A 500-year old Family Business (Part 1)

What make some family businesses go on for centuries while others succumb and die early? My quest for corporate longevity continues.

In my last article, I glowingly talk about Lee Kum Kee’s 129 year run where they defied the third-generation curse but on the one hand, I have also written numerous articles about the 3rd generation curse and have highlighted statistics that only 3% of all family-owned corporations make it into the fourth generation.

In an insightful research material by Schwartz and Bergfeld, the authors pointed to one country that seemed to challenge the 3rd generation curse much better than others.

Japan has 7 out of the 10 oldest companies on the planet and also has the highest concentration of old family businesses by any measure such as GDP, population, and landmass. According to a 2008 study from the Bank of Korea, the world had 5,586 companies that were older than 200 years. In the same study, Japan was number one with 3,146 firms or 56 percent; the second was Germany with 837 or 15 percent; the Netherlands came third with 222 and fourth was France with 196 companies.

But it is not only the extreme cases of very old companies that are surprising, the overall life expectancy of a Japanese family business is higher in general. According to Professor Toshio Goto from the Japan University of Economics in Tokyo, the average lifetime of a Japanese family business in 2005 was 52 years, more than double that of its American counterparts.  What can the unique Japanese approach teach us about longevity?

If family businesses from around the globe strive for future prosperity and family survival in an increasingly volatile, complex and ambiguous world, how does a tradition-rich company like Japan’s Toraya Confectionery Company managed to keep pace with an ever-changing world?  Even with a great idea, thorough research and hours and hours of hard work, one rule still applies:  Nothing is certain in life and in business.  No one can unfailingly know if one will fail or succeed in life, how investors will receive a startup idea or whether a company will survive past the one-year mark.  So, how can one increase the odds of, well, beating the odds?

It’s a question asked often enough that it deserves an answer.

Toraya Confectionery Co. Ltd. is a Japanese confectionery company founded by  Enchu Kurokawa in early 16th century, Kyoto.   Toraya, a maker of wagashi (traditional Japanese confections), was a supplier to the imperial court during the reign of Emperor Goyozei, which was from 1586 to 1611. Toraya established a foothold in Tokyo in 1869, after the national capital was transferred there on the heels of the Meiji Restoration. At present, Toraya has three factories and approximately 80 shops throughout Japan, in addition to a boutique in Paris.

Running a business for almost 500 years is not without challenges, mainly in the form of disasters, change in society, economic transformation and several World War upheavals and Toraya  countered by shifting from being the imperial family’s purveyor to opening retails stores.

Steve Jobs once said, “You can’t connect the dots looking forward; you can only connect them looking backward.”   Even the Great Confucius explained that if we want to define the future, we have to study the past.  And so, let us study Toraya’s history for the past 500 years.  Indeed, for a small start-up company, to last this long is a testimony to its great history. Since its inception, Toraya has grown big and evolved into a well respected corporate venture that has become known in Japan, the rest of Asia Pacific, and the world.

To be continued….

(esoriano@wongadvisory.com)

Rule No. 3 No Extra Marital Affairs

The rule definitely appears controversial and has raised many eyebrows every time I introduce the topic during Family Governance talks. Even my best friend who is a second-generation Chinese family member weighed in on the rule that it is very “un-Chinese”.  I leave the readers to interpret what my Chinese friend said.

Lee Kum Kee Policies

But for the 129-year-old Lee Kum Kee Group, the family edict related to extra marital affairs is one of the most powerful rules that the third generation and grandson of the founder, Lee Man-tat has required the next generation shareholders to obey especially those sitting on the board.

There are equally unique and governance rules that Lee Man-tat espoused as well and these are:

Rule No 1: No Late Marriage

Rule No 2: No Divorce

Rule No 3: No Extra Marital Affairs

Any family board member who contravenes Rules No. 2 and No. 3 are expected and required to leave the board automatically and will no longer have the right to speak and participate in the family council and business decision-making process.

Family Constitution and Family Council in 2002

For Lee Man Tat, these rules are important and crucial as the family members have grown in size, some have lost personal interest in the business, the market environment has become complicated, shareholder ownership are dispersed and owners have varying versions of where the future is headed.

After weathering through two major corporate battles, the Lees agreed to finally set up a family council and draft a family constitution in 2002.

In an article penned by Jeff Pao, he highlighted the different corporate governance systems set up by LKK and what came out of the initiatives, most notable was organizing the Family Council Board and the roles of the 29-member family assembly.

Pao further contends that the family council is in charge of the family business, family office, family investment firm, family charity fund and family training center.

I will share more initiatives that the Lee Kum Kee incorporated in their Family Constitution:

a. All family members have to work at least three to five years in other companies after graduating from college if they want to join the family business

b. Family members who violate rules do not just defy the values enshrined in their Family Charter but will also lose their moral and business ascendancy to implement, enforce and discipline erring or wayward family members.

c. Another powerful value worth repeating in this article is their strong adherence to “Si Li Ji Ren“, a Mandarin saying meaning “Put Other’s First, before yourself.”

d. If family members quit the board or company for personal reasons, they can sell their shares to the company and remain as family council members

e. The next generation are allowed to inherit shares even if they are not involved in the daily business operations.

These rules are the heart and soul of Lee Kum Kee’s flourishing existence and the foundation of their commitment to pursue business excellence and stewardship so the business can be handed to the next generation seamlessly.

Lee Kum is the name of the founder, and Kee is a Chinese word that means a new family business.

The enterprise will be celebrating 130 years in 2018 and there are no signs of the group slowing down. On top of their strict observance of protocols, the other critical and indispensable governance rule that the Lee family initiated was formalizing their succession plan.

The family believes that the plan is critical to sustaining a long-lasting family business.

(esoriano@wongadvisory.com)

How to Overcome the Third Generation Curse

Family businesses need to get over the “succession curse”; otherwise there is no legacy to speak of beyond two or three generations.

In my previous articles, I highlighted the remarkable 129 year run of the Lee Kum Kee (LKK) Group, a Hong Kong-based Chinese family enterprise that started in 1888. At present, it continues to dominate the condiments and sauces industry and has presence in over 100 countries.

But there is a bit of irony here. When you search for Asian family-owned businesses that are more than a century old, you rarely find Chinese enterprises in the list. When you scroll up, you will find Japanese businesses dominate the global list for longevity with the oldest one, Kongo Gumi, a construction company established in 578 A.D. extending its run to 1,428 years!

So why are there only a handful of Chinese owned enterprises surviving the third-generation curse?

The answer lies mainly on the changing norms and new generation expectations.  The younger generation of Chinese businessmen are increasingly exposed to Western values and the gap between them and the older generation is becoming a source of conflict in the succession planning of family businesses.

In my coaching work in Asia, I have seen an alarming rate of family business disputes with poor succession planning as a root cause of the problem. The impact of poorly managed succession and family infighting are detrimental to both the family business and the owner/managers.

The Lee Kum Kee (LKK) Formula    

The LKK Group is an exception. It is more than a century-old, presently managed by the fifth generation and has weathered two major break-ups. There is clearly no doubt that the enterprise has proven to be resilient and their longevity points to the family leader’s desire to carry out and implement the best formula without compromising the values of its founder.

Their secret? The Lee family redefined the concept of family business management by positioning the family as the core, and treating business as part of the family, not the other way around. They also blended family dynamics and incorporated the business structure as part of the family ecosystem.

The experiment worked and now they are on their way to pursuing more milestones clearly making them one of the few Chinese family owned businesses in the world that is expected to last for many generations.

Practical Advice

In one of his celebrated talks in Thailand and documented by writer Pichaya Changsorn, Eddy Lee, the fourth-generation leader of Lee Kum Kee highlighted in his own words a handful of practical and powerful insights that every family business leader must embrace regardless of the size of the family business:

a. Problems begin small and then the ‘virus’ grows. Prevention is better than cure. In family businesses, before the family business gets sick, do something about it.

b. Family-run enterprises are essentially different from general business enterprises in that the former have not only business issues to deal with, but also the obligation to take care of “family values”, which sometimes can be a personal thing and have nothing to do with business.

c. Sometimes the problems stems from the fact that the role of each family member is not clearly defined.

d. The driving force for business systems is to move the business forward. But sometimes, family is not looking at the driving forces but is concerned about relationships.

e. Needs may be different. For example, in business, you need to deliver results and show returns to your shareholders; family businesses may be looking for love, care or financial security.

f. Families talk about harmony… we stay together. Business don’t talk about harmony, we talk about rules, KPIs or key performance indicators

g. You don’t get to choose your parents. But in business you can choose your boss or where to work

To be continued…

(esoriano@wongadvisory.com)

The Lee Kum Kee Family Secret

Hong Kong sauce giant Lee KumKee Group is one of a handful of Chinese family owned enterprises in the world that has not only managed to survived for more than a century but has thrived after 129 years of steadfastly holding on to some unique and time tested values reinforced with a powerful succession plan model.

Established in 1888, the Lee KumKee group has a remarkable history built over five generations. Yet, despite its market leadership and being a world-renowned brand offering an assortment of Chinese sauces, the group has not been spared of her share of family conflict as a result of business disagreements and buyouts.

Major Shocks

In 1972, the third generation heir, Lee Man-tat and grandson of the founder suggested to its shareholders the importance of creating additional product lines for its oyster sauce business to reach a bigger market. But the idea did not sit well with his uncles, so the following year and with the backing from his father, Lee Man-tat ended up buying all the shares of the company.

Another setback happened in 1986 when Lee Man-tat proposed the idea of expanding the factory but ended up being rebuffed by his younger sibling who at that time owned 40 percent of the business. Due to differences in management style, Lee Man-tat offered to buy his brother’s shares.

After going through these two major corporate hiccups, Lee Man-tat ended up gaining control of the business. His five children then joined the company one after another.

The two shocks made the Lee family realized the vulnerability of the enterprise to internal conflicts, so in 2002, the family agreed to set up a family council and draft a family constitution.

Family First, Business Second

The core value of Lee KumKee is “family first, business second,” there other values according to writer Alan Lee Ka-Fai that are worth emulating by family business owners and these are the following:

a. Entrepreneurship is Key: The family requires the successors to stay as entrepreneurs as “it does not believe one would succeed in keeping the business without instant innovation and thinking out of the box.” The family business will not be able to stay on long unless it always maintains the mindset of entrepreneurs.

b. Governance System must be in Place: Apart from family values, the family constitution and family council are two key elements of family governance. These elements would help build trust among family members and cement family ties.

c. The family motto also underlines achieving a win-win situation

Additionally, I have included some of the powerful values I mentioned in my article last week namely:

d. Put Other’s First, before yourself

e. Pragmatism

f. Integrity and

g. Benefiting the community

According to Dr. Amen Lee, President of Legacy Academy, developing a long-term vision is a key element. He goes on to espouse the five dimensions that includes the practice of family values, continuation of family relationship, passing on of family knowledge, management of family wealth and succession of family business.

Inevitably, for family enterprises aspiring to become legacy bearers, the key is to pass on the values of the first-generation entrepreneurs, including their core concepts and life wisdom.

For writer Allan Lee Ka-fai, he concluded that “Family businesses which have lasted more than 100 years usually have a very unique understanding of family, business and relationships, and pass it on to the next generation as the family legacy.”

(esoriano@wongadvisory.com)

Lee Kum Kee: 129 years and Growing

Lee Kum Kee International is a Hong Kong-based food company that manufactures oyster flavored sauce and a wide range of Chinese and Asian sauces. It is a popular fixture in most Asian dining tables. It is also loved by Filipinos.

The brand was founded in 1888 by Lee Kum Sheung, a chef working in a small eatery that sold cooked oysters. He eventually formed the Lee Kum Kee company to market what has now become a staple sauce, seasoning and condiment sold in more than 100 countries.

Today, the Lee Kum Kee (LKK) group continues to run as a family business under the leadership of the 5th Generation family members. I shared this inspiring family business in my workshop last Saturday.

At the center of LKK’s corporate culture and existence is a Mandarin saying:

“Si Li Ji Ren” which means “Considering Other’s Interests or Put Other’s First, before yourself.”

Si Li Ji Ren is the heart and soul of the Lee Kum Kee’s very existence and the foundation of their commitment to ingrained values such as Pragmatism, Integrity, Constant Entrepreneurship, and Benefiting the community.

Today, family enterprises that are haunted by a multitude of daunting challenges related to succession battles and sibling rivalries may do well by learning powerful insights from LKK’s success formula as well as its preference over family embracing the business.

I espouse business first in my coaching work to dramatize the need to grow the business in a highly complex and competitive environment but the case of the LKK family business’ endless pursuit in espousing best practices under a family first model is equally inspiring.

Quoting a well written article by Jeff Pao… “Family first before business,” company chairman Charlie Lee Wai-chungonce said in an interview. “If family members work together, the business will thrive naturally.”

“As a family business, we’ve gone through several transitions within our family. And the two key transitions in the 1970s and 1980s have exerted huge shock on our family governance,” he said.

In 2002 the family decided to set up a family council as part of their efforts to bolster business growth.

Lee Wai-chung, the fourth-generation heir, said involving all family members in the business may not necessarily be a good thing.

“It’s a common belief that you are a part of the family unless you join the family business, or you become an outsider. But that idea is outdated and has to be changed,” he said.

A traditional family embraces harmony and tries to avoid infighting. So even if there are issues, they tend not to confront them for fear of causing disharmony in the family.

But those issues have to be tackled, Lee said, adding that it’s normal for family members to have different views.

In Family businesses that my advisory firm, W+B assists, the family leaders have the habit of sweeping the problem under the rug and totally ignoring the underlying problems. It should not be that way.

My model of coaching work is simple… when there is conflict make the family members internalize the values. Values are like glue that keeps the family together.

Values inspire people to do things that are sometimes difficult, to make commitments that require discipline and to follow certain behaviors that will redound to the benefit of the greater good. An enduring commitment to values is the greatest strength and competitive advantage family ownership can bring to any enterprise.

The Lee Kum Kee model is a glowing example of what family businesses should be.

(esoriano@wongadvisory.com)

Are Business Owners Doing It Right? (Part 2)

  • Do you think your children are dedicated in pursuing business continuity?
  • Are your children qualified to assume leadership roles?
  • Do you have rules for in-law participation?
  • Have you already identified a successor?
  • Do you have a succession plan in place?
  • Do you honestly believe your eldest child is the most qualified? 
  • Are your children entitled? Were there rules when they joined the business?
  • Did you require them to work outside the family business before joining?
  • Are you compensating your children commensurate to their skills and annual performance?
  • Does an HR policies cover family members? Does your HR Manager have the power to discipline family members?
  • Have you established criteria for family members owning shares? For selling shares? Assigning shares? Encumbering shares? Selling to siblings or other branches?

If you answered “NO” to just a handful of the questions above, sadly your family and the business may be headed to a bruising conflict.

If you sense the undercurrents and tensions building amongst family members now, it is wise not to disregard them. As their leader, do your family a big favor, fix the problem. If you cannot fix it, find someone who has the competence, experience and objectivity to help.

Let me take this opportunity to say that this extremely sensitive subject will be highlighted and discussed in my one day workshop in Cebu on Saturday, May 20 at City Sports Club.

The simmering tensions are telltale signs of a “baby elephant in the room”. Ignore these issues and the family and business will suffer. You might think that these issues will heal over time. It will not. As a matter of fact, the conflict will manifest in many forms and through time, implodes as you start losing your grip of the business due to advancing age or when you are no longer around to make important decisions.

It is obviously clear that these problems surfaced many years ago and you brushed them aside. These problems relate to entitlement, sibling rivalry, generational conflict, conflicting interest, in law and cousin participation.

When you procrastinate, the problems are magnified, emotions takes center stage, entropy pervades and battle lines are drawn.

Emotion and entitlement

At this juncture, legal intervention assumes a more active role and my capacity and influence as a family business coach diminishes. As family business advisor, our governance intervention is more effective if lawyers are kept out of the conflict.

Immediately right after helplessly watching his children bitterly fought for ownership and control of the business he started 50 years ago, a client confided to me:

“Prof, I failed as a parent. How I wished I were poor again. I never expected that the wealth I created has cause so much pain and misery amongst my children…we used to live simple lives but things have changed, all because of greed and pride!”.

If I hasten to add, emotion and entitlement remained as aggravating circumstances to any conflict.

With no policies in place, it will be overwhelmingly tough for the family to move forward in one direction.

I can go on and on with more nagging questions but inarguably, it will still reflect on the most fundamental question for family business owners…

“Are you doing it right? If you think you are not doing enough to ensure your legacy, do you plan to urgently do something to create harmony amongst family members?”

It is not too late though. There is still time to do something right but you must start the process now!

(esoriano@wongadvisory.com)

*****

Prof Soriano is slated to deliver a talk to family business owners in Cebu on May 20, 2017. The talk this month is part of W+B Cebu’s advocacy campaign related to Family and Business Governance. Seats are limited. Those interested to reserve a slot may call Octopus Events at 09159108686 and look for Ms. Cherryl.

 

Are business owners doing it right? (Part I)

ANY relationship between the family and the business must be governed by policies.

If you are like most family business owners, you probably have initiated very informal rules with little or no compliance. That said, the likelihood of a future family business conflict is high.

Examples of undocumented policies that you established are rules related to your next generation family members being assigned to manage their respective departments, their compensation and equity percentage that are likely to be equal and setting weekend lunch gatherings to discuss business opportunities.

It is also likely that you have prepared a will that only your lawyer is aware of or an insurance policy ready to be monetized when an emergency strikes the family and the business.

As to investments and liquidity, I am certain that you also have set aside a significant amount of cash in a number of bank accounts and some assets like real estate to distribute to family members, as well as future liquidity for the business to cushion the impact when you are no longer around.

If you have extended family members due to past indiscretions (having children outside of wedlock), you have most likely set aside properties or trust accounts for them too so they will not be financially burdened when you are unable to provide their monthly allowances as a result of a debilitating condition or worse death.

Article 887 of the Civil Code enumerates the list of compulsory heirs, including illegitimate children.

Additionally, providing for their future support as mandated by law will also serve as a deterrent against future claims against your estate.

Finally, for a select group of senior employees (non-family employees, relatives and cousins), I am also confident that you have incorporated (Last Will) a financial package that is sort of a reward or incentive for their long years of service.  The gesture is meant to reciprocate their commitment and dedication when they supported you during the startup years. And with the entry of the next generation members, documenting their rewards is important.

I just enumerated a significant part of what a typical family business owner has been doing or planning to do for the family and the business. But in a talk I shared recently in Singapore, I ended up exchanging notes with a participant who appeared to be confused and worried.

”Prof I am not sure if I am on the right track. Despite the initiatives I put in place like buying insurance, real estate, etc, I am still bothered with the thought that my business might not last when I am no longer around. Am I doing it right?”

To provide clarity of purpose, I raised a slew of tough questions to business owners. Some of those questions I have listed below:

a. Are your past initiatives on policy making sufficient to ensure your legacy will continue?

b. Will your current actions cultivate harmony and improve relationships among family members when you are no longer around? Can you sense trouble ahead?

c. Does the next generation members have what it takes to bring this business to a higher level? Do they share the same values and mission?

d. Do you honestly believe that some of your children will sell their shares when you are no longer around? Do you think money will be a primary source of conflict?

e. Do you want in laws to actively participate in decision making?

f. Have you put in place conflict of interest policies in place?

To be continued…

*****

LINK: http://www.sunstar.com.ph/cebu/business/2017/05/08/soriano-are-business-owners-doing-it-right-part-1-540761

Prof Soriano is slated to deliver a talk to family business owners in Cebu on May 20, 2017. The talk this month is part of W+B Cebu’s advocacy campaign related to Family and Business Governance. Seats are limited. Those interested to reserve a slot may call Octopus Events at 09159108686 and look for Ms. Cherryl.