Rebuilding Lego

Melanie stern is section editor of Families in Business.

Jorgen Vig Knudstorp talks to Melanie Stern about his first year as CEO of the Danish family business and toy giant Lego, how he led the company out of a period of financial risk and his mandate to fix the national treasure

Last May, Families In Business interviewed fourth generation brothers Dag and Bengt Ivarsson of Brio, the Swedish manufacturer of those iconic little wooden train sets made with connecting magnets. The company had slipped into a 122 million loss and was engaged in a battle for market share against its computer game-making rivals but the brothers insisted a turnaround plan aiming for profitability by year-end would "absolutely work". Their hopes turned out to be as naïve as they sounded; just eight weeks later Swedish private equity house Proventus bought 42% of the company from the Ivarsson family, installing its own CEO and scrapping the notion of profitability until at least 2008.

Brio's fate owes as much to the unforgiving nature of the children's toy markets as it does to the blinkered inertia of its management, then firmly influenced by the Ivarsson family and chief executive – no doubt restricted by owner-manager domination. There are many parallels with the fortunes of Danish toy brick maker Lego. The difference is that while Brio's owners did not appear to take emergency steps to save the company forcing them to sell, Lego's majority owner and CEO for 25 years, Kirk Kjeld Kristiansen, had the wherewithal to admit he had outstayed his welcome in the top job. Handing the role last November to Jorgen Vig Knudstorp, Lego's youngest senior executive, executive vice-president of corporate affairs and a former McKinsey consultant with zero corner office experience, the family took a step back that has already produced results.
 
Nine months in, Jorgen has cleaned up some of Lego's debt by 1375 million with the sale of a 70% stake in the company's unprofitable Legoland parks business to private equity outfit Blackstone Capital Partners and Merlin Entertainments. This has put the company on a realistic footing towards profitability, moving towards 2006 as a debt-free, slimmed down, back-to-basics company. Jorgen spoke to Families In Business about his speedy rise to CEO, and being only the second non-family chief executive in the group's 73-year history as a tightly controlled family concern.

FIB It has been one year now since you took over as CEO. How is it going?

JVK [laughs] So far, it's going well. It's an extremely exciting job but, as you know, we are going through a real survival turnaround situation. We are out of financial risk now [following the sale of Legoland Parks] – a debt free company. From a narrow financial and ownership point of view we are out of the survival period, which was my primary objective. We are now focused on streamlining the company to create a vehicle that can bring profit from what is a very attractive brand and franchise – that will take a bit longer to achieve, at least three years I think. It'll be a long journey.

FIB What is the relationship between yourself as CEO and Kirk, who relinquished his 25-year role as third-generation family CEO and currently vice chairman, as the link with the owning family?

JVK I was business development manager and then interim CFO between April and November 2003. Around that time a number of our executives were asked to leave; Mr Kristiansen took over for a while so he and I were able to develop a partnership over the following 10 months. We worked very closely during that period and then he offered me the CEO position. He still participates in meetings, and any functions celebrating the achievements of our employees. Of course he and his children control the board of directors as our owners, but I can safely say that our chairman Mads Ovlisen is one of the country's most respected executives and has been the chairman of some of the largest corporations in Denmark for many years [he retires next year as chairman of diabetes treatment giant Novo Nordisk]. So Kirk really does takes a secondary role now, and the reason he wanted to do that was to have somebody who is the 'executive producer' – telling him when we're really doing things wrong. Kirk has been in my shoes as the chairman and the CEO, and one of the things he often tells me is how his father's father found it difficult to step back from the business and let him take control. He wants to make sure that I don't experience this too. He is hands-off on the daily operations and knows that major decisions have to go through the board. He knows we have to go through external directors if we want to see where the problems are in our business. We need to stick to the highest standards of corporate governance to create a workable environment, and I need to be allowed the space to do this job properly.

FIB In many family companies, the non-family CEO is really just a steward, carrying out the orders of the family until a suitable family member is found to run the business. They are not always afforded true authority to do the job.

JVK Kirk has really held back on the operational side of the business and let me take the driving seat. I have to develop the vision of our future with my team, and present it to the board and the owning family. Of course in strategic matters the family have strong opinions and points to make, but they are at the 'receiving' end of the process.

FIB You have said you were surprised to be offered the CEO role. As the youngest member of the company's leadership with no corner office experience outside the company, why do you think you were chosen above your colleagues?

JVK [laughs] Good question! I think what happened was in my previous role as interim CFO I had a very broad perspective of the business. It's important to remember that under the last CEO, the quality of the company's senior management had deteriorated greatly. They had asked a great number of people to leave and although, perhaps it was the right decision, they were unable to find suitable people to fill those vacancies. I think it was a matter of them seeing that I had something to offer; the company really lacked other internal candidates to choose from and they pointed to me as somebody they felt they could trust and who was an insider. You could say I have been extremely fortunate to be in the right place at the right time, in the right company. In another company at a time of crisis I may not have been appointed CEO, as there would have been too many other internal candidates to choose from. It is a general reflection of the quality of executives available to the board of Lego at the time.

FIB When Lego achieves full turnaround, you could reasonably expect offers of similarly exciting and better-salaried roles with other companies. What's your view on that?

JVK I would say that I'm in this for the long haul. It took me six months to decide to join Lego in the first place. I was still enjoying working at McKinsey, and I enjoyed the life I had in Copenhagen, so it was quite a difficult decision to move to Billund away from my family. My main concern was about the quality of the culture at Lego. My assessment was that the quality was pretty weak in terms of leadership and organisation culture. I saw it as a highly successful company where the saying that success is sometimes the biggest enemy to a company was true. But I also felt there was a strong desire to change within the ownership of the company, and after talking to them there was no doubt in my mind that I wanted to work for Lego. Of course my career is important to me but I think it is so important to go to the grave knowing you made a difference and that you have done something really important that had an impact on the world. This is a company with so much potential. I feel we have a product and a brand that really does make a positive difference to the lives of children. I am committed to that and I can't see the end of my commitment anytime soon.

Of course it is a demanding job but I can see myself being here in 20 years' time having brought the company a great deal of success. But I don't want to be hanging around having had that success but not bringing any new successes or adding anything dynamic to the business. I would like to see the company develop over time.

FIB How do you take full reward from the efforts you put into the company if you have no share ownership, as it is a family owned business?

JVK It is becoming a fairly common type of program that we have basic salary and then a bonus scheme tied to company performance, and in order to incentivise we have another scheme for the top management of the company. I think acting as an owner when you are in a position like mine is incredibly important. If there was a possibility of some ownership open to me it would be something I would seriously consider pursuing, even if it was just a small stake. But the family hasn't had to really consider this before because the ownership and management has remained for the most part in family hands. They have always been at pains to protect their ownership and I completely respect that.

FIB You are only the second non-family CEO the company has had. Does this create any additional pressure for you?

JVK I don't see it as a major pressure but one thing I do consider is the value of the family to the company. As entrepreneurs and owners of this company they of course have so many feelings and values attached to the brand. I certainly want to preserve these. Being given this role feels a bit like being elected prime minister. If you are the CEO of a family business you need to be sure you can represent the family and their values.

FIB Although you have not worked as a chief executive for another company before Lego, what do you think are the key differences in leading a family business versus a non-family business?

JVK There are huge differences in corporate governance and its enforcement, and that is an area my colleague, our CFO Jesper Ovesen, and I have focused on in particular – we both came from publicly traded companies. We introduced corporate governance to the company. The advantages of family ownership are similar to that of the private equity sector; more patience and understanding from our owners on the kinds of thing we believe need to be done. We get better advice from the board. With the right type of setting I believe family businesses have many of the same advantages as private equity. The family felt it was better to be privately owned than publicly traded, but a lot of people feel the company's poor performance carried on a bit too long because of it, and that this wouldn't have been allowed if Lego had been traded on the markets. There is also a sense that the company has long been at risk of a hostile takeover, because it is a well-known brand and our industry is consolidating. But the family sees the company as a place founded on ideas and they don't think it is right for it to be integrated into the consolidation movement.

FIB What was Kirk doing wrong that you are now doing right?

JVK Kirk had an unfortunate hand in recent years in picking people to surround him who believed the company was in better shape than it actually proved to be. In latter years Kirk became more the chairman of the board than the CEO, very much more strategic.