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Can family businesses survive?

James Olan Hutcheson spent 19 years in his family business, the world's largest photography company, before forming ReGENERATION Partners, an international business consulting group.

Family businesses have always been here. They have survived vast change, dominated many fields and have made major, lasting contributions to the economy and to society. It will be interesting to see how family businesses evolve into the third millenium

Don't act surprised. Sooner or later, you knew it would happen. The largest corporation in the world is once again – a family business. But to an observer looking at news headlines describing economic events of the past century, it might seem that the most significant enterprises are, and have always been, other than family businesses. Publicly owned corporate colossi such as AT&T, Exxon, IBM and General Motors, each with millions of public shareholders and many billions of dollars in annual revenues and assets, have dominated the media.

It would be a mistake, however, to assume that the publicly owned enterprise has always been the most important form of business – or the most important now. Prior to the Industrial Revolution in the 19th century, publicly owned enterprises were scarce and generally confined to a few industries such as transoceanic shipping.

Even today, when there are more than 10,000 public companies in the USA, many industries are led by family enterprises. Examples include the confectionery business, where the third generation of the Mars family runs the world's largest sweets purveyor, with total annual sales of an estimated US$19 billion. In telecommunications, family-controlled Siemens AG of Germany effectively rivals the AT&T Corporation. Wal-Mart Stores Inc, 38% owned by heirs of Sam Walton and with a Walton comfortably occupying the seat of Chairman, is not only the world's largest retailer, with sales greater than Sears, Kmart and JC Penney's combined, it is now the world's largest corporation.

In sophisticated, capital-intense industries such as automobiles, telecommunications and retailing, it's surprising to find that major companies are family businesses. But some other industries are dominated by a small group of very large family industries. For instance, the largest companies in the USA in grain trading are Cargill Inc, Koch Industries and Continental Grain – all family businesses. Cargill, in fact, is the largest privately-owned family business in America with over $50 billion in annual sales.

In the beginning
Family business as we know it clearly has been a mainspring of the modern economy, giving rise to many of the world's largest, best-known and most enduring business enterprises. Considering that, it would be no surprise if family business was a heavily studied topic, with characteristics analysed in depth by researchers, taught in business schools and widely recognised and appreciated by the business community at large. Yet that is not the case – in fact, far from it.

Family businesses have not been the objects of careful study until the early 1970s. This seems remarkable when you realise that the history of business is, until recently, the history of family business. To put it another way, in the beginning and for a long time afterward, all businesses were family businesses.

The Greek philosopher Aristotle, writing in the 4th century BC in Politics (despite the name, the work goes far beyond political matters), describes a number of contemporary family enterprises including an olive oil manufacturer and an iron ore trader. Significantly, the only publicly administered enterprises he describes are either political, such as the state or village, or state-owned, such as monopolies granted by certain states to themselves. All others were owned by families, generally members of a single household, which Aristotle considered the basic social unit.

How could Aristotle, a keen observer and one of the original social scientists, have missed out on the existence of enterprises owned and managed by groups of unrelated people? The answer is that, with the exception of the government enterprises and some loosely organised associations of merchants, there were no non-family commercial entities during Aristotle's time or for many centuries after.

Enterprises resembling modern public companies did not come into existence until the Middle Ages. The first publicly owned commercial organisations were merchant guilds, which first appeared around the year 1000 AD. The guilds had their beginnings in the caravans formed for protection from bandits by groups of merchants traveling between medieval towns. In time, caravans of traders became more organised, setting up rules governing the behaviour of their members and electing leaders – similar to the corporate bylaws and executives of a modern corporation.

Before long, these temporary mutual protection societies were extended beyond the time of the journey and beyond the purpose of defense against criminals. Ultimately, merchant guilds controlled the distribution and pricing of goods in many European cities and in some, even controlled the governments. The Hanseatic League, a merchant's guild spanning several German towns, controlled a large expanse of Northern Germany for centuries. At their peak in 1341, the league's military forces defeated the army of King Waldemar IV of Denmark.

A century or two after the first medieval merchant guilds appeared, a new form of public commercial entity sprang up and grew rapidly in influence. Craft guilds were composed of individual practitioners of crafts such as cloth weaving, glassblowing and woodcarving. Craft guilds were formed, in part, to protect individual craftspeople against the power of the merchant guilds. They helped establish standards for pay and workmanship and also controlled who was authorised to practice a certain craft. In a similar way to merchant guilds, craft guilds were also politically powerful and often effectively controlled the municipal governments.

Neither the military and commercial might of the merchant guilds, nor the political power of the craft guilds could sustain them against the rise of a new variety of enterprise, namely, the public corporation. These commercial entities were formed specifically for a business purpose, as opposed to the self-defense objectives of the early guilds. They were owned by a group of people who were not related by family, craft or industry.

One of the first and most influential of the public corporations was the British East India Company. Chartered in 1600 by Queen Elizabeth for the purpose of setting up trade between London and the East Indies, it was the dominant force in global commerce for nearly three centuries and effectively ruled all of India for much of that time. The British East India Company was run by a governor and a board with 24 directors selected from stockholders, much like a modern corporation.

Certainly, there are some significant contrasts between today's corporate executives and their predecessors. One notable difference: despite constantly claiming that these are the most competitive of times, any modern executives would be in well over their head in trying to compete in the style of the 17th century. The Dutch, Danish, French and English East India Companies fought each other not with advertising and product development, but with warships, cannons and soldiers for the rights to trade in certain ports.

By comparison with the East India companies' conflicts, modern battles between software rivals such as Bill Gates and Larry Ellison are laughably tame. The respective founders, of Microsoft and Oracle Corporation are labeled confrontational because they trade barbs in the press. Yet if they were to compete for East India trade three centuries ago, they would need military might – and a lot of it – to back up their mouths. At its peak in the late 17th century, for instance, the Dutch East India Company could field 40 warships and 10,000 soldiers. And the British East India Company, when it was finally dismantled 200 years later, commanded a private army of 25,000 troops.

All these entities had their day. The Hanseatic League, the biggest and strongest merchant's guild, held their last meeting in 1669. The craft guilds were outlawed in Germany shortly after 1800 and in England in 1835. The British East India Company was dissolved in 1874.

The fledgling American Colonies, however, were not idle during this span. Among other entities that arose during the early years of settlement in North America was the Waterbury Company, a Connecticut firm that manufactured buttons for uniforms to clothe the soldiers in George Washington's Continental Army. Paul Revere, besides being famous for his midnight ride, was a noted silversmith. A company he founded to manufacture kitchenware survives today as the Revere Ware brand of cookware. In 1702, J E Rhoads & Sons, a family-owned manufacturer of conveyer belts, began operating. The company exists today, still independent, as the oldest enterprise founded in the USA.

All these early American enterprises were family businesses. With a few exceptions such as the European East Indies trading companies, the family business was the only business organisation.

The next major business entity born was the modern corporation, perhaps best exemplified then and now by the General Motors Corporation. Since not long after it was first assembled by William C Durant in 1908, GM has served as the archetype of the 20th Century company. Durant grew GM from the beginning by buying many other carmakers – too many as it turned out, for he overextended the company financially and was forced out by his bankers only a few years later.

Durant eventually returned, only to be forced out once again. This time he was succeeded by one of the most influential business managers in modern history, Alfred P Sloan Jr. The decentralised global behemoth Sloan designed and ran from 1923 to 1937 has, for many years, been the world's largest manufacturer and, despite its recent reversals, is still among the most respected. For many reasons, from its millions of unrelated shareholders to its impersonal name, GM is the antithesis of a family business. And yet, for many people, GM (and other companies like it) is a place-holder for all businesses.

Keeping pace
Over the past 1,424 years (the oldest family business dates back to 578AD), while different forms of businesses have temporarily ruled, family businesses have been a constant – a sometimes forgotten given. When the currently fashionable form of enterprise went, family businesses stayed.

This is not to say that family business has not changed. It has not been unaffected by the sweeping alterations in the business world. Take Kikkoman Corporation, for example. Members of the Mogi clan began an enterprise brewing soy sauce for sale in the 1600s, north of Tokyo. The company today is headed by president and CEO Yuzaburo Mogi, a descendant of the founders, and is based in the village of Noda where Mogi's ancestors moved the firm to escape a 17th century war.

Surprisingly little has changed about Kikkoman. Its ownership has remained largely intact through 17 generations of Mogis. Even more astonishing, in this age when seemingly indestructible companies such as Westinghouse transform themselves overnight from industrial to entertainment conglomerates, is the fact that Kikkoman still is primarily what it started as: a brewer of shoyo or soy sauce.

Yet Kikkoman is, in many ways, a 21st century firm. In 1917 several branches of the Mogi family came together to reincorporate the company into a thoroughly modern but still family-based company.  Today Kikkoman is listed on the Tokyo Stock Exchange and reports sales of $2 billion annually. Not only is it the world's largest purveyor of soy-based products, Kikkoman has business interests in biotechnology and other areas. Like Honda and Toyota, it built and operates a US manufacturing plant to serve American markets. Kikkoman's CEO was the first Japanese citizen to receive an MBA from Columbia University.

But keeping pace means more than just realising profits. Consider the most powerful trend in business or, indeed, in society today: the switch from an industrial economy to one based on knowledge and information. In the Information Age, the key to economic success is not ownership of capital resources, such as factories, mines or land, but knowledge, intelligence and the management of those intellectual assets. But also crucial, when customers of every variety are constantly bombarded by commercial offers in a bewildering array of media, is simple attention.

The ability to command the attention of consumers is the reason for the amazing stock market valuations placed on 'information age' companies such as Yahoo! and Amazon.com. Despite modest, if any, profits to date, these companies are valued in the billions of dollars by investors who appreciate the worth of their early stake in the internet arena and their resulting power of commanding people's attention.

What does this have to do with family businesses? Plenty. In an era where companies rise to prominence seemingly overnight, and once indomitable brand names disappear almost as quickly, trust is a commodity almost beyond price. And when consumers are dealing with a family business, with the name of the founder, the owners and the current managers over the door, trust is assumed. Trust in a family name is what makes a commodity such as tomato ketchup worth billions of dollars when plastered with the family name of H J Heinz. Trust in a person, not in its anonymous stockholders, is the reason even a public company such as Wendy's built its advertising around the image and personality of founder Dave Thomas. In an age when businesses, as well as people, seem limited to only 15 minutes of fame, family businesses possess potent possibilities for turning that brief moment of acclaim into lasting success.

To infinity and beyond
Family businesses have always been here. They have survived vast change as a group and, in some cases, individually for centuries. They have outlasted many innovations in business organisation and continue to dominate many fields. They have made major, lasting contributions to the economy and to society. And they are well-positioned to continue in just this fashion in the third millennium and, more than likely, beyond.

What might an observer of business news in the 21st century see? Doubtless, the headlines about family business will contain their share of reports covering the seamy side of life. Disputes between family members, struggles for control of family firms, lawsuits, even murder, will likely be part of family business in the next millennium just as they have in the two millennia since Aristotle made his observations.

Yet for each of these well-publicised disputes, there is a family that is quietly going about its business, co-operating and coexisting to their mutual benefit. For each bitterly fought lawsuit that splits apart a family, there is a heartwarming tale of a young businessperson gracefully mentored to success by older relatives. For each family business scarred by an actual murder, there are countless lives that are improved through work in a family business. In fact, for each negative report about family business, there are countless positive stories to be told. Family business can change your life. Family business can enhance your life. Family business can easily, it's true, become your life. But it is a rewarding life.

Clearly, family businesses can and will keep pace, if not lead the way, as business evolves over the coming centuries. Next time you hear about a great business accomplishment or innovation, remember not to act surprised when you learn that behind it is a family business.

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