A Fixture Among Private Companies
from
May/June 2006
by
Bonnie Azab Powell
With
apologies to Tolstoy, all successful family businesses resemble one
another, but each unsuccessful family business fails in its own way.
The latter outnumber the former: Fewer than a third of family-owned
companies survive into the second generation, according to
Family Business Review
, and only 12% into the third.
The survivors have three things in common, says Glenn R. Ayres, a
University of St. Thomas business professor and former president of the
Family Firm Institute, a professional organization for advisers and
researchers. First, the family is committed to basic business
governance, including electing directors who will serve the best
interests of the company. Second, the family members resist the
temptations of going public to raise capital and can thus make
decisions whose success is measured in decades rather than fiscal
quarters. And last, the owners have internalized good corporate
stewardship as a family value. This, Ayres explained in an article for
the
Review
,
means that the company becomes “the financial (and, in all probability,
the emotional) centerpiece of the greater family,” as emblematic as the
family farm.
Kohler Co. is a textbook example of all three
characteristics, starting with its board. In an arrangement that’s
extremely unusual for a privately held company, five of the 12
directors are outsiders, and they reality-check the chairman and CEO
regularly—even to the point of sending him back to the drawing board to
flesh out his plans for the company.
Founded in 1873 as a manufacturer of farm implements by John Michael
Kohler, an Austrian immigrant, the business started to take off in 1883
when Kohler looked at a cast-iron hog-scalding trough and thought,
“With a little enamel and four claw feet, I bet I could sell that as a
fancy bathtub.” Company lore says the first tub made went to a farmer
who bartered a cow and 14 chickens for it.
Under the leadership of five Kohlers—particularly Herbert V. Kohler
Jr., 67, the current chairman and CEO and John Michael’s grandson—the
company has grown into a global conglomerate with more than 31,000
employees, 49 manufacturing plants, and four affiliates. Kohler’s
Kitchen & Bath division sells fixtures, cabinets, and other
products under 10 brand names, manufacturing them in the U.S., Canada,
China, Egypt, England, France, Mexico, Morocco, and Spain. The Global
Power Group, begun in 1920, makes and leases generators, switchgears,
and small gas-powered engines. Herb Jr., who became CEO in 1972,
created the two newest groups: Interiors, which sells furniture and
flooring, and Hospitality & Real Estate, which manages resort
complexes in Kohler, Wisconsin, where the company was born and is still
headquartered, and at St. Andrews, Scotland, which, as the golfer
knows, is where God plays.
The company looks likely to be among the 3% of family businesses that
survive into the fourth generation. All three of Herb Jr.’s children
are executives at Kohler. Laura, the eldest, is senior vice president
of human resources, Rachel is the president of the Interiors group, and
David heads Kitchen & Bath. The company declines to disclose their
ages.
“You have to understand that we really have a passion for this company,” Herb Jr. told
Corporate Board Member
in a rare interview. “It’s not just an ordinary old job. When we think
about the company, we don’t think of dollars and cents. We think about
our mission and guiding principles.”
He may not have money
on his mind, but following that mission—to foster “gracious living”
through all Kohler’s products and services—has resulted in big bucks.
When Herb Kohler Sr. died in 1968, company revenues were $111 million.
Last year they topped $4 billion, and they’ll probably surpass $5
billion in 2006, says Herb Jr. He proudly claims that the company’s
book value has grown an average of 11.4% annually for the last 35 years.
The secret of that success? Staying private, Kohler says. It was a
lesson he learned young by watching what happened in 1971 when another
successful Wisconsin-based family business, the
tissue-and-paper-products manufacturer Fort Howard, “got a little
greedy,” as he puts it, and went public. Fort Howard ended up loaded
down with debt and in 1988 went private in a leveraged buyout, then was
forced to go public again. Finally, says Kohler, the company “was taken
over [by Georgia-Pacific Corp.] and wiped out.”
Kohler himself turned to the public to raise cash in 1972, his first
year as CEO, selling bonds to finance an $8 million gamble in which the
company massively increased cast-iron production capacity even as its
competitors were flirting with acrylics. The public financial
disclosures required really irked him. He thought they might give away
proprietary information to his competitors, and he never went back to
Wall Street. Nevertheless, in 1978, the year he finished paying off the
bonds, he realized that he might have to make disclosures for the rest
of time. Over the years various Kohler family members had sold their
stock to outsiders—some to raise large sums of cash, others to
guarantee loans that went awry. As a result, the number of stockholders
had come to exceed 400. Once the number hit 500, the Securities and
Exchange Commission would have considered the business to be publicly
owned and required it to start complying with all kinds of pesky
regulations.
To head that off, Kohler boldly declared a 20-for-1 reverse stock
split. Anyone left with a fractional share could either sell the stock
back to the company or ante up enough cash to make it a full share. The
company was offering $412.50 for whole shares, and most fractional
shareholders chose to sell. The number of shareholders dropped to fewer
than 200, and Herb Jr. breathed a little easier.
Yet Kohler shares continued to leak to outsiders, usually because
distant cousins wanted a payday, and a small group of Wisconsin brokers
made a market for them. These included the same people who had forced
Fort Howard to go public, which really made the Kohlers nervous. “They
clearly were speculating,” says Natalie Black, 57-ish (she won’t say),
who in addition to being corporate counsel, senior vice president of
corporate communications, and board secretary, is married to Herb
Kohler. “When you have a small number of shares like that, where your
only opportunity is to get a dividend check, which is not great in the
scheme of things”—the company has always paid a relatively small
dividend to its shareholders, preferring to reinvest 90% or more of
profits—“the only possible reason to continue to hold them is the hope
that the company will have to go public. And that was never going to
happen.”
Not everybody believed it. By 1998, a few of the 300 Kohler shares not
held by family members were changing hands at more than $100,000
apiece, a price that made them the most expensive stock in America,
surpassing even Berkshire Hathaway’s. These outside holdings
represented a mere 4% of the company, but that was still too much for
Herb, Natalie, and Herb’s sister, Ruth, 64. They put together a
complicated recapitalization plan that in essence called for non-family
members who owned Kohler stock to receive cash for their shares, while
family members could choose either cash or stock divided into four new
classes of shares, each with different rights. If all went according to
plan, the Kohler Stewardship Trust, a perpetuity trust with stringent
restrictions against the sale or other disposition of Kohler stock,
would control a majority of the outstanding shares with voting rights,
and the company would stay private for generations to come—or at least
until the generation with a lawyer as sharp as Black came along to
untangle the knot.
The problem was, Kohler was valuing the stock at $55,400, about half
the price brokers had paid a few months earlier for shares unloaded by
two Kohler cousins. (The Kohler family has had its share of tensions
since the late 1930s, when Walter Kohler handed the reins to his
half-brother Herbert Sr. rather than to any of his four sons. Control
has remained with Herbert’s side ever since.) Although 88% of
shareholders approved the recapitalization plan, a bunch of brokers and
various disgruntled family members sued the company, claiming that the
shares were actually worth $273,000 apiece. Kohler settled the case in
2000 just before it went to trial, paying $135,000 for each share.
It was a large chunk of cash to lay out, but it did buy peace of mind.
“We really felt it was important to consolidate the control of the
company in the Stewardship Trust,” explains Black. “We called it the
Stewardship Trust for a very big reason: We want to make sure that the
concept of stewardship is intrinsic in the family and in the company
going forward.”
For the Kohlers, good stewardship applies not only to the business but
also to Kohler Village, the Wisconsin town built from the dirt up by
John Michael Kohler when he moved his foundry operations there in 1899
from nearby Sheboygan. Kohler Village is one of the last surviving
company towns in America, but the Kohlers wince when anyone calls it
that. The community was never like those built and operated by, say,
mining companies intent on extracting every last nickel from their
workers by renting them their housing and selling them their food, says
Kathryn Oberdeck, a history professor at the University of Illinois who
has studied the village. “This is a welfare capitalist model, part of a
time when people were trying to create towns and worker environments
that would be healthful and uplifting.” So while the family-owned
Kohler Improvement Co. built the houses, it sold them at cost and the
employee-owned Kohler Building & Loan Co. financed the mortgages.
To house some 250 single male immigrant workers who couldn’t afford
homes, the family built the American Club across the street from the
foundry, providing its residents with meals, laundry, a four-lane
bowling alley, and free classes in American history and English
grammar. Later on the Kohlers built a civic auditorium and a sports
club and hosted many cultural events for the village.
Relations between the company and its employees weren’t always
harmonious. In particular, a 1954 strike led to one of the bitterest
and longest-running labor disputes in U.S. history. The actual walkout
ended after 54 days, but the associated litigation wasn’t fully settled
until 1965, when Kohler agreed to pay its workers $3 million in back
pay and put another $1.5 million into their pension funds.
Fences seem to have been mended, and Kohler Village, with a population
of just under 2,000, is almost bucolic. “It’s a very unique community,
very safe and with lots of amenities,” says Tom Leonhardt, the
village’s president and the closest thing it has to a mayor. He is a
third-generation resident as well as a third-generation Kohler
employee, retired but still loyal to the company that treated him “like
family.” All the Kohlers, he says, are civic-minded and “very much
involved with making this a better community.”
Family-owned companies in the Midwest, such as Kohler and S.C. Johnson,
a Racine, Wisconsin-based cleaning-products manufacturer, “tend to be
very much oriented to giving back to communities in ways that large
public companies don’t care about as much,” according to Allen Bettis,
principal of Legacy Associates, a family-business consultancy, and
president of the Minnesota chapter of the National Association of
Corporate Directors. “They build libraries and do tremendous things for
their communities, because that’s their name on the door.”
When it comes to the business, however, the Kohlers do not “confuse
good stewardship with being caretakers,” asserts Black. “We’re growing
things here.”
Take the company’s relatively new hospitality unit, which has burgeoned
into its most profitable business almost by accident. The family had
commissioned two 50-year master plans for Kohler Village. The first, in
1917, was created by the Olmsted Brothers, the famous landscapers who
designed New York City’s Central Park; the second was done in 1977 by
the Frank Lloyd Wright Foundation. By the time No. 2 was needed, the
American Club where the single men used to live had fallen into
decline. Herb Kohler renovated the old rooming house, opening it in
1981 as a luxury hotel and building an upscale commercial center around
it.
The reborn American Club was such a success, Kohler says, that guests
being shuttled to nearby golf courses started badgering him to build
some himself. Although he didn’t play golf at the time—he was breeding
and riding horses—Kohler was never one to go for bargain talent, so he
hired Pete Dye, a top golf-course architect. In 1988 Kohler Co. seeded
the first of the four 18-hole golf courses it operates. Blackwolf Run
opened to rave reviews from golfing magazines; just 10 years later it
landed a U.S. Women’s Open Championship. And last year the U.S. Golf
Association and the PGA of America dueled over Kohler’s Dye-designed
Whistling Straits, which opened in 1998, 15 minutes away from Kohler
Village on the shores of Lake Michigan. The Straits played host to the
2004 PGA Championship and is set to host the U.S. Senior Open in 2007.
The PGA made Kohler an offer he’d have been mad to refuse: Whistling
Straits will host the 2010 and 2015 PGA Championships and the lucrative
Ryder Cup in 2020.
That’s amazing success in a short time for a completely new business,
and pretty remarkable for a third-generation CEO to pull off. (After
all, isn’t he the one who’s supposed to be squandering the money made
by the first and second generations?) Ernst & Young thought so,
naming Kohler one of 2002’s top entrepreneurs for diversifying an
old-fashioned manufacturing business into a growing tourism venture.
Being privately held is what allows Herb Kohler to take these risks,
with their potential long-term payoffs. But before he does so he must
still clear them with the company’s board, including its
independent-minded outsiders. The directors habitually push Kohler for
details about his plans for the company. They certainly did this when
he broached the idea of starting the resort business; it took him three
tries to persuade them to vote yes. The board threw its weight around
again last year when Kohler proposed the acquisition of three generator
and power companies from France’s Meunier Group. “The board didn’t see
the strategic value for us,” says Black. “They saw us getting bigger,
but they didn’t see the two plus two equaling five, because we hadn’t
done a good enough job making the case for the acquisition.” It took
what she calls “very aggressive debate”—and a three-month delay while
additional due diligence was completed—to persuade the board to go
along with the deal, which finally went through in December for an
undisclosed price. “The outside directors really made the acquisition
much more valuable to us, and cheaper, as it turned out,” Black says.
“Management, whether it’s Herb or the children or whoever, needs the
intellectual rigor of having to prove their case. That’s the value of
an active board.”
Board members see it the same way. Says outsider Glen Hiner, 71, former
chairman and CEO of Owens-Corning and a director for the past six
years: “Kohler is a private company that acts like a public company as
far as financial processes are concerned, although we don’t have to go
quite as far. The outside directors were selected pretty carefully, and
I do believe we provide a positive influence on Kohler’s operations.”
The other outsiders are Jeff Bleustein, chairman of Harley-Davidson;
William C. Foote, chairman and CEO of USG Corp.; Ned Hardison, retired
chairman of Charlotte Pipe & Foundry Co.; and, the most recent
addition, Jeff Joerres, chairman and CEO of Manpower Inc. In addition
to Kohler and Black, the insiders are John M. “Mike” Kohler Jr., a
great-grandson of the founder and a former plant manager at Kohler;
former CFO Richard Wells; and Herb’s three children.
That willingness to respect the opposing views of outside directors is
unusual in a family business, says Allen Bettis of Legacy Associates.
“It’s a real indication of confidence, that they’re using those outside
directors so well. You want them to challenge your thinking and force a
better strategy than the family would have come up with on its own, and
to protect the family from themselves.”
The directors have also been taking a role in helping Herb Jr. pick a
successor. Each of his children seems qualified to succeed him. All
three have master’s degrees and worked for other outfits before their
father lured them back to the company. Herb Jr. followed a circuitous
path into the family business: He didn’t talk to his father for five
years while he was “finding himself”—a voyage that took him out of Yale
and into the Army Reserve for six months, then to the University of
Zurich and a couple of other colleges, and eventually back to Yale,
where he earned a business degree. When the old man finally tracked him
down, Herb Jr. agreed to come back to the company on the condition that
he start from the ground floor and be allowed to succeed or fail on his
own merits. His father agreed but died in 1968. Two outsiders ran the
company as CEO and president for the next four years, until Herb Jr.
was ready to take over the top jobs.
Kohler will not disclose whom he has chosen to succeed him. “They have
different strengths,” he says diplomatically. “All of them in
combination can do a much better job than I’ve ever done.”
Of course, a CEO troika is unlikely. Because the family business has
defied the odds to grow and flourish under each new generation, the
next leader of Kohler will have some big stewardship shoes to fill. But
one thing seems sure: She, or he, won’t be taking the company public.
