Monthly Archives: July 2017

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)

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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)