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Episode Transcript

This is Freakonomics Radio, I’m Stephen Dubner. Let me ask you a question: What do this …

[SOUND EFFECT: Ford Motor Company]

and this…

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and this…

[SOUND EFFECT: This family moment is brought to you by Walmart]

and this…

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and this…

[SOUND EFFECT: How about some M&Ms?]

and this…

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and this…

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…have in common? Yeah, they’re some of the most popular and prestigious brands in the history of American business. But also, each of them is a family business. Isn’t that amazing? Isn’t that fantastic? About one-third of the companies in the Fortune 500 are family-controlled. You know the story: some incredibly hard-working person starts a business — maybe a bakery or a brewery, could be a carmaker or a newspaper. And, against all odds, the business doesn’t just succeed — it flourishes. But someday, the founder has to retire, or die. So, who takes over then? That’s easy: the founder’s son or daughter. The scion of the family. Who better to protect and grow the family brand? Makes sense, doesn’t it? Who could possibly work harder than someone whose name is on the building?

Wendy YUENGLING BAKER: What’s important to me is the fact that it’s a family organization and it’s my great-great-great-grandfather that started it, and my dad is still in charge of it.

On the other hand, things don’t always work out …

Bill FINNIE: It’s a Greek tragedy.

The family firm: it’s a way of life. And it’s a nice story. But we’ve got a big, hungry economy here, people. “Nice” doesn’t necessarily generate jobs. So when it comes to putting the family scion in charge of a company, here’s what I want to know: What do the numbers say?

*      *      *

Let’s start with the story of the little brewery that could. Close your eyes and picture a lovely old town in eastern Pennsylvania. It’s got a tidy main street and the houses built into the hills. The town is called Pottsville, used to be a big coal-mining town. The writer John O’Hara grew up here. And across the street from O’Hara’s old house is a five-story brick building with an American flag and tall white letters that say “D.G. Yuengling & Son.”

DUBNER: Here’s Dick, I think. Hi Dick? Hey, Stephen Dubner.

YUENGLING: Nice to meet you. Are we going to talk where it’s nine degrees? Or are we going to go inside? We have heat inside.

DUBNER: What’s your preference?


DUBNER: Let’s go.

Dick Yuengling is CEO of America’s oldest brewery. Yuengling — that’s Y-U-E-N-G-L-I-N-G — is a name with a history. In the original German, it means “young man.”

YUENGLING: It’s also a drawback, because a lot of people won’t ask for something that they can’t pronounce. But we’re getting a pretty good reputation now, and people know what Yuengling is. It amazes me.

DUBNER: What are some of the mispronunciations that you’ve heard?

YUENGLING: Well, they’ll call it “Yoo-ling,” “Young-lings”, we don’t care, usually the bar owner knows what they’re talking about.

As we walk through the brewery, Dick tells me about the company’s past. In 1829, a young man named David G. Yuengling — that’s Dick’s great-great grandfather — emigrates from Germany, settles in Pottsville, and opens the brewery. The reason he came here is that his father had a brewery, but since David wasn’t the oldest son, he had no shot at running it. So, he comes all the way to America, runs the Yuengling brewery for forty-eight years, and then, when he dies, his son Frederick buys it. For five generations, that’s how the business stays in the family. Today, in the Yuengling office, there are paintings of all those Yuenglings hanging on the wall.

YUENGLING: That was the founder of the company, David G. Yuengling. And that was his son, Frederick. And that’s my grandfather. And that’s my father’s picture over there. Great-great grandfather, great-grandfather, grandfather, and father. You don’t go up there until you are deceased and I don’t want my picture up there right now.

Dick is 68, pretty darn sturdy, a full head of white hair. His eyes are so blue there’s a shirt in the Yuengling gift shop named after him. Most mornings, he gets to the brewery around five a.m. so he can catch up on things in peace. The stairs up to his office are steep and narrow — these are old buildings we’re talking about. He pours some black coffee…

YUENGLING: How do ’you like that radio station? Every morning they play a Davy Crockett song.

Yuengling beer has a weird kind of fame. If you don’t live on the East Coast, there’s a good chance you’ve never even heard of it. On the other hand, tourists come from all over the world to see America’s oldest brewery. And in Pennsylvania…

YUENGLING: You go into a bar in Philadelphia and say give me a Lager, you get Yuengling Lager.

DUBNER: It’s like a Kleenex. A Lager is a Yuengling.

YUENGLING: Yes. Why do you think Budweiser came out with the Great American Lager? You know. It’s kind of interesting. All these years, they just, Budweiser, Budweiser. But all of the sudden it was the Great American Lager. Very interesting.

Dick worked at the brewery as a kid, loading bottles, shoveling snow, whatever needed doing.

YUENGLING: We really were not financially viable in those days. I mean, I remember the girls in the office telling me I’d better go to school and find another way to make a living, because this place can’t survive. We were barely making payroll.

But all he really wanted to do was make beer, and buy the brewery some day from his father. Dick was the only son. But he and his father had disagreements about how to grow the company. In 1973, the scion did the inconceivable — he left the family business. Even worse, he bought a local beer wholesaler. I asked him what his father thought of that.

YUENGLING: Well, I think he kind of admired me for doing it, because I think he thought about doing it but he didn’t have the nerve to. But it was very confusing for the local bar room owners for me to come in and try to sell them Pabst and Rolling Rock.

DUBNER: I’m Dick Yuengling, and I’m here to sell you Pabst…

YUENGLING: Yeah, it was a very interesting experience but I still did well with it, I did well with the brands.

When Dick’s father got sick, with Alzheimer’s, Dick came back and bought Yuengling brewery. It was 1985; the company, nearly broke. He’s managed to turn things around remarkably well. Nothing too dramatic — just a slow, steady expansion, lots of hard work. Yuengling opened a second brewery in Pottsville, another one down in Florida. Last year, sales were up six-and-a-half percent; the year before, twelve percent. And unlike most of the big beer companies you’ve heard of, Yuengling is still American-owned. Believe it or not, it’s the second-largest American-owned brewer, after the Boston Beer Company, which makes Samuel Adams.

YUENGLING: Well, our volume last year was like 2.2 million barrels. You know, when you equate that into market share, we’re like one tenth of one percent. You know, we’re only in thirteen states; we’re not national, so we have a very small market share. But we don’t care. I mean, we’re doing very well. Longevity is the name of the game. We don’t have stockholders that we have to say we had a great quarter to. All we have to do is continue to grow.

DUBNER: So, you just identified, kind of, the meat of the argument about a family business versus, you know, let’s say, you know, even a smaller publicly owned business, which is, you’re not responsible to your shareholders. You’re responsible to your employees, and your customers, and the company itself and so on.

YUENGLING: It’s very rewarding, especially due to the fact that when I started here in the late fifties we were all but out of business. We were going the route of the other, small coal-region breweries. And my dad had a guy that wanted to buy the place. I’ll never forget this, back in the early sixties. And it was a guy that was going to buy it and shut it down and sell all the copper and brass that’s in a brewery. And he didn’t sell it. Thank God he didn’t. If you stick around long enough you give yourself a chance, and look where we are today. At that time we were selling about eighty thousand barrels of beer.

So the Yuengling brewery has been run by Yuengling men for more than 180 years. Soon, that will change. Dick has no sons. But he does have four daughters. And two of them work at the brewery. Jennifer’s the plant coordinator. And Wendy handles administration. They walked me through the bottling floor, where a big, noisy conveyor system carries row after row of bright green bottles filled with fresh beer.

Jennifer YUENGLING: We’re about to have a beer right off the line.

DUBNER: Oh, man we just grab one off? That’s all you gotta do?

J. YUENGLING: All you gotta do.

DUBNER: It’s like picking apples off a tree. So, there’s a lot of head on that.

J. YUENGLING: Yeah, it will foam on you when you open it.

DUBNER: All right, and I got my beautiful Yuengling eagle cap there. Are they twist-off?

BAKER: They are. Cheers.

DUBNER: Cheers.

Not only can you pick a fresh beer off the belt, but the Yuengling break room is a bar, with all the company’s beers on tap. We sat in a booth and talked. Here’s Wendy:

BAKER: I don’t remember a whole lot of spending time at the brewery when we were young, other than going down with my dad at night when he was loading trucks. So I never really thought about that being my future. And it wasn’t talked about. So, it was almost a realization that each of us had to come to on our own.

DUBNER: So, talk to me a little bit about the succession plan, if there is one, what’s going to happen, how much you know about what is going to happen, and whether you want to know more, whether…

J. YUENGLING: Did you meet my dad earlier? Because he’s got all the answers.

DUBNER: Well, his answer was basically: I am not going to retire. How old are you guys?

BAKER: I am thirty-five.

DUBNER: Thirty-five.

J. YUENGLING: Thirty-nine.

DUBNER: Thirty-nine.

J. YUENGLING: He’s sixty-eight. He’s got a good twenty years left in him.

DUBNER: Plainly he loves doing it; plainly he’s really good at it. He has no desire to retire like a lot of people do have. But does he do anything to kind of specifically groom you for that eventuality, or is more just, like, come to work and we’ll figure it out?

BAKER: That’s been his approach, which has always been concerning to me, because I’m a planner. But I have eased up over the years, and I have faith in him and his ability to give up the reins some day to us. But for now, like Jennifer said, he’s good at it, he enjoys it, and he’s extremely hands-on. So, I don’t see that changing.

So there’s no succession plan in place. The consultants who work with family firms will tell you that that’s, a) not uncommon; and b) a terrible idea. Uncertainty is bad for business, any kind of business. But the Yuenglings, they seem pretty mellow about it. Wendy and Jennifer are already preparing their kids for the family business — that’d be a seventh generation. Wendy’s children are five, three, and one.

BAKER: They now know how to go to the refrigerator and get a bottle out for us. Because I can remember doing that when we were little. My dad had an old refrigerator that he rigged into a Kegerator, and I can remember filling up his beers when I was little. I mean, the hard part was getting them back to him at the couch without spilling anything.

J. YUENGLING: Oh, if it had too much head on it you were sent back down to redo it.

BAKER: We haven’t gotten a Kegerator yet, but my husband’s pushing for it.

So Yuengling seems to show a lot of things that are right with family business. Institutional knowledge gets passed down from generation to generation; you trust one another; there’s immense pride in the brand — I mean, it’s your name on the bottle. You can see why some business founders would rather shut down a company than turn it over to someone who isn’t related. But how typical are the Yuenglings? What if they’re a big, fat outlier? And if you’re the one who started the family business, how are you supposed to know? For years and years, you work days and nights, you probably don’t sit around in your spare time reading the academic literature on family succession. So… we did it for you. Let’s bring in the economists.

Antoinette SCHOAR: My name is Antoinette Schoar, I’m a professor at MIT in finance.

DUBNER: Schoar analyzed the data on family firms, and what happens once the next generation takes over …

SCHOAR: So, one thing I can tell you is that at least in the countries that we have looked at, on the accounting performance, or the real side of performance, like profitability and so on of the firm, we actually see drops in performance of these firms after they are transitioning from a founder to the heir, or the heirs. We see drops between ten and twenty-percent of profitability.

Ouch! Ten to 20 percent! That’s a steep price for loyalty, isn’t it? But wait a minute — Antoinette Schoar looked at a firm’s profitability. What if — just what if — loyalty costs you in profitability but, if your shares trade publicly, you make up for it in share price? You know, what if Wall Street loves the story of the family firm?

SCHOAR: There is one nice study by Francisco Perez-Gonzalez, who has actually looked at these transition events in the U.S., so he looks at what happens when in the U.S. a publicly traded, family firm hands over the reins to the heir. And he finds that there is a drop in the stock price by around 10 to 15 percent.

Francisco PEREZ-GONZALEZ: Okay, so I went and collected those data, and what I found was what in my opinion was rather shocking.

That’s Francisco Perez-Gonzalez.

PEREZ-GONZALEZ: I’m an assistant professor of finance at Stanford grad school of business.

The data covered three hundred and thirty five family firms in the U.S. that had a management transition. 122 of them, just over a third, brought in another family member as CEO. The rest went with outside management. And as you heard, the market did not like the family successions. But Perez-Gonzalez wanted to answer a harder, more important question: Why do family CEO’s do worse? While rooting around in the data, he found an answer…

PEREZ-GONZALEZ: The underperformance of family CEOs was basically explained by those family CEOs that do not attend, you know, forget about the most selective colleges in the U.S. If you’re in the top thirty college pool, you do fine. If you’re in the top fifty colleges, again you do fine. Or top hundred you do fine. It’s that in forty percent of the cases in my sample were people who attended colleges outside the top hundred and eighty-nine colleges in the U.S. despite having substantial wealth. So, these people that wanted, say, maybe did not have the ability, or did not have the effort because they might be able, but they’re not encouraged to make huge effort. These were the ones that were driving, or dragging, the performance of the family CEO pool.

DUBNER: So, if you throw out the family firms who hand off the CEO position to a family member who went to a non-selective school, if you throw out those companies, then you find that family firms do as well as family firms who hand off to a non-family CEO, yes?

PEREZ-GONZALEZ: Statistically there’s no difference in performance.

So there you have it. The entire effect can be explained by a handful of family CEOs who just aren’t very good, or very smart, or very motivated. In other words: Junior isn’t necessarily cut from the same timber as dear old Dad — hard-working, self-effacing, up-from-the-bootstraps dad. Now, it should be said: this is hardly a new insight. Remember Max Weber? He wrote The Protestant Ethic and the Spirit of Capitalism, which you read, or pretended to read, when you were young. In 1904, Weber wrote that capitalism requires, and I quote, “a more individualistic form of entrepreneurship and the absence of nepotism.” Modern scholars have a name for this:

Vikas MEHROTRA: So this is called the Carnegie Conjecture.

That’s Vikas Mehrotra. He’s a finance professor at the University of Alberta in Edmonton. The Carnegie Conjecture goes back to Andrew Carnegie, who made a huge fortune in steel in the 19th century.

MEHROTRA: Right, so in his idea, he’s actually very clear on this, he did not mince words at all. In his idea, the inheritance of a fortune for the second generation, the heirs who inherited fortunes in his opinion it deadened their talents. And therefore it was incumbent upon rich tycoons and entrepreneurs and so on to distribute their wealth prior to their departure from this earth.

Think about it. You start a company, and it succeeds – beyond your wildest hopes. Now, what are the odds that the best person you can find to take over this business just happens to be a person who sprang for your own loins? On the other hand, what if there is a CEO gene?

Coming up: the heritability of leadership. And the fall of an American dynasty.

Cheryl STELTER: What was his father thinking?

*      *      *

Today, we’re visiting the Church of Scionology. We worship the idea of handing off a family business to the next generation. But is this heresy to economists? You can pick anyone to run your company. So why, instead of tapping that big talent pool, do you want to draw from your tiny little gene pool instead? The economists who study family firms say that you destroy value when you hand off the business to your blood relative.

Most people agree that Warren Buffett is a pretty good businessman. Like, fifty billion dollars worth of pretty good. Buffett’s not a big fan of inheritance. Thinks when you give all your money to the next generation, you create a lazy, over-entitled aristocracy. As he put it once, it’s like “choosing the 2020 Olympic team by picking the eldest sons of the gold-medal winners in the 2000 Olympics.”

Matt McGUE: I know that’s the analogy that, I guess, Buffett made is with athletic ability.

That’s Matt McGue. He’s a behavioral geneticist at the University of Minnesota.

McGUE: Yeah, I mean geneticists have for a long time used this statistic called heritability, which can range from zero percent to one hundred percent. And what heritability seeks to estimate is the percentage of individual differences in a trait that can be attributed to inherited genetic factors. So for example the heritability of height is on the order of eighty to ninety-percent.

So traits that are important for something like sports are pretty heritable. Consider the son of a Major League Baseball player. You want to know how much more likely it is that he’ll also play in the majors compared to the average kid? Eight hundred times more likely. Not eight times, eight hundred. So you probably could field a good Olympic team if you could get your hands on Michael Phelps’s kids, and Shannon Miller’s and Apolo Anton Ohno’s kids. But running a company isn’t the same thing as running the bases. Here’s McGue again:

McGUE: Other traits are much less heritable. Most behavioral traits would be a lot less heritable than height. So personality characteristics, maybe the heritability estimate would be on the order of forty to fifty percent. IQ might be higher. Might be fifty, sixty, some would argue seventy percent. Do you know the story of the Vanderbilts?

The original Vanderbilt, at least the original rich one made his money in the railroad business in the 19th century. And he actually, he not only wanted to build a railroad empire, he also wanted to build a family dynasty. He actually, that was his goal, so that when he passed, he wanted his family name to remain very famous. And he decided, he ended up being the richest man in the world at the time. But what he decided to do is he gave ninety-five percent of his wealth to one of his sons. Now the son actually did pretty well, that first son. But after that the wealth started to really digress. To where today, if you think about it, how many leaders of industry do you know named Vanderbilt? You don’t know any. Even though that was his goal a hundred and fifty years ago, to establish this family dynasty. You don’t know of any famous Vanderbilts in the railroad business or anything.

What ended up happening — in fact there are two family members wrote memoirs about this, about how the Vanderbilt wealth had actually created dysfunction within various lines of the family — because what ends up happening is that the talent gets diluted over generations, just like our height will get diluted. If you look at the decedents of seven foot tall men, eventually they are not going to be that tall. So if you look at the decedents of extraordinarily talented individuals over time, it just gets diluted by intermixing with everyone else.

So, sad to say, it looks like there is no CEO gene. But just try telling that to the CEO of a family business. Like, maybe another brewery? I’ll bet you’ve heard of this one. The story of the Busch family and Budweiser beer isn’t so different from the Yuengling story. A German immigrant, Eberhard Anheuser, starts a brewery, this time in St. Louis. His son-in-law, Adolphus Busch, joins the business. When Anheuser died, Busch took over. Next in line was his son, August Busch. That’s the way it went for nearly 150 years and five generations, each of them named either Adolphus Busch or August Busch. The beer kept flowing, and so did the money.

Cheryl STELTER: When we traveled, we were allowed to fly first class. It was extraordinary even through some hard times. There were some restrictions, but I mean basically, it was a great place to work. We were all very comfortable. And I used to pinch myself thinking wow, how lucky am I to work here?

Cheryl Stelter worked at Anheuser-Busch for twenty-one years, mostly in human resources. She was a single mom. Working there was a godsend.

STELTER: It seemed like every week, every month, there were fabulous parties. I just couldn’t believe my good fortune. We always, you know, we got all dressed up, we went out to you know fancy dinner dances. There were all kinds of activities. There were sports tickets because Budweiser sponsored every sport you could possibly think of right down to lawn darts, I think.

The Busch who made a lot of this happen was August Busch the Third. He came to be known as, simply, The Third.

FINNIE: One of the reasons I say that I think August Busch The Third was one of the best CEOs I’ve ever read about, or experienced is that if you put ten thousand dollars into Anheuser-Busch stock when he became a vice president in 1964, and you sold it in 2002 when he retired as CEO, not including reinvested dividends, that ten thousand would have grown to two-million sixty-thousand dollars. That two hundred five-fold increase is twenty-two and a half times what the S&P 500 did during those 38 years.

Bill Finnie was director of strategic planning at Anheuser-Busch, he worked there twenty-six years. He admired The Third, and worked closely with him.

FINNIE: For years, I was on the eighth floor of a nine-story office building. And if I got in there early around 7 or 7:30 I would hear August’s helicopter land on the top of the ninth floor. So he got in there early and he was extremely focused.

Here’s Cheryl Stelter again.

STELTER: Actually, my whole goal for the 21 years I worked there was to never get on, especially Mr. Busch The Third’s radar. I mean, he was the CEO of a Fortune 500 company, and you know, he could literally be walking around, and he did. He’d walk down into the brewery, he’d walk into offices, and everybody knew what he looked like, and you know, that he did this. If he came to your office, it was probably not going to be a good thing. So, I was successful in staying off of his radar. But, his standards were very, very high, anybody who ever visited the brewery, or the brewery complex, you wouldn’t even see a fingerprint on a piece of glass on a door.

The Third had taken the Budweiser throne by force, when he was thirty-seven years old. He ousted his father in a boardroom coup. The two men didn’t speak for ten years.

Julie MACINTOSH: When he started as CEO of the company in the seventies, his father basically had been kind of resting on his laurels and not willing to take enough risks, and The Third saw huge opportunity to take the American market.

That’s Julie MacIntosh, a business journalist who wrote a book about the Busch family called Dethroning the King.

MACINTOSH: And he ousted his dad in a coup, and took over with a bunch of his minions, MBAs from a variety of the best business schools in the country, and charged ahead in America. He was really intent on having Anheuser-Busch be the biggest and best American brewer. So, by 2001, they had fifty-two percent of the U.S. market share. Which is astounding.

DUBNER: What was the biggest rival?

MACINTOSH: Miller. And he, you know, you say that word, and it was like ice would course through his veins. The competition there was just unbelievably intense. And he thought about that day and night. The Third was incredibly calculating, and powerful, and scary. He knew the ins and outs of that business. People made presentations to him and he would correct them if they were off by a tenth of a decimal point. From a personal standpoint, he was equally cold and didn’t have many close friends.

In 1964, The Third had a son. The Fourth. When The Fourth turned five, The Third got a divorce from the Fourth’s mother. As the scion grew up, he sometimes hung out at his dad’s office. But no one would mistake him for his dad.

MACINTOSH: His son, on the other hand, was and still is a notorious partier and playboy. And while the father had a bit of a playboy reputation when he younger, he stuck that on a shelf one day and pulled a severe about face, dedicated himself to the business, and never looked back. The Fourth was never able to do that, whether it’s a lack of willpower or a lack of desire. He wasn’t at work as often as he should have been, he was difficult to reach, and he had struggled, and still does struggle with a variety of issues including depression.

DUBNER: Doesn’t sound like optimal CEO material.

MACINTOSH: No, but the counterpoint to that is he was the kind of guy you wanted to sit down and have a beer with. He was much easier to get along with than his dad, much more of a human being in a lot of ways.

DUBNER: But The Fourth had a nose for trouble. During college, he wrecked his Corvette, killing his female passenger, and then fled the scene. Charges were ultimately dropped. A few years later, he was arrested after a police chase. The cops were in an unmarked car, and The Fourth said he thought he was being kidnapped. And just last winter, The Fourth’s 27-year-old girlfriend, Adrienne Martin, was found dead in his bed, with large amounts of cocaine and oxycodone in her system. The police found a loaded shotgun behind the bathroom door and a loaded Glock hanging from the toilet-paper dispenser. But no charges were filed. All that said, August Busch IV was able to rise through the ranks at Anheuser Busch. He spent a lot of years on the brewing side, and he turned out to be unbelievably good at marketing. Remember the Budweiser frogs?

It was August Busch The Fourth who green-lighted the frogs. Even his father had to admit that The Fourth was doing a good job.

MACINTOSH: You know, The Third was incredibly stingy in giving out compliments to anyone, and in particular to his son. His son actually walked around with the briefcase that held the four or five handwritten notes his dad had given him throughout the course of his career that said things like, “Good job, son.”

DUBNER: He carried them at all times?

MACINTOSH: Yes. And there were very few of them. It wasn’t tough to carry them.

In 2002, The Third finally stepped aside as CEO, and, as chairman of the board, replaced himself with an executive named Patrick Stokes. Apparently, The Fourth wasn’t quite ready for the big chair. But Stokes turned out to be just a temp. In 2006, August Busch the Fourth was appointed CEO of Anheuser-Busch. I asked Bill Finnie, The Third’s longtime lieutenant, what chance The Fourth would have had if he weren’t the scion of the family.

FINNIE: No, I don’t think August would have become the CEO of the company, but for the fact that from day one, from the hour that August was born, and his father puts five drops of Budweiser in his mouth when he was one hour old, he was indoctrinated into the core values and the culture of Anheuser-Busch.

Wait a minute, wait a minute: What’d he say?

MACINTOSH: That’s right, the generations of Busch men who would be potential heirs of the company are given five little drops of Budweiser beer from a little eyelet dropper into their mouths before they have anything else. So their first drink upon being born is beer not milk.

Julie MacIntosh says that some of the company’s bankers, at Goldman Sachs, had their own nicknames for The Third and The Fourth – “Crazy” and “Lazy.”

MACINTOSH: “Lazy” for The Fourth, who after he became CEO, started showing up less and less at the office, became more and more demoralized perhaps by the fact that his dad was making it very difficult for him to be CEO.

Now, by this time, Anheuser-Busch was hardly a typical family firm. It had been a publicly-traded company since the 1970’s, with a current market value of about thirty-seven billion dollars. But even with a Busch still in the corner office, the entire family owned only about four percent of the stock. You want to know who owned five percent? Warren Buffett’s company, Berkshire Hathaway. July 13, 2008, was a day that will go down in infamy for St. Louis. There was a worldwide financial meltdown just getting under way, so the news kind of got buried. But on that day, Anheuser-Busch was bought out. It was a fifty-two billion dollar takeover, by a company called InBev, a brewer with roots in Belgium and Brazil. August Busch III and August Busch IV made out all right – 427 million dollars and 91 million dollars, respectively. But the sale didn’t go over so well in St. Louis.

MAN 1: I mean, my grandpa was in World War II and he drank Bud, heavy, all the time. And Busch, which is another product. And uh, I think it does, you know, everything they do is red, white and blue, down to their packaging. I mean, like I said, it kind of represents America.

MAN 2: Oh yeah, I heard somebody talking yesterday, that uh, I always get the different Busches confused, but the main guy who started it, is that Adolf or Adolphus? There’s a blue light coming out of his crypt right now because he’s spinning so fast that he could generate electricity.

MAN 3: I… and I’m not proud of this, but I perpetrated a bit of a… well, I basically had some fun at a friend of mine’s expense. She’s very trusting and I told her that InBev was going to euthanize the Budweiser Clydesdales and replace them with Belgian workhorses, because InBev is based in Belgium. And the look of horror on this woman’s face was heartbreaking. I immediately regretted it because she completely believed me. She said, “No! Why would they do that?” And I just, I couldn’t help myself, I was like, well, InBev has this reputation for being a ruthless corporate cost-cutter. Anheuser-Busch their iconic logo was the Budweiser Clydesdales, and I just told her that they were going to euthanize the Clydesdales and she believed me. She believed me completely. And it broke her heart. And it’s crazy when you think about it because why would anyone destroy valuable horses? You could sell them for a lot of money. But it’s something about it it taps into the sort of paranoia that people have about Budweiser, that she really believed me that this evil multi-national corporation was going to kill the Budweiser Clydesdales because of the symbol they represented St. Louis as this, “Now we own you. We’re going to replace your horses with our horses.” And it just chilled her and it was funny but I still kinda feel bad about it.

Most people who knew the company well say the handoff from August Busch The Third to The Fourth never should have happened.

STELTER: Absolutely not, that was the dumbest move. Ugh.

Here’s Cheryl Stelter again, the HR employee.

STELTER: That will be, you know, the fifty-two billion dollar question in my mind as long as I live. What was his father thinking?

And writer Julie MacIntosh:

MACINTOSH: They absolutely let their personal issues get in the way of running the company very well. Because of these arguments and the fact that the board of directors had to spend time refereeing these arguments, there was less time to spend on the actual matter at hand, which was that Anheuser-Busch was being subsumed by much larger global brewers who had figured out that beer was becoming a global industry.

For Bill Finnie, the story was too familiar.

FINNIE: It’s a Greek tragedy.

Neither August Busch the Third nor the Fourth are very talkative in public, and neither one would talk with us. That’s understandable. It’s also understandable why, even if The Third thought his son wouldn’t measure up as CEO, he still put him in that position. Because he was a Busch. Because he’d been fed five drops of Budweiser as a newborn. Because blood — even bad blood — is thicker than anything.

Coming up: There are ways to handle the family-business dilemma. Creative ways. In the U.S….

Peter BUFFETT: You know, I grew up with him saying do what you love. That’s the thing. There’s nothing more important than that.

And, especially, in Japan…

MEHROTRA: Japan has one of the highest adoption rates in the world. Second only perhaps to the U.S.

*      *      *

DUBNER: So if you would, I’d like to begin by your telling me in your voice, however you want to say it, your name, who you are and what you do.

BUFFETT: Peter Buffet. Composer, Author, Philanthropist, and I do those in that order actually. Well, maybe switched around a little, but…

DUBNER: Depending on day of the week?

BUFFETT: Yeah, I think so.

You may not know Peter Buffett, or his music, but you know his dad. His name’s Warren, chairman and CEO of Berkshire Hathaway, and the third-richest man in the world. But he’s also famously down-to-earth. He lives in the same house he bought in 1958 for $31,500, in Omaha, Nebraska. That’s where Peter Buffett grew up. It was a very ordinary upbringing. Peter’s 53 years old. His whole life, when people found out whose kid he is, they were shocked. They say: But… you’re so normal!

BUFFETT: Well, I think the assumptions are based on, of course, celebrity culture, what we’ve seen just grow and grow. It’s always been there of course, since Cleopatra probably, but celebrity culture and the Paris Hiltons of the world. So there was the you’re not an obnoxious, rich kid that thinks they’re entitled to everything. And then there’s the, I walked to public school, I had the same English teacher my mother had, all these kind of really fundamental Midwestern things.

DUBNER: Talk to me for a minute about your degree of interest in Berkshire growing up.

BUFFETT: Well, you know, growing up we really didn’t know what my dad did. It was quite mysterious. He read a lot, which he still does. And I will say if you walk in the house today you will see the same thing that I saw in 1965. I mean, he was just… what I saw was a consistent human being in spades. It was incredible. But we didn’t know what he did. In fact somebody, when my sister filled out a form, I think in fourth or fifth grade about what our parents did, she put security analysis, and that was assumed that what he did was check alarm systems. To a kid, it’s like, you know, what do all the numbers on the page mean? What exactly is the New York Stock Exchange? And buying and selling and all that? So we just, yeah, we really didn’t know.

DUBNER: Now, at some point you figured it out. I’m guessing that may have been gradual. Tell me about that.

BUFFETT: It was very gradual. People will ask me what was it like growing up in this household, when did you realize that your father had amassed all this wealth? My answer was, I was probably about twenty-five.

DUBNER: No kidding.

BUFFETT: The truth is it just wasn’t around. I can’t say enough for actions speaking louder than words.

DUBNER: At some point did you get interested in Berkshire Hathaway itself and the business, and did you put a toe into it, were you an intern?

BUFFETT: Well, I’m the last of three children. So, my sister didn’t go into the business. My brother didn’t, although he is sort of looked at as taking over the chairmanship at some point. But he didn’t go into the business. So I was the last great hope, I think, for my dad. And I went off to college because I got in, frankly. I went to Stanford, and I went because I got in. And I didn’t know what I was going to be when I supposedly grew up. So I took everything that ended in 101 or -ology. I mean, literally, I was just, what a great learning institution. And I’m going to take it all. And at some point, about a year in, I thought, well, it’s dumb not to at least explore this a little bit. And my dad was very accommodating, certainly. He sent me some information about the business and a bunch of old annual reports and things, and you know, it just wasn’t there for me.

DUBNER: It didn’t speak to you?

BUFFETT: No. And I knew it, and he knew it, and he wasn’t pushing it at all. I mean, I grew up with him saying do what you love. That’s the thing. There’s nothing more important than that. And we both knew that this wasn’t something that I was passionate about.

DUBNER: Sounds kind of wonderful.

BUFFETT: Tremendous. Yeah, very lucky.

DUBNER: What would you say to other fathers or mothers who founded companies about whether they should involve their sons and daughters in running the business after the founder has stepped aside? What do you say to that?

BUFFETT: Well, you know, my dad talks about the ovarian lottery, this idea that you’re born into these circumstances that you can’t, at least as far as I’m concerned, you can’t control when you’re on the other side of being born. And so I think there’s a version of that that holds true in this. The odds of having a son or daughter that are as passionate, and excited and driven as a founder of a business was, or even the person that took it over—whatever that might be, whatever passion and drive was there in that person—the odds of that being in the next generation, I think are incredibly small. I think that if the child is truly passionate about it and lives and breathes the same thing, absolutely. But again, what are the odds?

Despite the odds, the Church of Scionology flourishes. It is such a standard practice to hand off a business to the next of kin that we almost assume that’s how business in America is supposed to be done. Even though, as the economists tell us, it’s generally bad for business. But you want to know something interesting? Americans aren’t the most devout practitioners of Scionology. In fact, compared to the rest of the world, we’re heretics.

SCHOAR: So, the family effect and family control is strongest by far in emerging markets like in Asia and in South America where we find that even the largest public firms are to a very large extent family firms.

That’s Antoinette Schoar. She’s the economist who found that family firms perform worse once the next generation takes over. According to Schoar and other scholars, the U.S. has one of the lowest rates of family ownership in the world. Whereas in many parts of the world, Scionology practically is a religion. But why? Especially if, as the data show, the scions don’t do so well?

MEHROTRA: So, there are some theories out there by some famous professors.

Vikas Mehrotra is the University of Alberta professor who told us about the Carnegie Conjecture.

MEHROTRA: In the developed world, you have good contracting environments, a good system of law enforcement, and so on. So, in the developed world, you can hire professional managers and expect a certain sticking to the contract law, and so on. It’s rather more difficult to have the same kind of adherence to the rule of law in emerging economies. So, in emerging economies, family firms sort of provide a second-best solution to this poorly developed institutional problem.

DUBNER: The idea being that if the rule of law and the institutions are not as strong as one might see in a more developed economy, then families to some degree, or family firm structures perform some of those functions themselves, you’re saying?

MEHROTRA: Exactly, because, for example, Fukuyama talks about trust. So, trust is in short supply typically in countries where families are dominant. So the idea is that, in particular, if you have the only people who you can trust who are your families, that means the external contracting environment is rather ill-developed.

I don’t know about you, but I find this fascinating. Maybe not all that shocking once you think it through — but still, fascinating. It points out some of the benefits of strong institutions and strong markets that most of us take for granted. But there’s one country, when it comes to family business, that’s a stark exception. A wealthy country with strong institutions where handing off a business to a family member is very common — but there’s a twist.

MEHROTRA: Right, so first of all, a quick background for Japan. Japan is a rich country. And not only that, according to several economists, and even institutional design people, it has fairly well developed institutions. So we’re talking about a country that is not suffering from poor quality institutions and so on.

Mehrotra and a few colleagues compared family-firm performance in Japan against other rich countries like the U.S., the U.K., and Germany.

MEHROTRA: So, you would expect in Japan the professionally managed firms to outperform the family-managed firms just as they do in the rest of the developed world. But we don’t see that. So this was our puzzle, how to reconcile this with what we had found in other rich countries.

DUBNER: It is a puzzle. I mean, I would go reaching for all kinds of institutional or cultural questions. I would say, well the Japanese stock market, and banks, and investors treat family-run firms, or heir-run firms differently let’s say. Or maybe there’s more of a culture of respect. Or maybe the children of Japanese founders get more education than they do elsewhere. Maybe the children of those founders get a different kind of education entirely. But what is the real answer?

MEHROTRA: I’m not a big fan of assuming that inherently one group of people are superior to another. So, assuming that we all come from the same, you now, average ability pool, then there is something else going on here. And what we discovered quite serendipitously was that in Japan there’s a tradition of adopting outsiders into the family in situations where you either don’t have a male heir, or your male heir is not deemed sufficiently capable, to put it mildly.

DUBNER: When you say adopt an outsider; you’re not talking about adopting a baby are you?

MEHROTRA: That’s a good point, yes. So, actually Japan has one of the highest adoption rates in the world, second perhaps only to the U.S. The difference is that in the U.S., the adoptees are babies. In Japan, about ninety-eight percent, in fact more than ninety-eight percent of the adoptees are males around twenty-five or thirty years old. So, this is not common in the modern world, to my knowledge, in any other country.

DUBNER: I don’t mean to laugh. My laugh is not pejorative; my laugh is one of wonderment. So you’re telling me that the median age of adoption in Japan is somewhere twenty-five to thirty?

MEHROTRA: Closer to twenty-five, yes.

DUBNER: So, these are… OK. Let’s take a step back. So, you’re saying the reason that family-run firms or the heir-run firms in Japan outperform heir-run firms in other countries around the world is because instead of handing off the company to an actual blood heir, you adopt an adult male into your family who will be a good CEO and can still be in the family.

Absolutely, so the adoption process is rather formal. So you would have to take on the name of the adopting family, which means you give up your biological family’s surname and you adopt the surname of the adopting family. And it’s actually a legal process. You file papers in the city registry office, and so on. Much like a marriage, actually.

DUBNER: So, let’s pretend for a moment that you, Vikas, are an industrialist in Japan, and you’re fifty-five years old, and you’ve built this wonderful company from scratch, and it’s worth several billion dollars, and it’s time to hand off to a new CEO, and your son is a loser, and a deadbeat, and you say, I need a new CEO so I’m going to adopt this fellow who is wonderfully educated, wonderfully bright, and he knows the industry and I think he will be a great CEO. What does his birth family think of your adopting their son as your CEO?

MEHROTRA: Honored, they would feel honored, because the very fact that he has been selected as an adoptee puts him in a very, very select pool. So it’s actually an honor for the birth family to have their son, let’s say, adopted by the Toyota clan or the Suzuki clan or something like that.

And are these examples of actual adoptees then, Toyota and Suzuki?

MEHROTRA: Toyota about seventy years ago, Suzuki, the current chairman of Suzuki is an adopted son.

DUBNER: And what percentage of family firms in Japan that hand off to a family member, hand off to an adopted family member?

MEHROTRA: So, in our sample we have about twenty percent of events, succession events that involve a family successor, involve an adopted son. So, that’s not a very high number. It’s not like it’s a vast majority. So, I wouldn’t say there isn’t a preference for blood succession in Japan. There is still a preference for blood succession. But in my opinion, one out of five is not a trivial number either.

DUBNER: Well, let me ask you this, then: if you say that heir run firms perform better than non-heir run firms, or non-family firms in Japan, did those twenty percent of the adopted CEOs account for… How much of that difference did they account for?

MEHROTRA: In fact, pretty much all of it. So, if you compare the performance of firms under different kinds of heirs, blood heirs versus adopted heirs, the superior performance of second-generation-managed firms is pretty much entirely attributable to the adopted heir firms.

DUBNER: Now, what about you? You grew up in India, how would it work there if…

MEHROTRA: It would not work. It would not work in India. For a variety of reasons, it would not work. The first thing that comes to mind, when I actually presented this paper in India is people who say OK, so you want to adopt me, I get adopted, and then I go back to my biological family with all my new found wealth. So immediately they are thinking about how to cheat on this contract.

Ah, Japan. The land of clever solutions. But also: a land of tradition, where the continuity of a family firm really means something. On the west coast of Japan, in the small city of Komatsu, there’s a hotel called Hoshi, which is named for the family that runs it. It’s a beautiful place with natural hot springs, mountains, and the ocean nearby. Now over the years, Hoshi fathers have passed the business on to their sons, and if there is no son, or if the son isn’t management material, then the father gets his daughter to marry a man who is. Then the family adopts the son-in-law, who takes the Hoshi name. Today, the hotel is run by Zengoro Hoshi. We’re pretty impressed by six generations of Busches and Yuenglings. You want to know which generation of the Hoshi family Zengoro Hoshi represents?

Try the fourty-sixth.



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