KEEPING IT ALL IN THE FAMILY For 119 years, Browns have run distiller Brown-Forman. Their secret? Meritocratic nepotism, dogged consistency, and premium brands like Jack Daniel's.
By Brett Duval Fromson REPORTER ASSOCIATE Susan E. Kuhn

(FORTUNE Magazine) – SOMEWHAT improbably for the headquarters of a company that sells whiskey, the Louisville, Kentucky, home office of Brown-Forman resembles nothing so much as the main hall of a proper boarding school. Surrounded by an apron of lawn, a white-columned portico gives entrance to a five-story Georgian building of red brick. On the top floor a pensive middle-aged man works behind a massive wooden desk. He is Chief Executive William Lee Lyons Brown Jr., 53, son of W. L. Lyons Brown, the company's head from 1945 to 1951, who was the son of Owsley Brown, chief from 1917 to 1945, who was the son of George Garvin Brown, who founded Brown-Forman in 1870. The challenge facing Lee Brown: how to maintain the family's control over their cash-rich, publicly held company during the most difficult time for distillers since Prohibition. If he is to succeed, he will have to display continuing mastery over what can seem to an outsider a tangle of contradictions. The Browns are a quiet, genteel family, conscious of their standing in the community, jealous of their reputation. And yet their fortune comes from a business that sometimes smacks of the unsavory. The clan holds family unity as a primary value, but Lee Brown runs the company in a fairly authoritarian way. Nepotism rules at Brown- Forman, a meritocratic sort of nepotism for the most part, but one that still allows primogeniture to determine who becomes CEO. And while the business of selling so-called brown goods such as whiskey is generally awful, Brown-Forman does extremely well. There are lessons for managers here, and not just managers in family businesses. The Browns have an enduring talent for selling premium spirits, even in a market that euphemistically may be termed mature. Yuppie abstinence and public outrage at drunk drivers have contributed to the tendency of Americans to ( drink less. In the U.S., consumption of distilled spirits peaked in 1979. Partly because of declining demand, the liquor industry has consolidated, with fewer companies competing more fiercely for shelf space. Despite this, over the past ten years Brown-Forman shareholders have enjoyed a total return that has averaged 21% per annum. The holdings of the Brown family, which owns 70% of the Class A stock and 29% of the nonvoting Class B, are worth over $900 million at recent market prices. So how does the family do it? Begin at the beginning: The Browns aren't sticklers about creating the brands they sell; instead they buy existing brands and then build them. Their three top labels -- Jack Daniel's Tennessee whiskey, Canadian Mist whiskey, and Southern Comfort liqueur -- were acquired in 1956, 1971, and 1979, respectively. This trio now accounts for an estimated 50% of Brown-Forman's $1 billion in annual sales of wines and spirits, and for 60% of the company's $208 million in operating profits. JACK DANIEL'S provides the best example of what the company can do with a line it acquires. When Brown-Forman bought the brand, it was to the bourbon- and-branch-water set what Lafite-Rothschild is to connoisseurs of Bordeaux. So confident were the Browns of Jack Daniel's potential for a larger audience that they financed the deal with debt greater than Brown-Forman's net worth. They were right. In the 33 years since Brown-Forman acquired Jack Daniel's, sales have risen from 200,000 cases a year to four million. The widespread belief in the industry is that it's the most profitable unblended American whiskey on earth. As important, the brand seems to command extraordinary loyalty from its fans. The distillery receives over 60,000 admiring letters a year, and some 200,000 visitors make the pilgrimage to the central Tennessee hollow depicted in Jack Daniel's ads. The ads don't show you the big bottling plant just over the hill or the disciplined marketing operation behind the brand's success. Every important decision is reviewed by Brown-Forman's executive committee, consisting of Lee Brown; his brother Owsley, 46, the president; and two vice chairmen, Bill Street, 50, and Owsley Brown Frazier, 54, a cousin. The committee ranks each of the company's brands according to its return on investment, a system introduced by Owsley Brown, who is also chief financial officer. Top management holds each brand's marketing manager responsible for hitting his profit target. The Browns' rigorous adherence to ROI means that they pour dollars into only their most promising brands. They decide on such matters in a series of excruciatingly thorough annual budget reviews. First, Lee and the executive committee set strategic goals. Then managers below get together brand by brand to decide how to meet the objectives. Sales and marketing types come in from the field to hash things out with their peers in finance and production. How many cases do the salespeople think they can sell? What sort of ad support do they need? The process lasts four weeks. Each plan goes to Louisville to be approved by the executive committee. Managers make lengthy two- or three-day presentations, and top management mulls over every marketing issue in detail. TAKE, for example, the decision to redesign the packaging of Early Times bourbon. The goal was to broaden the brand's appeal, especially to women. The executive committee spent days thinking about it before finally okaying a change to a new squarish bottle, with earth tones on the label replacing macho red and yellow. One of the committee's abiding principles is consistency. ''We keep things fresh by keeping the message the same,'' says Bill Street. Consider what Brown-Forman has not done to the Jack Daniel's label since buying the brand. The label is still black and still says that Lem Motlow is the proprietor, even though he died in 1947. Brown-Forman's conservatism hasn't prevented it from going global. What the company does is to apply the same consistent marketing approach, but to new markets. When Brown-Forman acquired the Southern Comfort brand in 1979, ''The Grand Old Drink of the South'' was popular abroad in only England, Australia, and Canada. Today, Southern Comfort has a substantial presence in 80 countries. Overseas, liquor can generally be advertised in media closed to it in the U.S., and Brown-Forman makes the most of that opportunity. Says the head of its international division, Peter Rutledge: ''We spend heavily to advertise and promote.'' The company's executives see a strong link between ad spending -- what they call ''voice'' -- and sales. In West Germany, for instance, Southern Comfort sales have increased fivefold since a 1983 ad blitz on television and at the movies. Ironically, the Southern Comfort sold overseas is no longer even made in the United States. For tax reasons the company usually mixes the basic ingredients -- sugar, flavoring, and coloring, including dried prune juice -- in St. Croix and then adds grain alcohol in Ireland. The stuff never comes anywhere near the Old South. THE SAME SORT of slow-but-sure approach that Brown-Forman takes to marketing governed the company's first major move to diversify out of the liquor business -- its 1983 acquisition of Lenox, the largest American maker of fine china. Lee Brown spent nearly two years secretly gathering information about New Jersey-based Lenox before making an offer. Why Lenox? ''We wanted prestige consumer products with long life cycles. That is what we know about,'' he says. Once the hostile takeover was complete, Brown-Forman just turned up the marketing flame under Lenox. The company established stylish free-standing Lenox stores, two designed by noted American architect Michael Graves, in malls frequented by the Mercedes-and-mink set. It also set up a boutique in Bloomingdale's and plans for more. Other new channels of distribution are further down the snob scale: Lenox has begun selling porcelain figurines via direct mail. As recently as five years ago, Lenox sold a mere $1 million in china this way. Now it sells $60 million a year. Birds, flowers, and the Nativity scene are especially popular. The porcelain operation has also opened seven ''seconds'' outlets, located far away from its other stores to avoid damage to the brand's cachet. Instead of junking the 6% of output that doesn't quite make the grade, Lenox sells it for 50% of the regular retail price. Voila, a 10% increase in revenues with almost no additional investment. Money manager Thomas Russo, a partner at Gardner Investments in Lancaster, Pennsylvania, estimates that the pretax rate of return to Brown-Forman shareholders from Lenox has been 17% per year, only slightly below the return from the company's wine and spirits business. Perhaps the Browns' greatest managerial secret, and a surprising one at an outfit so long dominated by the same clan, is that at Brown-Forman the company comes first and the family second. Consider what happened to former vice chairman Martin Brown, 51, in an incident the Browns don't like to talk about. In the mid-1980s sales of Jack Daniel's were losing proof. Bigger competitors were muscling distributors to allocate less shelf space to the brand. This was unacceptable to Lee Brown. He wanted sales back up and market share gained. But how? The executive committee began deliberations and, in typical fashion, took two years to arrive at their decision: Consolidate the marketing and distribution operations of Jack Daniel's with those of other Brown-Forman brands. The CEO reasoned that it made no sense to have a salesman pitch Southern Comfort or Early Times to distributors one week and then have a Jack Daniel's salesman drop by ten days later. The company would have more clout at lower cost, he argued, if the same salesman took orders for all the brands. Everyone on the executive committee agreed with Lee, except his brother Martin, who ran Jack Daniel's. According to nonfamily Brown-Forman executives, Martin sincerely believed that Jack Daniel's image would be diluted if it was sold from the same briefcase as the rest of Brown-Forman's products. He also felt honor-bound to protect the people at Jack Daniel's. Over his opposition the rest of the executive committee voted to revamp along the lines that Lee wanted. Because the tally wasn't unanimous, the decision was referred to the entire board of directors for a final thumbs up or thumbs down. Martin Brown forced this showdown even though he had little chance of defeating his older brother. Brown-Forman's outside directors think a lot of Lee. One is a lawyer to the company and the Brown family, another the scion of a wealthy Louisville family with large holdings of Brown-Forman stock, and another a pal of Lee's from Fishers Island, New York, where the CEO has a large summer house. The fourth is Lee's first cousin Garvin. The fratricidal drama played out behind the closed doors of Brown-Forman's elegant boardroom. Owsley Brown, the youngest brother, took Lee's side. He and Bill Street presented the executive committee's position. Then Martin made his appeal. Board members surmised that if he lost, he would leave the company. The outside directors' decision was unanimous: Martin lost. When informed of the result, he told the board that he had no choice but to resign from the company. ''It was very, very painful for everyone,'' says a director. THERE IS LITTLE DOUBT that Martin's brothers Lee and Owsley made attempts to convince him to stay. But he would not. Was it pride? Frustration? Sibling rivalry? Owsley Brown Frazier, his first cousin and fellow nepot -- Brown lingo for a family member who works for the company -- has as good an explanation as any: ''It goes back to the most fundamental philosophy that we've had as a family: If it is in the best interests of the company that a nepot step aside, then he must. This is something that we all know from an early age.'' If that attitude seems coldblooded, it is. It also has a lot to do with how the family has managed to hold on to the company. ''Planned nepotism'' is how the Browns describe their practice. In a simple yet effective piece of reverse psychology, parents and grandparents emphasize to the young that only the best of the Browns should consider joining up. Nepots must have two degrees, usually a bachelor's and something more advanced, to work at the company. Lee and Owsley got their BAs from the University of Virginia and Yale, respectively, and their masters from the American Graduate School of International Management in Arizona and Stanford business school. At the same time, Browns who think they might be up to the challenge are subtly encouraged. Lee's eldest boy, Lyons Brown III, 29, recalls, ''We talked about the company at home. Dad was very fair, always emphasized that it was not a life or death decision. If I wanted to join, that was great, but if not, that was great too.'' Whatever Lee Brown said and did, it worked. Son Lyons, having earned his bachelor's degree and MBA from the University of Virginia, has joined the international division as a marketing manager. If past practice holds, he should become CEO some day. Planned nepotism serves two purposes. It politely keeps the dilettantes at safe remove -- on their yachts in sunny climes or within the comfortable confines of the family's 35-acre compound in Louisville -- and attracts the more dedicated and talented to Brown-Forman headquarters. The fallback position for a Brown is to become a director like Garvin Brown III, who spends half the year in Milan with his second wife, a former professional race car driver. FOR THE TOP JOB, the line of succession is eldest son to eldest son. (See family tree.) So far none has been a nincompoop. During the occasional interregnums when the firstborn is incapacitated and the heir presumptive too green to assume the throne, a family elder plays regent and loyal retainers run the company. This rigid adherence to primogeniture does not appear to create undue tensions in the family. Take Lee and his brother Owsley. Says a friend of Owsley's: ''They work together terrifically because there's one pair of pants, and Lee jumps into them first every morning.'' One cannot qualify as a nepot by marrying into the family. To quote from an official history of the company, ''It is the unwritten policy of the Brown family that 'We take care of the sons; the sons-in-law are on their own.' '' Nor have the Browns sought the participation of the women of their family in the business. All clan members currently working at the company are male, and there are no female Browns in the wings. So far the only fifth-generation Brown at Brown-Forman is Lee's boy, Lyons III. Lee Brown is highly disciplined. You can see it in his courteous smile and watchful eyes. He works all the time, family members say, and sets an almost puritanical standard. As examples of Lee's strictness, a friend of the Browns' points to his decision upon becoming CEO in late 1975 to sell the company's two private jets and move the family's Canadian camp off Brown-Forman's books. Says the friend: ''Lee hasn't got an emotional bone in his body.'' He can also be dictatorial. Observes a company executive: ''People mistake his good manners for weakness. They try to push him, a critical mistake. That's like badgering a bear: He turns and rips your head off before you know what hit you.'' But Lee's regime suits the rest of the family just fine. Says clan elder statesman and retired chairman Robinson Brown Jr., 72: ''Lee did the right thing in consolidating the company. Nobody has ever questioned that.'' The move did, however, rupture the tie between him and Martin. They visit at family events, but otherwise no longer socialize. In return for the free hand given him, Lee provides his relations a superior return on their money. In the past five years the annual dividend has almost tripled to $1.52 per share. Recently Brown-Forman used $197 million of its abundant cash to buy in 4.1 million shares of the stock. The dividend hike and the stock repurchases have driven the stock price to new highs, $80 per share for the Class A voting stock and $84 for the Class B nonvoting. Lee has also worked hard to keep the company and the family out of the line of fire on health and safety issues. Brown-Forman keeps a low public profile. The corporate name rarely appears on a bottle's label and seems to mean little to drinkers or protesters. In addition, since the Lenox acquisition the annual reports have trumpeted china more loudly than liquor. Nonetheless, incidents involving Brown-Forman liquor sometimes damage the company's reputation. Probably the worst: In 1986 an inebriated Brown-Forman sales executive who had just left a company party drove his car head on into ( another, killing a Louisville man. The company settled with the victim's family for an undisclosed sum, and the executive served a month in the county jail after pleading guilty to murder. Lee Brown was particularly upset when an account of the accident appeared on the front page of the New York Times. Says Bill Street: ''Lee spends a lot of time in New York. He has acquaintances up there,'' including some who serve with him on the business committee of the Metropolitan Museum of Art. ''He never said it, but I know that hurt him.'' Mothers Against Drunk Driving (MADD) notwithstanding, Brown-Forman will almost certainly continue to prosper. Its best opportunities lie overseas in wines and spirits -- even Lenox, which is well managed, cannot equal the liquor business's typical 30% pretax rate of return on assets. Security analysts predict that if Lee Brown merely makes no big mistakes -- overpaying for nonliquor acquisitions, for example -- the company's net income should reach $10 a share by the end of 1992. ''I could see the stock at $110 a share,'' says Elizabeth M. Shiels, of the Louisville-based brokerage Hilliard Lyons. But what if some hungry global colossus were to approach the company offering to pay the 15-times-operating-income that is the liquor industry's typical acquisition multiple -- in Brown-Forman's case a high-proof $3 billion, or $107 per share? Company director Garvin Brown replies heatedly: ''I have never had Henry Kravis come to me and ask for my vote. But if he tried to take the company over, I think people are pretty damn aware that the Browns' answer would be no.'' INHERITANCE TAXES, however, could do what buyout king Kravis cannot. Now that Congress has changed the tax code to prevent generation-skipping trusts, the Browns may one day have tremendous incentives to sell, obviously at an enormous premium to the then current stock price. This is not lost on Lee, who says, ''It'll be very hard to pass things on.'' The last word on any sale will, of course, belong to the Brown family, who would be guided principally by CEO Lee. Says he: ''There have been times in the past when there were offers that seemed wild. But we had the view that our future would be better served by keeping the company. That has not changed.'' Not yet, at any rate.