America may be the richest nation on earth, but we've never had much use for rich people. Oh, sure, we admire the guy who comes over from East Shblinsk with nothing but a sweat-stained shirt on his back and an American dream in his head, the guy who works 16 hours a day for the next 30 years building an empire out of nickel-plated widgets. We love this guy. But his son? The one who's handed the business on a silver platter? We hate him.
Ever since we thumped the royalists a couple of centuries back, Amer- icans have shared an obsessive distaste for anything that smacks of privilege. In this land, you hatch your own ideas, pay your own dues, and chop your own path through the woods. If Europeans are effusive about ancestral ties, the mantra of the American mogul is "Nobody gave me nuthin'." You could almost hear our collective applause when we read that Bill Gates and Warren Buffett plan to leave mere scraps in their wills to their offspring.
From Horatio Alger to Trading Places, this bootstrap model is regularly reinforced with inspirational tales of savvy poor boys who rise through the corporate ranks while the owners' pantywaist progeny scheme to destroy them. Among businessmen, it's a badge of honor to have been poor-ask Donald Trump and Ted Turner, who didn't rise from nothing but sure like to have people think they did. Not surprisingly, this ethos threads its way through business schools, too, as professors push the notion that success depends on self-reliance and cunning, not connections and favoritism.
What about you, a diligent student of business? If you're like most, you swallow the party line. You're righteous. You're steadfast. You'd rather assemble Happy Meals than accept a job from Dad. Well, before you piss the old man off, do yourself a favor: Open the books of those businesses that, for generations, have passed from father to son, have crowned brothers CFOs and cousins presidents. Take a hard look at the numbers. For all our national antipathy toward privilege and lineage, any reasonable analysis of American business leads to one inescapable conclusion: Nepotism is good. Good for business, good for America.
How good? Family-run businesses account for 40 percent of Fortune 500 companies and produce half the GDP. Ever hear of Ford, The New York Times, AIG, Lowe's, Nordstrom, Walgreens, Archer Daniels Midland? Those inbred silver-spoon firms have been kicking ass for ages. A 1997 study of 219 U.S. companies conducted by a team of business professors from the Universities of Cincinnati and California State, Northridge, found that family-owned companies generate 4.3 percent more sales growth and 6.2 percent more cash flow per employee than other companies. They carry 2 percent less debt than other firms. They have 5.4 percent greater value as measured by the market-to-book equity ratio.
Whether the company is a large-cap firm or a corner grocery, passing the corporate reins to Junior gives it a healthier balance sheet and a fatter bottom line. Oh, and about those stubborn beliefs that the corporate gene pool stagnates and leadership traits get diluted through the generations? Hogwash. Tom Watson Sr. didn't think computers would add much to his cash register business, but Tom Jr. saw the future and pushed International Business Machines deep into the product field where it would dominate the world. And it was son Samuel of S.C. Johnson & Son who helped turn his family's slow-growth wax company into a consumer-products juggernaut by developing a little product called Raid.
Maybe it's just the word we hate. Nepotism-usually uttered with disdain-sounds like a disease you might catch in certain municipal parks after closing time. In fact, the word stems from the Italian nepotismo, which comes from the root word nepote or nipote meaning "nephew." Nepotism and family business aren't always synonymous, of course. If two brothers start a chain of auto-parts stores, that's a family business. Twenty years later, when a son or niece hops a preferential track toward management, that's nepotism.
But what does a son or daughter, nephew or niece bring to the company that a nonrelative doesn't? Why is a family-owned business able to generate more sales growth and carry less debt? For one thing, in any well-run family company, offspring often feel extra pressure to perform. "People who sneer at nepotism are almost always those who are not part of a family business," says Alex Jones, co-author of The Trust: The Private and Powerful Family Behind the New York Times. With co-author Susan E. Tifft, Jones spent seven years probing the Times dynasty, which began with Adolph Ochs in 1896. The secret of the family's success? "They have never felt that The New York Times belonged to them; they feel that they belong to The New York Times," Jones says. "There's a sense throughout the family that they have an obligation to endure." Each successor to the newspaper's helm has been initially viewed-by just about everyone-as a lightweight incapable of carrying on the august traditions of the most overtly serious paper on the planet. Yet each new leader, including the current publisher, Arthur Ochs Sulzberger Jr., has risen to the occasion.
Besides providing motivation, nepotism allows managers to be more efficient in their extemporaneous dealings. Relatives perceive one another's thoughts and emotions so viscerally that an arched eyebrow or a nervous tapping of the pen can take the place of a three-page memo. What's more, nepotism among top managers often eliminates the game playing and posturing so common among corporate executives. People are apt to be more honest-often brutally so-with relatives than they are with nonfamily co-workers. "You have the opportunity to be totally authentic," says Joe Astrachan, Wachovia chair of family business at Kennesaw State University in Georgia. "And those kinds of reality checks help any enterprise."
When Dave Hurley's Connecticut-based air-charter business, Flight Services Group, hit bumpy weather during the early 1990s recession, he hired his wife, Johanna, to help out. Were employees skeptical at first? Absolutely. But after more than two decades of marriage, Johanna Hurley knew her husband's strengths and weaknesses better than anyone. She could read his moods without his uttering a single word. She could be blunt without undermining his authority. She could be trusted with the company's most sensitive information and Dave's deepest concerns. And she had a greater incentive to see the company succeed than any hired gun ever would. Johanna put her experience as an artist and writer to work on the company's image, streamlining everything from the logo to the in-flight food service. Dave Hurley was able to return to what he knew best: maintaining and flying airplanes. Within a few years, a company that had been losing $40,000 a month was earning more than $2 million per year. Dave credits Johanna's commitment with saving the company, which they sold in 1999.
That sense of commitment can't be overvalued. In an age when free-agent chief executives hop from firm to firm in search of the beefiest paycheck, a manager who bears the company's name is uniquely bound to the prosperity of that enterprise alone. This provides an advantage greater than any technological advancement or management strategy. For starters, everyone from the line workers to the board members can be sure that the CEO is not going to leave the company, taking his skills and proprietary information with him. "It's not like the chairman of Ford [William Clay Ford Jr.] is going to run off to General Motors," says Astrachan. "Augie Busch [August A. Busch III, Anheuser-Busch chairman and CEO] certainly isn't going to resign to become chairman of Miller. That's the kind of continuity that you don't get with a nonfamily leader." What's more, if everybody knows who the next boss will be, there probably won't be a disruptive round of resignations by top people with each changing of the guard. For an example of the kind of tumult that can bring, consider General Electric, where two key division heads quit after Jack Welch tapped Jeffrey Immelt to succeed him.
Any company with a clear line of succession assures its workforce and its investors that management will remain stable for generations. A secure firm begets confident customers who don't need to reevaluate the business with each management turnover. And suppliers keep the credit line open as Daughter takes over from Dad. Media mogul Rupert Murdoch, the 39th-richest person in the world, clearly had these benefits in mind when he appointed his 28-year-old son, James, to run Star, News Corp.'s Asian satellite broadcast system. But the timing of the move suggests that Murdoch was using nepotism to his advantage in yet another way. He has made no secret of his desire to penetrate China's huge and untapped television market, and as he has said, "family is very important to the Chinese." When James jets off to press his father's agenda with Chinese officials, he will presumably command more respect than a non-Murdoch would. By putting his son at the helm, Murdoch has signaled to Beijing that this relationship will last-that the family and the business are one and the same.
Businesses run by families have another major advantage, says Charles H. Matthews, one of the business professors who conducted the sweeping 1997 comparison of family-owned versus non-family-owned companies: The best qualities and traditions established by the founders get passed along through the generations. "Continuity is integral to the notion of a family business," he says. If Granddad preached frugality and the uneasy burdens of debt over Sunday dinner, subsequent generations will inherit his thriftiness even if they embrace modern leveraging techniques to grab a lower rate of debt. An outside CEO, on the other hand, will almost certainly change things and put his stamp on the company-after all, that's what he feels he was brought in to do. But CEO Jr. can stay the course without shame.
In most cases, of course, the driving force behind Dad's decision to turn the company over to the kids is rarely so thought-out, practical, or mindful of the bottom line. It's usually driven by something more powerful. Adam Bellow, whose book In Praise of Nepotism will be published next spring by Doubleday, believes the decision satisfies nothing less than a deeply instinctive, even biological urge. "Throughout history, all species have displayed a very marked preference for their relatives," he says. "It begins in the struggle for survival."
Indeed, from an evolutionary perspective, could there be a wiser play? In the natural world, the urge to give every opportunity to members of the same gene pool has always been the single greatest motivator. "There would be no cooperation and social life in nature without it," Bellow says. "Nepotism explains the integration and cooperation of ant colonies, beehives, and termite colonies." And so it is with humans: Once someone has invested his sweat and blood in a business, it seems only natural that he'd want to bestow it on the people who share his genetic material.
Given the primal feelings nepotism taps into, it's hardly surprising that it has transcended religions, cultures, and time. But in this country, which cut itself free of a land steeped in privilege and favoritism, biological necessity began bumping heads with the American philosophy of egalitarian self-reliance.
"We've always made a crusade of getting rid of nepotism," says Bellow, who, as the son of Nobel Prize-winning novelist Saul Bellow, knows something about the mixed blessing of inheriting a famous name. (His words form an appropriate credo for anyone who inherits the family firm: "My father's name got my foot in the door, but if the door slammed, it wasn't my father who was going to say ouch.") Perhaps Alex Jones, the chronicler of The New York Times dynasty, sums up the conflict best: "We have parallel myths," he says. "On the one hand, the myth of the self-made man is one of our enduring models. At the same time, every self-made man's immediate impulse is to pass what he's created to the next generation." In other words, Adolph Ochs didn't leave his home in Tennessee for New York, buy an obscure failing rag, and convert it into the greatest newspaper in the world in order to hand it over to a bunch of strangers.
