. Walgreen Sr. made his company one of the first to offer profit sharing, in the 1940s -- directing his son to use the proceeds from his life-insurance policy to fund it. Today, Walgreen is a generous contributor to employee 401(k) plans, chipping in more than $3 for every $1 contributed by workers. And fourth-generation scion Kevin P. Walgreen, a 42-year-old company vice-president, still cites his great-grandfather's boast whenever he signed up a promising young prospect: "He would mention to my great-grandmother, 'I hired someone smarter than me today."'


Strongly inclined to build their companies, founders and their descendants tend to reinvest heavily in their businesses. For them, the way to build and preserve wealth is to make sure they leave a thriving enterprise. In 2002, 61% of the family companies in the S&P 500 paid dividends, versus 77% of the nonfamily companies. In fact, the typical S&P 500 family company plowed $617.8 million back into research and development last year, $79 million more than its nonfamily counterpart. "The tendency is to reinvest in the business," says Colin C. Blaydon, director of the Center for Private Equity & Entrepreneurship at Dartmouth College's Tuck School of Business. "They see themselves as being able to develop their own wealth that way."

Whether it's geographic expansion, R&D, or conquering new markets, founder or family companies such as Gap (GPS ) (No. 56), Microsoft (MSFT ) (No. 14), and DuPont (DD ) (No. 133) are not shy about stoking the growth furnace with cash. But few have sunk as much money into growth as No. 62-ranked Wal-Mart Stores Inc. (WMT ). The Walton family presides over a company that in 15 years has quadrupled the number of outlets, to more than 4,700, and boosted sales twentyfold, to $244.5 billion. But to the family, devoted to the legacy of the late founder, "Mr. Sam" Walton, the chain may never be big enough. Rather than press for huge dividends -- which, after a recent hike, now total about $1.5 billion a year for all shareholders -- they will spend a staggering $11.5 billion on capital projects this fiscal year, up from $9.4 billion in 2002. Says Chairman S. Robson "Rob" Walton: "We're still a growth company."

Even with 38% of the stock and two seats on the board, Walton's heirs don't think in terms of how much cash Wal-Mart throws off for them each quarter. Instead, the Waltons take the role of "patient capital," making sure growth will come over time. "We view it really more as a trust, or as a legacy that we're responsible for, rather than something we own," says board member John Walton. This paid off, he says, in the mid-1990s, when Wal-Mart was being punished on Wall Street for spending heavily on new supercenters. With the family's backing, management stayed the course and felt less susceptible to market whims.


By current governance standards, which emphasize independent directors and watchdog boards, there is no shortage of "bad" boards among family companies. At No. 114-ranked Brown-Forman Corp. (BFB ), a distiller, five Brown family members sit on the board and own 74% of the Class A shares. And at No. 164-ranked Ford Motor Co. (F ), descendants of founder Henry Ford -- including CEO William Clay Ford Jr. and two former company executives who now serve as consultants with six-figure salaries -- occupy three of the 14 board seats. Two other company executives also sit on the board, for a total of five insiders.

Some governance experts, however, now say that the very characteristics that give family boards low marks in governance may also give some a competitive edge. Large personal and financial stakes in the company's future give family directors something many independent directors lack: a powerful incentive to hold management accountable -- and the clout with which to do so. With their intimate knowledge of the company gleaned from years of dinner-time conversations, many are as knowledgeable as management about its inner workings. And at companies where family members occupy both board seats and management positions, there is frequently a basic agreement on the most pressing issues. "A tight-knit group of very intelligent people can be very beneficial," says Ira Millstein, a New York lawyer who has advised companies on governance. "It runs well because everybody is involved in maintaining the integrity of their own fortune."

Where some shareholders see family boards as incestuous, others see owners deeply committed by blood and money to the company's welfare. At Alberto-Culver Co. (ACV ), No. 84 in our scoreboard, a $2.7 billion-a-year consumer-products company, no one can accuse the family in charge of not having skin in the game. Indeed, the family's nearly $700 million stake represents the "vast majority" of its wealth, says CEO Howard B. Bernick, son-in-law of the 83-year-old patriarch, Leonard H. Lavin. Lavin has been chairman for nearly half a century. His wife, Bernice E. Lavin, and their daughter, Carol L. Bernick, both sit on the board, along with CEO Bernick, Carol's husband.

Bernick says the stock holdings represent a huge responsibility -- one that weighs heavily in virtually every decision he makes. He often finds himself taking off his CEO hat to assume the role of shareholder. Concerned about too much insularity on the board, he has added two new independent directors in the past 15 months. On acquisitions, he has been known to renegotiate terms aggressively when circumstances warrant it. He suspects a nonfamily CEO with a lesser stake would be less diligent. "I don't consider it company money," Bernick says. "I feel that I'm playing with my own money."

And that, in the end, may be the reason companies like Alberto-Culver succeed. By maintaining a huge personal and financial stake in the long-term health of their companies, the controlling families have every incentive to give them the attention they demand. It isn't surprising that family connections confer a special advantage. With a legacy to live up to and pass on, family managers just seem to be motivated to work a whole lot harder. Turns out that extra sense of commitment is something that stock options and eight-figure salaries just can't buy.

By Joseph Weber in Chicago and Louis Lavelle in New York, with Tom Lowry in New York, Wendy Zellner in Dallas, Amy Barrett in Philadelphia, and bureau reports

    Before it's here, it's on the Bloomberg Terminal.