Failed Succession is a Global Concern

image (1)

Three-Circle Model of the Family Business System

The Three-Circle Model of the Family Business System was developed at Harvard Business School by Renato Tagiuri and John Davis in the 1970s.

It quickly became, and continues to be, the central organizing framework for understanding family business systems, used by families, consultants and academics worldwide.

This framework clarifies, in simple terms, the three interdependent and overlapping groups that comprise the family business system: family, business and ownership. As a result of this overlap, there are seven interest groups present, each with its own legitimate perspectives, goals and dynamics. The long-term success of family business systems depends on the functioning and mutual support of each of these groups.

===

NEW YORK, New York –– I wrote this article while on a plane bound for Frankfurt over the weekend. It is an eight-hour flight from New York and long flights allow me to reflect on a lot of initiatives related to my role as Business coach and Family advisor especially when dealing with international clients based in Asia and North America.

It has been a punishing week after flying a record eight times in the US and Canada in less than 10 days. At the end of this grueling two weeks of family business coaching work and doing research, I would have logged 10 flights and more than 30,000 miles crossing Asia, US, Canada and Europe.

On the flipside, I can say it has been a truly gratifying trip as well. The sessions and the new learnings galvanized my resolve to continue pursuing alliances with global Family Business advisors who have made significant contributions in the field of governance, succession and ownership.

My visit in Europe for a few days will be my last stop before Singapore then finally back to my home destination in Manila.

So why is my firm setting its sights in Europe? W+B has been invited to explore setting up shop a few times this year. When we researched and scanned the huge EU for advisory opportunities, the numbers that confronted us were staggering.

Collectively, I can highlight several reasons why family enterprises are naturally bound to fail if governance and succession are not introduced early in the business:

a. Giving Equal Power and Ownership to the next generation family members will breed conflict and rivalry

b. Family + Money+ Emotion = Conflict

c. Informal Rules = No Governance

d. Shift from Single Family to Multi Family System

e. Complexity of Issues required formal decision making mechanisms

In a report by EFB, the umbrella federation of family businesses across Europe, family owned businesses provides some startling contribution to the European economy:

● They represent around 50% of Europe’s GDP

● More than 14 million business are classified as family owned businesses

● They contribute 60 million jobs

Similarly, in a researched material prepared by my firm, we also found out that just like Asian enterprises, many family-owned businesses belonging to EU countries were unsuccessful in managing inter​-​generational transmissions and vanished after the first generation.

Recalling my Family Business engagements in London more than a couple of years ago, I discovered that the continued drop in numbers of family businesses transitioning from the second to the third generation already showed worrisome figures.

Germany topped the list with 24% left in the second generation and down to single digit in the third generation. Not a single family business survived the fourth generation.

Still reeling from its exit from the European Union, the United Kingdom came in a close second with less than 30% left in the second generation and a mere 12% going into the third generation with zero left in the fourth generation.

The trend was similar for French family enterprises but they fared better posting an above average 8% somewhat overcoming the third generation curse. The single digit survival rate however is still bad news for family enterprises.

These numbers are alarming and are in no way different from family businesses in Asia.

If they remain unchecked, the percentage of failed businesses will continue to free fall and more jobs will be lost as a result of family businesses breaking apart.

(esoriano@wongadvisory.com)

http://johndavis.com/three-circle-model-family-business-system/

 

Advertisements

Businesses Must Aspire to Reach 100 years (Part 2)

image.png

Cosmos Bottling Corporation

One of the more popular alternative soda brands in the Philippines after the war was a product of the Manila Aerated Water Factory, located on Misericordia St., Manila. It was founded way back in 1918 by Wong Ning, a Guangdong native who migrated to the Philippines.

The eldest of his 7 children—Henry Gao-Hong Wong—rebuilt the business post-war and renamed it in 1945 as COSMOS Bottling Corporation. Cosmos is the first softdrink manufacturer in the country.

Among its branded products include Pop Cola, Sarsi, Cheers Lemon, Orange and Ruby, Jaz Cola and Sparkle. Sarsi and Sarsi Light are directed at the Class A and B markets while Pop, Jaz, Sparkle and Cheers brands are primarily marketed to the Class C and D segments.

***

TORONTO, CANADA According to the Family Business Institute, only 30% of Family Business organizations last into the second generation, 12% remain viable into the third, and 3% operate into the fourth generation or beyond.

Family businesses face major challenges in working through ownership and management succession and family business leaders acknowledge the problem. However, few know where and how to develop a Governance and Succession plan. Let me continue part 2 of the article.

b. The Romero Group, a Philippine conglomerate with interests in construction and port services, got thrown into a turmoil when the son allegedly refused to cede control of the port business to his father. This led to a volley of court cases filed between them amid allegations of fraud, betrayal and financial improprieties. The son was a co-faculty at the ATENEO Graduate School of Business in the late 90’s and the father, a colleague in another business association. Common friends asked me to intervene but it was too late. The lawyers were already swapping accusations and the courts ended up taking over jurisdiction over the brewing conflict.

c. Another Philippine company is Manila Cosmos Aerated Factory, a beverage company started by Wong Ning in 1918 and successfully steered by the second generation only to fail in the third generation due to the sudden death of the patriarch and the lack of succession planning. This led to a power struggle between the uncles and the cousins ending with a sell-out to the RFM Group. Cosmos would have celebrated their 100th year next year. The third generation leader, Prof Danny is one of W+B’s Family Business advisor.

d. Family conflict is universal. In the US, the New England grocery chain Market Basket faced six weeks of mounting employee protests losing a hefty $583 million in sales as two cousins-both grandsons of the founder—publicly and bitterly fought for control of the company. The employees refuse to follow the directives of the newly installed CEO after removing his cousin Arthur T. Demoulas.  With pressure coming to a head, the feud ended with Arthur T, initiating a buyout and reclaiming his old post as CEO of Market Basket.

I have written in my column successful cases of family owned businesses overcoming hardship and triumphantly extending the founders legacy (Eu Yan Sang, Royal Selangor).

Visionaries need not go through the same periods of adversity.To preserve their wealth, theymust initiate governance and succession at the onset and not when they are old, sickly and dying.

Imagine the benefit, if the company mastered the art and science of governance, people management, leadership development, and succession practices?

Imagine the enormous rewards, if governance is reinforced with a shared vision supported with powerful values that the founder passed on to the next generation.

Imagine legacy-building benefits, if the founder put in motion the training of the next generation leaders so they can wholeheartedly embrace the value of fairness and meritocracy and the importance of making decisions based on “what is good for the company”.

The real challenge is to make every family member and future stakeholders understand early on the all-important concept of stewardship rather than ownership.

How? By learning from the best in their class… large family-owned businesses and their leaders that have defied the odds, went through rough patches in the second generation, summoned extraordinary strength to set things right, and deftly overcoming the third generation curse. They continue to prosper with some becoming certified century-old organizations.

Governance and Succession is non-negotiable. It is your wonderful gift to the next generation!

(esoriano@wongadvisory.com)

 

Family Businesses Must Aspire to Reach 100 years (Part 1)

ayala.png

Ayala Corporation

Ayala Corporation is the holding company of one of the oldest and largest business groups in the Philippines. Ayala has leadership positions in real estate, financial services, telecommunications, water infrastructure, electronics manufacturing, automotive distributorship and dealership, and business process outsourcing, and new investments in power generation, transport infrastructure, and education.

Year started: 1834

Number of Employees: 35,073

Annual Sales: $4,194.97M (2016)

Net Income: $547.74M (2016)

In a disclosure to the Philippine Stock Exchange (PSE) on Friday, August 11, AC reported a net income of P15.1 billion for January to June this year, compared to the P13.8 billion in the same period in 2016.

“A journey of a thousand li starts beneath one’s feet” is a common saying that originated from a famous Chinese proverb. The “starts beneath one’s feet” in family business parlance is governance. And governance is all about rules, policies, systems and accountability. In short governance is all about institutionalizing control and decision making.  As the 8th Generation successor, Jaime Augusto Zobel de Ayala, Chair of Ayala Corporation puts it…

“It is important to teach each new generation, early on, the difference between ownership and stewardship. Ownership is a right of possession. Stewardship is a fiduciary role. It is holding the institution in ‘trust for’ the next generation. We feel, as a family, that this institution has been passed on to us for our care and not for us to dissipate or do what we will with it for our personal gain.”

Ayala Corporation (AC) was founded in 1834 and is the oldest family business in the Philippines. That makes AC 183 years old.

Governance is uppermost in everybody’s mind today. But governance can be a difficult and extremely challenging act for family business owners.

According to a PWC report, “no matter what their size, the unique—and often volatile—mix of personal family dynamics, business strategy and ownership criteria can create an emotionally charged environment that makes decision-making, not to mention day-to-day management, challenging. And as the founding generation ages, succession and power issues across an expanding family can create cascading concerns.”

In my previous articles, I narrated a number of highly successful Family enterprises in Asia and researched on their history as well as their transformation as Asia’s gold standard in governance and succession. Without any doubt, these companies exhibited remarkable parallelism worth sharing over and over again.

What made these businesses tick? What were the qualities of the leaders that made them endure family tension, betrayal, adversity and conflict? Was it pure luck that they overcame a bitter feud? What was their secret to longevity?

It is a fact that all family businesses struggle with governance and succession with some even facing untold hardship and survival. Take the case of the Eu Yan Sang Family Business that was established in the late 1870’s.

Before the fourth-generation Eu family members engineered a buyout what was originally their family business, the family had to endure a tumultuous period starting with the murder of the wife of the successor by her in laws in the second-generation, an escalating conflict in the third generation with 13 uncles fighting for the spoils of the businesses and a volatile fourth generation involving 72 cousins.

If not for the daring move of the fourth-generation cousins led by investment banker Richard Eu, who engineered a buyout, Eu Yan Sang would have ended in their generation. With rules in place, Eu Yan Sang is now managed by a combination of fourth-generation descendants and professional managers and the growth has been phenomenal.

It is also noteworthy to consider some high-profile families in Asia that got embroiled in senseless and unnecessary conflict. For many, they ended in failure. For some, they were able to overcome the bitter rivalry and went on to strengthen their organizations.  I have compiled a handful of cases involving conflicts so owners, who are currently feeling the tension pervading within the family and the business, will realize the need to seek immediate intervention from family experts.

a. Mayfull Foods Corporation of Taiwan by far is the most violent and tragic family conflict recorded in Taiwan and probably in Asia. Gunshots rang out after a regular corporate meeting where the topic of inheritance was being discussed. Six brothers of the late tycoon Huang Jung-tu were present. The shooting resulted in the death of the two brothers. When the police arrived, the gunman ended up killing himself before falling from the 7th floor of their company’s headquarters. In one fell swoop, three brothers ended up dead in what police investigators called a pre meditated murder-suicide.

To be continued…

(esoriano@wongadvisory.com)

 

Rise, Fall and Rise of the EYS Family Business

Asian giant Eu Yan Sang (EYS) International is a traditional Chinese medicine (TCM) provider. The company was established in the late 1870s and has been in operation for 138 years. It is managed by a combination of fourth-generation descendants and professional managers.

This article highlights the complex nature of family businesses and the even more complex and often unwieldy interplay of preserving family values, managing sibling rivalries, personality differences, and reviving a century old business using modern management techniques.

Adding to the 100 year old drama that almost imperiled the business was the murder of Eu Tong Sen’s wife by his brothers, the sellout to an outside investor and the repurchase by the fourth generation members giving back control of the business to family.

Growing the Family Business

In an interview by NUS adjunct Prof Alison Eyring, she asked Richard Eu, the great grandson who led the buyout for his advice to leaders who want to grow a family business…

“Every generation, you’ve got to think what you want to do with the family business. Is your business the right business for the future? Is it more important to preserve the family or more important to preserve the business? That’s a discussion that you’ve got to have within the family and there’s many different parts to this. The family must have ongoing conversations about its future. This isn’t just about the patriarch or the founder – it’s got to include everybody.”

The entry of the fourth generation was a period of ups and downs but would end up as Eu San Sang’s defining moment.

Sell out due to 10 Uncles and 72 Cousins

In one newspaper account, Richard persuaded the board to make him general manager in 1989. But he ended up running  into a brick wall when the clan, comprising of mostly extended family members that included 10 uncles and aunts and 72 cousins, did not support him.

Instead, they sold their shares to the construction company Lum Chang. For the latter, it was a just an opportunistic investment in taking over the company.

Despite losing control, Richard navigated the company to steady growth, with the launch of a breakthrough product, American Ginseng Tea in 1991. The year after, the company listed in the Hong Kong Stock Exchange.

Four years later, Richard Eu and two of his cousins engineered a buy out of Lum Chang’s shares in EYS Holdings – making the firm a family business once again.

Back to Being a Family Business

Expansion went full-blast in Hong Kong, with its facility receiving ISO certification. In the coming years, the company achieved one milestone after another. The company would also end up becoming the majority stockholder of Australian health giant Healthzone.

With the company pursuing online automation for quality control, it aggressively expanded to more than 300 stores and clinics across four continents with $230 million in sales.

Growth and Expansion

Richard acknowledges that professionals are necessary in a huge enterprise, but he once told Asia Society that non-family managers tend to think short-term rather than long-term. For him, family is still paramount.

Since it was publicly listed in 2000, Eu Yan Sang has delivered double digit growth. In its core markets of Singapore, Malaysia and Hong Kong – the business enjoys the largest market share in its sector.

Many thanks to the participants of my Family Constitution seminar (Manila Series) last Saturday at the Tower Club in Makati as well as the participants who attended my talk in Jakarta the week before. These talks are extremely important for business owners in their quest to create a lasting legacy for their enterprises.

(esoriano@wongadvisory.com)

138 years of murder, sellout, buyout, growth

THE Eu Yan Sang Group is one inspiring family enterprise and undoubtedly deserves to be in the top spot of my Family Business Longevity Series because of the resiliency and resolve of the fourth generation members to regain control, where they ended up owning the majority shares after engineering a buyout from an outsider/investor.

It is a classic “stalls to stars to almost stalls and back to stars” turnaround story!

According to an account by Rachel Cheung in the South China Post, “despite years of family strife, the murder of the founder’s wife by her brothers-in-law and a takeover by a Singapore investment group, traditional Chinese medicine maker Eu Yan Sang has survived and flourished as a Hong Kong icon.”

Founded in 1879, Eu Yan Sang is Asia’s leading brand in the healthcare industry, with a core focus on traditional Chinese medicine (TCM). They market quality Chinese herbs, Chinese Proprietary Medicines, as well as health foods and supplements, offering more than 900 products under the Eu Yan Sang brand and sub-brands plus over 1,000 different types of Chinese herbs and other medicinal products.

The company’s ability to control the total supply chain enabled it to expand across Singapore with more than 50 retail outlets in major shopping malls and residential estates.

Overcoming years of strife and betrayal, the Eu Yan Sang Group is celebrating its 138th anniversary this year. It is now being run by the fourth-generation family members headed by the savvy and daring Richard Eu, two cousins together with institutional shareholder Temasek Holdings & Tower Capital.

In the 1870s, founder Eu Kong Pai, better known as Eu Kong, left the village of Foshan in Guangdong, China and settled down in the small mining town of Gopeng, Perak (now Malaysia). After failed ventures in a bakery and a textile dyeing business, Eu joined thousands of Chinese miners on a tin rush and noticed that his fellow mine workers were heavily dependent on opium as the easiest method for immediate relief for their medical needs.

He decided to start selling traditional Chinese herbal medicine using the ancient recipes that had been passed down through Chinese culture. Eu Kong opened his first Chinese medicine shop in 1879 in Gopeng.

In a 2009 biography by Ilsa Sharp about his son, Eu Tong Sen, the father was pictured as a savvy entrepreneur, acquiring land that was rich in tin deposits. Eu Kong eventually became a prominent businessman, supported by his second wife Mun Woon Chang, a well-connected Nyonya (female Malacca Strait-born Chinese).

The book also recounted that Eu’s success was short-lived. A disease suspected as smallpox, claimed his life at the age of 37. All his possessions went to Mun, triggering the envy of his two gambling addict brothers, who murdered her by lacing the family dinner with poison during a visit to China.

Sixteen-year-old Eu Tong Sen, who inherited his father’s business, narrowly escaped death himself. Toughened by the traumas of his early life, he went on to become one of the richest men in Southeast Asia in the early 20th century, owning tin mines, rubber plantations, properties and even a bank.

To be continued…

(esoriano@wongadvisory.com)

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)