The Six Habits of Successful Private Companies
It’s a good time again to be a privately held company. No pressure over quarterly earnings, no obsession with stock prices, no anxiety over what you can say to whom about how the business is going. Heck, nobody outside the owner has to know anything. Mark Zuckerberg probably wishes Facebook were still private.
Growth has been better among privates, too. Forbes’ 2012 roster of America’s biggest private firms, based on 2011 data, showed revenue growth of 12%, twice the growth of the S&P 500. More recent data come from a new study by KPMG and Forbes Insights, which found that 58% of private companies are poised for revenue growth of 6% or more over the coming year. Ten percent of the 473 executives who responded believed their sales will rise more than 20%. Projections are flattish to slightly up for S&P 500 earnings.
What makes private companies great? My colleagues and I, in an unscientific analysis, extrapolated six habits found at the biggest private firms as well at some smaller, successful ones. I hope you can apply one or more of these lessons to your business, no matter what size.
1. They have a mission
Great companies know what they are and what they stand for. Study after study shows that employees are happier and more productive, and may even accept lower wages, when personal needs higher up the Maslovian pyramid are being satisfied by their employment. Delivering on meaning also helps build more substantial relationships with customers and partners—especially when a company isn’t getting the kind of press coverage and attention public companies typically get.
Arts and crafts retailer Hobby Lobby, no. 147 on our 2012 privates list, is run by its billionaire chairman David Green. The son of a pastor, Green had to repeat seventh grade, never went to college and worked as a stock boy. He eventually started a business selling arts and crafts items like small picture frames, and built it into a massive retail chain that doubles as a missionary organization, the equivalent of the largest church bake sale in the world. Hobby Lobby is a corporate soldier of Christ. It puts half of total pretax earnings into a portfolio of evangelical ministries. Stores are closed on Sundays, forgoing revenue to give employees time to worship. The company also keeps four chaplains on the payroll. You may personally object to the mission of Christ, but Green’s embrace of it contributes greatly to Hobby Lobby’s success by giving it a strong identity to keep both customers and employees loyal. Few companies and CEOs can realistically bring religion to work but those who are compelled to do it cannot possibly do it as a public company. In Green’s camp are also Chick-fil-A founder Truett Cathy and the duo behind Forever 21, Jin Sook and Do Won Chang, born-again Christians who keep Bibles in their office and print John 3:16 on the bottom of each shopping bag.
There are many varieties of religion. For Patagonia, the $600 million apparel brand in Ventura Calif., the mission is environmental and has been since the early 1970s. Founder Yvon Chouinard made his first bundle making replaceable pitons (spikes for climbers), which caused less damage to rocks than permanent spikes. But over time, the pitons were weakening the rocks so they exited the climbing hardware business and moved into apparel. Patagonia led the way with high-quality, green, recycled textiles, and has been using organic fabrics since the mid-1990s. It puts 10% of profits into environmental actions and is now one of world’s biggest B-Corps., a designation that commits a company to heed environmental and community needs in all business decisions.
Mission-driven can also apply to business strategy. Finnish mobile game company Supercell has rocketed to more than $800 million in revenue by breaking most of the conventional rules of game-making. From Karsten Strauss’ recent profile of the company (“Is This The Fastest-Growing Game Company Ever?”):
“Most game studios have an autocratic executive producer green-lighting the work of designers and programmers. Supercell’s developers work in autonomous groups of five to seven people. Each cell comes up with its own game ideas. They run their ideas by [CEO Ilkka] Paananen (he can’t remember ever nixing a proposal), then develop those into a game. If the team likes it, the rest of the employees get to play. If they like it, the game gets tested in Canada’s iTunes App store. If it’s a hit there it will be deemed ready for global release. This staged approach has killed off four games so far, with each dead project a cause for celebration. Employees crack open champagne to toast their failure. “We really want to celebrate maybe not the failure itself but the learning that comes out of the failure,” says Paananen [who has said he wants to be the world’s least powerful CEO].
2.They keep employees happy
As SAS Institute’s CEO and cofounder Jim Goodnight once said, “If you treat employees as if they make a difference to the company, they will make a difference.” SAS, the analytics software company in the Research Triangle area of North Carolina, achieved its 37th year of record revenue (up 4.2%) in 2012. Why? Something Goodnight and his cofounder John Sall hit upon long ago. They take care of people, and not with options. They passed on going public years ago, something unusual as a tech company that competes with IBM and Oracle. Instead they lavish the benefits: on-site medical care, including psychiatrists, dieticians and physical therapists; on-site preschool and day care; paternity leave, summer camp, car detailing, nail salons, racquet stringing, dry cleaning, a swimming pool. It offers lessons in billiards, golf, ultimate Frisbee, tennis and dodgeball. The added cost for these programs are made up for in savings in recruitment: SAS boasts one of the lowest employee turnover rates in the industry: 3.3% versus the industry norm of 22%. The best private (and public) companies don’t lose people.
Southern supermarket chain Publix, the nation’s 7th largest private company, has thrived in large part because of its decision to turn its 157,500 employees into owners. Publix is the largest employee-owned company in the U.S., with 101,000 stockholders. Having employees as stakeholders give them incentive to keep customer experience great. That in turn has helped the chain achieve a higher profit margin than any public U.S. supermarket.
Some employees will worry about advancement opportunities in family-run businesses. Owners will have to go out of their way to assure them there is still a future for them and come up with really smart ways to give them the experience and responsibilities they crave. M&M and Snickers maker Mars, Inc., makes it a priority to move people around to different divisions. So you might start out working in quality control for Uncle Ben’s, but then move to marketing Skittles, before landing in the Whiskas cat food group. Mars employees, who often call themselves Martians, also take advantage of mentoring programs that dispense advice from old to young and the other way around: they have older workers seeking out young employees be their social media mentor.
Steelcase CEO Jim Hackett, who’s been CEO of the office-furniture maker since 1994 (it went public in 1998), told me recently that the company’s three founding families had always treated people as equals and didn’t put family first. The culture of egalitarianism they created still exists today, and ensures that no outsiders felt limited.
Many of the biggest private companies are old: 42 of the top 220 are more than a century old. But heritage doesn’t mean stale. Founded more than a century ago, Hallmark has continued to stay out in front. In 1932, it signed a licensing agreement with Disney, one of the first such ventures for both companies. It started a line of Spanish language greeting cards in the early 1990s, before Hispanic marketing really took off. It diversified smartly into cable TV, embraced the Internet early with e-cards and introduced some of the first cards with sound chips. Even more recent new product offerings include video greetings and many new recordable storybooks.
Getty Images, the largest licensor of fine and stock photography, could not have chosen a much more difficult time to go private than mid-2008’s turbulence. “It was very clear very quickly that our projections were simply unattainable,” its CEO Jonathan Klein told me. “We moved swiftly and adjusted our cost base, invested in our employees and were able to acquire our then second largest competitor at a knock-down price.” All of this was possible as a private company without the issues of quarterly reporting, providing guidance on earnings, a volatile stock price and external pressures.
3. They work the long term
Being privately held affords companies the freedom to invest in high-risk, high-reward projects that may not pay off for years. Kohler, the maker of kitchen and bathroom fixtures, got into China much earlier than its rivals and did so by itself, not through the quick-win of a joint venture.
Phil Libin, the CEO and cofounder of Evernote likes to say “we’re a 100-year company.” Evernote sells online note-taking and productivity tools that imply a promise to its users that notes will be accessible forever. That required changing the usual principles of how Silicon Valley startups are run. Libin raised $251 million in venture capital, a wildly large amount and far more than its immediate needs, for two reasons. One was to create a sense of a 100-year reserve but the main reason was to take out the early investors who’d be likely to clamor for an IPO. “I wanted to to decouple the IPO from the idea of an exit,” says Libin. In the recent Forbes Insights-KPMG study of private company leaders, the no. 1 reason for going private was to ‘satisfy primary investors.’ If that’s your best reason for an IPO, that’s a failure of imagination.
No company does the long term better than agribusiness concern Cargill, the biggest private company in the U.S. with revenue same as Ford Motor Co. ($134B) and operations in 66 countries. Its mindset is summed up nicely by its vice chairman Paul Conway in this excellent 2011 Fortune magazine story:
“As far as how our corporate strategy works,” says Conway, “we don’t say, ‘We think the world’s going to look like this, let’s define our strategy for that world.’ We say, ‘We don’t know what the world’s going to look like. We need a strategy or a set of strategies that can be successful almost irrespective of what the world looks like.’”
Cargill started out trading grain in Conover, Iowa after the Civil War, then moved into rail and barge transport, ocean shipping, insurance, and trading of almost every commodity. It runs its own hedge fund, sells oils and lubricants made from plants, and introduced the world to the no-calorie sweetener, Truvia, now the No. 2 selling sugar substitute in the U.S. The Fortune piece tells a great story about how Cargill spent 11 years building a cocoa business in Vietnam, a country that had zero cocoa production when President Clinton normalized trade with Hanoi in 1995. But Cargill jumped into the vacuum, knowing that it couldn’t risk continuing to get most of its cocoa from the war-torn Ivory Coast.
Today Cargill is Vietnam’s largest producer of livestock feed and a big catalyst in the country’s transformation to a free-market economy. In 2004, it launched a public-private partnership with Mars Inc., and the governments of Vietnam and the Netherlands to begin cocoa exports. Two years before the first harvest, before there was anything to buy, Cargill opened two cocoa buying stations on major roads into rural areas, introducing the idea to growers of switching to cocoa from well established crops like coffee, black pepper, and cashews. It offered to send text farmers the daily international cocoa price and what Cargill is paying locally, and gave growers the ability to lock their price while the crop ferments and dries after harvest. Cargill also built a network of more than 100 demonstration farms. In February 2011 the company took delivery of the first Vietnamese cocoa beans and Vietnamese farmers are producing more than 2,500 metric tons of cocoa, 70% of which will go to Cargill.
4. They have a family plan
Close to half of America’s biggest private companies are owned by the founders or their relatives. The best ones have learned how to handle domestic squabbles. Marilyn Carlson Nelson of the Carlson Cos. outside of Minneapolis spent ten years running her family business, which includes 1000 hotels (Radisson) and 900 TGI Fridays. She persevered despite the fact that early on in her career her father fired her because he thought she wasn’t spending enough time with her 4 kids. And her son Curt sued her and the company because he didn’t get the CEO job.
Shep and Ian Murray, the brothers who own tie and preppy-clothing maker Vineyard Vines, were telling us recently about how some days they don’t even speak to each other though they share an office and that the CEO, an old college buddy, sometimes has to play referee. Having a family council or some other mutually approved oversight structure will help protect the company over time. In some cases, that means buying out relatives. A descendant of Cargill’s founder did that decades ago, buying out 72 relatives who wanted cash and giving those shares to employees. Now just six family members own a much bigger chunk.
In the case of Chicago’s Pritzker clan, which prided itself on its discretion and low-profile, too much power in too few hands inside the family led to mistrust and a nasty lawsuit over assets. The younger relatives of the billionaires who ran the clan were sued for discounting the value of their shares. The plaintiffs said that the defendants “don’t view their job as managing other people’s money. They have a stronger sense of self-entitlement than they do of fiduciary responsibility.”
5. They’re not islands
Being private does not mean going it alone. The best private companies recruit real outsiders for the board and put them in executive positions. They use outside advisory firms and consultants. They actively play a role in their local and global community, from the Rotary Club to Davos. Don’t mistake privacy for engagement. This can means corporate philanthropy, volunteer programs. The founder of smartphone case-maker OtterBox told us this: “[Having outside advisers] allows us to focus on other aspects of the company that are very important but that shareholders don’t immediately associate with the bottom line such as culture. OtterBox company culture is critical to our ability to deliver a great product with top-notch service. We’re able to enhance culture through encouraging volunteering activities, profit sharing and having world-class facilities.”
If you work for or run a private company and want to share a story, or if any of these habits don’t sound right to you (or if you have others that work just as well) drop me a comment below.