Family Firms

I’ve always been interested in family firms because I come from one. My great-father founded Bobby’s as a milliner (hat shop) in Margate around 1900, and he and his son built up a small empire of department stores through the following twenty years, mainly around the south coast of England. I still meet people who can remember Bobby’s and most do so fondly, the stores were associated with class for many years.

I enjoy watching “Mr. Selfridge” on PBS and sometimes wonder if it could have been “Mr. Bobby”. I never met my paternal grand-father, since he died a year to the day before I was born – the reason I was given his names as two middle names. From what I hear he, like Harry Selfridge, was a bit of a character. It must have helped to be a swash-buckling society type in those early days of modern retail, and his flaws were as evident as well, including a propensity for gambling and a wandering eye.

Family folklore believes that the firm over-expanded and was caught out by the great depression, being forced to sell out to Debenhams. Debenhams retained the store names until the early seventies, the point at which brand management became very influential to senior managers. You can still find remnants of my family legacy carved into buildings around the south coast.

“Rags to rags in three generations” is a saying in England, one with an equivalent in other cultures. It expresses the theory that fortunes are often won and then lost again over a span of about a hundred years. My family follows the pattern. Frank, the founder, was a dreamy-eyed entrepreneur. Arthur, the builder, had a forceful if flawed personality. Harold, my Dad, inherited more of the flaws than the forcefulness, and might be said to have had things a bit too easy in his early days. Then there is me, without really much of a remaining legacy to follow and making the choice to take a different path.

Last month The Economist published a good survey of family firms. Perhaps the whole concept of the family firm is cyclical, not just the life cycle of a typical example. For the survey found that a couple of generations ago most successful businesses had a leading family. Then the concept seemed to hit a rocky patch, just like Bobby’s. But somehow it is making a comeback now.

Partly the comeback is due to the growth of Asia in business. Korean Chaebol are just one example of an Asian cultural approach of keeping things close to the family, and now Chinese, Japanese and other Asian firms are gradually conquering the globe without discarding their methods. But there is more to it than Asia. The Economist quoted the German Mittelstand as a set of enduring companies that usually had a dominant family and a paternalistic culture.

True to form, The Economist conducted an analysis of the strengths and weaknesses of family firms. The weakness is obvious. Family firms are anything but meritocracies.

Rather than selecting leaders based on talent alone, a family firm finds roles for the family, talented or not. So a founder will probably be great for the swashbuckling early phase, but may struggle when teamwork and patience need to replace autocracy. An elder son may give fresh impetus, but may be a spoilt brat resented by everyone in the firm. There may be several sons (or daughters), all with their eye on the main prize and unable to work together or divide the spoils. There may be no sons at all, or at least no children who actually want to take over the mantle. Any outsider joining the firm has to recognize that their ladder to the top will depend on ingratiation with family members, patiently waiting for delayed retirements, and might even necessitate marrying a chosen daughter. All of these issues multiply if the firm manages to survive into a third generation.

Given all these handicaps, it is truly amazing that family firms survive at all. Rags to rags is indeed much more common, but a great many firms manage to avoid that curse. Most have near-death experiences along the way, for example the fate of the Ambani brothers of Reliance, unable to work with each other after their founding father died and in the end surviving by splitting the company in two. Somehow, more survive and even thrive than one would think made any sense.

Why? We have to look at the other side of the equation, the advantages.

Family firms tend to have enduring leadership, with a consistent core purpose and strategy, pursued over multiple years without taking undue notice of temporary setbacks and short-term results. The culture and ethos of the company comes from the founder, and is often plastered all over the walls of the premises next to portraits. It is clear what the core values are, and the leaders epitomize them and demonstrate them.

Next, family firms are usually careful whom they borrow from. Most debt comes from domestic sources or from a local bank with a long-term relationship. Debt itself is often avoided or at least kept as a small portion of the balance sheet.

Finally, family firms engender genuine loyalty among staff. People tend to stay at such firms longer. They buy into the strategy and will work hard not just for themselves but for the family as well. Their rewards may not come consistently or even commensurately to their efforts, but they sense that they are treated fairly and that they will not be laid off except as a genuine last resort. If the family boss says something, they are inclined to believe it.

None of these advantages are fixed or guarantees of success. The stable strategy may be a misguided one or become obsolete. The inheriting son may not value long-term employees in the same way, and might force through reckless investment programmes. Worst of all, they may come to embody an ethos contradictory to that plastered on the walls.

It is these moments when a family firm is most vulnerable. But some can use these principles to help them through such potential crises and to emerge stronger on the other side.

The Economist made all these points, and concluded that the family firm is far from dead, and may even continue to outperform more conventionally managed competitors in many cases. And then the survey rested its case. In my opinion, it failed to ask the obvious next question.

What stops all firms having the advantages of family firms?

When you look at the so-called list of advantages, you can actually paraphrase them. You can simply describe the firm as well-managed. All firms should strive for clear values, consistent strategy, a long-term approach, managed debt, and authentic staff loyalty. And, with sound practice, the list is attainable by any firm.

So most non-family firms are actually poorly managed. Why? Well, when I started at Shell, I would say that the firm enjoyed most of the positive attributes. Even when I left, it still had many of them. To an extent some were lost, it is clear to me what the prime causes were. Managers became greedy, joined in the share-option and bonus circus and lost sight of their values. They started listening to consultants, bankers and financial analysts. And they started serving the master of the quarterly earnings report.

Shell is more immune to these diseases than most, because it has a deep legacy and still has conservative debt practices. But most publicly quoted firms have sold out to the new masters completely, spouting shareholder value and ignoring strong basic principles. To be fair, there are strong elements to such scrutiny, but I do feel that overall it has failed in its primary purpose of value creation.

Wall Street and the so-called investment community are the real villains of this piece. Despite competing against privileged, upper-class spoilt brats, sometimes talentless and usually fighting among themselves, shareholder capitalism has not convincingly won. Now isn’t that a scandal?

If I had somehow inherited Bobby’s intact and it was still independent, my conclusion from all this would be to avoid taking it public at all costs. As a small investor, my conclusion is to ignore virtually everything I read from financial analysts. And as a citizen, my conclusion is to ignore any political party or argument sponsored by these charlatans.

Now that would have been a neat conclusion to the survey in The Economist! Ah, but let me quickly check where their sponsorship and finance comes from. Oh yes, that explain it!   

Solutions to low Pay

A series of strong trends have combined to squeeze the wages of all but the highest earners since about 1980. Labour markets have become globalized, deregulated and made more efficient by technology, while labour supply has grown due to women and older people working. Unions overplayed their hand and have been punished by near impotence, greed has taken hold at the top of companies and their advisors and in finance, while technology has served to reduce the labour content of many tasks.

These are all major trends, and none show signs of abating. The effect has to fundamentally alter the balance between buyer and seller of labour in the west. The Economist tends to believe that over the long term innovators will grasp the opportunity and create new industries and new jobs, but I am skeptical, at least that this dream will arrive fast enough to avoid serious social damage.

The damage is severe, since the concept of jobs for almost all and living wages has been at the centre of the economic model for generations. Now we see food banks spreading towards the middle classes, people surviving on ever-reducing benefits in trailer parks, others working on three or four jobs even while infirm or raising a young family, and a whole generation heading towards pensionable age with no accrued pension. Even the rich notice that these people do not fuel further growth through consumption (at least once ruses of credit card debt have been maxed out). Linked issues of racial and generational imbalances and inequality are highlighted, and intolerance is growing. Serious social unrest and even breakdown may follow.

So this is a serious problem requiring serious solutions. The left, sadly, seem to propose solutions around reversing the trends. Many advocate inhibiting trade, re-regulating labour markets and even re-nationalisation, and forcing power back into the hands of unions. I was shocked recently to see Mark Brooks, a US commentator I respect, railing against impending trade deals – it made me wonder which union he was in the pocket of.

The problem with such solutions is twofold. First, like King Canute trying to hold back the waves, they cannot work. These trends are inexorable, we have to accommodate them not try to wish them away. Second, the solutions ignore the positive benefits that most of the trends have brought in their wake. Trade is a good example – from trade we all benefit from wider selections of useful goods and services at lower prices. Who would seriously argue that we would be better off with a new generation of Arthur Scargills wielding power? And do we really want to go back to branch banking and forsake other internet conveniences? The trends have made our lives better in countless ways, and have helped developing economies to support better lives too. So the left sound out-of-touch with their arguments, and all they do is reduce their credibility and support.

The Economist identifies three solutions, all overlapping and none providing more than sticking plaster. Labour markets can be partially re-regulated, governments can impose higher minimum wages, and lower paid people (and companies employing them) can be given tax breaks. The Economist points out downsides to all three, but each have a role to play.

Re-regulation does not mean going back to the days of jobs for life. But the new normal of zero hours can become close to exploitation. In Italy they have just rolled out a standard minimal employment contract, an idea which seems to make a lot of sense. We have it for renting houses – Bloomberg introduced a standard simple contract that is now used almost universally and which has cut out unscrupulous landlords. The same idea can apply to employment. Fair terms of notice, conditions, insurance, hours and so on could become statutory minima, and if widely publicized then anyone operating outside can be easily spotted and censured.

Minimum wages are hated by the money lobby, but have actually been quite successful. Like pensions, they should be indexed so that they don’t become gradually eroded, and cities with a high cost of living should introduce a higher minimum wage as well. Something is wrong when Walmart and McDonalds are able to claim kudos by raising their wages.

Tax is the third option. The Blair government in the UK introduced tax credits, and the liberals in the last coalition grew personal allowances. It must be in the interests of nation to get more people into work, so while these trends of supply and demand are so strong, this sort of incentive is a good one.

But I would extend tax reform further, to place greater emphasis on jobs. US states compete with each other to reduce corporation tax and give incentives to start-ups, but many of these firms employ precious few people. Why not keep corporation tax a bit higher, but tie incentives to the payroll budget? Shifting tax from employment towards other factors like land, property, carbon and money (debt, dividends and my old friend Tobin) would be affordable overall while making a real contribution to the low wage challenge. Non-polluting firms outside expensive cities using labour and equity would benefit, and jobs could flow as a result.

The other simple policy response is to target the expenses of those on low pay. This suggests reducing sales tax on basic items, as well as provision of plentiful affordable housing. Plentiful and inexpensive public transport would also be a natural target.

However, in the face of all these powerful trends, I am not sure that even all these measures together would be enough. Instead, governments might have to start rethinking the basic idea of a normal working life. Maternity and paternity leave is a good start – how shameful it is that the US still holds out on any paid maternity leave. An extension could be to greatly expand the concept of jobs as carers, so that nearly anyone can qualify and be adequately compensated.

Family values are stronger in developing nations, but have become eroded in the west. Most of us now endure periods with elderly parents who would really appreciate more time with their kids. Instead of packing them into nursing homes and shuffling them between stretched care workers, why don’t we devote some hours each week and some weeks each year to truly caring for our parents (or other elderly people)? A simple qualification could be quickly arranged to cover most care needs, and a system like maternity pay introduced so it could be monitored and compensated. Our families would become stronger, we would learn new values and skills, and the overall economy would be rebalanced.

The money lobbies would fight this change, and probably only enlightened places like Scandinavia would have the courage to introduce it first. We would have to be careful that the change did not act as a set back for women, with both genders taking their share of the caring opportunity.

So far, I don’t think policy makers have understood the scale of the assault on standard employment models. So many trends are at work that small measures will not be enough. Creating carer as a job for most of us for periods is one example of the sort of response that could be radical enough to make a real difference. Maybe other similar ideas are also available.     

The Challenge of low Pay

I am delighted to see the political conversation in the west finally starting to embrace the challenge of low pay in developed countries. Challenges of inequality, poverty and race are closely related and are also attracting the attention of commentators, and not before time. One risk is that people conflate these different issues together. They each need attention, and call for overlapping but distinct remedies.

The Economist included a good essay about low pay in its May 2-8 edition. Given the massive weight of factors driving the trend, perhaps what is most remarkable is that the problem is not even worse by now. For, in the absence of legislation, there is no powerful reason why wages should be enough for people to live on.

Many of the driving factors overlap and support each other. They started working in concert from the 1970’s or even before, and really accelerated with the Reagan and Thatcher revolutions of the 1980’s. Few of the factors are abating, and indeed many are accelerating. As with so many trends, globalization and technology may be the strongest factors behind low pay.

Several elements of globalization are in play. Stronger communications and simpler logistics enable companies to source from different places. Developing countries have greater skills and stability than before to go along with their abundant cheap labour. Companies have become more international in focus. Governments have also reduced inhibitors to greater trade, such as tariffs. Standards and specifications have become more international as well.

All of this has made it more attractive and more feasible to arbitrage labour, producing where it is cheapest. In turn, this puts pressure on wages everywhere, and authorities have to accept this in order to stay competitive and not to lose all their jobs.

Technology started with the self-service revolution, whereby consumers now complete purchase or service steps themselves that previously would have been performed by salaried producer staff. When was the last time you used a travel agent? Technology has also generally made capital goods cheaper, shifting the equilibrium with labour. Technology has also changed the nature of what is produced or marketed, into more automated and less labour intensive areas. Internet based companies such as Snapchat or Twitter now have a large share of consumer time and money, but often employ only a paltry number of staff.

As a result, more can be produced and consumed now with fewer people. Global demand for labour is hence reduced. The Economist argues that this may be temporary: during the industrial revolution, labour demand initially reduced before rebounding as new innovative applications came through. I am not so optimistic this time around – it would take an unlikely number of start-ups to employ as many as even just the car manufacturers used to fifty years ago.

Globalisation and technology would have significantly reduced the power of labour without any other factors. But government policy has accelerated the trend. Trade unions had their heyday through the middle of the last century, but they overplayed their hand. Moneyed interests tolerated this growth in union power, perhaps because they feared uprisings: after all communism was entrenched elsewhere in the world and had not yet displayed all its flaws. The fight back started in the 1980’s, led by Reagan with the air traffic controllers and Thatcher with the miners. Now unions are a shadow of their former selves, often representing only a tiny fraction of workers, and hamstrung by legislation.

Despite the downsides, it is not tempting to mourn the days of Arthur Scargill and his ilk. I wish unions had a greater role than today, but they can abuse power, and take a blinkered view putting existing members ahead of the wider constituency of potential future members and the workforce. Damaging legacies of this still exist in the public sector.

The fight back against unions was fair enough, but what came with it was not. Parasites, often in finance or consultancy, started telling bosses that they were worth crazy salaries. The same interest groups built interest in politics and pushed the agenda of greed, masquerading as necessary incentives for competitiveness (why do bosses need extra money to be motivated while workers need less?). Shareholder value took hold as an overriding aim, with investors demanding ever greater short-term returns. Not content with rolling back progressive taxation and unions, the same interest groups successfully lobbied for so-called flexible labour markets, ultimately leading to zero-hours contracts.

I benefited from this through my career. From about 1990, my pay rises and bonuses started expanding. It was trickle down, a subtler version than advertised based on shame. The CEO doubled his own salary, so thought he’d at least have to give 20% or so to those three or four levels below him (while giving nothing to those at the bottom). A few years of this and any semblance of fair reward had disappeared. I did not give the money back, but I do believe I was overpaid for what I did. Now we see the CEO even of conservative Shell taking out over $20m last year: how can that ever be reasonable?

The last trend is supply. People live longer, and are both allowed and expected to work longer (partly because the greed lobby has made a mess of pensions). Women have joined the workforce. More people have more education that they want to see a return from. Further, the Economist points out that a whole matching industry has built up. Starting from humble temp agencies, this industry uses technology to help firms and workers link up more efficiently. Of course, the main effect of this has been to drive down wages further.

So we have a tsunami of trends, all working in the same direction, and I don’t see any of them reversing anytime soon. The meagre increases in wages we start to see this year seem to be a reflection of an unacknowledged economic boom (and even then, compare these wage rises to stock market and property value increases), and sometimes as a sort of PR exercise by firms looking to build popularity with high-profile initiatives. That almost feels like philanthropy.

The effects of lower wages in the west are very clear to see in the statistics for median incomes. These used to be a correlation between GDP growth and wage growth, so that successive generations became better off. This has stopped abruptly. GDP still goes up, most of the time, but wages are flat or often declining in real terms.

This creates misery and poverty in many, coupled with the health and welfare effects of having to take multiple part-time jobs just to make ends meet, or even send kids back into work, like the nineteenth century. This challenges the established social and economic model at its very heart. And to repeat – this trend shows no sign of abating, indeed if anything it is becoming stronger.

There is also a macro-economic effect, one that our cynical friends in finance have started to notice, even while they choose not to notice the grinding poverty all around them. Growth is driven mainly by consumer spending, and if people don’t have income they cannot spend. So each ratchet of inequality and squeezed wages makes the next spurt of growth harder to attain. Even if society can somehow cope with the human consequences of low pay, the economic consequences gradually become untenable as well.

So what should be done? The Economist lists three areas, all somewhat overlapping. The labour market can be re-regulated, governments can give tax credits to top up wages, and minimum wages can be increased. It sees downsides to all three, but seems to prefer the last two over the first.

For me, these areas all have a role, but the problem is bigger so the solutions have to be wider as well. I intended this blog as cause, then effect, then solution, but the causes are so many that I’ll have to return with solutions later in the week.

Free Will Confusion

I enjoyed a recent article in the review section of the Guardian Weekly, which started by discussing some new research about twins.

Twins are the dream of anthropologists, especially twins sharing identical genetic code, since they help research about the balance between nature and nurture. There have been some extraordinary findings. Apparently one pair of twins, separated soon after birth and unaware of each others’ existence, went on to marry a girl of the same first name, then divorce her, then marry again to women of another shared first name.

Of course there are lots of other twin pairs who do no such thing. If you make your sample size big enough, you’ll always find some outliers that feel amazing. Miracles may or may not happen, but there are so many events in the world that some things take place that feel as though they must be miracles.

Nonetheless, the new research does conclude that nature does have a larger role in our choices and our outcomes than was previously established. Experiments with twins have concluded that there is a higher degree of predetermination in our lives than earlier research. Some have gone so far as to claim that we hardly have free will at all, and we are somehow hardwired to take a certain direction.

I am not surprised by the findings. There is a certain mystery to our genes. I have similarities to my parents and to my sibling that I can’t really explain. Even in a situation where we could not possibly have shared an environmental experience, we seem to be drawn the same way, to an uncanny extent.

My suspicion is that most of us share these sensations and find them uneasy, so we rarely articulate them or even admit them to ourselves. Due to our nature, we are always searching out our blemishes and our vulnerabilities, and we see them in our parents and our siblings, usually unconsciously.

Watch how we all treat our close blood relatives. They annoy us much more easily than anyone else. We treat them with shocking disrespect, much more willing to criticize than a situation warrants. They can bring out our best, but far more often they bring out our worst. I think this is because somehow we see in them what we like least about ourselves, facets that we resent and regret. We are not lashing out at them, but at ourselves, or at least our creator or our own characters.

This must be especially difficult for twins. I have only known one twin really closely, and indeed her relationship with her twin sister seemed to have a far deeper impact on her life than I could easily explain, and usually in a mutually damaging way.

The Guardian article went on to discuss how difficult we find the nature or nurture question, This field is a bit like evolution or some others, in that in goes uncomfortably near to core beliefs or fears or perceived wisdom.

A lot of this is about sin and judgment. We have to believe in free will, or how can we do good or evil, except as somehow preordained? If somehow our free will does not exist or is somehow highly limited, how can we judge others? In particular, how can we justify punishing others, if really they had little or no choice over their actions? And how does a human preordination square with a different belief in a divine one?

Separately, there is a fear about our power and even our purpose. If all we do is act out our fate, why do we get so anxious about it? How can we be so self-important? How can we see ourselves as superior to others or even to animals?

This can all be very uncomfortable. If that gives us pause to question our easy judgment of others and our support for punishment over reconciliation, then that is only good. Similarly, it can only be good if it gives us pause to consider whether we really should be defending our relative privileges, for example in welfare or immigration policy.

The article explains that it does not help that we are somehow taught to think of free will in terms of binary choices – perhaps again influenced by the binary notion of sin or goodness. We somehow consider our lives as a long series of binary choices. If even the choice between turning left or right is somehow preordained by genes, we feel powerless or even worthless.

Like the article, I am happy to accept a more prosaic mathematical explanation. Most things we do are from a spectrum of options rather than binary alternatives. Even binary alternatives are so many and overlapping that it feels like a spectrum. In every case, we have complete free will over our choice. But the choices have a range of probabilities based on context.

So for each choice in our lives, the probability distribution may be a sort of bell curve. The most likely value and spread of that curve will depend on everything my brain knows about that choice based on the current situation, everything that occurred in my past and everything in the past of my parents and grandparents and ancestors. In as much as I am hard-wired, it is the wiring that determines the boundaries of the choice. It does not make the choice for me, but makes some outcomes more likely than others. Someone else facing the identical choice would have a different set of probabilities.

I don’t find this scary at all. My free will is intact. So is that of everyone else. But it does explain how my parents and grandparents continue to affect my life. If I had a twin, it would help to explain any uncanny similarities in how we might see the world, and it helps me better understand my sister.

Does this contradict God? I don’t think so, at least if we explain God as a mysterious higher power rather than some controller of the universe. It helps me to see how extraordinary our existence is, and how little control we have, even though we have so much free will and control. Life is just an unimaginably complex algorithm, made up of interlinking probabilistic choices going back to the start of time. That makes me feel humble, and gives me a sense of awe. In my understanding of God, those are good things.

It also gives a little bit of insight into a belief of Hinduism and some other religions, that of reincarnation. I had previously thought of this as one of the human constructs about life after death. Some sort of perennial league table across multiple lives seems to give us more purpose and hope, as well as a way for the powerful to exploit others. But I wonder if there was additional origin, based on people noticing strange family connections across generations. It is a short step from noticing an uncanny shared trait of someone with their grandfather towards believing in some sort of reincarnation.

This also recalls a book from my childhood that I remember a teacher reading to us and that I found scary. Someone in the book was invited to go back in time, many thousands of years. But because everything in the present was influenced by everything in the past, preparations had been made so that nothing should be disturbed, in the form of some sort of safe path. In the event, the protagonist carelessly strayed from the path and squashed a small creature. On returning to the present, everything was subtly different. Sensing this, the organisers killed the protagonist.

Ever the logician, I remember thinking how the plot didn’t quite square up. If things were different, how could the organisers tell, since their own lives must have been different too? This only made me think harder and be more scared, and it made we want to watch the next episode of Doctor Who even more than before.

For all its flaws, I find the plot of the book quite helpful, as it does get across this concept of unimaginably interlinked history. Now I can understand this concept better, I actually find it reassuring and empowering. Thank you Guardian weekly, its reporters and the researchers who helped to make this clearer.