Family-controlled companies are the dominant form of business enterprise worldwide. A Wharton program documents their unique capabilities – and the challenges they face – in the global marketplace.

By Robbie Shell

“I feel great pressure from the investment bankers to go public,” says Roberto Civita, W’57, chairman and CEO of Sao Paulo-based The Abril Group, the largest publishing, printing and electronic media company in Latin America.

“They come and they say, ‘Look, there are so many reasons to do this now. You can give employees stock; you can make your children more liquid; you can raise capital as you need it; you will have better discipline inside the company,’ and so forth and so forth.

“These reasons are all good,” says Civita, whose $1.5 billion company was founded by his father in 1950. “But then I look at the world and I see a business climate where the quarterly earnings report has become deified. Once you go public, you get all these analysts saying that you promised to make 67 cents a share this quarter and you only made 65 cents. Your shares drop and everyone goes crazy. At stockholder meetings there are angry people asking why you made this or that decision. I would want to answer that I did it because I wanted to, or because it was important, or because I’m placing a bet on the future …

“I told my children last week that I have had enough experience with the requirements of publicly-held joint venture partners and with the due diligence of American lawyers and SEC filings to know that I really don’t want to go public.”

Civita is hardly alone in his concerns about public ownership and the whole question of how companies like his can stay competitive and still hold on to the advantages of family enterprises.

Indeed, the names of some of the largest family-controlled corporations in the U.S. read like a Who’s Who of successful businesses: Cargill, Inc., Jockey International, Inc., Goya Foods, Mars, Inc., Kohler Co., Levi Strauss & Co., Koch Industries, the Bechtel Group and Continental Grain — all privately held. Publicly held family businesses include Estee Lauder, Inc., the Marriott Corp., Berkshire Hathaway, Inc., Hasbro, Inc., J. M. Smucker Co., Campbell Soup Company, Gerber Products Co., Carnival Cruise Lines, Inc., Playboy Enterprises, Inc., Wal-Mart Stores, Inc., Tootsie Roll Industries, Inc., and Adolph Coors Co., to name a few.

In one form or another, all these companies are family-controlled corporations where family members still retain a significant (up to 100 percent) ownership of the company and, in many cases, senior management responsibility.

According to the most recent research, 37 percent of the Fortune 500 companies in the U.S. are family-controlled. In the Business Week 1000, top managers in 21 percent of the companies are descendants of the founder; 60 percent of all public corporations are family-controlled.

Abroad, the figures are even higher. In Latin America and Europe, the family-controlled corporation has long been the predominant form of business entity. In Mexico and Chile, for example, 80 percent and 65 percent, respectively, of the largest firms are family businesses.

In Europe, 99 percent of Italian companies and 71 percent of Spanish companies are run by families. And in Asia, almost all the largest businesses — from the Salim Group in Indonesia and the Formosa Plastic Group in Taiwan to Li & Fung in Hong Kong and the CP Group in Thailand — are family conglomerates.

While New York-based Estee Lauder might seem to have little in common with Mexican beer exporter Grupo Modelo or Thailand’s CP Group, these family-controlled corporations all face the challenge of operating in a global marketplace.

Two years ago, the Family-Controlled Corporation Program (FCCP) was established at Wharton to enhance the competitiveness and adaptability of family-controlled companies. The program’s initial focus has been on Latin America: The opportunity to study the efforts of this region’s multi-generational businesses to meet the challenges of global competition is unprecedented. The FCCP has targeted Asia as its second area of concentration. Studies of family corporations in the U.S. are ongoing.

While the predominant research on family corporations tends to view family ownership as a negative influence to be contained if not excised, the FCCP’s belief is that family businesses have potential competitive advantages over other firms.

“Family ownership has always offered inherent efficiencies and strengths — such as consolidated decision making and the ability to take a long-term approach to planning — especially in a company’s early years,” notes FCCP director Timothy G. Habbershon. “But in later-stage multi-generational companies, these efficiencies can become liabilities. Companies tend to lack formal incentive systems and communication channels, effective financial accounting, long-range strategic planning and other concepts that professionally managed non-family companies take for granted.”

Such distinctions gain added importance as the opening up of new markets worldwide “forces companies to rethink corporate strategy more quickly than ever,” Habbershon notes. “How do you structure the organization and professionalize your firm to compete in today’s marketplace?”

Also at issue in Latin American and Asian countries is the reluctance of family businesses to open their companies to outsiders. The perception exists that outside ownership will weaken family control and eventually lead to acquisition or bankruptcy.

That doesn’t have to happen, Habbershon would argue. “Many in the investment banking community suggest that family firms are obsolete in the global marketplace,” he notes. “I disagree. Family-controlled companies and ‘familyness’ can continue to influence societies and enterprise in a positive way without being turned into short-run organizations … In fact they shouldn’t be. A recent study concluded that family-controlled corporations over the last 20-year period have outperformed, by as much as 3 percent, non-family controlled corporations. They are still maximizing value.”

To address issues related to family ownership, the FCCP has undertaken research, outreach and education programs intended to generate new knowledge of family-controlled corporations and cultivate a network of family business partners around the world.

The FCCP’s approach to its research is practical as well as theoretical. In January, Habbershon initiated a project with Banco Popular, the commercial banking subsidiary of Ban-Ponce, a $16.8 billion financial services company based in San Juan, to collect and analyze relevant data from 50 family businesses. Habbershon sees it as a unique opportunity to build a long-term firm-level relationship with a group of top-tier companies whose market value is more than $3 billion.

“We are not only addressing the competitive strengths of family companies but we are doing so on a global scale,” he says. “In addition, we are looking for outcomes-based success criteria of family firms and we are developing a strategy for getting at firm-level data and doing firm-level research.

The big difficulty with trying to mobilize family businesses, says Ian MacMillan, executive director of the Sol C. Snider Entrepreneurial Center and George W. Taylor Professor of Entrepreneurial Studies, is that “you have sets of procedures, decisions and processes that are family-driven but may not be that efficient. So the organization succumbs to looking after family interests instead of getting on with making the company more competitive.

“Our goal,” he adds, “is to help businesses which have significant family control achieve two objectives: First, to grow successfully over long periods of time and second, to compete using their advantages. These firms are facing a serious onslaught from competitors and in many cases an erosion of the family power base. What does it take to mobilize — and renew — the family business structure as opposed to the non-family business structure?”

Adapting to Global Competition

Federico Zorraquin, WG’87, general manager of IPAKO, a family-controlled public chemical company based in Buenos Aires, remembers the difficulties brought on by a restructuring of the Argentine economy several years ago. “It meant a lot of pressure for companies like us because our markets were opening up to foreign competition on one side, and our currency was becoming severely appreciated with regards to the dollar on the other side. Meanwhile the chemical industry worldwide was facing one of the biggest recessions in history so there was lots of product available at very cheap prices. It was an explosive situation.”

Zorraquin was able to restructure IPAKO by, among other things, selling off an unprofitable joint venture, restructuring debt, finding a British mining conglomerate to purchase 30 percent of the company, and in 1995 selling off two of its three plants to Dow Chemical. Today IPAKO is a smaller, more tightly run and profitable business “with substantial financial resources which we will be reinvesting into new activities,” notes Zorraquin. “We are redesigning the future of the company.”

Similarly, a recent Latin Trade magazine article on the success of Grupo Modelo, a beer exporter based in Mexico with sales of more than $2 billion, noted the company’s ability to establish a global vision and marketing campaign. Although the 72-year-old family firm went public two years ago, family members still own more than 40 percent of the company.

IPAKO and Grupo Modelo, whose Corona Extra is the second most popular imported beer in the U.S., “are great examples of companies that grew with the times,” says Habbershon. “In Grupo Modelo’s case, it happened primarily because it formed a strategic alliance with Anheuser Busch. In the case of IPAKO, Zorraquin and his father, rather than fighting with each other, worked as a team to make the hard decisions needed to refocus and adapt the business.”

“Successful family-controlled companies in the Dominican Republic have one thing in common,” states Jose Miguel Bonetti, W’61, CEO of Sociedad Industrial Dominicana C. por A. (SID), a manufacturing and consumer goods company founded by his father 60 years ago. “They have all looked for technical assistance from, or partnerships with, foreign companies. We are a small country. There is no way we can keep up with new technologies and developments in the world without looking outside.”

Adapting to global competition heads the list of challenges facing firms all over the world, but perhaps especially in areas like Latin America, Eastern Europe and parts of Asia. Free market economies and greater access to international markets have made change a matter of survival.

“Virtually everywhere I travel, companies are facing very tough competition not just internationally but also locally because of privatization within their own countries,” notes Michael Useem, professor of management and director of Wharton’s Center for Leadership and Change Management. “There is the sense that they might get eaten up by bigger global firms or even smaller local enterprises.”

Along with the challenges of global competition, Useem adds, are the challenges of growth. “As these family-controlled companies get to a reasonably large size — 300 or 500 or 1,000 employees — a host of new problems develops around management and leadership. Professional management tools — ranging from process reengineering, outsourcing and activity-based costing to incentive compensation, strategic business units and creative international financing — are needed to make companies run better and more efficiently.”

Al West, WG’66, chairman and CEO of SEI Corp., a $226 million global asset management/investment systems and services firm, “decided four years ago to go global. We ran smack into something we couldn’t get around and that we have ended up embracing — the family business. We concluded that if we didn’t learn the special needs of family businesses that we would have to stay in a small market.

“Emerging economies are privatizing large sections of their industry — including in many cases their pension systems — and in the process creating local capital markets,” notes West. SEI has already expanded into Latin America and South Africa by, for example, setting up programs to educate Registered Investment Advisors, many of whose clients are family firms.

The new global order sets in motion a chain of events that family-controlled corporations either adapt to and thrive on, or ignore at their own peril, Habbershon says. “Global competition causes strategic realignment, which means moving the family beyond the closed borders concept of the market to the global market. That creates capital needs which often means going outside the firm. At this point family firms have to ask themselves if they want outside investors, and if so, what role the investor will play. Does the family let outsiders in? Give them shares? Give them control? How much control? How much is too much?

“Does the family have a solidified shareholder group? Shareholder agreements? An active board of directors? Once you have outside partners as shareholders, you have to reorganize, give partners a place to get involved, do different types of training, add outside managers, reassess family members, and so forth.”

In short, owners/managers must professionalize the family-controlled corporation.

Professionalizing the Firm

Going public, suggests Richard Carrión, W’74, chairman, president and CEO of BanPonce, “forces much greater discipline and transparency on the process of managing a corporation. Among other things, you have to be much more formal.”

In the 1950s, when Banco Popular was still private, Carrión’s grandfather went to the U.S. and bought 20 percent of the former Continental Bank of New York. Eventually, Carrión remembers, his grandfather got around to telling family members back home of the transaction. “It was like he had eaten lunch at the Palm Restaurant and was putting it on his expense account,” Carrión says. “It doesn’t work that way anymore. You can’t do that in a public company.”

Following a series of acquisitions plus the decision to raise capital by going public, the Carrión family’s ownership of Banco Popular has gone from 60 percent to 20 percent. They still retain control, however, and Carrión is the third generation to head the company. Today Banco Popular is opening additional banks in the U.S., expanding operations in the Dominican Republic, Costa Rica, Jamaica and the Virgin Islands, and looking for local partners in Central America and the Caribbean.

“When I say professionalization, many people think I mean getting the family out of the business,” notes Habbershon. “I don’t. I mean creating guidelines and structures which clarify the relationship between the family and business.

“When a company is seeking capital from outsiders — whether it’s through the formal capital markets or a joint venture partner or some other outside source of funding — it has to demonstrate that it is a professionally run organization. Otherwise the outsiders will want to bring in professional non-family managers.”

“The problem that companies in the Dominican Republic face,” adds Bonetti, whose Sociedad Industrial Dominicana has annual sales of more than $200 million, “is lack of professional management. It’s extremely difficult to make family groups understand that in order for a company to be successful it must hire outside managers for specific areas of responsibility.”

There are, of course, many ways to create a professionally run firm. In Civita’s case, The Abril Group under his guidance has spent the last few years moving into new technologies, new products, new alliances and new markets. Its three main divisions — publishing, the direct marketing/telephone directory group and the TV/Video group — operate 28 subsidiaries in all, often in conjunction with international partners such as Hachette, Hearst, Hughes, U S West, Disney/ABC, Viacom, Polygram and Time-Warner. Its news weekly magazine Veja is the largest circulation magazine in Latin America.

Yet Civita is well aware of the dangers of family ownership. “I have seen it happen in most of the big companies in Brazil. Once the founder establishes a successful company, the big challenge is surviving the founder’s death. Very few companies make it. Then you have to get past the second generation, which also isn’t easy.

“If you get to the third generation, you generally have dozens of cousins. If you let them all into the business, and I know companies that did this, it becomes totally unmanageable. It goes bankrupt or somebody buys it.”

Civita, however, has a “recipe” for avoiding that scenario and it involves making a clear distinction between ownership and management. “Working in a company is one thing; owning stock in it is another. A family member doesn’t have to work in the company if [he or she] doesn’t want to or isn’t well-prepared to do so, but he does have to learn to be a responsible stockholder. This is the minimum I demand.”

Civita, who has two sons and one daughter, likes to say that “50 percent of my children work in the company.” One son works full-time in The Abril Group and the other son works part-time. But all three children are members of an “advisory council” that also includes five members whom Civita has personally selected. “It is not a board of directors, because it doesn’t make decisions,” Civita says. “We meet every other month and the five men are all highly-qualified outsiders representing different backgrounds and viewpoints. The board is there to advise me. I want them to tell me if they think I am doing something crazy or if they don’t think a particular initiative should be pursued, or whatever.

“This board is also a mechanism for transition. When I am no longer around, there will be these five men, plus my children. They could likely become a real board of directors whose first order of business would be to find a new CEO. In other words, this group would plant and nurture the seeds of change.”

“Either you are ready to adapt to the rules and quality standards of a multinational or you run into trouble,” notes Bonetti, whose Sociedad Industrial Dominicana is in the edible, cleaning and personal products business.

Bonetti’s strategy has been to establish relationships with a number of consumer goods companies whose products are imported by his company and sold in the Dominican Republic. These companies include, for example: Unilever PLC, Hershey Foods Corp., Kimberly-Clark Corp., Kellogg Co. and Pillsbury Co. “We have achieved a very good relationship with Unilever,” notes Bonetti. “They give us technical assistance on the products that we manufacture in return for royalties. We have several people that have come from Unilever to work for us in Santo Domingo. They have been a tremendous help.”

Bonetti, his brother and his sister maintain control of the company in partnership with the Armenteros family which owns about 30 percent of the company. Another 35 people have close to 12 percent ownership. “The big challenge looking ahead will be for my children and my siblings’ children,” Bonetti notes. “I hope that at the very least we can leave them a well-organized, professionally-run company.” Professional management, says Habbershon, means a number of different things. For example:

Formal Board of Directors: Adding outside directors to a formal board brings new insights and perspectives and creates a professional atmosphere among family members. A board can also become a vehicle for creating strategic alliances or joint ventures.

“Strategic partners expect to have an active role in the company and that means board representation,” notes Habbershon. “Without a board, there is no way the partner can evidence involvement…

“In addition, the board helps define a proper role for family shareholders; it becomes a buffer between them and the firm.”

Outside Managers: “If you are going to perpetuate the business, you need specialists beyond family members who understand financing, marketing, accounting and other key functions,” notes William Alexander, a lecturer in family business at Wharton and the third generation member of a $150 million family-owned engineering and construction business started by his grandfather in 1928. “That means formal job descriptions, personnel procedures and job evaluations.”

It also means honestly evaluating the managerial and professional strengths that family members bring, or don’t bring, to the firm. “The most difficult problem is getting family groups to see that in order for a company to be successful you must hire professional people,” says SID’s Bonetti. “If not, sooner or later you will have so many family members working in the company that something will go wrong.”

Merit-Based Compensation: A merit-based pay system indicates that a family has clarified the relationship between family and business. It also highlights the need for stakeholder education, in which stakeholders — such as children of the CEO or third generation cousins involved in management — are educated as to why they all don’t deserve the same salary, or why non-monetary forms of compensation aren’t a good idea, or what the difference is between salaries and dividends and bonuses, says Habbershon.

“I’m in a regular compensation system and get paid what the other plant managers get paid,” notes Art Mann, WG’94, one of four plant managers in a $65 million Lancaster, Pa., iron foundry and machine shop founded by his grandfather. “But I also get stock in the company and I should be getting life insurance for family planning purposes. How does all this fit in with my career and compensation track, with regards to me, other family members, and plant managers who aren’t part of the family?”

Buy-Sell Agreements: In privately held companies, shareholder agreements are key to professionalizing ownership involvement, says Habbershon. “Family members often overlook the fact that minority shares are only worth the value that the buy-sell agreement confers on them. Once you clarify the value of the shares, it anticipates and fends off future conflict.” Buy-sell agreements are also crucial parts of liquidity planning, even though, Habbershon adds, “they are one of the hardest things for families to agree on.”

As companies get into their third generation, the situation becomes even more complex. “Whatever efficiencies there once were have often been diluted by the proliferation of family members involved,” Habbershon notes. “Without professionalized pruning of what is often referred to as the ‘cousins coalition,’ the company becomes inbred. Pruning can mean buy-sell agreements that give an exit point to inactive family shareholders.”

Shareholder Education: “All family members have diverse needs,” notes Carrión, whose grandfather had eight children, who had 34 children (of which Carrión is one) who in turn have 140 children. “It’s the classic dilemma of growth vs. income. Some family members — usually the ones working in the bank — want to reinvest in the business. Others would like more income… The first thing to do is determine what everyone’s preference is and then create the proper legal and tax structures to optimize everyone’s desires.”

Shareholder groups must be educated as to their responsibilities and rights, adds Habbershon. “If the CEO wants to keep an inactive shareholder/cousin out of his hair, he doesn’t achieve this by ignoring the cousin. He does it by having organized family meetings, explaining terms like preferred stock and dividends and bonuses, creating shareholder agreements that allow family members the ability to cash out if that’s what they want, and so forth.”

Formal Succession Planning: Bill Alexander, who offers a course at Wharton entitled Family Business Management and is also part of The Next Generation Workshop presented by FCCP, makes a point of teaching his students about empowerment — preparing the son or daughter (or other family members) to assume leadership in the business.

It’s done, he says, when the son or daughter establishes relationships with people who are key to the business’s prosperity, gets a thorough knowledge of how the business works, and develops negotiation skills to handle not only operational but also family issues. “People always want to think about succession, how to get [the CEO or president] out of there,” says Alexander. “But the CEO is never going to consider succession until his suppliers or whomever say they are impressed with the next generation and will continue to do business with the company. The older generation has to hear those signals before thinking about wanting to let go.”

Empowerment is a “big issue,” notes Andrew Bosshard, W’97, whose grandfather founded what is now a group of eight community banks based in LaCrosse, Wisc. “It’s about how you set yourself up for becoming the next leader of the company, how you get your father’s respect and also the respect of the employees and key managers so that they will follow your leadership. I am the oldest sibling in my family and I definitely want to be involved in the company. I saw my grandfather build it. I don’t want to be the one responsible for letting it end.”

The irony in any discussion of professionalization, however, is the backlash against the image of unfeeling, unattached managers leading a company in which they have no stake other than compensation.

Historically in America, says Michael Useem, “the attitude has been to get professional managers in and unprofessional family members out. And yet intuitively, I have the sense that one of the great sources of vibrancy, or energy, in companies is the fact that the family is there.

“In the U.S. there are efforts now in large firms to somehow reunify management and ownership by making top executives own lots of company stock, ensuring that their compensation is similar to what they would get if they actually owned the enterprise. American companies are coming full circle back to where family enterprise never left.”

“Our vision,” says Habbershon “is a global network of families where the top businesses from all over the world will come together, and report on research … In emerging economies such as Latin America and Asia, where the success of family-controlled companies is an integral part of their future, creating a network of family corporations is more important than ever.”


If the family-controlled corporation is the predominant form of business organization in the world, it follows that the great majority of Wharton alumni will have some contact with family-owned and managed companies during their careers. “Either they will work in their own family-owned firm, in a consulting company whose clients include family firms, in a financial institution securing capital for family firms or in a major corporation that itself is family-controlled,” notes Habbershon. “If you are a Wharton graduate in the middle of any of these situations, you need to understand how family dynamics impact enterprise — both the efficiencies and inefficiencies they create.”

The influence of family firms on the U.S. economy is impressive. About 49 percent of all GDP comes from family owned firms, 59 percent of the workforce are employed by them, and at least 78 percent of net new jobs — some say close to 100 percent — are created by them.

For Habbershon, it all provides a rich universe of research and teaching opportunities. “My overall goal is to encourage Wharton faculty to conduct world-class research on the family form of business organization and then have it delivered to family firms in educational programs,” he says. “But you can’t deliver what you don’t understand.” The FCCP has a number of projects underway:

–          The Wharton/Banco Popular Family Corporation LEADS Project is the pilot for a worldwide network of institutional partnerships created to conduct firm-level research on family corporations.

Central America, Brazil and Chile are currently being explored as sites for future LEADS projects.

“It’s one thing to say there is intergenerational disagreement,” says MacMillan, “and another to say exactly where the disagreement is and measure it. Once you do that you can reach some consensus and get on with forging a strategy for the business rather than just battling away over things like succession planning.”

–          The Next Generation Network is a series of workshops focusing on leadership development and the transition process in multigenerational family firms. Successor generation persons are invited to three-day entry workshops offered in Philadelphia for the U.S. market and in Miami for the Latin American market. A third site is being explored for an Asian workshop.

–          A series of Executive Summits is being planned as a precursor to the Family Corporation Best Practices Program. The first will be conducted in Brazil in June. Wharton in conjunction with alumni will invite the leading family business CEOs in Brazil to an interactive session on the challenges and opportunities of the new global marketplace. The goal is to generate best practices among these family firms and then to develop them into a worldwide best practices program.