The Decision Tree of Family Business

With goals beyond making money and commitments to both the long-term and professionalism, today’s family businesses appeal to some MBAs while others plot their escapes.

by Margaret Steen

Michael Gober, MBA ’05, cofounded the Graduate School of Business’ Family Business Club as a student. But after some long talks with his mother, he decided to venture out on his own after graduation instead of returning to New York to work for the family’s publishing business.

Family ties can make doing business together a pleasure, or they can complicate already difficult decisions. For some family members, the business is a launching pad for a career; for others, it can be a weight they can’t shake off. And the question of succession can burden both the current leaders, who wonder if their children will take over, and those in the next generation, who wonder if they want to.

“It used to be that there were professional businesses and there were family businesses,” says John L. Ward, MBA ’69, PHD ’73, clinical professor of family enterprise at Northwestern University’s Kellogg School of Management.

No longer.

With family businesses, like all businesses, facing global competition and rapidly changing markets, there is more pressure on those who join to make sure they’re up to the task. This emphasis on professionalism has made family businesses both more daunting and more attractive—and has created new interest in them, from family members, outsiders, and business school students.

Double-Edged Sword

The advantages of joining a family business can, in some situations, quickly turn into disadvantages. Family businesses have very strong cultures and are less likely to be driven by short-term profits, traits that can make change difficult. Likewise, the emotional ties among family members can enrich the business experience—or complicate it. And although the idea of being an owner is a lure for many family members, it can be counterbalanced by the gnawing fear that they are in their position only because of their family connection.

The culture of a family business can be very different from that of a company that answers to Wall Street. “Family businesses frequently take a very long-term point of view. They’ll make investments that they don’t expect to pay off for 5 or 15 or 25 years,” says Ward, whose interest in family businesses stems from strategy consulting he did with several of them near the beginning of his career. “Culture in a family business is more frequently based on very personal and emotional values. It’s stronger because there are deeper roots and closer connections to the history of the company.”

But the sense of stability can also make it difficult to change. Stanford students tend to be “over-achieving, high-aspiration, ‘I-can-change-the-world’–type personalities,” says Andres Nannetti, MBA ’05, a cofounder of the Family Business Club. “When you come into a family business, the first thing that you find is tradition, structure. Changing that is not simple.”

For Marcella Kanfer Rolnick, MBA ’04, change made her more enthusiastic about joining her family’s company, professional skin care and topical pharmaceutical manufacturer GOJO Industries. “When I was growing up, the company wasn’t in a cutting-edge industry,” Kanfer Rolnick says. “We used to only sell products for bathrooms and shop floors.”

But during the 1990s, the company introduced the hand sanitizer Purell and moved toward “a health and well-being orientation,” she says. “The business changed a lot in ways that made it much more compelling to me.” Kanfer Rolnick led the creation of an e-business division before business school. Now, she is about to take on a new, higher-level management role.

Ward says the key to changing a family business is to define tradition in terms of the company’s core values, not specific ways of doing things. “If you perceive your traditions as ‘Well, Grandma and Grandpa always did it this way,’ then the company becomes really stagnant and blocked.”

For Thomas B. Klein, MBA ’79, the family tradition is tied to the land. His family farmed for years in California’s Central Valley. Today, the business has evolved, and part of it is Rodney Strong Vineyards, which he persuaded the family to buy and now runs.

Klein enjoys working for the family. “I can call a board meeting in five minutes on the telephone,” he says. “If I’ve got a problem, I tell them about it right away, without fear of the consequences.”

Still, all this closeness can lead to sibling rivalry or problems when both parent and child want control. And by the third or fourth generation, with dozens of cousins potentially sharing ownership, governance can get very complicated.

Leo Linbeck III, MBA ’94, president and CEO of his family’s holding company, Aquinas Corp., addresses some of these questions in a recently developed course at the Business School: How are family businesses governed? How can they measure goals, which are usually more complex than simply making money? How should they develop a family council and an outside board of directors? How do they compensate non-family employees? How do they resolve conflicts?

“I can’t imagine anything worse than having a conflict with one of my sisters about the management of the family business,” says Austin Ramirez, MBA ’06, as he prepared to return to Waukesha, Wis., to join HUSCO International, a hydraulic valve manufacturer run by his father.

Ramirez and many others say one of the main hurdles to joining a family business is the feeling that they didn’t have to earn their position. “It’s hard to go back to something and feel like your success is contingent partly on your last name instead of your abilities,” Ramirez says.

Ward says these feelings are typical: “All successors to family businesses—the good ones for sure—have the doubt of, ‘Is it me or is it who I am?’ At some point, they become comfortable with that.”

But the pressure can be intense, especially for those who share a name with their parent or with the company. “I always felt like I had to work harder to prove it,” Linbeck says. “Especially because I had the same name as my dad, I was always concerned that there was this presumption that I was not competent unless proved otherwise.”

Even those whose names give them relative anonymity are not immune. “I went into it with my eyes wide open. As a family member, there is a higher bar,” says Anne MacMillan Pedrero, MBA ’00. Pedrero, a member of the Cargill-MacMillan family, spent five years at Cargill Ventures, the venture capital arm of Cargill, before deciding to take a leave of absence.

But the reason for this uneasiness—the family connection—also affords family members an opportunity to have significant influence early in their careers. As Ramirez found when he compared working for his family company to his experiences outside: “In management consulting and investment banking, you’re an advisor, you’re a coach. You’re not a player.”

No turning back?

The decision to join or not join a family company is a momentous one for the individual, and it can be for the company as well.

Joining a family business has a more final feel than taking a job with a technology company or management consulting firm. Leaving in mid-career could not only make for awkward Thanksgiving dinners, it creates an unconventional career path as well. It’s not always easy for people on the cusp of big career decisions to evaluate what they want, however.

“What I really wrestled with at the end of high school was looking at Bechtel’s environmental footprint,” says Brendan Bechtel, Class of ’07 and son of Riley Bechtel, MBA ’79, CEO of engineering giant Bechtel. Brendan Bechtel focused on geography and environmental studies in college and later worked for an environmental nonprofit group for two years. “I got kind of upset about it and asked myself and my family, ‘What are we doing about our environmental footprint?’”

After doing summer work with Bechtel’s sustainable development group, he had a new perspective. “Even if it’s building a coal plant, I’d rather we do it than anyone else,” Bechtel says. He is proud of the company’s efforts to go beyond doing the least harm possible to actually creating environmental value through its projects. He cites a family legacy of outdoorsmanship and conservation, as well as “a corporate legacy of best-in-class environmental stewardship.”

He plans to return to Bechtel after graduation and says he is about 80 percent of the way to making a long-term commitment to the company. “What I really care about is greening businesses,” Bechtel says. “I see an opportunity to do that at our family business, if I earn a right to be there.” He is at business school, he says, “to temper that passion” with business skills and knowledge.

Bechtel’s evolving feelings are not uncommon, Ward says.

“If somebody told me at the age of 25, ‘No, I’ll never go back to the family business,’ I would say at the age of 30 or 32 that there’s a 50-50 chance they’ll go back,” he says.

Linbeck had a similar experience. “If you go way back to high school, about the last thing in the world I wanted to do was work in my family’s business,” he says. Nonetheless, he took a summer job at Linbeck Group, one of the family’s operating companies, and found that he was drawn to the construction business.

The connection to the industry is critical. Certain industries—those that are cyclical, are based on trust, or require a lot of land, for example—are ideally suited to family-controlled businesses, Ward says. But not everyone wants to work in one of those industries.

“If you have a family business in an industry that you don’t enjoy, don’t go to work there,” Klein says. “Do something else. Family businesses can be like a noose.”

Nannetti, for example, found that he does not share his father’s passion for managing large farms and the other operational aspects of growing and exporting flowers from Colombia and Ecuador to the United States. “I’m more of a finance and technology person,” he says. At his father’s request, he is helping him buy out his partners. “It’s akin to in a time of war, the country says, ‘Come and join the ranks.’ You owe so much, you don’t think twice about it. It’s not the kind of thing I would have chosen.”

He has decided that once the buyout is over, he’ll be on the board of directors for his father’s company but won’t take a role in the operations—a common choice for those who don’t devote themselves full time to the company.

“Even if you’re not involved in a family business in an operating capacity, you’re likely to be involved in some capacity or another, and that’s always a tricky thing,” says Gober, who is an advisor to the company his mother runs, Waldman Publishing.

These roles can evolve, as well: Gober decided when he graduated not to work at the family business full time, but he says it’s “highly likely” that he will become more actively involved with the children’s book publisher at some point. “I’ll bring more value to the company in the future than I will now,” he says.

Though Nannetti and Gaston Chan, MBA ’72, who heads his family’s cosmetics company, were asked by their fathers to help, many of those who have faced this in-or-out decision say their parents made it clear they could choose to work elsewhere.

And yet it’s possible to influence children’s choices without being overt about it.

Richard Gerdau Johannpeter, Class of ’07, says his father never told him he wanted him to join Gerdau, a multinational steel producer based in Brazil that is controlled by his family. Still, he knew his father was hoping he would. “He would drive me to find my way without telling me,” Gerdau Johannpeter says. “It’s a smart way to influence.”

Succession Success

Soul-searching by parents and children is just one part of the succession equation. For the business, the question of how to handle the next generation of family—whether as owners, leaders, or employees—is both crucial and complex.

“The reality is, most family businesses don’t survive a generational transfer,” Linbeck says. “They tend to die, they’re bought, they stop being family businesses.” Indeed, the Family Firm Institute says that in the United States, more than 30 percent of family-owned businesses survive to the second generation, 12 percent to the third, and only 3 percent to the fourth generation or beyond.

Bechtel has had four consecutive family CEOs. CEO Riley Bechtel’s father, Stephen Bechtel Jr., MBA ’48, was part of the first regular MBA class after World War II.

“Always plan that you may not have a family successor,” Riley Bechtel remarked to the Business School’s Family Business Club. “You have to have professional management ready to take over in any case, and a good family successor will want to know their selection was validated by good competition. Constantly review and develop the next generation of potential leaders, family and non-family, to promote a robust process.”

One key to the Bechtel firm’s longevity, Brendan Bechtel says, is that it has historically repurchased ownership from family members who are not working in the business. He also says that while his parents left his involvement in the company up to him, they made it clear he had to work hard if he joined. When he started his first summer job with the company at age 14, he says, his father told him on the way to the office, “This is great that you’re here, but this is a performance-based organization and if you screw this up, I will personally fire you if somebody else hasn’t already.”

“Good parenting has sustained Bechtel,” the younger Bechtel says. He knows his decision about a long-term commitment will be an important one. “If I say ‘I’m interested’ or ‘No, I’m not,’ it affects succession planning.”

Some family members work at the family business knowing they are unlikely to become CEO. Gerdau Johannpeter says he expects one of his older cousins will one day lead his family business. He doesn’t mind. “There are still a lot of ways to grow this business,” he says.

But in many cases, the question of who will take over leadership of the company is lurking in the background.

Kanfer Rolnick, who has been working for her family’s business from Iowa while her husband pursues a graduate degree, says she suspects employees at GOJO have been wondering if she, as representative of the next generation, will return to the Akron, Ohio, headquarters—A move she is making as she joins the executive team. “I am cognizant that other people’s careers are in the balance, not just my own,” she says. “I know that I can’t just come back lightly at this stage of my career.”

It is possible she will take over the business someday, she says, though that decision has not been made. “It’s not just about my personal desires. It’s about what’s best for the business.”

For those who do join, preparation is key—and in many cases more extensive than it used to be. Some families require members to get outside experience before joining the business. Accordingly, Linbeck started a software development business and then worked in Japan for a year; Paul Danos, MBA ’05, worked as a management consultant learning more about the oil and gas industry.

Even without a policy, many choose to explore other industries early in their careers. “I always envisioned myself going back to Stockton and working at the family company,” Klein says. After college, he did just that. But after three years there, he joined McKinsey as a management consultant. “I just felt that I wanted to see more of the world, learn more about business and the way the world worked.”

Another key part of preparation is to gain experience working in many parts of the company. Brendan Bechtel, for example, is spending this summer in West Africa working on a liquid natural gas project. Paul Danos started his career at Danos & Curole “in the fabrication shop with the welders.”

THE NEXT GENERATION

Even as family members consider their career paths, some are also focused on their children.

Pedrero wants to be sure her 4-year-old twins (a boy and a girl) and 2-year-old son eventually learn enough about Cargill to make an informed decision about whether to work there. “Hopefully, I can take them to visit some of the locations so they can meet the people, see the culture, the way of doing business,” Pedrero says. “A lot of it is storytelling and exposure bit by bit to what the company does.”

John S. Lapides, MBA ’77, president of United Aluminum, a company founded by his great-grandfather in 1891, says he would like to make sure his children, now 13 and 9, have the opportunity to join the business but don’t feel forced. “Ultimately, people in life have to choose their own path,” he says. “I really want them to be happy. I don’t want them to do something out of obligation to me.”

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FEATURES IN THIS ISSUE

• The Decision Tree of Family Business
• Tackling Corporate Governance
• Calculating Ways to Stop Terrorists
• Bumpy Road to Savoir Faire
• Profile: Ivan Png, PhD '85

 

Photo by Anne Hamersky

Molly Voorhees, MBA '06

Tradition and memories shape the decisions of some MBAs who return to their families’ businesses. Molly Voorhees helped pick out a milkshake mix for Becks Prime, her family’s Houston-based chain of restaurants, when she was 10. At 20, she suggested they add a veggie burger to the menu. “There’s a bond that I have with this business,” she says.

During the summer between her two years at the Business School, Voorhees worked at one of her family’s restaurants taking orders, cooking burgers, and one day grinding 140 pounds of hamburger. When her father visited during her second year, the pair hashed out a management role for her in the business while on a hike to the Stanford Dish. “It’s definitely tricky negotiating a salary with your dad,” Voorhees says.

 

Photo by Virgile Bertrand

Gaston Chan, MBA '72

He didn’t plan to lead his family’s cosmetics company, but when his father asked for help, Gaston Chan agreed. He finished his MBA and returned to Hong Kong.

Chan added fragrances to the Sam Fong Cosmetic Co., and he frequently tweaks the company’s cosmetics line to stay ahead of changing fashions. He made the difficult decision to cut costs by moving a factory from Hong Kong to Guangdong, China.

Chan’s daughter has a banking career in Singapore, so he expects that he’ll ultimately sell the company. “I’d like to keep it going, but it doesn’t have to stay owned by the family,” he says.

 

Photo by Rick Olivier

Eric Danos, MBA '04 and Paul Danos, MBA '05

“It was Dad’s way of keeping us interested in college,” Eric Danos, left, says of the way his father, Hank, center, the CEO of Danos & Curole Marine Contractors, steered him to a summer laborer’s job on an oil rig and his brother Paul to the fabrication shop. “That work also gave us a feel for the company from the ground up.”

Both sons are now managers in the company, but their sister and another brother didn’t join and “are not second-rate family members” as a result, Paul says. “We were always given the complete and absolute freedom to do whatever we wanted to do with our lives.”

Eric enjoyed investment banking but not the time away from family. Paul worked as a management consultant. Because their generation is young and Hank is nearing retirement, it’s likely there will be an outside CEO between generations, Paul says.