Family feud

Written by Fawzia Sheikh

Seated at the same desk from which he led the family firm for a decade, George Irwin is eager to display an i-Top, which puts a new spin on an old classic. Twirl the i-Top, and LEDs on its surface form numbers and words that might tally the revolutions made or answer life’s deepest questions like a Magic Eight Ball. (Some of the possibilities: “Very doubtful,” “Ask tomorrow,” and “It could be true.”) It’s the cornerstone of Irwin’s new business, I-Toys Inc., which he predicts will generate revenue of $15 million this year and $35 million the next.

But Irwin is less eager to discuss the day in October 1999 when his uncle Bryan, cousin Scott and brother David launched a “palace coup” over his direction of Toronto-based Irwin Toy Ltd., a Canadian icon. When the majority of the public company’s board rejected demands to dethrone Irwin, then president and CEO, the trio resigned. Before long, Irwin himself was out the door and the public company was sold to private interests. Two years later it was bankrupt.

Was George Irwin’s strategy that flawed? Given the changing competitive landscape, his plan to turn Irwin Toy into a self-reliant global player seemed bang on. But the firm’s trouble was symptomatic of the tensions within any family-owned company that governs its business well, but fails to govern the family.

Founded in 1926 by Sam Irwin, George’s grandfather, the company grew from a tiny souvenir business into a household name. It distributed bestselling toys, such as Slinky and Etch A Sketch, and produced several of its own, such as table hockey and Frustration, a popular board game. For more than two decades after it went public in 1969, Irwin Toy always turned an profit — delighting the dozens of school-aged shareholders who’d attend its annual general meetings to hear the good news and, more important, to play with all the toys.

However, its success was always a mixed blessing. “We were the Canadian distributor for almost every major U.S. toy manufacturer,” says Irwin, “but as their products became successful, they would open up their own subsidiaries here.” Also, by the mid-1980s, toymakers were consolidating and power was concentrating in the hands of a few big retailers, which prefer to cut out the middleman. It was bad news for a company that derived 90% of its revenue from distribution.

When George supplanted his father, Mac, as president and CEO in 1990, he implemented a strategy to wean the company from distribution and develop more toys for sale in Canada and abroad. “That way,” says Irwin, “we’d be masters of our own destiny.” By 1999, distribution was contributing just 30% of revenue, which had increased overall; half of sales came from the U.S., with overseas markets kicking in another 10%.

Still, some family members opposed refashioning the company as a self-reliant global player. Losses in 1996, 1998 and 1999 — the only years in which Irwin Toy lost money as a public company — buttressed their position. Another flashpoint was a 1998 restructuring that realigned the responsibilities of some executives by territory rather than function, in order to respect differences between domestic and foreign markets. As a result, the executive portfolios of senior vice-presidents Scott and Bryan changed from marketing and sales, respectively, to Canada and the U.S. According to Irwin, the pair thought the shifts stripped them of some power and responsibility.

Their discontent peaked in 1999, when Scott and Bryan, who were also directors of the company, along with David, a senior marketing executive, tried to depose George. But the board, which comprised five Irwins and seven outside directors, rejected the proposal and pushed out the threesome instead. A number of executives who supported the coup resigned soon thereafter.

The trio’s combined shareholdings were insignificant, as were George’s. How, then, were they able to foment so much strife? Irwin traces the trouble back to the late 1980s, when the board pressured majority owners and co-chairmen Mac and his brother, Arnold, to create a succession plan. George, Bryan (Mac and Arnold’s brother), Scott (Arnold’s son) and Paul Griffith, a senior VP, were candidates for president and CEO. Although the board believed George was the best candidate, there was reluctance to make one person boss. “In choosing me, they tried to communicate to everyone that [the four of us] would all be equal, other than in title,” says Irwin. Indeed, they earned identical salaries and formed the nucleus of a seven-person committee that made most business decisions.

“Personalities and conflicts, more so than the business’s well-being, were driving some of the decisions,” says Irwin. “One of the things my father and uncle could have done better was to make it very obvious that there could only be one person running the business.”

He also believes Scott and Bryan were “somewhat jealous” of his position. “If your goal is to be CEO and that isn’t going to happen, then [the company] has to communicate what your role is going to be to avoid disappointment and conflict, and to give you the opportunity to sign on for good or to go find something else,” says Irwin. “That lack of communication is what hurt us in the end.”

Irwin’s job didn’t get much easier. He says the hasty departure of Scott and company generated lingering bitterness. “There was discontent with respect to my uncle, who certainly was an irritant,” says Irwin. “I’d been president and CEO for 10 years, and everything I was trying to do to move the company forward was being met with unproductive resistance.” When two of Irwin’s close friends died within a few months of one another in 2000, he decided running Irwin Toy was not worth the hassle and he resigned.

After a committee charged with replacing George disapproved of the candidates it interviewed, in March 2001 Arnold and Mac sold their 51% stake in Irwin Toy to Livgroup Investments Ltd., a Toronto company owned by financier Richard Ivey and Jean-René Halde, a former CEO of Quebec grocer Metro-Richelieu Inc. (Other shareholders did the same.) Total value of the deal: $31.5 million.

At the time of the sale, Irwin Toy employed 400 and was on track for net income of $9 million on annual revenue of $150 million. Yet Livgroup’s ambitious plan to grow the company into a $500-million-a-year developer of toys for global markets quickly fell apart.

“All of a sudden, they were thrust into being a heavy R&D-based company,” notes Ben Varadi, executive vice-president of Toronto-based toymaker Spin Master Ltd. (Ivey and Halde did not respond to interview requests.) Varadi says Irwin Toy’s new managers underestimated the duration of toy development, a process that can take 12 to 18 months. The result: in 2002, it missed some Christmas deadlines at big U.S. retailers, cutting into revenue. The price of a new computer system and the costs of luring seasoned toy executives from the U.S. compounded the trouble. By January 2003, Irwin Toy was bankrupt and ready to be liquidated.

Livgroup’s fumble gave George and his brother Peter — another former VP of Irwin Toy — a chance to reclaim their business heritage. They purchased the rights to the Irwin Toy name, some of the old toy lines and even George’s old desk. George, 53, is playing CEO, while Peter, 47, is president of the fledgling firm.

Its strategy is to add technology to “very common, tried, tested categories of products” such as tops and drawing toys, says George, while maintaining profitable Irwin Toy classics such as table hockey. Products will be developed at a manageable pace — 10 per year — and the brothers have sorted out important family matters well in advance. For instance, they’ve signed a shareholders’ agreement that dictates the course of events should one of them die or desire to sell, among other possible scenarios.

It’s said third time’s a charm. Will the Irwins find luck on this go-round? According to the i-Top, it could be true.

© 2004 Fawzia Sheikh

Originally appeared on PROFITguide.com