Webcast #18: Keep it in the Family? (12 minutes)

Author Rod McQueen wrote, “Business leaders may be divided into three groups: entrepreneurs who start their own companies; hired guns who manage corporations for others; and members of the lucky sperm club.”

Any time we see a stock trading with a Class B set of shares, it usually means one thing: voting control is concentrated by the heirs of the company’s founder. We take note of family-run companies with Andrew Carnegie’s proverbial adage in mind — “shirtsleeves to shirtsleeves in three generations.” The saying suggests that the necessary hard work endured by the first generation of a family to achieve success (and remembered by the second generation) is often lost by the third generation.

Some family-run companies have proved to be great investments over time while others have not survived. We discuss only three families below, all of which have experienced very different fates.

Eaton Family

Commanding a dominant market share in Canada’s department store industry for much of the early half of the twentieth century, Eaton’s didn’t live to see the new millennium. After Timothy Eaton opened its doors in 1869, he instructed advertisers to “use no deception in the smallest degree”; curtailed the workday; and extended financial support to any of his fellow associates (the word “employee” was dropped) that succumbed to an illness.

In the decades following Timothy’s death in 1907, his son Sir John Craig (President, 1907-22) and cousin Robert Young (President, 1922-42) continued to expand the company. Canadians developed an emotional attachment to Eaton’s. It was written that “Canadians felt such a kinship with Eaton’s that they claimed ownership of the retailing empire for themselves” (The Eatons, Rod McQueen, published 1998). Goodwill was established by sponsoring the Santa Claus parade in Toronto in Winnipeg in 1905; assisting to finance Canada’s WW1 effort through remitting profits to the federal government and continuing to pay wages to its servicepeople; establishing a summer retreat for associates; and introducing 6 weeks paid vacation for associates upon reaching 25 years of service to the company. By 1919, Eaton’s had over 20,000 associates (many of whom were also customers). Unsurprisingly, almost twenty-five thousand people lined the streets during Sir John’s funeral procession in 1922.

Growth was facilitated by rural Canadians that beloved the mail-order catalogue for its extensive product availability. By the fourth generation of Eaton’s, urbanization had expanded, and the company was slow to adapt to modern retail department store developments. The catalogue became a money-losing operation by the 1970s and should have been shut down years before it was finally cancelled. Investments in technology were never made and stores were deprived of the same renovations that peers such as Hudson’s Bay and Sears were undertaking. Furthermore, its business practices hadn’t changed much in decades. George Eaton (President, 1988-1997) adopted an “everyday value pricing” strategy in 1991, which meant no more sales or discounts for customers, but it unfortunately proved disastrous. By 1997, with now only an 11% market share (down from 58% in 1930), the company filed for creditor protection and was eventually sold off to Sears.

Ford Family

Credited with inventing the first affordable automobile, Henry Ford co-founded the Ford Motor Company in 1903. Like the Eaton’s department store, many of Ford Motor Company’s employees were also its customers. After introducing a $5 daily wage in 1914 (equivalent to $142US today), employee turnover was greatly reduced. Employees were a target market for the single colour Model T automobile that debuted six years earlier and cost $825 at the time ($25,400US today), much cheaper than its $2,000 rival cars, and the price progressively dropped as mass production accelerated. By 1916, the Model T now cost $360, almost 56% cheaper than its price just 8 years before. With a new affordable means to travel, customers could now explore geographies that were previously difficult to visit. By 1918, the Model T commanded a 50% share of the U.S. auto market.

In 1919, Henry appointed his son, Edsel, to become President (though he retained the CEO title for himself). While Edsel sought to expand Ford Motor Company’s product offering, Henry overturned many of his son’s decisions and wanted to focus all efforts on producing the Model T. Edsel passed away of stomach cancer in 1943 at the age of 49. After Henry reassumed the President’s title at age 78, the company spiralled into so much disarray that U.S. President Franklin Roosevelt considered nationalizing the Ford Motor Company to maintain its wartime production. Henry’s wife and daughter-in-law forced the founder to step down and appoint his 28-year-old grandson, Henry Ford II (also known as “HF2”), to take over his responsibilities due to failing cognitive capacities.

Acknowledging his inexperience, HF2 immediately hired new executives to participate in the company’s decision-making process. In 1956, he took the Ford Motor Company public, raising $650 million ($6.78 billion today). HF2 formally retired as President in 1960 and CEO in 1979. Aside from Bill Ford’s five-year tenure as CEO from 2001 to 2006, the President and CEO titles have been occupied by individuals outside the Ford family since 1979.

Former Boeing executive Alan Mulally can be credited with saving the company due to a decision taken shortly after his CEO appointment in 2006. Ninety days after joining the c-suite, he sought to borrow $23.6 billion from the debt market. Two years later, access to borrowing dried up when the financial crisis spooked lenders. During that period, U.S. vehicle sales collapsed by 35% from 16 million autos in 2007 to 10 million in 2009. Both GM and Chrysler were forced to borrow $17.4 billion from the federal government to avoid bankruptcy while the Ford Motor Company remained a going concern.

Though the person most harmful to the Ford Motor Company appears to have been the founder himself by resisting change, the Ford family’s reliance on outside expertise (first with HF2 in 1945 by hiring outside expertise and then appointing Alan Mulally prior to the financial crisis) may have very likely saved the company from potentially tragic consequences.

Rogers Family

Ted Rogers’s right-hand man and the present Vice Chairman of the Board at Rogers Communications, Phil Lind, often comments in interviews that many forget that Rogers rose to its heights in only one generation. Ted, born in 1933, was notorious for taking big risks and borrowing excessive amounts of debt to fund the company’s expansion. Today, Rogers Communications has a $37 billion market capitalization. While a student at Upper Canada College, Ted hung an antenna outside his boarding room window to establish a connection for other students to watch TV. Ted was an early entrant in the cable industry, growing subscribership from several thousand in the 1960s to 10 million today; privately entered the wireless market on his own after his company’s board voted against the investment (Ted later sold his private assets back to Rogers Communication); and said in 2008 that “miniaturization is going to continue [and] the notion of being able to listen or view programming or information at a time you choose [and] at a location you choose is going to grow — that’s huge.”

Last fall, the boardroom dissension at Rogers Communications went public and attracted much interest from the media and its shareholders.

In Ted’s autobiography, Relentless (ghostwritten by Robert Brehl in 2008), succession was discussed by saying, “I would like to see the Rogers family keep control of this company that I worked so damned hard to build over 50 years.” In an interview with Allan Gregg in 2008, Ted added:

[Edward] and Melinda would like desperately to also be the CEO but that will be up to a board committee and then the board. We have a fair number of talented and experienced people. Despite me being so proud of everything Edward’s done – he’s been there for 17 years, he’s done every crappy job there is, he’s not been spoiled, he’s met his targets – so he says, “why not me?” And he’s right, except there are others with more experience. The board will have to make that decision. It’s too hard for a father.

After Ted’s death in December 2008, the board appointed Nadir Mohamed to become Ted’s successor as CEO. Mohamed served until January 2014 (5 years) and was followed by Guy Laurence, who departed in October 2016 (3 years) after conflicts with the Rogers family. His successor, Joe Natale, lost the faith of Edward Rogers and was dismissed in November 2021 (5 years) after a highly publicized public dispute that the Canadian media openly published. While Ted’s wishes were for his family to retain control of the company from a long-term perspective and appoint someone else to run its day-to-day operations, the Rogers family clearly has the final word on all maters affecting the company.

At SPWM, we are open to buying family-run companies but will not purchase its stock unless the valuation offers compelling value. Because of our governance concern, family-run companies must trade at a significant discount to our internally calculated intrinsic value before we commit client capital to the business.