God save the CEO

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Queen Elizabeth II inherited her job as the “CEO” of Britain’s most famous family firm. History shows us that those born into power can be just as effective as those who are chosen.

The Queen is celebrating 50 successful years at the head of “the firm”, as she calls it. Still, the way she got the job – inheriting it on the death of her father – does not meet best practice in modern corporate governance. What would Cadbury, Hampel or Turnbull have to say?

In fact, Sir Adrian Cadbury was appointed in a similar way. But he also filled his role effectively. Over 200 years, the Cadbury family firm became one of Britain’s most successful businesses.

Simon Marks and John Sainsbury reached their positions through dynastic connections but turned Marks and Spencer and J. Sainsbury into leading retailers. Thomas Watson Jr succeeded his father as president of International Business Machines and beat all competition in the race to develop the world computer market. Arnold Weinstock got his job in much the same way as Prince Philip: he married the daughter of the boss. He then turned the business, GEC, into Britain’s largest electrical company. Most big companies are now too big for controlling family shareholdings, though some – such as the fiercely secretive Mars and Bechtel – retain that structure.

Still, there are failures as well as successes. There are Marks, Sainsbury, Watson and Weinstock – but there is also Warwick Fairfax. A fresh-faced Harvard MBA who at the age of 26 fended off other family members to succeed his father at the helm of Australia’s John Fairfax newspaper group, he bankrupted the company in only three years. Against Mars and Bechtel, we have Littlewoods, beset for years by family squabbles. And it is best not to mention Barings.

There have been systematic attempts to compare the performance of family controlled businesses with others. The results are mixed. But that conclusion is itself striking. “Clogs to clogs in three generations” is a Yorkshire saying but most business cultures have their own version: for the Chinese, it is “paddy field to paddy field”. In a meritocratic world, we should expect dynastic succession to produce much worse results than open competition. Why doesn’t it?

One feature of family succession is that it allows people to take responsibility at a young age – as with the Queen herself. This did not work with Warwick Fairfax but occasionally it produces a Simon Marks.

But most chief executives, however appointed, are not in that league. Often it is more important that someone does the job than who does it.

You need a chief executive, or a monarch, because choices between good alternatives need to be made and given legitimacy. This legitimacy can be acquired just as well from traditional authority as from meritocratic selection. Difficulties arise if chief executives – and monarchs – convince themselves that with their status comes unique insight and superior wisdom. Charles I and Kenneth Lay made similar mistakes, both with disastrous consequences.

And part of the role of any leader is symbolic. We feel honoured by the presence of the Queen because she holds the office of Queen, not because of her personal qualities, admirable though they are. Much of what a chief executive or chairman does, inside or outside the organisation, has this representational function.

Dynastic succession emphasises that leadership is a responsibility, rather than a prize. Thomas Watson Jr was one of the most effective chief executives of the 20th century but he was tormented for years by worry over his capacity to do the job.

One of the reasons why the Queen is so respected is that she has never doubted that privileges come with obligations. Minor royals command less respect because they do not seem to appreciate this. The business parallels are remarkably close. Sainsbury and Marks, like the Cadbury family, developed their businesses in a way that commanded exceptional public confidence and affection. They saw their roles not just as managers of the business but as trustees of the business. As scions of a dynasty, they were exactly that.

This concept of business allows long-term investment, such as the seven-year development of float glass by the family-controlled Pilkington. The costs and problems brought the company close to financial ruin. But float glass revolutionised the glass industry and transformed the finances of the company.

The inventor of float glass was Sir Alastair Pilkington, who went on to succeed Lord (Harry) Pilkington as chairman of the company. Surely some relation? No. Sir Alastair’s father’s genealogical research had established no connection whatever between the Reading Pilkingtons and the St Helens Pilkingtons. It was when he described his investigations into early Pilkingtons to the St Helens family that the glassmakers had the happy idea of offering a job to a Reading Pilkington: a whim that was to prove the best decision they ever made.

But Pilkington long ago became a public company and the days of such serendipity are over. If you want to get to the top in Barclays today, it is better not to be a Bevan or a Tuke. Matt Barrett was not born into any English banking family but is paid far more than any Bevan or Tuke received from the bank. Modern governance practices will no doubt one day determine our choice of head of state. But not too soon, I hope.

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