Keeping it in the family

News Corp's takeover of Dow Jones is a major deal. But it has raised serious issues for the two battling families involved: the Murdochs and the Bancrofts

by Randel S Carlock, Elizabeth Florent-Treacy and Manfred Kets de Vries, INSEAD
Last Updated: 23 Jul 2013

When Clarence W Barron bought Dow Jones & Company in 1903, little did he know that, just over a century later, his descendants would be pitched into one of the most fascinating inter-generational, inter-company struggles the media industry had ever seen. Nor that after three months of agonising negotiations there would be sufficient support from his descendants - the Bancroft family - to put The Wall Street Journal in the hands of the Australian newspaper magnate, Rupert Murdoch. While the deal is likely to be closed in December, Murdoch has already set up a desk in Dow Jones' offices and is busy making plans for the takeover.

On the one side of this fascinating three-month battle for control of Dow Jones, there were several generations of the Bancroft family, descendants of Barron, owners of 64.2% of Dow Jones' Class B voting shares, and defenders of the proud tradition of the Wall Street Journal: ‘The Truth in its proper use'. On the other side, there was another family business, News Corporation, a global media conglomerate that is still under the control of the first generation - in the person of entrepreneurial founder Rupert Murdoch. With Murdoch approaching his 76th year, the time for him to hand over control cannot be far away.

The Bancrofts and the Murdochs demonstrate many of the dilemmas that family businesses face at different stages of their life-cycle, and highlight just how complicated maintaining family ownership across generations can be.

In the Bancroft family, we can see how several generations view the family business in conflicting ways. A century of proud tradition probably counted for more with the senior Bancrofts, while the younger set was more likely to be looking closely at the current business climate for media organisations, and trying to determine whether Dow Jones could continue to support the ever-growing family. Indeed, Christopher Bancroft, a senior member of the family and a director of Dow Jones, was reported to have left one of the crucial shareholder meetings in July without voting at all. The board of the company had by then given its backing for News Corporation's $5 billion offer. The $60 per share offer represented a 65 per cent premium on the value of Dow Jones shares before Murdoch had made his offer public. It was later suggested that the generosity of the offer - coupled with the fact that no other suitors had come forward to match the bid - appeared to have pushed a majority of the Bancroft family to agree.

While News Corporation's bid for Dow Jones may have appeared to be the latest push for growth by a successful entrepreneur, family succession issues are an equally critical, though less evident, theme. As Murdoch closed in on Dow Jones in May, News Corp faced its first succession battle, complicated not only by the departure of the heir-apparent, Lachlan Murdoch, in 2005, but also by the fact that, with his ambitious third wife, Wendi Deng, Rupert Murdoch has children younger than some of his own grandchildren. With all the boiling emotions that such difficult family relationships engender, how on earth do family businesses ever succeed?

We identify five factors that can give business families an advantage over their non-family competition. These are: • Networking: sharing information and building strong relationships • Goal alignment: balancing individual and collective goals • Control: family power in the company, board and ownership group • Time-frame: long-term commitment to family investment and business strategy • Organising structures: flexible and rigid controls to support a clear family business philosophy.

These are behaviours that large and especially publicly traded firms have difficulty matching. Using individual and family psychology, we can demonstrate how these factors translate into effective family and business practices. It should also be noted that if a family fails to practise these behaviours they create a weaker firm because of the lack of corrective external or market forces. Consider the different degrees of ownership influence on a firm's performance. Identified family owners that monitor performance and hold management accountable are the best; public shareholders that demand performance through holding or selling stock are the next most effective control; and the least effective are passive family owners who abdicate their responsibilities to management or a board.

There's no doubt that successful business families exploit their unique advantages. Family businesses are a prime source of wealth creation and employment - 95% of businesses in Asia, the Middle East, Italy and Spain are family controlled, as are over 80% of the companies in France and Germany, and between 60 and 70% of companies in the US. One third of the businesses in the Fortune 500 are family companies, as are some of the world's most successful firms, including Cargill, Michelin, LVMH, Ikea, BMW, Sainsbury's, Wal-Mart and Hutchinson Whampoa. A well-known study of family versus non-family business performance of the Standard & Poor's 500 companies showed that the family-controlled firms outperform their widely traded peers (‘Founding-Family Ownership and Firm Performance: Evidence from the S&P 500', RC Anderson and DM Reeb, The Journal of Finance, June 2003).

Family businesses work for a number of reasons, not least because of the added social and emotional dimensions that they bring to the art of making money. In an age where ‘jobs-for-life' are rapidly disappearing, the ‘company man' is becoming extinct. The traditional psychological contract between individual and organisation is breaking down and family companies can represent a safe haven. Families have their own loyalties and culture that non-family businesses can rarely create, the emotional glue holding the family together translating into an enduring sense of corporate identity. Members of the owning family, and employees, can feel that the psychological bonds in such a business provide a greater security than in non-family owned companies.

Family businesses also survive because they have a different focus to publicly owned, widely traded companies. All businesses are ultimately set up to make money, but a publicly owned business will always be geared towards the next quarterly or annual results in an attempt to keep its shareholders happy. A family-controlled business, on the other hand, will have an eye on the next generation, and a few blips in results will be just that, blips, rather than a signal for radical change. The family's reputation will be an important part of the decision-making process and can promote a sense of continuity by overriding immediate financial considerations.

But family businesses also have their own, unique psychological problems. Being tied to the founder and his or her heirs creates a line of succession that may not always be good for the organisation, because there are clearly differences in the needs and demands of the generations. While the founder may be driven by the need to succeed, the next in line may take that success for granted, or might even feel trapped in a family business that doesn't ‘do it for them'. On top of this, members of the family who do not work in the business will never share the emotional investment in the company that those who do work for it have, and as a consequence they're much more likely to look at the bottom line when voting their shares.

The lifecycle of the business will be intricately caught up in the life-cycle of the family, with older and younger members having different perspectives on financial and family issues. Older members of a family will be less concerned with financial needs and more concerned about the family's legacy. Younger members of the family may have no concrete connection with the business other than their name, some shares, and perhaps participation in a trust fund. They may never have worked for the business themselves, and may never even have known a family member to work in the business, so they are unlikely to have the same emotional attachment to the business as the older generation.

The feelings of family members towards the business are also compounded by their notion of family, again connected to life-cycle. Because younger people are busy with education, developing new relationships outside the family and choosing their path in life, their time for cousins and other relatives may be limited. Older people have a different appreciation of the importance of family and family relationships. When someone is in their 50s and beyond, relationships with their siblings and cousins can be an extremely important part of their life. While all family members are connected through the business, the younger generation may not appreciate how that shared ownership creates part of the emotional glue that holds the family together.

Succeeding generations bring another problem. As the numbers in the family increase, the family's wealth is divided between more and more people. Whether they're being greedy or pragmatic, the younger generation could well see the business situation very differently to their forebears. They may indeed have a more realistic picture of the business' prospects and will give this consideration more weight than the family name when push comes to shove.

We could see all these effects at work in the Dow Jones/News Corporation story. The senior generation of Bancrofts, who controlled the company, made it clear that they were not interested in the price offered by Murdoch. They saw their roles as stewards of Dow Jones and the Wall Street Journal, and were not prepared to hand over the company and its flagship newspaper. Other Bancrofts, probably the more numerous younger members, were less entrenched, according to reports.

In all likelihood they took a long hard look at the newspaper business, saw that Dow Jones was struggling to find its place in the increasingly competitive media world, and concluded that an offer that gave them an excellent premium over the current market price should be accepted. It was also reported in the Financial Times that Dow Jones' advisers had contacted 21 ‘potential transaction partners' and none had been prepared to match the offer.

While Murdoch did not have such intergenerational concerns surrounding his bid for Dow Jones, the issue of succession for News Corporation remains highly complicated. The departure of Lachlan is only one part of the puzzle. While Murdoch's children from his first two marriages currently share 90% of the trust that controls News Corporation, Murdoch is seeking to redraw the trust to include his two youngest children, so that all his children inherit equally. Elected directors represent the children currently covered by the trust, and by extension will be chosen for the two youngest children if Murdoch succeeds. But representation on the trust is not just about money, it is also about the control of the Murdoch family legacy. It is not difficult to imagine the complications this will create for the family - and by extension the business - if sorting everything out proves costly and time-consuming.

With the Bancrofts, we also saw how a business can serve as a symbol for the family. Without Dow Jones, the Bancrofts are arguably just another old-money family, nothing unique about them, nothing special. As stewards of the Wall Street Journal, they had an important responsibility - to ensure that financial information and news was as accurate and fair as possible - which created meaning in their lives. In the end, however, it proved increasingly hard for them to resist shareholder pressure to accept such a bountiful offer for their stock. Clearly there were not enough old-style guardians of the Bancroft legacy to prevent the Australian interloper from taking over. Press comment since has suggested that Murdoch's plan may be good for the company. Some of the senior Bancrofts will hope that this is indeed the case.

Family Business on the Couch: A psychological perspective, John Wiley & Sons, 2007

At INSEAD, Randel S Carlock is the first Berghmans Lhoist chaired professor in entrepreneurial leadership, Elizabeth Florent-Treacy is research project manager, and Manfred Kets de Vries holds the chair of leadership development.

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