All in the Family

Family offices and patrimonial capitalism

January 02, 2023 • Estimated Reading Time: 7 minutes

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I spent some of my last post complaining about the shareholder revolution of the 1980s, which took a large degree of power from the managers of corporate firms and placed it in the hands of rentiers. Without romanticizing the era of managerial capitalism, I think we are surrounded by evidence that shareholder supremacy has impoverished American culture and intellectual life; as I argued in the previous post, the engines of cultural production are now firmly controlled by anonymous coteries of investors who may or may not have the dimmest understanding of the machines they own.

But there are some wrinkles to this tidy narrative, and Melinda Cooper (whose book on the asset economy, co-authored by Lisa Adkins and Martijn Konings, has made so many cameos on this Substack that you’re probably sick of hearing about it) happens to discuss one of them in a new essay for The Baffler. Her piece explores the growth of “family offices,” which now manage some $6 trillion in assets for billionaires and their families. Cooper argues that the growth of this private, family-owned capital is in some ways an unintended consequence of the shareholder revolution:

In hindsight, it appears that the shareholder revolution, meant to shift the balance of power from the professional manager to the owner-investor, also ended up undermining the raison d’être of large-scale ownership itself, as a generation of corporate raiders discovered they could best maximize “shareholder value” by limiting the number of owners to a handful of private activists. Michael C. Jensen, one of the fathers of shareholder value theory, foresaw as much in the late 1980s when he noted that the leveraged buyout craze would signal the death of the public corporation as it had existed throughout the twentieth century. Although the obituary was premature, time has tended to confirm Jensen’s insight.

It would take a series of key tax and regulatory reforms to turn the hostile takeovers of the 1980s into the more respectable form of the mutually agreed-upon private equity deal. But by the first decade of the millennium, more and more firms were going private, while startups were waiting much longer to make an initial public offering—if they chose to do so at all. Private investment funds have grown precipitously since the global financial crisis and now command so much capital that they offer a serious alternative to public securities markets. As recently as the early 2000s, the only real options for companies that wanted to expand was an IPO or the corporate bond markets. Today, it is no longer necessary for a company to go public when it wants to scale up operations; it has only to find a congenial investment fund to shepherd it through the transition phase.

[…]

The new crop of privately held companies are bigger and more dynamic than they were in the past, and they exist in close symbiosis with the market for private capital. Public corporations are in no danger of disappearing, of course—in fact, the most prominent among them are getting larger and more monopolistic—but there are fewer of them, and those that survive have typically left behind the stage of greatest expansion. While private investment markets finance the bulk of new entrants and rapidly growing companies, public markets are fast becoming a “holding pen for massive, sleepy corporations,” to quote the legal scholar Elizabeth de Fontenay.

For many years, private equity firms were the most significant provider of growth funds outside the public markets. Family offices now operate alongside them, sometimes surpassing their more established rivals in the scale of their assets and the size of their investment positions.

This isn’t shareholder capitalism or managerial capitalism. You might instead call it patrimonial capitalism. Drawing on Weber’s definition of patrimonial power, Cooper describes the reign of the patrimonial ruler as one who “treats ‘political administration’ as a ‘purely personal affair’ and considers ‘political power’ to be ‘part of his personal property, which can be exploited by means of contributions and fees.’”

The shift from shareholder capitalism toward patrimonial capitalism, Cooper says, brings us closer to the political economy of the Gilded Age, when the economy “was dominated by family-owned and managed companies that had few obligations to outside investors and relied heavily on the resources of private financiers.” This was the age of the Carnegies and the Mellons, the Morgans and the Vanderbilts.

But while the above families had plenty of political influence, none of them managed to install one of their own in the White House—not that Nelson Rockefeller, for one, didn’t try. Only in 2016 did we get a president who was also minor nobility in the world of patrimonial capital. And as Cooper points out, his main objective during his tenure in the Oval Office was to funnel its assets back into his own family office.

While Trump is a sui generis figure in various ways, Trumpism as a political tendency tells us a lot about the ideological valence of patrimonial capital. Repatrimonialization—to borrow a word from Fukuyama—is not a peaceful process. It may be illuminating to think of the fights between billionaire rightists and “woke capital” as a series of border clashes between patrimonial and shareholder capitalism. Publicly traded companies are naturally going to place profits above the more eccentric priorities of individual oligarchs, creating unavoidable friction in the economic stratosphere.

Succession does an effective job of dramatizing this friction: In season one, Waystar Royco is publicly traded but run along patrimonial lines. (For the Roy kids, ultimate power looks a lot like a kiss from daddy.) Much of season two revolves the Roy patriarch’s efforts to take Waystar private again.

In the real world, the most revealing post-Trump contest between patrimonial and shareholder capitalism is playing out in the duchies of Lord Elon Musk. With the unfolding Twitter fiasco now dragging down Tesla’s stock price, shareholders in the latter company—which, unlike Twitter, is still publicly traded—have resorted to publicly petitioning their errant CEO. And Musk has evidently interpreted their pleas as a threat to his untrammeled mastery over his own personal demesne. He isn’t entirely wrong.

Musk’s spiraling addiction to cringey anti-woke memes is of a piece with his exertions to break free of shareholder capitalism’s limits. Similarly, his ongoing crusade against current and former Twitter employees could be seen as an effort to reassert personal rule over a corporate form that still contains bureaucratic, impersonal systems inherited from the age of high managerial capitalism. Those systems may lead to more prudent long-term decision-making and limit his own legal liability, but they also make Twitter into something that exists independently of his own will and his own household.

The Trump and Musk sagas, while revealing, aren’t exactly typical. The president and Chief Twit have exposed some of the contradictions in this stage of capitalism through their uncommon recklessness and stupidity. We know less about how many other family offices are governed, in part because other families have the good sense to limit their exposure—their exposure to lawsuits, to political retribution, and to public ridicule. That’s part of what makes Cooper’s work so valuable.