Monthly Archives: June 2017

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)