How Important is a Company’s Patriarch?

The previous published essay focused on the California Gold Rush (available here), and was used to illustrate points about bubbles in general and gold bubbles specifically. In this essay, I refer again to that period, but relate it to the survivability of automobile companies, and also to highlight how important the patriarch of a company can be to its success. I find the California Gold Rush intellectually fascinating, because so many effects can be traced back to that phenomenon. It turns out that it even had a role in automobile production, in spite of the fact that the automobile wasn’t invented until many decades after the California Gold Rush.

In 1849, a certain Mr. John M. Studebaker decided to move his business to Placerville, California, which is not far from modern Sacramento, which was at the center of the California Gold Rush at the time. Studebaker was in the business of making wheelbarrows, which is how he came by the nickname of Wheelbarrow Johnny. Studebaker was a remarkably insightful human being in the sense that he was able to understand that the California Gold Rush would have to end at some point. In 1858, when the Gold Rush was winding down, he moved back to South Bend, Indiana, to join his four brothers in the family’s wagon business. South Bend was a good place to be in the wagon business, since it was one of the starting points for the wagon train migration to the West.

His brothers belonged to a Christian religious sect called Dunkards. They are similar to the Mennonites and the Amish people in their aversion to violence. Adherence to their religious beliefs meant that they wouldn’t serve in the Civil War, which began several years later. As the Civil War commenced, there was an increased need for wagons, and one of the five Studebaker brothers sold out to the others, because he couldn’t abide making wagons that would be used in war.

John M. was the last of the Studebaker brothers to die, and he carried on the business. In the nineteenth century, the Studebaker Company was the General Motors of covered wagons. It eventually dominated that business, and it was reputed to have produced half of all the covered wagons that moved across the Western plains. In the 1880s, people were experimenting with the internal combustion engine. Given the evolution of the automobile, it’s hard to imagine a business that would be in more jeopardy than a manufacturer of covered wagons. Yet, John M. transformed the Studebaker Company into one of the leading automobile manufacturers of the time.

To understand the size and importance of Studebaker in its era, if you find yourself in Chicago walking on Michigan Avenue near Grant Park, you will see the Studebaker Building right across the street. It’s a Chicago landmark. By modern standards, it’s not a large building, but in John M.’s time, it was enormous, and it gives a sense of how important Studebaker was at that time.

After John M. died in 1917, there was no longer a so-called patriarch in charge of the company. Those who subsequently took control of the company engaged in a number of transactions that John M., despite his lack of professional training, probably would never have endorsed or, at least, he didn’t employ them while he was in charge of the company. For example, as a way of expanding the business in the 1920s, the Studebaker Company engaged in a takeover bid of White Motor. It used leverage to buy an enormous number of shares of White Motor. Then came 1929, and the company was unable to service its debt, and Studebaker came very close to going out of business. While in that condition, its balance sheet could not support production expansion after the conclusion of the Great Depression in the way that Ford and General Motors did. Therefore, Studebaker couldn’t undertake the kind of World War II U.S. government orders that its two major competitors could.

When the war ended, the war orders ended, and Studebaker didn’t have the economy of scale to compete on price with General Motors and Ford. Studebaker’s management made several unsuccessful attempts to gain the economy of scale it needed to grow. For example, in 1954, it merged with Packard, another automobile company, but that venture was unproductive. In later years, it diversified into parts manufacturing, and tire stud production. Studebaker even diversified into manufacturing missiles. It’s hard to imagine the Studebaker missile, but there actually was such a plan. All of those efforts were ineffective, and Studebaker went out of business in 1966.

When considering the issue of survivability, it’s amazing to see the number of defunct car brands and companies that found their way into automobile history during the last 100 years. As a group, they probably have one of the lowest survivability ratios of any industry you can imagine, which probably explains why there isn’t an automobile ETF right now. The challenge is to find a quantifiable index that could be used as a predictor for lack of survivability. In searching for a common denominator in the failure of so many of these companies that had previously enjoyed periods of success, the element that emerges is the demise of the patriarch. For example, the Stutz Automobile Company, which made the Stutz Bearcat, a luxury automobile in its day, was fabulously profitable until the founder, Harry C. Stutz, died in 1930. In 1935, Stutz went out of business.

Walter Chrysler, the founder of Chrysler Corporation, started out as a master mechanic in the railroad industry. In 1911, Buick was looking for a master mechanic to be its production chief. In the early evolution of automobiles, master mechanics played the role occupied by engineers today. Back then, there was a lot of trial and error, whereas today there’s a lot of computer design. Maybe the engineers today have something to learn from the master mechanics of the early twentieth century.

In 1916, when Walter Chrysler wished to resign from Buick, he was so important to the company that in exchange for him staying for several more years, he was offered a salary of $10,000 a month and a $500,000 annual bonus. That salary wouldn’t be bad, even by today’s standards. He stayed at Buick for a couple of years and, at the conclusion of the First World War, when he had built up enough of a fortune, he resigned and ultimately bought his own automobile company.

The company that he bought in 1929 was called Maxwell Motors, and it was on the verge of bankruptcy. That company later became Chrysler, which was a very successful and profitable company until 1940 when Walter Chrysler died. Arguably, Chrysler Corp. was never the same after his death. I don’t think anyone has ever tried to calculate the failure rate of companies in relation to the tenure of their patriarchs but, in principle, it should be possible. It should be no different from calculating the mortality rate of a given population. In this case, the population would be defined as the number of people who are founders of companies.

Assuming that the founder is successful in the first place, the question is whether or not there is a higher average return on equity, higher earnings stability and a greater survivability rate when the founder remains in charge of the business than when he is not. I guess, in that sense, it’s a conditional probability. Defining the set to be studied would not be simple, but once established, it would be a very interesting challenge.

Looking at certain historically very successful companies, one gets an intuitive sense of the patriarchs’ huge influence. For example, Sony without Akio Morita would be a completely different company than Sony with him. Apple Computer is a very different company with and without Steve Jobs. Intel with and without Andrew Grove and Gordon Moore seems to be very different. Teledyne, one of the great stocks of all time, probably couldn’t even have existed in the form that it did without George Kozmetsky and Henry Singleton. It’s something to think about.

Excerpt from the Contrarian Research Report – July 2010

Related Research: “Gold Rush & Other Bubbles”

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