The Critical Role of the Fourth Generation

The entry of the fourth generation in the late 1990s signaled Royal Selangor’s need to cater to the tastes of younger markets. “Pewter has a new attitude”, is their mantra and the fourth generation has a lot to do with this strategic move. As to who will eventually succeed patriarch, the family remains reticent. The family is fiercely protective of control over Royal Selangor but the family business leaders understand the importance of hiring professional managers.

Globally, only 10 to 15 per cent survive up to the third generation, according to a study by Family Business Prof. Randel Carlock of Insead.  But there are a handful of home-grown companies which have beaten the odds and are now into the fourth generation. 

Prof Carlock told “The Business Times” that many firms don’t last more than three generations. They go bankrupt, merge or close down because they just can’t face the competition.“But working with family, people can sometimes get emotional, and so you need professional management. It’s all about combining family sentiments with professional management,” he added.

Associate Professor Chung Chi-Nien from the NUS Business School said that business leadership needs to be selected based on competence and not just by traditional family hierarchy. He said: “My study shows that ideally, family members should not make up more than 60 percent of the department heads. The rest should be non-family professionals. The family members, have vested interest and have a more long-term view of the business, while non-family members, with different capabilities, will bring new ideas and perspective to the business.”

This is the case with Royal Selangor.  Chen Tien Yue, a Gen 4 successor candidate says,  “Four of us from the fourth generation of the family are currently working in the Royal Selangor group of companies. Our leadership team at Royal Selangor consists not only of family members but also non-family managers with decades of Royal Selangor experience working closely with dynamic young department heads. The Department heads are all in their 30s. This is the team taking us forward for the next 20–30 years.”

Family Business expert Dr Chung said that ownership structures are commonly used in Taiwan for dynasties.  In an ownership structure, the founder divides the shares of the various companies equally among his children.  For example, if the family has three companies run by three different sons, each company will own about 30 per cent of the other company.

He said: “In this case, no one has total ownership of a company. This prevents fighting within the family after the founder dies and ensures that there is a balance of power.”

A trust can also be an effective way to ensure that shares in a business can continue to be held together for the benefit of all family members, said HSBC Private Bank’s private wealth solutions managing director, Mr James Aitken.The family members are obliged to manage the assets and act in the best interests of the beneficiaries, guided by the wishes of the patriarch. The governance document sets the rules as to how the various family members participate in the business – both in terms of management and as shareholders.

Business owners often are busy with the daily routine in their business operation, leaving little time for business succession planning. We conclude that succession is one of the most important things business owners can do for their dependents & shareholders to ensure corporate longevity. This is one of the topics I will extensively discuss in a seminar entitled Family Constitution: Your Wonderful Gift to the Next Generation. It is on August 5 at the Tower Club in Makati and open to the public.

(esoriano@wongadvisory.com)

Family Charter and Succession Planning

I will now continue my Family Business Longevity Series using Royal Selangor as a gold standard for Family and Business Governance. Family owned businesses reaching a milestone of more than 100 years are indeed extraordinary and Royal Selangor, a Malaysian company that started in the 1880’s and with Chinese descent has proven that with a well-crafted Family Charter (constitution) and a timely succession process, the family business can continue to survive and grow amidst a complex and competitive marketplace.

Allow me to continue Royal Selangor’s amazing 132-year story.

The Yong brothers started out as tinsmiths making everyday items catering to the growing mining community at that time. Gradually, they started a side business crafting pewter to make Chinese ancestral worship items.  In time, Yong Kong veered off and established Malayan Pewter Works. The company — jointly run by Yong Kong’s four sons — expanded into making cigarette boxes and tea sets in the 1900s, which got the attention of European clientele.

After World War II, family feuds tore the business apart and the brothers set up rival companies Tiger Pewter, Selangor Pewter and Lion Pewter. However, only  Selangor Pewter, which was renamed Royal Selangor in 1992, survived. Right after the Malayan independence, it began making souvenirs and corporate gifts.

What were the lessons learned that led to the break up?

“My father told me to beware of family feuds. If you have family members contesting over the pot, then nobody looks after enlarging the pot,”says Yong Poh Kon, the Managing director of Royal Selangor International and third-generation leader of the family business. Although in one interview he concedes that for this type of business to survive, product innovation is the key to stay in the game, however he also emphatically asserts that succession planning should be given utmost attention.

While he wouldn’t say whether his son or his nephew would eventually be chosen to lead the business, the third-generation patriarch stated criteria and gave advice for his successor.

“It will be based upon the track record of the person and the support he will be able to derive to bring his idea into action.  Maintain the family harmony so that everybody feels that they are part of the business… continue this, then you are able to have the passion to drive the business forward,” Yong said.

In the PwC Family Business Survey 2016 — the Malaysian chapter points out that although 69% of local family businesses have members of the next generation working in the company, but only 15% have a robust, documented and communicated succession plan. That survey reflects a looming universal trend among family businesses that tend to overlook the dire consequences when senior business leaders set aside or completely neglect succession planning.

Another source of major conflict and possibly one of the biggest dangers faced by family businesses today is the risk of the younger generation taking it as a free ride and feeling a sense of entitlement to a position in the company purely because of his or her surname. To avoid this, Royal Selangor employs a policy wherein every family member has to work in another company for a period of time before joining the business.

“The rationale behind working in another organization and the reason why that rule is in place is because you have to have something to contribute and bring to the table if you want to work for the company”.

(esoriano@wongadvisory.com)

Royal Selangor’s Amazing 132 Year Success Story

I am back in the country after a grueling 7 days of uninterrupted Family and Corporate Governance campaign covering major business groups in two of East Africa’s biggest economies, Kenya and Ethiopia.

This campaign is an initiative of the World Bank’s private sector arm, International Finance Corporation or IFC in making sure the investment they placed in these family owned enterprises adhere to Corporate governance protocols. 

Family-owned and controlled businesses loom large not only in Asia but also in Africa. Some are grappling with awkward succession battles, while others have shown innovation as younger members rise through the ranks. The issue is why do some family businesses go on for centuries. What is their secret?

To address this phenomenon, I have embarked on a new set of articles that will focus mainly on family business longevity series. The first two companies I shared  last month was that of the almost 500 year old/18th Generation Toraya Confectionery Group from Japan and the Hongkong based Lee Kum Kee Condiments Group. Toraya has been recognized as one of the world’s top 25 oldest family owned business.

Next in our longevity success stories is Royal Selangor, a 132-year old Malaysian pewter manufacturer and retailer and considered the largest of its type in the world. 

Founded in 1885 by Yong Chin Seong, Yong Wai Seong and Yong Koon, it is a successful family business that has weathered global recessions, survived two world wars as well as the boom and bust of the tin industry, including a bitter family feud.

The company started out making Chinese ancestral worship items in the 1880s and later expanded to cigarette boxes and vases that appealed to European colonials. In the 1950s it began making souvenirs and corporate gifts after the Malaysian independence sparked a tourism boom.

Royal Selangor opened its first store abroad in the 1970s and now has 50 stores around the world in countries including Singapore, Japan and Australia.  The brand is also found in stores such as Harrods and John Lewis in the UK.

For all these fame and fortune,  “Thanks to proper succession planning and a family charter in place,” notes Yoon Li, who runs the business with cousin Chen Tien Yue, making them the fourth generation to do so.  Apart from the two, the company is run by a team of professional managers. “We rely on the heads of various departments to come up with strategies and execution plans,” says Yoon Li.

For the fourth generation family members, formulating a Family Charter was the best thing that ever happened to Royal Selangor. And to prevent a repeat of a damaging family feud, a six-member family council along with a family charter, were established in 2002 with guidelines to handle potential disputes. 

Yoon Li says his family’s charter has gone through at least 30 iterations since it was implemented. It was put in place to ensure that the family business “was not considered a place of occupation for family members or an employer of last resort.”

This policy simply means that anyone interested in joining the family business is required to have worked outside the scope of the company for at least two years. The charter basically sets the ground rules and is the constitution for how the family engages with the business. For instance, things like who gets to have a physical office and who is allowed to use the resources of the business are specified in the charter. 

“It is this foundation that has kept the family run entity in business all these years,” he adds.

(esoriano@wongadvisory.com)

Only One Child Inherits (Last Part)

NAIROBI, KENYA. We have all heard about the 3rd generation curse and are familiar with the grim statistics that only 3% of all family-owned corporations make it into the fourth generation.

I am in Nairobi now for a week-long World Bank/IFC mission to promote corporate governance amongst East Africa’s aggressive family owned enterprises and I would frequently challenge business leaders to ponder on the unique Japanese approach to longevity especially for the Toraya Group.

Five hundred years later, Toraya continues to stand tall above other family owned enterprises with the current proprietor belonging to the 17th generation, ably supported by the next in line successor-son Kurokawa Mitsuharu.

How did the family business managed to navigate the business amidst an emotion-driven enterprise where family relationships always come first over business?

The “ie” concept, unique only to Japanese family business community immediately comes to life.

Non-existent to the western world, the concept in a patrilineal household, is at the core of the traditional Japanese family and is based on a forefather or primogenitor model.

In this ecosystem, only one child inherits. All of the other children in any generation are expected to eventually leave the family and go on to establish themselves in some other institution. The chosen successor, usually the eldest son, inherits the family and everything to do with the family, and the rest of the children have to find their own way in the world.

In theory, the “ie” should last forever and in principle never dies. Japanese culture plays down the role of the individual and places significance on the importance of conformity and the success of the group.

The primary objective of an “ie” is to preserve the clan. Therefore, it entails: (1) long-term planning, (2) priority to market share, rather than profit, (3) weak shareholder position, (4) resisting mergers and acquisitions, and (5) displaying, even more, strength in the face of adversity.

Since the company should last forever, a Japanese family business based on the “ie” principle will have very few disturbances from misalignment or possible frictions between the different family circles.

The Chairman/CEO and head of the “ie” is usually in full control and the family is programmed to support him in any possible way.

In case there are no children or the offspring of the owning family is not willing or capable to fill the position, the head of the “ie” can rope in an outsider via adoption.

This centuries-old adult adoption practice in Japan was developed as a mechanism for families to extend their family name, estate and ancestry without an unwieldy reliance on bloodlines.  The Chairman/ CEO of the “ie” can substitute his own bloodline with a competent person that he likes.

By choosing a “mini-me” he can ensure the survival of the business and bar incompetent heirs from ruining the family lineage. The effect is twofold: (1) his own children will be much more aligned to the overall business goals; (2) he signals to his employees or talent pool that they also have a theoretical chance to make it big.

It is the unwritten spirit of “ie” and truly lived unity that is powerful. Written agreements are important, but worthless if the core “ie” does not exist.

This addresses the question why 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 land mass.

(esoriano@wongadvisory.com)

The Heart of a 500 Year Old Family Business (Part 2)

In Toraya’s English webpage, the first clearly documented reference to Toraya is an existing temple records from 1600. There are also records dated September 15, 1635 that provide a glimpse into the company’s business at the time of proprietor Enchu Kurokawa’s death. I will walk the reader and articulate each of Toraya’s longevity principles as manifested in their 500 years of existence.

No. 1 It Is Important to Focus on the Present

Toraya’s current president, Kurokawa Mitsuhiro, the seventeenth to take the helm, does not spend too much time dwelling on his company’s illustrious past.  Kurokawa believes focus on what needs to be done now, rather than simply following the ways of the past, is what has kept Toraya in business all these years and also allowed it to preserve many of its traditions.

According to him, “It’s mere hindsight for us to ponder why Toraya has been around for so long.  What’s important is not the past or even the future, but the present. It comes down to doing what needs to be done to create the sort of sweets that customers will like.”

This flexibility may have something to do with the fact that there are no set-in-stone Kurokawa “family precepts” to be passed down from father to son. When Kurokawa Mitsuhiro took over from his own father, back in 1991, he realized the freedom and responsibility that came with the position: “Since there were no precepts, it was basically: Do what you like—it’s all up to you now.”

Thus, Kurokawa asserts that choice, not circumstances, determines success.  As Geoffrey Gaberino, 1984 Olympic Gold Medalist says, “The real contest is always between what you’ve done and what you’re  capable of doing.  You measure yourself against yourself and nobody else.”

It might sound overly simplistic, but if you’re going to sell something successfully, it better be worth the price tag.  This is another longevity formula for success that the Toraya Company holds on to.

No. 2 The Goal is to Be Relevant And Authentic

Temple records dated September 15, 1635 showed a list of 20 types of confectionery that Toraya (literally, “tiger store”)  served to the Empress Meisho on the occasion of her visit to her father’s court of retirement.  In 2003, the company opened its first Toraya Café in the fashionable Roppongi Hills building in Tokyo, featuring a lineup of sweets that combine elements of wagashi and Western confectioneries to create a whole new taste category.

The company’s effort to cultivate a taste for wagashi is not limited to overseas; it is also doing its utmost to foster demand among Japan’s younger generation, which has become more familiar with European-style confectionaries than home-grown ones.

No. 3 Product Centric

Matsudaira Naritada, head of Toraya’s Public Relations Division, explains that the firm is always developing new namagashi and other sweets—a process that takes around three years for each item. But Toraya only introduces a sweet once it has complete confidence in the new creation—without relying on customer feedback along the way to make adjustments.

Because the namgashi lineup is always changing, including the appearance of brand-new items, each visit to a Toraya shop promises a novel encounter. And the items selected have a connection to the particular time of the year, both in their design and in the ingredients they contain.

To be continued…

(esoriano@wongadvisory.com)

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)