Tech Industry

Corporate strategy: Does family matter?

With the Hewlett and Packard families opting to oppose a HP-Compaq merger, are family ties considered toxic? Not exactly, says Wharton faculty.

Walter Hewlett and David Packard, sons of the founders of Hewlett-Packard, announce their opposition to the proposed merger of HP and Compaq Computer, a deal upon which the future of HP's CEO, Carly Fiorina, could rest.

William Clay Ford Jr. announces that he will succeed Jacques Nasser as sole chief executive officer at the troubled automaker founded by Ford's great-grandfather.

Are these family members being too intrusive, wrecking the well-laid plans of professional managers and meddling in affairs that are none of their business? Hardly, says Timothy Habbershon, director of the Wharton Enterprising Families Initiative, a program that conducts research on family influence in organizations. He says members of founding families that own blocks of shares have not just the right but the responsibility to take issue with management if they feel that corporate strategy is out of line with the best interests of the company.

"We are talking about families that have immense amounts of their personal net worth tied up in these companies," says Habbershon, who has been a consultant to many family firms. "Their risk profile is much higher than the average investor in a Ford or an HP. Families have the right to set their return expectations. When those expectations are not being met, they have a right to make it known just like any institutional shareholder. It's easy for securities analysts to stand back and say a family is meddling, but if those analysts had anywhere near that level of net worth tied up in a company, they'd be meddling, too."

There is more at issue than money, though. Habbershon says members of founding families often are the caretakers of the values and standards that have made the company successful. "Families have an allegiance stronger than most shareholders, so families feel the obligation to fix things. Obviously, values can constrain as well as energize, but a family ownership group is the steward of the values, vision and legacy of a company. Families tend to be in a business for the long haul," he adds. "Markets are in it for the short term, as are managers."

It might not be apparent to many consumers, but some of the biggest and best-known American companies still have deep family ties. Wal-Mart (the Walton family), Motorola (the Galvin family), Comcast (the Roberts family), Tyson Foods (the Tyson family), Campbell Soup (the Dorrance family), The New York Times (the Sulzberger family), Coca-Cola (the Woodruff family), and Archer Daniels Midland (the Andreas family) are just a few.

To be sure, the behavior of members of some families that control or influence high-profile companies are frequently grist for the tabloid mill and can leave investors wondering about just how much of a legacy or stability scions actually provide to major companies.

Some of the biggest and best-known American companies still have deep family ties. An heir to the DuPont fortune, for example, was convicted of murder in suburban Philadelphia a few years ago. Prominent names often pop up in nasty divorce cases and in news accounts of lurid, eccentric or other decidedly un-businesslike behavior. More common are stories about families that engage in infighting and those who show neither business acumen nor interest in the family company, but every once in awhile emerge to complain about how the company is run.

Clash of personalities
In Ford's case, the Ford family owns 6 percent of the company's stock and controls three of the 15 seats on the board of directors. But family members own a special class of stock that gives them 40 percent of the voting rights and effective control of Ford Motor.

Habbershon and others point out that Ford Motor stumbled badly during Nasser's tenure and that Nasser would have been a good candidate for the ax even if the corporation had no powerful family members dissatisfied with performance.

The Firestone tire controversy would have challenged the leadership abilities of any CEO. But there were a score of other serious problems that led to the demise of the executive known as "Jac the Knife": a large drop in the value of Ford shares; sharply declining profits; the inability to meet cost-cutting goals; the delay in introducing the revamped Explorer; serious quality problems that undercut Ford's old ad slogan that "Quality is Job 1"; a rebellion among dealers who were angered by an initiative that gave Ford a direct ownership interest in some dealerships; a cut in the dividend; severely depleted cash reserves; and downgraded ratings on Ford debt.

"Nasser had so many new initiatives and big changes that he wanted to push on Ford, and he wanted to move very quickly," says management professor John Paul MacDuffie. "He's always been known as an impatient manager with expertise in turnaround situations where cost-cutting was the way you got out of trouble."

Management professor Harbir Singh says many of Nasser's ideas were good for the long-term interests of Ford. But he adds that Nasser "did not deal with crises well enough and did not connect enough with the interests of the Ford family."

Jim Wright, an analyst at Delaware Investments in Philadelphia, a unit of Lincoln Financial Group, says it was not surprising that Bill Ford, 44, was applauded by employees when he announced that Nasser was out. "Jacques Nasser was certainly not well perceived inside the company," Wright says. "He was pretty hard driving. And, ultimately, it was a clash of personalities; he and Bill Ford didn't connect real well."

Wright, who recently attended a conference at which Bill Ford spoke, says he was impressed with the new CEO and the way in which he convincingly discussed the importance of the company to the Ford family. "It's a family company; his name is on it," Wright says. "I think he is sincerely committed to improving this company and growing it well into the future. He alluded in the speech to the fact that this is not just his company but his children's and grandchildren's company."

Wright and Habbershon, however, say it is far from certain whether Bill Ford, chairman of the company since 1998, is the right CEO for the long term. "I definitely detected the commitment and desire on his part to improve the Ford Motor Co. name," Wright says. "But I also detected that while he's been chairman and involved with the company for many years, he still is a little green and this is a big undertaking for him. And I'm not sure that he's got the plan to turn it around. I think he and Nick Scheele are working on that, but they're not there yet." Nicholas Scheele, one-time head of Ford's Jaguar division, was recently named Ford Motor's chief operating officer.

Tradition is so important at HP that Fiorina became the first outsider to lead the company. "Whether Ford is the leader for the long run is different from the debate over whether Ford should have jumped in now," Habbershon says. "I think Ford was right to jump in." Adds Singh: Bill Ford has to "shake the image that he got the job because of his family name." Because of Ford's relative youth, "the question arises as to how long he will be in the position. Theoretically, it could be as long as he wants. He could be there 20 years. That's a great opportunity but also a great responsibility."

The "Bill and Dave" legacy
The concept of family legacy and employee loyalty is also important in the HP case. It is a company where employees still talk in reverent tones about the "HP way" of management and about "Bill and Dave"--William Hewlett and David Packard, the men who founded the company in a Palo Alto, Calif., garage in 1938 with a few hundred dollars. The old offices of the founders are preserved as they were decades ago, in a tribute to their leadership. Tradition is so important at HP that Fiorina became the first outsider to lead the company when she was hired from Lucent Technologies in 1999.

The Hewlett family and its charitable foundation jointly control 5.3 percent of HP's shares, and the family has said it will vote against the acquisition of Compaq. Walter Hewlett, the eldest child of co-founder William Hewlett, is a member of HP's board.

On Nov. 16, Walter Hewlett filed a proxy statement with the Securities and Exchange Commission, outlining his opposition to the proposed acquisition. The filing may signal a proxy battle, but Hewlett has not indicated whether he will go that route. The filing said that Walter Hewlett was joined by his sisters, Eleanor Hewlett Gimon and Mary Hewlett Jaffe, the William R. Hewlett Revocable Trust and one of its trustees, Edwin van Bronkhorst, a former chief financial officer of HP.

David Packard, the only son of the other co-founder of HP, is chairman of the Packard Humanities Institute, which owns 1.3 percent of HP's shares. David Packard has already said that he will vote against the acquisition. The David and Lucile Packard Foundation, headed by family member Susan Packard Orr, holds a 10.4 percent stake in the company. The foundation has not yet decided how it will vote.

Those who oppose the merger say that it would, among other things, put pressure on the stock price, result in massive layoffs, and increase HP's exposure to the highly competitive, and increasingly commoditized, personal computer business.

"Family members have the right to push back on management--not necessarily to stop them but to push back and create a healthy tension," Habbershon says. "There's a difference between tension and a feud. Tension is good. The news media may have taken that tension and made it into a feud, but there is a difference. I don't see the Hewletts as wrongly creating a tension here because the layoffs would be a challenge to the company's historic values."

Habbershon adds that Fiorina's future at HP is not necessarily doomed simply because the Hewlett and Packard families oppose the merger. Indeed, he says it has already had a positive effect on her. "Opposition is creating a public tension that will cause Fiorina to fight harder to prove the merits of her case, which she is now doing. She has sent out a letter defending her case, saying she doesn't think she's going against the HP way."

Habbershon also notes that it was not the Packard and Hewlett descendants alone who cast doubts on the merits of the HP-Compaq combination. The market as a whole signaled its dismay when it sent HP's stock price plunging after the proposal was announced; the share prices of both HP and Compaq later rose after the families disclosed their feelings about the merger.

"I want to make it clear that with H-P, this isn't a case of management saying, 'We want to maximize shareholder value' and shareholders saying, 'We don't,'" Habbershon says. "The shareholders are saying, 'We're concerned about value too, but we're just disagreeing with your strategy.'"

Family values
Habbershon notes that one Wall Street analyst recently sniffed that the Hewletts and Packards had reacted too "emotionally" about the proposed merger of HP and Compaq. Families are often unfairly caricatured in this way, he says, and many otherwise astute observers do not know that family-controlled or family-influenced companies are some of the best-managed ones.

Indeed, a 1996 study by Robert Kleiman, a finance professor at Oakland University in Rochester, Mich., reported that from April 1976 to March 1996, the stocks of the 209 largest family businesses in the United States outperformed non-family companies, according to a report in The New York Times. The chief reason: Families typically take a long-term perspective on the business instead of trying to maximize earnings from quarter to quarter.

Kleiman found that the 209 companies enjoyed an average annual return of 16.6 percent, compared with 14 percent for the companies in the S&P 500. The study, which Kleiman conducted with Netmarquee Online Services, based in Needham, Mass., defined family businesses as those with two or more officers or directors with the same last name and with inside ownership of 10 percent or more. For periods of less than 20 years, however, the S&P companies outperformed the family-run enterprises.

Wright, the Delaware Investments analyst, says that when he recommends stocks he does not count family influence on a company as necessarily positive or negative. But he does say that knowing the role a family plays in a company is important in assessing the overall attractiveness of a stock.

"I don't sit here and say, 'I only want to look at companies with strong family ownership.' Certainly in doing research on a company you want to know who the shareholders are and whether there's a family stake in the business. But that's just a point of information. It's not a reason to buy or sell a stock. But it's important in industries where consolidation is taking place. You want to know if there is family ownership and if the family is willing to sell their stake if a beneficial offer for all shareholders comes in or if it wants to keep control of the company."

 
To read more articles like this one, visit Knowledge@Wharton.

All materials copyright © 2001 of the Wharton School of the University of Pennsylvania.