All in the family

When does family business become crony capitalism?

August 24, 2011

Big economic crises often cause iconic companies to falter. Rupert Murdoch’s media empire is a model of the modern global enterprise. A particularly dynamic and innovative business model came from outside and took over central aspects of British and then American public life. That model is now threatened by the fallout from the scandal that started with phone hacking in Murdoch’s British press operations.

The Murdoch experience is a microcosm of how modern globalisation works. Murdoch always looked like a foreign intrusion into British life. It was not just that he was Australian; he also brought new ideas.

In particular, the application of digital technology, introduced after a ferocious struggle with the powerful print unions, brought substantial cost savings and allowed a new era of journalism. Even more importantly, Murdoch represented a concept of family business that is common in many parts of the world, but relatively rare in Britain and the United States.

Family capitalism in the continental European model uses relatively little capital to achieve maximum control. It frequently depends on very complex corporate structures, with multiple layers of holding companies, as well as privileged shares that can guarantee the continuation of control.

This sort of firm is also very common in the most dynamic emerging-market economies in Asia and Latin America. The Murdoch family holds only 12 percent of the shares of News Corporation, the top-level holding company, but it wields about two-fifths of the voting rights; other votes are held by a loyal Saudi prince.

Long-term thinking
For decades, academic analysts have been fighting over whether such large-scale family businesses should be considered beneficial. Their defenders point out that such companies often have a much longer-term vision than is true of managerial capitalism, which enables them to establish strong and enduring relationships with their customers and suppliers.

At least in the case of the Murdoch empire, it now appears that they pursue long and binding relationships with politicians and the police as well. Indeed, political entanglements are one of two sources of weakness in European-style family capitalism, as owners seek political advantages and preferred access as much as they strive for technical innovation.

Murdoch’s empire depended on its closeness to politicians. In retrospect, three successive British prime ministers – Tony Blair, Gordon Brown, and David Cameron – were on overly familiar terms with a manipulative business leader. Cameron now talks about the need for “a healthier relationship between politicians and media owners.” And Murdoch apparently is now saying that he wishes that all these prime ministers would “leave me alone.”

Business before blood
The second notorious weakness of family businesses is the problem of succession. When he appeared before the British parliament in July, Rupert Murdoch looked like an old man, remote and out of control. In old-style family firms, there is a clear rule of succession that the oldest son takes over. But that rule is rightly recognised as being potentially dysfunctional. There is obviously no guarantee that the oldest son is the best businessman, and the result could be bitter and ferocious sibling rivalry.

Such succession disputes become even more acute when there are multiple marriages and multiple sets of competing children. Until the eruption of the current scandal, the youngest of Murdoch’s three children from his second marriage, James, was generally believed to stand the greatest chance of succeeding his father.

The complexities of modern marriage patterns make family life much more fraught, especially when phenomenal power and huge sums of money are involved. All three of Murdoch’s marriages have produced children, though those from his current relationship are too young to be considered potential corporate successors.

In addition, succession planning can be complicated by the emergence of “substitute children” from the company’s management. Rebekah Brooks, the editor of the News of the World at the beginning of the phone-hacking scandal, and subsequently the chief executive of News International, Murdoch’s British subsidiary, played precisely such a role. The disintegration of the business empire is then accompanied and amplified by bitter disputes between the children and the substitute children.

Crony capitalism
Indeed, the crisis of the Murdoch family’s business empire is neither unique nor unprecedented. In the first half of the 1990s, many observers of the alleged Asian economic miracle emphasised trust and families’ capacity to cooperate with political authorities in order to realise long-term growth plans.

However, after the 1997‑8 Asia crisis, and as authoritarian regimes in South Korea and Indonesia disintegrated, these relationships were suddenly interpreted as corrupt. Instead, the counter-view – that ‘crony capitalism’ had become entrenched in these countries – very quickly prevailed.

The Arab Spring has been in large part a movement against corrupt family capitalism, embodied not only in ruling families like the Ben Alis, the Mubaraks, and the Assads, but also in the large family business empires that depended on and supported them.

As a result of globalisation, large family firms could increase their size and their geographic range. But globalisation also increases the chances of backlashes that focus on the vulnerabilities, weaknesses, and mistakes of big family firms. They are vulnerable to an Arab Spring (and a British summer) – and maybe to a US autumn that will focus not just on the Murdochs’ business, but also on its interplay with politics.

Harold James is Professor of History and International Affairs at Princeton University and Professor of History at the European University Institute, Florence. He is the author of The Creation and Destruction of Value: The Globalization Cycle

(c) Project Syndicate, 2011