Chapter 26 - John D. The Founding Father of the Rockefellers
Today's Chapter is based on the book “John D. The Founding Father of the Rockefellers” by David Freeman Hawke.
Buy it on Amazon here:
https://www.amazon.com/Founding-Father-Rockefellers-Freeman-1980-05-03/dp/B01FKTM2ME
Here's what I have learned from the book:
Lessons from his Father
“A good father is one of the most unsung, unpraised, unnoticed, and yet one of the most valuable assets in our society.”
— Billy Graham
Just like most of us, John D. Rockefeller’s corporate and personal value has been forged during his childhood. He looked up to his father who taught him many memorable lessons of life. One of the things that his father taught him was to ignore the noise and to be a contrarian. In fact, his father once told him: “Never mind the crowd. Keep away from it. Tend to your own business.” This was an extremely important lesson to John D when he built the Standard Oil Company. While many people taught he was a ruthless businessman, he ignored the public’s opinions and focused on his own business.
As we have learned previously, being a contrarian is a trait that is quite common among business fanatics such as Steve Jobs and Jeff Bezos. In fact, J. Paul Getty famously mentioned that a successful businessman is a rebel who is never satisfied and is always seeking new and better ways of doing things.
“The men who will make their marks in commerce, industry and finance are the ones with freewheeling imaginations and strong, highly individualistic personalities.”
— J. Paul Getty
More importantly, John D’s father taught his son the value and the importance of money. As a matter of fact, whenever he brought John D on a business trip, he made sure his son knew the cost of the room of any hotel rooms they stayed in. This inspired John D to start making and saving money at a young age.
“I can still see upon the mantel the little box with the lattice top that I kept my money in, silver and gold. It was safe there. I had loaned out money and got interest on it before I was fourteen years old. And I knew well how to make out a note. My father taught me these things."
— John D. Rockefeller
This philosophy of his father of borrowing money to invest for the long-term definitely had a significant impact to John D’s career as a businessman. In fact, John D was able to build an oil empire mainly through acquisitions by raising capital through loans and issuing share capital. His understanding of using capital to grow his business and revenue was definitely a competitive advantage he had over his competitors in the oil industry. More importantly, his father taught John the importance of respecting any contracts he agreed with others, especially those that involved money. Furthermore, his father mentioned that sentiment should not influence any transactions with money and whenever he loaned money to one of his sons, he still demanded the going rate of interest and reciprocated if he borrowed from them.
“He taught John D. the rules that governed all transactions involving money. Debts were to be paid off and loans called in when due. As a buyer he should be meticulous to demand what he paid for. As a seller he should get the best possible deal he could. Once a sale had been made both sides must live up to the letter of the agreement; a sale was a private contract that must be strictly observed.”
— David Freeman Hawke
“From his father John D. had learned the merit of borrowing, and money passed constantly between father and son, always at 10 percent interest. Borrow money in the present, Big Bill believed, in order to accumulate a fortune in the future. John D. practiced that philosophy.”
— David Freeman Hawke
Building an Empire
“Typical mergers happen when there are two competitors coming together, and they reduce overhead.”
— Tony Fadell
John D’s believed that life was all about facing problems and solving them. He once said, that “it has been that way all my life, find a problem, work at it, solve it as well as I can, put the administration in good hands, and then go on to the next.” This philosophy of life can be seen through his business career at Standard Oil. As a matter of fact, when he first started his oil refinery business, he mainly focused on two problems that he had to solve if he was to be successful: how could Cleveland overcome its disadvantages as a refining center and how could he surpass his competitors in Cleveland.
John D tried to solve the first issue by uniting all the refiners in Cleveland into one single organization. With size and efficiency, the cooperative group would be able to undercut Pittsburgh and New York as well as other oil regions. Furthermore, their size would allow the members to obtain substantial rebates for shipping their oil. This reminds me of the principle of economies of scale that we have learned from Sam Zell who purchased similar businesses with the hope of having great synergy among the companies.
“This was my first experience listening to proposals about the great “synergies” of mergers. As an investor and a risk taker, my focus has to be on what is specifically attainable. Buying another company based on the perception of opportunities for cross-selling and other intangible benefits generally represents a much higher level of risk than I believe is justified. Therefore, I concentrate on eliminating redundancies, which measurably reduces the capital required to run the business. This epiphany later became relevant across industries from drugstores, to radio stations, to supermarkets, and others. Redundancies are much more predictable and transparent than theoretical opportunities to add value. My focus is always on the downside. Overly optimistic assumptions lead to the graveyard of corporate acquisitions.”
— Sam Zell
Secondly, John D knew that the best way to surpass his competitors in Cleveland was to acquire them. Through his experience as the president of the refiner’s association, John D came to know the inside of every other refinery’s operation. He also got to know every leader in the industry. This definitely eased his plan of consolidating the oil industry.
“The point is, that after a while, when the people, or, at least the intelligent, saw that we were not crushing or oppressing anybody, began to listen to our suggestion for a pleasant meeting at which we could quietly talk over conditions and show them the advantage of entering our organization.”
— John D. Rockefeller
However, to do so, he would need a large amount of cash. Luckily for him, John D Rockefeller was ahead of his time as he would often manage to find enough cash to make big acquisitions through one of the following methods:
Retained Earnings
Bank Loans
Issuance of additional share capital
“John D.'s strategy: only a fraction of the profits would be distributed in dividends among the five stockholders. The rest was retained in the business. John D. continued to be a lively borrower from banks, but he saw to it that there was always plenty of cash in the till when the time seemed right for expansion. He thought this policy of "retained earnings," then unique in American business, the crucial element in his strategy; he believed that it soon freed Standard from the banks, except in emergencies, and hastened its growth into one of the world's largest industrial corporations within less than a decade.”
— David Freeman Hawke
While John D was known by the public as being a ruthless businessman who would force its competitors to sell to him, he himself believed that the success that led from these transactions was only possible because they were made through fair deals with willing partners. As a matter of fact, Rockefeller would often target companies that were having difficulties in the refining business and were losing money. This is also the reason why he was able to purchase them at a bargain price, usually in cash or in shares of Standard Oil.
“Come with us, and we will do you good. We will undertake to save you from the wrecks of this refining business and give you a return on the capital which you have in the plant and land; or, your if you prefer, we will take the business off your hands.”
— John D. Rockefeller
Emperor John D. Rockefeller
“It is hard to imagine Napoleon as a businessman, but I have thought that if he had applied himself to commerce and industry he would have been the greatest businessman the world has ever known. My, what a genius for organization!”
— David Freeman Hawke
John D Rockefeller admired Napoleon because of his wit and leadership ability during his war campaigns. In fact, John D often compared himself to Napoleon and he wanted to imitate Napoleon's organisation and leadership tactics in the running of his business. As a matter of fact, those who worked with John D said that he dominated because “he had character and ability and could see farther than anyone else, and knew how to put together a team of men that could not be matched anywhere in the world.” This is eerily similar to the qualities that Napoleon had and the reason why John D Rockefeller loved implementing ideas he learned from Napoleon.
Although it is hard to imagine Napoleon as a businessman, it is not unthinkable to think that he would have been a great businessman, partly due to his leadership ability and due to his understanding of men. As we have learned previously, Napoleon truly understood the power of incentives when leading men. As he famously once said, “men are moved by two levers only fear and self-interest.”
“Another thing about Napoleon was his virility—his humanity. I mean humanity in the broad sense, of course. He was a human being, and virile because he came direct from the ranks of the people. There was none of the stagnant blood of nobility or royalty in his veins. There's where he had the advantage over the monarchs of Europe to begin with. He could think quicker and along more individual and original lines than any of them. And being from the people, he was in close touch with the people. The men whom he had to combat didn't understand either him or the people, and it is always hard to successfully control what you don't understand. Napoleon didn't play the game, as the saying goes, as they understood it. And then, coming direct from the people he had their sympathy; he appealed to their imaginations; Europe had not yet been educated to the fact that it could get along without any kings at all, and the French people, I believe, reasoned that if they had to have a king to rule them, it was better to have a king of their own kind and from their own ranks, than from the breed which had ruled them for a thousand years.”
— David Freeman Hawke
Furthermore, Napoleon's leadership ability was beyond his time. As mentioned above, because he had a great understanding of men, he had the ability to inspire them. As we have learned from Lee Kwan Yew, it is the leader's job to motivate people to move forward in the right direction.
“He also had what I have always regarded as a prime necessity for large success in any enterprise that is a thorough understanding of men and ability to inspire in them confidence in him and what is of equal importance, confidence in themselves. See the men he picked as Marshals, and the heights to which they rose under his inspiration and leadership.”
— David Freeman Hawke
Similarly, John D made sure to treat his employees equitably, as he wanted to build loyalty to his company among his staff. He did so by paying decent wages and by providing some shares in the company.
“He paid decent, usually slightly better than average, wages. He made an effort to assure employees steady work. Above all, he took care in selecting field managers. They had to be more than competent; they must be able to engender loyalty to the company among the men under them. He won the managers' loyalty by listening to their complaints and suggestions and giving them a feeling that they shared in company policy.After 1882 he cemented them even tighter to the company by persuading Standard's leaders to turn over to a pool some 7,000 shares of stock because "we desire to have some of our young men have some of them."”
— David Freeman Hawke
Beyond the Book
Read "Lessons from Rockefeller: The Upside of Patience" by Farnam Street
Listen to "#254 John D. Rockefeller: The Founding Father of the Rockefellers" by Founders Podcast
Read "John D. Rockefeller: The Founding Father of the Rockefellers" by David Senra