Dynasties: Fortunes and Misfortunes of the World's Great Family Businesses
by David S. Landes
A review by Niall Ferguson
"Happy families are all alike," Tolstoy famously announces in the opening sentence of his great novel; "every unhappy family is unhappy in its own way." David Landes's new book is about eleven families, all of whom would have been comparably -- and boringly -- happy if money were the key to happiness. Fortunately for Landes's readers, the relationship between wealth and contentment is fascinatingly non-linear. You need a certain amount of money to escape from the miseries of want, no doubt; but beyond that point, each additional thousand dollars does not yield a proportionate increase in happiness. Quite the contrary. Great wealth can lead to great unhappiness, sowing discord between parents and children, husbands and wives, siblings. It turns out that every rich family is also unhappy in its own way.
Why do some families become very wealthy? Why do a small number of those families remain very rich over more than a couple of generations? Landes observes that business historians have as a rule paid too little attention to such questions, preferring to study the rise and the fall of corporations rather than of family enterprises. As he rather startlingly points out, 90 percent of American firms and almost as high a proportion of European firms are family businesses, accounting for half of all employment in the United States and two-thirds of jobs in the European Union. Nor are all of these firms mere minnows. Around one-third of Fortune magazine's top 500 firms are family-controlled or at least partly family-managed. According to BusinessWeek, the big family-run firms have recently out-performed public corporations, which are owned by multiple unrelated shareholders and managed by salaried managers.
So the study of rich families is more than gossip or social history. Family firms clearly matter. A majority of business ventures begin as family enterprises, especially in developing economies where trust in kinship exceeds trust in legal and regulatory institutions. But the question that most exercises Landes is why certain family firms endure. To answer it, he has provided eleven case studies: three banking families (the Barings, the Rothschilds, and the Morgans); four car-making families (the Fords, the Agnellis, the Peugeots, and the Toyodas); three that started out in mining (the Rockefellers, the Guggenheims, and the Schlumbergers); and one (the Wendels) that began with iron and steel.
A social scientist might consider this a rather small and unrepresentative sample -- all but one of these families are Western -- and skewed in favor of success. In order to explain satisfactorily why these eleven have endured, we really need to know why, say, eighty-nine others did not. For a historian, however, eleven dynasties is plenty. No one should underestimate the scholarship that lies behind each of Landes's chapters, though the erudition is lightly worn.
Do any general rules emerge? Explaining initial success is, perhaps, the easy part. Each of Landes's families was launched on the road to riches by an individual who was in the right place at the right time with the right idea and the right skills. Nathan Rothschild grasped the possibilities for international bond issuance after the Napoleonic Wars. Henry Ford saw that the automobile could be mass-produced as an essential item, not a luxury. Sakichi Toyoda understood that Japan could copy and improve on Western textiles and cars. John D. Rockefeller realized that oil would first illuminate, then heat, and finally propel the American economy. And so on.
Good timing, a neat innovation, a strong work ethic (not forgetting ruthlessness toward the competition): these are invariably the central ingredients of entrepreneurial success. The challenge is to perpetuate the family's success beyond that individual's working life. (Landes's definition of a dynasty is "a succession of at least three generations of a family business, marked by continuity of identity and interest.") Dynasties, he says, endure by giving the right answers to the following questions. Which family members should be directly involved in the firm, and which excluded? The Barings' principle was, as one of them explained, that "there can be no place for one of our members unless he shews [sic] the requisite character and brains." The Rothschilds and the Peugeots explicitly excluded sons-in-law; the Toyodas did the opposite. Should children be educated for business or allowed to follow their own inclinations (or society's fashions)? Edoardo Agnelli was no Gianni, but, Landes implies, sending him to Princeton did not help matters. Should accumulated wealth be passed on to a single heir according to a rule like primogeniture, as favored by the British monarchy and aristocracy, or divided up between all heirs equally, as under French law? The Rockefellers favored primogeniture. The Peugeot family's rules required male heirs to buy their sisters out. Finally, should decisions about marriage be left to children, or should children be steered toward suitable partners? The nineteenth-century Rothschilds favored cousin marriage, which helped to keep the family's wealth concentrated. The Wendels, by contrast, had a weakness for blue blood, with the result that their heirs preferred "estates...sports, art collecting, scholarship, dignities and amiable distractions" to honest toil and capital accumulation.
One of the most interesting documents adduced by Landes is the set of rules drawn up by Robert Peugeot in 1936 with a view to imposing his preferences on his five children and fourteen grandchildren. Landes paraphrases this rare example of a family constitution:
Shares in the enterprise would be passed only to sons, never to daughters or sons-in-law....The company was charged with buying the women out....All members of the family must reinvest earnings from the company in the company. There was no question of simply enjoying the income at the expense of the enterprise. Black sheep had to be put aside, where they could not make trouble.
The Rothschilds arranged matters even more formally in their regularly revised and renewed partnership agreements. In the first, dated 1810 and signed by Mayer Amschel Rothschild and his two elder sons, it was specified that the father alone had the right to withdraw his capital from the firm during the period of the agreement, and the right to hire and to fire employees of the firm. Moreover, his unmarried sons could marry only with his permission. Profits were to be divided in proportion to capital shares, no partner was to engage in business independently of the others, and the agreement was to run for a fixed period of ten years.
All the Peugeot[s] should have enough collateral income to be able to live up to these terms. In other words, they would have to work in order to make enough money to reinvest. There was no stipulation that they had to work in the family firm, but if they were capable and wanted to work there, they could count on united family support to maintain them in key posts.
All the sons would be given a place on the board of the family partnership....Their voting power would be partial to start, but would grow as they got older and gained experience. It would grow faster for graduates of one of the competitive grandes écoles....
Executive managerial officers of the company were explicitly forbidden to engage in political activity other than local.
The most remarkable clause in this agreement stated what would happen in the event that one of the partners should die. Each solemnly renounced the rights of his wife and children or their guardians to contest in any way the amount of money agreed by the surviving partners to be the deceased's share of the capital. Moreover, his widow and his heirs were to be denied any access to the firm's books and correspondence. This was the first formal statement of that distinctive and enduring rule which effectively excluded Rothschild women -- born Rothschilds as well as those who married into the family -- from the core of the business: the hallowed ledgers and letters.
The Rothschild family agreement of 1818 -- this one between Mayer Amschel's five sons -- introduced a new system whereby each of the partners received 4 percent of their individual capital share per annum by way of an income to cover their expenses, business and domestic; any lump sums spent on legacies for children, homes, or land were to be deducted from the individual's capital. Since they were now operating distinct business "houses" in three different cities -- Frankfurt, London, and Paris -- the new agreement had to specify the partners' shares of both profits and expenses, "although [the three houses] form[ed] but one general joint concern." Each house had to inform the others of the transactions it carried out on a weekly basis, though this later became a monthly obligation.
Seven years later, in an effort to avert possible disputes over inheritance, it was again agreed to bind each of the partners' heirs to accept whatever their share might be without resort to law. Now it was specifically stated that if the heirs of a deceased partner took legal action against the surviving partners, one-third of the deceased's share of capital would be forfeited and would be distributed to the poor of Frankfurt, London, and Paris! Presumably for reasons of brevity, Landes leaves out these details of the Rothschilds' modus operandi. The omission is regrettable, given their crucial importance to the family's success as a business dynasty.
Family constitutions and contracts matter because, as Landes's eleven examples illustrate, powerful forces are always working to dissolve dynasties. The first of these is the "Buddenbrooks syndrome," named after Thomas Mann's great novel, subtitled "The Downfall of a Family," which tells the story of four generations of a Lübeck mercantile dynasty. The founder is smart and tough; his son is competent; his grandson is self-indulgent; his great-grandson is degenerate. This is the extreme case. The more common problem is what statisticians call mean reversion: fortunes are made by exceptional individuals, but their children are seldom so brilliant. Landes quotes a member of the Hambro family as having once declared, "Our job is to breed wisely." But the lottery of genetics tends to foil calculated reproduction. Hambros Bank is now owned by Société Générale.
A smart businessman is more likely to produce a worthy heir if he has more than one. Mayer Amschel Rothschild had ten children. Of the boys, two -- Nathan and James -- were exceptionally bright. The problem with repeating this strategy of multiple offspring over time is that pretty soon your dynasty is a full-scale clan of unmanageable size. If each of your five kids has five kids, and each of them also has five kids, and so on, by the time your great-great-grandchildren meet to celebrate your hundredth birthday, there will be 625 of them, which is a big board meeting. Something like this actually befell the Wendels, who had 350 family shareholders by 1977.
In practice, the demographic transition that characterized the twentieth century meant that few dynasties grew so large. (In the 1870s, 18 percent of British women had ten or more live births, while more than half had six or more. But European fertility has since declined dramatically, to an average of 2.7 children per woman in the 1950s, and just 1.4 children per woman today.) The catch is that in limiting their broods to two children, the wives of millionaires have significantly reduced the chances of bearing one financially talented heir -- or any heir at all, given the habitual reluctance of male millionaires to entrust their companies to daughters, no matter how smart. (The Guggenheims are said to have "daughtered out": from mines to museums in three generations.)
One way to avoid this, of course, is for millionaires to have more than one wife, which many do. But this, too, has its disadvantages. Divorce is seldom good for family fortunes. Second wives have an especially bad reputation among those who give legal advice to the very rich. Finally, there is what might be called the "old fool factor." As average life expectancy has risen -- from forty-eight in 1900 to seventy-six in 1990, to take the British example once again -- so successful men have increased their chances of blowing it all in their dotage. John D. Rockefeller very nearly did, living long enough to lose, at the age of ninety, $18 million in the crash of 1929.
It is for all these reasons that nearly all family fortunes, if they are to endure, must in some measure be separated from the families of those who originated them. On close inspection, indeed, that is the real story in all but one of Landes's cases. By the 1920s, J.P. Morgan was being run by men like Thomas Lamont and Dwight Morrow, not by "John Jr." In London, the firm became Morgan Grenfell thanks to the resourcefulness of the firm's office manager, Edward Grenfell. Ultimately, the New York partners rebelled when asked to employ the dim Charley Morgan's even dimmer brother John.
Henry Ford was so hostile to outside influence that he once bought back all the shares in Ford Motors that were not in family ownership. Yet his overbearing personality wore down his own heir, Edsel, who predeceased his father at the age of forty-nine, by which time an outsider, the thuggish Harry Bennett, was calling the shots at the company. Family members -- most recently Bill Ford Jr. -- have retained the power to hire and to fire top managers; but the company's ups and downs have owed much more to "imperial CEOs," the most famous being Lee Iacocca. Indeed, if the stars of Landes's book are the mercurial founders, then the co-stars are not their offspring but their managers. The Agnellis had Vittorio Valletta and Cesare Romiti. The Peugeots had Maurice Jordan, Jacques Calvet, and Jean-Martin Folz. The Toyodas had Taiichi Ohno. As characterized by Landes, these men combined technical skill with drive and unswerving loyalty.
At the same time, nearly all the families in Landes's sample have brought in outsider capital over the years, often ending up with only a minority stake. (The Peugeots have a 26.5 percent shareholding in the company founded by their ancestors, though two-fifths of the votes.) The reasons for these processes of partial alienation of both management and ownership are clear. In the words of John Dumesnil, who married into the Schlumberger family, there have been "too many instances of businesses brought to ruin by a soviet of sons and sons-in-law, all extremely convinced of their right to equality, all fussing with everybody and giving orders left and right, the least experienced and the least active stifling the initiative and the authority of the better ones."
In fact, only one out of the eleven families that Landes discusses can boast an unbroken line of family ownership and control dating back more than two hundred years. Even the Rothschilds would be the first to admit that they rely heavily on the skills of non-family directors and managers, and have done so for at least half a century. Moreover, they have paid a price for resisting infusions of non-family capital. Once the biggest financial institution in the world, the Rothschild Group is today a federation of boutique companies offering niche financial services. A modern-day giant such as Goldman Sachs would not be Goldman Sachs if it were still a family-controlled firm.
Dynasties is rich in anecdote and will bring pleasure to the many readers who admired Landes's last book, The Wealth and Poverty of Nations. It offers the same combination of shrewd insight and an engagingly conversational style. It is especially funny on the temptations to which nearly all dynasties sooner or later succumb, the most lethal (in the author's view) being horses. And it also offers a satisfyingly paradoxical conclusion: Rich families stay rich only by delegating the management of their firms and fortunes to able outsiders, and quickly. Beyond that, to echo Tolstoy, every rich family seems to be rich -- and often quite remarkably unhappy -- in its own way.
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