William P. lauder on governing the controlled corporation: the best reason to invest in companies, says The Estee Lauder Companies Executive Chairman, is that they are really good at what they do ... and not what their voting system is.

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Charles Elson: The Estee Lauder Companies, when it went public, was a family business, founded by your grandmother and grandfather in 1946. It adopted a dual-class structure, which many family businesses do when they go public. The company has been extraordinarily successful, and the family is highly involved in the business as they have been from the start. How does corporate governance fit into the way you run Estee Lauder? William P. Lauder: If you think of the classical definition of governance as representing the voice of the shareholders, that holds true here because the largest shareholders in our company happen to be active in management. By having gone public, we accomplished a number of objectives.

First of all, we cleaned up the internal governance structure. No longer were board meetings also known as Thanksgiving dinner. It got us to bring in some outside directors and ask the question, "What is the role of an outside director?" Clearly the most important thing was to give us insight and advice in areas for which we did not have experience. So for our first wave of outside directors we chose those with public company experience, either as sitting CEOs or in other aspects of public company operations. Our management team was really expert in our business but we needed to learn how to operate in this new environment.

We wanted to be very careful, though, to not become subservient to the quarter, or even to the year. Nor to allow the analyst community and what some may think is a knee-jerk reaction to dictate how we operate. This was a key driver for us as to why we justified the dual-class structure.

As a company, we have always invested for the long term. For 50 years we have invested in developing brands that sometimes took a longer horizon to achieve returns, but whose returns are very good over a long term. Secondly, from a competitive standpoint, the vast majority of our competitors were also family-controlled companies, or if they were public their float was very small. So they had the same horizon that we had. Those companies in our competitive set that were broadly held seemed to be less durable. We had, over time as a private company, overtaken them because they were more inclined to succumb to a shorter-term horizon. They had management that had bigger skin in the game in short-term performance than in longterm growth of equity value. We felt it was very important to align ourselves with a set of values for long-term sustainable success--which, especially in the consumer-branded world, is where the real payback is.

And finally, as a private company, there was nothing in the compensation structure that aligned employees with the ownership structure, because their compensation was purely cash. We had no phantom equity or other means of compensating. Now, we have an equity component to offer.

When you went public, did you ever consider not using the dual-class structure and going with a more traditional governance structure? We did consider it. What we decided to do was put a sunset provision into the dual-class structure so that it would not be permanent. We also defined the universe of those who could hold the B shares to be a very small group of family members. If the B shares leave that...