Nothing tests the mettle of the board of a family-controlled company like a crisis involving an executive from that family.
Witness what happened when the board couldn't rein in Herbert Haft, the founder and chairman of Dart Group Corp., the discount drugstore chain. In 1993, Haft removed his oldest son from top corporate posts after a personal quarrel. Some directors — including Haft's wife — protested.
But Haft, who controlled 57 percent of the company's voting shares, prevailed. He threw his wife and son off the board, fired the directors who supported his son, then made radical changes in management and corporate strategy. The previously successful company spiraled out of control amid a crush of lawsuits. "It's one of the horror stories of privately controlled public companies," says Craig Aronoff, a co-founder of the Family Business Consulting Group, who has spent 25 years researching family-business issues.
The Dart story is an extreme example of the difficult challenge facing directors of a family-influenced company: How to deal with an executive from the family who performs or behaves badly.
Most cases are more subtle, as in Christopher Galvin's 2003 resignation as chief executive of Motorola Inc., which was founded by his grandfather. Motorola at the time was languishing behind cell phone rivals but has revived under a new CEO, Ed Zander.
The issue could come to the fore amid the latest signs of trouble at Ford Motor Co. William Ford, great-grandson of founder Henry Ford, was named CEO of the company in 2001, succeeding Jacques Nasser. The Ford family controls 40 percent of the voting shares. Ford recently reported a surprisingly large second-quarter loss and said it would "accelerate" a restructuring plan Ford put in place just six months ago.
No one is yet suggesting publicly that his job is in peril. But his family's long involvement at the company could complicate matters for Ford's directors, experts say. A Ford spokesman says the company doesn't comment on board-related matters but "having a family member as chairman and CEO is an asset."
Many family-influenced firms wait too long to replace a nonperforming executive-family member, says W. Gibb Dyer Jr., a management professor at Brigham Young University. That is sometimes because of the presence of other family members in the boardroom, he says.
In other cases, boards loyal to founders or their relatives may not know when to pull the trigger when things turn sour, says Aronoff. (If a company's patriarch is still around, it may be easier for him: Ted Turner famously fired his son, Robert Turner, from Time Warner Inc.'s Turner Broadcasting System Inc. in 1996 by telling him during dinner, "You're toast.")
Researchers at the Harvard Business School and University of Pennsylvania's Wharton School define "family firms" as those where a founder or family member was a corporate officer, director or owned at least 5 percent of the company's shares. In a 2004 study, they found that family firms accounted for more than 35 percent of the United States' 500 biggest companies in the latter half of the 1990s.
The board at one of Aronoff's clients, a midsize wholesaler, didn't know what to do when the longtime chief executive — a son-in-law of the founder — confessed he didn't have a plan to tackle recent problems. Aronoff, who had been brought on as a consultant, says he asked the CEO to pretend he was advising the board — and the CEO decided to step down.
In another family-controlled private company, Aronoff is pushing to replace many of the family members on the board with outsiders who know more about business. Only then, he says, is there a chance of replacing the underperforming chief executive, who also is a member of the clan. "It's a long, hard, convoluted process," says Aronoff.
Feuds within the founding family can give a board a headache. Rupert Murdoch, News Corp.'s chairman and founder, recently said the family had resolved a dispute over control of its stake, which contributed to the resignation of Murdoch's oldest son and heir apparent from the company.
At Dart, which also owned the Crown Books chain, the board had to take extreme measures to control the influence of the founding Haft family. Independent directors got a legal agreement protecting themselves and other board members from being fired, and formed a committee that effectively ran the company even though Haft remained CEO, according to a former director. Still, it took them five years to win control of the Haft family's voting stock, take over the executive suite and sell the business to a grocery distributor. By that time, the Dart Group had been unprofitable for five straight years, and the Crown Books unit was ready to file for bankruptcy protection.
Galvin's departure from Motorola was less wrenching. Some directors were concerned that his turnaround strategy wasn't aggressive enough, and they worried about the defection of Motorola's No. 2 executive in 2002. At a two-day board meeting in mid-2003, several directors expressed dissatisfaction with Galvin's leadership, prompting the CEO to bow out. Forcing out the founder's grandson was "very, very difficult" for Motorola's board, a former executive familiar with the directors' thinking says. The Galvin family "represented a lot to that company."
Cal Turner made things easier for the board of discount retailer Dollar General Corp. in 2002, when he repaid the company $6.8 million in vested options and bonuses and then stepped down, following an accounting scandal. The board gave Turner, the founder's grandson, a $1 million retirement payment and half of the company's season tickets for the local professional football team as a parting gift.
Experts say boards of family-controlled companies can take steps to guide decision-making in sticky situations. Dyer suggests establishing a panel to rate family executives' performance based on criteria — including when such an executive could be punished or fired.
A few family firms take more draconian measures, sometimes urged by the families themselves. The founding family of window and door maker Pella Corp. prohibits family members from serving in company management and limits them to one seat on the board, says Raphael Amit, a Wharton professor and co-author of the family-firm study.
Jeffrey Sonnenfeld, a senior associate dean at Yale University's School of Management, argues that a family connection can hurt as much as it helps, as insiders and outsiders alike wonder whether scions will live up to their famous names. Plenty of founding-family scions help turn around companies gone astray under nonfamily management, he says.
In 2002, James Houghton returned to run Corning Inc., the company his family founded in the 1800s, after the telecommunications crash of 2001. In 1945, Henry Ford II, a grandson of the founder, wrested control of a struggling Ford from Harry Bennett, a deputy of the founder. Ford II ran the car company for 34 years.
William Ford was greeted as that kind of savior when he succeeded Nasser. For a while, he appeared to play the part. Under Ford, the company returned to profitability in 2002 and profit surged through 2004, before higher gas prices and tough competition eroded profits on Ford's popular trucks and SUVs.
Sonnenfeld argues that Ford, the man, has performed decently considering the challenges he faces. "His biggest trouble is his last name," he says.