In 1980, the Stroh family business, started by German immigrant Bernard Stroh in Detroit in 1850, was the third largest in the United States, with a valuation of $9 billion at its height.
Two decades later, the company had crumbled, a mere shadow of its former glory.
How could family wealth, which had taken a century to amass, dissipate in just 20 years?
Typically hardworking and frugal, the founder ensured that his company found solid footing. The second generation leveraged the aftermath of the Second World War to grow the business, which their successors struggled to maintain.
But when the fourth generation took over, things began spiraling out of control.
Outwardly, the cause appeared to be a desire for rapid expansion, leading to poor investments. Flush with cash, the owners and managers bought many brands like Old Milwaukee and Schlitz, and even branched out into biotechnology and real estate.
These investments might have worked, except for the fact that the company went heavily into debt to finance the former, and as for the latter, it fell victim to the US recession and Detroit’s deterioration.
But bad luck or poor business sense is rarely the sole culprit.
“The more time-honored and reliable way to lose a fortune, “ says Scott James of the “The New York Times,” “often comes down to just one word: family.”
Unqualified and entitled heirs
Frances Stroh, a member of the fifth generation, tells all in her book “Beer Money: A Memoir of Privilege and Loss.”
And yes, the Stroh descendants have fallen prey to diseases of affluent dynasties: drug and alcohol addictions, internal family squabbles, untrained male successors chosen in lieu of potentially more prudent female ones.
Even while the company was sinking, skyrocketing dividends continued to be bestowed on more and more descendants, who lived extravagantly.
Though certainly not ideal, these payoffs might still have been sustainable, except for the fact that dividends were already eating into the principal, and even if the board of directors attempted to reinvest the remainder, they failed.
The Stroh rise and fall is unfortunately all too common among heirs of family businesses. Michael McGerr of Indiana University tells “The New York Times,” “Dynasties are…hard to pull off…You have to be really lucky within your own family.”
Samsung heir’s fall
I do not fully agree. Luck plays a role, but as the saying goes, luck favors the prepared.
Family businesses need to identify and train successors as early as possible, and cement core values (against profligacy, for example) in their members.
Accompanying the downfall of South Korea’s former President Park Geun Hye, Samsung heir Lee Jae Yong has also been arrested on charges of collusion and bribery.
While details of the sordid affair remain murky, Michael Schuman places the blame on Confucian culture.
When applied well, the hierarchical structure of Confucian culture can be a blessing to family businesses. Respect of the young for elders, mentorship of the next generation by the old, clear structures backed by family and community tenets: all these have fueled the rise of family wealth in Asia in the last half-century.
But Confucian culture can backfire.
“In certain chaebols [family conglomerates like Samsung], employees are actively indoctrinated in the wonders of the company’s founding clan,” Schuman tells “Bloomberg.” “[Some] employees would praise the brilliance of [founder] Lee Kun Hee the way the North Korean media lauds dictator Kim Jong Un…The top family executive…much like an imperial ruler, becomes a point of focus and loyalty for managers.”
Even when business practices may be unsound, “shareholders, bankers and bureaucrats, who often have longstanding connections to chaebol management, are naturally reluctant to rock the boat.”