Monthly Archives: February 2015

Do we really need a family constitution?

THE following is the confession by a worried 62-year-old business owner:

“Three of my children have proven themselves to be competent and reliable.

I know they are hardworking and I believe they are capable of leading the family business into the future. They have been egging me to look in into the possibility of hiring non-family members to occupy middle management positions in the family business. Perhaps, it’s about time as the business has become so complex. Honestly, I didn’t expect this family business to grow this big.”

“Separately, through the help of a consultant/friend, we are also in the process of discussing the transfer of some control from me to the three of them. This will give me more time to look at opportunities in Vietnam and Indonesia due to the Asean integration.”

“Apart from empowering my children, we are also talking about an ownership plan where we start the gradual transfer of ownership to my children.

That way, we resolve many ownership issues when I am gone and more importantly in the interim, work out a very good tax minimization plan.

Personally, I should have done this much earlier (before the marriage of my daughter) but after a few meetings with the consultant, he assured me there is still time. We both agreed that it is better to start the process.”

“So why am I still worried? What makes me awake on some nights? It is really about my other son. He is not involved in the family business and decided years ago that he wanted to pursue his own career. He is an IT engineer working in the US.”

“I cannot stop worrying about whether I am treating my other child fairly. Is he feeling bad that he is not included in the future of the family business? Does he feel that I am giving something to the others and nothing to him? I didn’t know the ownership issue is very sensitive especially to my children active in the family business. It didn’t help any that it became even more pronounced when they got married. I guess as their needs change, you can expect issues like higher pay and ownership to surface quite often. “

“Anyway going back to my son in the US, should I give him a piece of the ownership?

Dividend sharing? Or an allowance maybe? After all, he is my son and I want to treat them all equally. Should I talk to him when he takes his vacation again? He was here over the holidays but I was not prepared to talk to him. And if I ask him, would he really share to me what he feels?””

This business owner’s fears and discomfort were eventually put to rest when the family completed its family constitution. It was really a process that covered 12 three-hour sessions spread over 12 months. The process of crafting agreements included dialogues with all members of the family and the development of a set of agreed upon roles for the future employment, leadership and ownership of the family business. Even Skype was used during the session just so family members where in the loop. The once a month session was a process that gave family members the chance to work together and made decisions together and talked in a structured logical way about the future of the family business.

After the signing of the constitution, the business owner knew he had no further need to worry when his son (who was not active in the business) told him that one of the best investments the family ever made was the family constitution for which he was in full support of and, as he further indicated, “who knows, just maybe one of my kids will help continue your legacy.”

Research confirms the truth of this old saying. Fewer than half of all family businesses survive the transition from each generation to the next. Do the math — only about 10 percent will make it to the fourth generation. It’s a sad commentary on the reality that faces family business.

The reasons for possible failure are complex; however, it’s increasingly recognized that family issues more so than business issues determine the outcome of generational change in family businesses. The actual case provides an important perspective in managing this change—the adoption of a family constitution.

Most business owners would always ask: Do we really need one?

Many family businesses appear quite able to get by without concerning themselves with a family constitution. Of course, for as long as the patriarch or matriarch is alive!

But what if he or she suddenly goes? Therefore, it pays to be well prepared and this doesn’t necessarily mean these businesses and families wouldn’t benefit from a family constitution.

From my experience working with family business across Asia, there are generally nine common issues for a family business and these are all important subjects that are addressed in family constitutions:

a. Balancing family concerns and business interests;
b. Entry policies of the next generation family members;
c. The role of the in laws in the family business;
d. Roles of active and non-active family members;
e. Compensating family members involved in the business;
f. Working out a smooth transition;
g. Maintaining family control of the business;
h. Preparing and mentoring a successor; and
i. Appointing a successor.

Chinese New Year and the family constitution

KUNG HEI FAT CHOI! to our Chinese friends and clients in the Philippines and elsewhere in the world.

Dragon and lion dances are common during Chinese New Year. It is believed that the loud beats of the drum and the deafening sounds of the cymbals together with the face of the dragon or lion dancing aggressively can evict bad or evil spirits. Lion dances are also popular for opening of business offices.

The biggest event of any Chinese New Year’s Eve is the reunion dinner where members of the family, near and far away, get together for the celebration. This meal is comparable to Christmas dinner in the West.

It is customary to serve dumplings as it is believed to symbolize wealth because the shape resembles ancient Chinese gold ingots. Glutinous sweet cakes (tikoy) are eaten and given as gifts to relatives and friends to maintain harmonious relations. After dinner, some families go to local temples hours before midnight to light incense and pray for a prosperous new year.

Chinese are business-minded and entrepreneurial

The Chinese in the Philippines are mostly business owners and their life centers mostly in the family business. These small or medium enterprises play a significant role in the Philippine economy. A handful of these entrepreneurs run large companies and are respected as some of the most prominent business tycoons in the Philippines.

Chinese Filipinos attribute their success in business to frugality and hard work, Confucian values and their traditional Chinese customs and traditions. They are very business-minded and entrepreneurship is highly valued and encouraged among the young.

Chinese family businesses have a high mortality rate

Although family-owned businesses can generate and significantly improve the financial wealth that stems from the family’s original fortune, most Chinese family businesses are relatively short-lived, rarely extending beyond one generation. The high mortality rate in family businesses points primarily to a myriad of challenges.

Examples of these challenges point to sibling rivalry, entitlement, senior leaders reluctance to let go, conflict of interest, undefined role of in laws, and clearly the absence of a management transition and succession plan. There is recognition that inter-generational succession is essential for both the profitability of Chinese family businesses and the welfare of the family as a whole.

As I write this column I am in Singapore preparing my slides related to the crafting of a family constitution. The 78-year-old visionary/patriarch of a family-owned enterprise incorporated in the 70s requested me to facilitate and prepare a family constitution for all active family members in the business to embrace and follow.

He is ailing and he has confessed that there are nights that he could not sleep worrying about the family business’ uncertain future. He blames himself for creating “monsters” out of his children.

The dilemma of the patriarch is the escalating conflict among his children that has affected not only the relationships among family members but also the business has continuously taken a beating due to accusations of mismanagement among the warring siblings. Naturally, employees especially the good ones have started their exodus to outside employment opportunities

Their core business is in trading but they have since shifted gears to real estate development. The children and their spouses are all in their 40s and early 50s. If we include the grandchildren and the in laws active in the business, the total number of family and extended family members in the business would be 16.

Never, never ignore the warning signs…it might be too late!

At first the patriarch thought that the best solution was just to ignore the conflict.

As the misunderstanding intensified into a shouting match with a lot of finger pointing and threats upon counter threats of going to court, the old man decided to act. This is very typical for Chinese family business leaders. More often, they neglect a myriad of issues particularly if they are entrepreneurial founders, until it is too late.

What can a family constitution do?

A family constitution is sometimes called a family creed, family charter or family agreement. Whichever country you are in, it has essentially the same meaning and serve the same purpose.

The objectives are straightforward and primarily focus on the following:

a) It formulates and documents the values and vision that of the family business. This include the family values and the corporate values of the firm

b) It defines and measures (monetized) the strategic objectives of the business. It answers a most fundamental question…” Where Do you want to be in three, five even 10 years?”

c) It aligns family policies and provides governance in the way in which the family will make decisions affecting the ownership and management of the business.

Depending upon the circumstances of the family and the business, the constitution can be either short and concise or long and complicated.

Developing a family constitution is never a guarantee that it will prevent conflict among family members. But through my years of experience, it is as clear as day that formulating a family constitution can help minimize and significantly lessen much of the potential conflict that a typical family business will face.

Finally, the family constitution does not only provide a process or a solution by which conflict can be successfully managed and resolved, it also compels and imposes discipline on family members to consider important and strategic issues about the future of the family business that might otherwise be neglected.

Next column: The family constitution: do we really need one?

The rise of Dr. Andrew L. Tan: vision-centered leadership style

“I believe that it is my duty as a CEO to lead and inspire the workforce, to provide vision and direction, to guide and motivate my people so that Megaworld continues to maintain its competitive edge in the property market.”
Dr. Andrew L. Tan

A powerful statement reinforcing the notion that growth in business evolves around a leader with a clear vision and a motivated workforce.

Fellow billionaire and developer Manny Villar Jr. acknowledges Dr. Andrew Tan as the undisputed No. 1 condominium developer in the Philippines, surpassing even the old-rich landed clan of the Zobel-Ayalas.

Property consultants CBRE, Colliers International and Wong + Bernstein Group named the Tan-led Megaworld as the Philippines’ top residential condominium developer in more than a decade, and the country’s biggest builder of residential condominiums in terms of units completed.

Working and collaborating with Tan, a certified rainmaker

So how was it like working as a senior executive under Dr. Tan and managing a portfolio of three start-up business units while simultaneously mentoring his eldest son?

I can say the man is truly a visionary, a brilliant strategist and a brand builder.

From a start-up business unit with zero contribution and literally no employees to start with in 2001, the market capitalization of these three business units is probably valued now at more than P100 billion.

Megaworld Lifestyle Malls

When I took on the role of establishing the Commercial Services Group, it was borne out of a need to provide a recurring income stream for Megaworld. Similar to what Ayala and SM have been doing for decades, their sustainability relied heavily on their retail and mall operations.

It must be recalled that when the 1997 Asian Financial crisis struck, these real estate companies with retail operations were so resilient and naturally overcame the contagion with so much to spare.

Sometime in 2000, during one of my regular visits to Tan’s office, I reiterated the need for Andrew to create a business unit focused solely on retail operations and mall management.

After explaining the rationale and objective of not selling the commercial and retail spaces instead of the usual sell-all initiative, he immediately scribbled a marginal note on a piece of paper and declared to all the executives that effective immediately Megaworld will discontinue the selling of ground floor spaces in all of its properties and shift the efforts to leasing out the assets. He also tasked me to lead the retail operations starting with the management of Eastwood City.

What started as a four-man team with me on top and carrying the distinction of being employee No. 1 back then, the commercial services team grew exponentially and later became known as the Megaworld Lifestyle Malls, contributing more than 23 percent of Megaworld’s total revenues.

Currently it is run by its hardworking FVP Kevin Tan and managing a portfolio of five lifestyle malls and hundreds of commercial spaces found in various condo developments. Another 10 more malls are currently in the pipeline.

Resorts World Manila

Resonating Tan’s passion and decisiveness, I vividly recall a short meeting sometime in 2004 where he requested me to prepare an exhaustive business plan for a 25-hectare development in Pasay City.

That plan, hatched in collaboration with business development managers and student researchers, led to the creation of his gaming, hotel and tourism empire under the Travellers Hotel International (THI) brand. A few months later, Andrew asked me to head THI.

The company’s first foray into leisure and gaming development was the hugely successful Resorts World Manila Entertainment Complex in Newport City in Pasay. It went public in 2013. Presently, the casino and hotel complex employs 7,000 employees, mostly returning OFWs. RWM has started expansion in the bay area for another development twice its current size. It will be known as Resorts World Bayshore.

How does Tan bring out the best in his executives? What is his leadership style?

People who worked with him look at his management style in the organization as one that blends entrepreneurship and professional management. Entrepreneurship provides the vision for the company and looks at the big picture while the professional managers take care of the small details.

He puts so much trust in his professionals. At Megaworld and all its subsidiaries, the only family member I know is his eldest son, Kevin. The rest are professionals from the COO, CFO, Treasury, Operations all the way to the head of sales.

As a CEO, he sees that the success of Megaworld rests on its ability to tap the individual skills of employees and to efficiently harness these skills when employees work as a team.

Tan once remarked, “Under Megaworld’s culture of innovation and excellence, I give my officers and employees free rein to think and perform innovatively. I don’t just assign specific tasks to individuals; I challenge them to work outside their comfort zones in order to develop their creativity and resourcefulness.”

Recipe for success

Tan shares that his recipe for success was so simple: “Do not expect everything to turn out the way you want it to. Be ready for disappointments. You should have extra bullets left to help you fight another battle.”

He continues further, “Making my first million at 27 marked a turning point in my business career. My philosophy as a businessman is really quite simple: Just keep working and investing whatever profit you make in new businesses. That way, you generate more jobs and help the country’s economy grow,” he said.

That, in a nutshell, is the story of Tan’s corporate life. It has been a continuous process of moving forward. Every time he sees a certain room to grow, or a new opportunity to advance further, he goes out and takes it.

The rise of Dr. Andrew L. Tan: The struggling years

“About a week after arriving in the Philippines, I happened to wake up one day at 7 a.m. My father got angry and he scolded me. As a newcomer in the country, he said, I had to work harder than the people here. ‘You cannot wake up at 7 a.m. You must wake up at 5 a.m.’ I was 16 then and that incident opened my eyes to the importance of diligence and hard work, and I have taken my father’s advice to heart since then.”
Dr. Andrew L. Tan

WITH a net worth of US$5.1 billion and ranked next to fellow industrialists Henry Sy and Lucio Tan, the first-generation Dr. Andrew Tan has been described by Forbes Asia magazine as a “property plutocrat with a large stake in Megaworld, a builder of apartment complexes doubling as small cities. He is big into brandy, too. His Emperador Distillers went public last year and is now worth P172.50 billion. Last May, Emperador acquired the fifth biggest scotch maker in the world, Whyte and MacKay, for US$720 million, outbidding global brands like LVMH. His fortune extends to 408 McDonald’s restaurants in the Philippines and the gaming leader Resorts World Manila.”

 

Also last year, Tan’s holding company, Alliance Global Group, became the country’s 10th most valuable conglomerate with a market capitalization of P277.28 billion, just a billion shy of power retailer Meralco and the youngest entrant to the prestigious list.

Clearly, Andrew has built, through “hard work and brand building,” an impressive portfolio through the Alliance Global Group that includes Megaworld Corp., Travellers International Hotel Group Inc., Emperador Distillers Inc., Golden Arches Development Corp., Empire East Land Holdings Inc. and Suntrust Properties Inc.

But these did not come easy for Tan, who started working for others as a marketing executive.
In a one-on-one interview, he emphatically remarked, “Business was tough when I started my first company. When you don’t have much capital, it is paramount that you exercise your nose a lot, much like a dog that never ceases to sniff out for food. You cannot afford to fail and lose vital resources. That is how you develop an instinct for success,” Tan relates.

He revealed that two weeks after they launched the first Megaworld project in 1989, the bloodiest coup threatened the Cory Aquino administration.

“Considering that Megaworld then was a start-up, the decision to pursue this project was one of the toughest I made,” Tan notes.

“The Asian financial crisis in 1997 also tested me and Megaworld a lot. The crisis especially threatened the real estate industry. Banks were very averse to lending. We were able to overcome this and came out stronger by being innovative. Megaworld launched Eastwood City, our first integrated township project with the live-work-play mantra, in the late 1990s,” he explains.

Today, Eastwood City is what Tan now considers as the “epitome of a successful development: Eastwood City Cyberpark has been named as the No. 1 IT Park and counts more than 40,000 employees, while our condo residents enjoy living here, and shoppers love visiting our new Eastwood Mall.” The success of Eastwood City has spawned 15 other city center concepts all over the country.

So how did Tan climb the top? Through hard work and determination.

The son of poor immigrants from Fujian province, Andrew was born in China. His family migrated to Hong Kong when he was four years old. As a child, he and his family used to share a tenement apartment with four other families, with only one bathroom and one concrete table for all the families’ cooking stoves. Tan recalls the apartment owner even leased out the corridor to another family.

At 16, he came to the Philippines to join his father who was then working in a transistor radio factory. Tan recalls the difficult period. “I lived with my parents in a cramped 20-square-meter apartment in Sta. Cruz, Manila. I struggled throughout my college days because I had no money. To save on jeepney fare, I walked every day from my apartment to the UE campus on C.M. Recto.”

For lunch, Tan often ate banana cue (fried bananas) that he bought from vendors along Gastambide St. During his first two years as a student, he supported himself by selling watches and tutoring grade school students in math on a part-time basis. It was hard juggling a part-time job and going to college, but Tan never complained. He learned that whether working or studying, doing it as best as he could brought him a sense of satisfaction and fulfillment. It also helped him become a better person.

Most of Tan’s classmates were better off than him since their families owned small businesses such as a grocery or hardware store. That started his dream of doing his own business to give his family a better life.

He quipped, “I would tell myself that if I had P200,000 ($4,500)—a lot of money back then—I would use it to open a grocery store.”

The young Andrew took up Bachelor of Science in Business Administration and eventually graduated magna cum laude in 1974. Such a feat for a young dreamer armed only with the values of hard work, tenacity and a burning desire to help his family have a better life.

Indeed, Dr. Andrew L. Tan has already gone far from his simple dream of owning a small grocery store to becoming one of Asia’s wealthiest businessmen.

The next article will highlight my working relationship with Tan as his CEO for eight years, his family and business values, and his vision.