200-Year History: Family Business Lessons from an American Icon

Planning & Strategy

A recent Barron’s article on the link between Elon Musk, corn, and John Deere piqued our interest. No, Tesla is not about to start converting Model 3s into farm implements, but electric vehicle adoption is expected to impact a number of areas in the transportation economy, including agriculture. Per the article, over 40% of corn grown in the U.S. is used for ethanol, a fuel made from corn and other plant materials, and more than 98% of gasoline in the U.S. contains some ethanol. As electrification hits the U.S. auto market, coupled with cars generally becoming more fuel efficient, less gasoline (and ethanol) will be required.

Or, more simply: Less ethanol, less corn, less “rides on my big green tractor” and John Deere sales.

However, D.A. Davidson stock analyst Michael Shlisky said the risk does not affect his stock rating. “Deere is by no means doomed… A company does not stay in business for over 180 years if it cannot adapt to the times.”

Enduring almost 200 years as a company compelled us to dig a little more. In the 1830s, John Deere invented one of the first steel plows that could till sticky American Midwest prairie soil without clogging. Later, Deere established a business to manufacture and market the plow, and Deere & Company was incorporated in 1868. The present firm, Deere & Company (NYSE: DE), was incorporated in 1958. The company had five generations of Deere family leadership until the early 1980s when non-family members took the driver’s, or tractor’s, seat.

The road from steel plows to $500,000+, 60,000-pound behemoths had its share of droughts and plentiful harvests. But what can family businesses take away from this American icon? We see two lessons: be open to seeking non-family members to run your business, and don’t be afraid to be a fast follower.

Who’s Our Next Leader?

Many succession issues are rooted in a failure to distinguish between being a good family member, a good employee, and a good business leader. Without belaboring the point, just because the next generation has been good sons and daughters, as well as good employees, it doesn’t mean they are guaranteed to be great business leaders. The combination of skills needed to run a large family business with a multi-generational runway is rare. And your son or daughter may be the perfect candidate! But having an “outside” CEO does not mean the company has ceased to be a family business. Rather, your directors have fulfilled their responsibilities to shareholders, employees, and the community by seeking the right candidate for the job.

As mentioned, five generations of the Deere family led the John Deere company before opening up the head job to an “outside” CEO. Robert Hanson became the company’s first non-Deere CEO in 1982 after a nearly 30-year history with the company. Hanson guided Deere through the near-crippling farm crisis of the 1980s and managed declining sales and inflation. The company diversified and saw a rebound in sales during Hanson’s tenure. After steering the company through one of its most difficult periods, Hanson retired in 1990. Since that point, each CEO has been with the Company for an average of over 25 years before taking the top job. Over that time, DE’s stock has risen nearly 13.0% annually, outpacing the S&P 500’s 9.0% price appreciation.

As previously written in this blog and as noted in the Harvard Business Review, the likelihood that successor-managers would be able to implement needed changes and improve the long-term sustainability of the family business was linked to three strategies: (1) limiting the power of the outgoing CEO subsequent to their retirement, (2) crafting a formal agreement regarding the how and when of power transfer, and (3) selecting a non-family successor. Don’t be afraid to look outside the family for your next leader.

Don’t Be Afraid to Be a Fast Follower

I recently met with a client who said, “We can’t afford to always be innovating. Sometimes you have to be a fast follower.” What does that mean? A quote from a Harvard Business Review piece summarizes the idea well:

Here’s the important thing to remember: ultimately, no one remembers who leads a race at the half-way point. They care about who crosses the finish line. So don’t ask “Should I go first?” Instead, ask “How do I accelerate the path to a breakthrough idea?”

Apple was not the first mover in digital music, Facebook was not the first mover in social media, and Google wasn’t the first online search engine. And while there are plenty of examples of first movers, or companies making innovative products like John Deere’s first steel plow, imitation remains the highest form of flattery (and long-term business continuity). The first gasoline-powered tractor was invented by a John, just not with the last name “Deere.” John Froelich invented and built the first gasoline/petrol-powered tractor in 1892. As fortune would have it, Froelich’s tractors failed to take off, and the company turned to produce other engine products. The company would eventually produce the popular Waterloo Boy tractor in 1911. The company was then purchased by none other than John Deere.

Ultimately, the question comes down to capital budgeting: are we investing in acquisitions, innovative research and development, diversification, or modernization? John Deere has led in several innovation areas, called the “Tesla of farming,” and is on the cutting edge of autonomous driving, GPS, and smart applications. But the company has also been willing to seize opportunities when presented in the market. Ultimately, you and your family board need a process for choosing where and how much to invest or not invest.

John Deere Green

As family businesses look to make decisions focusing on long-term, generational success, keeping lessons from companies who have “tilled the ground” before us is always a helpful exercise. John Deere is a great example, enduring for nearly 200 years. Through our family business advisory services practice, we have worked with successful families facing long-term planting decisions daily. Give us a call to discuss your needs in confidence.

My grandmother raised cattle, and my wife’s family has been farming on the same ground for almost 150 years. Make sure to thank farmers and landowners for feeding and powering our country! This is my oldest in a picture taken a couple of years ago while visiting my wife’s family farm in Missouri.