William Lauder: Number one, we perceive our competitive advantage to be our people and the imagination we encourage in them. Second, being a family-owned and controlled company for a sustained period of time allowed us to have patience from an investment perspective – we looked at our investments over decades rather than quarters. In 2007, at an investors’ conference, a sell-side stock analyst said, in effect, “Because the Chairman and the CEO are family members and large shareholders, we don’t think that their long-term interests are in line with those of outside shareholders.” And she defined “long-term outside shareholders” as people who held the stock for three quarters.
I looked straight at her and said, “I just want to tell every-body in this room that our definition of ‘long-term’ is ten years. If you want to talk about long-term horizons around that definition, great. For us, three quarters are yesterday. If your horizon is that short, that’s fine, too, but just so there is no misunderstanding, that is not what we are talking about from a long-term investment standpoint.”

Lauder: Our patience allows us to occasionally support brands beyond what a public company might do. Our long-term view has also allowed us to create a culture of entrepreneurship and belonging. We encourage entrepreneurial thinking. We encourage the creativity, imagination, and energy that come up with unique ideas, and we actually get behind them and invest in them. To the extent that we can, the handful of family members in a company of over 30,000 employees tries to make everybody feel a part of a very large extended family. Having deeply embedded that in our DNA over time, we have created, I think, a competitive advantage over many of our direct competitors.

Lauder: We have a lot of long-time employees at many different levels of our company who are loyal because of the way they have been encouraged, nurtured, and stimulated in what they do. And they in turn practice those values with the people who are part of their organizations.
When you look at candidates for jobs one of the most important elements is personality fit. We have had some brilliant people who ultimately didn’t fit in from a personality standpoint with the culture of the company.

Lauder: The cowboy, gunslinger types who make high-risk decisions without consulting or collaborating with their peers, or who, from a leadership standpoint, adopt the style of the dictator. That is not a part of our culture. Our style is inclusive, not command-and-control. We really feel that collaboration, bringing people along in a decision, and supporting people in decisions is preferable to a more directed approach.

Lauder: In most of our acquisitions, we are buying directly from founders, so we look at the underlying personality of the founder. Like any large company that buys other companies, we have a mixed record in maintaining the presence of the founders. In a couple of cases, we still have the founders involved.
When entrepreneurs suddenly find themselves working for a company for a salary some remain motivated, some need to be motivated, and some just say: “I am out; I am going to do something else.” Often, they have a hard time seeing their creation modified from their original vision.
Whether it’s a founder or a new hire, it comes back to whether there is a natural personality fit. If you can contribute your voice but at the same time feel comfortable being in a place like this, you can be successful here.

Lauder: We are a meritocracy. Success in this company is not based on the accident of your birth or your name, but on ability to perform. That certain members of my family are successful is a testament to our parents – the upbringing and education they gave us. Not just academic education, but also professional education and development. Not every member of our family is involved in the business. This too is a testament to parenting. We were allowed to succeed at whatever we wanted to do, not told that we had to come here.

Lauder: The personal touch that certain members of my family are able to bring to the business has been important. But it goes beyond brands: Some of our strongest retail partners in North America are family-controlled retailers with their names on the door: Dillard’s, Belk, and Nordstrom. The personal relationships we have with these family-controlled companies are part of what makes us successful with them, as well as with Macy’s.

Lauder: Every enterprise like this has different reasons and routes to where they are in the process of ownership. Going public gave various family members, who would not solely engage in the enterprise, a way to monetize and diversify their own financial interests. And it gave those who wanted to stay in the opportunity to do so. It has now allowed our many thousands of employees around the world to participate financially in the success of our company.

Lauder: Going public changed the way we actively managed the company because you have to make and report decisions about such things as dividend practices. Are you paying quarterly or are you paying annually? What’s the dividend pay-out, and what are the guidelines on that? Where do you want to be considered in a spectrum between a growth company and an income company?
Going through that decision-making process allowed everybody to find their own natural level of economic interest in the company. But it’s complicated by having to deal with sell-side analysts and the outside shareholders, who are always in their own logic cycle about why they invest and choose to invest.

Lauder: I would say the first four or five years of digesting Sarbanes Oxley and everything that came with it. Every private company should put itself through that discipline, not necessarily to prepare itself to go public, but for good-governance practice.

Lauder: There are New York Stock Exchange and SEC rules or exemptions for closely held companies. We manage our company according to all of the larger principles. Our Audit Committee is fully authorized to have the same breadth of responsibilities as that of any public company. We have a Nominating and Board Affairs Committee with its roles and responsibilities and a Compensation Committee with its roles and responsibilities. Those are the three active committees of the board that exert a great deal of influence on the governance of the company. Our Audit Committee is populated solely by outside directors who meet all of the qualifications for independence. On the other two, we have a majority of independent directors.
Any family-controlled company, even if it is privately held, ought to be putting itself through these paces in order to protect the minority shareholders. Unless you have a company that is solely controlled by one individual, somebody is a minority shareholder, regardless of whether that minority is 49.9 percent or 0.1 percent. Their interests ought to be represented. I certainly have made it my mission to make sure that we are making decisions that are in the best interest of all shareholders.
So occasionally, I have to have tough conversations with family members and say, “I understand why you might prefer that we make this or that decision, but we have to do it this way because it is right for the company.”

Lauder: Effectively there are four family members on the Board and that is certainly not chartered.

Lauder: Perhaps, but we are a long way from that now. Any large family enterprise has to manage itself almost as if it were public, even if it isn’t. If it’s privately held I would suggest that although you don’t have to have a majority of outside directors, you should certainly have enough outside directors who are influential enough to bring in a different point of view and bring in some experience. Any director has to add some real value to a company. You ask yourself what kind of expertise or experience a director brings to the Board that the company might need. It could be regional experience, category experience, distribution, legal, or financial experience. You ask what expertise you have inside the company, specifically within the significant shareholders, whether they are family members or not.

Lauder: Often, family members have a certain way of loving each other and there is a certain logic to the way they may talk about some things. A third party, with a different viewpoint, might say, “You know, that is interesting the way you’re thinking, but think about it in another way.” So the discussion is not all about, ‘well, you were mean to me when we were growing up and therefore I will always say no to you.’ It is about the right thing to do for the business.
The cultural piece is whether or not the family welcomes and encourages outside feedback, how they process it, and how they deal with it. If you really want substantive outside feedback, you have to be prepared to listen to it, digest it, and discuss it. And on a particular issue you might respond with your concerns and the outsider might come up with a solution that works for both of you. Then there is the approach where you simply say every member of the Board has a full voice, regardless of whether they are a shareholder or share your name.

Lauder: Having a non-family member as CEO sends a message to everybody inside and outside our company that what we look for is the accomplishment and the ability to lead our organization, regardless of who you were born. It says that there is an opportunity for anybody who is smart and capable to become a leader in our company.

Lauder: I was in my role of CEO for about five years. Being CEO of a public company in the United States today is not what it was perhaps a few years ago. I’ve been quoted as saying that in today’s world, being CEO of a public company is a sentence. Being CEO of a family controlled company is a life sentence. Some people enjoy it, some people don’t; but you are a hamster on a treadmill, and you can only do it for so long before you get tired and break your stride.
I thought that I needed somebody with whom I could lead this company over the coming years. I knew the players we had on the field and I wanted to take a look at who was out there as a free agent, someone who might add something to our team and help us to perform better.

Lauder: Fabrizio spent the vast majority of his career at P&G in fast-moving consumer goods. P&G is known for its thoroughness and discipline in areas like consumer knowledge, while we were considered a much more entrepreneurial, seat of the pants, ready-fire-aim kind of company. In our industry, we live with one foot in the fashion world and one foot in the fast-moving consumer goods world. The fast-moving consumer goods world is aim-aim-aim; re-aim, and finally get it right and go. Fashion is just go, go, go, go! And because fashion moves quickly you can’t be yesterday’s story or last year’s story. We were very good on that side and less good at preparing the likelihood for success.
I had always felt that we’d need to move ourselves a little closer to more consumer insight, more consumer knowledge, and understanding what is likely to be successful as opposed to betting on red and black and odds and evens.

Lauder: We are not trying to move away from that, we are trying to add more discipline. What allows Fabrizio to work so well with the team and with me is that he under-stands and respects deeply those things and values that have made our company what it is today – imagination, creativity, and entrepreneurship. And he brings focus and discipline in certain areas where we were perhaps all over the place. Early on, we were working on a project he was enthusiastic about and I had him take the lead because I thought he would learn more about the company that way. I suggested that he invite me to sit in only on things he wanted me to be a part of and that I would coach him in private. We had gone through a meeting and afterward he told me that he didn’t really like what had been presented. I said, “I didn’t like it, either. But the presenter has two peers who are equally as capable. And I don’t see why you couldn’t go to each of them, give them the same brief, and see what they come up with.” Two weeks later he showed me a short presentation that one of those two people had created and told me how much he liked it. He said, “At P&G this would have taken 18 months and it would have been backed up with 180 pages of data. Here I got it in two weeks.” “Yes,” I said, “we do that all the time.” And he said, “You kept telling me about the creativity and imagination here – now I get it. I understand what that unique competitive advantage is for our company.”

Lauder: Fabrizio spends a good deal of time with each of them one-on-one, and with my father and me when he wants to talk to us about a certain general direction or about things he sees. They have their own ways of dealing with each other, and each of them has his own way of dealing with me. We all try to figure out a way to get to the same place and get a certain comfort level. Ronald also has his own opinions about certain things, and he shares them with each of us, either individually or collectively. We all have this commitment to getting to a consensus where we either agree, or acknowledge that there is more to be discussed or more to be learned before we can reach a conclusion.

Lauder: There are certainly examples of family companies that have blown up because, ultimately, the different factions of the family could not agree. We are all very committed to the fact that this is a fabulous company, which has given us all an extraordinary opportunity in our lives, and we don’t want to mess it up.

Lauder: There’s no secret sauce, just hard work. It is sitting down with everybody individually, hearing them out, hearing their thoughts. Occasionally, it involves disagreement. A family member might say, “Let me tell you why I am not enthusiastic about this idea.” And we go through it.

Lauder: The best thing that any family company can do for the future generations is to set up standards to which all family members agree. The generation that is essentially in control should set up the standards before the oldest member of the next generation comes out of college or starts building expectations about working in the company. No matter how many cousins, aunts, or uncles there are, the eldest of the next generation becomes employment-eligible in the company only after getting experience elsewhere. There should be general guidelines of what those criteria are – what qualifies as relevant experience, how many years, and so on.

Lauder: We don’t have that codified. The company was built under the second generation’s leadership, and my father set that standard for me. When I was at university he said to me, “If you want to join this company, you must go to work somewhere else first.” And that’s what I did. Now it’s a matter of what standards the third generation – my cousins and I – may wish to apply to our children, so that if they are interested in working in the business, they feel that they are being treated equally.

Lauder: In my generation, three out of the four of us are involved in the business. My brother chose a different path but I think he has a certain level of connection with the company. Perhaps it does become more of a challenge when you get to the next generation, when you have cousins who don’t know each other quite as well or are further apart in age. We’ll have to see.
Over time, the real challenge is whether or not we would transform from a family company with a family active in management to a family-controlled company without management involvement. We don’t know yet, because the next generation is still too young. And that may drive decisions down the road that may be different than the decisions that were made twenty-odd years ago. But we are not there yet, and it is too soon to make a decision that should be practical, not theoretical.
In the meantime, we still sell a lot of lipstick, we still sell a lot of fragrance, we still sell a lot of creams, and we still sell the aspiration of beauty to many women around the world. That is the most important thing.