Family misfortunes

Canada’s business dynasties face uncertainty


Family misfortunes

Canada’s business dynasties face uncertainty


Family misfortunes


Canada’s business dynasties face uncertainty

On a crisp morning in September, 1987, 11 members of Winnipeg’s Richardson family gathered in the rustic comfort of the Minaki Lodge resort near Kenora, Ont. All cousins, the 11 were well acquainted: they had shared Christmas dinners and cottage vacations throughout their lives. But the Minaki meeting was different—the family members had assembled to transfer control of the clan’s 130year-old commercial empire from their parents’ generation to their own. At stake were interests ranging from the supply of farm equipment and fertilizer to construction, real estate and the Bay Street brokerage firm of Richardson Greenshields of Canada Ltd.

Determined to avoid the acrimonious and sometimes public rifts that have afflicted heirs to other dynastic fortunes, the Richardson cousins eventually agreed to a set of collective family objectives. Declared 39-year-old Royden Richardson, a senior vice-president with Richardson Greenshields and one of the fifth generation to manage the family assets: “Family businesses are prone to self-destruction, and we would have been naïve to assume that we were immune.”

The self-destructive tendencies of family fortunes are nowhere more significant than in Canada. A handful of hard-driving individuals and their ensuing dynasties have traditionally dominated the country’s relatively small national economy. Many of the names are well-known—Bronfman, Molson, McCain, Irving and Woodward among them. But the spectacular reversal of fortunes experienced by Toronto’s Reichmanns has underscored the vulnerability of such family enterprises. Said Donald Thain, a business professor at the University of Western Ontario in London: “In a business dominated by a founder, all of that individual’s weaknesses and idiosyncrasies are woven into the corporate fabric.” And Thain, who is a director of Reichmann-controlled GW Utilities Ltd. of Toronto, said that such a personal stamp can contain the seeds of its own destruction. He added: “If the company grows too large, it spins out of control.”

Indeed, some claim to detect exactly that pathology at work in the Reichmanns’ faltering empire. Although the family holding company,

Olympia & York Developments Ltd. (o&Y), is a partnership of three brothers—Albert, Paul and Ralph—it is Paul whose dominant personality and corporate vision led the company to undertake increasingly ambitious projects and ever greater debts. From the outset, close observers of the family say, it was Paul who pressed ahead with the project that now threat-

ens to topple O&Y: its $7-billion Canary Wharf development in London. Despite soaring office vacancy rates in the British capital, he propelled the project forward, lavishing attention on the most minute construction details, even selecting the marble for its walls. Sources close to the company blame the same insistently hands-on management style for the loss of highly regarded former banker Thomas Johnson less than three weeks after he was hired to steer O&Y through its debt restructuring.

Indeed, even under increasingly grave financial pressures, the Reichmanns have stubbornly refused to cede control over their troubled empire. That was evident last week, when critics noted that their offer to convert bank debt into nonvoting equity in O&Y would have left creditors without a voice in the company’s affairs—and the family in full control of the company’s destiny.

The Reichmanns’ troubles are of more than academic interest to other family-owned busi-

nesses. Like many other private companies, O&Y issued no shares for public sale, relying for working capital on bank loans and lines of credit instead. Eventually, the family business ran up debts totalling $14.3 billion that, by earlier this year, exceeded the Reichmanns’ ability to repay. Their difficulties have now cast a chill over other family-owned enterprises. Said Timothy Hogarth, vice-president of the family-owned retail petroleum business Pioneer Group Inc. of Burlington, Ont., and a director of the 600member Canadian Association of Family Enterprise: “It’s always more difficult to raise money if you are a private company, and the events at O&Y have made it much worse. The banks have become much more squeamish about family business since O&Y.”

At the same time, many other family fortunes suffer from the same unwillingness as the Reichmanns to share management authority with outsiders. In extreme cases, noted Thain, “It can be completely demoralizing for qualified managers to report to family members who couldn’t get an entry-level job outside the nest.” By contrast, some of the most successful corporate families, like the Molsons of Montreal, have relied heavily upon the counsel of non-family managers for generations. For his part, Royden Richardson acknowledges that it is “tempting to tamper” with outside managers, but he added that bringing them in involves learning to “suppress your ego.” Even the presence of outside managers is no guarantee that turbulent families will be kept in check. In one case, hired executive Dean Muncaster ran Canadian Tire Corp. for almost 20 years before the actions of the three children of founder Alfred (A. J.) Billes disrupted the company’s operations and embroiled it in a

bitter struggle over corporate control.

Even when such families do not own a company outright, their influence can still be excessive—and detrimental to other investors. Minority shareholders raised just that complaint against Toronto’s Billeses during their squabbling over control of Canadian Tire—a grievance that the Ontario Securities Commission later upheld.

The strength of minority shareholders is often restricted by the use of multiple-voting share structures, designed to allow the founding family to retain control over a corporation despite the issue of public shares. Noted William Chisholm, an analyst with the Toronto brokerage firm Loewen, Ondaatje, McCutcheon & Co. Ltd.: “You have to assess your degree of comfort with a controlling family on an individual basis.”

Such an assessment can be greatly complicated where there is no clearly identified and plainly competent successor poised to take over the reins of the enterprise. In the case of New Brunswick’s McCain frozen-food empire, a recent spell of ill-health on the part of co-founder Harrison McCain,

64, sparked intense speculation about who might replace him.

While the failure of one generation to make its succession plan clear may pitch its heirs into battle, the same thing can occur when control over a company is handed over in equal shares to several offspring. In the past decade, bitter fights about family fortunes have erupted over such well-known commercial names as Woodward’s, Steinberg’s and Birks, in addition to Canadian Tire.

But even carefully laid succession plans, in which a single heir is identified, may disrupt the smooth course of a business. Although Peter and Edward Bronfman agreed that Peter’s son, Bruce, should succeed them at the helm of their Toronto-based empire, there were complications. In order to ensure that Edward’s three children would be able to extract their share of the wealth, the brothers were obliged to create a new company, which effectively sold Edward’s private stake in the empire to the public and complicated an already labyrinthine corporate structure.

Even when subsequent generations accede smoothly to control of a business, they sometimes find that their inheritance is not what they expected.

The iron-willed personalities that create empires may also bring them close to ruin. Although Stephen Roman, founder and autocratic ruler of Roman Corp. Ltd. of Toronto, anointed his daughter Helen Roman-Barber to succeed him, the holding company was already tottering before his death in

1988. Since Roman-Barber took the helm, the family’s fortunes have evaporated as its assets have plunged into insolvency. The family has a 45-per-cent stake in the company, but the value of a Roman Corp. share has dropped from $11 in 1988 to $1.80 at week’s end.

Some founders of fortunes have attempted

to prevent intra-family power struggles after their death or retirement by assigning each heir a distinct and separate sphere of operation. That is the approach taken at Power Corp. of Montreal, where founder Paul Desmarais has groomed his two sons to enter the business. While André, 35, concentrates on the company’s industrial operations, his elder brother, Paul Jr., 37, is more involved in the financial side of the business. New Brunswick magnate Kenneth Irving followed a similar pattern, giving one of his three sons control of the family oil business, another its forest interests and a third its media holdings. The brothers Galen and Garry Weston received responsibility for different parts of the international food and grocery company founded by their grandfather, George Weston.

For his part, plainspoken Vancouver entrepreneur James Pattison says that he has a simple plan to avoid succession struggles among his three children. Pattison insists that he intends to exclude his children from his diversified $3-billion industrial empire—and his will.

That approach wins the approval of Thain, at least. The business professor is among several critics who doubt that any family-controlled empire is equipped to survive the competitive demands of an increasingly global economy. International business, says Thain, demands “critical mass, management and finance, at a level above the grasp of one family unit.” According to Thain, the practice of turning large corporations over to what he dismissively calls “birth accidents,” rather than to professional managers, “has had tremendously negative effects on the Canadian economy.”

As for the Reichmanns, however, many analysts saw the brothers’ diversification of their empire away from real estate during the 1980s as an attempt to ease the succession for some of their 14 children into the family business. Albert Reichmann’s son Philip and Paul’s son-in-law, Frank Hauer, have already been teamed together in o&Y’s real estate division, where they are actively involved in leasing negotiations and other functions. But Philip’s brother, David, is involved with the Reichmanns’ pulpand-paper company, Abitibi-Price Inc. of Toronto.

As their fathers struggle to prop up the shaky edifice of o&Y’s finances, however, many of the younger Reichmanns now have to concern themselves with just how much of the family wealth will be left for them to inherit—with or without a tussle.



Why are family fortunes ruined?

The Canadian Association of Family Enterprise compiled a list of the most common mistakes:

1. General conflict: parents and children disagree on how to manage the business.

2. Sibling rivalry: offspring fight for control of the business.

3. Buggy whip syndrome: family members refuse to update products or management methods.

4. Imperial presidencies: the founder exerts autocratic personal control over decisions.

5. No help wanted: talented non-family managers are driven away by family politics or incompetence.

6. Excessive secrecy: accustomed to selfreliance, founders fail to share information with other managers.

7. No heirs apparent: rather than turn the company over to one heir, a retiring generation distributes shares among several,

setting off a destructive fight for control.