The Family Plot

The Baffler:

Truth be told, family capitalism never really went away. Family-controlled businesses are still overwhelmingly the norm; some 80 to 90 percent of businesses in the United States are family-owned. Family-controlled firms make up about 35 percent of the Fortune 500 and a third of the S&P 500, and account for 62 percent of U.S. jobs. Household names such as Walmart, Ford, Campbell’s Soup, The Gap, Comcast, and Purdue Pharma (the maker of OxyContin) are family-run enterprises. Media empires seem to be especially fond of family control: witness the New York Times Company (the Sulzbergers), News Corp (the Murdochs), Viacom (the Redstones), Condé Nast (the Newhouses), and Rolling Stone (the Wenners). Forbes’s list of the richest Americans is studded with gazillionaires—the Kochs, the Waltons, the Pritzkers, Donald Trump himself—who made their money the old-fashioned way: they inherited the family business. Family owners of the world’s most lucrative businesses are often strikingly reluctant to yield control, no matter how much they might marry for love or delegate day-to-day managerial tasks to a credentialed business elite. A recent study of the world’s five hundred largest family-run businesses found that 44 percent of them were owned by members of the fourth generation or later.

So what happened, exactly? One key development is that the older model of family-controlled capitalism has merged with the financialized variety rather than ceding control to it. Today’s family firms are far more likely than their predecessors to have access to the capital markets they need in order to expand. Perhaps even more important, regulators have been extraordinarily accommodating of families’ desires to maintain control of their businesses even as they sell off large quantities of company shares to outside investors. The innovation that enables this valuable bit of legerdemain is called the dual-class share. Such stocks enable the nameplate family at the helm of a large conglomerate to retain most of the voting power even while owning a minority of shares. The advantages to the family are obvious: dual shares maximize control but minimize financial risk. Dual-class shares are becoming increasingly popular, especially in the tech sector, but they have a serious downside. Numerous studies have found that dual-class firms perform worse than those that confer equal voting rights to outside stock purchasers.

An old problem also plagues family firms: what do you do if your heir apparent turns out to be a wastrel, a dullard, or worse? In Thomas Mann’s great novel of family capitalism, Buddenbrooks, each successive generation displays less business sense and weaker attachment to bourgeois virtues than the one preceding it. The once-thriving family firm slowly declines until finally, in the novel’s closing pages, it is liquidated. Contemporary research supports the intuition that putting the heirs in positions of power tends to be bad for business. One study found that family members who serve as board leaders and CEOs are more likely to erode shareholder value. Investors in corporate giants such as Comcast, Bechtel, Marriott, and Fidelity Investments, as well as countless others, should take heed. In each of those companies, the CEO inherited the job from dear old dad.

Unlike the class of executive heirs Warren Buffett dubs “the lucky sperm club,” managers do not inherit their positions. But today’s managerial elites have little in common with the socially mobile “young men from the provinces” whom Bell saw embodying the brave new spirit of technocratic capitalism. Particularly in the United States, spiraling economic inequality has largely been driven by a new class of “supermanagers”: executives who have helped themselves to lavish, historically unprecedented compensation packages—chiefly stock options designed to spur the lucky CEO clutching them to push for ever greater upward spirals of short-term profitability. These pay packages convert such traditional longer-term managerial perks as performance-based salaries and pensions into wealth and future income from wealth. Defenders often claim that “merit” is the reason the executive elite is rewarded so exorbitantly: the competition for truly gifted Maximum Leader CEOs is so intense that the firms retaining their talent have to produce top-dollar paydays to keep them generating value. Yet there is not a shred of evidence that firms that reward their executives with spectacular compensation packages perform any better than those that remunerate them more moderately.

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