Millennial heirs need to prove their worth
The economist John Kenneth Galbraith wrote of the heirs of Cornelius Vanderbilt that they “dispensed their wealth for frequent and unparalleled self-gratification and very often did it with downright stupidity”.
That stupidity seems to have been inherited by the daughters of Cho Yang-ho, chairman of Korean Air.
“I feel crushed by the immature behaviour of my daughters,” Cho said on Sunday as he removed them from senior roles at the company. Heather Cho is notorious for having humiliated a Korean Air crew over how her in-flight nuts were served in 2014, while her sister Cho Hyun-min allegedly threw water at an advertising agency executive during a dispute.
Cho has pledged to reinforce Korean Air with more professional executives, but his offspring are not done. Cho Won-tae, his son, is president of the company and may one day lead the Hanjin chaebol founded by Cho’s father. It is difficult to curb the instinct to keep business in the family.
Yannick Bolloré, 38-year-old son of the industrialist Vincent Bolloré, who was arrested on Tuesday in a bribery probe, last week described his appointment as chairman of the supervisory board of Vivendi, the French media group that his father controls, as “very natural”. It is equally natural for Alexandre de Rothschild, the 37-year-old son of David de Rothschild, to take control of the family bank in May.
It is natural, but is it wise? The downfall of the Korean Air heiresses shows the pitfalls of entitlement among millennial heirs. The rarity of a founder’s son or daughter being fully qualified for the top job is what leads to most family companies being put into the hands of professional executives after the founder has died.
There can be advantages to continued family control, either through board oversight or when a son or daughter occupies the executive suite. It often happens in the media business —AG Sulzberger has succeeded his father as publisher of the New York Times — and it can work. Brian Roberts took over the Philadelphia cable company Comcast from his father Ralph and has since turned it into a global force.
The scion can be more dedicated to the long-term health of the business and more willing to ignore short-term pressure from outside investors.
A study in Germany found that entrepreneurs make longer-term investments in Mittelstand companies when their children are likely to succeed. Employees may put more trust in, and be more dedicated to, a family leader.
But although companies overseen by families often outperform those with a thorough separation between investors and managers, the verdict on next-generation CEOs is brutal. “When descendants serve as CEOs, firm value is destroyed,” concluded one study of Fortune 500 companies. So what must scions do to beat the odds and become suitable leaders?
First, be humble. This is the hurdle at which the Cho heiresses spectacularly fell, behaving as if their family status brought immunity from the usual rules of conduct. In fact, it is the opposite: if everyone knows you did not get a job solely on your merits, you must prove your ability even more.
Keeping your voice down helps. It is noticeable that both AG Sulzberger and John Elkann, who chairs the Agnellis’s investment company Exor, are known for working hard and being quiet. The fact that Lachlan Murdoch is less brash than his brother James has helped him to emerge as the likely successor to their father Rupert at 21st Century Fox and News Corp.
Second, be prepared. Family heirs will fail if they lack the credibility in education and experience of the professional executives with whom they are compared. This means not only having a good degree, but working their way up within the family business. Cho’s daughters had jobs at the family company but they did not learn to deal with being subordinate.
Ideally, the next generation should have put in time beyond the family business, as all of Rupert Murdoch’s children from his second marriage — Elisabeth, Lachlan and James — have done.
Even if they do not match their parent’s skill, external experience brings valuable experience and self-respect.
Last, know your strength. Heirs have an advantage over other executives from growing up in the business. As a teenager, Brian Roberts was brought by his father to meetings with banks to discuss Comcast. If the next generation can pass the test of competence, it adds continuity; no one inside the company needs to be convinced that heirs are there for the duration.
Insiders and outsiders have contrasting strengths. The latter are more likely to have the skill and detachment to manage operations efficiently but there will always be questions about their loyalty. It is hard to combine both qualities. One study found that only 10% of US family businesses endure to the third generation, but when an heir has both, it is powerful.
Cho Hyun-min failed the leadership challenge when she threw water at a hapless executive. Inheriting a business is the easiest thing in the world; handling it is very difficult. /Financial Times
FAMILY HEIRS WILL FAIL IF THEY LACK THE CREDIBILITY IN BOTH EDUCATION AND EXPERIENCE OF THE EXECUTIVES WITH WHOM THEY ARE COMPARED