Ownership: Reinventing Companies, Capitalism, and Who Owns What

Excerpts

1. THE OWNERSHIP CRAZY QUILT

[Someone] who uses an imaginary map
thinking that it is a true one, is likely to be worse
off than someone with no map at all.

- E. F. SCHUMACHER
Small Is Beautiful: Economics as if People Mattered

CONSIDER THE SUPERMARKET.

The grocery business is probably the single most familiar industry in the world. Nearly everyone in developed countries shops in a supermarket. In the US alone, groceries account for $758 billion in annual sales and employ about 2.9 million people.

But who owns your local supermarket? If you shop at a Walmart, the answer is obvious. Conversely, if you shop at one of the many small local chains that dot the grocery marketplace, you may even know the family that owns those stores.

Some family-owned grocers have grown large and are loved by both customers and employees. Wegmans has become a name to conjure with among supermarket shoppers in New York State and elsewhere in the eastern United States. A new Wegmans in a community is a cause for celebration. H-E-B, named after the founding Butt family, is a Texas icon, a valued part of many neighborhoods. "H-E-B is a grocery store chain," declared a recent article in the New York Times. "But it is also more than that. People buy T-shirts that say 'H-E-B for President,' and they post videos to TikTok declaring their love, like the woman clutching a small bouquet of flowers handed to her by an employee: "I wish I had a boyfriend like H-E-B. Always there. Gives me flowers. Feeds me.'" The idea of the friendly, family-owned grocery store is deeply embedded in the nation's psyche.

Several US supermarket chains are owned not by families but by their employees. By far the largest is Publix Super Markets, based in Florida, with a payroll of over 225,000. Others include fast-growing WinCo Foods (Idaho), Brookshire Brothers (Texas), Homeland Food Stores (Oklahoma), and Harps Food Stores (Arkansas). These companies, too, emphasize their local ownership. "Who Owns WinCo Foods?" asks the website of the Boise-based chain. "WinCo is employee owned. WinCo is owned and operated by people in your community, and when the company does well, those hard-working people see the reward."

But this is the 21st century. The full ownership landscape is complicated - and global.

Would it surprise you to learn that Stop & Shop, the popular New England chain, is owned by Ahold Delhaize, a company based in the Netherlands? Or that the same Ahold Delhaize also owns Hannaford, Food Lion, Giant, and several other supermarket brands? Safeway, a chain that was once one of the nation's largest, was acquired by Albert-sons in 2015; the principal owner of Albertsons at the time was Cerberus Capital Management, a private equity firm. Albertsons (whose stock is now traded on the New York Stock Exchange) owns about twenty other chains, including Acme, Vons, and Tom Thumb, as well as its eponymous stores. The quirky Trader Joe's, the choice of many budget-minded food mavens, is owned by Aldi Nord, a German multinational - not to be confused with Aldi Süd, which owns the US stores of the Aldi chain. (The Aldi family fell out and split their business into two companies.) Tesco and Sainsbury's, the big British supermarket chains, are publicly traded on the London Stock Exchange; the largest shareholder in Sainsbury's in 2021 was the sovereign wealth fund of Qatar. Monoprix, in France, is owned by an international retail conglomerate called Groupe Casino, whose shares trade on the Paris stock exchange.

Whew. If you don't know who owns your favorite store, don't worry; the owner is likely to be different the next time you turn around. Individual stores and whole chains in this business are being bought up and sold off all the time. While we were writing this chapter, a private equity firm called Clayton, Dubilier & Rice topped other would-be buyers in a "frenzied" bidding war to acquire the British supermarket chain Morrisons.

And it isn't just supermarkets where the ownership landscape gets complex and global. The manufacturer of MINI automobiles, which typically come decked out in the Union Jack and other Britishisms, is a division of BMW, a German company. Volvo, for decades a flagship of Sweden's economy, was sold in 1999 to Ford, which later sold it to China's Geely Holding. Budweiser, once the main product of the fabled US brewer Anheuser-Busch, is now part of an international brewing giant known as AB InBev, created by the Brazilian-American investment firm 3G Capital. 3G was also instrumental in buying out Kraft Foods and later merging Kraft with Heinz. Other food operations, including Keurig Dr Pepper, Krispy Kreme, Panera, and Peet's Coffee, are owned by a German company called JAB Holding Company, itself mostly owned by Germany's billionaire Reimann family.

Fortune magazine, once the prime chronicler of US corporations and the flagship business publication of Time Inc., is itself a symbol of this new crazy-quilt world. Here's what the magazine's 2020 statement of ownership says (full mailing addresses are omitted, but the various companies' headquarters are indicated in brackets):

Owner: Fortune Media (USA) Corporation [New York City], which is a wholly owned subsidiary of Fortune Media Group Holdings, Limited [Macau], which is a direct wholly owned subsidiary of True Cosmic Bliss Media Holdings, Limited [Grand Cayman], which is wholly owned by Chatchaval Jiaravanon [Thailand].

You can't help wondering how many lawyers Mr. Jiaravanon employs to keep the ownership straight.

Why the Crazy Quilt? Tradeable Shares

In principle, business ownership seems so simple.

An entrepreneur starts a company. Of course she should own and control it. It's her idea, it's her time that she's spending trying to make the venture a success, and it's her money that is at stake.

If the founder then wants to bring in other financial partners, active or passive, isn't it natural that she should give them - or sell them - part ownership in the business? Like her, they're risking their money. And if one of the new partners then loses interest in the enterprise, shouldn't he be able to sell his share to someone else? A share of a company, after all, is a piece of property, worth whatever someone will pay for it. We don't put restrictions on the buying and selling of a house or a horse, as long as there's no fraud involved.

But this idea of portable, transferable ownership - tradeable shares - is nothing more than a convention, determined by a particular combination of laws and business practices developed over the last couple of centuries.

You can see that it is a convention because it applies only to certain kinds of enterprises. If someone starts a community center, a school, or a charitable organization, it will likely be structured as a nonprofit. Nonprofits - including large ones such as the American Red Cross or Harvard University - are not owned in the conventional sense by anyone. They are governed by a board and run by an appointed chief executive, just like business corporations. But there are no shares to be sold, so nobody can buy them.

Alternatively, imagine that our entrepreneur starts a law firm or an accounting firm. In this case the company will almost certainly be structured as a partnership. The founder may take on partners, who may be required to buy their partnership interest. But those partners normally can't sell their interest in the firm to a bystander on the street or an outside investor. They can only sell it back to the firm. Their ownership is a kind of property right, but it is attached to membership in the firm - being invited in by one's fellow partners - rather than to the investment of money. A somewhat similar principle applies to cooperatives, including consumer co-ops such as REI, the outdoor equipment company; producer co-ops such as Land O'Lakes; and worker co-ops such as Spain's remarkable Mondragon Corporation. These are for-profit businesses. But they are owned by their members, who are customers or suppliers or employees. The owners remain owners only as long as they remain members, and they can't sell their interest to an outsider.

Even in the case of a conventional business corporation, ownership isn't automatically attached to the provision of capital. Investors can provide money to a company by lending it money - by buying its bonds, for example. Bonds are portable and transferable, like stocks. In theory they could be structured to carry a variable rate of return so that an investor could profit handsomely if the company were to grow and make money. But bondholders have no right of ownership or control, only the rights of a creditor. So it's easy to imagine an entrepreneur or a group of partners starting a company and acquiring the necessary capital by borrowing it. In this case the "capitalists" - meaning the lenders who are putting up the money - would be entitled to a return on their investment but not to any ownership.

And yet, despite the exceptions and counterexamples, tradeable shares have long dominated the free-enterprise system. The legal owners of a company are the founders plus anyone who purchases stock - equity capital - either from the company itself or from another shareholder. Once you do own shares, you can usually sell them to any buyer at any price the buyer is willing to pay. It follows naturally that markets in shares would develop, and even that whole companies could be bought and sold - in some cases, again and again, as in the supermarket industry. Hence the crazy quilt.

Wait! What about keeping it in the family? Our company founder may have exactly that in mind. She might not want other owners, let alone the anonymous investors of Wall Street, mucking about in her business. She might hope to build a company that she can pass on to her children and her children's children. And indeed, the idea isn't implausible. Wegmans, H-E-B, and other family-owned companies are key players in the supermarket business. Franklin Clarence Mars launched Mars, Inc., the candy company, back in 1920. His son Forrest Mars Sr. took it over and expanded it. Other Mars descendants continued the tradition. Today Mars is a worldwide operation with 130,000 employees and $40 billion in sales - and it is still owned and controlled by members of the Mars family, reportedly the third wealthiest family in the United States. There are plenty of other big family-owned companies throughout the world. Some, such as Germany's JAB, are active acquirers of other companies, doing their part to maintain the crazy quilt.

But it's hard to maintain a family business over time, which is why there aren't more of them in the big-business landscape.

Think about the dynamics of most families. The sons and daughters of the founder grow up with the business. They are often interested in inheriting the company from their parents and running it themselves. If they have the skills to run it successfully - not a given - it may survive and prosper. But the third generation is less likely to be interested, just because it's a larger group and apt to be more diverse. Some of these young men and women may want to pursue other careers. Some may be more interested in enjoying the privileges of inherited wealth than in taking on the responsibilities of running a company. Nor are the traits required for managerial success necessarily passed on through genetics or upbringing. The "idiot third generation" is a trope you hear a lot from family-business consultants.

But let's say that the company does make it to the third or fourth generation of family ownership. The founding patriarch or matriarch has died. There are now dozens of shareholders, widely dispersed, all with their own interests. Those not in the business may be looking for other family members to buy them out. Those who need regular income may lobby the board to pay large dividends. Those who are still involved will argue that the company needs the money for long-term investments. It's a recipe for conflict and bad blood - and it is likely to be resolved through selling the company and distributing the cash.

The Inevitability of a Sale, and Its Effects

So what we are left with is a truism that everyone in the business world knows: nearly every company that does not close its doors will eventually be sold.

If you own a successful company of significant size, you will find prospective buyers lining up at the door, each one offering a big payday. Large corporations and private equity firms will come calling. So will competitors, though they may be more interested in your company's physical assets or customer lists than in your business as a going concern. If your company is big enough or enjoys significant growth prospects, investment bankers will also be knocking on the door, hoping to sponsor an initial public offering (IPO) or some other device for selling the company's shares to Wall Street investors.

Many companies, of course, are founded with a sale to Wall Street explicitly in mind. Start a growth-oriented business in computer hardware or biotech or electric cars and you are likely to bring in venture capitalists (VCs) as partners from the very beginning. The VCs will expect a share of the company's equity in return for their money; they will also expect some sort of sale, sometimes to Wall Street investors but more often to another company, within a period of five to ten years. (VCs refer to such a sale as a liquidity event.) The proceeds from these sales fund the VC firm itself and provide a return to the firm's investment partners. Again, the original owners get a big payday.

In all these ways, every company that is not still owned by its founders becomes part of those markets for shares or for whole businesses. Ownership almost inevitably passes on.

The metamorphosis. Once a company is sold to financial owners, it is no longer anybody's baby. It is no longer tied to the founder's values or to the communities where it operates. It may no longer put a priority on ensuring long-term jobs for its employees. It has been transformed into a financial asset, of value to its new owners only insofar as it fits with their business strategies and generates the expected levels of profits. It can be managed for maximum short-term gains, such as through layoffs and other cost cuts, or it can be managed for growth. It can be resold, merged, carved up into pieces and the pieces sold off, or milked until it winds up in bankruptcy and then - the antiseptic term of art - "reorganized." Whatever best suits the new owners' judgments of their financial interests.

It's hard to overstate the effects of this transformation. Way back in the 1970s, one of us (Corey Rosen) was working on Washington, DC's Capitol Hill and organized a hearing of the Senate Small Business Committee. Robert Reich, then on the Federal Trade Commission and later Secretary of Labor under Bill Clinton, told the committee that the United States was becoming a nation of paper entrepreneurs, with people focused on moving money around rather than actually producing anything. In 2002, the bestselling author Kevin Phillips (once a Republican strategist) made a similar argument in his book Wealth and Democracy. As countries move from producing to financing, he wrote, they chart a path toward economic decline and rising inequality.

Their concerns were prescient. Decisions made by absentee owners purely on the basis of financial gain inevitably seem arbitrary, even capricious, to the millions of people who are affected. Communities - even cities - can find their economies decimated. Employees can be shunted about or left to fend for themselves while the owners move on to the next opportunity for profit. Before long, the entire economy comes to seem fundamentally unfair.

Ironically, it's the very fact of tradeable shares that opens up those opportunities for financial wheeling and dealing. No one would want to get in the way of the plumber, the graphic designer, or the shopkeeper who starts and runs a small business. And few would fault a system that gives successful entrepreneurs a substantial reward. But when businesses grow larger - when their operations affect significant numbers of people as customers, employees, or taxpayers - they will almost certainly be sold. At that point, society has an interest in encouraging some kinds of sales and discouraging others.

So let's take a hard look at the world this convention has created. We'll begin with the two huge industries that have devoted themselves to making money mainly from the buying and selling of stock and of companies. One is Wall Street, purveyor of shares in publicly traded enterprises. The other is private equity - buyers and sellers of businesses. Both industries have swelled in recent decades to the point of absurdity, a point where the owners and the operators of the nation's most important companies are two largely separate groups - and where these companies' day-to-day workings are ultimately governed by the needs of investors and the executives who serve them.

Takeaways

• Ownership is more complex, and more open to change, than it first appears. Ownership by shareholders is just a convention, not a law of nature.
• When a company is sold - and nearly every company that doesn't shut up shop will be sold - there's an opportunity to transform its ownership.

WHICH COMPANY WOULD YOU LIKE TO WORK FOR?

The largest grocer in the US is Walmart, with about a quarter of the market. In 1970, founder Sam Walton took Walmart public, selling shares on Wall Street. But he retained a large number of those shares, which he passed on to his descendants. Since then, those descendants have become the richest family in the world. Their company, however, has long had a poor reputation as an employer. Its wages lag those of competitors. Its benefits are meager. Annual turnover in the workforce is high. Few people think of working at Walmart as a great job.

George Jenkins, founder of the Publix Super Markets chain, took a different route, selling much of his stock over time to the company's employees. Today, Publix is the nation's largest employee-owned enterprise, and it's as different from Walmart as June from December. In 2016, Fortune magazine sent a reporter to Florida to work in a Publix supermarket for a week. The magazine wanted to learn the secrets of a company that had shown up on its list of "100 Best Companies to Work For" every year since the list began.

One such secret, reporter Christopher Tkaczyk found, was happy employees. "Or more accurately: pleased-as-punch, over-the-moon, ridiculously contented" employees. Voluntary turnover was far lower than the retail average. There had never been a layoff. After a year of employment, every worker who puts in at least 1,000 hours gets a stock allotment, which in the last several years has been worth 8.5 percent of an employee's pay. As owners, Publix employees who stay with the company for their careers can accumulate a nice nest egg. People told the Fortune reporter things like, "I love working for Publix!"

George Jenkins's descendants aren't doing badly either - they're #39 on Forbes's list of the richest US families, with an estimated fortune of $8.8 billion.